Self-Regulation in Global Electronic Markets through Reinvigorate

Argument

To effectively address the demands of participants in global electronic markets, it is essential to revitalize the concept of usage-of-trade Rather than being viewed simply as an interpretive tool used by courts to settle contractual disputes, usage should be recognized as a legal foundation that underpins the practices of market participants This perspective not only legitimizes and empowers these practices but also establishes a binding obligation for all involved participants.

In short, trade usages should be seen as a means of self-regulation

In a revitalized role, trade usage effectively reduces uncertainty, safeguards expectations, enhances flexibility, and promotes efficiency, benefits that alternatives lack Express statutory contract rules inadequately address the urgent needs of participants in global electronic markets, confirming Chen's conclusion that their application may lead to uncertainty without achieving potential Pareto improvements Additionally, the cumbersome and reactive nature of contract law reform fails to proactively meet the evolving needs of market participants, making it less effective in the long term.

2 Jim C Chen, Code, Custom, and Content: The Uniform Commercial Code as Law Merchant, 27 TEx INT'L L.J 91, 106 (1992)

Trade usages are regulated by Section 1-205 of the Uniform Commercial Code (U.C.C.), with all references pertaining to the official 1990 version published by the American Law Institute and the National Conference of Commissioners on Uniform State Laws.

The term "electronic" as used herein includes telephonic communication links, electronic messaging systems, and computer-to-computer interfaces

4 See infra note 185 and accompanying text

The significance of revising Article 2 is highlighted by recent law review articles, such as Raj Bhala's work on a pragmatic strategy for sales law and the Statute of Frauds, which examines proposed changes to the definition of these legal frameworks.

In the context of contract law reform for global electronic markets, significant discussions focus on the definitions of "goods" as outlined in section 2-105 and the statute of frauds in section 2-201, particularly for foreign exchange market participants The symposium titled "The Revision of Article 2," published in the William & Mary Law Review, highlights the importance of private contractual relationships and electronic data interchange (EDI) Notably, Amelia H Boss's work on Electronic Data Interchange Agreements emphasizes the role of private contracting in fostering a global marketplace.

Environment, 13 Nw J INT'L L & Bus 31 (1992) (discussing the contribution of EDI agreements to the facilitation of global electronic commerce)

1995] REINVIGORATED TRADE USAGES 867 bly meet their needs in the short-term

The global foreign exchange market serves as a prime example of an electronic marketplace that highlights the importance of revitalizing trade practices Within this market, banks face significant challenges in managing credit risk and Herstatt risk These risks become particularly complex when foreign exchange contracts are facilitated by brokers acting as agents for partially disclosed bank principals, making it difficult to accurately assess their extent and impact.

6 The term "currency" as used herein includes exchanges of credits to bank account balances denominated in a particular foreign currency

Credit risk refers to the possibility of nonpayment by the counterparty in a financial transaction, as defined by Charles J Woelfel in the Encyclopedia of Banking and Finance Specifically, in foreign exchange transactions, this risk arises when one bank may not receive payment in foreign currency from its counterpart Understanding credit risk is essential for managing financial transactions effectively.

Herstatt risk is a specific type of credit risk that arises when one party fulfills its obligation to deliver foreign currency, but does not receive the corresponding currency from its counterparty This nondelivery can happen if the counterparty defaults or is shut down by regulatory authorities before completing the transaction Additionally, time zone differences can exacerbate this issue, leading to potential losses for the party that has already made its payment.

Herstatt risk refers to the potential loss arising from the failure of one party to a foreign exchange transaction to fulfill its settlement obligations due to regulatory closure, as exemplified by the 1974 case involving Bankhaus I.D Herstatt KG.a.A This German bank was unable to complete its settlement with Delbrueck & Company after receiving foreign currency, leading to a significant risk when the two legs of a spot foreign exchange transaction do not occur simultaneously, particularly when the parties are in different time zones.

Hereinafter, unless distinguished expressly, "credit risk" is meant to encap- sulate "Herstatt risk."

Foreign exchange brokers are essential in connecting banks that wish to buy or sell foreign currencies In nine countries, including Australia, Belgium, Canada, Denmark, Hong Kong, Portugal, Spain, the United Kingdom, and the United States, approximately one-third of all foreign exchange transactions are facilitated through these brokers.

In France, the Netherlands, and Ireland, the proportion is 44-47 percent In Japan,

25 percent of transactions are arranged by brokers BANK FOR INTERNATIONAL SETTLEMENTS (BASLE, SWITZERLAND), CENTRAL BANK SURVEY OF FOREIGN EX- CHANGE MARKET ACTMTY IN APRIL 1992 Table VI at 21, 23-24 (1993) [hereinafter,

In transactions involving brokers, they serve as agents for partially disclosed principals, as defined by the RESTATEMENT (SECOND) OF AGENCY § 4(2) (1958) This means that while the other party is aware that the agent represents a principal, the principal's identity remains unknown It is important to note that agency law considerations do not impact the analysis presented in this context, as outlined in sections 26-27 and 50-51 of the same RESTATEMENT.

Banks handle transactions directly without brokers by managing risks effectively To mitigate potential financial exposure, a bank may cancel a foreign exchange contract with one party and establish a new agreement under the same terms with another party This approach helps banks navigate unwanted risks while maintaining transaction integrity.

Rules regarding assignment and adequate assurances of future performance are insufficient to address the bank's needs The bank cannot rely on those responsible for reforming contract law for assistance Instead, uncertainties surrounding credit risk can be mitigated through a market practice known as "switches," which allows for the substitution of one party for another in a foreign exchange contract This approach effectively demonstrates a solution to these challenges.

The concept of trade usage should be revitalized to serve as an effective self-regulatory mechanism in the financial sector To address regulatory concerns, it is suggested that banks engaged in foreign exchange trading implement a five-minute right of rescission This practice would allow banks a five-minute window upon identifying a counterparty to evaluate the associated credit risk, enabling them to rescind contracts if the risk is deemed unacceptable, request their broker to find a new counterparty, and replace the original counterparty with a more secure option.

Why the Global Currency Bazaar?

The global currency market, being the largest financial market in the world, serves as an exemplary case study for regulating uncertainty through enhanced trade practices With an average daily trading volume of one trillion dollars in foreign currencies, this marketplace is rapidly evolving In direct trading scenarios, automated dealing systems streamline negotiations and finalize transactions, with key sponsors including Reuters, Quotron Systems, Inc., and Minex Corp.

9 For discussions of the foreign exchange market, see ANDREW KRIEGER, THE MONEY BAZAAR (1992); J ORLIN GRABBE, INTERNATIONAL FINANCIAL MARKETs 63-174 (2d ed 1991); RUDI WEISWEILER, HOW THE FOREIGN EXCHANGE MARKET WORKS (1990)

10 See GRABBE, supra note 9, at 65

According to the 1992 BIS survey, the total reported gross turnover in foreign exchange contracts amounts to $1.354 trillion After adjusting for double-counting and reporting gaps, the "net net" global turnover averages $880 billion per day This turnover includes spot, forward, and derivative contracts For a detailed analysis of these contract types, refer to Raj Bhala's work.

Risk 1'ra.tk-offs in the Foreign Exchange Spot, Forward and Derivative Markets, 1 THE FINANCIER 34 (1994); B Albert, A Foreign Exchange Primer for Commercial

1995] REINVIGORATED TRADE USAGES 869 getting bigger: average daily turnover increased 35 percent between April 1989 and April 1992 12

The significant U.S interest in the bazaar underscores the need for stronger legal recognition of trade usages U.S commercial and investment banks actively participate in bazaar trading, while brokerage firms facilitate transactions among traders Additionally, the Federal Reserve often intervenes to influence the U.S dollar's exchange rate with other currencies The U.S is intrinsically linked to the bazaar due to the dominance of its currency, as the U.S dollar accounts for 82% of all foreign exchange trades, making it the most widely traded currency globally.

The foreign exchange market exemplifies a unique case study in trade practices and electronic commerce due to its distinct characteristics This highly liquid marketplace operates 24/7, leveraging advanced technology to facilitate transactions The consistently high trading volumes are a reflection of its continuous operation, attracting thousands of commercial and investment banks globally While London, New York, and Tokyo stand out as the primary trading hubs, the market itself is decentralized, allowing for extensive participation from various financial institutions worldwide.

12 1992 BIS SURVEY, supra note 8, Table I at 6 With respect to the "net- net" global turnover, the increase during the same period was 42 percent 1992 BIS SURVEY, supra note 8, Table I at 6

According to the 1992 BIS Survey, the German deutsche mark is involved in 40% of all transactions, making it the most significant currency The Japanese yen follows, appearing in 23% of transactions, while the English pound accounts for 14%.

14 In general, liquidity refers to the amount of time required to turn an asset into cash - the shorter the time period, the more liquid the asset See

In the foreign exchange market, the time it takes to exchange one currency for another is crucial for liquidity Major currencies like the dollar, yen, pounds, and marks benefit from a high volume of trading by numerous banks Interestingly, while the largest 8-10 banks only represent 30-40 percent of daily turnover, smaller institutions significantly contribute to market activity.

1988, at 34 Naturally, trading in some currencies (like dollars, yen, and pounds) is more liquid than other currencies (like United Arab Emirates dinars, Indi~ rupees, and Turkish lira)

London boasts the largest average daily turnover in the financial market, reaching $300 billion, resembling a centralized stock exchange Trading participants are globally dispersed, with emerging financial hubs like Madrid, Athens, and Copenhagen experiencing the fastest growth in trading volumes The telecommunications revolution, facilitated by fiber-optic and satellite communication, enables bank principals and their broker agents to maximize their trading efficiency.

United States ($192 billion), and Japan ($126 billion) 1992 BIS SURVEY, supra note 8, at 13, Table IV at 14 See also James Blitz, All Change in Foreign Ex- changes, FIN TIMES, Apr 2, 1993, at 15

17 Between April 1989 and April 1992, turnover in Spain and Greece increased by more than 170 percent, and Denmark's growth rate was 112 percent

1992 BIS SURVEY, supra note 8, at 13

The foreign exchange market operates as an over-the-counter market, meaning there is no central physical location for currency trading Instead, traders work from major commercial banks worldwide, utilizing computer terminals, telephones, and other communication channels to execute trades For instance, when an FX trader in New York exchanges dollars for pounds with a trader in London, they agree on a price over the phone and quickly record the trade in their bank's system The actual transfer of currencies is handled later through electronic confirmation messages, where each bank settles the transaction by transferring deposits electronically This process highlights the efficiency and speed of currency exchange in the global market.

GRABBE, supra note 9, at 65-66 (emphasis supplied except for "settlement") As

According to Grabbe, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) is the predominant international financial communications network This Belgian not-for-profit cooperative organization was established in May and plays a crucial role in global banking transactions.

As of 1990, the SWIFT network connected 3,000 banks across 67 countries, facilitating the exchange of an average of 1.1 million electronic messages daily regarding foreign exchange and cross-border financial transactions These messages are transmitted through central operating centers located in Brussels, Amsterdam, and Culpeper, Virginia, which are linked to regional processors, allowing individual banks to connect seamlessly For a detailed look into the dynamics of a foreign exchange trading floor, refer to J Madura's "International Financial Management."

With respect to settlement of foreign exchange payment obligations, the Clearing House Interbank Payments System (CHIPS) (owned and operated by the

Organization

SWITCHES: AN ILLUSTRATION

A The Attempt to Switch Counterparties

Bangkok Bank and Citibank are looking to engage in a dollar-yen spot foreign-exchange transaction, with Bangkok Bank aiming to sell 5 billion yen for dollars while Citibank intends to purchase the same amount of yen However, neither bank realizes that they could serve as counterparties for each other, highlighting the initial challenge of aligning their buying and selling interests A potential solution for this issue is for both banks to communicate directly via telephone.

