13 The Uniform Commercial Code and the Ongoing Quest for an Efficient and Fair Commercial Law

The commercial law that we have today is the product of a number of different and often competing institutions.¹ At one time or another over the past two hundred years, common law courts, state and federal legislatures, and private legislative groups such as the American Law Institute (ALI) and the Uniform Law Commission (ULC) have all struggled to take the lead in generating commercial law rules that are efficient as between the transacting parties and fair in their treatment of affected third parties. And yet each of these institutions has failed to deliver on that normative goal in important respects. The story of American commercial law, then, is a story of an as yet unachieved quest by succeeding institutions to produce better commercial law rules than the institutions that preceded it. The Uniform Commercial Code (UCC) project sits at the center of this story, and its successes and failures exemplify the challenge of creating commercial law in an environment of continuing technological change and uncertainty.

For around seven hundred years, from 1200 to 1900, only one institution—common law courts—produced commercial law in England and America.² For much of that time, commercial law as we know it today was nonexistent; commercial parties primarily relied on the practice of exchanging penal bonds in order to trade goods and services.³ Modern commercial law developed after the industrial revolution as common law courts began to resolve contract disputes in ways that over time evolved into widely acceptable default rules. The courts functioned unaided for many years because intrinsic to common law adjudication is a mechanism for generating a particular subset of efficient commercial law rules. The mechanism starts when a contract lacks a term to resolve a dispute between litigating parties and the court must step in to fill the gap in their agreement. The court’s decision then becomes a rule when future parties facing the same dispute determine to leave a similar gap in their contract rather than draft an express term that regulates the dispute in a different way. If subsequent contracting parties do leave a gap, the first case becomes a precedent in the sense that the court will resolve the later dispute with the rule that it used to resolve the initial dispute. Rules of decision in earlier cases thus become default terms in contracts that are written thereafter unless those parties contract out.⁴ And while courts cannot calculate the magnitude of any third-party effects from a proposed rule, courts do commonly consider both fairness and public policy concerns when creating these default rules.

This common law adjudication mechanism creates “transcontextual” commercial law rules: the rule solves a contracting problem for parties functioning in diverse contexts. If the rule in the first case failed to apply broadly to different parties in different circumstances, future parties in other areas would have realized that the rule did not work for them and, rather than leaving a contract gap, they would have explicitly contracted about the problem for themselves. Note as well that a common law default rule roughly tracks changing commercial patterns. When commerce materially changes, parties do different deals under new contracts. If the future parties’ contracts nevertheless also leave a gap when a solution to the problem could be found, the rule in the first case continues to function as a precedent: The rule has thus been “updated.” If parties facing new commercial situations instead create contracts that expressly govern the issue, the rule in the first case becomes vestigial. But then, the common law mechanism, triggered by current disputes, will create new rules.⁵

The updating feature of the common law mechanism has an inherent limitation, however. Parties in different commercial contexts often require solutions that are specific to their circumstances, and generalist courts are ill-equipped to supply specific solutions to particular industries. Facing the inherent limitations of the common law process, the American legal establishment came to understand that a modern economy would benefit from a set of laws that applied to discrete bodies of commercial law. Moreover, American lawyers were unsatisfied with the common law mechanism. The main source of their impatience was that default rules are slow to form. Litigation must proceed over time in different contexts before a default rule is fully established. Consequently, most of the common law default rules were developed over the course of the nineteenth century, and the process of commercial law rule development slowed considerably thereafter.⁶ In addition, these commercial lawyers observed from experience that courts are poor regulators of a modern economy. Courts cannot find facts, apart from case records, and so cannot form accurate views of the context in which a possible rule will function and the effects of current rules. Compounding the problem is the fact that judges are generalist lawyers. The typical judge has little commercial expertise and cannot effectively resolve the economic issues that a possible rule may pose. Given the several deficiencies of common law courts, a consensus emerged: another rule generating mechanism was required.

