The comparison of data for scientific purposes was practiced in antiquity. Greek geometry, for example, compared figures and dimensions and synthesized observations by means of theorems. Nevertheless, comparative observation and verification as a method of searching for the truth in pure and applied science was not widely adopted in the Western world until the Renaissance. Astronomical observations and oceanographic chart-making by the Spanish and Portuguese ocean voyagers had much to do with this intellectual awakening.1
Regrettably, the comparison of legal institutions remained well behind the comparative empirical advances in the physical sciences. Suffice it to say that it was only during the second half of the nineteenth century that the first attempts to engage in systematic comparisons of legal institutions were undertaken and comparative law research societies were created.2
In its nineteenth century beginnings, the comparison of legal institutions was largely static or non-contextual. Only rarely was it pursued beyond establishing the textual meaning of concepts or rules as found in the laws of other countries or jurisdictions. Law was not examined contextually or “in action” or by measuring its accomplishments or failures and the reasons for both. Thus, much scholarly ink was invested in pinpointing the textual (but not contextual) differences between, say, the French civil law concept of “causa” and the common law “consideration” or between the equitable powers of the Roman Praetor and the English Chancellor.
Similarly, not an insignificant number of professors in renowned centers of legal scholarship taught comparative law as an annotated lexicography as late as the post-World War II period. For instance, in a graduate course on comparative law that I 36attended at the University of Paris in 1958, the professor, after exhorting his students to be comparatists (“soyez comparatistes”), proceeded to discuss the meaning of a long list of terms in various languages, followed by short commentaries on each term and by citations to their respective codes or court decisions that used the terms. Obviously, the law that this professor failed to discuss was much more complex and vital (I like to call it “peopled” in the sense discussed in Chapter I) than that reflected in his lists of equivalent terms and summaries of statutory and judicial applications.
Take, for example, some of the commercial aspects of the causa and consideration mentioned in Chapters 1 and 22. As will be apparent when comparing the different attitudes toward commerce and especially commercial credit in French, German and Anglo-American law, serious socio-economic consequences followed from French jurists requiring a morality-laden causa when determining the negotiability of promissory notes, drafts and government bonds.3 Our University of Paris comparative law professor failed to tell us that the broad definition of usury in effect in France during the eighteenth and much of the nineteenth century was a major reason why these negotiable instruments were deemed not only non-negotiable but also unenforceable, having been “vitiated” by an illegal cause. Consequently, secondary markets for the discount or purchase of negotiable instruments failed to materialize in nineteenth-century France and French-influenced Spain.
He also failed to tell us that countries whose legal systems did not require a causa had developed healthy secondary markets for the same instruments during the same period. I would suggest that the relationship between causa, usury and other morality-laden concepts was an infinitely more important legal-contextual datum than our professor’s explanation of what Aristotle meant by his “first,” “material” and “final” causes.4 In addition, as the reader will discover when reading Chapter 22 on the formation of contracts, our Parisian class should have also discussed how the giving of something of value as consideration as an initial step in the formation of contracts had much to do with instilling trust between lenders and borrowers; a trust that helped build a commercial credit society in late sixteenth and early seventeenth-century England, the importance of which exceeded that of any development in any other European nation.5
Fortunately for comparative law studies, the great Romanist and legal philosopher, Rudolf von Ihering, called attention during the middle of the nineteenth century to the need to connect the study of legal institutions to their purposes. In his words:
[T]he stone does not fall in order to fall, but because it must fall … whilst the man who acts does so, not [necessarily] because of anything, but in order to attain to something…. As there can be no motion of the stone without a 37[gravitationally related] cause, so can there be no movement of the will without a purpose.6
The importance that von Ihering attributed to the purpose of legal institutions was reflected in his comparison of the Roman law contracts of immediate and simultaneous performance with those whose performance was to take place in the future, a recurrent theme throughout this book:
Not every contract requires compulsive coercion [such as in action for specific performance] for its [enforcement]; a contract of sale or exchange which is at once carried out … leaves nothing to be gotten by coercion…. For [its purpose is to facilitate the] simplest form of exchange, viz., a cash business…. But this immediate fulfillment on both sides, which makes compulsive coercion unnecessary, is not practicable in all contracts. It is not practicable in a loan—[where] the lender must precede with his performance; the consideration, viz., the payment of the loan, can only follow later. It is not practicable in a contract of lease—whether the rent is paid before or after permission is given to use the object; one of the two parties must come first with his performance and wait for the consideration. Thus certain contracts necessarily presuppose the postponement of the performance on the one side….7
The above comparison highlights the diverse functions of two types of contracts, one designed for simultaneous exchanges and the other for extensions of credit. It also makes clear the function of executory promises: to bind their promisors to give or to do something at a future time despite the fact that nothing was given or promised to them prior to the utterance of the promise to perform at a future time. This purposive vision of contracts was behind the suggestion of a functional comparative law analysis by Konrad Zweigert and Heinrich Kötz, two of von Ihering’s modern-day followers.8 In their opinion:
From this basic principle stem … the choice of laws to compare, the scope of the undertaking…. The proposition rests on what every comparatist learns … the legal system of every society faces essentially the same problems, and solves these problems by quite different means though very often with similar results…. [T]he problem must be stated without any reference to the concepts of one’s own legal system [but, rather, to the objectives of the mechanisms under analysis]. Thus instead of asking, “What formal requirements are there for sales contracts in foreign law?” it is better to ask, “How does foreign law protect parties from surprise, or from being held to an agreement not seriously intended?”9
This is as clear a formulation of a purposive comparison as I have read anywhere, and yet there is more to a purposive comparison if it is truly contextual.
The truism that “generalizations are a fertile soil for misperceptions” is worth repeating because static or non-contextual comparative legal analyses are often guilty of misperceptions. Zweigert and Kötz thus assumed that contractual formalities such as the requirement of a writing have a similar purpose, no matter where or when. That purpose, according to these authors, is the prevention of surprise so that the contracting parties do not wind up with a contractual outcome contrary to what they expected. Yet, legal cultures are relentless transformers of the original purposes of legal institutions. For example, the purpose of the requirement of a formal writing for the validity of contracts in Andres Bello’s Chilean Civil Code, a code after which many Latin American civil codes were modeled,10 was not merely to discern the true contractual intent from the literal meaning formally stated in the contract. Bello’s purpose was to stamp out the courts’ reliance on fraudulent testimonies purchased by the parties or their attorneys from “witnesses” who offered their “testimony” to the highest bidder literally feet away from the courtroom where judges and their clerks adjudicated contractual intent.11
The ruptured link between the original and the transplanted purpose of legislation and their respective socio-economic contexts is quite common. I encountered it while discussing a newly drafted chapter on negotiable instruments law with its Nicaraguan drafter during the 1960s.12 His definition of a negotiable instrument expressly excluded those payable in metal or commodities and quoted as the source for this definition that which appeared in an Italian commercial law treatise.
Yet, my field research in rural Nicaragua revealed that “chips” (fichas) issued by the stores of large agricultural producers were among the most popular means of payment in that nation’s countryside in the 1950s and 1960s. These chips were issued to company employees or third parties in exchange for the services they rendered to the agricultural company. They entitled their holders to purchase products in the company stores and in some instances they also entitled them to obtain the cash value of products sold by the company store. The chips were commonly transferred by their holders as if they were bearer negotiable instruments. As stated by many of their users, they trusted the intrinsic value of these chips more than they trusted other instruments. Not seeing any reference to these chips in the draft, I asked the drafter why he excluded them. His reply was:
Your datum on the use of chips is merely an empirical one. What is important to me as a drafter of a “scientific law” is to find the best scientific definition or concept of a payment instrument. The definition of a payment instrument I chose is by Professor X, my great Italian mentor.13
Notice this drafter’s dismissal of the circulation of chips in rural Nicaragua as a mere empirical datum and his reliance on an Italian definition of a negotiable instrument as the appropriate datum of commercial legal science regardless of its socio-economic purpose and context. Yet, when shorn of its pseudo-scientific definitional purpose, the common purpose of an Italian and a Nicaraguan negotiable instrument is the same—to provide a widely acceptable means for the payment and extinction of obligations. And if a company store chip was trusted to extinguish obligations more than any other instrument in rural Nicaragua, why deny them the negotiability of bearer instruments that their everyday users were willing to accept in a business and economic environment so different from that of a highly-commercialized Italian marketplace? While ignoring market practices, my Nicaraguan interlocutor revealed an important aspect of his country’s legal culture: Legal academics like him disdained empirical facts as a source of law making and preferred to rely on the logical symmetries of foreign legal concepts even though they had been shaped by very different socio-economic conditions and experiences.
In summary, a contextual comparison searches for the purposes of the compared legal institutions, and inquires into the socio-economic and legal needs that these institutions are expected to fulfill. And it does so by examining the relevant commercial practices as well as the official or positive law and the society’s legal culture, i.e., the values and attitudes of market participants. This comparison also includes an assessment of the socio-economic consequences of the enactment in question. When a chosen legal institution fails its purpose(s), the comparative analyst must find out the reasons for the failure, and, based upon his findings of successful alternatives, suggest a suitable local or foreign replacement.
As noted in Chapter I, the contextual analysis is greatly facilitated by identifying the archetypal behavior that helps to shape both standard and best practices and their resulting legal institutions. Lord Mansfield was one of the first to identify accurately the behavior of the average merchant as he did in a landmark decision in which he stated that the average merchant is someone who does not need to rely on formalities because his word is “his bond.”14 The same was true with Justice Cardozo, whose fiduciary had to evince the punctilio “the most honorable.”15 Please recall that by archetypal behavior, I mean the representative behavior of average merchants, bankers or professionals as reflected in their standard practices as well as in the practices of highly respected and trusted merchants, bankers or professionals, to which I refer as their best practices. It is worth emphasizing that what matters to the 40contextual analyst is whether the conduct of the merchants selected as archetypes is truly representative of the behavior of a class or group of merchants.16
Max Weber, one of the founders of modern legal sociology, was among the first to call attention to the importance of representative (he referred to it as “ideal”) social behavior in social science research.17 Think of how hard it would be for social scientists to attribute features to the behavior of social groups or classes without being able to rely on the representative behavior of some of their members. Without it, social scientists and comparative lawyers would have to engage in endless and costly observation and analysis of the behavior of each member of the class or group in question.
Unfortunately, not all the archetypes relied on by law makers, lawyers and adjudicators are representative of the commercial behavior of the classes or groups they are supposed to represent. Assume, for example, that the comparative analyst was trying to determine how best to resolve the problem of excessive litigation on the alleged intent of contracting parties. Assume further that the analyst was Andres Bello, the principal drafter of Chile’s Civil Code of 185718 and that the legislative model he used to resolve this problem was the Code Civil. This code requires that contracts over a certain sum be executed in a highly formal public or notarial deed (the titre or acte authentique), and when such a deed is executed it excludes most other evidence on the parties’ intent.19 Finally, assume that Bello blamed the practices of Chilean archetypal court witnesses for the excess and unpredictability of litigation on contractual intent. He referred to these witnesses as “an infamous class of men,” and in his introduction to Chile’s Civil Code, he accused them of earning their living by offering their testimony on contractual intent to the highest bidder.20
Certain that this was the behavior of representative archetypal witnesses in contract litigation, and certain also that contracting parties would use them as witnesses and thereby would not hesitate to testify falsely themselves, Bello’s solution was to require a high level of contractual formality that would automatically dispense with the reliance on witnesses to determine a disputed contractual intent.
Yet, how representative was the behavior of these “infamous men” when compared with the behavior of the much larger class of merchants who entered into their commercial contracts in good faith, and with the intention to cooperate with each other’s ability to earn a profit? In addition, because the intent of regular participants in market transactions has to be manifested usually in informal, quick and standardized contracts or parts of them, their intent could best be established by determining what was customary for that trade or business as expressed in informal documents and not in time consuming and costly written and notarial documents. Finally, why assume that the decision to use purchased witnesses was invariably made by the merchants and not by the lawyers to whom they entrusted their litigation?
Justice Oliver Wendell Holmes Jr.’s “bad man” of contracts was another unrepresentative archetyhpe. He was the contracting party ready to breach any contract if paying damages, turned out to be cheaper than performing it. This archetype was as unrepresentative of the contractual behavior of merchants as was Andres Bello’s “infamous witness.”21 Yet, the reliance on Bello’s “infamous witness” and on Holmes’ “bad man” of contracts as archetypes of commercial contractual conduct led Bello to require costly, dilatory and anti-commercial contractual formalities for all contracting parties, and in Holmes’ case, led to a presumption of commercial bad faith in the performance (or non-performance) of contracts that is just as costly, if not more, than Bello’s. Imagine, for example, the cost incurred by the holders of checks about to be deposited with their banks if the banks’ presumption was that their check depositors were (a la Holmes) the “bad men of checks.” Such a presumption assumes that check depositors had acquired them in bad faith and that it was their burden to prove that they did not steal, embezzle or fraudulently procure and endorse them. Aside from the high cost of such a negative proof, check depositors could no longer count on receiving provisional credits for their deposited checks as is normally received by check depositors under existing law and practice.22
Perhaps one of the most serious misperceptions of the nature of an archetypal banker was that of Alan Greenspan, the former chairman of the Federal Reserve. His archetypal banker was capable and willing to restrain and regulate himself against highly risky forms of lending and hedging. Yet, the Wall Street Journal version of Greenspan’s testimony before the House Oversight Committee on October 23, 2008 quotes Rep. Henry Waxman making the following statement to Greenspan: “You had the authority to prevent irresponsible lending practices that led to the subprime-mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price….” In response, Mr. Greenspan said he made “a mistake” in his hands-off regulatory philosophy, which many now blame in part for sparking the global economic crisis whose consequences we are still suffering. He quoted something he had written in March: “Those of us who have looked to the self-interest of lending 42institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”23
Serious mischaracterizations of archetypal commercial behavior also abound in Marxist-Leninist dogma and legal literature. As will be discussed in later chapters,24 Karl Marx and Vladimir Illyich Lenin (among others) characterized ordinary merchants in many different ways, such as criminals bent on “exploiting someone else’s labor,” “speculators” with the goods or money of others, embezzlers of the excess value created by the work of their employees, or avaricious and selfish farmers (“Kulaks”). As will also be discussed in these chapters, these inaccurate archetypal characterizations of merchants and farmers became part of the Soviet living law of commercial contracts. Thus, sayings by Lenin on the avariciousness of merchants or farmers and how they profited by hiring and exploiting laborers were soon repeated by self-appointed accusers against the recipients of administrative bonuses who as “model” state employees were awarded: 1) automobiles (but used them as taxis with the help of hired drivers); 2) plots of land (when they were used to grow vegetables with hired help); or 3) dachas (country houses or villas) (when rented out and maintained also with hired help).25
Obviously, it is easier to identify archetypal behavior in simpler transactions than in complex ones. The archetypal behavior in a simple transaction such as in a sale of goods in a retail store or market is more easily standardized than that in a complex financial transaction with multiple parties, some supplying goods, others services, and under highly negotiated terms and conditions. Further, the behavior associated with familial (and “civil” or not-for-profit) archetypes such as the French “good father of family” of the Code Civil26 tends to change less over time than that of commercial archetypes. Can you visualize why?
