On the State of Commercial Law at the End of the 20Th Century [Article]

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On the State of Commercial Law at the End of the 20th Century [Article]

Item Type Article; text

Authors Kozolchyk, Boris

Citation 8 Ariz. J. Int'l & Comp. L. 1 (1991)

Publisher The University of Arizona James E. Rogers College of Law (Tucson, AZ)

Journal Arizona Journal of International and Comparative Law

Download date 28/09/2021 22:36:14

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Link to Item http://hdl.handle.net/10150/659475 ON THE STATE OF COMMERCIAL LAW AT THE END OF THE 20TH CENTURY

Boris Kozolchyk*

I. INTRODUCTION: THE MISSION OF COMMERCIAL LAW

In order to evaluate the state of commercial law its mission must be identified. Norbert Reich, among other scholars concerned with law and economics, describes the mission of law as "organizing" and "correcting" the marketplace.I These are not, however, discrete functions. Law organizes the marketplace by correcting distortions, and corrects distortions by organizing a more efficient market. Nevertheless, Reich's description remains valid. A marketplace cannot exist without guideposts of acceptable behavior, whether by sanctioning a given usage or custom, or by promulgating a new rule or principle of interpretation. Such a guidepost organizes the marketplace by giving it order and predictability. In turn, when sanctioned or acceptable behavior results in inequalities it must be susceptible to correction, not only to adjust the law to unforeseen circumstances or new practices, but also to prevent abuses or distortions. The mission of organizing and correcting the marketplace is particularly appropriate for commercial law, the quintessential branch of private law. Commercial law is quintessentially private because it is usually made by the participants in the various transactions. As a branch of private law, commercial law was concerned from its inception not only with the meum et tuum (mine and thine) but also with third party, "marketplace" rights. I will first identify, with the help of historical perspective, the marketplace(s) which present day commercial law is at- tempting to organize and correct. Having done this, it will be possible to identify some of the law's guiding principles and assess their effectiveness in carrying out their assigned mission. The marketplaces discussed are not necessarily the most representative of a given stage of commercial law development. Important legal institutions * Professor of Law, University of Arizona College of Law. President of the International Academy of Commercial and Consumer Law. S.J.D., University of Michigan, 1966; LL.M., University of Michigan, 1960; LL.B., University of Miami, 1959; D.C.L., University of Havana, 1956. This article is based on my inaugural presidential presentation at the August 1988 meeting, in Melbourne Australia, of the International Academy of Commercial and Consumer Law. I wish to thank Peter Matiatos, Managing Editor of the AJICL, for his painstaking copywork and valuable editorial comments. I also wish to thank Benis Bernstein, Articles Editor of the AJICL for her valuable editorial assistance. Copyright © 1990 by Boris Kozolchyk. All rights reserved. 1. See N. REICH, MERCADO y DERECHO (1984). Arizona Journalof Internationaland ComparativeLaw [Vol. 8 emerged from other periods and places not discussed, such as the late medieval trade of Italian port cities, French fairs, and the colonial maritime trade of the 16th and 17th centuries. Nor are the chosen marketplaces described in an exhaustive or systematic fashion. Rather, the following thumbnail sketch of marketplaces is intended merely to help understand the purpose of key contemporary legal concepts and principles whose roots lie in the chosen marketplaces.