21 See infra text accompanying note 185

22 Bangkok Bank and Citibank each have offices all over the world It is assumed that the Bangkok, Thailand office of Bangkok Bank and the New York office of Citibank are involved in the transaction detailed above

Bangkok Bank and Citibank play significant roles in the global foreign exchange market, operating through their offices in Thailand, the U.S., and various locations worldwide This setup allows for a realistic simulation of foreign exchange transactions, reflecting actual market conditions.

23 The most basic and significant foreign exchange transaction is a spot

According to the 1992 BIS survey, spot contracts represent approximately 50% of all foreign exchange transactions These contracts entail a commitment from one party to deliver a specific amount of one currency in exchange for a predetermined amount of another currency from the counterparty Typically, the deliveries are executed on the value date, which is usually within two business days following the trade date, when the contract terms are finalized Thus, spot foreign exchange transactions facilitate the settlement of payment obligations promptly.

In foreign exchange transactions, spot contracts for Canadian dollars and Mexican pesos typically have a value date of T+1, meaning one day after the trade date In contrast, forward contracts, which differ from spot contracts by having a value date that is more than two days after the trade date, represent the second most significant type of transaction in the market.

The dollar-mark currency pair is the most prevalent in spot transactions, representing 29.6% of average daily turnover, while the dollar-yen pair follows as the second most common, accounting for 15.7% of turnover, according to the 1992 BIS survey.

In 1995, the process of direct dealing in large currency transactions, such as a 5 billion yen deal, presents significant challenges for banks Firstly, reaching out to multiple banks for interest can be time-consuming and may yield no results, especially if the caller lacks current information about potential counterparties More critically, direct dealings compromise anonymity; for instance, when Bangkok Bank requests price quotes for a substantial yen transaction, other banks quickly become aware of its intentions, potentially leading them to anticipate that Bangkok Bank is looking to sell yen short This lack of privacy can influence market dynamics and trading strategies.

24 Alternatively, Bangkok Bank and Citibank may be members of the same electronic direct-dealing system sponsored by a third-party vendor See supra note

25 See THE FOREIGN EXCHANGE COMMI'ITEE, ANNUAL REPORT 23 (1986) (stating that "[b]y providing participants anonymity until a transaction's size and exchange rate is agreed to [sic], brokers contribute to the depth and breadth of the market.") A "long" position results from buying a currency See infra note 26 (discussing short selling)

The Foreign Exchange Committee, an independent entity supported by the Federal Reserve Bank of New York, includes representatives from around 30 commercial banks, investment banks, and foreign exchange brokers, along with officials from the Federal Reserve.

(1993) [hereinafter, ANNuAL REPORT 1993] It lacks the legal status of a self-regulatory organization and is akin to a trade association The comparable body in the U.K is the British Bankers' Association

26 Technically, short selling refers to the sale of an asset that the seller does not own at the time of sale The seller must enter into a covering transaction whereby the asset is purchased before the seller is obligated to deliver the asset to the buyer

Short-selling is a common practice in the global currency market, exemplified by a transaction involving the sale of 400 million pounds against the dollar For instance, if Bangkok Bank shorts 5 billion yen at an exchange rate of 101 yen per dollar, it must secure 5 billion yen to fulfill its obligation to Citibank on the settlement date.

Bangkok Bank can manage its short position by taking a long position in another spot transaction, such as purchasing yen in the spot market However, this strategy carries the risk of incurring losses if the spot rate for yen increases, potentially leading to costs that surpass the revenue from subsequent sales For instance, if the yen appreciates to 99 yen per dollar, the bank would need to buy 5 billion yen at this rate and sell it to Citibank at an earlier agreed rate of 101 yen per dollar This transaction would result in a purchase cost of $50,505,050.51, while the sale would only yield $49,504,950.50, culminating in a loss of $1,000,100.01 Therefore, Bangkok Bank will face losses on the short sale if the yen appreciates beyond 101 yen per dollar.

Bangkok Bank strategically engages in short selling yen, anticipating a depreciation of the currency By purchasing 5 billion yen at an exchange rate of 103 yen per dollar and subsequently selling it to Citibank at a lower rate of 101 yen per dollar, the bank aims to capitalize on the price difference for profit.

A second way to cover a short sale in the spot market is to enter into er banks may take dollar-yen positions that undermine Bangkok Bank's strategy 27

Bangkok Bank and Citibank engage in transactions through a foreign exchange broker, which acts as an intermediary to efficiently connect parties within the international banking network while ensuring anonymity during negotiations Communication between Bangkok Bank and the broker, referred to as the "Thai Broker," is facilitated through satellite telecommunications, including telephone and electronic messaging systems For instance, Bangkok Bank may purchase a call option on yen, allowing it to acquire yen at a predetermined price This strategy exemplifies the use of foreign exchange derivatives to hedge against currency exposure, with the possibility of employing short sales to protect positions in options as well.

See KRIEGER, supra note 9, at 65-79

27 For example, banks may buy yen knowing that Bangkok Bank will have to cover its short position by purchasing 5 billion yen These banks expect Bang- kok Bank may buy the yen from them and hope that Bangkok Bank's covering purchases will cause the yen to appreciate relative to the dollar Alternatively, the banks may sell yen anticipating that Bangkok Bank ultimately will dump yen, which will depress the price

Reactions to the Attempt

Citibank has three potential responses to a counterparty switch Firstly, it may agree to the change and purchase yen from Fuji Bank instead of Bangkok Bank, provided that Fuji Bank is deemed a suitable credit risk and the spot market rate remains stable at 101 yen per dollar during the transition Conversely, if Fuji Bank does not meet the credit risk criteria, Citibank is likely to assert its contractual agreement with Bangkok Bank, refusing to accept the removal of the latter from the transaction.

44 Because the identities of the principals are known instantly in a direct dealing arrangement, the need to switch counterparties does not arise therein

In a brokered transaction, one potential alternative to switching is for each bank principal to provide their broker with a list of counterparties they will not engage with However, this approach presents two significant challenges Firstly, it would be administratively burdensome, as the counterparties on each bank's list would frequently change due to fluctuating trading limits and credit risk assessments Consequently, these lists might require daily, or even multiple daily, updates.

In previous cases, when a bank provided a list of unacceptable counterparties to a foreign exchange broker, that broker often shared the list with other brokers and banks These entities sometimes relied on the originating bank's credit risk assessment rather than conducting their own evaluations, leading to significant trading difficulties for the banks listed Additionally, brokers and banks that base their decisions on this shared list could face antitrust liabilities for collectively refusing to engage with the listed banks, as outlined in the Sherman Act and discussed in antitrust law literature.

Fuji Bank is often called the "clearing bank" by participants in the foreign exchange market, as noted in a letter from Lewis W (Woody) Teel, Chairman of the Foreign Exchange Committee, dated September 23, 1993.

Citibank's attempt to disallow a switch may be short-sighted, as future transactions could see Bangkok Bank avoiding bad credit risks Commercial parties often have long-standing relationships and may prefer alternative dispute resolution methods to maintain these ties, opting for negotiated settlements over litigation While insisting on the original contract's performance through litigation is an option, it poses significant challenges for the New York Broker Moreover, if Citibank were to litigate against Bangkok Bank to enforce the initial contract, it would face complications related to jurisdiction, choice of law, and the enforcement of U.S judgments in a foreign country.

If the rate condition is unmet, a third reaction may occur due to the short-term volatility of exchange rates, causing fluctuations in the dollar-yen spot rate, such as a change from 101-100 to 100-99 yen per dollar Consequently, Citibank would need to pay $50 million instead of $49.5 million for 5 billion yen at a bid rate of 100 yen per dollar To mitigate this, Citibank might pressure the New York Broker to convince Fuji Bank or another counterparty to transact at the outdated rate of 101 yen per dollar This poses a challenge for the New York Broker, as persuading Fuji Bank could be difficult, potentially requiring unethical incentives, known as "points," which can include cash, cars, or drugs, raising significant ethical and legal concerns in the global currency market.

46 The exact figures are $49,019,607.84 and $49,504,950.50, respectively

The Federal Reserve Bank of New York, through its Foreign Exchange Committee, has raised concerns regarding the use of points in the foreign exchange market The committee has issued multiple warnings to market participants, highlighting the regulatory attention surrounding this practice.

The CY Statement issued on August 1, 1980, addresses the use of "points" in settling foreign exchange contracts, as detailed in the Annual Report 28 (1990) Additionally, the Foreign Exchange Committee's Annual Report (1989) provides insights on this topic across pages 4-6, 15-17, and 23 Margaret L Greene from the Federal Reserve Bank of New York also contributed to the discussion with her remarks on the practice of points in the brokered foreign exchange market during the Forex USA, Inc Senior Dealers' Seminar held from November 9-11, 1989, which is also referenced in the 1989 Annual Report.

The appropriate response from Citibank regarding the attempted switch of counterparties hinges on the legal basis for the action If the switch leads to the rescission of the Bangkok Bank-Citibank contract and the establishment of a new contract with Fuji Bank, then Citibank should agree to the substitution Conversely, without a valid legal foundation for the switch, Citibank can reject the proposed change and demand adherence to the original contract terms This ambiguity surrounding the legality of counterparty switches introduces uncertainty in how Bangkok Bank and Citibank can manage their credit risk exposure effectively.

Regulatory Concerns About Switches

Government regulators, most notably the Federal Reserve, have expressed concern about the practice of switches on three grounds 50 supra, at 18-22; THE FOREIGN EXCHANGE COMMITI'EE, ANNuAL REPORT 6-8, 22-36

In 1988, the Bank of England acknowledged the ongoing practice of point payments among participants in London, provided that proper disclosures are maintained This indicates a continued acceptance of such transactions, despite anecdotal evidence suggesting their persistence.

CJICJI 88-89 (May 1992); ANNuAL REPORT 1989, supra, at 6

48 Of course, without Citibank's assent, Bangkok Bank remains liable for Citibank's performance See infra notes 176-78 and accompanying text

If switches lack a solid legal foundation, Citibank understands that obtaining a new counterparty without the initial counterparty's consent, in this case, Bangkok Bank, is impossible once the terms "yours" or "mine" are stated To manage credit risk exposure effectively, Citibank could consider deferring the contract formation moment, delaying the utterance of these terms until after conducting a credit risk assessment of potential counterparties.

The proposed solution presents two main issues: it assumes that Citibank can identify potential counterparties, who may prefer to remain partially disclosed for an extended period, and it highlights that delaying contract formation is detrimental, as it results in fewer profitable brokered foreign exchange transactions being completed.

50 Acting through the Foreign Exchange Committee, the Federal Reserve has caused a number of pronouncements about switches to be issued See Teel Letter, supra note 45, at 23

The Federal Reserve has raised concerns about contract formation during meetings of the Foreign Exchange Committee and its subcommittees, questioning whether a contract exists between the two initial bank principals in the illustrated scenario.

On this point the Federal Reserve creates unnecessary confusion Regard-

Finding a substitute counterparty, such as Fuji Bank, for a new foreign exchange contract can take several hours, as the Federal Reserve prefers that banks like Bangkok Bank or Citibank do not maintain an "open" foreign exchange position for long periods This situation creates uncertainty regarding the credit risk exposure of the bank and can lead to disputes if the bank fails while the position is still open Additionally, due to exchange rate volatility and the applicable legal framework, it is clear that a contract is formed between Bangkok Bank and Citibank, as both parties demonstrate intent to be bound under Article 2 of the U.C.C., which eliminates the need for traditional requirements of offer, acceptance, and consideration.