The widespread dissatisfaction with the common law process produced two major statutory interventions in the twentieth century that sought to change commercial law itself. The first effort at a codification of commercial law occurred at the turn of the twentieth century when the National Conference of Commissioners on Uniform State Laws, now known as the Uniform Law Commission,⁷ produced the Negotiable Instruments Law, followed shortly thereafter by the Uniform Sales Act.⁸ Ultimately, seven Uniform Acts were enacted between 1896 and 1933 governing various aspects of a commercial transaction. This early codification effort soon proved obsolete, however. The various uniform acts were far from uniform, especially in the case of personal property security interests: state rules governing trust receipts and conditional sales varied widely. Grant Gilmore famously remarked that “pre-code personal security law closely resembled that obscure wood in which Dante discovered the gates of hell.”⁹ Even more troubling was the fact that these early codifications basically reified the past; they had little relevance for the dramatic changes in commercial law that occurred after their enactment. As just one example, the Sales Act failed to treat the host of issues raised by the emergence of long-term supply and distribution contracts and the complex contractual relationships that they stimulated. As a consequence, only the courts were able to keep sales law current with these changing commercial practices throughout the interwar period.¹⁰

Obsolescence coupled with the lack of uniformity thus led in the mid-twentieth century to a second effort by the ALI and the ULC to codify much of commercial law under the umbrella of the UCC. The UCC was promulgated and drafted during the 1940s by a distinguished group of scholars and practitioners, headed by Professor Karl Llewellyn, under the joint auspices of the ALI and the ULC. The UCC was intended to be a unified, integrated, and comprehensive statutory treatment of commercial transactions as a “single subject of the law, notwithstanding its many facets.”¹¹ The drafters viewed this new code as a “single uniform law that would deal with all the phases which may ordinarily arise in the handling of a commercial transaction, from start to finish.”¹² True to the drafters’ ambition, the UCC was ultimately adopted in every state (except for portions of Article 2 in Louisiana) and in the District of Columbia and all U.S. territories.

The drafters’ faith in the benefits of a publicly supplied collection of commercial law default rules was justified: private parties cannot solve every contracting problem that they face. Contracting parties seldom can internalize the full gain from creating a useful solution to a common commercial problem—others can copy their innovation—but nonetheless they bear the full cost.¹³ When the cost exceeds the share of the gain to contracting parties, the problem will not be solved efficiently without outside help. Responding to this dilemma, the drafters promised to address these common problems and supply commercial parties with apt solutions in the form of UCC provisions. And, in many respects, as I discuss more fully later, the UCC delivered on that promise.

But the seventy-plus year history with the UCC reveals a deeper institutional problem. A public program of supplying commercial law rules must satisfy two conditions: the rules must first solve commercial problems as the parties would have solved them, and the rules must update promptly as economic conditions change. The source of the difficulties that plague the commercial law production process is the problem of obsolescence. An efficient commercial law rule must not only solve a commercial problem in the current state of the world, but it also should solve the problem in future states of the world that are “relevantly similar” to the current state. Yet if the commercial problem takes a different form in a future state, the efficient solution to the problem can change as well. In that case, the legal rule becomes obsolete: the rule no longer solves the commercial problem in its current form.¹⁴

Obsolescence is a significant concern because the commercial world of today is dissimilar in significant ways from the world that existed when the UCC was promulgated.¹⁵ Article 2 on sales took its current form by 1952 and has not been materially amended since then.¹⁶ Somewhat perversely, the obsolescence problem also negatively affects those areas of commercial law in the UCC that have been updated, including Article 9 on secured credit, and Articles 3 and 4 on commercial paper and banking.¹⁷ Here, focused interest group pressures stimulated reform proposals that have led to regular updating.¹⁸ But this focused response to the risk of obsolescence raises yet another concern: while interest group pressure did produce new commercial law rules, the public interest was not represented in the revision process.¹⁹

This chapter proceeds as follows. Section II briefly describes the drafting history of the UCC project and explores the political economy of its promulgation and enactment. In section III, I discuss the benefits of this experiment in codification: important innovations in sales law and the rules regulating personal property security illustrate how the drafters of the Code were able find new ways to facilitate efficient commercial exchange. Section IV turns to the ongoing costs of codification. The pressure to update commercial law rules produces one of two suboptimal results: either competition between interest groups deters meaningful revision or a dominant interest group overcomes barriers to revision while capturing rents from third parties in the process.

The persistent and significant costs of obsolescence demand a critical re-examination of the institutional features of the commercial law production process. I conclude that the disregard for the public interest justifies skeptics asking whether there is a role for institutions other than the private lawmakers who created the UCC in developing commercial rules that take broader social interests into account.²⁰ Until that question is resolved, the search for a better commercial law remains elusive.