H. SELECTED MARKETPLACES AND ROLES OF COMMERCIAL LAW A. The Roman and Early Medieval European Marketplace

Commercial law played only a modest role in the Roman and early medieval European marketplaces. Trade and moneylending were not held in high esteem by Roman lawmakers. 2 In pre-republican Rome, trade was passive.3 Few manufactured items were sold, and if they were sold it was through non-professional intermediaries. When wholesale commerce did arrive, during late Roman republican and early imperial days, it was control- led by large landholders. These landholders acted directly or through slave surrogates, instead of professional intermediaries. Although Roman cities had numerous craftsmen and petty merchants, their trade was only a subsistence. Commercial prosperity was limited to the large landowner monopolies. Commerce was viewed as less respectable than fanning. According to Cato: When our ancestors had to praise a good man, they spoke well of a... good farmer. Such was the finest praise. . . I am aware of the merchant's diligence and pursuit of profit... [but] ... is not agriculture [the activity] that provides the strongest and vigorous of soldiers? could be more honest that of the farmer? Those who What profit 4 devote themselves to tilling the soil do not think evil thoughts. Medieval religious doctrines on usury and just price strengthened the view that commercial and money lending activities lead to evil thoughts. During Charlemagne's empire an influential body of ecclesiastical legislation, the Hadriana,5 contained a papal decree that forbade clerics from taking usury,

2. See Kozolchyk, Transfer of PersonalProperty by a Non Owner: Its Future in Light of Its Past, 61 TuL. L. REv. 1453, 1459-62 (1987) [hereinafter, Kozolchyk, Transfer]. 3. Id. 4. Id. 5. See J. NOONAN, JR., THE ScHoLAsnc ANALYSIS OF USURY 15 (1957) [hereinafter Noonan]; see also B. NELSON, THE IDEA OF USURY 3-4 (2d ed. 1969) [hereinafter Nelson]. Nelson traces the evolution of Christian views of usury to a dictum by St. Jerome (340-420 A.D.) and an elaborate commentary in De Tobia by St. Ambrose of Milan (340-397 A.D.). St. Jerome contended that the prohibition of usury among brothers in Deuteronomy had been universalized by the Prophets and the New Testament. St. Ambrose interpreted Deuteronomy 23:20 as allowing usury against the enemies of Biblical Israel. 1991] Commercial Law at the End of the 20th Century and declared usurious laymen guilty of turpe lucrum (shameful gain). Usury, a mortal sin, was defined as any amount of interest charged for the loan of principal. 6 In addition, the just price, or the price that could be lawfully charged for one's wares, was limited to amounts that allowed the producer to live and support his family on a scale suitable to his station in life (per 7 quanto res suas vendendo statutum suum continuarepossit). Another influential rule, attributed to Albert Magnus and Thomas Aqui- nas, directed parish priests to admonish flocks to charge wayfarers no more than the price obtainable in the local market (quam in mercato vendere possint).8 Aquinas' market was not comprised of professional intermediaries or distributors seeking independent profit. Rather, those who earned their livelihood selling everyday commodities, such as bread, were licensed to do business only on condition that they maintain certain pricing and quality standards. 9 While the prevailing just price standard was determined by a market estimation (secundum aestimationemfori),this estimation could be superseded by prices or standards set by priests or by boni viri (decent men, or men of humanity). 10 Thus, in the Roman and European medieval marketplace, commercial law was only a marginal organizer and corrector. In comparison with present day marketplaces, there was precious little to organize and correct. Sales of valuable assets such as land, cattle, and horses was discouraged by the cumbersome formalities of pre-classical Roman law.1 Marketplace transactions were mostly face to face, and paid for in cash or equivalent. Goods and monies were seldom entrusted to professional intermediaries. Even when long distance trade took place in Central Europe entrustment did not occur. The Central European merchant transported his wares by himself, or

6. See Noonan, supra note 5, at 17-20, especially at 20, and Nelson, supra note 5, at 5-28. 7. See generally de Roover, The Concept ofthe Just Price: Theory andEconomic Policy, 18 J. ECON. Hisr. 418-19(1958). For a discussion on the relationship betweenjust price theories and the fairness of commercial law, see Kozolchyk, The Commercialization of Civil Law and the Civilization of Commercial Law, 40 LA. L. REv. 3, 9-35 [hereinafter Kozolchyk, Commer- cialization]. 8. Kozolchyk, Commercialization, supra note 7, at 11. 9. But cf.the wise warning in R. LopEz, THE COMMERCIAL REvoLUnON OFTHE IDDLE AcES, 950-1350 127 (1971). Lopez stated: Guilds often stressed their concern for producing good wares at low prices; their statements to that effect should be neither disbelieved nor overrated. Then, as now, the main object of a producer could not be to serve God and the public, but to sell his goods at a profit; still he knew that shoddy goods at inflated prices would not keep him in business. The religious, patriarchal character of guilds, and the pressure of what was essentially a buyer's market were mutually reinforcing interests. Id. at 127-28. 10. Kozolchyk, Commercialization, supra note 7, at 11 (especially note 41). 11. Kozolchyk, Transfer, supra note 2, at 1456. Arizona Journal of nternational and Comparative Law [Vol. 8