Under the Convention for the International Sale of Goods (C.I.S.G.), a contract is established through specific articles Article 14(1) outlines that Bangkok Bank made a definitive offer to Citibank via brokers in Thailand and New York, indicating their intent to be bound According to Article 15(1), this offer becomes effective once the New York broker communicates it to Citibank Citibank's acceptance, as stated in Article 18(1), is conveyed through the brokers and constitutes a valid acceptance of the offer Article 18(2) specifies that this acceptance is effective upon reaching Bangkok Bank Furthermore, Article 16(1) clarifies that any attempted retraction of the offer by Citibank occurs after it has sent its acceptance, meaning the offer cannot be revoked effectively.

AMERICAN BAR AsSOCIATION SECTION OF INTERNATIONAL LAW AND PRACTICE, THE CONVENTION FOR THE INTERNATIONAL SALE OF GoODS 32-33, 80-81 (Daniel Barstow Magraw & Reed R Kathrein, eds., 1987) [hereinafter, THE CONVENTION]

Under common law, a contractual agreement is established through an offer from Bangkok Bank via Thai and New York Brokers to Citibank, followed by acceptance from Citibank through the same brokers The consideration for this agreement amounts to $49.5 million in exchange for 5 billion yen Notably, the acceptance by Citibank is deemed effective upon dispatch, occurring prior to any attempted switch, as outlined in the RESTATEMENT (SECOND) OF CONTRACTS.

A foreign exchange contract that includes a switch may be considered to involve an illusory promise, potentially rendering it unenforceable Each party essentially communicates, "I will deliver the required currency on the value date if I can," which highlights credit risk concerns and grants the promisor discretion over performance However, the promise may gain substance if it is accompanied by an obligation of good faith.

The hypothetical scenario involving the Bangkok Bank-Citibank deal highlights a critical situation While the Thai Broker seeks a replacement for Citibank, both banks hold open positions, having tentatively noted a dollar-yen foreign exchange trade with specific rates and quantities, yet lacking a counterparty If this period extends for several hours and Citibank faces bankruptcy or regulatory closure, the implications for both banks could be significant.

In 1995, the complexities of switched transactions in foreign exchange highlighted significant challenges As the time to locate a new counterparty increases, the likelihood of the agreed exchange rate changing also rises, making it difficult to finalize a new contract at the original rate Additionally, poor record-keeping practices can lead to situations where individual traders arrange switches without their senior management's awareness, potentially bypassing trading controls and exposing the bank to risks of fraud.

The Federal Reserve's current approach limits the potential of trade usages as a self-regulatory mechanism, potentially stifling future innovations in this area To address the Federal Reserve's concerns, a five-minute right of rescission usage is proposed Additionally, for nationally-chartered banks, the Office of the Comptroller is identified as the appropriate authority A key question arises regarding the enforceability of the Bangkok Bank-Citibank deal and whether it was rescinded due to the switch.

The stance on this issue may hinge on the deal's profitability for Citibank If the deal is advantageous for Citibank, the Federal Deposit Insurance Corporation (FDIC), as the receiver, could assert that a binding contract exists with Bangkok Bank under 12 U.S.C § 1821(c)(2)(A)(ii) (1994) However, Bangkok Bank may challenge this assertion.

52 For example, the Bangkok Bank-Fuji Bank transaction may be executed at a rate other than 101 yen per dollar, which is the prevailing market rate

53 See text accompanying infra notes 46-47

54 These concerns are evinced in the Federal Reserve's pronouncements (made through the Foreign Exchange Committee) about switches:

Recent discussions within the Foreign Exchange Committee have highlighted that while name substitution can improve the efficiency of the brokered foreign exchange market, it also introduces risks that could jeopardize its proper functioning Exchange rates fluctuate between the rejection of a counterparty and the identification of an acceptable clearing institution, often resulting in switched transactions executed at outdated rates These transactions require careful handling similar to off-market rate transactions The time frame for identifying a substitute counterparty can vary, ranging from a few minutes to several hours Additionally, current name substitution practices often occur without management's knowledge or approval, as they are informal arrangements between traders and brokers, not typically recorded as official switches.

Teel Letter, supra note 45, at 23

Assumptions About Governing Law

THE NARROW ROLE FOR TRADE USAGES

Players in the global currency market can seemingly manage their credit risk uncertainties through practices like switches, which should be recognized as a "usage of trade" under Section 1-205 However, these usages are often limited in scope, diminishing their effectiveness What participants in the foreign exchange market truly need is not only the acknowledgment of switches as a trade usage but also a revitalization of the concept of usage itself.

The Brooding Omnipresence

Article 2 contains numerous direct and indirect references to the term "usage of trade." Defined broadly in Section 1-205(2), "usage of trade" plays a significant role in various provisions throughout the article.

A usage of trade refers to a consistent practice or method within a specific industry or profession that creates a reasonable expectation of its application in a particular transaction To validate a usage of trade, it must be demonstrated as a factual occurrence If this usage is documented in a written trade code or similar document, the court is responsible for interpreting the content, as outlined in U.C.C § 1-205(2).

The RESTATEMENT definition of "usage of trade" closely resembles that in Section 1-205(2):

A usage of trade refers to a practice that is consistently followed within a specific industry, profession, or location, creating a reasonable expectation that it will be applied to a particular agreement This concept encompasses a set of rules that are regularly adhered to, even if specific rules may evolve over time.

RESTATEMENT, supra note 50, at Section 222(1) See also id at§ 219 (defining "usage")

Section 222(2) of the RESTATEMENT, like Section 1-205(2), states that the existence and scope of a trade usage are factual questions, and if documented in a written trade code, its interpretation falls to the court Additionally, Section 222(3) clarifies that a known or reasonably known trade usage can supplement or qualify an agreement, a concept echoed in Section 1-205(3) While Section 1-205 does not specify a knowledge test, it addresses local trade usages in Section 1-205(5).

One distinction between the U.C.C and RESTATEMENT defmition pertains to the term "usage." Unlike the U.C.C., the RESTATEMENT distinguishes between a

"usage" and "usage of trade" and defines the latter as a species of the former A

"usage," defined in Section 219, is a generic term encompassing any "habitual or customary practice." See infra note 95

The C.I.S.G does not explicitly mention "usage of trade," but this concept is referenced in the definition of "agreement" found in Section 1-201(3) This definition plays a crucial role in various provisions of Article 2 Additionally, the term "contract" in Section 1-201(11) includes the term "agreement," highlighting its interconnectedness within the framework of the C.I.S.G.

"trade usages." Not surprisingly "contract" is used throughout Article

Section 1-102(1) of the U.C.C distinguishes between two types of "usages" in contract law Article 9(1) of the C.I.S.G states that parties are bound by any usage they have agreed upon Additionally, Article 9(2) implies that unless otherwise agreed, parties are considered to have incorporated a usage into their contract if it is widely recognized and regularly observed in international trade, which they knew or should have known.

Article 9 of the C.I.S.G is considered less effective than U.C.C Section 1-205 due to the absence of a definition for "usage." Additionally, it remains ambiguous whether parties can establish a usage through means other than an explicit contractual agreement.

78 See U.C.C §§ 2-202 (parol evidence rule), 2-316 (exclusion or modification of warranties), 2-504 (shipment by seller), 2-723 (1991) (proof of market price)

An "Agreement" refers to the mutual understanding between parties, which can be discerned from their explicit language or inferred from surrounding circumstances, such as their previous interactions, trade practices, or performance history, as outlined in Sections 1-205 and 2-208 of this Act.

U.C.C § 1-201(3) (1993) (Emphasis supplied.) "Agreement" is used in Sections 2-

The article discusses key provisions of the Uniform Commercial Code (UCC), including definitions (106), the parol evidence rule (2-202), and general contract formation (2-204) It also covers modifications, rescission, and waivers (2-209), as well as the allocation of risks (2-303) and open price terms (2-305) Additionally, it highlights options and cooperation in performance (2-311), along with the liquidation or limitation of damages (2-718) and contractual modifications or limitations of remedies (2-719).

80 See U.C.C §§ 2-106, 2-107 (goods to be severed from realty), 2-201 (statute of frauds), 2-203 (seals inoperative), 2-204, 2-206 (offer and acceptance), 2-207 (additional terms in acceptance or confirmation), 2-208 (course of performance), 2-

The article outlines key provisions related to commercial transactions, including assignment and delegation (2-209), the general obligations of parties (2-301), and unconscionability (2-302) It discusses contracts based on output and requirements (2-305, 2-306) and addresses delivery terms, such as single lot delivery (2-207), place of delivery (2-308), and timing of delivery (2-309) Additionally, it covers warranties, including warranty of title (2-312) and implied warranties of merchantability (2-314) The article also examines specific contract types like CIF and C&F contracts (2-321) and the nuances of sales on approval and consignment (2-326, 2-327) Furthermore, it details the passing of title (2-401), the rights of sellers' creditors (2-402), insurable interest in goods (2-501), buyers' rights upon seller insolvency (2-502), and the seller's obligation for tender of delivery (2-503).

504 (shipment by seller), 2-505 (seller's shipment under reservation), 2-509 (risk of loss), 2-510 (effect of breach on risk of loss), 2-512 (payment before inspection), 2-

The buyer's rights under the Uniform Commercial Code include the right to inspect goods before acceptance (Section 513), the right to address improper deliveries (Section 2-601), and the effects of acceptance on contractual obligations (Section 2-607) Additionally, buyers can request adequate assurance of performance (Section 2-609) and address anticipatory repudiation (Section 2-610), with the option to retract such repudiation (Section 2-611) For installment contracts, specific provisions apply (Section 2-612), while Section 2-613 addresses casualty to identified goods Buyers may also seek excuses for non-performance (Section 2-615) and must provide notice for claims (Section 2-616).

In 1995, the revitalization of trade usages aimed to broadly interpret and implement practices that support its fundamental goals and policies A key objective of this approach is to facilitate the ongoing growth of commercial practices by allowing the usage and customs established by the parties involved.

In commercial litigation, the concept of "usage of trade" primarily serves as an interpretive tool, as outlined in Article 2 Recent cases demonstrate that Section 1-205 is often invoked when disputes arise over contract term interpretations Typically, one party attempts to define a term based on trade usage, while the opposing party challenges the relevance or existence of that usage Courts generally regard trade usage as a means to clarify contractual terms, rather than as a standalone argument.

The article explores the difference between trade usage as a means of translation and as an additional device in commercial dealings This distinction is examined in detail in the note titled "Custom and Trade Usage: Its Application to Commercial Dealings and the Common Law," published in the Columbia Law Review.

In legal contexts, "interpretation" encompasses two key processes: determining the intended meaning of contractual terms by the parties involved and assigning legal significance to those terms This second process, often called "construction," may not always align with the parties' original intentions.

J PERILLO, CONTRACTS 165 (3d ed 1987) [hereinafter, CALAMARI & PERILLO]

83 See, e.g., Ragus Co v City of Chicago, 628 N.E.2d 999 (lli Ct App

Reasons for the Narrow Role

Austinian Positivism

Vestiges of Austinian positivism may account for the narrow role This jurisprudence suggests that a trade usage cannot be

"law." 86 To be sure, the usage is habitually followed, and traders setting up a mobile home); Conmar Intl Trading Corp v Wearever-Proctor Silex Corp., No 86 Civ 8691, 1987 U.S Dist LEXIS 5328, at *8-9 (S.D.N.Y June 19,

Evidence of trade usage can clarify or enhance terms in written agreements, as demonstrated in various legal cases like U.S Industries, Inc v Semco Manufacturing, Inc and Blue Rock Industries v Raymond International, which involved disputes over delivery terms and specific contract language However, these precedents do not apply to the Bangkok Bank-Citibank contract, as it is an oral agreement.