Consider, for example, the changes experienced by an archetypal United States commercial banker in the twentieth century alone. Prior to the enactment of the 1933 Glass-Steagall Act, he could be a deposit banker, a commercial banker and an investment banker or underwriter. After this enactment, he could no longer function as an investment banker.27 In November of 1999, however, the Gramm-Leach-Bliley Act authorized commercial bankers to engage in some of the same previously-forbidden activities.28 Quickly thereafter, highly complex new archetypal standard banking practices were engaged in by United States banks with greater powers and rights than ever experienced.
As if on cue, shortly after the repeal of Glass-Steagall, an international financial “bubble” grew uncontrollably while new standard practices for complex and often risky transactions continued to be fashioned to meet the demands of a growing national and international clientele. Yet while new standard practices were being created, no attention was paid to their effects upon the welfare of regular participants in those transactions as well as of third parties—among them millions of homeowners who lost their homes and approximately 8 million jobless workers in the United States alone.29
Please recall Chapter I’s distinction between standard and best practices. There, I described the standard practices as governed by the market standard of fairness which mandates that each party to a contract treat the other as a regular market participant would reasonably expect to be treated when viewing his own advantage. And I described best practices as those that take into account the effect of their transactions upon third parties and in fiduciary transactions treat the counter party in an altruistic or brotherly fashion.
The fact that recent standard practices in the United States on sub-prime mortgages, including their sales to third parties, were the result of agreements between or among a small group of “primary” market participants should not be missed. For the regular market participants who designed and negotiated the various agreements involved in the creation and distribution of sub-prime mortgage-backed bonds or certificates were the “originating” mortgagee banks, the underwriting banks or securities intermediaries or both, and, of course, their “special purpose” vehicles.
The third party purchasers of the bonds or certificates or of security interests in them were not regular participants in that primary or originating market and were not parties to the negotiation and drafting of the agreements that resulted in the standard practices of that primary market. They belonged to the secondary markets and their reasonable expectations of profitability and safety were taken into account only hypothetically by the drafters of the agreements and creators of the primary market practices. I say “hypothetically” because what the drafters of standard practices on the distribution of mortgage-backed sub-prime bonds or certificates calculated was a likely interest rate that would be attractive to these third parties. They did not truly attempt to assess the risk assumed by their third parties.
Justice Benjamin Nathan Cardozo was one of the most insightful and influential users of the contextual and purposive legal analysis in Anglo-American law. He attributed its authorship to the “legal sociology” of Rudolf von Ihering. After describing the lawmakers’ and especially the judge’s function as “thinking of the end which the law serves, and fitting its rules to the task of service,”30 he added:
This conception of the end of the law as determining the direction of its growth, which was I]Ihering’s great contribution to the theory of 44jurisprudence, finds its organon, its instrument, in the method of sociology. Not the origin, but the goal, is the main thing. There can be no wisdom in the choice of a path unless we know where it will lead. The teleological [or purposive] conception of his function must be ever in the judge’s mind.31
By “the method of sociology,” Cardozo did not mean today’s widely practiced quantitative and statistical analysis of social institutions. His (and von Ihering’s) sociological methods relied on their observation of societal developments likely to impact statutory or judge-made law, and especially on those developments likely to prompt serious social or interpersonal conflicts. In Cardozo’s time, one such development was the increasing number of accidents related to the industrial manufacture and use of automobiles. Its likelihood of causing injuries to immediate and remote purchasers-users brought into question the manufacturers’ duty to foresee the injuries caused by their defective manufacture of vehicles.
Another conflict that attracted Cardozo’s attention was the relationship between trusted merchants and financial intermediaries at a time when the latter began to manage the investments of a growing number of savers who were not as professionally capable or economically powerful as managing merchants were. Cardozo’s observation of the interests and forces at stake in these conflicts was accompanied by his ability to identify the behavior that was customary among average and model or highly-respected participants in the legal and business relationships, especially when some or all were merchants. Yet, despite Justice Cardozo’s references to legal sociology, I would suggest that his method is closer to the one used by legal-cultural anthropologists such as E. Adamson Hoebel and Marcel Mauss, and that Cardozo also relied considerably on archetypal behavior to formulate his concepts, principles and rules of adjudication. The reason why this is such a useful method is because it not only peers into human nature but focuses specifically on those activities that eventually become legal institutions.32
In pre-industrial societies, the behavior of average merchants when selling their goods was largely governed by the principle “buyer beware” (caveat emptor).33 In contrast, in societies with a developed or developing commercial and financial marketplace, such as the mid-twentieth century United States, similar sales were increasingly accompanied by implied warranties.34 Further, some commercial relationships required even a higher standard of diligence and concern for the interests of others. This was the case, as noted in the previous section, with trustees when dealing with their settlors and their beneficiaries. Cardozo’s observations on the seminal role of trust in certain individuals and legal institutions made him conclude that the behavior that ought to be required from those who were most trusted was that of “a man of the most delicate conscience and the nicest sense of honor.”35
Because this behavior was archetypal and took place repeatedly, it could be ascertained objectively and was neither subjective nor capricious. As stated by Cardozo, the standards of behavior required from the highly entrusted were not the product of what some German jurists called “a jurisprudence of mere sentiment or feeling” (Die Gefühlsjurisprudenz).36
Similarly, although relying on historical observation, von Ihering identified the archetype that inspired the Roman law of contractual fortitude and duress for a considerable period of time. It was the stolid Roman legionnaire, whose standard of contractual behavior was of such fortitude that his contractual will could only be broken by the most severe of physical pressures and for this reason very few contracting parties in classical Roman law were granted the remedy of rescission of contract on the grounds of duress.37
The reliance on archetypal behavior to fashion long-lasting commercial law rules is a trait of great jurists from the Ulpians to the Cardozos, also apparent in commercial law adjudication in the Middle Ages, and in the method used by Maimonides, the Jewish medieval sage and rabbinical authority.38 When instructing lower court judges on whom, between or among the disputing merchants, should take the oath that would decide the controversy, he often resorted to archetypal behavior. For example, where force majeure was alleged to have prevented one joint venturer or partner from rendering a proper accounting to the other,39 he required that in the absence of written, oath-supported promises (such as in a formal promise known as a “shetar”), the partner or joint venturer whose behavior varied most from the customary norm had to take the oath reserved for archetypal partners or joint venturers (Shavuot shutaphim).40 As a decissory oath, taking it meant that the disputed fact would be resolved in favor of the oath-taker and a failure to take it would concede the other party’s factual allegation.
Similarly, the codifiers of the model European civil and commercial codes resorted to archetypal behavior such as that of the “good father of family” (bon père de famille) of the Code Civil or the “proper merchant” (eines ordentlichen Kaufman) of the German HGB. You will find in Chapter X that I contrast the behavior of this standard but respectable merchant with that of another but more highly trusted archetype, that of Mayer Amschel Rothschild, the international banker in late eighteenth century Germany who protected the assets of his joint venturers in preference to his own.
Archetypal behavior generates what Harvard’s Dean Roscoe Pound, the Australian legal philosopher Julius Stone, and the United States founder of legal anthropology E. Adamson Hoebel, among others, referred to as “jural postulates.” These postulates express the principles that shape the living law of a given legal 46culture. As such, they epitomize the moral criteria that govern archetypal legal behavior, whether officially or unofficially approved, and are therefore omnipresent throughout the history and geography of commercial contract rights and duties. They range from the pre-industrial postulates such as “buyer beware” to Justice Cardozo’s turn of the twentieth century financial centers’ “punctilio—the most honorable.”
One of the reasons why the anthropological method is helpful when using commercial legal institutions as tools for economic development is because it not only looks deeply into human nature, but focuses specifically on those activities that eventually can become legal institutions and tells us why they have succeeded or failed. Professor James Greenberg of the University of Arizona Anthropology Department is a leading cultural anthropologist much of whose research involves poor indigenous populations among whom he has lived. Recently, he analyzed the use of microfinance as a tool for economic development,41 and found that many of its advocates made seriously erroneous assumptions about the archetypal entrepreneurial poor women recipients of micro-loans. One assumption was that these women’s access to financial services was sure to increase their income and productivity creating self-employment and reducing poverty. Another assumption was that these women not only lacked access to credit but that they wanted such an access regardless of its source. They imagined them as longing to be self-employed and envisioned microcredit as creating successful enterprises that produced cash to pay off their loans and the income to lift them out of poverty. They also assumed that the poor need no special training to do this as they know what is best for them.42
Yet, these advocates were unaware that their targeted archetypal poor women entrepreneurs were:
[U]sually leery of credit, and with good reason as the darker side of credit is debt. Borrowing means being in debt. Borrowing from any kind of institution is fundamentally different from borrowing from friends. Taking loans, even from microcredit associations, is perilous for the poor, as they risk sinking into even deeper economic and social poverty if they cannot repay them. For poor households whose livelihoods are very vulnerable taking on debt increases the risks of falling into a downward debt spiral.43
To which Greenberg added:
The reality is that few microenterprises are very successful for a variety of reasons. One of the major constraints on them is that women already have a full workload: childcare, cooking, cleaning, garden work, fetching water, and tending animals. Rather than having infinite time to devote to a microenterprise, because their time is highly constrained, any microenterprise they undertake must fit into their schedule. Usually this 47means that such activities need to be extensions of the kinds of skills and work women do as part of their everyday activities
* * *
If the startup monies come from savings group, or a similar organization, another limiting factor is that most groups require that repayments begin (with some exceptions for agriculture) almost immediately. This means that this activity must produce sufficient revenues from the start in order to make these weekly payments.44
One of his findings deserves special attention:
If microenterprises were really run like business firms, capital invested in the microenterprise would be administered separately from households from household expenses…. The reality is that microenterprise and household funds are intermingled. In good times household funds may subsidize microenterprise; in bad times microenterprise may be decapitalized to meet household needs. Given this intermingling of funds, to talk about production or consumption loans is utter nonsense.45
Please note how Professor Greenberg’s observations are, to paraphrase the interviewing style of a sports television program of a bygone era “up-close and personal.” This is how he found out how debt was perceived by many of the poor as “the darker side of credit.” The same is true with the women entrepreneurs’ practice of commingling business funds with those needed to cure their sick children.
The methods of legal reasoning are part of a nation’s or region’s legal culture and as such they influence and are influenced by its attitudes and values, and for this reason they also influence economic development. If as a result of his method of legal reasoning a judge or administrator denies validity to a transaction that is otherwise legal, moral, or consistent with public policy and can contribute to its economic development, there is every reason to question their legal reasoning. For if that transaction’s only fault is that it conflicts with a legal definition or classification whose purpose was to better describe and classify transactions used during the life and times of the definer and classifier, but not those who were their necessary replacements, why block their use? After all, commercial legal definitions and classifications should reflect transactional life and not the other way around. The following sections explore the interaction between the two most utilized methods of legal reasoning and economic development.
During the Middle Ages, what eventually became the civil and common law jurisdictions started diverging in varying degrees from their common Roman law ancestry. This divergence was caused largely by the different methods of legal reasoning employed by the jurists, lawyers and law professors within each system. 48Together with the attitudes and values of legislators, judges, lawyers and law professors, these methods shaped the drafting, interpreting, practicing and teaching of law on each side of the systemic divide.
Scholasticism became the prevailing method of legal and theological reasoning in southern and central European universities during the late Middle Ages (mostly from the twelfth to the fifteenth centuries) as well as in some other countries and regions, especially in France, Spain, Portugal and Spanish and Portuguese America. One reason for its popularity was that it aimed at reconciling the teachings of Greek philosophers, especially those of Aristotle, with the prevailing Christian theology.
Christian theology was interested in establishing the permanence and universality of its teachings. Aristotle’s writings, particularly on logic and metaphysics, proved very helpful, especially to a mind as keen as that of Saint Thomas Aquinas. For Aristotle, the search for the essence of things was intended to reveal what was unique, universal and permanent about them. Unlike Plato, who believed in a world of forms and ideas that existed separately from the things perceived through our senses, Aristotle believed in universal features that exist within each of the objects discernible to our senses.46 When successful, this search for the permanent and universal essences leads to definitions such as those admired by my earlier-referred-to Nicaraguan colleague. As stated by Wilhelm Windelband, the distinguished German historian of ancient philosophy:
[According to Aristotle] … human knowledge can obtain a conception of the essential and the permanent only through exact and careful scrutiny of the facts [i.e., what actually exists]. In these teachings Aristotle theoretically adjusted Platonism to empirical science.
The logical form of … [his empirical findings is through the process of a] [d]efinition … in which the permanent essence … is established as the ground of the changing conditions and manifestations … for every single phenomenon … [Hence,] [t]hese determinations of concepts are based partly upon deduction and partly upon induction …47
For example, Aristotle’s definitions that apply to animals start with an observation of their peculiarities followed by their classification.48 Thus a hierarchy was organized in accordance with the complexity and function of animal organs.49 Similarly, the heirs of the scholastics in pre-codification civil law France50 (and in many other countries that followed the French example) classified legal institutions such as contracts according to their formalities, mutuality, gratuity, etc., and having done so, placed them within the family of voluntarily-assumed obligations which, in turn, belonged to the genus of obligations (both voluntary as contracts and involuntary as, say, the tort of negligence). The classification was followed by definitions that gathered the peculiarities of each species as part of a genus. Thus, a sale agreement 49could be defined as a “bilateral,” “consensual,” “synallagmatic” and “onerous” agreement.51
Because of their supposedly logical rigor, these scholastic classifications and definitions were particularly well-suited for the synthetic formulation of legal concepts, principles and rules that eventually populated many codes in civil law countries. Thus, the observed practices that had been “incorporated” into the Roman rules on the contract of sale (emptio-venditio) receded into the background, and the mere mention of a sale agreement was deemed by courts, lawyers and legal commentators to be the result of the synthesis of concepts such as bilaterality, consensuality, etc. Similarly, it was enough to refer to “property” to suggest the existence of the attendant rights to use, enjoy (and for some, even to abuse), mortgage, pledge or convey the subject property.
