Commercial Law and Commercial Practice

COMMERCIAL LAW AND COMMERCIAL PRACTICE

This edited collection brings together leading scholars and practitioners

from various jurisdictions with chapters and commentaries coordinated

around the theme of alignments and misalignments between commercial

law and commercial practice. The purpose of the book is to prompt a more

critical and constructive reassessment of current commercial law and its

practices, and to instigate a more fruitful dialogue between academics,

judges, law reformers and practitioners.

The result is a series of provocative and challenging essays addressing an

enormous range of problems that are of intimate concern to commercial

practice. Some essays focus on broad themes, such as globalisation and

trust. Others address more specific issues, such as contract interpretation or

constraining modern management. Yet another group targets special prob￾lems, such as dematerialisation or super-priority, in order to assess the suc￾cess of commercial law in meeting commercial demands. The depth and

breadth of issues addressed is a credit to the authors. Taken as a whole, the

volume makes some pointed suggestions for improving the practices and

processes, and indeed the future progress, of commercial law.

Commercial Law and

Commercial Practice

Edited by

SARAH WORTHINGTON

Professor of Law, London School of Economics and Political Science

OXFORD AND PORTLAND OREGON

2003

Published in North America (US and Canada) by

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Contents

Contributors ix

Introduction: Aligning Commercial Law and Commercial Practice xi

Sarah Worthington

Part 1: General Pressures for Change

1. Globalisation: Its Historical Context 3

Ross Cranston, QC MP

Commentary: Catherine Newman, QC

2. Commercial Notions and Equitable Potions 29

Sir John Mummery

Commentary: Philip Wood

3. Statutory Ingredients in Common Law Change: Issues in the

Development of Agency Doctrine 57

Deborah A DeMott

4. Property, Private Government and the Myth of Deregulation 85

Paddy Ireland

Commentary: Andrew Whittaker

Part 2: Contract Terms and their Interpretation

5. The Intractable Problem of the Interpretation of Legal Texts 123

Johan Steyn

6. The Interpretation of Contracts: Lord Hoffmann’s Re-Statement 139

Ewan McKendrick

7. The Uses of Ambiguity in Commercial Contracts: On Facilitating

Re-Bargaining 163

William T Allen and Galya Levy

Commentary: Paul Lomas

8. Objectivity and Committed Contextualism in Interpretation 189

Hugh Collins

Part 3: Adapting Commercial Law to Modern Conditions

9. Documents and Contractual Congruence in International Trade 213

Michael Bridge

Commentary: William Blair, QC

10. The Dematerialisation of Money Market Instruments 249

Joanna Benjamin

Commentary: Guy Morton

11. Material Adverse Change Clauses After 9/11 305

Richard Hooley

12. Re-thinking Insurable Interest 335

John Lowry and Philip Rawlings

Commentary: Sir Jonathan Mance and Adrian Hamilton, QC

13. The Challenge of Modern Bankruptcy Policy: The Judicial

Response 373

David Milman

Part 4: Commercial Terms for Commercial Ends

14. Damages for Breach of Exclusive Jurisdiction Clauses 403

Nik Yeo and Daniel Tan

15. Interpreting Employment Contracts: Judges, Employers and

Workers 433

Simon Deakin

16. Super Priority for Asset Acquisition Financing in Secured

Transactions Law: Formalism or Functionalism? 457

Catherine Walsh

17. The Floating Charge—An Elegy 479

Riz Mokal

Part 5: Controlling Modern Management

18. Contractual Modification of the Duties of a Trustee 513

Michael Bryan

19. Relieving Directors’ Breaches of Duty 529

Rod Edmunds and John Lowry

20. Enron and the Long Shadow of Stat. 13 Eliz. 565

Douglas G Baird

Commentary: Kevin E Davis

vi Contents

Part 6: Moving Forward: Law and Practice

21. Commercial Law and the Limits of the Black Letter Approach 595

Anthony J Duggan

Commentary: David Gold

22. The Legal Academy’s Contribution to the Development of

Commercial Law: An Anglo-Canadian Perspective 619

Jacob Ziegel

Commentary: Tony King

23. Contracts, Contract Law and Reasonable Expectations 651

Robert Bradgate

Contents vii

Contributors

PROFESSOR WILLIAM T ALLEN, Nusbaum Professor of Law &

