Учебный год 22-23 / Binding Promises - The Late 20th-Century Reformation of Contract Law-1

lar, their power in the “second round” of bargaining that generally occurs if something goes wrong with a product after it has been sold. Secondround bargaining power is important in itself, and it provides an essential support for consumers’ first-round bargaining power. Consumers cannot benefit from the better contracts their increased first-round bargaining power gets them unless they have enough second-round bargaining power to enforce their contracts if the producers breach them.

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Article 2 of the Uniform Commercial Code

I EXPLAINED the relevance of Article 2 of the Uniform Commercial Code in the introduction. Some of the article’s provisions anticipated the reforms and thus created an attitude that facilitated their acceptance; and, courts interpreted certain provisions in a way that made them part of the reforms. On the other hand, other provisions require courts to act contrary to the reforms, many provisions are bad law, and many unnecessarily complicate contract law by arbitrarily differing from the common law of contract. The genesis of Article 2 is also relevant, because it demonstrates the strengths and weaknesses of legislating in comparison to judicial lawmaking as a means of making contract law.

The Reasons for Creating Article 2

Article 2 grew out of a movement to revise the law of sales. The movement began in 1922 with a presentation to the American Bar Association of a proposed draft of some modifications and additions to the Uniform Sales Act, a law then in effect in about half the states.1 By the mid-1930s the aim had changed to enacting a Federal Sales Act. The act would apply only to interstate sales but would serve as a model for state legislation. Karl N. Llewellyn, then a professor of law at Columbia University, became the leader of the movement during the 1930s and remained so until his death in 1962. In 1940 he changed the aim again, this time to creating a new uniform state law, which is how the article (together with the rest of the Code) was finally brought into existence.2

The law of sales prior to Article 2 was largely just a law of the transfer of ownership of personal property. As Llewellyn expressed it, the central concept was the present sale of present goods, about which the seller made no promises.3 Llewellyn’s goals for the Code were to improve the law of sales, to integrate it with contract law so that it could take effective account of promises,4 and to make it uniform across the states.5

As time went on, however, the project came to include more purposes. By the time the Conference of Commissioners on Uniform State Laws offered the Code for enactment, it included nine articles, only the second of

which dealt with sales. It is largely this article that will concern us, because with only unimportant exceptions, just this article affects contract law. Like all the other UCC articles, however, Article 2 is affected by Article 1, which is the repository of provisions that apply throughout the Code. I therefore will occasionally refer to Article 1. For the sake of simplicity, however, I will often refer just to “the Code,” without bothering to specify which article.

Although Llewellyn did not state it as one of his goals, he also hoped to improve the law of contract. This is the only reasonable explanation for the inclusion in Articles 1 and 2 of so many laws that have no more to do with contracts concerning goods than with any other contract. To name just a few, there are provisions for contract amendments, the parol evidence rule, waiver (three kinds!), offer and acceptance, expectation damages, liquidated damages, and the defense of impracticability of performance. However, with few exceptions, the Official Comments to the Code do not explain why its provisions differ from the common law of contract when they do. As a result, we do not know why the drafters thought the differences were improvements, or even if they intended them rather than their being mistakes.

The Code can change the common law of contract in three ways. First and most directly, it displaces the common law to the extent it states the law if the situation concerns a “transaction in goods.” Second, it can influence the common law as a model for judges to follow if they think the common law is unclear or that they ought to change it. Third, it can serve as a model for future editions of the Restatement of Contracts, and these, in turn, can influence the common law as a model for judges to follow.