The importance ascribed by contemporary civil lawyers to the classification of contracts and to the precise features of the various types classified is in some measure attributable to the “typification” of contracts in Roman law.52 This is particularly true of those trained to apply codes of the Code Civil (definition- and classification-governed variety). Yet, please bear in mind that the Romans typified contracts because of the practical need to enable a high administrative and judicial official (praetor) to fashion causes of action and defenses geared to different, albeit standardized, sets of contractual practices. For example, contracts of bailments or deposits of things required that a thing be delivered to their custodian or depositary to be enforceable. In contrast, other agreements such as the emptio venditio did not require the delivery of the thing before the parties were bound; their mere agreement sufficed (nudo consensu). Thus, the buyer acquired an action to obtain the thing bought or its worth (actio emptio) and the seller to receive its price (actio venditi) from the time of the agreement.53
The reason for the Roman classification of contracts, then, was not the search for universal and permanent essences, but rather for practical, mostly procedural or remedial purposes.
The scholastic search for essences started (as with Aristotle) with observation and was followed by definitions and classifications. Unlike Aristotle, however, the scholastics54 were not interested in an empirically-based legal science. Most of their classifications and definitions were intended for theological purposes and for theologically-influenced argumentation and persuasion in law, ethics and politics. In attaining these purposes, they relied not only on Aristotelian logic, but also employed Plato and other Greek philosophers’ inspired dialectics. Traces of these methods can still be found in today’s civil-law reasoning, and the better one identifies them, the better one can separate what is factual from what is rhetorically persuasive but not necessarily factual.
Dialectics in Ancient Greece was a form of dialogue among thinkers who held different ideas and wished to persuade each other by structured, although not necessarily syllogistic, arguments. Plato’s dialectics additionally embodied a search for the truth, but this search was not supported by a previous Aristotelian-like collection of facts. In Professor Windelband’s words:
In a strict sense, [Plato’s] dialectics consists of … suppositions that serve as bridges to enable the discussants to ascend to the principles that embody the truth of the subject under discussion; an axiom was such a principle pure or free of facts. It, in turn, supported the formulation of the sought after definition.55
In the Roman law chapter,56 we will discuss the frequent use of axiomatic reasoning, especially in its rules of law (regulae iuris). These were maxims endowed with the persuasive power of self-evident propositions such as: “No one can convey what he does not have.” (Nemo plus iuris in alium transferre potest quam ipse habuit.) One should not be deceived by the self-evident nature of these maxims, for often they are invoked to reach a conclusion whose factual assumptions have not been proven or have only been proven in part. For example, assume that the above maxim is applied to a conveyance by an owner’s agent who lacked an express power of attorney but was clothed by the owner with every appearance of having such a power. Should this maxim apply? As I will discuss in later chapters,57 at least German and Anglo-American commercial lawyers reject the unqualified application of this maxim for good commercial reasons.58
Another method of reasoning used by the Greek dialecticians is the one known in United States law schools as “Socratic.” Imitating that which was attributed by Plato to Socrates, this method shows how a given hypothesis (or in our case a legal argument, rule of law or statement about it) can be tested for its reasonableness and can lead to a contradiction or to an absurdity (reductio ad absurdum).59
The main focus of Aristotelian thinking—the essence of things as species which are identified by placing them within their corresponding genus—is the relationship between the universal and the particular. It was based upon this relationship that Aristotle created what Windelband refers to as “the science of logic.”60 In this science, the essence of things is, as noted, what is peculiar to them, and the ultimate mission of Aristotle’s science of logic, then, is to make possible the deduction of the particular and peculiar from the general or universal.
And since knowledge requires the validation of unknown concepts by known concepts, the “scientific” explanation consists of the deduction of minor (unknown) premises from general (known) premises. Following such a deduction, it is possible to define the thing, whether tangible or intangible. This is why the central point and most-resorted-to feature of Aristotelian logic is its syllogism.61 I used the word “validation” to remind the reader of my earlier discussion with the Nicaraguan commercial law professor who dismissed his need to include “chips” (fichas) in his definition of payment instruments as merely an “empirical” endeavor. His scholastic-legal training required that his proposed rules be validated by “scientific” definitions. Unlike Aristotle, however, he did not think it necessary to take into account the full range of observations or sensorial perceptions of payment instruments used in the Nicaraguan marketplace.62
Yet, the validity of what a syllogism concludes depends upon the quality of the data assumed by its major premise. And unlike Aristotle’s attempt to verify the accuracy of his observations, however imperfectly at times, the scholastics seldom went beyond what they perceived with their senses. Thus, after having observed an elephant that had been painted white (for whatever reason) they could easily fashion a major premise, such as “Elephants are white”—and this premise would inexorably lead to the conclusion that because X is an elephant, he must be white. Or, as was quipped by Jeremy Bentham (the influential eighteenth and nineteenth century English utilitarian philosopher and jurist) with respect to Aristotle’s conclusion that money was a barren commodity therefore not entitled to earn interest when lent, Aristotle missed the fact that, in a credit economy, money does indeed have reproductive organs.63
Similarly, and as will be discussed in connection with the “juristic act” of the German Bürgerliches Gesetzbuch of the 1900s (hereinafter BGB), an equally faulty observation of the universe of binding promises could lead to a premise such as “contracts are the only binding voluntary obligations.”64 Such a logical major premise would preclude the reliance on promises that in the world of business are binding upon the promisors from the moment they are issued and therefore not the product of a pre-existing contract between the promisor and the promisee.65
The explicit or implicit aim at permanence and universality of scholastic definitions and classifications was and continues to be at the expense of changing socio-economic reality. In one of my first lectures at a Spanish law school during the nineteen sixties, a professor of “civil law contracts” (non-commercial contracts) objected to the title of my lecture “Conditional Sales or Sales with Retention or Reservation of Title” as follows:
How could such sales exist? Has it not been clear for centuries now that sales are consensual contracts which transfer title to what is bought from the moment that the buyer and seller agree on the subject matter and price of the sale?66
My reply was that if he was referring to the physical existence of conditional sales, the physically verifiable fact was that while he was formulating his objection, millions of these agreements (labeled as contracts) were being concluded throughout the trading world. And if he was referring to their legal existence, all that was required in those jurisdictions that deemed them unenforceable was to replace the invalidating definition or classification with validating ones. This replacement would take into consideration that the former were conceived at a time in which there was little if any commercial and installment credit and that sales were mostly on a “cash on the barrelhead” basis, while the latter would reflect the omnipresence of a credit economy.
Not only did the scholastically-inspired code definitions of “consensual” sales continue to challenge the enforcement of conditional sales in some jurisdictions at least as late as in 1968,67 but, as I will discuss shortly, other nineteenth century definitions and classifications do the same to other contracts. In their Roman law days, some of these contracts were classified as gratuitous, such as those of deposit or bailment and agency, and continue to be classified as such in the Code Civil and its progeny despite the fact that in the transactional life of those countries most depositories, custodians and agents do charge for their services.
Please note that the scholastic definitions of legal institutions use the verb “is” (as in “a deposit is, or an agency is or in the above assertion by my Spanish colleague that sales are consensual) to signify that such is the legal nature (meaning the Aristotelian essence) of deposits, agencies and sales, now and forever, here and elsewhere.” Not surprisingly, a contemporary decision by the Spanish Supreme Court distinguished between a loan and a financial lease by comparing their “essences,” even though the essence of the loan it was comparing relied upon thirteenth century observations by Saint Thomas Aquinas regarding loans of things “consumed by their use.”68
From an economic development standpoint, this method of reasoning causes not only the above unjustified and unnecessary obstacles traceable to anachronistic definitions and classifications, it also precludes the validation of new legal institutions by imposing closed-number (numerus clausus) criteria to acts of commerce.69 After all, if the list of contracts, rights in rem or “acts of commerce” is supposed to be of all the contracts, rights in rem and acts of commerce endowed with uniqueness and universality, how could there be any other? It also undermines trust in legal 53institutions in general and commercial legal institutions in particular, especially as interpreted in scholastically-inspired judicial or arbitral disputes. The repeated clashes between judicial or arbitral decisions (or “individual” norms) and marketplace customs and practices creates commercially counterintuitive and thus unpredictable or “irrational” legal institutions.70 As in some of the decisions discussed in later chapters, many of the courts that apply the scholastic method ignore the inequity or unreasonableness of their decisions and support their reasoning by invoking the scientific truth, comprehensiveness and precision of their scholastic definitions and classifications. That being the truth, there is nothing they could do as judges or arbiters about them.71
Hence, the pseudo scientific definitions of a methodology which does not require much by way of factual findings become helpful tools in the hands of corrupt judges who hide their disregard of facts behind such definitions. The bribed judge does not have to explain the irrationality and unfairness of his decisions. All he has to do is to point to a classification such as “obligations to do and to give” with its inherently factual and semantic uncertainties and claim that his hands are tied because the contract before him required say the issuance of a public deed which is an obligation to do, and not one to give and failing such an issuance whatever the parties actually agreed to is irrelevant.72
The following are examples of scholastically inspired definitions and classifications of contracts in the Code Civil:
Articles 1102—1105 of the Code Civil:
1102—A contract is synallagmatical or bilateral when the contractors bind themselves mutually some of them towards the remainder.
1103—It is unilateral when it binds one person or several towards one other or several others, without any engagement being made on the part of such latter.
1104—It is commutative when each of the parties binds himself to give or to do a thing which is regarded as the equivalent for that which is given him, or for that which is done for him.
When the equivalent consists in the chance of gain or loss for each of the parties, in consequence of an uncertain event, the contract is aleatory.
1105—The contract of beneficence is that in which one of the parties procures for the other an advantage purely gratuitous.73
In his “Revolt of the Masses,” a classic analysis of European philosophical culture and ideas at the turn of the twentieth century, the Spanish philosopher José Ortega y Gasset74 decried the French and German intellectuals’ veneration of the revolutionary spirit; for these intellectuals, if what took place was revolutionary, it had to be good. The French were the elegant masters of rhetoric and the Germans plumbed the depths of metaphysics deeper than others, but both found it very difficult to bring about social change in their own countries in an evolutionary, non-violent manner.
In contrast, the British were neither as elegant in their rhetoric nor as deep in their metaphysics, but through centuries of war, revolution and turmoil had learned how to find practical solutions to the conflicts engendered by social change and did so in an evolutionary manner that was respectful of man’s right to “the continuity of his life.”75 After all, Ortega argued that man, unlike other animals, has a memory built up each second of every day by the accumulation of daily experiences. Thus, it is most unnatural for man to go to bed at night believing, on the basis of all those accumulated experiences, that he had a family and a status in life which he acquired by honestly following certain rules only to wake up one morning to be told that he had neither family nor status and that the rules under which he acquired them were no longer in effect—and that all of this radical and unexpected change occurred because of someone else’s revolutionary inspiration or whim. This is why Britain, according to Ortega, had to become the “nurse” of a relentlessly revolutionary and violent Europe, a continent that continued to be embroiled in violent and costly social change during most of its history.
He ascribed to the English a “necessary intelligence.” As best as I can describe it from a legal standpoint, it is an intelligence that searches for the practical ways to resolve the problems of the here-and-now by relying on past experience as well as by reflecting on the likely consequences of one’s actions. Not surprisingly, that intelligence produced a utilitarian school of thought that spent much time calculating the costs and benefits of projected actions and also produced reliance on legal precedents as the products of past experiences. The method of legal reasoning that I am about to describe as the “logic of the reasonable” is a product of Ortega’s “necessary” intelligence and although it often relies on utilitarian thinking it is not exclusively utilitarian, for as I will discuss shortly it ascribes absolute value to concern for the “other.” Because the nature and importance of this logic, especially for economic development purposes, is not widely appreciated, I will devote the remainder of this chapter to it.
The logic of the reasonable is one of the most common methods of legal reasoning in Anglo-American countries. It is not the only method of reasoning used in these countries, as Anglo-American lawyers, jurists and scholars frequently resort to syllogistic logic or to the absolute value of certain freedoms, such as freedom of expression. Neither is it exclusive to the common law, as more and more commercial 55lawyers in civil law countries resort to it when drafting statutes, treaties, contracts or arguing cases. Nonetheless, the logic of the reasonable prevails in common law countries when addressing issues as basic as: Is there a contract? What was the intent of the contracting parties? Was there a breach and what remedy or remedies should be granted?
Dr. Luis Recasens Siches was a Spanish legal philosopher who admired Ortega’s teachings and became a government official and law professor during the Spanish Republic. He fled Franco’s Spain and spent a major part of his academic career as an exiled law professor and researcher at the National University of Mexico School of Law. Despite this background, and as a reflection of the universality of legal phenomena, Recasens Siches’ writings (written mostly in Spanish) provide one of the best introductions to the logic of the reasonable.76
As did von Ihering when he distinguished between causation in the legal and physical sciences,77 Recasens Siches singled out purposive action as characteristic of man’s legally relevant conduct.78 The logic of the reasonable guides the choice of legal courses of action, although they are limited in number.79 In making these choices, man relies on value judgments such as: 1) the appropriateness of the means and purpose[s] to satisfy his perceived need[s]; 2) the utility of the considered action; 3) the morality of the action (for those who regard morals as independent of utility); 4) its justice and fairness; and so on.80 A law student once asked me for an illustration of the reasonableness between means and ends, as discussed by Recasens Siches. As an answer, I asked him about his reaction to a court decision which required that a sale of a loaf of bread at a local market had to be documented by a notary public’s deed (escritura publica) or it would be unenforceable. He answered by saying that under the circumstances, such a requirement would be unreasonable. I told him that my illustration was the same given by Professor Lon Fuller in one of his writings in which he stated: “We must preserve a proportion between means and ends; it will scarcely do to require a sealed and witnessed document for the effective sale of a loaf of bread.”81
I added that the choice of reasonable conduct is guided not so much by the opinions of experts, but by what similarly situated contracting parties would do, as the student said, “under the circumstances.” As discussed in earlier sections, these 56similarly situated contracting parties are the archetypes of average (or standard) and best commercial behavior which often become standard and best practices. In addition, and as I will discuss shortly, the logic of the reasonable often resorts to analogies or close similarities between precedents and the facts at hand and the law applicable to them. In addition, when the disputes or competing claims are likely to adversely affect the interests of third parties, the logic of the reasonable is a very helpful tool in shaping best commercial practices by providing the reasons involved in the selection of protected parties and the manner in which they should be protected.