in caravans which he accompanied.12 Marketplace corrections were imposed by rulers who granted the licenses to trade or enacted regulations on the quality, weight and measure, and just price of the goods or products. Although Roman merchants played a marginal role in the formulation of commercial law, Roman jurists contributed momentously to the entire spectrum of private law. Roman jurists shaped what von Jhering aptly described as the law's "alphabet" by applying "geometric" logic to the resolution of legal disputes.' 3 The Roman legal alphabet continues to supply building blocks of contemporary legal institutions. Contemporary concepts such as obligation, intent, notice, diligence, negligence, and possession, owe their existence and much of their precision to Roman law. To this day, commercial law uses these concepts to organize systems of contractual or extra contractual liability, and to protect third party rights. Roman geometric logic became the most precise tool for measuring commercial rights and duties, which were in actual or potential conflict with each other. 14 This Roman logic became apparent in axiomatic regulae hiris formulations such as "no one can transfer what one does not have," or "that which is ours cannot be transferred without our consent," or "anything which is void in the beginning cannot be remedied by the lapse of time."'15 These maxims ascribed absolute legal values to certain institutions such as ownership, and relative value to others such as grantors' intent or lapse of time. By setting up a hierarchy of rights and duties, Roman law enabled measurement of their relative dimensions, much as geometry enabled measurement of graphic representations of the physical world. Thereafter, it was possible to analogize, say, a fee simple absolute to a perfect quadrangle, and an easement to a rectangle or triangle within the quadrangle. The geometric analogy, then, provided a means with which to measure previously unmeasurable non-cor- poreal rights and duties. If, for example, one could not convey more than what one owned, and what one owned depended upon how one had obtained it, the methods for acquiring ownership had to be precisely outlined and carefully ranked. Accordingly, a public or open and peaceful possession acquired in good faith conferred greater rights than a possession acquired violently or in bad faith. The Roman method of measuring rights and duties became the favorite juristic tool for correcting the private law inequalities that resulted from treating unequals as equals or vice versa. The method is apparent in the