As it turned out, the Code exerted a direct and personal influence on the Restatement (Second) of Contracts, which the American Law Institute published in 1981. The American Law Institute appointed Robert Braucher, then a professor at Harvard Law School, to be the Reporter for this Restatement in 1960. Braucher had been one of the two editorial coordinators who helped Llewellyn put together the Code. Prior to taking the job as Reporter, he had not taught contracts since 1950. His lifetime publication record includes nothing on contract law. The only reason the American Law Institute could have appointed him Reporter was to bring the influence of the Code to bear on the Restatement. Braucher served as Reporter until 1971, when he resigned to become a justice of the Massachusetts Supreme Judicial Court. E. Allan Farnsworth, a professor at Columbia Law School, succeeded him as Reporter. The Restatement (Second) of Contracts allocates credit between Braucher and Farnsworth for the sections they produced.6 Several of Braucher’s sections are almost verbatim repetitions of Code provisions,7 and the entire Restatement uses “modification” for “amendment”8 and various circumlocutions instead of “unilateral

contract” or “bilateral contract.”9 Llewellyn used these same terms and circumlocutions in the Code in the hope they would contribute to certain substantive changes he hoped to make in the law of contract.

Although Article 2 achieved Llewellyn’s stated purposes, it failed to change contract law. Ultimately, the only way it could have changed contract law would have been by persuading judges that its provisions were superior to the common law, but judges were not persuaded. With the exception of the provisions on unconscionability, not a single provision of Article 2 has been adopted into the common law of contract of a single state, let alone a sufficient number of states to justify our saying that the provision has become a part of our general law of contract.10 Even the unconscionability exception is only apparent. Although the Code introduced the concept, it did not define it. Section 2-302 says no more than that a court can refuse to enforce a contract or contract term if it finds it to be unconscionable. Courts themselves had to make the law of unconscionability even as they used it under the Code. Therefore, when they adopted it into the common law, they were not changing the common law to be like Article 2—they were making the common law and the law of the article simultaneously.

The Efforts to Make Amending Article 2 Unnecessary

Article 2 has never been importantly amended although it has been in existence in most states for more than twenty-five years. Llewellyn anticipated this and called it “the problem of a semi-permanent code.”11 He realized that unless every state legislature enacted the same amendment, amending the article would destroy its uniformity among the states,12 which was one of his chief reasons for creating the article, and that it would be difficult to obtain the agreement of every state legislature to the same amendment. Llewellyn’s solution to the problem was to use the Code itself, Articles 1 and 2 in particular, to revive what he called “grand-style judging,” which he hoped would make amendment unnecessary, or at least necessary much less frequently.

Llewellyn defined grand-style judging as that which creates a new rule to serve the underlying purposes for which a rule is needed, rather than follows an existing rule past the point where it ceases to serve its purposes. He contrasted grand-style judging with “formalism,” which follows the existing rule regardless of the consequences, at least ostensibly. Formalist judges were not necessarily blind to the needs of justice, but their principles required them to serve those needs surreptitiously. They fudged the law or the facts or twisted logic in order to come to a just result while pretending to follow the existing rules. This fudging and twisting had two

negative consequences. Justice was done less often, because it was only in egregious cases that formalist judges felt justified in compromising their principles. The fudging and twisting produced confusing and contradictory laws, which provided no predictability for future cases. Although Llewellyn thought life was too complex for laws ever to provide anything close to perfect predictability, he believed that grand-style judging could make the outcomes of future cases at least “reckonable.” However, he thought that with a few exceptions (he admired Benjamin Cardozo and Learned Hand) grand-style judging had ended at about the time of the Civil War.13

Ordinarily at least, judges cannot engage in grand-style judging except when making common or constitutional law. They cannot engage in this style of judging under statutes, not at least as lawyers tried to draft statutes in Llewellyn’s time. Unless an administrative agency was to administer the statute, the goal then was to draft it to provide clear and comprehensive directions that left the courts with as few unanswered questions as possible.14 Llewellyn decided to construct the Code differently, so that it would encourage, or even require, judges to engage in grand-style judging. He used four tactics to try to achieve this goal.

