International Commercial Law

Berkeley Spring Semester 2018

Professor JH Dalhuisen

Syllabus/Course Description

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Attendance first class is mandatory. Any enrolled students who are not present
without prior permsssion of the instructor may be dropped in favour of those on
the waiting list.

1. Background

In this course, we study in commerce and finance the transnationalisation a) of

the applicable private law, b) of public order and public policy standards, and c)
of the dispute resolution facility through international arbitration. It concerns the
transformation of the rules applying to the dispute and to the substance of the
case, and the difference when using the ordinary domestic courts.
This willbe done against the background of the globalisation of the flows of
goods, services, capital, information and technology. In volume and value, these
international flows are now far larger than the domestic ones. They are often also
virtual, meaning that transactions in these flows are increasingly difficult to
locate. Under the traditional rules of private international law, finding the proper
local contact is still the method of determining the applicable law. It remains then
always national and assumes that adding up the local legal pieces results in an
efficient legal regime for the international transaction as a whole. There is no
legal transnationalisation to make these flows move better. In this approach even
international arbitration remains subject to the local arbitration rules of the seat
and is not truly transnationalised either.
Given the enormous increase in these flows, in international business this result is
increasingly artificial and unsatisfactory; it has also become irrational, more so
because these national laws were seldom written for international transactions
and their dynamics and for the dispute resolution concerning them. The more
rational approach for professional dealings is then the re-emergence of a truly
transnational private law or modern lex mercatoria and the identification and
recognition of an autonomous international or transnational commercial and
financial legal order, covering both substantive and dispute resolution or
procedural issues.
This law can be known from and is based on fundamental and general legal
principle, custom and practice, and party autonomy. Sometimes there may also be
treaty law. This tracks Art. 38(1) of the Statute of the International Court of
Justice together with Article 53 of the Vienna Convention on the Law of Treaties
for public international law as the law between states. Borrowing this

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methodology for international business transactions means that the pre
19th Century uniformity in law formation for both private and public law is re-
established and 19th Century nationalism in private law formation and application
both as to substance and in dispute resolution is substantially abandoned and
only retains a residual role in international business transactions.
These substantive developments are strongest in international finance especially
in the Eurobond and international swap markets, but its effects will be studied
more broadly for all of contract and movable property law leading to new
perceptions and models in transnational professional dealings. These newer
models will be compared with present civil and common law practices. As such,
this course is also a foundation course in comparative law.
Strife with domestic public policies, especially regulation, to the extent
international transactions still come demonstrably on shore in conduct and effect
in a particular country, or with other local values or public order or policy
requirements, on the one hand, and the impact of increasingly internationalised
public order requirements or transnational minimum standards, on the other,
especially in competition and environmental matters and in matters of financial
stability, will be other important discussion points.

Local policy and values cannot and should not be ignored in this globalisation
process but they are increasingly supplemented or superseded by transnational
minimum standards for all those who want to participate in this new order. The
essence is standardisation of all rules in respect of international commerce and
finance to promote the greatest efficiency in the international flows and the
transnationalisation of the production and distribution processes and attendant
services, information and technology supply, but the greater challenge is the
formulation of these minimum standards to balance the international market place
and make its operations palatable and beneficial to all.

2. Litigation and International Arbitration

This balancing of the international market on the basis of public policy is
perceived here as the greatest challenge to the internationalisation process of
private law. It poses at the same time the question who are truly the
spokespersons for the public interests in these international flows, which in
international arbitration poses in particular the question of the law formulating
and law making powers of international arbitrators and of their institutional
status.
In disputes concerning international commercial and financial transactions, the
applicable law and its public policy confines must be pleaded and proven,
especially in international commercial arbitration. This shows even now when we
invoke international practice but there is an important difference between
litigation in the ordinary courts and international arbitration in this regard. Judges
have more power but these are locally confined. Arbitrators may not have them
even though they have an international status. This discussion makes this course
highly relevant for all students who wish to specialise in the area of international
dispute resolution and it should make them thoroughly familiar with these newer
developments, perceptions and practical needs.

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 It means that in international transactions even a contractual choice of a national
law must now be put in a transnational context and may be eclipsed by mandatory
international principle and customary law or be corrected by public policy
considerations of a transnational nature. An important question is then in how far
international arbitrators have power to take here the initiative and create new law.
Where could that power and authority come from? It suggests that international
commercial and financial arbitration has also become subject to transnational
principles, rules and practices which eclipse the domestic laws of the seat and its
order. Placing international arbitration in the transnational legal order itself,
activated but not founded in the arbitration clause, which itself would be
transnationalised, may then fundamentally affect the powers, role and practices
of international arbitrators.
3. Format and Exam
This course is tauight in seminar style by an academic who was also a senior
international practitioners and arbitrator. It is based on questions and answers. If
the class is larger, a small number of students will be asked to be fully prepared
for each class to respond in the socratic manner. There will be a written
examination.

4. Course Material

The primary course material is Dalhuisen on International Commercial, Financial

and Trade Law 6th edition published by Hart Publishing in Oxford (2016), Vols. I and
II. The references in the footnotes of this book are also part of the course
material. Students are advised to acquire only the first volume, which has also a
large section on international arbitration. The second volume will be put on the desk
in the library.

Students will also need:

- a copy of the Vienna Convention on the International Sale of

Goods
- a copy of Articles 1 and 2 UCC (US) as amended.
- statutory or other texts in their own legal system on the law of
contract, agency, proprietary rights in movable property (their
creation, their protection and transfer)
- the European Draft Common Frame of Reference (DCFR)
- other law texts or texts of principles as and when advised

These texts are available on the web.