84 See, e.g., Latex Glove Co v Gruen, 497 N.E.2d 466 (lli App Ct 1986) (stating that a usage of trade can fill gaps in a contract but not create "a new obligation for [the delivery of] separate goods")

85 See, e.g., Elizabeth Warren, Trade Usage and Parties in the Trade: An

Economic Rationale for an Inflexible Rule, 42 U PITT L REv 515, 516, 545-46,

In the context of contract interpretation, the concept of "usage of trade" serves as a critical foundation, as highlighted in various legal discussions Notably, Roger W Kirst emphasizes its role in defining terms within written agreements and introducing additional terms, while Joseph H Levie explores the implications of trade usage and custom under common law This underscores the significance of trade practices in shaping contractual obligations and interpretations.

The Uniform Commercial Code (U.C.C.) emphasizes that trade usage serves as a means to ascertain the probable intent of the parties involved, rather than acting as an independent source of obligation or authority In contrast to this perspective, Jim C Chen adopts a broader interpretation of trade usages in his work, suggesting a more integrated view of the U.C.C as a law merchant.

Trade usage plays a crucial role in contractual interpretation by serving three main functions: it defines jargon, clarifies ambiguities, and explains technical terms; it adds terms to the agreement; and it allows commercial meanings to take precedence over lay definitions This understanding is supported by the State of New York Law Revision Commission's study of the Uniform Commercial Code.

The New York Law Revision Commission Study (1955) emphasizes that Section 1-205 is designed to allow the introduction of trade usages as evidence, serving as aids for interpreting contracts and transactions governed by the Uniform Commercial Code.

86 See John Austin, The Province of Jurisprudence Determined (1832), in

1995] REINVIGORATED TRADE USAGES 895 may treat it as if it were binding on them But, a trade usage lacks the imprimatur of a sovereign whose commands are backed by threats of punishment: 87

Customary laws are viewed by many as having legal force independent of the sovereign or state, arising from the consistent observance by citizens rather than being imposed by authorities Although these laws can be abolished by the sovereign, they are recognized as positive law due to their enforcement by the courts However, their existence stems from the voluntary acceptance of the governed, rather than being established by political leaders Therefore, customary laws, while categorized as positive law, do not function as commands and do not qualify as laws or rules in the traditional sense.

A custom originates as a spontaneous rule of conduct followed by individuals, independent of formal laws established by authorities It transitions into positive law when courts recognize and enforce it through judicial decisions backed by state power Prior to this judicial adoption and legal endorsement, a custom remains a guideline of positive morality, widely practiced by citizens but lacking the formal force of law.

In "The Great Legal Philosophers" (1959), edited by Clarence Morris, various perspectives on contract law are explored, particularly through a positivist lens Georges R Delaume emphasizes the importance of comparative analysis of substantive rules across legal systems before selecting applicable laws in state contracts, questioning the efficacy of lex mercatoria as an alternative legal framework Keith Highet examines whether lex mercatoria has supplanted national laws in the interpretation of international contracts, while John S Ewart critiques commercial law as merely a collection of unrefined customs rather than a coherent legal body Additionally, J.W Harris offers a critique of Austinian positivism, providing further insight into the complexities of legal philosophy.

87 AUSTIN, supra note 86, at 338 See also BERNARD SCHWARTZ, MAIN CUR-RENTS IN AMERICAN LEGAL THOUGliT 339-40 (1993) (discussing the imperative char- acter of Austinian doctrine); HARRIS, supra note 85, at 32 (stating that "Austin defines the sovereign as a person or body of persons who receives habitual obedience within a political society and who renders habitual obedience to no one else" and that "[l]aw are defmed as the sovereign's general commands.") possess, from the general disapprobation falling on those who transgress it 88

Austinian positivists may acknowledge that Section 1-205 is a conditional command that could be deemed null if not followed For foreign exchange traders to establish a trade usage, adherence to Section 1-205 is essential; otherwise, their practice lacks legitimacy This perspective, however, reflects a limited view of law, necessitating a broader acknowledgment Even within an Austinian framework, Section 1-205 can be considered positive law as it represents an enforceable command from a sovereign authority, specifically a state legislature Although Section 1-205 does not explicitly mention usages like switches, this lack of specificity should not prevent their acceptance as positive law.

The argument supporting the idea that usages constitute law under Section 1-205 is reinforced by H.L.A Hart's critique of Austinian positivism Notably, formal enactment by a sovereign is not the sole method of law creation, meaning that specific trade usages, such as those involving switches, do not require official approval to be considered law Furthermore, many laws serve as power-conferring rules, allowing private parties to engage in particular practices and self-regulate their activities.

88 AUSTIN, supra note 86, at 342 See also H.L.A HART, THE CONCEPI' OF LAw 24-25 (1961) (stating that Austin's command theory requires "some persons or body of persons issuing general orders backed by threats which are generally obeyed, and it must be generally believed that these threats are likely to be implemented in the event of disobedience")

According to the Austinian approach, a usage of trade may not qualify as a command due to its lack of generality, as it is specifically directed at foreign exchange traders Additionally, it does not include a sanction, which is a key component of a command Austin emphasizes that every law must possess the characteristic of generality, while Hart notes that legal control is based on general directions.

89 See IIARRis, supra note 86, at 30

90 While Austin's command theory implies a personal sovereign (e.g., a king or President), in fact Austin looked to the Constitution to identify the sovereign

The sovereign is defined as the collective members of the electors from all state governments, as they hold the authority to amend the Constitution.

91 See HART, supra note 88, at 26 (stating that "[s]urely not all laws are enacted nor are they the expression of someone else's desire "), 43-48 (arguing that the legal status of custom is not based on judicial enforcement of that custom)

Textual Overemphasis

Two questionable textual interpretations may underlie the narrow role ascribed to trade usages First, Section 1-205(3) is prone to misreading 94 Courts and scholars may overemphasize the phrase

"give particular meaning" at the expense of the words "supplement" and "qualify.ằS 5 In truth, it is not a distortion of Section 1-205 to

94 Section 1-205(3) states that "[a] course of dealing between the parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or ã qualify the tenns of an agreement." U.C.C § 1-205(3) (Emphasis supplied)

95 A distinction between the RESTATEMENT and U.C.C definitions concerns the extent to which a "usage of trade" can serve as a legal rule The RE- STATEMENT provides that "[a]lthough rules of law are often founded on usage, usage is not in itself a legal rule but merely habit or practice in fact." RE- STATEMENT, supra note 50, at § 219 cmt a See also id § 221 cmt c (indicating that "if the rule of law is one which overrides contrary agreement, it also overrides usage; but if the law merely supplies a term in the absence of contrary agreement, usage can have the same effect as contary agreement") The role of a

Usage serves as an interpretive device when all parties are aware of it, allowing it to supplement or qualify an agreement Trade usage plays a significant role as a legal foundation for practices, enabling self-regulation among practitioners As noted by Professor Kastely, there is a textual basis supporting this broad application of usage in legal contexts.

The Code reflects the belief that the reasonable practices and standards within the commercial community serve as a legitimate source of legal obligation, establishing a framework for conduct in business transactions.

A "usage of trade" can enhance or clarify an agreement when the involved parties are aware of it, as outlined in the RESTATEMENT § 222(3) However, since a "usage of trade" is inherently linked to a "usage," it cannot function as a legal rule Instead, it acts as an interpretive tool, as demonstrated in illustrations 1-6 of Section 222 While U.C.C Section 1-205 also mentions that a usage of trade can "supplement or qualify" an agreement, it does not face the same limitations regarding its role as a legal rule.

The treatment of usages in the C.I.S.G is inadequate, as it fails to clarify whether a usage can create legal obligations beyond serving as an interpretive tool, as indicated in Articles 8(3) and 9 Furthermore, Article 4(a) explicitly states that the C.I.S.G does not address the validity of any usage Michael B Devine suggests that the C.I.S.G may grant legal effect to the practices of the parties involved, highlighting the need for clearer guidelines on this issue.

96 See supra note 95 and accompanying text; FARNSWORTH, supra note 83, at 509 ("the Code's use of the words supplement or qualify makes clear that more may be involved than merely interpretation of contract language, although many cases involve no more than that" (citation omitted)); JAMES J WHITE AND RoBERT

S SUMMERS, UNIFORM COMMERCIAL CODE 121 (3d ed 1988) (usages of trade "are relevant not only to the interpretation of express contract terms, but may them- selves constitute contract terms [and] these sources may not only supplement or qualify express terms, but in appropriate circumstances, may even override express terms.")

Professors White and Summers identify three legal implications of trade usage that influence contract language: it can add express terms, remove existing terms, and modify U.C.C provisions that would otherwise apply The uncertainty arises regarding whether trade usage can contradict explicit contractual language Official comment 2 to Section 2-202 suggests that trade usage is assumed to be part of the contract unless explicitly negated, while Section 1-205(4) asserts that express terms prevail over inconsistent trade usages This was exemplified in Kologel Co v Down in the Village, Inc., where a court ruled that the express requirement for delivery to a consignee in a bill of lading took precedence over a conflicting trade usage regarding delivery to a "notify party."

In 1995, the recognition of trade usages as integral to legal agreements was reinforced, emphasizing that actual expectations should be fully acknowledged within the law Section 1-205 establishes a foundational framework for incorporating trade usage into contractual interpretations, ensuring that these practices are respected in legal contexts.

The case of Provident Tradesman's Bank & Trust Co v Pemberton highlights the significance of trade usage in legal agreements In this instance, a bank financed a car dealer and a customer for a new car purchase, with a security agreement stating that neither party needed to notify the other However, a customary practice existed requiring banks to inform dealers if a customer's insurance policy lapsed, allowing dealers to secure their own coverage When the bank failed to notify the dealer of the policy lapse, resulting in the car being wrecked, the dealer refused to pay, leading the bank to sue Although the bank acknowledged the trade usage for notifications, it relied on the specific terms of the security agreement that contradicted this practice.

The court ruled in favor of the dealer, determining that trade usage could clarify the security agreement and create a separate legal obligation, despite conflicting terms in the contract This decision was supported by Section 2-202's official comment, which emphasizes that trade usages are inherently recognized in contract language unless explicitly negated As a result, banks, car dealers, and customers can now expect that notices will be mandated, with trade usage serving as a legal basis for notice that overrides any opposing contractual clauses Consequently, this usage effectively helps manage the risk of default on financing loans.

Official comment 4 to Section 1-205 is often misinterpreted due to its conflicting stance on usages It differentiates between mandatory legal rules and those that can be modified by mutual agreement among parties, leading to potential confusion in understanding its implications.

97 Amy H Kastely, Stock Equipment for the Bargain in Fact: Trade Usage,

"Express Terms," and Consistency Under Section 1-205 of the Uniform Commercial Code, 64 N.C L REV 777, 780 (1986) (citations omitted, emphasis supplied)

99 ld at 173 A.2d 780, 781-83 For Levie, Provident stands for the proposi- tion that a usage of trade may establish that a contract does not accurately reflect the intention of the parties See Levie, supra note 85, at 1112 However, as suggested above, a different but compatible view of the case is that recognized usages are a source of independent legal obligation

Trade usages can supersede variable rules by addressing aspects that parties may have overlooked or not explicitly agreed upon, as established in Provident, 173 A2d at 784.