In sum, the logic of the reasonable uses many sources of wisdom, but unlike the exact sciences, it does not intend to uncover the ultimately truthful course of action. Rather, it only aims to suggest the wisest conduct under the circumstances. It also operates under the assumption that no general rule, no matter how wisely conceived, is self-executing or automatically implementable. Implementation requires fashioning what Recasens Siches refers to as the appropriate individual norms most often found in court administrative or arbitral decisions and the product of the informed application of general rules to concrete sets of facts.82 He suggests that the time is ripe for this logic to replace its scholastic counterpart and, as you could have predicted by now, I heartily agree.83
Anglo-American commercial legal reasoning makes particular use of two additional features of the logic of the reasonable. I alluded to the first of these sources in previous sections and I would like to identify it now in more precise fashion as a commercially “peopled” logic. This logic compares the behavior of the parties to the contract with the behavior of representative merchants, as in the question “What would ‘X,’ an average merchant, or ‘Y,’ an exemplary merchant, have done under the circumstances, i.e., while negotiating or performing the contract?” Thus, much of the behavioral comparison in this book tries to find out the extent to which the contracting parties’ behavior approximates that of commercial archetypes.
The use of a commercially peopled logic is not peculiar to Anglo-American law. The reader will find a singularly effective use of it in an opinion by the Roman jurist Ulpian where he measured the conduct expected from a contracting party faced with a discretionary clause against the conduct of a respected man of affairs (Bonus Vir).84 In future chapters, the reader will also find references to exemplary, average and bad faith behavior in French, German, Italian and Anglo-American court decisions. In the following summaries of important Anglo American commercial decisions, please try to identify standard, bad faith or sub-standard and exemplary commercial behavior.
In Miller v. Race, a decision by Lord Mansfield, one of England’s and the Western world’s great commercial judges,85 the main issue was: As between an innocent maker of a stolen promissory note and an equally innocent purchaser of it, who had a better 57title to the note. The note was issued by the Bank of England (the defendant) to a “William Finney or bearer on demand.” Finney mailed the note to Odenharty who mailed it to a third party. During this mailing, the note was stolen by someone who used it to pay his debt to Miller (the plaintiff). Miller was an innocent innkeeper who took the note in the ordinary course of his business from someone whom Mansfield described as having the “appearance of a gentleman.”86
Once he learned of the robbery, Finney applied to the Bank of England to stop payment on the note. The Bank did so and Lord Mansfield held that Miller enjoyed the protected status of a good faith purchaser of the note and that his title was superior to that of Finney. He stated: “A bank-note is constantly and universally, both at home and abroad, treated as money, as cash; and paid and received, as cash; and it is necessary, for the purposes of commerce, that their currency should be established and secured.”87
Please note that Lord Mansfield’s analogy between promissory notes and money or cash was predicated upon the behavior of numerous unidentified people. Yet, he gave us an important clue on who these people were: these were people who constantly, both at home and abroad, used banknotes and treated them as cash. Incidentally, what in this reference would lead you to conclude that these people are in fact merchants? Please note also that treating promissory notes as cash has a special connotation in the law of negotiable instruments. It means that notes could be payable on sight or upon their presentation to their maker-payor, although they could also be paid in time. It also means that, as cash, they are easily transferable to another by their delivery (to a “bearer,” a term used in the note) or by their endorsement. And it also means that the person obligated to pay must do so when promised and with no excuses, except for a very few and limited legal defenses.
How much would the willingness of merchants to abide by such practices in Lord Mansfield’s England as well as in many other European countries have to do with a “law merchant’s willingness to treat these practices as binding among merchants”? And what elements lie in these practices that make them binding to merchants and widely enforceable? What if the practice of creating a negotiable promissory note allowed such a note to be stamped on the back of a cow? (as suggested for a negotiable cow by the British humorist A.P. Herbert) Could you see the depositor and the bank’s clerk, or more likely clerks, struggling with the effectuation of the deposit of such a negotiable cow? Although Herbert wanted to make fun of the truism that anything can be made to be a promissory note, clearly the medium on which a promissory instrument is drafted must easily accommodate all the functions ascribed to the promissory note, and must do this as easily and inexpensively as possible. This brings us to the first element of a viable standard commercial practice—its cost effectiveness, and by this I mean nothing more portentous than its ability to fulfill its assigned business and legal purpose as quickly and inexpensively as possible.
The second element of a standard practice springs from the above described market standard of fairness: The promissory note must treat all the parties who regularly use it as they reasonably expect to be treated when viewing their own advantage. Can you see why? Could bank notes or private notes be used to this day if they would allow makers to take unfair advantage of holders or endorsers or vice-versa. Finally, what about third parties? Please note that Mansfield held that the Bank 58of England should not have stopped payment on the note to Miller, the innkeeper who gave value to the holder of note whose appearance was that of a “gentleman.” In acquiring the note for value from its “bearer” (as authorized by the note), Miller was acting innocently and in good faith as a third party without knowledge of what transpired after the Bank of England issued it to Finney and he mailed it to Odenharty.
When Lord Mansfield concluded that Miller enjoyed the protected status of a good faith purchaser of the note and that his title was superior to that of Finney, he justified his conclusion by saying that for banknotes to continue to be paid and received as cash, “their currency should be established and secured.” Was he not saying that for that currency to be established and secured, third parties such as Miller had to be protected in their purchases, discounts or negotiations of banknotes? And if so, was he not laying the basis not only for a standard practice, but also for a best practice, applicable not only to the original parties of the underlying transaction, but also to those who dealt with them or their successors in interest?
In Frigaliment Importing Co., Ltd. v. B.N.S. International Sales,88 the issue before the court was seemingly straightforward: What did the parties mean when they agreed on the purchase and sale of animals which their contract described as “chicken?” As it turned out, there were many types of chickens available for purchase in that market and depending upon their variety, prices and profits varied considerably. If the court agreed with the buyer, the type of chicken he claimed to have purchased would have resulted in a significant loss to the seller. After examining numerous sources to establish the meaning of “chicken” and comparing their market prices to the seller’s costs, Judge Friendly remarked that: “Plaintiff must have expected defendant to make some profit—certainly it could not have expected defendant deliberately to incur a loss.”89
Why, in the words of Judge Friendly, could the plaintiff not reasonably have expected the defendant to incur a loss? What standard of fairness was Judge Friendly applying: The “brotherly,” “market” or “stranger” standard?90 Could you identify Judge Friendly’s resort to the logic of the reasonable in the quoted statement? Could Judge Friendly’s response to the Plaintiff’s interpretation of the meaning of chicken not be paraphrased as saying: Each contracting party must treat the other in a manner that a regular-archetypal participant in that transaction would expect to be treated when viewing his own advantage?
This standard expectation of reasonableness and fair dealing was codified by the U.C.C. As stated by a California appellate court, the U.C.C. contains “an implied covenant of good faith and fair dealing that neither party will do anything which injures the right of the other to receive the benefits of the agreement.”91 In a later chapter,92 I will explore the connections between the Anglo-American version of 59commercial good faith and reasonableness, but I do not mind anticipating my conclusion that these two concepts have become coupled and seem inseparable throughout the U.C.C., including in Article 5 on letter of credit law that ironically purported to excise their connection.
The concern with treating others fairly, especially in commercial contracts, often relies on the determination of what is reasonable. Reasonableness is, in fact, the favorite logical and empirical tool with which to respond to the issues posed by transactional fairness. As noted in the preceding chapter, reasonableness often requires identifying the behavior of representative or archetypal merchants by asking what Judge Friendly asked himself: Is it reasonable to expect someone who earns his living selling chickens to sell—whatever qualifies as a chicken—for a price that would result in a loss for each pound of chicken sold? This inquiry into the archetypal behavior of a merchant identifies profit-making as the most basic and common feature of commercial reasonableness among regular market participants. But reasonableness can also rely on a more subjective, fact-specific and thus less archetypal inquiry. For example, to be reasonable could mean to place oneself in the shoes of one’s counterparty and attempt to act as if one were such a party by asking oneself: What would I have done or expected if I were in his shoes? Or, it could mean a contracting party’s willingness to satisfy the contractual expectations of his counterparty when these are known to him, in which case to do what is reasonable would mean to do what is good for the other, as the other sees it.
Occasionally, Anglo-American courts and legislators require a commercial behavior that exceeds the standard of good faith practiced by an average merchant. In Meinhard v. Salmon, a 1928 decision by the New York Court of Appeals, Justice Cardozo characterized some of practices of a commercial trade or profession as those of the “workaday world” or the ones “trodden by the crowd.”94 He also referred to other practices in more admiring terms. In this case, defendant Salmon entered into a lease with the owner of a building who agreed to convert the building into stores and offices. Plaintiff Meinhard was a third party who invested half of the cost for the reconstruction and in exchange was to receive 40% of the profits for the first five years of the lease and half of the profits for the remaining fifteen years of the lease. Salmon was to be the sole managing partner of the lease. Near the end of the lease, the owner of the building, who also owned the adjoining land, proposed that Salmon tear down the building and build a larger building on the adjoining properties. Without informing Meinhard of the proposed deal, Salmon created a company to manage the new construction and lease. The annual receipts of the new rentals would be almost ten times greater than the amount of the original annual receipts.
Meinhard did not find out about this new lease until the old lease had expired. He sued Salmon, alleging that he had been left out of the new venture wrongfully and that were it not for his original investment, the new venture would not have been possible. As a remedy, he claimed a participation in the new venture. On appeal, the court of appeals held that Meinhard was entitled to almost one half of the interest in the new lease as long as he also assumed half of the liabilities. Cardozo’s opinion stressed the 60fiduciary nature of Salmon’s position and the forthright conduct required by his status as the sole trustee in charge of managing the original venture. As a trustee, he was required to disclose to Meinhard that a new project had been proposed to him by the owner of the building and adjoining land.
In Cardozo’s words, such joint venturers were “subject to fiduciary duties akin to those of partners and owing each other, while the enterprise continued, the duty of the finest loyalty.”95 His following statement became a seminal principle of the United States law of investment trusts, especially in financial ventures, and has been cited on numerous occasions by U.S. and foreign courts:
Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior…. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.96
The second feature of the logic of the reasonable as applied in Anglo-American law is that it is preponderantly factual or dependent upon a careful determination of the relevant transactional and disputed facts. Some of its best judges also use sets of facts upon which decisions have been rendered in a legal analogical manner, i.e., they search for a common legal principle behind a similar holding even though the things or objects involved are physically different. And by finding the common legal principle behind the previous judicial decisions involving the use of different things, they develop a justification for extending this principle to a different, but not relevantly distinct, category of acts and things. But before I discuss reasoning “by example,” I need to clarify what I mean by the preponderance of facts in Anglo-American judicial decision-making.
Unlike what happens in many a civil law court proceeding, the factual universe of an Anglo American judge is not confined to what was alleged by the parties in their pleadings, as required by the principle of the “Prayed for Justice” (justicia rogada) observed in some European and most Latin American jurisdictions.97 It is also not confined to what the parties managed to prove in court. The adjudicator who relies on the preponderance of facts in arriving at his final decision is not precluded from initiating his own fact finding or allowing facts that were discovered after the filing of the pleadings or after the period of proof to be introduced in evidence. Neither are the parties precluded from delving into the socio-economic context of the dispute and from ascertaining a more realistic meaning of the relevant facts, as the Supreme Court of the United States did when reassessing its own previous conclusion that “separate” 61was the functional equivalent of “equal” when it came to the education of African-American children in the United States.98
The logic of the reasonable also encourages the lawmaker or adjudicator to examine the socio-economic consequences of the rule he is about to fashion. At times, he is discouraged by what appears to be a reasonable outcome of a rule under consideration, such as its “opening the floodgates of costly and unnecessary litigation;” and for this, among other reasons, he will discard the considered rule. At other times, he will reject a projected outcome as either unlikely or not worth the risk in light of the benefits it would confer upon society at large.
Historically, fact finding was intimately connected to the role of juries since the birth of the common law. At first, jurors as residents in the vicinity were expected to know the facts that allegedly occurred. Yet, as England and the population of its judicial circuits grew, juries heard the facts from the parties and their lawyers and eventually were tasked with determining which version was the most credible and, inferentially, reasonable. This function continues to this day. However, when the facts are highly technical or complicated, the parties may agree to have the judge find the facts, in so-called “bench” trials, or have the fact finding done by a specially designated judicial official. A favorite aphorism of Justice Louis D. Brandeis still sums up the assumption that lies at the root of the preponderance of fact in applying the logic of the reasonable: From the facts the law is born (Ex Facto Ius Oritur).
As a short time practitioner in United States courts, I learned the importance of proven facts in jury and bench trials. Often the hardest battles of advocacy were spent in trying to get persuasive evidence before the jury or judge who was the trier of facts. Victory or defeat could be reliably prognosticated once certain facts had “gotten into the record.” But it must be remembered that this is a battle that starts during the pre-trial phase of “discovery.” During this phase, witnesses, documents and other credible forms of evidence are examined and cross-examined seemingly endlessly in search for a kernel of persuasive evidence. As Alex de Tocqueville is supposed to have commented to an American commercial trial lawyer who asked him about de Tocqueville’s trial work in France compared to what he observed in the United States: “In the United States, lawyers spend much of their time finding facts on their own as if they were detective of facts, in France I hear the facts from my client and it is my job to dress them up with the appropriate legal arguments and citations and with that version of facts we march to court.”99
In a later chapter, I recount how, during a commercial arbitration procedure that I chaired the determinative factor was a motion by the victorious party requesting the surrender by the losing party of non-privileged, informal, communications between the comptroller and the president of the company comptrol;100 The losing party fiercely fought this request as part of the pre-trial discovery, using every possible argument under the sun, and for good reason. Once the document was surrendered, it contradicted the facts that this party alleged to have occurred in connection with the 62losing party’s interpretation of the agreement in dispute and conceded the validity of the opponent’s version of facts.
Facts also act as an acid test for the validity of what at first sight looks like a highly persuasive logical argument. One such an instance involved Justice Cardozo when he was an appellate judge at the New York Court of Appeals. For a good number of years, courts even in the most sophisticated commercial centers of the world, such as was the New York Court of Appeals, applied letter of credit principles in a syllogistic-formal logical manner. One such a principle was that of the independence of the letter of credit promise from the defenses and equities that the buyers and sellers or other parties of the underlying transactions could raise in connection with the payment of the letter of credit. As in a manner that became customary of the keenness of his factual and purposive analysis, Cardozo taught us all the importance of a factually based distinction.
