Uniform Commercial Code

Abstract: The cotton industry has almost entirely opted out of the public legal system, replacing it with one of the oldest and most complex systems of private commercial law. Most contracts for the purchase and sale of domestic cotton, between merchants or between merchants and mills, are neither consummated under the Uniform Commercial Code nor interpreted and enforced in court when disputes arise. Rather, most such contracts are concluded under one of several privately drafted sets of contract default rules and are subject to arbitration in one of several merchant tribunals. Similarly, most international sales of cotton are governed neither by state-supplied legal rules, nor by the Convention on the International Sale of Goods, but rather by the rules of the Liverpool Cotton Association. This Article draws on a detailed case study of contractual relations in the cotton industry to examine the ways that the rules, norms and institutions that constitute the industry's private legal system ("PLS") create value for transactors. It begins by describing the formal operation of the PLS and discussing the ways that its substantive rules, adjudicative approaches and arbitral procedures improve on those provided by the Uniform Commercial Code and the public legal system. It then describes the many steps taken by cotton industry institutions to strengthen the social and informational infrastructures of trade and analyzes how these efforts combine to make reputation-based nonlegal sanctions a powerful force in the industry. The paper then draws on this discussion to suggest that the availability of such sanctions may enable transactors to create value-enhancing contract governance structures that might be either unavailable or prohibitively expensive if their transactions were governed by the public legal system. The paper also discusses in great detail how the industry's efforts to support the legal and extralegal aspects of contracting relationships, together with certain other features of cotton institutions, have succeeded in creating conditions that are conducive to the creation, maintenance and restoration of cooperative contracting relationships. It concludes by suggesting that understanding how the cotton industry's institutions create value for transactors may help identify other industries and other contexts in which private institutions can play a positive role in supporting trade.