Business, New York University, USA, Director NYU Center for Law and

Business

PROFESSOR DOUGLAS G BAIRD, Harry A Bigelow Distinguished

Service Professor, University of Chicago, USA

DR JOANNA BENJAMIN, Reader in Law, London School of Economics

and Political Science, Member of the Bank of England’s Financial

Markets Law Committee, and Consultant at Clifford Chance,

London, UK

WILLIAM BLAIR, QC, 3 Verulam Buildings, London, UK. Visiting

Professor, London School of Economics and Political Science, UK

PROFESSOR ROBERT BRADGATE, Professor of Commercial Law,

Institute for Commercial Law Studies, University of Sheffield, UK

PROFESSOR MICHAEL BRIDGE, Professor of Commercial Law and

Dean of the Faculty of Laws University College London, and Director of

Legal Research at Norton Rose Solicitors, UK

PROFESSOR MICHAEL BRYAN, University of Melbourne, Australia

PHILLIP CAPPER, Lovells, London, UK

PROFESSOR HUGH COLLINS, London School of Economics and

Political Science, UK

ROSS CRANSTON, QC, MP, Visiting Professor, London School of

Economics and Political Science, UK

PROFESSOR KEVIN E DAVIS, Associate Professor, Faculty of Law,

University of Toronto.

PROFESSOR SIMON DEAKIN, Robert Monks Professor of Corporate

Governance and Fellow of Peterhouse, University of Cambridge, UK.

PROFESSOR DEBORAH A DEMOTT, David F Cavers Professor of Law,

Duke University School of Law, USA, and, since late 1995, the Reporter

for the Restatement Third, Agency.

PROFESSOR ANTHONY J DUGGAN, Associate Dean and Iacobucci

Chair, Faculty of Law, University of Toronto, Canada, and Professorial

Fellow, Faculty of Law, University of Melbourne, Australia

ROD EDMUNDS, Queen Mary, University of London, UK

DAVID GOLD, Head of Litigation and Arbitration, Herbert Smith,

London, UK

PROFESSOR RICHARD HOOLEY, King’s College, London, UK

ADRIAN HAMILTON, QC, 7 King’s Bench Walk, formerly Deputy High

Court Judge (Commercial and Admiralty Courts), London, UK

PADDY IRELAND, University of Kent, Canterbury, UK

TONY KING, Head of HR Development, Clifford Chance, London, UK

GALYA LEVY, Graduate Fellow, NYU Center for Law & Business,

New York University, USA

PAUL LOMAS, Freshfields Bruckhaus Deringer, London, UK

JOHN LOWRY, Centre for Commercial Law Studies, Queen Mary,

University of London, UK

SIR JONATHAN MANCE, Lord Justice of the Court of Appeal of England

and Wales

PROFESSOR EWAN McKENDRICK, Professor of English Private Law,

University of Oxford, Fellow of Lady Margaret Hall; Barrister,

3 Verulam Buildings, Gray’s Inn, London.

PROFESSOR DAVID MILMAN, CMS Cameron McKenna Professor of

Corporate and Insolvency Law, Centre for Law and Business, University

of Manchester, UK

DR RIZWAAN MOKAL, Lecturer in Laws, University College

London; Research Associate, Centre for Business Research, Cambridge

University, UK

GUY MORTON, Freshfields Bruckhaus Deringer, London, UK

SIR JOHN MUMMERY, Lord Justice of the Court of Appeal, UK

CATHERINE NEWMAN, QC, Maitland Chambers, London, UK

DR PHILIP RAWLINGS, University College London, UK

LORD JOHAN STEYN, Lord of Appeal in Ordinary, House of Lords, UK

DANIEL TAN, Lecturer in Law, Pembroke College, Oxford, UK

PROFESSOR CATHERINE WALSH, Faculty of Law, McGill University,

Montreal, Canada

ANDREW WHITTAKER, General Counsel to the Board, Financial

Services Authority, UK

PHILIP WOOD, Allen & Overy, Visiting Fellow at Oxford, Cambridge,

QM and LSE, University of London, UK

PROFESSOR SARAH WORTHINGTON, London School of Economics

and Political Science, UK

NIK YEO, Barrister, Fountain Court Chambers, Temple, London, UK

PROFESSOR JACOB ZIEGEL, Professor of Law Emeritus, University of

Toronto, Canada

x Contributors

Introduction

Aligning Commercial Law and

Commercial Practice

SARAH WORTHINGTON

T HIS COLLECTION OF essays is intended to spark debate. The

goal is to promote a better dialogue between academics, judges, law

reformers and practitioners, and to initiate a more constructive

reassessment of current commercial law and its practices. Both aspects are

crucial if the underlying debates are to have a noticeable and worthwhile

impact on legal developments. Early drafts of these essays were first dis￾cussed at a two-day round-table seminar held at the LSE in November 2002.