In Maurice O’Meara Co. v. National Park Bank,101 the underlying contract was for the sale of newsprint paper of a specified tensile strength. The plaintiff presented documents that on their face complied strictly with the terms and conditions of the letter of credit, but the defendant issuing bank refused to pay the drafts. It alleged that upon investigating whether that the plaintiff-beneficiary had acted fraudulently, a reasonable doubt arose in its mind regarding the quality of the newsprint paper.102 The plaintiff-beneficiary sued the issuing bank for the damages he sustained by the bank’s dishonor and the issuer countered by offering to prove that the paper shipped by the beneficiary was considerably inferior to that described in the tendered documents. The majority of the Court of Appeals of New York decided, in a syllogistic manner, that it was established letter of credit law that the issuing bank was concerned only with the strict compliance of draft and documents and if the documents tendered by the beneficiary complied on their face with the terms and conditions of the letter of credit. If that was the case, the bank was absolutely bound to pay, regardless of whether it knew or had reasons to believe that the paper was not of the tensile strength contracted for.103
Justice Cardozo agreed that the general rule was indeed that the issuing bank had no duty to investigate the performance of the underlying contract, but he disagreed that if the bank chooses to investigate and discovers that the merchandise tendered is not the merchandise which the documents describe, “it may be forced by the delinquent seller to make payment of the price irrespective of its knowledge.”
Then, he focused on the critical facts and the distinction ignored by the majority:
We are to bear in mind that this controversy is not one between the bank on the one side and on the other a holder of the drafts who has taken them without notice and for value. The controversy arises between the bank and a seller who has misrepresented the security upon which advances are demanded. Between parties so situated payment may be resisted if the documents are false … I think we lose sight of the true nature of the transaction when we view the bank as acting upon the credit of its customer 63to the exclusion of all else. It acts not merely upon the credit of its customer, but upon the credit also of the merchandise which is to be tendered as security … I cannot accept the statement of the majority opinion that the bank was not concerned with any question as to the character of the paper. If that is so, the bales tendered might have been rags instead of paper, and still the bank would have been helpless, though it had knowledge of the truth, if the documents tendered by the seller were sufficient on their face.104
The first critical yet basic fact was, simply put: Who is the plaintiff? Is it an innocent holder of a draft or negotiable instrument as was Mr. Miller in Mansfield’s Miller v. Race (the innkeeper who innocently gave value for a stolen and forged draft without knowing anything about its past)? Or, was it the very same person who as a beneficiary tendered the documents that misrepresented the tensile strength of the paper that both the buyer and the issuing bank had every reason to expect? If it was the latter, and “between parties so situated” as the misrepresenting beneficiary and the innocent payor-issuing bank, payment may be resisted. The second critical fact was the meaning of possibly valueless cargo to an issuing bank which in the nineteen twenties and almost through the end of the twentieth century regarded the negotiable bill of lading and the goods it covered as an important component of its security.105 His analysis showed that the bank’s position was supported by both the most relevant facts and the soundest banking practice.
As I said in the preface to my book Commercial Letters of Credit in the Americas, having read this decision as a law student who came from a civil law country in which facts such as those identified by Cardozo were seldom considered by judges, my interest in a letter of credit law such as articulated by Cardozo and my outlook on judges and on the role of facts was a crucial discovery.106 Add to this discovery Cardozo’s analysis of the purpose of documents of title as collateral and as a critical component in the issuance of letters of credit at that time, and an entire new panorama of purposive commercial adjudication opened before my eyes.
My change of outlook was confirmed when I read Justice Cardozo’s decision in MacPherson v. Buick Motor Company.107 MacPherson bought a Buick from an automobile dealer and was injured when one of the automobile’s tires collapsed as a result of defective spokes. These spokes were manufactured not by the defendant, but by a sub-contractor. Anglo-American law did not have a codified or statutory provision that enabled bringing an action against anyone guilty of negligent conduct in terms such as found in Article 1382 of the Code Civil: “Any act whatever of man, which causes damage to another, obliges the one by whose fault it occurred, to compensate it.”108
Under the common law, the MacPhersons of this world could not sue a remote manufacturer seller such as Buick. It was neither in a direct contractual relationship with them (“privity of contract”) nor had Buick directly harmed them, at least not in a manner that could be easily established. An action on negligence required the existence of a duty recognized by the courts flowing from the defendant to the plaintiff or class of plaintiffs. As framed by Justice Cardozo, then, the main issue before the New York Court of Appeals was “whether the defendant owed a duty of care and vigilance to anyone but the immediate purchaser, that is, to anyone but the dealer.”109
Cardozo reviewed court decisions he regarded as the foundations of this area of the law. The first involved poison falsely labeled by the druggist-seller as a harmless substance. In this case, the injured customer was awarded damages from the careless seller.110 The court held that defendant’s negligence had put “human life in imminent danger” as any poison falsely labeled was likely to do. To this, Cardozo added that because the danger is to be foreseen, there is a duty to avoid the injury. He then turned to a decision in which the defendant, a contractor, built a scaffold for a painter whose employees were seriously injured when the scaffold collapsed.111 The court held the contractor-builder liable because he knew that an improper construction of the scaffold was also highly likely to injure its user(s). In Cardozo’s words, “Building it for their use, he owed them a duty, irrespective of his contract with their master, to build it with care.”112
He then analyzed a decision which imposed liability upon the manufacturer of a coffee urn which, when heated in preparation for the dispensing of coffee in a restaurant, exploded and injured the plaintiff, a customer of the restaurant.113 Cardozo reasoned that the manufacturer was liable because the urn “was of such a character inherently that, when applied to the purposes for which it was designed, it was liable to become a source of great danger to many people if not carefully and properly constructed.”114 Cardozo then concluded that although the facts differed in some respects from those in the preceding cases, their governing principle was not limited to poisons, explosives, and things which in their normal operation are implements of destruction. If the nature of a thing is such that it is “reasonably certain to place life and limb in peril when negligently made, it is then a thing of danger. Its nature gives warning of the consequences to be expected.”115
Please notice how the reasoning employed by Cardozo made use of a legal principle that could be applied analogically to different things only because the principle was the same: liability for the effects caused by negligently manufactured, built, erected, or packaged items. Thus poison was analogized to scaffoldings and the latter to coffee urns and automobile wheels. This was indeed reasoning from example 65to example, but the example was a composite of factual and legal considerations.116 Factually and legally, what they had in common is that they were all negligently manufactured and all injured either buyers or third parties. Thus he chose that legal analogy they had in common—the likelihood of causing injury when negligently manufactured. As a legal analogy, it was “open-ended” and supported by the logic of the reasonable and the principle of foreseeability of likely harm to innocent victims. If the defendant knew of the danger posed by a defective product or should have known of such a danger, he was under a duty to foresee the consequences of his actions and prevent them.117
With this statement, Cardozo bridged the gap between a universal duty of diligence toward third parties (as set forth in Article 1382 of the Code Civil) and the duty only to those parties who had a cause of action under the traditional conceptual categories of the common law, such as those who were in privity of contract. Reasonableness made this bridging possible by asking the key question: Is it not reasonable to impose the duty to foresee the consequences of a negligently manufactured product upon a defendant with knowledge of the harmful consequences of his acts?
One could hardly miss the central role played by fact finding in MacPherson v. Buick, even when expertly and subtly blended with the legal principle of foreseeability in order to make new law. Reasoning by example, then, is used by those appellate judges who are convinced that the state of the law is unsatisfactory and that new judicial and “interstitial” law is more likely to be put in motion by courts than by a legislature. In MacPherson v. Buick, the changed socio-economic circumstance was the increased number of victims of automobile accidents caused directly or indirectly by defendants who were not in contractual privity or in direct contractual relationships with the plaintiffs.
By finding out the purpose of legal institutions, one discovers whether they worked or not and hopefully why they have or have not worked. In the case of the Nicaraguan drafter of a negotiable instruments law, his purpose was “to render an homage to Professor X’s theory of negotiable instruments,”118 not to improve the reliability of all the instruments that circulated in Nicaragua as negotiable instruments. Thus from the very moment the purpose was formulated, one could predict that it was not going to fulfill its economic purpose. His method lacked the right goal, the proper analytical tool and the required data.
Aristotelian-scholastic logic is a useful tool for the purpose of attaining precision and symmetry in the drafting of rules, but because of its aims at permanence and universality (which leads inevitably to a closed number of legal institutions whether they are types of contracts, rights in rem or causes of action), it impedes progress and 66economic development. This logic could be helpful in adding precision to the formulation of rules, such as by avoiding redundant or contradictory definitions, but it is not helpful in fashioning market sensitive commercial norms.
The logic most suitable for using commercial law as a tool for development is the “logic of the reasonable” because it takes into account past experience with legal institutions as well as the likely future experience with the new institutions, i.e., what the legislator, judge or administrator should reasonably expect to happen once the new institution is operative. In addition, by encouraging law makers and governed alike to consider the reasonable expectations of “the other,” including counterparties and third parties, it is the most likely to produce standard and best practices and with them economic development.
Because it is a fact-driven logic, it depends upon the comparative law researchers’ ability to collect not only the above described experiences with official legal institutions, but also thorough and accurate versions of commercial and consumer customs and practices and their socio-economic context. This task is greatly facilitated by identifying representative or archetypal behavior of merchants and their counterparties and third parties including consumers. It is also facilitated by the fact that only those commercial legal institutions that are guided by certain immanent principles or standards can aspire to long term viability. Some of them will be discussed in the following chapter, such as the fair competition and cooperation among merchants and the protection of third parties acting in good faith. Others became apparent in Chapter I when discussing the selfish but also altruistic nature of social man, reflected in customs and practices that required the giving of something of value as a means to gain the trust of contracting and third parties.
The logic of the reasonable also serves as a valuable drafting tool. Precise rules are no doubt helpful in bringing about a high degree of predictability, but the more precise the rules are, the narrower is their scope of application. Yet, constantly changing commercial practices need broader guidelines than those offered by the highly precise rules. It is for this reason that the law of commercial contracts of the United States is governed increasingly by standards rather than by rules.119 And it is precisely in the drafting of such a law that the principles derived from standard and best practices are effective tools, as will be illustrated in the following Appendix..
This Appendix illustrates the use of the methodology discussed in this chapter when applied to an economic development project. Assume that the cost of commercial credit in country X, particularly for micro, small and medium-sized businesses—if and when available—is approximately fifty per cent per annum, thereby undermining the creation and growth of micro, small and medium-sized enterprises. Assume also that 67many of these enterprises wind up paying rates in excess of 4OO per cent per year to usurious lenders. X has requested multi-national organizations to help it fund studies and draft laws that could help it obtain commercial credit at reasonable rates of interest. One of these multi-national financial organizations has heard good things about your law firm and about the fact that you have a group of lawyers trained in the law of comparative commercial contracts. It requests that you send them a proposal outlining what your firm could do for X and what you would charge for it.
The following sections will illustrate what could be an important part of your description of the “technical” work involved in that request. It will also illustrate how to use the comparative contextual method.
Up to date socio-economic data on X can be obtained, in part, from widely available printed and electronic sources. The subjects usually covered are wide ranging: 1) X’s population including average age, life span and access to medical services; 2) its annual gross domestic product and per capita income; 3) its education and literacy, graduation rates and presence of viable commercial and industrial professionals in various sectors; 4) X’s principal sources of income, including exports and the sectors on which its economy depends on most; 5) X’s proximity to profitable markets for its goods and services and the adequacy of its infrastructure and means of communication; and 6) governmental institutions, including type of government, role and importance of its branches, taxation, tax evasion and corruption.
These data help identify those goods and services that are the most likely to serve as collateral for commercial loans. For example, if the statistics on health services indicate that a sufficient number of X’s residents have regular access to physicians and hospitals, this may bode well for the utilization of medical bills or invoices as accounts receivable collateral for loans made to physicians and hospitals. The same would be true with members of other professions such as artisans and craftsmen. Clearly, this initial statistical data would require further inquiry on, say, the patients’ or clients’ ability and willingness to repay their credit obligations. Incidentally, a similarly promising initial datum on the importance of tourism for country X led to the suggestion that widely circulating “travel vouchers” be used as collateral for loans granted to travel agencies, and their lodging and transportation contractors or sub contractors who are also holders of travel vouchers. Up until that time, X’s travel agencies were under the impression that the only reliable and liquid collateral they could offer were their bank deposits of the amounts paid to them under these vouchers. They were unaware that credit card receipts, and travel vouchers given to them in exchange for their services—while not as liquid as bank deposits—were desirable collateral as contractually promised payments owed by reputable payors. Once X enacted its law on secured transactions, the reliance on credit card receipts and travel vouchers as collateral markedly increased.
Another frequently underestimated datum when visualizing the viability of collateral is the adequacy of a country or region’s transportation infrastructure and means of communication. Depending upon its adequacy, it may be possible to increase the utilization of air, rail or truck waybills, ocean bills of lading and warehouse receipts (paper based or electronic) and their transported or stored goods as collateral. In addition, it may be possible to create a national collateral (or personal property 68security interest) registry either as part of a network of local registries or as a directly accessible central registry or both.
Recall that in the first sentence of this section, I qualified the use of sources of socio-economic data by using the words “in part” in relation to up-to-date standard printed or electronic sources. The other and perhaps most important source of the socio-economic data is that provided by local experts. There is no substitute for the qualitative information provided by national or local researchers and consultants. What may look clear and convincing to foreign eyes, even when armed with the most current statistical reports, may be quite different through discerning local eyes.
For example, certain goods or services may appear at first sight to be highly valuable collateral because of their scarcity and exclusive distribution. Yet, the local expert may be aware of the fact that a monopoly or exclusive franchise for the distribution of product “Y” is scheduled to disappear in the immediate future. The same may be true with a cleverly hidden and corrupt governmental subsidy available only to certain farmers, or with unreliable means of communication. Or, based upon experiences elsewhere, the comparative analyst may be convinced that a secured transactions law could not be enacted in X without the support of the local bankers’ association. Yet, the local expert will warn him that bankers would be opposed to the proposed law because it entails taking risks they have never taken. But, thanks to the same local expert, the analyst will find out that that a large demonstration of farmers are willing to show up in front of congress and support a law that will give them access to credit at low interest rates that they had never enjoyed.
Another guiding theme of this book is the sharp separation between the official or positive law and the unwritten or living law in developing nations. After more than forty years of doing comparative legal studies in developed and developing nations, the only plausible explanation I have for the sharpness and significance of that separation is another guiding theme of this book: the familistic component of the legal culture of developing nations. As will be apparent in later chapters, familism is omnipresent in the legal cultures of Latin America, Russia, and China and is the force that shapes many of their living law institutions as developing nations (another guiding theme of this book). It accounts for the privileged or monopolistic rights of the select few, which, in turn, allow them to write their own rules (or have their governmental connections write them on their behalf). And this continues to occur despite written laws that customarily proclaim the equality of opportunity and the freedom of competition of all.
The vast majority of those who live on the other side of the tracks of economic success in developing nations are unaware of how the other side succeeded. Thus, they have no hesitation in creating their own rules and practices, whose common denominator is that they will obey the official law or the law of the powerful only when it is convenient for them to do so. When it is not, they spend much of their lives avoiding or evading the laws of the “others”. As a Spanish serf answered his feudal lord’s question: “Don’t you obey the King’s Command?” “I obey it but I don’t fulfill it” (in modern Spanish, “Lo obedezco, pero no lo cumplo”) whose true meaning is that he only pretends to obey, or simulates his obedience, a contractual attitude which, y as you learned in the preceding chapter, is another guiding theme of this book.