5. Additional Reading (the materials marked with a * are considered prime

reading materials)

1) Legal nationalism and positivism. Important for English legal nationalism

and positivism remains :

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 - HLA Hart, The Concept of the Law (Oxford1991), Second Ed. 1994.
See as an antidote the work of R Dworkin, especially his: Taking
Rights Seriously (1977)

2) Legal Formalism and Legal Realism in Europe and the US

- * PS Atiyah and RS Summers, Form and Substance in Anglo-American
Law: A Comparative Study of Legal Reasoning, Legal Theory and
Legal Institutions (London 1987).

3) Cultural approaches to the law (often leading to a narrow nationalism):

- C Harlow, ‘Voices of Difference in a Plural Community’ in Paul
Beaumont a.o. Eds, Convergence and Divergence, 199 ( Hart
Publishing 2002)
- * R.Post, ‘The Challenge of Globalization to American Public Law
Scholarship’, 2 Theoretical Inquiries in Law (2001), 323
- * N Walker, ‘Culture, Democracy and the Convergence of Public Law:
Some Scepticism about Scepticism’ in Paul Beaumont a.o. Eds,
Convergence and Divergence, 257 ( Hart Publishing 2002)

4) Sociological approaches to the formastion and application of private law

(often leading to greater internationalism)
- * R Cover, “Nomos and Narrative”, 97 Harv LR, 4 (1983), 31
- * G Teubner Ed. Global Law without a State (1997), in particular the
Foreword: ‘Legal Regimes of Global Non-state Actors’ p xiii-xvii, and
'Global Bukowina: Legal Pluralism in the World Society’ p. 3 ff.
- G Teubner Ed. Autopoietic Law: A New Approach to Law and Society
(1988)
- Ph Selznick, The Communitarian Persuasion (2002)

5) Law and economics approach (often leading to a decentralised view of the

law)
- * RD Cooter, ‘Three Effects of Social Norms on Law: Expression,
Deterrence, and Internalization’, 79 Oregon LR 1 (2000)
- * RD Cooter, ‘Structural Adjudication and the New Law Merchant: A
Model for Decentralisation’, 14 Intern. Rev. of Law and Economics,
215 (1994).
- Penner, Schiff and Nobels, Jurisprudence 855 (2002)

6) Legal orders. This is a newer area of research.:

- Neil MacCormick, Questioning Sovereignty (especially Chapter 1 and
5, Oxford 1999)
- K Lenaerts, ‘Interlocking Legal Orders in the European Union and
Comparative Law’, 52 Int’l & Comp LQ (2003), 873
- *JH Dalhuisen, “Legal Orders and their Manifestation, The Operation
of the International Commercial and Financial Legal Order and its Lex
Mercatoria”, 24 Berkeley JIL, 129 (2006) also on ssrn under Jan
Dalhuisen
- T Broudi and Y Shany Eds, Multi-sourced Equivalent Norms in
International Law (Hart Publishing 2012)

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 - PS Berman, “Global Legal Pluralism”, 80 Southern California Law
Review 1177 (2007) and Global Legal Pluralism – A Jurisprudemnce
of Law Beyond Border (Cambridge 2012)
- C Scott, “Transnational Law as Proto-concept, 10 German Law Journal
866 (2009)
- G Shaffer, Transnational Legal Ordering and State Change (CUP 2013)
and T Halliday and G Shaffer (Eds) Transnational Legal Orders (CUP
2015)

7) Commercial law and Property Law

- RM Goode, Commercial Law, 5th Ed. (London 2016)
- WH Hohfeld, Fundamental Legal Conceptions as Applied in Judicial
Reasoning (New Haven CT 1919)

8) International commercial law and the modern lex mercatoria:

- R Goode, ‘Rule, Practice, and Pragmatism in International Commercial
Law’, 54 Int'l& Comp. LQ, 594 (2005)
- Emmanuel Gaillard, ‘Transnational Law: A Legal System or a Method
of Decision Making?’ 17 Arbitration International 59 (2001)
- M Mustill, ‘The New Lex Mercatoria’ in M Bos and I Brownlie (eds.),
Liber Amicorum Lord Wilberforce (1987), 149 and ‘Contemporary
Problems in International Commercial Arbitration’ (1989) 17 Int. Bus.
L 161
- *JH Dalhuisen, “Globalisation and the Transnationalisation of
Commercial and Financial Law”, 67 Rutgers Law Journal 19 (2015)
also on ssrn.com Search under Jan Dalhuisen author.
- JH Dalhuisen, “The New Lex Mercatoria: An Emerging Challenge to
Legal Systems in Cross-border Transactions” Address to Caribbean
Acacemy (CALCA Oct. 2016) also on ssrn.com
- JH Dalhuisen, “How to Secure Contractual Obligations in Civil and
Common Law” (CALCA Oct. 2016) also on ssrn.com

9) Role and Critique of Private International Law

,
- F. K Juenger ‘Private International Law or International Private
Law?’, 5 King's College LJ (1994-1995)
- ‘The UNIDROIT Principles of Commercial Contracts and Inter-A
F. K Juenger ‘American Contract Choice of Law,’ Universidad
Nacional Autonoma de Mexico - Universidad Panamericana, 229-236
(1998)
- F. K Juenger ‘Conflict of Laws, Comparative Law and Civil Law:
The Lex Mercatoria and Private International Law,’ 60 La.L.Rev. 1133
(2000)