The story of the UCC project and Karl Llewellyn’s unique role in the drafting and process of initial enactment has been told many times already.²¹ The following synopsis suffices to illuminate the inherent tensions in the codification process.²² The rise of the modern industrial state in the late nineteenth century exposed the significant diversity that existed in the commercial law of various states. The resulting uncertainty led to proposals for the enactment of a federal commercial code to govern interstate commercial transactions.²³ These proposals, in turn, stimulated the formation of the ULC in 1892. Rather than accept federal intrusions on traditional state authority, the ULC proposed to formulate and seek adoption by states of various uniform laws governing different aspects of commercial law. One of those uniform statutes was the Uniform Sales Act, drafted by Samuel Williston and adopted by the ULC in 1906. The Sales Act, in turn, was modeled on the English Sale of Goods Act of 1893.

As the years went by, many scholars noted problems with the Sales Act, and, in fact, a number of states declined to enact the statute. One of those critics was Llewellyn, then teaching at the Columbia Law School. Llewellyn had two principal objections to the Sales Act. First, he objected to those default rules that were based on artificial doctrinal conceptions, such as the location of “title” in the goods. These defaults were “inefficient” in the sense that they did not reflect the terms of agreement that most parties in the relevant trade would have made for themselves. Second, the Sales Act default rules applied in the main to all transactions equally and thus were insufficiently tailored to the circumstances of particular trades and industries. The deficiencies of the Sales Act led to reform initiatives. In 1940, the Federal Sales Act was introduced in Congress.²⁴ The Commissioners in the ULC reacted to the threat of federalization by lobbying against federal enactment and beginning to draft a revised Uniform Sales Act. Perhaps most significantly, they recruited Llewellyn, one of the strongest advocates for the federalization of sales law, to their project.²⁵

By 1945, the ULC had formed a collaboration with the ALI and, working in tandem, they expanded the revised sales act project to include the drafting of a comprehensive commercial code.²⁶ Llewellyn and the other proponents of the project sought to avoid previous difficulties in achieving uniformity by creating a “code” in the true sense—a systematic, preemptive, and comprehensive enactment of a whole field of law. Many observers noted, however, the striking differences in the rule form between Article 2 and the other substantive articles of the Code. Article 2 contains a large number of broad standards, vague admonitions, and “muddy” rules. Many sections are little more than statements of principle that delegate broad discretion to courts to apply them to specific circumstances.

The decision to produce a code was primarily instrumental. The ALI and ULC believed that this consolidation of commercial law into a single statutory scheme would enable them to sell the entire project to the states on a “take it or leave it” basis thus avoiding the selective enactment that had occurred with earlier uniform acts.²⁷

While Llewellyn worked on the UCC project for more than ten years, responsibility for drafting key provisions dealing with credit instruments, bank collections, and secured transactions—Articles 3, 4, and 9—was assigned to others. William Prosser was the principal Reporter for Article 3, Fairfax Leary followed by Walter Malcolm were the Reporters for Article 4, and Allison Dunham and Grant Gilmore were the Reporters for Article 9. In short order, the drafting process of these articles came to be dominated by representatives of banking and commercial financing interests.²⁸ In particular, financial institutions and those sympathetic to their needs played a significant role in the drafting and ratification of Article 9. When the UCC project had just gotten underway after World War II, Homer Kripke, then associated with CIT Financial Corp., served as a key Adviser to the Reporter, Grant Gilmore, and to the other drafters of what eventually became Article 9. In addition, Kripke then served as one of the two principal drafters for what became the 1972 revision of Article 9. Articles 3, 4, and 9 were, in the main, characterized by detailed, precise rules that allocated commercial risks in ways favorable to the commercial interests that participated so actively in the drafting process. No doubt the clarity of the new rules governing secured financing, credit instruments, and payment systems reduced transactions costs in the relevant credit markets. But, equally clearly, the rules favored the interests of sophisticated repeat players in those markets over those of occasional participants in financing transactions.²⁹

The Article 2 project, on the other hand, proceeded without the active participation of external interest groups. The project was dominated by Llewellyn and his band of academic reformers.³⁰ The revisions that the academic reformers agreed to during the drafting process were those that they felt were necessary to secure the approval of the far more conservative lawyers and other legal professionals that dominated the two sponsoring private legislative bodies. Once Article 2 passed the twin hurdles of approval by the ALI and the ULC, it was essentially carried along by widespread industry support for the credit and financing articles. Although Pennsylvania adopted the Code in 1952, it was not until the comprehensive lobbying following the New York Law Revision Commission analysis of the Code in 1956 that the professional community joined forces to ensure the enactment of the Code in New York and thereafter within a decade in every other American state except Louisiana.³¹