A legal system plagued with such unequal, unfair and deceptive attitudes can best be deciphered by those who live it, understand it and are capable of translating its legal institutions in a coherent manner for the comparative law analyst. Whenever possible, you local experts must become leaders of the drafting effort. Hence, one of the most important staffing decisions for X’s project is to find the local legal talent that best understands both the principles that guide the drafting of an effective secured transactions law as well as X’s written and living law. Usually the local expeerts are only superficially familiar with the foreign laws that best apply these principles. It then becomes the task of the comparative analysis to serve as a bridge between the foreign experience with the model laws and the local socio-economic and legal data.
Armed with the above described sources of information, the comparative analyst of X’s secured transactions law will learn that X’s written law provides only two security interests or rights in rem; one for real property (the “hipoteca” or mortgage) and one for personal or movable property (the “prenda” or pledge). And since according to X’s civil code, the number of rights in rem is closed or is a numerus clausus (such definitions being attributable to Aristotle’s essences as discussed in this chapter),121 no more security interests in personal property can exist. These truisms are firmly believed by X’s lawyers and judges, who also believe that they came to them directly from Roman law. They must be made aware that this was simply not the case. For Roman jurists, as you will learn in Chapter IV, were non Aristotelian, eminently practical and non-dogmatic and invariably found ways to adapt their legal institutions to the needs of their admittedly rudimentary marketplace by contemporary standards. Thus, in due course, the Roman pledgor of personal property was allowed to remain in possession of the pledge by relabeling this non-possessory pledge a mortgage (hypotheca).122 A similar flexibility will be needed by X’s lawyers, law professors and judges with the notions they inherited from the Spanish Civil Code that intangible things such as contract rights, accounts and trade names cannot be pledged because they are not movable or corporeal things.123
The comparative law researcher will also quickly learn that under X’s law, inventory could be used as collateral only when “immobilized” or locked up in a terminal warehouse, and thus could not be transformed, resold or re-pledged thereby facilitating the repayment of the commercial loan. Yet, was it at least possible under X’s law for the seller or a third party custodian to foreclose on the collateral by reselling it publicly or privately without having to ask a court for its judicial remedy? The answer he would hear from the local lawyer was that private parties constantly 70tried to effectuate such extra judicial remedies and at times got away with them. However, courts continued to insist on the need for judicially ordered repossession or foreclosure and rejected extra judicial remedies as in violation of the civil codes’ prohibition against the Pactum Commissorium or agreement that enabled the creditor to repossess or foreclose on collateral.
The prohibition of this Pactum, incidentally, was enacted more than a thousand years ago by the Roman Emperor Constantine and is still found in most of the civil codes of Latin American nations.124 Nonetheless, it has remained in force even though its purpose disappeared long ago. Its purpose was to enforce a canonic definition of usury that forbad the charging of any interest, no matter how small, by using the Pactum as a subterfuge for the creditor to pocket the value of a thing pledged that was worth much more than the principal and interest due on the loan. It did not matter that the definition of usury in force in most, if not all, of the nations that proscribed the Pactum had changed and that a usurious rate was only one that exceeded the maximum allowable rate. And as if this were not enough, any clause that allowed a creditor or third party to repossess or foreclose on collateral, even if it was carried out pursuant to the parties’ agreement and without breach of peace, was deemed to have violated constitutional due process by depriving the debtor of a court hearing.
A comparison of lending scenarios in developed and developing nations by the NLCIFT and by a group of Anglo-American and Latin American experts was concluded in 2001.125 It showed that X’s law shared most of its features with those of the laws of other developing nations. In contrast, while the secured lending laws of Canada and the United States were quite similar, they differed sharply from the laws of developing nations.
In a 2001 meeting of Western Hemisphere experts on secured lending laws, the participants encouraged the NLCIFT to circulate its draft of the principles that inspired the secured transactions laws of Canada and the United States to all the nations in the hemisphere. They also proposed that these principles be used as a guide to draft what a year later became the OAS Model Inter-American Model Law on Secured Transactions of 2002 (hereinafter OAS Model Law).126 These principles, in turn, became known as the NLCIFT 12 Principles of Secured Transactions Law in the Americas (hereinafter NLCIFT Principles).127
What is the importance of these principles as elements of a successful law reform process? Their importance is multi-faceted. First, they provide the justification for the selection of the standard and best practices that will eventually become part of the new law. Second, as justifiers of the proposed law, their legitimacy is earned by the successful legislative experiences that inspired them. In the case of the NLCIFT 71Principles, they were inspired by the standard and best secured transactions practices and laws in nations with developed market economies such as Canada and the United States. In the case of Canada the selected statute was its Personal Property Security Act128 (hereinafter PPSA) and in the United States’ it was Article 9 of the U.C.C.
As recommended by the 2001 meeting of hemispheric experts, the NLCIFT Principles, as inspired by the experience with these statutes were to be used as a guide when drafting the OAS Model Law. Thereafter they also continued to be used as a guide for the drafting of the statutes enacted with varying degrees of success by Latin American nations, such as Mexico, Peru, Guatemala, Chile, Honduras, Colombia, El Salvador, and awaiting enactment in Costa Rica.129 The third reason for the importance of these principles is that they summarize the new law’s purposes and as such they act as reminders to those applying the new laws that they may missed or disregarded an important goal.. For the benefit of the reader, the NLCIFT Principles are included below.130
1. Secured commercial and consumer credit is an effective tool for economic development because it allows the debtor’s use, transformation, sale or barter of collateral (mobilization). The mobilization of these assets leading to their sale or disposition makes possible the payment or self-liquidation of the loan. A single security interest can support a series of loans whose amount and collateral can vary during the life of the loan or loans. By executing a single security agreement and by giving public notice of the loan or line of credit, the secured creditor establishes his priority in the collateral over third parties without having to enter into new credit extension agreements or having to make successive filings. Self liquidation can take place only when the following corollary principles are implemented by legislators, the parties, registries and courts.
2. A security interest is a preferential right to possession or control of personal property. As such, it does not require that the debtor who grants the interest have title to the personal property collateral; his right to its possession, even though co-existent with other possessory rights in the same property by other creditors and debtors, will allow the creation of the security interest.
3. The security interest may be created in any personal property susceptible to monetary valuation whether present or future, tangible or intangible including rights to the same, as well as in the proceeds of this collateral, whether in their first or future generations. Thus, personal property collateral as well as security interests in them are open in number (numerus apertus), and these security interests are not limited to pre-existing devices such as the pledge, with or without dispossession of the collateral, chattel mortgages, retention of title or conditional sales, etc.
4. Security interests may be created by contract or by law. The effectiveness of a security interest between the secured creditor and debtor arises from their contract or 72from a statutory or judicial imposition without any additional formality. Nevertheless, third party rights, including the rights of judgment creditors and trustees in bankruptcy, will not be affected by the security interest unless proper notice of it is provided to third parties.
5. A principal goal of a secured transactions public notice system is to eliminate secret liens. Public notice can either be attained by the creditor’s or designated third party’s possession or control of the collateral, or by registration. A perfected security interest in personal property can merge with a negotiable instrument, in which case it will become a negotiable security interest and, thus, an “abstract” undertaking, independent of rights and equities associated with the underlying transaction, thereby allowing its “true sale” or unrestricted negotiation to a bona fide purchaser.
6. Effective public notice by a specialized registry occurs when all known or future legal mechanisms with the effect of guaranteeing the payment of a debt against personal property are treated as a unitary security interest. The effect of such a recorded security interest, including its priority, upon third parties (such as other secured creditors and purchasers) commences from the time of its filing, irrespective of the time of its creation.
7. Registration should be inexpensive and should take place in a public registry easily accessible to third parties regardless of nationality or economic sector, if at all possible by electronic means. The filing, in standardized fashion, should contain only the essential data to identify the parties, the amount of the loan or line of credit and collateral, consistent with the needs of actual and potential third parties to discover all recorded liens against the debtor’s assets. Generic descriptions of collateral such as “inventory” or “accounts receivable” should suffice. The registry should be indexed generally by the debtor’s name and, only exceptionally, by the serial number of the goods.
8. A “purchase money”, or “acquisition” security interest should take priority, to the extent that the credit provided is used directly to acquire the collateral, over prior existing perfected security interests in the same kind of collateral, as an incentive to those wishing to provide timely, valuable and needed loans and as a safeguard against the monopolization and immobilization of the collateral available by one or more secured creditors. Perfection of a purchase money security interest should require, in addition to the appropriate filing, a special notice to pre-existing security interests.
9. A buyer in the ordinary course of business takes free of a perfected security interest created by his seller, even when the buyer may know of that security interest. If the sale occurs outside the ordinary course of business, then the buyer takes subject to the security interest even if he pays a fair purchase price.
10. Self liquidation of the security interests requires that repossession of the collateral and foreclosure take place by means of a contractual, rescissory and extrajudicial enforcement that confers upon the creditor or agreed-upon fiduciary the power to repossess or retain and foreclose on the collateral privately or by means of a highly expeditious judicial foreclosure.
11. Whenever possible—and until such time as a perfected and modern bankruptcy system that duly protects debtor and creditor rights has been adopted—the perfected security interest should not become part of bankruptcy proceedings and the law of bankruptcy or any other branch of the law should not become a tool to delay, 73avoid and evade secured obligations. Exceptionally, where the bankruptcy takes the form of a business reorganization, collateral may become part of the bankruptcy estate, subject to the exclusive jurisdiction of the bankruptcy court to confirm the perfection of the security interest and establish its priority against the claims of other creditors, to determine the extent and value of the security interest and ultimately to decide whether the collateral is essential to a feasible reorganization that shall protect valid security interests.
12. The harmonization of secured transaction laws—including conflict of law rules—is essential in order to promote cross-border extension of credit.
Experience with the drafting or assisting in the drafting of approximately half a dozen secured transactions laws in Latin America and Africa it became apparent that a three-step process was the most effective. They were: (1) The determination of the compatibility or incompatibility of local law and practice with the NLCIFT Principles by means of a Roadmap study of local secured lending practices. (2) The gathering of as pluralistic a local drafting committee as possible. The committee’s need to include all the sectors of the local economy and the legal profession affected by the law familiarize its members with the results of the Roadmap study. (3) The testing of the effectiveness of proposed provisions with lenders and borrowers and to obtain opinions on their constitutionality as well as on other possible difficulties of enforcement with Supreme Court justices, trial judges, practicing lawyers and law professors.
At this time, I would like to return for a moment to the Canadian PPSA and U.C.C. Article 9 as models for the drafting of the OAS Model Law. The reason for this detour is to answer those critics prone to regard the use of foreign legislative models by developing nations as “cultural imperialism.” I believe that a conversation I had with a member of the Mexican delegation to the NAFTA agreement in 1991 places the allegation of “cultural imperialism” in its proper perspective.
I had stated to members of the Mexican delegation to the drafting of Nafta’s banking provisions that unless Mexico facilitated credit for its small businesses, tens of thousands of them would not be able to compete with their Canadian and United States counterparts who had access to commercial credit at rates of interest below ten percent per year, while their Mexican counterparts had to pay between forty and fifty percent annual rates of interest-when they had access to it. I then suggested that Mexico consider enacting an Article 9 or a PPSA-like law (properly adjusted to Mexico’s legal system and civil law tradition). In response to what one member of that delegation perceived as yet another instance of cultural imperialism he asked: “Why is it that Mexico must import its trade and commercial laws from Canada and the United States and the same is not true the other way around?” I responded that the question that he and his Mexican colleagues had to ask themselves was a different one: Does Mexico wish to have commercial credit at affordable interest rates so that its merchants can compete on a level playing field with their Canadian and United States colleagues? If so, a form of commercial credit that started out in England two centuries earlier and from there spread to the United States and Canada was the only one that would make such competition possible. It was a form of credit that allowed commercial, industrial or professional borrowers to remain in possession of the raw materials, equipment, fixtures, inventory and other business assets to enable them to produce, 74transform, exchange or sell their products and, with the proceeds of the sale or exchange, pay off their “self liquidating” loans. And such a purpose requires certain transactional and legal pre-requisites, without which self liquidating loans could not occur.
In fact, commercial experience has shown that, especially in credit transactions, usually only certain practices could accomplish the necessary cost-effectiveness and fairness that would make them competitive. Starting out with how a credit transaction is structured, how it is documented and who has to give what first to whom, standardization is a pre-requisite of cost-effectiveness.131 I repeated the example of A.P. Herbert’s “negotiable cow” (used earlier in this chapter)132 and suggested that because of the need for cost-effective practices, a negotiation clause stamped on the back of a cow could not compete with one written or stamped on paper.
Mutatis mutandi, rules that required the debtor’s surrender of his assets as security for the loan, could not compete with those that allowed him to make a productive use of those assets. This was a case where using the most appropriate means to attain one’s ends was crucial. At this point, our conversation became friendlier and warmer. My interlocutor remembered similar words being uttered by his professor in a course on “Introduction to Law” at the National University of Mexico Law School (UNAM). And this professor was none other than Luis Recasens Siches (whose support for the “logic of the reasonable” was discussed in this chapter).133 “Yes”, he said smilingly, “that is what Don Luis referred to as one of the principal features of reasonableness.” (Hopefully, you will now be tempted to re-visit the discussion on the logic of the reasonable in this chapter.)
My newly acquired friend asked me for examples of Mexican legal institutions that were incompatible with such a loan. I repeated to him some of the examples enumerated in the preceding section. I added that the most incompatible was the familistic nature of Mexico’s marketplace and legal culture, for secured lending is a form of credit extended to borrowers who are neither members of the lenders’ family nor are they his friends. In fact, they are often unknown to the lender. Consequently, the lender must treat family and stranger equally (and so must the borrower) and remember the principle that for a business asset to be relied upon as collateral, it has to have a discernible marketplace value. And one of the legal means to assure equality of treatment is a transparent system of perfection and priority of security interests. Additionally, one of the corollaries of equal treatment and transparency is to protect those who filed or acquired their possession of the collateral first.