One was to draft the Code in such vague terms that the courts would have no choice but to use their creative powers in deciding cases falling under it. Subsection 2-718(1) is an instance of this tactic. It reads:

Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

Anyone not already familiar with the common law of liquidated damages would be at a loss for the meaning of this subsection. Its evident purpose is not so much to state the law of liquidated damages as to invoke it. In effect, the reader is being told to treat liquidated-damages provisions in contracts governed by the Code as he or she would treat such provisions under common law, as the common law changes and develops.

A second tactic was to make frequent reference to trade practice. This would allow each trade (today we would be more likely to say “each industry”) to make its own rules by choosing its practices without legislative or judicial intervention. This tactic is closely related to the first, because when the Code uses broad language, a court will often look to trade practice to decide a case even if the Code does not expressly refer to trade practice.

A third tactic was to provide specific answers but condition them on the court’s not having a reason for concluding differently. For example, some Code provisions set forth the result that is to follow unless the contract or circumstances indicate a different one.15 Others instruct the court in very

general terms how to go about determining the meaning of the contract if the contract is not clear on the question.16 Still others state a rule the court is to follow unless the court decides that a different rule would be better.17 A court can generally reach the same conclusions it could properly reach under the common law under any of these kinds of provisions, because the provisions allow the court to rest its conclusions on the same considerations as it would a common law decision.

None of these tactics raised eyebrows even among the most conservative people with whom Llewellyn dealt, but his fourth tactic did. Evidently in an effort to be as clear as possible about this last tactic, he stated it in three separate places in both the 1940 and the 1941 drafts: in the report accompanying the proposed legislation, in the legislation itself, and in the official comments he intended to be part of the legislation. (The quotations that follow are from the 1941 draft.) First, the Code would include a statement of its general underlying principles and policies. Second, the Code’s provisions would make their more particular underlying principles and policies manifest. Third, the Code would include a statement that its provisions were subject to all these underlying principles and policies. Fourth and most radically, the Code would be “hedge[d] . . . against its own errors. . . .

[W]hen circumstances unmistakably and persistently show the obsolescence of a [principle or] policy declared in the Act, the Courts are free to move in the common-law manner toward cure.”18 In other words, the Code would direct the courts to treat it as though it were common law. A court could “overrule” a part of the Code if it became obsolete, just as though the Code were a body of judicial decisions rather than a statute.

Authorizing courts to treat the Code as a body of judicial decisions was a brilliant idea in my opinion, but it was more radical than the Commissioners on Uniform State Laws would accept. Llewellyn never proposed it again. He also eventually dropped the proposal that the official comments be part of the legislation. However, the Commissioners on Uniform State Laws published the official comments, every legislatively authorized publication of the Code includes them, and the courts frequently refer to them. Moreover, the Code as the Commissioners finally proposed it includes a section urging and authorizing the courts to interpret its other provisions broadly to effect its underlying purposes and policies and stating these purposes and policies so broadly as to leave the courts a practically unlimited discretion in interpreting them.19

Although Llewellyn presumably dropped the proposal because he thought he had to, his dropping it caused all his other tactics for keeping the Code current to fail. Grand-style judging without this authority will not keep the Code current for several reasons. First and most important is the inherent conflict between grand-style judging and the reasons the Code was made. The Code was made in order to improve sales law, to integrate it

with contract law, and to make the integrated law uniform among the states. One cannot achieve these goals without giving clear statutory commands about how the courts shall decide cases, but clear statutory commands preclude grand-style judging, which requires that courts be free to decide cases according to the laws they make.