Toward a Broad Role and Self-Regulation

Legislative Intent

The narrow interpretive role of trade usages in the U.C.C is unsatisfactory as it overlooks legislative intent and the connection between trade practices and the law merchant Article 2 highlights the pervasive nature of trade usages, suggesting that the drafters intended for these usages to play a more significant role than the limited interpretations allow Professor Kastely's insights indicate that Section 1-205 aims to enhance the importance of trade usages, positioning them as essential components of a contract rather than mere gap fillers.

The drafters aimed to create a flexible commercial code that could adapt to evolving commercial practices, avoiding a rigid framework that would quickly become outdated In 1955, the New York Law Revision Commission emphasized the importance of usages, asserting that they influence not only contractual terms but also the overall legal relationships between parties, a concept that could be effectively incorporated into the proposed Uniform Commercial Code.

The adoption of a usage as a rule of law goes beyond mere repetition; it introduces legal consequences that must be carefully considered Lawmakers face the challenge of determining not only the suitability of the usage for those it affects but also its appropriateness for enforcement through legal mechanisms.

To ensure the U.C.C remains relevant in governing 21st-century high-technology cross-border transactions, it must actively address the needs of participants rather than serve merely as a passive post hoc tool for trade usage.

103 See supra notes 77-81 and accompanying text

104 See supra III.B.2 Indeed, under pre-U.C.C contract law, the common practices of a trade were used to fill gaps left in an express contract See Kastely, supra note 97, at 778

105 See Kastely, supra note 97, at 779

106 See, e.g., U.C.C § 1-102(2)(b); N.Y LAW REVISION COMMISSION STUDY, supra note 85, at 14-15, 79-80

107 N.Y LAW REVISION COMMISSION STUDY, supra note 85, at 325

The N.Y Law Revision Commission Study highlights the importance of interpretive aids in resolving contractual ambiguities, suggesting that these tools can serve as proactive means of self-regulation for parties not currently in dispute.

The broad role of trade usages highlighted in this article aligns with international standards, such as Article 1.8 of the UNIDROIT Principles on International Commercial Contracts This article states that parties are bound by widely known and regularly observed usages in international trade, unless their application would be unreasonable Unlike Section 1-205, the Principles avoid ambiguous phrases like "give particular meaning," providing clearer guidance on the recognition of trade usages.

"supplement or qualify." Thus, their broad language gives legal effect to trade usages.

The Law Merchant

Limiting trade usages solely to an interpretive function overlooks their potential connection to Sections 1-205 and 1-103 Section 1-103, which emphasizes legislative intent and proper textual interpretation, can support a broader self-regulatory role for trade usages This section is considered one of the most significant provisions in the Uniform Commercial Code, acknowledging the ongoing relevance of the law merchant.

In his work "Law and Economic Growth: The Legal History of the Lumber Industry in Wisconsin 1836-1915," James W Hurst explores how trade usages effectively address the concerns of commercial parties, providing valuable insights into the legal and economic dynamics of the lumber industry during that period.

110 See UNIDROIT PRINCIPLES ON INTERNATIONAL COMMERCIAL CONTRACTS

IN UNIDROIT, THE PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS 19

(1994) "UNIDROIT" is the French acronym for the "International Institute for the Unification of Private Law." Id

For a comprehensive understanding of Section 1-103 of the Uniform Commercial Code (UCC), refer to key analyses such as David Frisch's examination of buyer's remedies and warranty disclaimers, which argues for the implications of mistake in the context of UCC Section 1-103 (43 ARK L REV 291, 1990), and Robert A Hillman's insights on the construction of the UCC.

The article references several key works discussing the Uniform Commercial Code (UCC) and its application Notable contributions include "Code Methodology" by Robert S Summers, which explores general equitable principles under Section 1-103, and Steve H Nickles' analysis of the methodological challenges and civil law approach to sources of law relationships under the UCC These scholarly discussions provide valuable insights into the complexities and foundational principles governing commercial law.

Code - Part II: The English Approach and a Solution to the Methodological Prob- lem, 31 ARK L REV 171 (1977); Mitchell Franklin, On the Legal Method of the Uniform Commercial Code, 16 LAW & CONTEMP PROBS 330 (1951)

1995] REINVIGORATED TRADE USAGES 903 for centuries the law merchant has been a source of legal obligation and thereby a means of self-regulation:

As a general rule "merchant law" embodied a respect for "merchant" practice as a primary source of regulation and the

"law" as a secondary control over commerce The ordinary undertakings of merchants were binding because they were

"intended" to be binding, not because any law compelled such performance Mandatory law was not to impede the self-sufficient pacts of the merchants

The agreement served as a fundamental principle in governing commercial conduct, overshadowing all other factors in its regulatory role It empowered the merchant to take control of their own fate, ensuring that their actions were guided by this central tenet.

A trade usage that meets the criteria of law merchant is not only supported by the legal framework outlined in Section 1-103 but also functions as a self-regulatory mechanism due to its nature as law merchant.

Unless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant shall supplement its provisions u.c.c § 1-103

The "law merchant" refers to the body of law that governs commercial transactions, originating from the common law of England and specifically regulating merchants According to BLACK'S LAW DICTIONARY, a "merchant" is defined as an individual who either deals in specific goods or possesses expertise related to the goods involved in a transaction, which may also extend to their agents or brokers who exhibit similar knowledge or skills.

U.C.C § 2-104 Undoubtedly, Bangkok Bank and Citibank qualify as "merchants."

113 LEON E TRAKMAN, THE LAW MERCHANT: THE EVOLUTION OF COMMERCIAL LAW 10 (1983) (emphasis supplied)

The question arises whether the law merchant is a static legal framework that ceased to evolve in England during the seventeenth century While Section 1-103 has become obscure and infrequently cited, often playing a minor role in legal decisions, it is essential to recognize the historical connection between the law merchant and trade practices As noted by Professor Farnsworth, this relationship underscores the law merchant's dynamic nature and its relevance to contemporary commercial law.

The Uniform Commercial Code (UCC) has its roots in the law merchant, a specialized set of customs and usages that regulated commercial contracts until the seventeenth century This historical framework laid the groundwork for modern commercial law, influencing how transactions are conducted today.

The challenge lies in defining when a usage of trade becomes integrated into the law merchant Is it enough for a practice to meet the Section 1-205 standard, or should further criteria, such as the duration and international prevalence of the practice, be considered? While reducing legal formalities can help incorporate a usage of trade into the law merchant, failing to impose additional tests may blur the line between the two, potentially undermining the integrity of the law merchant Critics argue that this could lead to the acceptance of trade usages that lack historical significance or widespread recognition.

One possible solution is based on the jurisprudence of Section 1-

Section 103 implicitly empowers merchants to create their own legally recognized rules This authority suggests that merchants should have the ability to establish specific regulations, particularly in disputes arising at fairs, which were pivotal to early trade Notably, Chief Justice Lord Mansfield emphasized the importance of understanding and applying trade usages in merchant controversies, often consulting a special jury of merchants for insights into commercial practices.

In the late 1700s, merchant juries were utilized in the U.S for commercial cases, as discussed by Morton J Horowitz in "The Transformation of American Law, 1780-1860." However, Professor Karl Llewellyn's proposal to have juries made up of merchants decide commercial cases was ultimately rejected by the National Conference of Commissioners on Uniform State Laws in 1942, as it was deemed inappropriate for laypersons to establish legal rules This debate highlights the evolving perspective on the role of specialized knowledge in the legal system.

The link between trade usages in global electronic markets and the evolving body of law merchant remains significant today As noted by Trakman, the international law merchant is continually adapting, particularly in the international crude oil market, to address the changing needs of the industry.

The relationship between the law merchant and its integration into common law has garnered less focus compared to discussions surrounding its historical incorporation Notably, Wyndham Anstis Bewes highlights this aspect in his work, "The Romance of the Law Merchant," where he explores the nuances of this legal evolution.

The law merchant complements the U.C.C by incorporating trade usages into agreements, offering a comprehensive framework that includes not only the terms of the agreement but also the enforcement rules and remedies available for breaches.

In contrast, usages pertain only to a particular practice associated with the agreement

Advantages of Self-Regulation

Reducing Uncertainty

A "usage of trade" serves as a valuable mechanism for minimizing uncertainty in business transactions by establishing legal obligations and facilitating self-regulation When a practice meets the basic criteria outlined in the U.C.C for a "usage of trade," the involved parties can consider it legally recognized Therefore, if a practice qualifies as a usage of trade, it is inherently permissible.

To achieve this result, a change is needed in the way Section 1-

205 is interpreted in theory and used in practice The link between

Reevaluating the concepts of "supplementing" or "qualifying" an agreement alongside "developing a common framework of understanding" is essential, particularly in the context of reducing uncertainty Authority plays a crucial role in this relationship, as trade usage grants permission and legal backing for specific market practices This authority fosters certainty among market participants regarding the legality of these practices By incorporating trade usages to supplement and qualify their agreements, participants essentially create their own legal framework.

118 See generally TRAKMAN, supra note 113, at 40-43 (discussing the evolving international law merchant through trade associations, codes, and conventions)

In the global currency market, switches can serve as a legal foundation that enhances and clarifies oral foreign exchange contracts, allowing participants to mitigate unwanted credit risks In the case of the Bangkok Bank-Citibank transaction, where the agreement's terms are undisputed, the critical issue is whether players are obligated to a contract they find unfavorable due to associated credit risks Each participant must understand if the right to a switch complements their oral agreement, with Section 1-205 offering a positive affirmation By revitalizing these trade usages, both Bangkok Bank and Citibank can confidently engage in brokered foreign exchange transactions without incurring undesirable credit risk The authority of trade usage surrounding switches will help minimize uncertainties related to credit risk exposure.

While switches can mitigate uncertainty, they do not completely eliminate Herstatt risk, as there remains a slight chance that the new counterparty, such as Fuji Bank, could face insolvency Nonetheless, by reducing credit risk through a counterparty switch, the associated Herstatt risk is also diminished.

Eliminating Herstatt risk is achievable through settlements occurring within the same time zone Implementing a centralized foreign exchange clearinghouse with a settlement facility could facilitate simultaneous settlements, ensuring a single-time zone process.

The avoidance of Herstatt risk would be possible with the implementation of a 24-hour, multi-currency payments system, which is currently lacking As illustrated by the example of a spot deal, existing single-currency payment systems are still in use In this scenario, Bangkok Bank will transfer yen to its yen-denominated account in Japan via the Japanese payments system, while dollar payments will be processed through the U.S payments system, specifically the Federal Reserve wire transfer network (Fedwire) or CHIPS.

The main obstacles to the advancement of multi-currency systems are primarily political and economic rather than technological The U.S is reluctant to allow dollar transfers through networks that it does not control or regulate, as this would undermine its sovereignty and authority over its currency Additionally, such a system could have negative implications for monetary policy, as it would enable foreign central banks, like the Bank of Japan, to create dollar-denominated overdrafts, thereby granting them the ability to issue credit in U.S currency, a power currently held by the Federal Reserve and U.S.-regulated banks.

Protecting Expectations

Banks engaged in foreign exchange trading, such as Bangkok Bank and Citibank, prioritize managing credit risk exposure and maintaining control over their own limits Upon entering a brokered transaction, they expect their counterparty to fulfill their central obligation by delivering the correct currency on the agreed value date and to remain within established trading limits If doubts arise regarding the counterparty's ability to meet these expectations, a credit risk issue emerges, prompting banks to consider switching counterparties as a solution to mitigate potential risks.

Switches serve as a crucial mechanism for regulating private credit risk, aligning with the primary goal of legitimizing trade usages to safeguard expectancy interests This is highlighted in Section 1-205(2), which emphasizes a "regularity of observance" that validates the expectation that such practices will be upheld The rationale behind this section is clear: if a contract can be shaped by shared expectations formed through trade usage, then it should indeed reflect those usages By granting legal recognition to switches as a trade usage, the expectations of institutions like Bangkok Bank and Citibank regarding their right to switch are effectively protected.