However, such a system was certain to be opposed by those who, despite being lenders, labeled themselves in their contracts as conditional sellers, financial lessors or trustors of goods entrusted to their debtors. At root, those transactions simulate or provide the appearance of a legally disguised status. In the case of the above listed lenders, they simulated the status of owners of the collateral, for as owners they would acquire a legal status superior to that of secured creditors even though the latter filed their security interests. And the reason for not wanting to file their security interests was not so much to avoid paying filing fees but to avoid appearing in a public record of 75transactions whose transfer taxes alone would be quite significant and worthy of a simulation. Keep in mind that sales or transfer taxes and not income taxes are usually the main source of tax revenue in developing countries. Keep also in mind that in the contemporary marketplace and personal property law most purported owners of this type of property are at best lawful possessors.134
My newly acquired friend tried to make a case for those who wish to file to be able to do so and those who did not want to file to be able to do so as well even though the latter’s rights or liens would remain secret. (Incidentally, this was the formula first used by Mexico’s Decree law, which was the first version of its secured transactions law when enacted in 2003 and was also one of the reasons for its demise a few years later.)135 In response to his proposal, I quoted a fancy term that legal anthropologists use in connection with such a suggestion, “inherent incompatibility.” As translated to lay language by my friend and mentor E. Adamson Hoebel, this term means that “a people cannot cook the same piece of meat and eat it raw.”136 In other words, a commercial self liquidating loan could not be at the same time transparent and secret or unrecorded.
The same would be true with or among many other incompatible legal institutions, including: 1) a principle that requires that the debtor remain in possession of his productive assets in order to be able to repay the loan with their yield, and a definition of a pledge that requires the possession to be transferred to the creditor or to a third party custodian; 2) a definition of movable goods which excludes intangibles such as contract rights, accounts receivable or trade names or trademarks; or 3) a procedure whose purpose is to preserve the value of perishable collateral in the event of debtor default and at the same time require that the remedy of repossession or foreclosure be adjudicated in a lengthy judicial procedure.
A Roadmap study describes and analyzes lending practices in representative sectors of the nation’s economy. It does this by identifying the archetypal behavior of borrowers, lenders, appraisers of the value of collateral, warehousemen or custodians, and other likely participants in the secured transaction, including lawyers and judges.
The Roadmap refines the socio-economic data at hand by identifying the standard borrowers and lenders and the typical terms and conditions of existing functionally equivalent loans such as conditional sales, chattel mortgages, financial leases or guarantee trusts. It also focuses on the collateral and on how it is used, repossessed or foreclosed on. And it describes and analyzes legal and judicial practices in connection with the loans and their collection and obtains reactions on the effectiveness of proposed new concepts, rules, principles and practices from their likely users.
As a rule, the NLCFIT’s Roadmap studies are sectoral in nature. Thus the lending practices are examined having in mind the participation by micro, small and medium-sized 76businesses in the agricultural, commercial, industrial and professional sectors.137 Based upon the statistical socio-economic information for typical, micro, small and medium-sized businesses in X, it became apparent to the Roadmap researchers that the vast majority of these potential borrowers did not have the required business or professional licenses with which to do business and apply for loans from banks or cooperatives or other “non-usurious” sources of credit.
This datum was made known to the designers of the software of the collateral registry. But at the same time, the Roadmap showed that almost all the applicants for bank or cooperative credit had a national identity card with significant data and security features in them to make them acceptable as the functional equivalents of the debtor’s personal or business name and address, especially those required for filing or registration purposes. This fact made it possible for the designers of the registry software to use the identity card number instead of the debtor’s name as the key reference to the securing debtor in filed financing statements. It also made it easier for the banks and cooperatives to file their security interests and thereby make their lending decisions revolve not on formalities, but on the actual merits of the loan, i.e., whether the debtor had the willingness and ability to repay and whether the source of his repayment was reliable.
As noted earlier, the sectoral data of the Roadmap concerned the archetypal behavior of typical lenders and borrowers. Thus, in the agricultural sector, it became apparent that many of X’s poor farmers (either as micro or small businesses) relied on the credit of the so called “coyotes.” These were the lenders who advanced moneys to facilitate the growing of the crops and at harvest time, paid the remainder of what became the purchase price for the crops. In other words, the archetypal coyote was a hybrid lender-buyer of the crops. Interestingly, the interviewed farmers did not resent the coyotes’ financing as much as the interviewers expected, especially when taking into account the cruel connotations of the coyote designation.
The reason why they were not resented as expected was because their financing was less oppressive than that of another archetypal lender—the omnipresent usurer and his oppressive rates of interest. What many of these poor farmers did not realize was that if they only had a vehicle or vehicles with which to transport their crops to a market often two or three hours away, they could have sold the same crops for as much as two to three times the price they received from the coyotes.
The previous finding underscored the need for financing growing crops, tractors and vehicles for the micro and small farmers. Yet, once the feasibility of such a loan 77was explored with banks and cooperatives, their response was that they could not finance the crops unless the borrowers either owned the land where they grew the crops or obtained a subordination agreement from the recorded owner, usufructary or lessor of the land. As you will recall from your reading of this chapter, this reasoning by the bankers, cooperatives and their lawyers was based upon the scholastic classification of “principal” and “accessory” things, and of the resulting principle that the principal things, i.e., the real property or land and the rights in it, invariably absorb the rights to the accessory things (i.e., the growing crops). This finding led the Roadmap to recommend that growing crops and other accessories be given independent status as collateral in the proposed new law.
The growing of cattle is also of considerable economic significance in Central America. Yet, surprisingly to the Roadmap researchers, X’s lenders only provide loans to the ranchers-cattlemen after their cattle has been slaughtered. Bad experiences and losses suffered with the methods of identifying cattle subject to their security interests, especially when the cattle could be easily moved and commingled with other cattle, discouraged this type of secured lending. It was the view of these potential lenders that unless a reliable system for identifying and tracking the movement of cattle is designed and implemented, they will remain reluctant to provide financing. Some of them suggested that the best solution would be to create a registry of cattle and ranchers and devise a more reliable system of cattle identification.
How does an archetypal micro or small business person who operates a stall in a public market or in a street obtain credit with which to purchase and sell his wares in X? The Roadmap study found out that this type of business is still largely dependent upon the credit of an archetypal usurer. The Roadmap also identified the pawn shop-like features of the municipal licenses obtained by usurious lenders to allow their secured borrowers to operate market stalls in X as the lenders’ sub-licensees. The usurers as a rule lend paltry sums each week to their sub-licensees, who are then enabled to buy only a minimal amount of wares. Yet these borrowers-sub-licensees pay interest rates that exceed thirty percent a month. If the stall operators fail to repay principal and interest, they will cease to be sub-licensees and will be evicted by their lender licensees.
Contrast such an immobilizing loan with the line of credit financing referred to in the NLCIFT Principles. With such a line of credit, the same stall operator can receive loans from banks or cooperatives at an affordable rate of interest now secured by his inventory, accounts, and proceeds. And, as a line of credit loan, the amount lent by the bank increases in proportion to the operators’ sales, proceeds, and profits, and is not limited to a percentage of the original value of the initial collateral. However, the legal culture of tax evasion is a major obstacle to this type of lending in X. When stall operators were asked why they had no books or records with which to document their cash flow and their profits and losses, many were at first reluctant to answer. Finally, some responded by asserting that “no one pays taxes in X.”
Even after dramatic illustrations of how much more money the stall operators would make by providing that information to a bank, cooperative or other non-usurious 78lender and contrasting the costs of a twenty percent per month loan (with a very limited and fixed amount of principal) with a nine or ten percent loan per year with an open-ended line of credit proportional to the volume of sales and profits, many were still reluctant to supply that information. The effect that this aspect of the legal and business culture of X had upon the lenders’ willingness to lend was palpable. On the other hand, the transparency of the filings of security interests in the collateral registry evoked fear in the borrowers that the availability of information on their borrowings would prompt the instances of tax collection raids or blackmail by tax collectors.
Consistent with the findings on the lack of accounting or bookkeeping records among stall operators, the Roadmap showed that micro and small businesses in X kept very few records of their business transactions. Only those who sold on credit, such as the owners of small grocery shops, kept a “booklet” (libreta) to document their sales of groceries. This prompted the recommendation of professional accountants that as part of the Roadmap the NLCIFT provide some simple but reliable forms of financial statements. This was done and much to the NLCIFT’s surprise and satisfaction, some of X’s banks started using these forms and this was soon reflected in the rise in the number of secured loans to small businesses.
A NLCIFT study on lending to micro and small businesses on a secured basis had shown the importance of accounts receivable as collateral. As summarized by a former Superintendant of Banks for Colombia: the invoices signed by the buyers of a delicious ice cream made and sold in his and surrounding buildings by a family of four (two parents and two children), even though payable thirty days later, were more liquid (or collectable) than many of the loans in the Colombian banks’ portfolios.
Nonetheless, the Roadmap emphasized that to facilitate reliance on accounts receivable financing by micro-borrowers, their lenders will need to be satisfied that the statement of income flowing from the performance of services or sales of their wares is accurate and reflects a steady and reliable enough clientele (i.e., account debtors) to merit loans or lines of credit. This will require not only the micro-entrepreneur’s use of simple but reliable accounting records, but also a higher degree of specialization of the lenders to micro-businesses.
On the remedial side of the law, asking experienced litigators how they would prevent an extra judicial procedure of repossession or foreclosure from going forward yielded important lessons and a recommendation for new filing provisions. Many of the consulted trial lawyers responded to the Roadmap question by asserting that their mere filing of a request for an interlocutory commercial attachment of all the assets of the defendant-borrower invariably led X’s courts to issue such an interlocutory attachment order that froze any other proceeding related to the debtor’s property.
This finding led to the inclusion in the draft of X’s law of the requirement that whoever wanted to obtain judicially or extrajudicially an attachment of the defendant’s assets had to file a notice of the extra judicial or judicial attachment, repossession and foreclosure. Accordingly, for a judicial order of interlocutory attachment to have 79priority over such a notice, it had to have been filed prior to all the other filers, including those by secured creditors seeking an extra judicial remedy. Similarly, trial lawyers suggested that the naming of an agent for repossession and foreclosure by means of an “irrevocable mandate” (mandato irrevocable) had proven more effective in practice and less vulnerable to judicial interference than the naming of a third party depositary or custodian.
The Roadmap of X’s socio-economic, legal, business and cultural data contained many more findings and recommendations for legislative, contractual, administrative (mostly registry) and judicial practices. However, the main purpose for this Appendix is to illustrate the real life application of the methodology of the contextual comparison discussed in this chapter and advocated by this book. If this illustration is successful, you should be able to start developing your own set of Roadmap-like notes concerning your own future economic development projects as you come across the contextual comparisons that attract your attention in the following chapters.
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1 See generally ALLEN G. DEBUS, MAN AND NATURE IN THE RENAISSANCE (Cambridge Univ. Press, 1978).
2 See, e.g., Association Internationale de Droit Comparé, Annuaire de Législation Etrangère (1872–1936), at http://www.periodicals.com. See also Hessel E. Yntema, Comparative Research and Unification of Law 41 MICH. L. REV. 261–268 (1942) [hereinafter Yntema, Comparative Research], for a brief but insightful review of some of the leading European and North American ideas on the components of comparative legal research. See also Neville Brown, A Century of Comparative Law in England: 1869–1969, 19 AM. J. COMP. L. 232 (1971). Professor Brown similarly traces the beginning of comparative law studies in Europe to the foundation of the French Society of Comparative Legislation in 1869, which was also the year when Sir Henry Sumner Maine accepted the Chair of Comparative Jurisprudence at Oxford. According to Professor Brown, from 1869 until 1918 comparative legal studies in England followed the direction provided by Sir Henry Sumner Maine.
3 See infra § 11:4 (on German law including a discussion on the House of Rothschild).
4 See infra § 22:2.
5 See infra § 22:4(C).
6 von Ihering, a Means to an End, at 2 (emphasis added).
7 Id. at 198.
8 See Zweigert & Heinrich Kötz, Comparative Law, at 34.
9 See Zweigert & Kötz, Comparative Law, supra note 8, at 34.
10 See infra § 14:5(A)(1).
11 In his executive message to congress proposing the adoption of Chile’s Civil Code of 1855, Chile’s then president Manuel Montt made the following testimonial statement on the unreliability of evidence on contractual intent (known to have been written by Andrés Bello): “Well known among inferior classes of the population is the existence of an infamous class of men who earn their living by prostituting their testimonial oath” (“Conocida es en las poblaciones inferiores la existencia de una clase infame de hombres, que se labran un medio de subsistencia en la prostitución del juramento.”). (“Mensaje del Ejecutivo al Congreso Proponiendo la Aprobación del Código Civil de 1855”) [hereinafter President Montt’s Executive Message] See http://www.chilein.com/c_civil1.htm (for the full text of this executive message). The relevant rules are Cód. Civ. (Chile) arts. 1708, 1709, 1710 & 1711. For a compendium of essays on Bello’s Civil Code, see Universidad de Chile Facultad de Derecho, IV Anales de la Facultad de Ciencias Jurídicas y Sociales (Cuarta Época 1964–1965—No. 4), available at http://www.analesderecho.uchile.cl/CDA/an_der_indice/index. html.
12 Conversation with one of the drafters of a 1968 proposed revision of the Nicaraguan Commercial Code, Managua, Sept. 12, 1968 who preferred to remain anonymous (on file with author) [hereinafter Nicaraguan Conversation].
13 Id.
14 Miller v. Race, 97 Eng. Rep. 398 [K.B. 1758]; infra notes 80–82 and accompanying text.
15 See infra § 23:9(C).
16 It is important not to confuse the archetypes used in this book with the heroes of Greek or subsequent mythologies. Our commercial archetypes are creatures of commercial cultures. Unlike the Greek mythical heroes, they did not earn emulation and, in some instances admiration, because of their strength or other extraordinary God-like powers but because of their reproducible human features. See e.g., Merriam-Webster Online (2011), www.Merriam-Webster.com (“Archetype: the original pattern or model of which all things of the same type are representations or copies; prototype; also a perfect example.”).
17 See Max Weber on the Methodology of the Social Sciences 90 (Edward A Shils & Henry A. Finch trans., 1st ed. 1949). Max Weber describes the research value of archetypal or ideal behavior as follows: “[W]here market-conditioned relationships … are discovered or suspected to exist in reality to some extent, we can make the characteristic features of this relationship pragmatically clear and understandable by reference to an ideal-type. This procedure can be indispensable for heuristic as well as expository purposes.” Id.
18 Cód. Civ. (Chile) (1857). The code was promulgated on November 22, 1855, but it went into effect (or entered into force) on January 1, 1857.
19 See C. Civ. (Fr.) 358–359 (Barrister 1804).
20 See President Montt’s Executive Message, supra note 11 (on the adoption of Chile’s Civil Code of 1855).
21 See infra § 29:2 (on the remedial implications of Justice Holmes’ “bad man” archetype).
22 See U.C.C. § 4–214(a) and Comment 1 (“Under current bank practice, in a major portion of cases banks make provisional settlements for items (checks) when they are first received….”) (Parenthesis added).