10) Role of Comparative Law:

- Anne Peters and Heiner Schwenke, ‘Comparative Law beyond Post-
Modernism’, 49 Int'l and Comp L Q, 800 (2000)

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 - K Zweigert/H Kotz, An Introduction to Comparative Law (transl. T
Weir), Third Ed. (Oxford 1996) p. 1-48

11) Legal Scholarship:

- Allan C Hutchinson, ‘Casaubon's ghost: the haunting of legal
scholarship’, 21 Legal Studies, 65 (2001)

12) Legal History

- JM Smith, ‘History's living legacy: an outline of 'modern'
historiography of the common law’, 21 Legal Studies 251 (2001)

13) DCFR

- Horst Eidenmueller, Florian Faust, Hans Grogolet, Nils Jansen, Gerhard

Wagner, Reinhard Zimmermann “The Common Frame of
References for European Law” http://ssrn.com/abstract=1269270

14) International Arbitration

- Pierre Mayer, Reflections on the International Arbitrator's Duty to

Apply the Law, 17 Arbitration International 235 (2001)
- JH Dalhuisen Bookreview JC Betancourt (Ed), Defining Issues in
International Arbitration (OUP 2016) in …. Journal of International
Maritime Laws…. (2016)
- JH Dalhuisen Bookreview M Goldby and L Mistelis, The Role of
Arbitration in Shipping Law (OUP 2016)) in …. Journal of
International Maritime Laws…. (2017)

********

Topics.

Week I

What are the Alternatives in International Dispute Resolution?

Dalhuisen Vol. I, p 398-453

Scenario 1. In an international arbitration, parties have formulated their dispute in

their pleadings, one party saying that upon a proper application of the applicable law
as pleaded the outcome is black, the other says it is white. Arbitrators in their award
hold that it is green. Both parties protest and challenge the award in the courts
claiming that arbitrators have exceeded their jurisdiction and decided a conflict
which never existed between the parties.

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 Questions: a) is there a fundamental difference between litigation in the
ordinary courts and arbitration?
b) what are the powers of arbitrators, and from where do they
come?
c) are these powers different in international arbitration, how
and why?
d) do international arbitrators speak for any legal order or
whom do they represent?
e) is international arbitration inquisitorial or adversarial?
f) must law be pleaded as fact? What does that mean? What
law in international cases?
g) how do arbitrators decide? Are they pseudo judges and
lawmakers or are they more like juries?
h) when can arbitrators raise legal issues independently, if
ever?
i) can arbitral awards ever be legal precedents and is
consistency relevant or obtainable in international
arbitrations?
j) why does arbitration do away with appeals and procedural
rigidity? What is the effect on the status of the award?
k) can parties do away with appeals in ordinary court
proceedings or arrogate to themselves procedural
flexibility? Why not?
l) do appeals ever clarify anything? Why may they be
destructive and a social evil? Is finality more important?
m) what is the difference with a challenge of the award? On
what grounds?
n) what law govern international arbitration? What is the
meaning of the lex arbitri of the seat? How is it
internationalised?

Week 2

Legal Orders and their manifestation. Is there a transnational commercial and

financial legal order? Relationship to local legal orders.

Dalhuisen Vol I, 175-296

Scenario 2. Worldwide, the sum total of the cross border trade in goods is at the
moment about US $ (equivalent) 16 trillion; in services about US $ (equivalent) 5
trillion. Compare this to the GDP of the US at about US S 16 trillion, of the EU a
little more, total world GDP being in the region of US $ 65 trillion. The total dollar
equivalent issued in Eurobond market, being the larges capital market in the world is
about US $ (equivalent) 4.5 trillion annually; the total outstanding amount is in the
region of US $ (equivalent) 26 trillion, the repo market in eurobonds alone being
around US $ (equivalent) 7 trillion. Compare the second largest capital market, the
(domestic) US treasury market, the total outstanding amount being about US $ 20

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trillion. According to the Bank of International Settlement (BIS), the international
swap market exceeded US $ (equivalent) 600 trillion (un-netted) in outstanding swaps
by the end of 2012, a little lower than the year before. What is the effect on the
applicable law, its formation and application in these flows?

Scenario 3.It is not wrong to assume that order is always better than anarchy and
that the principle role of law is to create such order even if very basic and have it
enforced. In that enforcement aspect, the legal order is different from the moral,
social or economic order. This law may emanate from the vilest dictatorships and still
be preferred. It makes it no less legal in its own territory. It may be a religious or
cultural product. But this law is better if it is also just, promotes social peace, and is
efficient. That is what civil society is all about. These objectives may conflict and
where they do it may be better to have a democratic process to sort these conflicts
out, but much may have to be left to practitioners and courts and there may then also
rely on other perhaps more participatory laws, like those derived from community or
industry custom and practices. There may also be overriding fundamental principles
which may still overrule the formal democratic order and customary laws. They are
our religious, social or cultural values as they constantly evolve.

What about the coherence of the international business community and its law making
power? May principles and customs or practice take on new forms and other
perspectives of what is just, socially acceptable and efficient in the international
business flows?

The Western order is based and secularization, democratic values, and a fundamental
separation of religion and other fundamentalist considerations from the social order
which is perceived as makeable, basically materialistic and market driven favouring
personal freedom and initiative. More fundamentalist orders based on religion or
traditional cultures may object and have other priorities. They are likely to be poorer
but it is a choice. But even in the West, the left may object to the market principle and
the right may favour the strongest, idealised in the authoritarian state.