12. See generally H. PIRENNE, ECONOMIC AND SOCIAL HISTORY OF MEDIEVAL EUROPE 93-95 (undated); see also Goitein, Formal Friendshipin the Medieval Near East, 15 PROC. AM. PHL. Soc'Y 484 (1971), and on Northwestern European Jewish trade, see 1 1. ACUS, URBAN CIVILIATION INPRE CRUSADE EUROPE 53-116 (1965). 13. 1 R. VON JHERING, L'EsPmrT Du DRorr ROMAIN 14-15 (1886-1888). For a discussion of Roman law's geometric logic, see infra, note 14 and accompanying text. 14. See Kozolchyk, Transfer, supra note 2, at 1469-72. 15. Id. at 1470. CommercialLaw at the End of the 20th Century techniques for ranking rights and duties in pre-codification and codification continental Europe as well as in Anglo American law. One need only examine English 16th and 17th real property law or 20th century American personal property law to appreciate Rome's everlasting influence. Take, for example, a concept such as the "priority" security interest of U.C.C. art. 9.16 This type of security interest embodies a right to the immediate possession of personal property superior to the rights of most other creditors or posses- sors. It is formed by adding inferior rights to each other in cumulative fashion. Beginning with the lesser rights and adding greater rights, priority requires: a) an unsecured creditor's right to attach collateral or to enforce a judgment lien; 17 b) a secured creditor's right derived from the creation or "attachment" of his security interest (attachment); 18 c) a secured creditor's with an attached security interest's right to provide notice to other creditors and bona fide purchasers of the creation of his security interest (perfection); 19 and d) a secured creditor's with a perfected security interest's right to prevail over other perfected security interest based upon the preferred type of value he gave to the debtor, such as a "purchase money" loan. Once all the components are added in algebraic fashion (a+b=c, c+d=e, e+f=g), the sum of rights (g) is given a term such as "priority" and becomes easily measurable against other terms or symbols. This algebraic progression toward an absolute or axiomatic type of right would not have been possible without an initial unit or coefficient of measure. In the case of a perfected security interest this initial unit is the notion of "rights in the collateral." 20 To be meaningful in real commercial life, this unit of measurement had to reflect the ordinary (stereotypical) behavior, or expectations of regular participants in marketplace secured transactions when they attempted to acquire rights in the collateral in exchange for the value they gave or advanced; query whether the borrowers relinquished possession of collateral, or did the lenders require formalities. Once the stereotypical behavior had been ascertained and expressed in synthetic and illustrative fashion, the applicable algebraic like rule could be formulated. A typical algebraic formulation in classical Roman law was: If A gives wine to C, and C promises to give back an equal amount of wine, then the 21 transaction is an X (loan of use) and not a Y (sale). The process of gathering all the illustrative syntheses related to a given legal institution, and translating these syntheses into measurable rights and

16. See U.C.C. § 9-312 (1988). 17. Id. § 9-301. 18. Id. §9-203. 19. Id. §§ 9-302 to -305. 20. Id. § 9-203(l)(c). 21. This illustration is a paraphrased summary of a series of illustrations provided in Gaius' Institutes 3.144-147. For an English translation see F. LAWSON, THE RoMAN LAW READER 114-16 (1969). Arizona Journalof Internationaland ComparativeLaw I Vol. 8 duties is what contemporary scholars refer to as "conceptualization." Al- though Roman lawyers were not particularly fond of abstract definitions and conceptualizations, and preferred casuistic and problem oriented reasoning, present day conceptualization owes much to Roman legal science. Roman law also popularized a more flexible, although less precise, method of measurement of rights and duties. It responded to questions such as "what is the diligence expected from this defendant in this transaction" by contrasting the defendant's behavior with that of an ideal person or with archetypal behavior; i.e., the bonus paterfamilias(good father of the family) or the bonus vir (honest or decent man). 22 It should be emphasized that this measure did not result from adding the consequences of stereotypical behavior, but rather from applying absolute or religious morality to the act or transaction in question.

B. The Ninth to Twelfth Century Arab and Jewish MediterraneanTrade

The only traders who relied on trusted intermediaries to conduct long distance business during the middle ages were Mediterranean Arabs and Jews. 2 3 Arab and Jewish "formal" friends, or religious "brethren" trusted 24 each other with money and wares to be invested or sold in distant markets. Various forms of investment developed as a result of these entrustments, 25 including "universal" or particular types of partnerships and joint ventures. Similarly, the entrusters and the entrusted developed various types of documents to evidence their requests for credit, or their orders to extend credit or pay debts.26 Over time, many of these arrangements and documents became popular in major Italian trading centers, and from there spread to the rest of the western trading world. The trade of medieval Arab and Jewish Mediterranean traders was clearly "active" in the sense of professional intermediation between producers and consumers. It was not, however, the type of marketplace which present day commercial law organizes and corrects. First, participation in this Mediter- ranean marketplace was based upon the trust derived from a formal type of friendship or religious brotherhood. It was not an open market. Brotherly or religious duties were strictly demanded and enforced, but only from 2 7 brothers. Non-brothers could not be subjected to a law other than their own.

