Rethinking Commercial Law’s Uncertain Boundaries

In a forthcoming article, I observe that commercial law has uncertain boundaries, challenging the traditional view that commercial law is a separate and distinct body of law. Various provisions of the Uniform Commercial Code (UCC) may be overinclusive, conflicting with provisions of property and contract law. For example, UCC Section 2-510 allocates the risk of losing defective goods in shipment to the breaching party, even if the breach is insignificant and the parties are unaware of the breach when the goods are in transit and regardless of which party owns the goods at the time of loss. The UCC also covers investment securities, notwithstanding that there is questionable justification for such inclusion. At the same time, the UCC excludes from codification certain commercial law concepts that derive from soft law or merchant practices.

My article hypothesizes and tests a range of possible explanations for why commercial law has uncertain boundaries. It also analyzes, more normatively, what those boundaries should be.

One hypothesis is that commercial law’s development has been path dependent and ad hoc. Commercial law developed over centuries based on merchant practices, aggregating into an informal body of path-dependent common law and “soft law” rules – often referred to as the “law merchant” or lex mercatoria. As merchant practices have changed, the boundaries of commercial law have become somewhat fluid – and hence, uncertain. The lack of agreement on the nature and sources of lex mercatoria has exacerbated that uncertainty. Path dependence can explain, for example, the inclusion of investment securities (such as corporate bonds or shares of stock) in the UCC.

Another hypothesis for its uncertain boundaries is that commercial law has allowed an unbridled law-making role for the business community. Commercial law allows this role in order to encourage the continued expansion of commercial practices and mechanisms through custom, usage, and agreement of the parties. This law-making role, however, lacks normative guidance. Additionally, business lobbying – sometimes insidiously sneaked and other times blatantly interjected into this law-making role – has introduced such irregularities as excluding bank deposit accounts as collateral.

Still another hypothesis (among others proposed in the article) is that commercial law’s uncertain boundaries reflect its lack of well-defined normative purposes. Other than increasing efficiency, which is itself vague, the purposes of commercial law are not well defined. Absent guiding principles, no body of law could have clear boundaries.

Next, the article analyzes what the boundaries of commercial law should be, starting by exploring what commercial law’s purposes should be. By definition, the fundamental purpose should be to facilitate commercial transactions, which involve commercially relevant – that is, business-related – transfers of property. This calls into question which transfers of property are business-related. In concept, these transfers could be defined by the consideration for the transfer, by the parties involved in the transfer, by the nature or use of the property being transferred, or by a combination of these.

Virtually all business-related transfers of property involve monetary consideration. Another relevant business-related trait is that the transferor or transferee, or both, is a person involved in business or trade who engages in the transfer in that capacity (broadly defined, a “merchant”). A possible additional business-related trait could be tied to the nature of the property being transferred. Traditional definitions of commerce refer to the transfer of commodities, products, or goods. In today’s world, however, those definitions are too narrow, because any property can be transferred in business. The article therefore does not tie business-related transfers to the nature of the transferred property; rather, it recognizes that any property could become the subject of a business-related transfer.

The foregoing analysis indicates that a business-related transfer of property should include any transfer of property, for monetary consideration, to which a merchant is a party. The article expands that definition to also include a transfer of property that is manifestly business-related, regardless of the parties thereto. This would include, for example, a transfer of mortgage loans or other financial assets to a trust or other special purpose vehicle in a securitization transaction.

Finally, the article evaluates its proposed boundaries for commercial law by comparing them with the actual scope of commercial law, using the UCC as a baseline. This comparison helps to verify whether those proposed boundaries are tethered to reality and also to assess whether the scope of the UCC itself should be modified.

The UCC is broader, for example, than the article’s proposed boundaries because it is not limited to business-related transfers. The concept of commerce, however, is business-related. Logically, therefore, commercial law – and theoretically therefore, the UCC – should only cover business-related transfers. The article recognizes that some parties might nonetheless wish to have their non-business-related transfers of property governed by commercial law. To that end, it proposes that they could incorporate commercial law provisions by reference into their contract. Incorporation by reference should be enforceable because it is not actually a choice-of-law rule; rather, it is merely a drafting technique equivalent to cutting and pasting the text of statutory provisions into a contract.

Having commercial law govern all business-related transfers of any property would resolve the anomaly that the UCC, with a minor exception, excludes unsecured commercial financing. It also would help to resolve a conceptual inconsistency in the UCC that has caused major business disruptions. On its face, Article 9 of the UCC, entitled “Secured Transactions,” applies only to transfers of property as collateral. Nonetheless, UCC Section 9-109(a)(3) provides that Article 9 also applies to sales of certain rights to payment. Although the goal of that subsection is to have the UCC cover those sales, which otherwise would be governed by a burdensome jurisprudence under the law merchant, courts, commentators, and even the drafters of the Official Comment that purports to explain Article 9’s application to those sales have become confused. Having commercial law more clearly govern all business-relatedtransfers of property would remove that confusion.

This post comes to us from Steven L. Schwarcz, the Stanley A. Star Distinguished Professor of Law & Business at Duke University School of Law. It is based on his recent article, “Rethinking Commercial Law’s Uncertain Boundaries,” forthcoming in 14 HARVARD BUSINESS LAW REVIEW (Fall 2023), and available here.