Scenario 4. Professor Harari in his 2014 bestselling book: Sapiens, A Brief History
of Humankind, argues indeed that the social order as we have it in the West is a myth,
it is entirely contingent and could easily have been very different. It is like paper
money, it works because we believe in it but there is nothing innately substantive to it.
In such a view, law has value only as long as it works and is perceived to do so, better
probably if it is just, promotes social peace, and efficiency as we understand them
from time to time.. Nationalism, culturalism, and religion may still back it up and
remain as such important pillars of the law and its sustainability, which since the 19 th
century made it territorial, at the same time more policy oriented and often less
rational but an important domestic policy instrument at the same time. Belief in
democratic legitimacy and the rule of law may be other props but all is in this view
imagined, transient, and make belief. This is the ultimate in relativism: there may be
objective truth in the natural order (although not necessarily in our perceptions of it),
but there is none in the social order.

Does it mean that any legal order that achieves credibility is legitimate?

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Questions: a) what are the traditional legal orders? States and the Order
between States, Confederate Legal Orders. The EU as Legal
Order. Church or religious and other cultural or community
orders?
b) can informal legal orders arise and what is necessary? The
difference between communities and communes and the
relationship and competition between communities and
states in mutual respect and law formation
c) can the size of the international flows in goods, services,
money, technology and information create a new legal order
(the transnational commercial and financial legal order)?
d) the difference between law formation, law operation, and
law enforcement and the impact of the type of order the law
serves
e) law as a cultural, social or economic manifestation
f) what is the contribution of sociology or “law and society”
and ‘law and economics’?
g) can there be law without a state? How was it before the 19th
century?
h) can an extrapolation of past experiences cover future legal
developments and needs? What is there in precedent?
i) is state law always superior and always prevails over other
legal sources especially fundamental principle and customs
or practices, on the basis of what principle or rule?
j) how static is this law? How can it deal with new situations
and societal contingency? Does this come out in
interpretation?
k) what is the interaction between state and non-state law
when public policy is at stake?
l) how does the transnational commercial and financial legal
order arrive at law formation, in this case the modern
transnational lex mercatoria?
m) bottom-up and top-down law formation. Public and private
law
n) what are the traditional sources of law, how autonomous are
they?
o) how do they operate in the transnational commercial and
financial legal order, especially fundamental principle,
custom, treaty law, general principle and party autonomy?
p) nature of customary law, what is it and how can it be
known, why is it often presented as contractual? Is it?
q) analogy with public international law, Art. 38(1) Statute
International Court of Justice and Art. 53 Vienna
Convention on the Law of Treaties?
r) hierarchy of these sources and the residual role of local law
s) international minimum standards to balance the
international market place. In which areas in particular?
t) strife with local policies when and to the extent
international transactions still come on shore in particular
country in conduct and effect.

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Week 3

What is the Fundamental Difference (if any) between the Civil and Common
Law Method? Which Method or any Other is followed Transnationally?

Dalhuisen Vol. I, p.1-175

Scenario 5. When thinking about the law that emerges in the international
commercial and financial flows we have to move from the national to the
transnational perspective and we do this by placing ourselves firmly in these
international flows rather than in a domestic environment. That is a change of
paradigm and the consequence of globalisation, even if during more nationalistic
moments, it may go underground for a while. But we are still be influenced by existing
models or perceptions of which the common and civil law produce the most important
examples, notably in contract and movable property. Which approach will be
preferred or to which one will we gravitate in the transnationalisation of commercial
and financial law, why, or do we need something in between or beyond?

Questions: a) is there a model in private law that can be discovered and has
enduring relevance in any legal order, also in the transnational
commercial and financial legal order?
b) common and civil law approaches and methods. How did they
develop?
c) is there something similar in policies and values or regulatory
law in these domestic systems that can also be spotted in
transnational commercial and financial law?
d) or do we have in essence an open system of societal
normativity also in private law that changes all the time, is the
subject of ongoing public debate about its values and practices,
can never be fully captured, and moves from the domestic to
the transnational (and back)?
e) in how far does this affect legal certainty? What is its cost?
Differences with predictability and transactional and payment
finality
f) how can courts or arbitrators deal with this? How relevant is
that? Or is law not mainly there for dispute resolution but rather
for making daily life easier?
g) in how far is law formation participatory, especially in
commerce and finance? Should that be promoted or is (at least
in Western society) formal democracy the true precondition in
terms of legitimacy?
h) how could it be transnationalised or is its local character an
argument against transnationalisation?
i) is custom perhaps more participatory and therefore also more
legitimate and of special relevance in international commerce
and finance?
j) how is it perceived in common and civil law?