22. Foran analysis ofRoman law's reliance on the bonus vir, see L. GoLDSCHMIDr, STORIA UNIVERSALE DEL DIRnro COMMERCiALE 35 (1913). 23. See generally S. GOrrEIN, INTRODUCnON TO LE-rERs OF MEDIEVAL JEWISH TRADERS 6 (1973) [hereinafter GorrEIN, INTRODUCTION], and 1 S. GOrrEIN, A MEDITERRANEAN SOCIErY 164-209 (1967) [hereinafter GOrrEIn]. 24. See GorrEIN, supra note 23, at 164-66, and sources cited supra note 12. 25. See GOrrEIN, supra note 23, at 169-92. 26. Id. at 229-264. 27. On the operation of "personal" laws, see GOrrEIN, INTRODUCTION, supra note 23,at 11. 19911 Commercial Law at the End of the 20th Century

Second, the relations between this "brotherly" marketplace and the out- side world and its many marketplaces, were governed by secular and religious (Moslem and Catholic) rulers. For these rulers, trade was a source of revenue with which to satisfy continuous budgetary shortfalls, especially in the military arena. These rulers decided who and what could be traded, as well as the terms of trade, including weight and measure, just price, and rate of interest. These regulations were designed more for retail than for wholesale "brotherly" trade.28 As was later seen throughout Europe, privileges and exclusive rights were granted to merchants in exchange for a promise of shared revenue and access to credit.29 Commercial law helped organize these Mediterranean "brotherly" markets by allowing the will of the market participants (reflected in their course of dealing, usage of trade, and community customs) to provide the forms of business association, and documents with which to invest or trade. Many of these associations are still with us in the form of general and limited partnerships and joint ventures. Associational brotherly duties helped correct the inequalities that resulted from taking advantage of another trader's youth, inexperience, or economic necessity. These brotherly duties are still being required from certain trustees by 20th century courts. 30 The impor- tance ascribed to telling the truth, and the attachment of religious consequences to lying under oath lead to the granting of evidentiary value to entries in the books of merchants, and to promises of payment which invoked the name of God.

C. Nineteenth Century Europe and North America

The marketplace whose commercial law still governs many of our transactions, emerged with the emancipation of the merchant class in Europe, toward the end of the eighteenth century. This marketplace flourished during the nineteenth century,and many if not most of its enabling rules, were enacted during that century. Emancipation meant that while the merchant class was still obligated to share revenues with rulers, albeit less than in the medieval past, it now had the right to enter into contracts, including contracts for the acquisition of valuable property, without having to ask for the rulers' permission. Article 1134 of the French Civil Code of 1804 stated that "contracts lawfully entered into have the force of law between the parties," 31 and was more than a statement on the binding effects of contracts. Article 1134 was a political affirmation of citizens' power (particularly the commer-

28. GorrEIN, supra note 23, at 266-72. 29. See generally H. PmroaNE, supra note 12, at 53-56. 30. Kozolchyk, Commercialization, supra note 7, at 41-46. 31. Article 1134 of the French Civil Code of 1804. For a discussion of the doctrinal influences on the text of art. 1134, see A. ARNAUD, LEs OmuGIwas DocrRNALES DOUCODE CiVI FRANcAis 204-05 (1969). Arizona Journalof Internationaland ComparativeLaw [Vol. 8 cial bourgeoisie) to enter into contracts with the same rights as were previously available only to the rulers and their proximate nobility. Such a power could not have been granted under feudalism because it was inconsis- tent with the feudalistic need to keep valuable real property in seignoral hands. Across the channel, Lord Mansfield had given English merchants the power to sit as "special" jurors in commercial trials.32 In this role, merchants could determine what was "reasonable" or "fair" under the circumstances of the commercial case. Commercial usages of trade and custom were thus allowed to play a primary role both as: 1) creators of institutions; and 2) as correctors of inequalities resulting from abusive practices or distortions by merchants in their relations with other merchants. This emancipated market, therefore, was more open and egalitarian than the Roman or later Arab and Jewish brotherly markets of the Mediterranean. As long as one qualified to act professionally as a merchant, the marketplace was available for one's trade. 33 Although Mansfield himself was a strong opponent of "usurious" loans, commercial law no longer had to rely on church doctrine to justify its moral worth. It developed its own "marketplace" morality.34 Its golden rule was that each party to the transaction should treat the other in the same manner that any regular participant in that market would have expected to be treated when viewing his own advantage. This was not the golden rule of the pre ius gentium (law of humanity) Roman marketplace in which non-Roman citizens had duties but not rights. Nor was it the rule of the brotherly marketplace of Arab and Jewish medieval merchants. The golden rule of these Arab and Jewish traders demanded that when the circumstances required it, a party was to treat the other altruistically, or as a brother would; i.e., by disregarding, if necessary, profit or loss considerations. Although the morality of Mansfield's marketplace appeared selfish when compared to the Arab-Jewish merchant, it was less selfish than the morality exhibited toward strangers in primitive or tribal societies, or exhibited toward foreign merchants in sixteenth century Europe.35 The rule applicable to strangers in the