Flexibility

Trade usage serves as an effective tool for self-regulation due to its inherent flexibility This flexibility is highlighted by the straightforward process through which a usage can be established and demonstrated in legal settings One contributing factor to this simplicity is the distinction between various trade practices.

The reference to expectations in Section 1-205(2) has faced criticism for being poorly drafted, as it seemingly invokes the objective theory of contracts but actually requires courts to consider the subjective expectations of the parties involved Additionally, it fails to clarify which party bears the burden of proof regarding the existence of the usage.

The U.C.C does not designate which party must prove the existence of a trade usage; however, courts typically place this burden on the party asserting the trade usage, drawing from the traditional English law notion of "custom." As noted by Professor Warren, this principle underscores the importance of established practices in trade.

In the early 21st century, courts relied on a common law concept of custom to interpret disputed contracts using established trade practices A party claiming that a trade practice should dictate contract interpretation was required to fulfill stringent criteria Specifically, the custom needed to be reasonable, continuous, notorious, certain, universal, and legal, and it had to have existed for a duration so long that it was beyond living memory.

In today's fast-evolving cross-border financial services industry, technological advancements are reshaping markets, exemplified by the dynamic global currency exchange As a result, the traditional notion of "custom" is becoming outdated and impractical, as rapid technological shifts significantly shorten the timeframe for the emergence of new practices It is unreasonable to expect a practice to take ten or twenty years to be recognized as a legal custom, as multiple generations of customs will have emerged and faded within that span.

The drafters of the U.C.C wisely eschewed the inflexibility associated with the concept of a custom As official comment 5 to Section 1-205 states:

Under subsection (2) of Section 1-205, a usage of trade must demonstrate "regularity of observance," moving away from the outdated English criteria for "custom." It is not necessary for a usage of trade to be "ancient," "universal," or similar This provision allows for the recognition of new and currently observed usages, provided that the party asserting the usage can substantiate its existence and benefits, as illustrated in Wright v Commercial & Sav Bank, 464 A2d 1080, 1083 (Md Ct App 1983), where the burden of proof lies with the asserting party.

123 Warren, supra note 85, at 518-19 (citations omitted) See also Chen, suã pra note 85, at 95-98 (discussing pre-U.C.C cases on usages); Levie, supra note

To be enforceable at common law, a custom must meet several criteria: it must be legal, notorious, ancient or immemorial and continuous, reasonable, certain, universal, and obligatory Additionally, the English requirements for a custom are further elaborated in legal studies, emphasizing the role of customs as law and their relationship to trade usages.

1995] REINVIGORATED TRADE USAGES majority of decent dealers, even though dissidents ready to cut comers do not agree 124

The drafters of the statute did not maintain traditional requirements for trade usage, such as the need for it to be certain, precise, or universally recognized Modern courts acknowledge that proving a trade usage does not solely rely on evidence of repeated and long-standing applications Instead, regularity of observance—defined as the recognition and acceptance within an industry that justifies the expectation of a practice being followed—is also a valid method for establishing trade usage This flexibility in defining trade usage enhances its applicability in contemporary legal contexts.

125 See Levie, supra note 85, at 1107 Official comment 9 to Section 1-205 states that a usage need not be certain or precise U.C.C § 1-205 cmt 9 See also

REsTATEMENT, supra note 50, § 222 cmt b (indicating that even under the common law many of the traditional requirements have been eliminated)

Trade usage cannot alter legal rules that parties are not permitted to modify through mutual agreement This principle is illustrated in the case of Farmers Coop Assn v Cole, 239 N.W 808 (N.D 1976), where the court ruled against expanding the exceptions to the statute of frauds based on trade usage.

According to Section 1-205(2) of the U.C.C., a usage in trade does not need to be universally accepted; it only requires observation by a significant majority of reputable dealers This highlights the importance of established practices within a specific industry, as noted in the relevant legal discussions.

50, § 222 cmt b (indicating that even under the common law many of the traditional requirements have been eliminated)

In the case of Posttapes Associates v Eastman Kodak Co., the court examined the economic justification for a trade usage within the film industry, specifically highlighting how a film manufacturer's liability is confined to replacing defective film.

129 See, e.g., B.F Hirsch, Inc v Enright Refining Co., 577 F Supp 339 (D N.J 1983), affd in part, vacated in part, 751 F.2d 628 (3d Cir 1984), on remand

In the case of 617 F.Supp 49 (D N.J 1985), the court determined that the practice of applying a retainage assessment on scrap gold deliveries to a jewelry manufacturer did not constitute a recognized usage of trade Similarly, in Sun Oil Co v M!l' "Mercedes Maria", C.A No 80-4862 (E.D Pa Dec 29, 1982), the court found that a 0.5 percent allowance for transit loss in oil transportation was regularly observed, indicating an established practice in the industry.

Usages of trade provide clarity for parties regarding the interpretation of their agreements in court, though establishing a usage requires case-by-case factual determination without a fixed standard for the amount of evidence needed Disputes often arise about the existence of a usage, as seen in cases like Pennzoil Co v FERC, which examined the authorization for gas rate collection in contracts, and Wright v Commercial & Sav Bank This framework is particularly beneficial for parties in technology-driven markets seeking legal support for evolving practices Notably, the frequent occurrence of switches in transactions indicates their potential recognition as a trade usage, especially given the foreign exchange market's consistent acceptance and observance of such practices.

Proving the existence of a trade usage is straightforward, as highlighted by official comment 7 to Section 1-205, which states that "usages may be either general to trade or particular to a special branch of trade." This means that even if a practice is specific to a certain geographical area or type of activity, it can still be recognized as a valid usage It is not required for such practices to be prevalent in every foreign exchange trading center worldwide.

In the case of 1080 (Md Ct App 1983), the court determined that the removal of a name from a joint bank account did not constitute a usage of trade, primarily due to the absence of testimonial evidence supporting such a claim Similarly, in Carl Wagner & Sons v Appendagez, Inc., 485 F Supp 762, 771-72 (S.D.N.Y 1980), the court examined whether the acceptance of a salesperson's orders at a company's home office serves as a condition precedent for establishing a contract, highlighting the complexities surrounding trade usage in contractual agreements.

Efficiency

It is widely understood that a clear aim of the U.C.C is to promote efficiency in commercial transactions:

Commercial law primarily aims to establish rules that safeguard the flow of commerce, ensuring its efficient operation The Code embodies principles regarding the distribution of goods and services within the economy Each section is strategically crafted to reduce transaction costs, promoting allocative efficiency in the marketplace.

Trade usages serve as an effective method of self-regulation, enhancing the efficiency of contract formation, interpretation, and performance By minimizing transaction costs linked to negotiation, finalization, and execution, they streamline the overall process of conducting deals.

In the global currency market, banks are familiar with shorthand expressions for trading billions in various currencies daily, as their profits rely on executing a high volume of transactions with narrow profit margins Business news programs often showcase how foreign exchange players react swiftly to sudden price fluctuations caused by new economic and political information, emphasizing that nothing, not even lunch, should hinder their trading activities There is a clear link between minimizing transaction costs and reducing opportunity costs, as any delay in completing a transaction represents a lost opportunity for executing additional deals.

135 Warren, supra note 85, at 535 (citations omitted)

136 For an economic analysis of the reason why Section 1-205(3) presumes knowledge of a usage of trade by a party engaged in the trade, see Warren, supra note 85, at 535-46

137 The latter concerns foregone opportunities, that is, for example, a cost to Bangkok Bank and Citibank of lost trading possibilities created by the rapidly changing dollar-yen exchange rate

138 The foregoing analysis should not imply that usages of trade lead to unmitigated economic benefits For example, usages of trade can raise costs of

The graph illustrates the benefits gained by two players in the foreign exchange market from reduced transaction costs, specifically within the global dollar-yen market on a given day On the vertical axis, the price of yen is measured in millions of dollars, while the horizontal axis represents the quantity of yen traded in billions The downward-sloping curve indicates the total demand for yen from banks willing to sell, while the upward-sloping curve shows the total supply from banks ready to sell yen Additionally, entry barriers for new participants in the foreign exchange market arise from the need to understand market usages, particularly when new entrants are expected to possess constructive knowledge as outlined in Section 1-205(3) However, Professor Warren's example regarding market entry costs is flawed, as it incorrectly suggests that party A will enter the market with total production costs lower than expected revenue, while party C will not enter due to higher production costs.

Professor Warren's explanation of market entry based on total production costs and anticipated revenue is overly simplistic In the short run, sellers will only enter a market if they can cover their variable production costs, which fluctuate with output levels If they can do so, they will operate along their marginal cost curve, specifically at the point where it meets the average variable cost curve The "shutdown point" occurs when the market price is too low to recover both variable and fixed costs, making it economically unwise to continue production if losses exceed the fixed costs of remaining idle.

In the long run, the break-even equilibrium occurs when the price equals the marginal cost, and the marginal cost curve intersects the lowest point of the average total cost curve.

When costs are fully recovered, a seller evaluates market entry or exit by comparing the selling price of a good to its marginal production cost If the price meets or exceeds the marginal cost, entering the market is considered economically viable.

139 The demand curve is sloped downward because of the inverse relationship between the price of the yen (measured in dollars) and the quantity of yen demanded by banks

The supply curve for yen increases as its price in dollars rises, reflecting the direct relationship between price and the quantity of yen that banks are willing to sell This analysis relies on the ceteris paribus assumption, which holds that the prices of other currencies, the income of banks like Citibank and Bangkok Bank, and their preferences for various currencies remain unchanged For a comprehensive understanding of demand and supply curves, refer to Samuelson's work.

The Relationship Between Transaction Costs and Foreign Exchange Traders' Surpluses

Quantity of yen bought and sold (in billions)

L ABDI is Citibank's buyer's surplus with no transaction costs

2 ABCJ is Citibank's buyer's surplus with $2 million transaction costs

3 GFDI is Bangkok Bank's seller's surplus with no transaction costs

4 GFEH is Bangkok Bank's seller's surplus with $2 million transaction costs

Citibank is prepared to pay 90 yen per dollar for 5 billion yen, resulting in a total cost of $55.56 million If Citibank manages to purchase yen at a lower total cost, the difference between this amount and $55.56 million represents a "buyer's surplus." On the other hand, Bangkok Bank is willing to accept 110 yen per dollar, yielding a total revenue of $45.45 million Should Bangkok Bank sell yen for a higher total revenue, the difference between what it actually received and $45.45 million would constitute a "seller's surplus."

In a transaction cost-free environment, both buyer's and seller's surpluses are maximized, with an equilibrium exchange rate of 100 yen per dollar At this rate, Citibank pays $50 million, achieving a surplus of $5.56 million, while Bangkok Bank receives the same amount and earns a surplus of $4.54 million These surpluses are represented by the points ABDI for Citibank and GFDI for Bangkok Bank.

Citibank engages with potential sellers through the New York Broker, which earns a commission for successfully connecting Citibank with a counterparty Additionally, Citibank incurs overhead costs related to foreign exchange transactions, including telephone bills, electronic database fees like Reuters subscriptions, and financial market research journal subscriptions Similarly, Bangkok Bank faces these transaction costs, which are estimated at $2 million for each entity Despite these expenses, Citibank's willingness and ability to pay remain unaffected.