23 See the summary of Greenspan’s testimony in Kara Scannel & Sudeep Reddy, Greenspan Admits Errors to Hostile House Panel, Wall Street Journal (Oct. 24, 2008), online.wsj.com/article/SB122476545437862295.html.
24 See infra § 15:3(C)(1).
25 See infra § 16:4.
26 See, e.g., C. Civ. (Fr.) art. 1374 (Barrister 1804). See also Kozolchyk, Commercialization, at 16–20; infra § 23:1(C).
27 See Glass-Steagall Act, 12 U.S.C. § 378 (1933).
28 Also known as the Financial Services Modernization Act of 1999, Pub. L. 106–102, 113 Stat. 1338 (1999).
29 These figures were provided by Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission during an interview with Charlie Rose. Gary Gensler, Charlie Rose (June 14, 2012), www.charlierose.com/view/interview/12409.
30 Benjamin Nathan Cardozo, The Nature of the Judicial Process 102 (1922) [hereinafter Cardozo, Judicial Process] (citation omitted).
31 Id.
32 See infra § 3:3(C).
33 See Goode on Commercial Law 201–02, 306 (Ewan McKendrick ed., 4th ed. 2009), on warranties. See also Lawrence Friedman, A History of American Law 194 (2005). Professor Friedman points out that in McFarland v. Newman, 9 Watts 55 (Pa. 1839), Judge John Gibson restated a United States version of caveat emptor when deciding on appeal that “he who is so simple as to contract without a specification of terms, is not a fit subject of judicial guardianship.”
34 See, e.g., D’Onofrio v. First Nat’l Stores, Inc., 68 R.I. 144 (1942) and the discussion of the emergence of implied warranies in English law, infra § 30:2(C) (on U.S. law).
35 Cardozo, Judicial Process, supra note 30, at 109.
36 Id. at 106.
37 Rudolf von Ihering, El Espíritu del Derecho Romano 59, 60 (1962). This translation and abridgement of Geist Des Romischen Rechts concludes that the early Roman law of property was enormously influenced by the model of behavior of the Roman warrior, a man whose favorite means of acquiring property was by the strength of his hands, his sword, and his lance. See also Dawson, Economic Duress—An Essay in Perspective, 45 Mich. L. Rev. 253, 255, 264 (1947), cited in Kozolchyk, Toward a Theory of Law, at 739 n.199, for an enlightening study of the development of standards and fortitude in the law of duress.
38 See infra § 5:10.
39 Id.
40 Id. at (2) Question 63b (FG).
41 See James B. Greenberg, Microfinance, Law and Development: A Case Study in Mali, 30 Az. J. Int. & Comp. L. 135 (2013).
42 Id. at 147.
43 Id. at 148 (citations omitted).
44 Id. at 159.
45 Id. at 160.
46 See Wilhelm Windelband, History of Ancient Philosophy 255 (Herbert Ernest Cushman trans., C. Scribner’s Sons 2d ed. 1910) (1901), available at www.books.google.com [hereinafter Windelband, History].
47 Id. at 255–56 (emphasis added) (citations omitted).
48 Univ. of Evansville, The Road to Modern Evolutionary Biology, http://faculty.evansville.edu/de3/evolutionweb2/history.html (on file with author).
49 Id.
50 See infra § 8:4(D).
51 Id.
52 See § 4:4(D)(3)(e).
53 See infra § 4:4(D)(3)(a) & § 8:1 (on the scientific method of the Greeks and Babylonians).
54 See Glossary, “scholastic logic.”
55 Wilhelm Windelband, Historia de la Filosofia Antigua 216 (Editorial Nova 1955) (this author’s translation).
56 See infra § 4:2(A)(4).
57 See infra § 11:2(G) (on Prokura).
58 Id.
59 See, e.g., Robert C. Pinto, Argument, inference and dialectic: collected papers on informal logic 1 (2001).
60 Windelband, History, supra note 41, at 249–50.
61 Id. at 251.
62 See supra § 2:2(A).
63 Jeremy Bentham, Defence of Usury 100–01 (London 1816).
64 See infra § 12:3(C) (for a discussion in Phillip Heck’s views, a follower of von Ihering, on this subject).
65 Id.
66 He was referring to Article 1450 of the Spanish Civil Code of 1887, which states: “The sale agreement is perfected between buyer and seller and is binding on both if the parties had agreed on the subject matter of the sale and on its price, even though neither was delivered or paid.” (author’s translation)
67 While teaching at the University of Costa Rica School of Law in 1968, I repeatedly heard the following reasoning from trial court judges on their inability to enforce conditional sales: Article 442 of the Commercial Code of June 1, 1964 provides that even the most informal of oral sale agreements (a viva voz) are perfected when the parties agree on subject matter and price, which means that title is transferred to the purchaser ipso facto and ipso iure. Article 457 of the same Code, in turn, provides the only instance in which title is transferred back to the seller is the event of buyer default, and in such an instance the seller must pay back the price received from the buyer.
68 See infra ch. 30 (on Spanish case law).
69 See, e.g., § 10:2(B)(1).
70 See Philip von Mehren & Tim Sawers, Revitalizing the Law and Development Movement: A Case Study of Title in Thailand 33 Harv. Int’l L.J. 67, 68–73 (Winter 1992). These authors aptly summarize Max Weber’s typology of legal logic, where economic development was concerned, as including among his four categories of logic a first type which was “formally irrational”. It was characteristic of systems that depend on primitive procedures for deciding disputes, such as the Delphic oracle in ancient Greece. Stringent observance of procedural rules is of utmost importance, but the rules have no relationship to the rational determination of the rights and liabilities of the parties in the particular case. One imagines a priest examining the viscera of a goat and proclaiming the guilt or innocence of the accused. A second type of legal logic was the “substantively irrational.” Kronman cites as an example “khadi-justice” of the Mideast. Weber characterizes these systems as using an ad-hoc process to determine the outcome of a particular case. The system is “irrational” because it espouses no general rules; it is “substantive” because of its willingness to consider the widest range of considerations in determining the outcome of a case. The picture of a Bedouin chief handing out rough-and-tumble justice sprung to the minds of von Mehren and Sawers.
71 See infra ch. 22:10(B)(2).
72 See infra § 22:10(K) (on the Maria Trinidad Gomez decision).
73 C. Civ. (Fr.) arts. 302–303 (Barrister, 1804).
74 José Ortega y Gasset, La Rebelión de las Masas 41 (1956).
75 Id.
76 See generally Luis Recasens Siches, The Logic of the Reasonable as Differentiated from the Logic of the Rational (Human Reason in the Making and Interpretation of Law), cited in American Society for Legal History & Ralph A. Newman, Essays in Jurisprudence in Honor of Roscoe Pound 192–221 (Ralph A. Newman ed. Bobbs-Merrill, 1962); See also Luis Recasens Siches, Situación presente y proyección de futuro de la filosofía jurídica, III Anales de la Facultad de Derecho (Tercera Época, Jan./Dec. 1956, No. 5) available at http://www.analesderecho.uchile.cl/CDA/an_der_articulo/0,1361,SCID %253D2609%2526ISID%253D212,00.html. Because of conflicting pagination, I will cite to this lecture’s numbered paragraphs [hereinafter Recasens, Anales, at ¶ #].
77 See von Ihering, A Means to an End, supra note 6, at 1–18.
78 Recasens, Anales, supra note 71, at ¶ 22.
79 Id. at ¶ 24. Although through a different route, i.e., the inherently cooperative nature of viable commercial conduct, I came to the same conclusion and expressed it as one of the principles that guide commercial lawmaking. See, e.g., Kozolchyk, Modernization, at 712. I state that the need for commercial cooperation among merchants, no matter where and when, “imposes serious limits upon both the operational and moral components of … (its) ingredients.” See also supra § 1:2 (for the guiding themes ofthis book, including guiding pronciples). See infra ch. 21 (for some of the principles that have inspired the drafting and shaping of United Syaes commercial legal institutions).
80 Recasens, Anales, supra note 71, at ¶ 25.
81 Lon L. Fuller, Consideration and Form, 41 Columbia L. Rev. 799, 805 (1941).
82 Recasens, Anales, supra note 71, at ¶¶ 30–33.
83 Id. at ¶ 27.
84 See infra § 4:6(C).
85 Miller v. Race, 97 Eng. Rep. 398 [K.B. 1758].
86 Id. at 402.
87 Id. at 403 (emphasis added).
88 Frigaliment Importing Co., Ltd. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960). This case is fully discussed, see infra § 23:9(G)(4)(a).
89 Id. at 120.
90 See infra § 9:2(A) (peace of the market); § 14:4(B) (on brotherly and stranger standards).
91 Steinmeyer v. Warner Consol. Corp., 42 Cal. App. 3d 515, 519 (1974) (citations omitted).
92 See infra ch. 21.
93 Meinhard v. Salmon, 249 N.Y. 458, 464 (1928).
94 For a full discussion of this case, see infra § 23:9(C).
95 Meinhard, 249 N.Y. at 459.
96 Id. at 464.
97 See infra § 25:1(B).
98 Brown v. Bd. of Educ., 347 U.S. 483, 488 (1954).
99 I owe this description of Alexis de Tocqueville’s comparison to the late and lamented Professor Saul Litvinoff of the Louisiana State University Law Center. Even though I could not find a reference to it in De Tocqueville’s Democracy in America, knowing Saul I am certain he had another good source for it.
100 See infra ch. 27.
101 146 N.E. 636, 637–38 (N.Y. 1925).
102 Id. at 639.
103 Id.
104 Id. at 641.
105 During the nineteen nineties letter of credit banks gradually relied less and less on the bill of lading as collateral and more on prepayments of the amount of the issuance or on perfected security interests on the applicant debtor’s inventory, accounts receivable and proceeds.
106 See Boris Kozolchyk, Commercial Letters of Credit in the Americas ix (1966).
107 MacPherson v. Buick Motor Co., 217 N.Y. 382 (1916).
108 C. Civ. (Fr.) art. 1382 (2008).
109 MacPherson, 217 N.Y. at 385.
110 Thomas v. Winchester, 6 N.Y. 397 (1852). See also Kozolchyk, Roadmap, at 25–34, for other select decisions by Cardozo.
111 Devlin v. Smith, 89 N.Y. 470 (1882).
112 MacPherson, 217 N.Y. at 386.
113 Statler v. Ray Mfg. Co., 195 N.Y. 478, 480 (1909), cited in MacPherson, 217 N.Y. at 387.
114 MacPherson, 217 N.Y. at 387.
115 Id. at 389.
116 See Edward H. Levi, An Introduction to Legal Reasoning 1–2 (12th prtg. 1968). Mr. Levi was Dean of the University of Chicago Law School and Attorney General of the United States. As far as I know, this term was coined in the United States by Mr. Levi.
117 See John Lewis, 2 Cooley on Torts 1486 (3d ed., 1906), cited in Kozolchyk, Roadmap, at nn.71 & 73 and accompanying text.
118 See Nicaraguan Conversation, supra note 12.
119 On the use of standards and rules in the law of commercial contracts of the United States, see the late Professor Richard E. Speidel, Restatement Second: Omitted Terms and Contract Method, 67 Cornell L. Rev. 785 (1982).
120 X is an abbreviation for a hypothetical Central American country because this Appendix reflects the application of the comparative contextual methodology in research and drafting secured lending law projects done in Costa Rica, Guatemala, Honduras and El Salvador first by the the author and then by NLCIFT over more than thirty years.
121 See supra § 2:2(A).
122 See Berger, Encyclopedic Dictionary, at 490.
123 C.C. (Spain) arts. 335, 336 (1889), available at http://html.rincondelvago.com/codigo-civil-espanol-de-1889.html. It is true that Article 335 characterizes goods as movable if they are “susceptible of being appropriated … and generally all that can be transported from one place to another without harming the immovable property to which they were united” (Se reputan bienes muebles los susceptibles de apropiacion … y en general todos los que se pueden transportar de un punto a otro sin menoscabo a la cosa inmueble a que estuvieren unidos). Id. art. 335. Yet, Article 336, also includes in the category of movable goods: “the rents or pensions, whether for the life of the recipient or as part of his inheritance….” (las rentas o pensiones, sean vitalicias o hereditarias….). Id. art. 336. This inclusion should have suggested to H’s legislator that it would have been enough add commercial movable goods such as contract rights, invoices or accounts, and others as part of a growing list new types of movables. Nonetheless, this provision was one of the most contentious and kept on being invoked against the use of such rights as collateral, because “movables are corporeal things.”
124 See De Commissoria Rescindenda, Constantine Augustus (Jan. 31, 326); cited and translated by Pharr, The Theodosian Code 3.5.2. at 64 (1952).
125 See Meeting of OAS-CIDIP VI Drafting Committee on Secured Transactions Conference Transcript, 18 Ariz. J. Int’l & Comp. L. 334, 334–339 (2001).
126 For the English text of the OAS Inter American Model Law of Secured Transactions of 2002, see http://www.oas.org/dil/cidip-vi-securedtransactions_eng.htm.
127 NLCIFT, 12 Principles.
128 See, e.g., Personal Property Security Act, R.S.O. 1990, c. P. 10 (Can.), available at http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90p10_e.htm.
129 See Boris Kozolchyk, The Implementation of the OAS Model Law: Current Status, 28 Ariz. J. Int’l & Comp. L. 1 (2011); Ley de Garantias Mobiliarias [Law on Secured Transactions], Decreto No. 182–2009, tit. VII, ch. 1, 28 de enero del 2010, DIARIO OFICIAL (Honduras); Ley de Garantia Mobiliaria, Decree 51–2007, 16 de noviembrede 2007, DIARIO OFICIAL (Guatemala).
130 See Boris Kozolchyk, Implementation of the OAS Model Law in Latin America: Current Status 28 AZ J. Int’l Comp. L. 1 (No. 1, 2011).
131 See infra ch. 22 (on formation of contracts).
132 See supra § 2:2(1)(a).
133 See supra note 71 and accompanying text.
134 For a historical and comparative background, see Boris Kozolchyk, The Transfer of Personal Property by a Non-Owner: Its Future in Light of its Past, 61 Tulane L. Rev. 1490–99 (1987).
135 See Boris Kozolchyk & Dale Beck Furnish, The OAS Model Law on Secured Transactions: A Comparative Analysis, 12 Sw. J. L. & Trade Am. 235, 278–94 (2006).
136 Id.
137 For an analysis of the main features outlined in the principal text of micro and small businesses in representative Latin American nations, see Boris Kozolchyk & Cristina Castañeda, Invigorating Micro and Small Businesses Through Secured Commercial Credit in Latin America: The Need for Legal and Institutional Reform, 28 Ariz. J. Int’l & Comp. L. 43 (2011).