Since the academic focus in recent years has turned to the deficiencies of the UCC, especially as scholars confront the effects of obsolescence, it is too easy to neglect the singular contributions the UCC introduced. In this section, I highlight the two most important innovations the Code brought to commercial law: Llewellyn’s contributions to contract theory in Article 2, and Gilmore and Kripke’s elegant harmonization of personal property security interests in Article 9.

As noted earlier, Karl Llewellyn had two principal objections to Willistonian formalism, as embodied in the Uniform Sales Act.³² First, he objected to those default rules that were based on artificial doctrinal conceptions, such as the location of “title” in the goods.³³ Second, the Sales Act default rules were insufficiently tailored to the circumstances of particular trades and industries.³⁴ Llewellyn’s effort to solve the first problem by substituting more efficient defaults was, in general, a conspicuous success. His attempt to solve the second problem by creating a mechanism for the recognition and incorporation of tailored, industry-specific defaults was, in the end, a noble failure.

The singular contribution to commercial law in Article 2 was a series of default terms for salvaging broken contracts that reduced contracting costs for many (if not most) parties to sales transactions. Under the Sales Act, most risk allocation questions were resolved by determining who had the title to the contract goods. The problem was, that while everyone knew that the party who had the title assumed the relevant risk, no one knew who had the title.³⁵ The resulting uncertainty increased transactions costs and complicated efforts to contract out of the legal default. Llewellyn’s risk of loss rules illustrate his commitment to legal defaults that reduce transactions costs for contracting parties. Rather than using artificial conceptions of title, Article 2 assigns the risk of loss in general to the party in control of the goods, on the (generally sound) intuition that the party in control can best take precautions to reduce endogenous risk and/or insure against exogenous risks.³⁶ A similar approach is reflected in the “salvage” rules of Article 2—rejection, cure, acceptance, and revocation of acceptance.³⁷ These rules were also drafted with the purpose of reducing contracting costs by encouraging ex post adjustments by the party with the comparative advantage in mitigating the costs of broken contracts.³⁸

Llewellyn was particularly sensitive to the costs of strategic behavior in the performance of sales contracts. He initially proposed to substitute a substantial performance standard in place of the traditional perfect tender rule as the more efficient default rule for sales contracts in which the seller’s investment in the transaction exposed it to the risk of opportunism by the buyer.³⁹ Llewellyn understood, however, that a substantial performance rule operated as a double-edged sword. Requiring a buyer to accept goods that “substantially conformed” to the contract reduces the risk of strategic rejections by the buyer, but, in turn, it exposes the buyer to an opportunistic tender by the seller of substandard goods. His solution to this dilemma reflects his understanding that legal defaults that impose flexible adjustment on one party become opportunities for exploitation by the other. In the end, Llewellyn returned to the perfect tender rule, but, by incorporating a cure provision, he was able to create a structure for mutual adjustment that accomplishes many of the same purposes as a substantial performance rule.⁴⁰

The remedial scheme introduced in Article 2 is a final example of efficient defaults for resolving broken contracts. Llewellyn began by focusing on a central question: Which party is responsible for salvaging the broken contract? This question, in turn, requires an answer to a deeper one: Given the default rule of expectation damages, why would anyone ever breach (except inadvertently)? And yet, we observe advertent breach. There are two possible explanations for a promisor’s decision to breach in the face of an expectation damages rule. The first is benign: the decision to breach is a “cry for help”—a request that the contracting partner adjust to the broken contract by covering (or reselling) on the market and submitting a “damages” bill to the promisor. The alternative explanation is strategic: breach is motivated by the imperfections in the judicial system that systematically deny the promisee its contractual expectancy. Promisors who breach, under this conception, are able to exploit these imperfections to secure a favorable settlement of the disputed transaction. The challenge for contract theory is to predict when the benign scenario is more likely than the malign one (and vice versa).