That early face-to-face debate was merely a preliminary step in exploring

these issues. The published collection will take the ideas to a wider audi￾ence. This strategy is becoming increasingly common, although the breadth

of the agenda behind this collection is novel.

I. RECOGNISING NORMS IN ENGLISH COMMERCIAL LAW

All of the essays and commentaries in this collection are coordinated around

the theme of alignments and misalignments between commercial law and

commercial practice. The time is ripe for critical reflection amongst commer￾cial lawyers. It seems obvious that commercial law—the law of the mer￾chants—should, by its very nature, be constantly under review. Its function

is to facilitate and, when necessary, constrain, the commercial activities of

businesses and entrepreneurs. As business and business practices evolve, and

as social expectations change, so too must the relevant legal rules. Yet exam￾ination of English commercial law exposes little more than incremental and

piecemeal change over the past century. The enormous strides made over a

century ago by both judges and legislatures have given way to tinkering at

the margins. Worse still, even the tinkering is largely driven by EU challenges

and company and financial services Directives rather than by serious inter￾nal domestic reassessment. The product of this approach is inevitably patchy

and in many places outdated. The genius of English commercial law is losing

out to its more aggressive and focused international competitors. To allow

this to continue seems at best short-sighted and at worst cowardly, given the

enormous potential still locked away in English commercial legal practices.

The way forward is not easy, however. Judges can only deal with the

issues presented to them. Their response is necessarily issue-specific,

party-oriented and rule-based. Nonetheless, especially in the House of

Lords, there is an increasing willingness to consider explicitly the policy

ramifications of the specific matters that do fortuitously reach the court for

consideration. Westdeutsche Landesbank Girozentrale v Islington London

Borough Council1 and Barclays Bank plc v O’Brien2 are perhaps two of

the most obvious cases from the last decade. Legislatures and law reform

bodies are not so constrained in their approach, and yet all too often these

institutions are content to concentrate on the particular, delving into the

detail of troublesome but narrowly focused legal rules or lacunae in the

rules, before ever asking the important questions about more general

overarching aims and objectives. The past decade of company law reform,

for all its worth, might be criticised on this basis. The DTI promised radical

overhaul,3 but the earlier more narrowly focused work of the Law

Commission on shareholder remedies and directors’ duties4 provided

pre-established pathways that appear to have seriously compromised poten￾tially more imaginative approaches.5 Professor Jacob Ziegel touches on

some of these issues (and many others) in chapter 22.

What should be done? The micromanagement that currently exists is

undoubtedly necessary, but it is not designed to deliver coherent, compre￾hensive modern law reform. For that, it is necessary to stand back and sur￾vey the entire field. The common law judicial system is not designed to

deliver this form of oversight. Nor, indeed, is the legislature: the govern￾ment’s political will cannot embrace the project. In Britain, there is no

recognised formal institution charged with the task and empowered to

implement, or even promote, its findings. The Law Commission’s role is

much more tightly regulated, and the government seems philosophically

disinclined to change this.6 The task is therefore left largely to lobby

groups, including academic lawyers. A united front might prove far more

effective, with academic lawyers, practitioners, judges and various other

xii Sarah Worthington

1 [1996] AC 669.

2 [1994] 1 AC 180.

3DTI, Modern Company Law for a Competitive Economy (1998). 4Law Commission, Shareholder Remedies (1997, Law Com No 246); Law Commission,

Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties

(1999, Law Com No 261, Scot Law Com No 173).

5 See S Worthington, ‘Reforming Directors’ Duties’ (2001) 64 MLR 439–58.

6See, for example, the government White Paper, Modernising Company Law (2002, Cm

5553–I), pp 48–9, rejecting the need for a formal institution to maintain general oversight of

English company law.

parties all making use of the tools at their disposal to analyse the problems

and advance potential solutions. In this vein, much might be learnt from

the role played in the United States by the American Law Institute.