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k) are in Western society fundamental values autonomous as legal
source or do they also need formal state authorisation,
preferably democratically, in order to be legally relevant?
l) if so, can they ever be transnational?
m) is morality separated from the law unless recognised by
legislation? Is it also ‘nationalised’ and localised in this
manner? How do common law and civil law react?
n) does the quality of the law and its responsiveness to our values
and our social and economic needs also have something to do
with its legitimacy?
o) is there bad law and how would that show? Can judges in
interpretation do something about this? Are they law makers in
that sense? How would that work transnationally?
p) how would it work in international arbitration?
q) can there ever be one single answer to the manifestation of
these values in the practices of the law and its response to ever
evolving facts and societal contingency?
r) is consistency important? Is the principle of precedent the same
everywhere? What about arbitration?
s) what is the role of academia in the development of the law?
t) what do empirical and interdisciplinary studies add?
u) what does codification mean to achieve in this regard? Why
was civil law nationalised in this manner?
v) is there a difference between the French and German
codification approach?
w) is there a difference between the administrative state
(Germany) and more market based societies (like the US and
the UK)
x) is the codification concept in the Uniform Commercial Code in
the US different?
y) how does nationalism manifest itself in common law?
countries? What is the role and status of legislation?
z) what is equity in a common law sense? What has it achieved
and in which areas is it still important?
aa) what is the attitude to interpretation (statute and contract) in
civil and common law?
bb) what is system thinking? What is it meant to do? Can law ever
be fully captured in an intellectual manner? Is our brain good
enough?
cc) what do we mean when we say that civil law may have a built
in intellectual prejudice?
dd) what is interpretation, what is methodological and ontological
hermaneutics?
ee) is the positive law promoting justice, social peace, and
efficiency per se? Why is this often assumed?
ff) is law application mere technique?
gg) what is legal positivism as against natural law? How do civil
and common law react?
hh) what is legal formalism and legal realism? How do civil and
common law react?

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 ii) what do we mean in this connection when we say that civil law
is rule or norm oriented and common law fact oriented? Is
common law systematic?
jj) what do we mean when we say that civil law is or was directed
towards guidance of daily life and common law more to
dispute resolution?
kk) what does it mean to look for structure in the law? What for?
How meaningful is it? Compare e.g. to finding structure in
ethics.
ll) what is the role and meaning of comparative law?

Week 4

Commercial Law in Common and Civil Law. The Idea of Ttansnationalisation

and Dynamic Private Law. The Operation of Non-statist Legal Orders.

Dalhuisen Vol I , p 1-76.

Scenario 6. When placing ourselves in the international flows and looking for its laws
or rules (the modern lex mercatoria and public policy constraints), we should get a
better idea what there is at stake and it can perhaps best be explained with reference
to the horizontalisation of the production process over several countries, which each
contribute what they can do best and most efficiently in this process, and in the later
selling of this production cross-border.

The car industry may be the simplest example: an Italian car producer buys iron
plates from Sweden, makes the chassis in Belgium, buys tires from France, electronic
equipment from the US, and technology from Germany. It assembles the final product
in Italy, subsequently sells these cars through intermediaries all over Europe, gives in
each country sales credit and will have receivables and subsequently bank balances
upon collection in various countries.

It must finance this production, sales, credit, and collection process and seeks to give
the entire process as security to a bank for the necessary working capital making this
activity possible and sustaining it. But under the traditional rules of private
international law or conflicts of laws, this will not be possible. Only national laws
exist and must be applied to each part of the this process depending on location,
different even for the contractual and proprietary aspects, in the hope that all
together this will make a sensible (and effeicient) legal regime for this process and its
funding.

Under many domestic laws, if they could be found to be applicable which is usually
connected with finding the proper contact, a further impediment is then likely to be
that these assets are in constant transformation and move backwords and forward all
the time in different and ever evolving shapes which makes not only location but also
identity difficult to establish. Most countries’ laws do not provide for this in their
property and securities laws as they cannot think in classes of assets or bulk in
transformation. It is the area of floating charges only better covered in equity in

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common law countries or now in legislation in the US (Article 9 UCC) but only for
local situations.

It creates a serious bar to easy financing arrangements against a charge or security

interest in the international flows for no other reason than that law could only be
national. In this view, international transactions cannot truly exist in law. But this
was never more than 19th century paradigm, product of nationalism and romanticism
in those day when international trade was in any event small or took place largely
between colonial powers and their dominions which had mostly the same laws.

Note that a contractual choice of law in favour of one country to cover an entire flow
will not help because proprietary issues are not at the free disposition of the parties
and they cannot create their own set of priorities when detrimentally affecting third
parties especially common creditors. Custom can in the trade or community it
concerns but can it be transnational?

A nationalistic attitude in these matters is increasingly irrational and inefficient,

leads to higher cost for no obvious reason. In a modern society, we live in a very
different world which requires newer legal facilities. This is the province of the
modern lex mercatoria and public policy at that level, which might even impact on
domestic bankruptcy laws in an insolvency.

Scenario 7. An international oil company through a local subsidiary in country A in

Africa, part of the civil law tradition, invests in and builds an offshore drilling rig on
country A’s outer continental shelf far outside its territorial waters. It borrows US 100
million for this venture from a subsidiary of a foreign bank in Country A. In the loan
agreement a charge on the rig and on all equipment, materials and inventory on it is
arranged giving the bank access and rights of inspection at any time and full
possession and a right of appropriation upon the occurrence of an event of default as
defined in the agreement. The company also provides a daily list of all new materials
and oil inventory and of all materials and oil inventory that have left the rig during
the day. The law of Texas is made applicable to the contract. The company is
declared bankrupt in country A. The bankruptcy trustee seeks to attach the rig and
her position is that local bankruptcy law does not consider this kind of charge and
that it cannot be recognized: she accepts no priority and contends that the property
inures to the benefit of all common creditors of which the bank is only one. You defend
the bank. What would you say?

Questions: a) what are the major differences between the civil and common
law concept of commercial law?
b) why was commercial law nationalised in either system? Does it
make sense?
c) how may it be denationalised?
d) can or should we now look at commercial law through the prism
of the international flows and recreate it as a separate part of
private law?