Under the Article 2 scheme, the nature of the market for substitute goods determines which of these explanations is more likely in any particular case.⁴¹ Where the market is thin, the implicit assumption is that breach is more likely to be strategic and the promisee can trump the “cry for help” by demanding either specific performance or the contract price (as the case may be).⁴² However, where there is an available market for the contract goods, the promisee is limited to market damages. This motivates the promisee to adjust efficiently to the circumstances by salvaging the broken contract on the market, either by resale or by cover (or, in the alternative, relying on proof of what such an action on the market would have yielded).

The success of Article 2 in substituting legal defaults that encourage cost minimizing efforts to salvage broken contracts should not be underestimated. While the people for whom Llewellyn was drafting were not sophisticated theorists, they were sophisticated commercial lawyers who were well aware of the inefficiencies embedded in the Sales Act. In drafting these provisions of the Code, as well as a set of defaults that reduced contract formation costs, Llewellyn relied upon his long career as a commercial lawyer. Tearing down the “wall” of title and drafting sophisticated schemes to facilitate the salvaging of disputed contracts was seen then, as it is now, as a major improvement in the legal regime, one that would likely ensure the support of the ALI and ULC members whose approval was necessary for the Code project to succeed.

Llewellyn’s solution for regulating ongoing contractual relationships was even more ambitious than his scheme for regulating broken contracts. Here, Llewellyn relied on an intuitive sense (derived from his years as a commercial lawyer) that ongoing contractual relationships were not efficiently regulated by binary default rules that allocated risks on an “all or nothing” basis. What Llewellyn saw was similar to the findings of Stewart Macaulay a generation later.⁴³ Parties adjusted voluntarily to changed circumstances during the life of the contract. If an exogenous shock delayed the delivery of goods in a particular industry, the buyer would accept the late delivery and look for a price discount on a subsequent transaction. Not only were these patterns of flexible adjustment ubiquitous, but Llewellyn saw as well that the parties coped with moral hazard problems in much the same way: strong social norms in the form of trade practice or even contract-specific patterns of interaction developed to police opportunism on both sides of the transaction.

The solution to the dilemma of relational contracting seemed straightforward. Rather than impose abstract and general rules to regulate ongoing relationships, the law should simply identify and incorporate the “working rules” already being used successfully by the parties themselves. These working rules (or “bylaws” as Llewellyn also called them) needed the imprimatur of the state: the “jurisdiction” of the working rules was uncertain because they arose from custom and practice. Legal incorporation was necessary, therefore, in order to resolve “trouble” cases where the relevant norms were in dispute.

Llewellyn addressed the incorporation objective by reversing the common law presumption that the parties’ writings and the legal default rules (the law of contract) are the definitive elements of the agreement. Rather, Article 2 explicitly invites incorporation by defining the content of an agreement to include trade usage, prior dealings and the parties’ experiences in forming the contract. The parol evidence rule under the Code admits inferences from trade usage even if the express terms of the contract seem perfectly clear and are apparently “integrated.”⁴⁴ The invitation to contextualize the contract in this manner is explicitly embodied in the Code’s definition of agreement,⁴⁵ and it was amplified in Section 1-205 (now 1-303), which specified that course of dealing and usages of trade give particular meaning to, and qualify the terms of, an agreement.⁴⁶

Since Llewellyn’s purpose was to incorporate flexible and tailored defaults, he needed a mechanism by which these local norms could be identified by courts. That mechanism was the merchant tribunal—a panel of experts that would find specific facts—such as whether the behavior of a contracting party was “commercially reasonable.” To avoid questions of constitutionality, Llewellyn proposed to retain the lay jury as the final arbiter of the facts, informed by the merchant tribunal’s judgment about the relevant commercial working rules that applied to the particular dispute.⁴⁷ Unfortunately, the idea of the merchant tribunal was entirely too radical for the commercial lawyers in the ALI who dominated the drafting process. By 1944, Llewellyn had abandoned this key device for discovering the relevant social norms, while still retaining the architecture of incorporation, including the injunction that parties conform their behaviors to the supereminent norm of commercial reasonableness. Viewed in retrospect, eliminating the merchant jury while retaining the hopelessly vague notion of commercial reasonableness was a drafting disaster.⁴⁸

Grant Gilmore and Homer Kripke (Gilmore’s principal Adviser and the drafter of the 1972 revisions) believed that secured debt was a good thing.⁴⁹ Thus, they wanted more of it. Not surprisingly, therefore, Article 9 was enthusiastically received by secured lenders. Indeed, that enthusiasm explains the rapid success enjoyed by state legislators in securing adoption of the UCC in the 1960s. But the enthusiasm that secured lenders showed for Article 9 begs the question of why they found it so attractive.