Moreover, the courts generally have not engaged in grand-style judging even when the statutory commands are not clear, but have tried to interpret the Code, instead. Interpretation is not grand-style judging, because grandstyle judging is lawmaking. The courts have also generally failed to engage in grand-style judging out of deference to their state legislatures, although the deference is misplaced in this situation. The practice with an ordinary statute is that if the highest court of a jurisdiction interprets it, no court thereafter will reconsider the interpretation. The legislature presumably will amend the statute if it disagrees with the interpretation. Therefore, if the legislature has not amended the statute, it presumably agrees with the interpretation, and the courts will be obeying the legislature only if they allow the interpretation to stand. Courts ought not to follow this practice with the Code, because state legislatures enacted the Code only in the technical sense; their members did not draft it and rarely understood or even cared what it contained. Nor is a state legislature likely to amend the Code in order to change a judicial interpretation of it. On the contrary, a legislature is not supposed to amend the Code for any reason without the advice and consent of the Conference of Commissioners on Uniform State Laws, in order to preserve the Code’s uniformity across the states. Nevertheless, courts have generally tried to interpret the Code rather than make law for it when it is unclear, and the highest courts of a jurisdiction have generally refused to reconsider their interpretations of the Code. I will describe just one example out of many where both these obstacles to grand-style judging have been present.

Debtors or alleged debtors who dispute the amount they owe (or whether they owe anything at all) sometimes try to settle the dispute by delivering a “full-payment check” to the creditor. This is a check upon which the debtor has written words to the effect that he is offering it in full payment and if the creditor cashes it, the creditor accepts it as full payment and thus loses any right to anything more. Creditors sometimes try to avoid losing their rights if they cash these checks by writing on them that they reserve their rights or by notifying the debtor to the same effect before they cash them. The common law rule is that the debtor wins; creditors lose their rights to more if they cash such checks whether or not they try to reserve their rights in some manner.20 However, Code Section 1–207 provides that a person can reserve his rights by saying that he does, in which case if he then proceeds to exercise his rights or perform his duties under the contract, he will not have lost the rights reserved. Therefore, the question was

whether Section 1–207 changed the common law rule. A large majority of the state highest courts that have answered the question have answered it in the negative. In none of the decisions, did the courts engage in grand-style judging; they merely tried to discern what the Code drafters or their state legislature intended or what the language of the section means. And in no case yet has a highest court even asked itself whether it should overrule its first interpretation.21

The Process for Drafting and Enacting the Code

Although the Code is legislation, it possesses none of the attributes of legislation that ordinarily determine the attitude an interpreter should take toward it. The legislatures that enacted it did so for none of the reasons ordinarily associated with legislating. The politically organized interest groups that normally take sides on legislation ignored it. Even the state bar associations usually had to be persuaded by Llewellyn or one of his associates to take an interest in it. Soia Mentschikoff, Llewellyn’s principal associate, addressed the first state bar convention I ever attended. She urged us to commend the Code to our state legislature, and we did. The Colorado State Legislature enacted it a year or so later, if my memory serves me correctly, with even less thought than we gave it. The Code received close scrutiny before being enacted in only one state, New York, but even there the scrutinizers were largely members of the bar rather than legislators. Their interests were largely just those of lawyers who wanted a law that would clarify uncertainties and overcome various technical problems.22 The real authors of the Code were Karl N. Llewellyn, a general advisory group of six people, and additional advisory groups of six people each for each of the Code’s nine articles. These people were academics, practitioners, judges and members of the staff of the Conference of Commissioners on Uniform State Laws. None was a legislator.23

Another result of this process is that the Code lacks a legislative history that might be useful for interpreting its provisions. There is no legislative history for the most part, because there was no meaningful legislative process. Most legislators simply said “Aye” to some thick packets of bill paper. The fact that every legislature enacted virtually the same Code also makes its legislative history meaningless. No matter what a legislator may have thought, his or her thoughts can rarely have influenced the language of the Code, because the Code was rarely changed in the process of enactment.24

Even if the six-person group that drafted an article intended a provision to have a particular meaning, there would be no reason to give the intention any weight. The group exhausted its authority when it presented the pro-

posed legislation, Official Comments, and any further reports or comments to the state legislatures. Any intentions it might have had that were not expressed in these documents should have no more effect on us today than they could have had on the enacting legislatures. Of course any intentions that were not expressed in these documents could not have had any influence on these legislatures.