32. For more on Mansfield's "jurymen," see L. TRAKMAN, THE LAW MERCHANT: THE EVOLUTION OF COMMERCIAL LAW 28-29 (1983). 33. See Lowe v. Waller, 99 Eng. Rep. 470 (K.B. 1781). Lord Mansfield held that insofar as the rights of bonafide purchasers of negotiable instruments were concerned, usury acted as an absolute prohibition, or as a "real" defense. 34. With his usual alertness to the forces shaping commercial law, Holdsworth pointed out that "Lord Mansfield's appeals to moral and natural law were attractive to the minds of the lawyers of his day; and so the idea that a conscientious obligation could be a consideration for a promise was speedily taken up." 8 W. HOLDSwORTH, HISTORY OF ENGLISH LAW 27 (1925). 35. See, e.g., A. ABRAMS, SOCIAL LIFE IN ENGLAND IN THE 15TH CENTURY 31-45 (1909). In England legislative acts against aliens were supplemented with rigorous restrictions against foreign traders. At one point, foreign merchants were not allowed to sell merchandise to each other and were forced to lodge with "hosts," whose function it was to report on the foreign merchants' transactions to the Exchequer. Violence against foreigners was also frequent. In the 1991] CommercialLaw at the End of the 20th Century pre-Mansfield market was "stranger or foreign merchant beware." No duty was owed to the foreigner unless formally and clearly assumed by a local layman or merchant. In contrast, Mansfield's archetypal trader, banker, or insurer owed a duty to provide marketplace value in exchange for the value he received. When issued in exchange for a recognizable value, a promise would not be held unenforceable because of a literal or legalistic interpretation of the contract. As Mansfield stated, "nudum pactum did not exist in the usage and law of merchants." 36 While this archetypal merchant was allowed to drive a hard bargain, the bargain could not be devoid of mutuality or reciprocity of value. And, while no stranger dealing with such a merchant should have expected altruism, he had the right to expect trustworthy and 37 reciprocal commitments. Such a merchant's word was his bond. This archetypal behavior was motivated by eighteenth century commercial law's mixture of religious and utilitarian moralities. Far from being 38 sinful, profit making was a sign of reward for hard work and honest dealing. If trade produced the greatest amount of happiness for the greatest number, (the unhappiness of slaves or imprisoned debtors notwithstanding) then this society was willing to enforce trade's "conventions and customs." This was 39 even if other societies regarded such conventions or customs as usurious. Active participation in this marketplace was based upon professional resources, including knowledge of the particular trade, reputation as a reliable merchant, access to credit, and access to information about market conditions. Professional intermediation between producers and consumers meant that most transactions were no longer face to face. As with the Arab and Jewish medieval Mediterranean markets, intermediaries were entrusted with the goods and services belonging to other merchants and the public. Entrustment fostered commercial specialization. Goods and services were provided on a credit or joint venture basis to intermediaries for broker- age, sale, manufacture, storage, or exchange. Specialization brought about multiple and diverse marketplaces. Wholesale and retail marketplaces were available for important commodities and textiles. The credit marketplace,