The first task of such a coordinated body should be to settle the strategic

direction. What is the function of commercial law, and what overarching

objectives should English commercial law pursue? Some sort of agreed

position on this is essential if the more specific issues are to be addressed in

any meaningful way. Consensus is unlikely to be easy, yet some agreement

is crucial to determining the form and function of commercial law. Many of

the essays in this collection confront this issue, some directly, some indirectly.

See especially Sir John Mummery (chapter 2), Paddy Ireland (chapter 4)

and Professor Robert Bradgate (chapter 23).7 The diversity in their

approaches is predictable, confirming, if that were needed, the urgency of

taking coordinated steps to identify a coherent and defensible strategy for

advancing the future direction of the law.

II. IDENTIFYING SHORTCOMINGS IN MODERN

COMMERCIAL LAW

Once the broad goals of English commercial law have been settled, it should

be possible to pinpoint those legal rules that seem especially effective or

especially ineffective. Several strategies could be usefully employed.

Quantitative and qualitative investigations may well indicate how commer￾cial parties themselves view the successes and shortcomings of the English

jurisdiction. Traditional legal scholarship should also prove fruitful: cross￾border comparisons and focused engagement with international legal and

political debates is likely to lead to important insights.

Notice, however, that the outcomes of this second stage evaluation are

critically dependent upon the precise standards against which the

legal rules are being judged. It follows that this second step cannot be

undertaken in any meaningful way until the first step has been completed

successfully—although the common practice is often otherwise. More

importantly, the first step must identify norms with sufficient particularity

to enable sensible discrimination. The touchstone may well be Lord Steyn’s

suggestion that the law should uphold ‘the reasonable expectations of

honest men.’8 But this is too vague to provide a useful normative yard￾stick. Reasonable expectations vary. For example, many would regard the

genius of English commercial law as its flexibility and liberal approach to

freedom of contract. These particular features may well be responsible for

Introduction xiii

7Also see, for example, M Bridge, ‘The Future of English Private Transactional Law’ (2002)

55 CLP 191, and the references cited.

8 (1997) 113 LQR 433.

delivering several crucial commercial developments, such as negotiability,

the trust, and the charge. Judged against these free-market standards,

many of the legal rules that currently regulate commercial agreements

could be seen as overly paternalistic. If a mismatch is confirmed, then the

offending rules might usefully be eliminated, or at least modified, in order

to facilitate a return to the recognised core values of English commercial

law, with their emphasis on party autonomy, ease of contracting, and cer￾tainty in risk management. More recently, however, other normative

approaches are proving influential. According to these equally ‘reasonable

expectations’, the parties’ bilateral agreement is not necessarily everything:

third party interests may also need protection. Equity’s imposition of fidu￾ciary duties and duties of confidence provide early and influential illustra￾tions of the way the law has addressed these wider issues. It remains true,

however, that western democracies are clearly committed to individual

freedom and autonomy, so any legal regulation should be consciously lim￾ited to the minimum necessary to achieve the identified social goals.

Some of the inadequacies identified at this second stage will reflect deep￾seated philosophical disjunctions between agreed modern norms and

entrenched legal rules. The restrictive rules relating to variation of contracts,

or to agreed remedies clauses, are often regarded as inconsistent with party

autonomy. Other disjunctions are different, however. They relate to unantic￾ipated differences between old and new commercial practices. For example,

much of our orthodox commercial law was designed to deal with directly

negotiated, short-term, geographically limited arrangements relating to tan￾gible property. Now, however, the reality is that many agreements are

agency-mediated, long-term, international negotiations relating to intangible

assets. Modern commercial law must therefore address the practical prob￾lems of fiduciary management, globalisation, conflict resolution (both

between parties and between national legal systems), and asset protection.

Predictably, many of the essays in this collection address these apparently

escalating problems, some commentators agreeing that there are crucial

shortcomings which need remedying, others arguing that there is nothing

terribly new in all of this—as Professor Michael Bridge pithily observes, a lot

of e-law turns out to be old law in a new setting (chapter 9). See especially

the essays by Professor Ross Cranston (chapter 1), Dr Joanna Benjamin

(chapter 10), Professor Catherine Walsh (chapter 16), Professor Michael

Bryan (chapter 18) and Professor Douglas Baird (chapter 20).

III. IMPLEMENTING APPROPRIATE CHANGES IN THE LAW

The third step in negotiating the path of modern law reform is obvious.

Once the disjunctions between current rules and agreed norms have been

identified, then strategies for implementing appropriate legal change need to

xiv Sarah Worthington