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 e) or do we still need to cut up the international flows in domestic
pieces? Why? What is the rationale?
f) can we still meaningfully do so now that much of the
international flows is not physical, part of it virtual, assets are in
constant movement and transformation whilst assets and risks
are often separated through derivatives?
g) could the total of the so applicable domestic laws still add up to
a sensible regime in international transactions?
h) what certainty does this provide and what about efficiency,
costs?
i) why should it be so difficult to create a transnational floating
charge?
j) how would you define the concept of commerciality,
internationality and professionality in this connection? Why is it
important?
k) what are the sources of transnational commercial and financial
law, where do they come from and what is their hierarchy?
l) what is the remaining role of private international law or
domestic legal systems in international commerce and finance?
m) what does it mean when parties still choose a national law in an
international business transaction?
n) what is at their free disposition?
o) how is the public interest expressed at the transnational level in
the international market place and who are its spokespersons?
p) are there transnational minimum standards that balance
international market forces? How do they relate to domestic
public policy considerations and values when international
transactions still come demonstrably on shore (in conduct and
effect) in a particular country?
q) can public policy be expressed in private law terms?

Week 5

Contract Law in Common and Civil Law, Formation and Interpretation Issues,
Performance. The Transnational Professional Contract. What do contracts
mean to achieve? What is party autonomy?

Dalhuisen Vol II, 1-130

See also MA Eisenberg, ‘The Emergence of Dynamic Contract Law’, 88 Cal.
LR 1743 (2000), Zweigert/Kotz 470-536

Scenario 8. Jack is in love and wants to move in with the love of his life. Jack is
euphoric but after a week or so, a mess stacks up in the kitchen and who is to clear?
“Not me” says Jack, “that was not in our agreement”! A bit later, the whole
apartment needs cleaning, his clothes and artefacts are everywhere. “Clearing is not
what I wanted or intended”, says Jack, a first year law student. After a month, there is

14
rent to pay, but Jack says, contributing was not covered. About 6 months later, there
is a child on the way. Jack says: “but that is not what I meant”!

But is it what he meant or was it the risk he took? He could have elaborated in the
moving in agreement to settle these issues and agree what should be done but he did
not. If he is not willing to accept the unallocated risks, perhaps he should not have
moved in after all.

The message is that entering into relationships of any sort is a dangerous thing to do
in terms of foreseeable or potentially even more of unforeseeable risk. How does this
translate into commercial realities and how do the common and civil law deal with
these issues in transactions between professionals?

Questions: a) consider the main features of contract law in terms of

intent/consensus, consideration/detrimental reliance,
nature of the relationship of the parties, type of contract,
notions of dependency and reliance, implied conditions,
and good faith.
b) what is the significance of offer and acceptance in civil
and common law? In how far is there a difference? Is
there a fixed moment of contract formation?
c) what does consensus and intent mean in civil law?
d) what is the difference with common law and its notions of
consideration or detrimental reliance? When does it
matter?
e) why are the will and intent so central in the civil law of
contract? What is meant by an anthropomorphic attitude
to contract (‘I did not mean it, I cannot help it, it is not my
fault’) in civil law?
f) what do we mean by relationship thinking and why is it
weaker in civil law? How does it treat the professional
contract?
g) what does it mean when we say that the common law of
contract has its origin in commercial law and is based
more on risk management and risk acceptance, rather than
risk redistribution? The professional contract as roadmap
and risk management tool.
h) how does this affect contract formation, interpretation,
and the defences and excuses?
i) the common law wants parties to invest in the contract
before they have a cause of action. How does that show
in the remedies?
j) what are the common defences in civil law and what are
they in common law? Misrepresentation, mistake and
rescission.
k) what are the excuses in civil law and what are they in
common law? What is the only true excuse in common
law? What is the effect of force majeure or a change of
circumstances or hardship?

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 l) what is objective or normative (good faith) interpretation
and how does this affect the implementation of the
contract?
m)what does good faith do? Is it an interpretation tool or
objective standard?
n) why is it more popular in civil law? why does common
law need the notion of good faith less? How does it
compare to equity?
o) does it mean to reintroduce the other sources of law
earlier expelled by legislation, in business especially
customary law?
p) does it also appeal to notions of justice, social peace and
efficiency or other fundamental principle?
q) what about pre-contractual disclosure and negotiation
duties, contractual duties of cooperation, loyalty and care,
post contractual renegotiation duties?
r) what is modern contract theory and how does a dynamic
contract law work? What are the key components?
s) to which approach, method or contract model does the
lex mercatoria incline? Why?
t) what is specific performance? What is its relationship to
contempt of court? What are the remedies in civil law?

Week 6.

Law of Movable Property in Civil and Common Law, Chattels and Intangibles.
The Issue of Liquidity and Transactional and Payment Finality. Security
Interests and Preferences (set-off).

Dalhuisen, Vol. II, 297-490

Scenario 9. The Eurobond market is the largest capital market in the world. It is an
offshore market, regulated domestically only to the extent it comes demonstrably
onshore, London being its center to a large extent. English and New York law are
often made applicable to the bond, but can that stick in property matters, including
repo-trading, shortening and bond-lending or rehypothication, custodial holdings,
and settlement. Do parties have power in proprietary matters which affect third
parties? How does this work out in bankruptcies which remain domestic. Is there
creation and operation of transnational customary law which covers also the issue of
liquidity and transactional and payment finality in these markets?

The eurobond is commonly expressed in the form of a promissory note or negotiable

bearer instrument. The essence of such an instrument is that it incorporates only the
monetary claims, in this case to coupons and repayment of principal on the due date.
It cuts off any defenses to these payments arising out of the underlying contractual

16
arrangements or loan agreements and the bond is easily transferable, by simply
handing it over. No other formalities, there is notably no assignment which otherwise
would be necessary to effectuate a transfer. The monetary claims are incorporated in
the document or are “chattelised”,treated as chattels or physical movable assets. This
is a great advantage that also promotes liquidity and finality of any transfer or
trading.