The Official Comments that accompany every section are sometimes helpful, especially when the subject of the section is a law of sales, but it is difficult to determine what weight one should give them, because they lack all the usual sources of authority. They are not part of the legislation, because the state legislatures did not enact them. They are not legislative history for the reasons already given. Although they presumably express the intentions of the six-person group that drafted the article, the only authority the group’s intentions could have had ended when the legislatures enacted the legislation without enacting the Official Comments. The Official Comments to the sections on contract law are rarely helpful if the section does not purport to change the common law, because anyone who is familiar with contract law already understands the purposes of particular parts of it. Although the Official Comments to the sections that purport to change the common law might be helpful if they gave the reasons for the changes, they rarely do this. For example, the Official Comment to Subsection 2-209(1), which states, “An agreement modifying a contract within this Article needs no consideration to be binding,” states, “Subsection (1) provides that an agreement modifying a sales contract needs no consideration to be binding.” Although the comment goes on to say more, it adds nothing that is not also true of the common law.

Unconscionability

The unconscionability section is a striking demonstration of how effective Llewellyn’s tactic of encouraging grand-style judging by deliberate statutory vagueness could be when he was willing to use it. Section 2-302 does not define the doctrine.25 Official Comment 1 adds only, “The principle is one of the prevention of oppression and unfair surprise . . . and not of disturbance of allocation of risks because of superior bargaining power.” Scholars initially reacted with shock and derision at such vagueness, predicting that it would render the doctrine ineffectual,26 but the courts soon vindicated Llewellyn. The U.S. Court of Appeals for the District of Columbia Circuit, in a decision written by Judge J. Skelly Wright, gave the doctrine a formulation in 1965 that has largely survived to this day. This was also the first decision to explicitly declare unconscionability to be a part of

the common law of contract, and virtually every jurisdiction has also followed it in this respect.27

The case was Williams v. Walker-Thomas Furniture Co.28 Williams had purchased a stereo set from Walker-Thomas Furniture Company in April 1962 and various other items at other times dating back to December 1957. All of the purchases were on credit. The security clause in WalkerThomas’s standard credit contract subjected to repossession all items a customer had ever purchased on credit if the customer failed to make a scheduled payment on any of them. Williams missed a payment, and Walker-Thomas began repossession. Williams resisted on the ground that the repossession clause was unconscionable. The lower courts held for Walker-Thomas without considering the Code, because the Code was not in effect in the District of Columbia when these events occurred. The court of appeals reversed and remanded for trial on the ground that the doctrine of unconscionability was a part of the District of Columbia’s common law.

The court stated, “Unconscionability . . . [is] an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” An “absence of meaningful choice” exists if the weaker party accepted the terms because he had no reasonable alternative, had no notice of the terms, or was unable to understand the terms or their significance for him.29 Although this formulation has hardly changed in substance to this day, courts and scholars subsequently made some verbal alterations in it. Instead of “absence of meaningful choice,” one now says, “procedural unconscionability,” and instead of “unreasonably favorable to the other party,” one now says, “substantive unconscionability.” Scholars and judges chose the new terms because they conceived of the elements of lack of meaningful choice as attributes of the procedures by which the parties made the contract, and they conceived of the one-sidedness of a contract as a matter of its substance. Thus, using the new names, Walker-Thomas held that a contract or contract term is unconscionable if it is both procedurally and substantively unconscionable.

Judge Wright followed the Official Comment to some extent. Substantive unconscionability seems to derive from “oppression,” and procedural unconscionability from “unfair surprise.” However, he ignored the Comment’s disclaimer of an intent to disturb the allocation of risks because of superior bargaining power. As Williams alleged them, the facts of WalkerThomas itself demonstrated both a disparity of bargaining power and a resulting one-sided allocation of the risks of nonpayment onto the purchaser. If the court had not allowed the unconscionability doctrine to “disturb” this allocation, the court could not have protected Williams against the operation of the repossession provision. The court must have realized that the doctrine could hardly provide any protection at all without “dis-