Two partial explanations emerge. First, Article 9 imposed certainty and uniformity onto a field previously characterized by quirky, indeterminate, and widely varying rules that recall Gilmore’s earlier reference to the gates of hell. The Article 9 scheme of clear, bright-line rules for regulating asset-based financing caused both prospective creditors and debtors to believe that the new system provided laws superior not only to the quagmire of regulations that previously governed the field but to other entirely different methods of financing as well. There is undoubtedly some truth to this explanation. The preexisting regime of pigeonholed classifications, each with its own filing system and special set of rules, created unnecessary costs as well as traps for the unwary, and left—under virtually any rationale—odd holes in coverage and scope.

But there is a second explanation as well. It is undoubtedly true that the enthusiasm of secured creditors for the new system derives in part from the fact that Article 9 unabashedly promoted the institutionalization of secured credit; it vastly expanded on pre-Code laws both in explicit coverage and in the dramatic lowering of costs. Perhaps the most notable feature of the new law was the institutionalization of the “floating lien” that protected future advances financing.⁵⁰ A series of provisions were adopted that collectively enabled a single creditor to acquire first-in-line priority and use it to control the financing of a debtor’s entire production process from acquisition of raw materials to fabrication of finished products to sales and subsequent realization of account receivables. Both the floating lien and to a lesser extent the purchase money security interest exempt certain secured creditors from important features of Article 9’s general “first-in-time” priority rule, giving such creditors a favored status compared to other secured and unsecured creditors.⁵¹ Moreover, both classes of creditors were afforded relatively lenient filing requirements for preserving their priority claims to the debtor’s assets.⁵²

Thus, when one views Article 9’s primary innovations—the dual characteristics of certainty in results and partiality toward some secured creditors, the reason for the enthusiasm of financial institutions for Article 9 and thus for the UCC as an entity becomes clear. The new scheme provided secured creditors a regulatory system that not only reduced uncertainty in general but settled many of the long-standing doubts in their favor.⁵³

The evidence of this enthusiasm is clear from a glance at the contemporary market for credit. Secured financing has undergone an enormous transformation since the enactment of Article 9. Perhaps the most vivid illustration of this is the dramatic increase in the number and size of firms that rely on secured debt as their principal means of financing both ongoing operations and growth opportunities. With the rise of securitization, secured debt has become the linchpin of private financing, prompting even large firms to employ leveraged buyouts as a means of fleeing public equity markets for the safe harbors of Article 9. When viewed in these terms, it is unsurprising that most practitioners and commentators regard Article 9 as a blazing success. As I discuss in section IV, however, this intertwining of innovative and efficient rules with the special interests of the dominant interest group affected by Article 9’s rules has remained throughout the various revisions to Article 9 and, as a consequence, has clouded ultimate judgments about the success of the Code in the twenty-first century.

In recent years, the UCC has undergone a complete revision. The principal impetus for the revision project has been the need to adapt the statute to technological change. This process resulted initially in the revisions of Articles 3 (Commercial Paper) and 4 (Bank Collections) (as well as the promulgation of Article 4A on Electronic Transfers), the recommended repeal of Article 6 (Bulk Sales), and the addition of Article 2A (Leases). Subsequently, revisions to Articles 5 (Letters of Credit) and 8 (Investment Securities) were completed. The two substantive revisions that then remained were especially important events in commercial law: Article 9, regulating secured lending, had last been rethought in 1972 and Article 2, regulating sales, had never been revised. Both revisions generated substantial controversy. The Article 9 revision was completed in 2002 and adopted in all fifty states. But much of the scholarly literature of the past several decades asks whether the revision promotes the normative purposes of the Code or whether it reflects the political economy of the revision process itself.⁵⁴ The outcome in the case of Article 2 was quite different: all attempts to revise the article failed after twenty years of effort. Some scholars have argued that these different outcomes were predictable. Where the legal regime regulates the interests of relatively cohesive industries, the UCC lawmaking process is likely to function much differently than where the regulatory effects are diffused. Thus, the normative implications of the revision of Article 9 are substantially different from the implications of the failure to revise Article 2.

