The cotton industry has almost entirely opted out of the public legal system, replacing it with one of the oldest and most complex systems of private commercial law.(1) Most contracts for the purchase and sale of domestic cotton, between merchants or between merchants and mills, are neither consummated under the Uniform Commercial Code ("Code") nor interpreted and enforced in court when disputes arise. Rather, most such contracts are concluded under one of several privately drafted sets of contract default rules and are subject to arbitration in one of several merchant tribunals. Similarly, most international sales of cotton are governed neither by state-supplied legal rules nor by the Convention on the International Sale of Goods, but rather by (2) the rules of the Liverpool Cotton Association. The institutions that create and administer the industry's private legal system work extraordinarily well. The trade rules are periodically revised to respond to technological advancements, market changes, and ambiguities revealed during disputes. Their content is known and understood by most market participants. The arbitration tribunals that resolve disputes do so expeditiously and inexpensively. Their decisions, which are recorded in written opinions, reveal a distinctive and coherent jurisprudential approach. Within the industry, arbitration awards are widely respected and complied with promptly. In short, the industry has succeeded in creating and maintaining a private legal system ("PLS") in which transactions costs, error costs, legal system costs, and collection costs are low. This system has endured since the mid-1800s, surviving widespread social change, years of extreme price volatility, and substantial changes in the background public legal regime. This Article draws on a detailed case study of contractual relations in the cotton industry to examine the ways that the rules, norms, and institutions that constitute the industry's PLS create value for transactors. Part I describes the formal operation of the PLS and discusses the ways that its substantive rules, adjudicative approaches, and arbitral procedures improve on those provided by the Code and the public legal system. Part II describes the many steps taken by cotton industry institutions to strengthen the social and informational infrastructures of trade. It discusses how these efforts combine to make reputation-based nonlegal sanctions a powerful force in the industry and explores how the availability of these sanctions makes important features of the PLS work better than they would in their absence. It also suggests that the availability of such sanctions may enable transactors to create value-enhancing contract governance structures that might be either unavailable or prohibitively expensive if their transactions were governed by the public legal system. Part III takes a step back and explores how the industry's efforts to support the legal and extralegal aspects of contracting relationships, together with certain other features of cotton institutions, have succeeded in creating conditions that are conducive to the creation, maintenance, and restoration of cooperative contracting relationships. Part IV concludes by suggesting that understanding how the cotton industry's institutions create value for transactors may help identify other industries and other contexts in which private institutions can play a positive role in supporting trade.