However, pPromissory notes under English or NY law must be expressed in the

simplest possible manner and cannot have conditions attached. They cannot embody
obligations. This goes against the grain of the eurobond which on its back has
commonly a raft of further provisions. It cannot therefore be a negotiable instrument
under either English or NY law, even if made applicable to the contract. National law
would disqualify the eurobond as a promissory note, assuming that a parties’ choice
of law in these matters could ever be effective.

But the eurobond is commonly considered a promissory note by virtue of

transnational customary law that operates in its markets. That law also facilitates the
underwriting, market making, custodial facilities, and settlement in these markets as
well as repos, shorting, bond-lending and rehypothication of these bonds and the
issue of liquidity and transactional or payment finality.

It is very important that this regime sticks and the international bond market floats on
this assumption. Remember. many debtors find it against their interest to pay
principal and against their principle to pay interest. They should not be tempted.

Questions: a) what is the difference between contractual and proprietary rights?

b) the operation of user, income and enjoyment rights in or to
assets. When are they contractual when are they proprietary?
Example: rights of way
c) what is an asset, asset classes and the status of future assets or
asssets in transformation
d) what is the asset status of claims, the status of promissory notes
e) what is the importance of liquidity of assets, how is it promoted
by proprietary rights?
f) droit de suite and droit de preference. The issue of ranking and
bankruptcy resistency.
g) the notion of numerus clausus of proprietary rights in common
and civil law
h) what is ownership, what is possession in civil and common law?
i) what is holdership in civil law or bailment and possession in
common law? Can it be constructive?
j) how are proprietary rights manifested and defended in either
system?
k) what is the meaning of acquisitive prescription or statutes of
limitation in either?
l) how are proprietary rights transferred? Capacity, title and
disposition rights. Formalities
m) what is the nemo dat rule? Exception of bona fide purchaser, its
development as a limited concept.

17
 n) what is the abstract system of title transfer? What does it try to
cover and why is it important?
o) what is transactional finality, why is it crucial and how is it
enhanced in either system?
p) international status of property rights, private international law
or transnationalisation?
q) what model in the modern lex mercatoria? Common or civil
law. Cf operations in the eurobond and swap markets

Week 7

Equitable interests in Movable Property. Deficiencies in Civil Law. Constructive

Trusts, Floating Charges and Finance Sales. Set-off and Netting. Importance in
international finance. Property as Risk Management Tool.

Dalhuisen Vol. II, 490-542

Scenario 10 The repo market provides substantial support to capital market activity.
Rather than taking out or creating a secured transaction to fund its bond business, a
dealer wanting to take a trading position in bonds (or other investment securities)
may sell these securities to a bank immediately upon acquisition to provide funding
upon the condition that the securities are returned to the seller on an agreed date.
That is a repurchase agreement or repo under which a repo-seller will pay the repo
buyer/financier a fee.

Who owns what in this situation? In particular does the repo seller have a proprietary
repossession right at the end of the transaction if he tenders the full repo price? This
is especially important in a bankruptcy of the buyer/financier. The risk for the repo-
seller is that the securities have increased in value. Is he a conditional owner and
does he have a proprietary retrieval right? If not, his right is only contractual, it
leaves the bankruptcy trustee of the repo buyer with the so-called “cherry picking
option”.

It means that if the securities have decreased in value he will force the non-bankrupt
counterparty to repurchase the securities and pay the full repurchase price, but if
they have increased in value he keeps them for the estate subject to a competing claim
for damages in respect of lost profit. The seller of course would not pay and save the
repurchase price but only receives a pro rate share in the bankruptcy distribution in
respect of his loss of profit as a common creditor. This option does not exist if the
repo-seller had a proprietary retrieval right.

The situation is further complicated by the fact that these securities are fungible and
the buyer will normally be entitled to resell them; his duty is only to return a similar
number on the repurchase date. This undermines the proprietary right of the repo
seller further. A bilateral netting out of all positions between regular repo dealers
may be more normal in the case of bankruptcy or other event of default of one of the
parties. That is the purpose of the repo-master agreement which provide an industry
standard in the eurobond market.

18
Scenario 11 The international swap market is the largest market in the world. It is the
source of an important hedging instrument in the financial service industry. Un-
netted the outstanding volume is in the order of US $ (equivalent) of 600 trillion, more
than 30 times the GDP of the US. It is covered by an industry standardization model
which is the International Swap Association (ISDA) Master Agreements. They are
subject either toy English or NY law and mean to achieve a bilateral netting out of all
positions on a continuous basis between two contract parties resulting at each
moment in time in a netted out exposure between both parties under which, depending
on market movements in interest rates (and also currency movements in currency
swaps) the one party may owe a net amount to the other or the other to the one.

This net exposure is a fraction of the gross exposure and the netting concept is
therefore of the greatest importance and provides a preference in any bankruptcy. The
issue also arises in Scenario 10 in respect of repo netting. Students should
understand what this means. If I owe you 100 and you owe me also 100 it means that
in your bankruptcy I need to pay in nothing, I will set off the claim I have against
you as bankrupt, on which otherwise I would probably not collect more than 5 cents
in the dollar. It means that I am paid in full out of the bankrupt estate and am
protected and released from my own payments to the extent I have counterclaims on
the bankrupt.