The Article 2 revision process has had a tortured history. In 1987, the Permanent Editorial Board for the UCC set out, under the auspices of a study committee, to consider modernizing the statute. Four years later, the study committee issued its report and recommendations, and the ALI and ULC appointed a drafting committee to begin work on a comprehensive revision of Article 2.⁵⁵ An important goal of this effort was a proposed Article 2B designed to address the unique characteristics of software licensing transactions. The first public indication that the project was beginning to unravel surfaced when the ALI declined to approve the proposed Article 2B for computer information contracts on the ground that the drafting process, dominated by the software and information industry, had produced a “seller-friendly” statute.⁵⁶ The ULC decided, however, to go forward with the project on its own, reissuing the statute as the Uniform Computer Information Transactions Act (UCITA).⁵⁷

The split between the ALI and ULC broke into the open in 1999, when Revised Article 2 was brought forward for final approval. The revised article was approved by the ALI, but two months later the leadership of the ULC withdrew the draft from its members’ consideration after encountering severe opposition from industry interests. In an attempt to patch the tattered alliance together, ALI and ULC agreed on a newly reconstituted drafting committee which was directed to focus only on “non-controversial,” technical amendments to the existing statute.⁵⁸ Yet, in August 2001, ULC members voted overwhelmingly to reject the Proposed Amendments to Article 2 that had just been approved the preceding May by the ALI. This vote followed a last-minute effort by the Article 2 drafting committee to amend the scope provisions of Article 2 in response to continuing criticism from representatives of the software and information industries. In the months that followed, the Article 2 drafting committee approved a new version that did not amend the basic scope section of Article 2, but did amend the definition of “goods” to exclude “information.” The amendments, as revised, were then approved by the ULC in August 2002 and subsequently by the ALI in May 2003.

But multiple efforts to secure adoption of the 2003 amendments failed. The amendments generated considerable controversy and faced interest group opposition in the various state legislatures. Over the next eight years, not a single state adopted the amendments to Article 2. Recognizing the inevitable, the ALI withdrew the proposed amendments in May 2011, and so the story of the attempts to revise Article 2 ended not with a bang but with a whimper.

The open split between the ALI and ULC and the subsequent failure to secure adoption of even “technical” amendments reflects the intense interest group competition that emerged during the Article 2 revision process. Retail manufacturing interests, opposed to provisions that extended warranty liability for economic loss to remote sellers, were successful in blocking the adoption of the initial revisions to Article 2. In turn, consumer interests (including large-firm licensees), opposed to the “seller-friendly” provisions in the proposed Article 2B, were able to separate the computer information article from the rest of the UCC project. From there the battleground moved to rival efforts to either secure or block the further enactment of UCITA.⁵⁹ Thus, even in the subsequent effort to bring forward the seemingly uncontroversial amendments to Article 2, each side was able to block approval of the other’s proposals but was unable to secure approval of its own.

It is unlikely that Article 2 will ever be revised to deal directly with the unique contracting problems presented by new contracting practices. Despite the dramatic changes in contracting practices brought on by the information revolution, Article 2 remains today essentially as it was drafted by Llewellyn seventy years ago. Whatever happens in the future, therefore, common law courts will be called upon to resolve the increasingly intense normative debate over the domain of free contract in computer information transactions, as well as to fill gaps in commercial disputes arising from the new technology. Ultimately, the law will be updated by the common law mechanism that creates commercial law rules, but there will be few rules and they will develop slowly.

The UCC ushered in a new moment for uniform specialized statutory rules, ranging from commercial paper and bank deposits, to letters of credit, to documents of title, and to secured credit.⁶⁰ Unlike the failure to revise sales law, every one of these specialized commercial statues has been revised, some more than once. But just as the concern about private interests supplanting the public interest led scholars to doubt the fairness of the original statutes, the history of the revisions to the UCC’s specialized commercial statutes reveals a similar pattern and a similar skepticism. I first take up Article 9, the exemplar of this problem.

As I noted in section III, there was extensive interest group participation, largely by asset-based financers and banks, in the original drafting of Article 9. Grant Gilmore documented the accommodations that led banks and finance companies to support the UCC project that they had earlier rejected as a radical reform.⁶¹ This support developed after Homer Kripke, then a legal counsel to CIT Financial Corp., became one of the key Advisers to Gilmore and the other drafters.⁶² Kripke subsequently described how, during their drafting deliberations, banking interests blocked proposed clauses that would have imposed on them the costs of various consumer-protection provisions.⁶³ He reported that avoiding arousing the opposition of banks and finance companies was necessary in order to ensure passage of the UCC project.⁶⁴ Thus, it is undeniable that the original Article 9 was the creation of an interest-group-dominated process.