$55.56 million or Bangkok Bank to receive $45.45 million, but it does reduce their respective buyer's and seller's surpluses by $2 million

Consumers' surplus is a key economic concept that refers to the difference between the maximum price a consumer is willing to pay for a good and the actual price they pay This surplus represents the benefit or value that consumers receive when they purchase a product for less than what they were prepared to spend For further insights, refer to Samuelson and Blaug's works on economic theory.

Producers' surplus refers to the difference between the actual earnings from selling a product and the minimum amount a seller would accept to sell that product, which is the point at which they would prefer to not sell it at all.

Transaction costs significantly impact the financial outcomes for both Citibank and Bangkok Bank in their transactions Specifically, these costs increase Citibank's effective price to 96.15 yen per dollar while decreasing Bangkok Bank's effective price to 104.17 yen per dollar As a result, the buyer's surplus diminishes to $3.56 million and the seller's surplus drops to $2.54 million, leading to a total loss of $4 million in surpluses If transaction costs were to escalate to approximately $5 million, the transaction would ultimately be abandoned, completely erasing both parties' surpluses.

Legal recognition of trade usages is essential for maintaining the economic viability of transactions by minimizing the reduction of buyer's and seller's surpluses Institutions like Citibank and Bangkok Bank utilize shorthand verbal expressions to convey complex information quickly and clearly, avoiding the need for lengthy explanations or documentation This precision not only enhances understanding but also reduces the likelihood of costly disputes Expressions such as "yours" and "mine" function similarly to trade practices like switches, both playing a crucial role in influencing buyer and seller surpluses Ultimately, by minimizing transaction costs through established trade usages, transactions worth billions can be completed in minutes, allowing banks to swiftly pursue new, lucrative opportunities.

Why Not a Five Minute Right of Rescission Usage?

The Proposal

The Federal Reserve's cautious stance on switches may stem from valid concerns regarding the integrity of the global currency market and the safety of its participants However, this reluctance is detrimental, as it hampers the acceptance of switches as a revitalized trading tool and a self-regulatory mechanism Furthermore, this hesitation could stifle future market innovations related to switches To foster a more progressive approach from the Federal Reserve, adjustments to current usage could be made to alleviate regulatory worries.

A five-minute right of rescission (5 RR usage) could be implemented for foreign exchange contracts, allowing banks to demand a switch within five minutes of identifying their counterparty If a bank makes this demand during the specified time frame, the contract with the initial counterparty would be automatically rescinded, and any demands for additional compensation would be adjusted accordingly.

An international framework supports the proposal as a trade practice, particularly through foreign exchange trading associations such as the New York Foreign Exchange Committee and the British Bankers' Association Representatives from these organizations, along with officials from pertinent banking regulators, could collaborate to draft and publish an acceptable 5 RR usage proposal.

Under U.C.C § 2-309(1), if a contract does not specify a delivery time, it is considered a "reasonable time." Additionally, U.C.C § 1-102(3) allows parties to set their own performance standards, provided they are not "manifestly unreasonable." Therefore, participants in the global currency market can effectively establish the 5 RR guidelines.

The five-minute interval does not influence the contract formation process; instead, it acts as a "cooling off" period, similar to a condition subsequent based on the acceptance of ordinary credit risk exposure Any switch after this five-minute period will be automatically rejected by a foreign exchange broker, necessitating the identification of an alternative counterparty deemed acceptable by the banks within that timeframe.

The concept of a "suspended animation period" in commercial law is not new, as seen in various contractual practices For instance, contracts negotiated by representatives outside a company's headquarters often require home office approval, rendering them non-binding until such approval is granted This approval can be indicated by returning a signed contract, initiating performance, or allowing a specified time to pass without objection Similarly, the Federal Trade Commission (FTC) enforces a three-day cooling-off period for door-to-door sales, during which either party can rescind the contract In both cases, the essence of these practices lies in a brief timeframe where neither party is fully committed to the contract.

It would be important to prevent excessive use or abuse of the 5

The primary rationale for requiring RR usage is to mitigate extraordinary credit risk exposure, defined as a situation where entering into a contract poses an unsafe and unsound banking practice Such a scenario arises when credit limits or account caps are surpassed Therefore, a transition cannot be justified solely based on reasonable credit risk concerns, as banks inherently operate by accepting and managing these risks.

Meeting Regulatory Concerns

One significant benefit of utilizing the 5 RR approach is its impact on time constraints, as it creates a brief five-minute period of uncertainty for both the contracting parties and their careful regulator regarding the execution of the initial contract This method effectively addresses the Federal Reserve's primary concerns, alleviating the apprehensions associated with contract performance.

Professor Farnsworth emphasizes that proposals requiring home office approval should not be considered offers, which delays the contract formation until the necessary approval is secured.

1995] REINVIGORATED TRADE USAGES 919 ing to open positions and off-market transactions 157 -because a substitute counterparty must be found, and risks must be specifically ascertainable and quantifiable, within a discrete period

An innovative trading approach can completely eliminate the risk of an open position while maintaining the option to switch A bank can inform its broker that a foreign exchange transaction is "subject to switch," allowing the broker to communicate this condition to potential counterparties This enables counterparties who prefer not to consider a switch to decline the proposed deal from the beginning.

The 5 RR usage also would address the third regulatory concern identified above regarding record-keeping and disclosure 158 The 5

Foreign exchange brokers must monitor five-minute intervals and notify a senior manager at their associated bank whenever a contract is rescinded and replaced This clear division of responsibilities ensures effective recordkeeping and disclosure, as brokers are ideally positioned to manage these tasks efficiently.

It is necessarily the broker that informs a bank of the identity of its counterparty and handles a demand for a switch of the counterparty 159 ã

Four New Issues

Despite the advantages of the proposal, it raises significant challenges, particularly regarding the notice and evidentiary obligations for banks exercising the 5 RR usage of trade For instance, if Citibank fails to receive notification from the New York Broker about a switch due to a telecommunications failure, it raises the question of whether that switch would still be considered effective.

Second, what should be the legal standard for determining an

"extraordinary" credit risk? An objective stan.dard of dissatisfaction with the potential credit risk exposure obviously would be consistent

158 See supra note 54 and accompanying text

Brokers may require banks to provide a list of senior managers to notify if the 5 RR usage is exercised, and they can send confirmations electronically for both the initial and new contracts While contract law often emphasizes objectivism, credit risk evaluations remain inherently subjective, as demonstrated by varying perceptions among bank managers regarding significant transactions For instance, what one bank views as a reasonable risk may be considered imprudent by another This subjectivity could enhance certainty in the application of the 5 RR usage, focusing solely on whether the credit risk is deemed "extraordinary" by the bank involved Ultimately, the only way to eliminate uncertainty would be to establish an absolute right of rescission for any reason.

The demand to switch counterparties may arise from opportunistic motives, such as a bank like Bangkok Bank seeking to benefit from favorable exchange rate movements This raises concerns about the enforcement of the "extraordinary" credit risk standard and the obligation to act in good faith, as exploiting such situations would be deemed bad faith Ultimately, the market is expected to self-regulate, as trade usages inherently promote ethical practices Reputational risks serve as a deterrent against illegitimate behavior, ensuring that any bank engaging in opportunistic actions risks being ostracized from the global currency market, as brokers and traders will quickly become aware of unscrupulous practices.

160 See, e.g., MORTON HORWITZ, THE TRANSFORMATION OF AMERICAN LAW:

Between 1870 and 1960, the influence of objectivism is evident in the "good faith" definitions found in U.C.C Sections 2-103(1)(b), 3-103(a)(4), and 4A-105(a)(6), where it is characterized by "honesty in fact" and adherence to reasonable commercial standards of fair dealing Specifically, Section 2-103(1)(b) highlights the perspective of merchants and emphasizes fair dealing within trade This contrasts with Section 1-201(19), which defines "good faith" solely as "honesty in fact" regarding the relevant conduct or transaction.

161 See supra note 46 and accompanying text (illustrating that Bangkok Bank would benefit from a change in the dollar-yen spot rate to 100-99 yen per dollar)

162 See text accompanying supra notes 157-58

163 See Steven J Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 HARV L REv 369 (1980)

1995] REINVIGORATED TRADE USAGES 921 tion will not stamp out all opportunistic behavior-nor would exter- nal policing mechanisms

To transition from the current practice of currency exchanges that lack time constraints, record-keeping, and reporting requirements, players in the global currency market must adopt a more structured approach This involves implementing standardized protocols that ensure timely transactions, accurate documentation, and transparent reporting, ultimately enhancing the efficiency and reliability of currency trading.

Players should refine current practices through their trade associations to enhance the use of 5 RR This initiative is driven by two key incentives: the potential to preempt Federal Reserve regulation and the opportunity to avoid unfavorable judicial rulings.

If players fail to take action, the Federal Reserve may respond by attempting to prohibit switches, which would likely provoke resentment among them Such a move could push some foreign exchange activities offshore, into regions where switches are allowed, thus evading the Federal Reserve's regulatory oversight.

In the absence of regulation, courts may be called upon to evaluate the legitimacy of switches, potentially deeming them unreasonable and unenforceable due to public policy concerns, particularly those upheld by the Federal Reserve Alternatively, courts might find the practice acceptable but impose constraints that contradict the players' needs This judicial intervention creates uncertainty, further complicating the situation for the players involved.

Lingering Reservations: Disharmony and

ALTERNATIVES TO SWITCHING

Participants in a global electronic market should be allowed to self-regulate through trade usages, despite the existence of commercial codes, as these codes may not adequately address the unique needs of the market Concerns about morality and regulatory disharmony often lead to a preference for rule-based regulation, but such rules can leave some participants disadvantaged and increase uncertainties in transactions.

The Assignment Approach: Not a Pareto

Bangkok Bank's effort to exit a foreign exchange contract can be seen as an effort to transfer its right to receive $49.5 million and delegate its obligation to deliver 5 billion yen to Citibank According to Article 2, there is a permissive framework for assignment and delegation, with Section 2-210 explicitly stating that "[a] party" has the ability to engage in such actions.

Bank Negara, Malaysia's central bank, engages in foreign currency trading for profit However, many regulators contend that central banks should refrain from such activities due to their access to sensitive information regarding monetary policy.

Under U.C.C § 2-210 cmt 1, the modern legal perspective emphasizes that rights are generally assignable, contrasting with earlier laws According to Calamari and Perillo, the prevailing view supports the assignability of rights and the delegability of duties, with certain exceptions noted Farnsworth also reinforces this notion, highlighting the shift towards a more flexible approach in commercial transactions.

"[t]oday most contract rights are freely transferable")

The RESTATEMENT provisions on assignment and delegation closely align with Section 2-210, as detailed in §§ 317-20 Unlike the RESTATEMENT, the C.I.S.G does not include specific provisions for assignment or delegation, which means that local laws, such as the U.C.C., will apply in these situations It is noted that a party may fulfill their obligations through a delegate, and generally, all rights of either seller or buyer are assignable unless otherwise agreed However, assigning the entire contract is often impractical.

Section 2-210 is designed to protect the non-assigning party by ensuring that their expectations and obligations remain intact Once the New York Broker notifies Citibank of its counterparty, Citibank begins preparing to exchange foreign currencies with Bangkok Bank rather than Fuji Bank, forming specific expectations regarding Bangkok Bank's performance and its own responsibilities Citibank may doubt the purported assignee's ability to meet these expectations or find that fulfilling obligations to the assignee would be more challenging than to the original assignor Consequently, Section 2-210(1) prohibits Bangkok Bank from delegating its obligation to deliver 5 billion yen to Fuji Bank if Citibank has not consented.

A significant interest exists in ensuring the performance of the original promisor According to Section 2-210(5), delegating performance can create reasonable grounds for insecurity, allowing a party to demand adequate assurance of future performance as outlined in Section 2-609 Additionally, Section 2-210(2) prohibits Bangkok Bank from delegating its obligations.