In the swap market it means that to the extent I have counterclaims the bankrupt
estate can claim nothing from me and since the mutual positions between regular
traders are likely substantially to cancel out, the net amounts payable either way may
be fairly small, in practice not much more than 5% of the outstanding mutual
positions, but it goes at the expense of common (non-secured or non-preferred)
creditors. This poses a public policy issue, but regulators like it because it promotes
financial stability among banks who are the main players and common creditors
normally get very little anyway.

However, the ISDA Master (as does do the Repo master) extends the concept very
considerably. Set-off is normally only possible between claims in the same currency
that are also mature. By introducing a currency clause (and for repos a valuation
method in respect of the underlying securities) and interest rate clause to allow
discounts for the time value of money, the statutory concept of set-off is greatly
extended. Can that be done by contract and does the application of English law or NY
Law help? Do parties have the power to achieve a (for them) better result and
stronger preference by choosing a more friendly law. Again, is this a matter at the free
disposition of the parties? It is unlikely; only the objectively applicable law can
achieve preferences at the expense of others.

Locally the stronger preferences are now commonly accepted by amendment of

bankruptcy statutes that allow them to operate in situations of insolvency when it is
likely to matter most. But a strong argument can also be made that in the
international swap market the practice and the preference it creates is governed by
transnational customary law. That still raises the issue whether domestic bankruptcy
laws, if remaining un-amended, will recognize this international practice. In those
countries which accept the benefits of the operation of the international swap markets

19
and have their banks using it, this is increasingly likely. In other words, globalisation
is not a one way street. Benefitting from it also means supporting its rules unless there
is a major public order or public policy impediment should these swap dealings still
come demonstrably onshore in the relevant country (e.g. in a local bankruptcy).

Questions: a) towards an open system of proprietary rights?

b) trusts and trust like structures,
c) segregation and the constructive trust
d) conditional and temporary ownership rights, how do they
work? Who has got what?
e) finance sales: leases, repos and factoring
f) the difference with secured transactions, when is there
recharacterisation?
g) floating charges
h) set-off and netting, preferences
i) agency
j) party autonomy in property? Open and closed systems of
proprietary rights
k) ‘law and economics’ idea of standardisation, support for
numerus clausus v property as risk management tool
l) the notion of insiders and protection of the commercial flows
as key public policy concept
m) concepts of publicity, segregation, legal personality, and
subordination
n) a dynamic concept of movable property law? Risk
management.
o) transnationalisation?

Week 8

The Law of Assignment and the Transfer of Contracts. The Issue of Liquidity
Revisited

Dalhuisen Vol II, p 442-490

Scenario 11 Securitisations have become a key risk management tool and aim to
remove large parts of banks’ loan assets to reduce credit risk and market risk and do
away with the attendant capital requirements. It is a way of creating liquidity in the
loan book by transferring the risk to the capital markets together with the underlying
loan assets. But there is a problem. Loan agreements as such cannot be unilaterally
transferred, that is without consent of the borrower because there are obligations of
the bank attached which it cannot freely transfer to others. So the monetary claims
need to be separated out, cut off from the loan agreements out of which they arise,
and become transferable without consent of the counterparty.

The traditional way of doing this was having borrowers sign promissory notes to
bearer, but paper shuffling is now inconvenient in an increasingly paperless society
and securitisations would involve thousands. Assignments are therefore the more
obvious route, but they require formalities and the claims may not be fully separable.
It is therefore necessary to have a facilitating or friendly assignment regime, either

20
domestic, in which case the location of claims must be determined in international
(securitization) transactions which has always proved difficult, or under
transnational customary law. Again it poses the question where we are going in the
international market place and what is truly needed and that is an approximation of
the promissory note without debtors signing one. So the challenge is how do we get
there and what does it require.

The problem is notably in the set-off of counterclaims arising under the original
contract out of which the claim arises, and in the defenses notably the status of
assignment restrictions or extra burdens that may arise in respect of the payment
duty of the debtor to the assignee. Others arise from the formalities including the
requirement of a document in respect of each claim, and official notification (not
consent) of the debtors. Individualisation of claims is here a particular disincentive.
A description in the assignment document of classes of claims or possibly a computer
print out .may help but the inclusion of future claims especially claims that may
result only at the end of a production process upon a future sale of an asset (and have
not yet a debtor) may still be problematic.

Questions: a) what is assignment, what are its problems and requirements?

b) why is the assignment facility so important?
c) transfer of intangible assets and its requirements different
from those of chattels ? Why, what is the problem?
d) effect on the mode of transfer, different structure?
e) the issue of notification as a legal or practical requirement.
Consequences
f) the protection of the bona fide collecting assignee in common
law. Its significance
g) the third party effect of contractual assignment restrictions and
the relevance of other defences of the debtor
h) the question of cooperation of the debtor and the regime of
Sections 2-210 UCC and 9- 403/4 UCC. the better status of the
assignee
i) the operation of collection agents, importance and proprietary
status
j) relevance in securitisations, floating charges and receivable
financing or factoring
k) types of assignment, the security and conditional assignment
l) assignments in bulk of present and future claims
m) the problems with the transfer of contracts, the significance for
the liquidity of hedging instruments like swaps futures and
options.
n) what is the answer, cf. Sec. 2-210 UCC for the transfer of
contracts for the sale of goods and the operation of central
counterparties (CCP) for futures and bilateral netting
agreements (ISDA swap master) for swaps.
o) the issue of standardisation, margin and set-off.

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