The business lawyers who served on the Article 9 study group revising Article 9 in the 1990s had similar preferences concerning the regulation of commercial practice.⁶⁵ The study group was comprised of two academic reporters and sixteen members—three legal academics and thirteen practicing lawyers, the largest number of whom were in-house counsel for banks and finance companies or private attorneys representing secured financing interests.⁶⁶ The Study Group revising Article 9 defined its mission as resolving “technical” problems that were susceptible to legal expertise, rather than undertaking possibly controversial reforms.⁶⁷ The privileged status of hands-on working knowledge of Article 9 rules thus gave the in-house counsel and the private commercial lawyers the power to determine the course of the revision. Efforts by the academic members to place significant reform proposals on the agenda were uniformly unsuccessful.⁶⁸ Buoyed by these successful efforts to draft revisions reflecting only the interests of secured creditors, the 1999 revisions to Article 9 were ultimately adopted in all fifty states.

The many successful revisions to the specialized commercial statutes in the UCC demonstrate that particular industries have been effective in creating, and preserving, law when the costs fall on diffuse groups. Indeed, the same influences that affected first the creation and then subsequent revision of Article 9 affected Articles 3 and 4 as well. These articles affect banks—but no other cohesive interest group—and bank lawyers played a large role in the original drafting process. These lawyers’ preferences also were close to those of the business lawyers in the ULC and the ALI. Because the political situation had not changed since the original UCC, it is unsurprising that the revised Articles 3 and 4 would resemble the original rules in relevant respects. The consensus view of participants in the revisions to Articles 3 and 4 was that the successful efforts to revise Articles 3 and 4 had produced “bankers’ legislation.”

These reports from participants in the Article 3 and 4 revision process are consistent with the observation that these study groups were industry dominated.⁶⁹ Both revisions passed the ALI and ULC, and both have been enacted into law in every state except New York. The new proposals are compatible with industry interests, but whether they serve the interests of other constituencies is hard to determine a priori. It is clear that Articles 3 and 4 are widely thought to be industry products, but that does not answer the question of whether the revisions are also in the public interest. There are, however, good reasons to believe that they are not.⁷⁰

In sum, banks and asset-backed lenders were initially successful in securing the adoption of UCC Articles 3, 4, and 9. Unsurprisingly, these agents have secured updates that create gains for them and have prevented amendments that would reduce those gains. To the extent that there is a public interest independent of the financers’ interest, it has not been represented in the creation of these current statutes.

Viewed from the vantage point of the end of the first quarter of the twenty-first century, the legacy of the Uniform Commercial Code is decidedly mixed. Article 2, the most ambitious and widely cited of the various articles of the Code, is hopelessly obsolete with little prospect of a revision that might address the very different contracting problems that commercial parties face today. To be sure, Articles 3, 4, and 9 have been revised frequently and remain relevant in their specialized spheres: they continue to provide the foundational rules governing the regulation of the markets in secured credit and commercial paper. But the evidence that these revisions were promoted and successfully promulgated by the very parties most affected by the regulation raises the continuing specter of distributional unfairness toward the third-party interests that are also subject to these commercial laws.

And yet, it is undeniable that the UCC has had a profound influence on the development of commercial law over the past seventy years. The innovations introduced by Llewellyn’s Article 2 were broadly adopted in the Second Restatement of Contracts and subsequently by common law courts. As a consequence, long-term supply and distribution contracts throughout the world, whether or not they are specifically covered by the UCC, operate under the umbrella of the Code’s default rules governing open terms, the battle of the forms, contract interpretation, excuse, and the incorporation of customary practices. Similarly, the incredible growth in the worldwide volume of personal property security transactions stands as a testament to the confidence that market actors have in the scheme of priority rules for Article 9 first introduced by Grant Gilmore and Homer Kripke. In the end, however, the question we must pose today is the same question the American bar posed at the beginning of the twentieth century: Can the state create institutions that are better than the common law courts at producing both efficient and fair commercial law rules? The answer, so far, is not clear.⁷¹