Europe Needs a Business Law. What Would It Look Like?

Globalization, whatever its problems, has created international flows of goods and other items that in value far exceed the GDP of the largest states (or combinations of them like the EU). and so it may lay claim to its own transnational commercial and financial legal order. Whatever that business law may look like, in particular for Europe, its coverage would go far beyond the older law merchant or lex mercatoria which was mainly concerned with mercantile issues.

It might have its own concepts of contract and movable property but would also have to deal with public policy or transnational minimum standards. Competition issues, market integrity standards, money laundering, corruption, and tax evasion come to mind, but also human rights, worker conditions, climate, and perhaps financial stability, all issues that do not stop at borders. In pressing cases, there may also be other overriding considerations:  justice, social peace, and efficiency, the ultimate goals of all law, at least in civil society. Local policies and mandatory laws must also be considered when these flows reach shore, if only briefly.

A European business law would defy the old private international law approach, which since the 19th century assumes that all legal relationships must have a place in a national law requiring international transactions to be split up according to closest territorial contacts in the hope that these various pieces add up to a rational legal framework for international transactions as a whole. That approach is ever more difficult to maintain: Think of the need to give these flows as flows in asset backed funding. This might be more a civil law problem, where all law is typically statutory, but even in England the approach has also been that law can only issue from a sovereign, putting pressure on other legal sources. In the U.S., however, the UCC, has always expressed respect for custom, party autonomy, equity, and the law merchant, probably a reflection of the older common law. Yet legal nationalism was never more than a paradigm, though earlier it had been assumed that law as an expression of rationality was universal in principle although in the marketplace often regional or even purely local, expressed in fundamental and general principle, custom and practices, or party autonomy, sometimes local regulation (notably concerning tariffs, taxation, and bankruptcy).

Now that in business dealings the organizational forces of state intervention are waning or coming up short, this approach is revived, at least in the international commercial and financial flows, reaching again for universality.  This development imperceptibly happened and is manifest in the eurobond market, the largest capital market in the world, and in the international swap market, the largest market of all.  It re-emphasises the self-creating or bottom-up law formation process in dealings between professionals and notably breaks with the idea that even democratic states can take all, may in their law formation subjugate custom and party autonomy beyond what public policy requires.

What does this business law look like? As for contracts, they are commonly signed by someone in authority who may have little idea of content beyond the business objectives. The civil law concepts of intent as the basis for contractual liability and the defenses flowing from the lack thereof can mean little in this context but remain nevertheless dominant, also in business. In common law, however, contract formation is based on conduct and (detrimental) reliance. Detriment means here investment in the contract or a beginning of performance before there can be a cause of action. The duration of a contract in particular becomes a risk management tool and a road map, much like a service manual, where one also does not ask what the drafters meant.  If there is a dispute on meaning, the peer group decides, while the objective law is not to interfere with the risk distribution except perhaps in extreme situations. It follows that there are no defenses based on lack of intent – it is not a formation issue, only one of performance when choices are made. Rather, there are some rescission remedies in equity when there is no sufficient overlap in offer and acceptance or in cases of misrepresentation. The only excuse is the other party not performing a major condition of the contract; force majeure and change of circumstances only figure if the contract so provides. The good faith notion is not commonly used to redistribute risk. This avoids the pernicious impact of protections necessary in the consumer sphere wafting over into business, normal in civil law, which distinguished contracts according to type, not according to the nature of parties, more the common law approach. It follows that the civil law cry, “I did not mean it, I cannot help it, it is not my fault,” does not go very far in business in common law countries.  That is consumer law.

In movable property, the common law approach in business is also primarily one of risk management, less who owns what, rather what user, income and enjoyment rights can be effectively created in what type of assets in order to facilitate value enhancement: milk is bought to make something out of it and manage/finance this process.  In civil law, it is bought to drink when all proprietary interest disappears. One can also say that the common law is interested in how presents get under the Christmas tree, the civil law in what is left thereafter. Equity can deal here with assets in bulk or bulk assignments also covering assets in transformation or the future, with replacement and fungible assets and tracing, in finance even with an open system of property rights allowing party autonomy in their creation, in asset backed funding effective against the peer group or insiders but subject to the protection of outsiders, notably consumers, against resulting charges. There is conditional ownership in repos and finance leases, there are floating charges, constructive trusts and asset segregation, set-off and netting facilities, all instances where the civil law became a handicap in business dealings because of its rigid system and static codification and largely consumer protection mode.

Proprietary rights are here cut off at their operation (against outsiders) not at their creation. The system is open, promotes risk management and efficiency between the professional insiders and reduces cost, while party autonomy has an important role to play in the definition of assets and the rights to be established therein and thereto. There is no sharp distinction between contract and property law. There is also nothing physical per se about assets in this sense, which are any object of economic value. Even property law was in truth always about rights and obligations and about how much third-party effect there can be for its structures or when privity resumes its role. In this approach, there is no much need for mystical ideas of dominance, authority, or sovereignty either, which at least at the transnational level confuse rather than enlighten. To the extent a closed system of proprietary rights is also advocated in law and economics, it is a misunderstanding. In business, it is all about risk management; transaction costs are important but secondary.

This is all closer to the older common law where contract and movable property derived from commerce, much supported in equity. Civil law derived from what we now call consumer law. It follows that in the international business flows, custom and party autonomy become again of great significance, no longer government licensed concepts. The former are business’ routines and may change overnight e.g. because of technical developments. In Europe, especially in the EU, these concepts should take deeper root in business law now that England is gone and the remaining common law jurisdictions are small. It needs a new business law.

It leaves open the issue of public policy and public order requirements to balance the international markets. The 2018 U.S. Restatement (Fourth) of Foreign Relations continues to suggest reasonableness in the adjudication of competing national policies but gives little guidance. In the EU, its Rome I Regulation in Art. 9 is even less specific.  States could help more in particular by formulating a number of transnational minimum standards e.g. in respect of the environment, competition, corruption, and workers’ rights. UNCITRAL and UNIDROIT may help. The OECD is effective in taxation. In international arbitration, the New York Convention made an important contribution. Notably in corporate bankruptcy, there could be useful guidance, very much needed to complete an open system of proprietary rights, protecting consumers against these charges, defining the conditions of an early stay of enforcement proceedings, the cram down of preferences, and the conditions for conversion of debt into equity. In terms of guidance and clarification, it would appear that principles are at this stage much more important than texts and probably easier to agree.

This post comes to us from Professor Jan H. Dalhuisen at the University of California – Berkeley and King’s College London. It is based on his recent article, “Europe Needs a True Business Law,” available here.

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