Section 2-210(2) establishes a presumption that general terms in a contract assignment encompass both the assignment of rights and the delegation of duties It simplifies the process by stating that an assignment does not require a written form or specific wording.

Under U.C.C § 2-201, an assignment does not need to be in writing, and since Section 2-201 is assumed to be abolished, it does not apply to contracts for the sale of goods as per Section 1-206 Therefore, Bangkok Bank can orally assign its contract to Fiji Bank However, it's important to note that official comment 7 to Section 2-210 clarifies that this section does not encompass all legal aspects of delegation and assignment, and other laws may impose specific requirements regarding the form of an assignment or the necessity for notice.

The restrictions on assignment outlined in Section 2-210(2) are not driven by a general opposition to assignment, but rather by the need to protect the reasonable expectations of the obligor at the time the contract is formed.

The delegation of performance does not absolve Bangkok Bank from its obligations or liabilities unless Citibank consents or Fiji Bank fulfills the performance According to Section 2-210(1), a party delegating performance remains responsible for any duty to perform and any potential breach of that duty.

In 1995, it was established that a party could assign its rights to receive $49.5 million only if such an assignment would not significantly alter the obligations of the other party, increase their contractual burdens or risks, or adversely affect their ability to secure performance in return.

Current legal principles indicate that the right to receive payment is typically assignable, including cases involving foreign currency transactions The anticipated receipt of 5 billion yen from a foreign obligor to an offshore bank account clearly constitutes a monetary payment Additionally, the obligation to pay money is generally delegable, regardless of the delegate's creditworthiness, as the original obligor retains liability for the payment.

The exceptions outlined in Section 2-210(1)-(2) create uncertainty regarding the assignment of the complete dollar-yen contract Citibank may argue that its burden has significantly increased and its chances of receiving reciprocal performance are compromised Specifically, Citibank might have reached its trading limit with Fuji Bank, and raising this limit would introduce additional risks, constituting a material change in its obligations Moreover, Citibank may question Fuji Bank's ability to deliver 5 billion yen on the value date, raising concerns about Herstatt risk In terms of delegation, Citibank could assert that it has valid reasons to believe that performance by Bangkok Bank would be less satisfactory than that by Fuji Bank, as it relies on the integrity, reputation, and skill of its counterparty, making performance by Bangkok Bank a personal matter Additionally, Citibank may argue that Bangkok Bank would lack the necessary supervision or control over its delegate.

In sum, the central thrust of Citibank's argument is that the purported assignment compels it to assume imprudent risks An ag-

180 CALAMARI & PERILLO, supra note 82, at 735

181 CALAMARI & PERILLO, supra note 82, at 761

Citibank has the right to request sufficient assurance from Fuji Bank regarding its capability to fulfill obligations as outlined in Section 2-210(5).

Citibank's objection to delegating performance to Fuji Bank prevents a novation, which would replace Bangkok Bank with Fuji Bank as the counterparty and relieve Bangkok Bank of its obligation to deliver 5 billion yen.

The Adequate Assurances Approach

Rather than switching counterparties to mitigate credit risk, Bangkok Bank should insist that Citibank provide sufficient assurance of future performance Under Section 2-609, if Citibank fails to give adequate assurances, it constitutes a repudiation of the dollar-yen contract, allowing Bangkok Bank to rescind the agreement.

A potential conflict arises between UCC Sections 9-318 and 2-210 regarding the assignability of contracts If Citibank communicates to Bangkok Bank that their contract is non-assignable, while satisfying the writing requirement of Section 9-203(1)(a), Section 9-318(4) invalidates any contractual provision that prohibits the assignment of an account This leads to the possibility that the dollar-yen transaction may be considered an "account," allowing Bangkok Bank to argue for the assignment based on Section 9-318(4) In contrast, Citibank could reference Section 2-210(1)-(2) to support its position that the contract remains non-assignable.

Bangkok Bank's argument regarding Section 9-318's specificity compared to Section 2-210 hinges on whether the transaction involves the sale of an "account." However, the classification of yen as "goods" is questionable According to Section 9-106, an "account" refers to any right to payment for goods sold, but the $49.5 million from selling 5 billion yen at 101 yen per dollar may not qualify The U.C.C defines "goods" in Section 9-105(1)(h) as movable items, explicitly excluding money Since yen is recognized as "money" under Section 1-201(24) as a medium of exchange authorized by the Japanese government, it does not meet the criteria for "goods" in this context.

The applicability of Article 9's definition of "goods" in dollar-yen transactions is questionable, as no security interest is present; therefore, the Section 2-105(1) definition should be considered, which may classify yen as "goods."

190 There is no changeã in Section 2-609 in revised Article 2, except that it is renumbered 2-608 Hence, the above analysis would be unaffected by the enactment of the revision

The common law rule outlined in Section 251 of the RESTATEMENT aligns with Section 2-609, with four notable exceptions Specifically, under Section 251(1), an obligee may request adequate assurances from the obligor only if the obligor's failure to perform would significantly impact the agreement Additionally, the application of Section 2-210 indicates that relying solely on Section 2-609 does not fulfill the parties' requirements, as it does not provide Bangkok Bank with the necessary certainty.

The determination of "reasonable" grounds for insecurity in brokered transactions, where the identification of counterparties occurs post-contract formation by agents of partially disclosed principals, remains unclear and fact-dependent Under U.C.C § 2-609, the concept of "reasonableness" serves as a limiting factor, while RESTATEMENT Section 251 diverges by not requiring written demands for adequate assurances Additionally, unlike Section 2-609(4), RESTATEMENT Section 251(2) does not impose a 30-day deadline for providing such assurances and allows the obligee to treat a failure to provide adequate assurance as a repudiation.

The C.I.S.G does not grant the right to request adequate assurances for future performance; however, it permits a party to suspend its obligations if it is evident that the other party will fail to fulfill a significant portion of their commitments.

(a) a serious deficiency in his ability to perform or in his creditworthiness; or

(b) his conduct in preparing to perform or in performing the contract

C.I.S.G Article 71(1) establishes a more limited criterion for suspending performance compared to the "reasonable grounds" standard outlined in Section 2-609(1) for requesting adequate assurance This distinction highlights the differing approaches to performance suspension in international sales agreements.

Article 71(1)(a) of the U.C.C clearly identifies a lack of creditworthiness as a valid reason for suspension, making its application to the Bangkok Bank-Citibank transaction less ambiguous compared to Section 2-609(1).

According to Section 2-609(1), if one party has reasonable concerns about the other party's ability to perform their obligations, they can request written assurance of performance Until this assurance is received, the concerned party may suspend any performance that has not yet been compensated, provided that such suspension is commercially reasonable.

While a written demand is typically required, a fax may suffice in certain situations, as courts have not always insisted on strict adherence to this formality For instance, in AMF, Inc v McDonald's Corp., the court excused a buyer's failure to provide a written demand because the seller was clearly aware that the buyer had suspended performance pending adequate assurances This flexibility makes the rule applicable in global electronic markets, where a high volume of transactions occurs rapidly, generating significant profits.

192 See WHITE & SUMMERS, supra note 96, at 234-35; FARNSWORTH, supra note 83, at 643-44

193 The difficulty is illustrated by Farnsworth's own statements On the one hand, "[m]ere doubts by one party that the other party will render his perfor-

Citibank may contend that there are no reasonable grounds for change, as its creditworthiness remained unchanged at the time of contract formation Conversely, Bangkok Bank could assert that the disclosure of Citibank by the Thai Broker constitutes a significant change in circumstances.

Section 2-609(2) suggests that the reference to "commercial standards" may not significantly assist merchants, as it broadens the scope of events justifying Bangkok Bank's request for adequate assurances beyond the dollar-yen transaction The question arises whether Bangkok Bank is required to conduct a credit analysis or establish a trading limit for Citibank before making such a demand, or if it can rely on rumors regarding Citibank's potentially unstable financial condition and possible defaults on its commercial paper obligations.

The determination of what constitutes "adequate" assurance of performance remains ambiguous, even when "reasonable" grounds exist The requirement for the seller to act in good faith and adhere to commercial standards may not provide clear guidance While Bangkok Bank can demand more than what the dollar-yen contract stipulates, their requests cannot be deemed excessive Consequently, it is challenging to ascertain whether Bangkok Bank's dissatisfaction is justified Furthermore, even in the absence of UCC 2-609, a party may act on the belief that the other party will not perform However, mere doubts about the other party's solvency do not grant the first party the right to suspend performance, a stance supported by questionable authority from pre-U.C.C cases.

According to Official Comment 1 to Section 2-609 of the UCC, a significant decline in either party's willingness or ability to perform between the contract signing and the performance date poses a threat to the other party, potentially jeopardizing a substantial portion of their contractual expectations This principle is further illustrated in the case of Field v Golden Triangle Broadcasting, 305 A.2d 689 (Pa 1973), cert denied, 414 U.S.

1158 (1974) (a demand for additional security is not justified where "there has been no change in circumstances to give rise to reasonable ground for insecurity")

Commercial Law Reform: An Apostasy

SUMMARY

To enhance self-regulation in global electronic markets, trade usages must be revitalized and recognized as having a solid legal foundation By expanding the concept of usages beyond merely interpreting disputed contract terms, market participants can confidently engage in these practices, knowing they establish legal obligations This empowerment allows them to self-regulate effectively through their established trade usages Notable examples, such as switches and the 5 RR usage in the global currency market, exemplify the significant potential of reinvigorated trade usages.

Self-regulation through revitalizing trade usages is essential for several reasons Firstly, trade usages help reduce uncertainty, safeguard expectations, provide flexibility, and enhance efficiency in commercial transactions Secondly, rule-based regulations often create uncertainties and can disadvantage certain parties Lastly, attempts to reform commercial law may not adequately address the immediate needs of stakeholders, such as banks involved in foreign exchange, due to the slow and reactive nature of the reform process Therefore, it is crucial for courts and scholars to recognize the importance of trade usages, while regulators should embrace innovative practices As commerce increasingly depends on advanced technology, inconsistencies in contract formation rules, particularly in relation to part II of the C.I.S.G., have emerged, with countries like Denmark, Finland, Norway, and Sweden expressing reservations.

The specific rules in texts like the C.I.S.G can sometimes increase uncertainties for parties, similar to the U.C.C To improve the acceptability of these texts among member states in international commercial institutions, ambiguity in the drafting language is often intentional For instance, the term "fundamental breach" in Article 25 is based on the idea of "substantial" deprivation Additionally, some issues remain unresolved, contributing to the overall complexity.

Multinational trade associations, such as the International Chamber of Commerce (ICC), wield significant influence over global trade practices, often surpassing that of international quasi-governmental authorities A prime example of this is the widespread adoption of the ICC's Uniform Customs and Practices for Documentary Credits, which demonstrates the association's ability to consolidate and establish accepted market standards.

207 See N.Y LAW REVISION COMMISSION STUDY, supra note 85, at 86.

Tiêu đề	Self-Regulation in Global Electronic Markets through Reinvigorated Trade Usages
Tác giả	Raj Bhala
Người hướng dẫn	Professor David Frisch, Dean Tom Krattenmaker, Professor I: Trotter Hardy, Professor Alemante Selassie, Professor Amy Boss, Professor Pat Fry, Professor Amy Kastely, Professor Fred H. Miller, Professor Yana Rodgers, Professor Michael Clark
Trường học	William & Mary Law School
Thể loại	faculty publication
Năm xuất bản	1995
Thành phố	Williamsburg

Định dạng
Số trang	75
Dung lượng	3,4 MB