14th century, foreigners were attacked and driven through the city streets during peasant revolts. In one of these revolts, men were pursued and slain if they could not pronounce "bread and cheese" with a pure English accent. 36. See Pillans v. Van Mierop, 97 Eng. Rep. 1035 (K.B. 1765), but cf.the overruling of this common law heresy in Rann v. Hughes, 2 Eng. Rep. 18 (1778). See also the commentary on both cases in 8 W. HOLDSWORTH, supra note 34, at 29-30. 37. See Pillans v. Van Mierop, 97 Eng. Rep. 1035 (K.B. 1765). 38. See Kozolchyk, Commercialization,supra note 7, at 41-42 for a discussion of Richard Baxter's CHusTIAN DIRECTORY. Baxter's work was described by R. Tawney as "one of the most widely read books in 17th century England." 39. The reference to conventions and customs comes from Jeremy Bentham's Defence of Usury: "Antecedently to custom growing from convention there can be no such thing as usury; for what rate of interest is there than can naturally be more proper than another?" 3 J. BENTHAM, DErEacF OF UsuRY, LETTER II (1787), reprinted in 3 THE WoRKs OF JEREMY BENrHAM 4 (J. Bowring ed. 1962). Arizona Journalof Internationaland ComparativeLaw [Vol. 8 comprised of moneylenders, goldsmiths, and bankers, catered not only to merchants but also to consumers. Insurance was no longer a form of "usurious" lending, but of probabilistic risk taking, with a marketplace for each major type of risk. Maritime transportation evolved from ajoint venture between shippers and carriers to an independent service provided by carriers to shippers, involving storage and carriage of goods. In summary, commercial law helped organize the eighteenth century English marketplace by fostering the principle of freedom of contract. The power to create commercial obligations was left to the merchants' determination of what symbols conveyed the seriousness of their intent. Commercial law helped correct the inequalities of the marketplace by developing, among other things, the institutions that made possible the protection of third party purchasers or creditors. These third parties were enfranchised on the egalitarian basis of their contribution of good faith, or market recognized value to the transaction in question. Most of the principles that helped organize and correct the marketplace were themselves a product of several centuries of commercial activity, and were in force at the time that our peculiar marketplace came into being. Although, I believe, these principles continue to shape commercial law, they are seldom expressly articulated. The following is an attempt to articulate these principles.

II. THE PRINCIPLES OF COMMERCIAL LAW MAKING A. First Principle: Risk Assumption, Finality and Limitation of Liability

The first principle states that the liability of parties to commercial transactions can be limited as to time and amount. This principle is discussed first because it is one of the historic landmarks that first separated legal institutions associated with subsistence farming from those associated with trade.40 This principle requires that obligations be limited or discharged with certainty or finality by acts of the parties or third parties, as well as by events such as the passage of time, death, or insolvency. In pre-commercial subsistence societies, liability was often collective and unlimited. Liability continued forever, and flowed to the surviving members

40. A distinction should be drawn between limitation of liability for certain serious torts or crimes in ancient law which was effected by the surrender of animals or other valuable objects, and the commercial law limitation of liability flowing from commercial ventures, effected by risk sharing agreements. A gray area, or possible bridge between the two notions may be found in admiralty rules on limitation of liability. As pointed out by Justice Holmes, very early in maritime law, the "ship was not only the source, but the limit, of liability." 0. HOLMES, THE COMMON LAW 27 (M. Howe ed. 1963). See also, Finkelstein, The Goring Ox, 46 TEMP. L.Q. 231 (1973). 19911 CommercialLaw at the End of the 20th Century

of the obligor's family. 41 For example, in certain regions of India, a largely agricultural survival economy, unpaid interest would accumulate in unlimited fashion, from generation to generation of family members. To prevent this, contemporary Hindu law enforces the damdupat doctrine. Damdupat provides that the total interest charged on a loan cannot exceed the amount of principal that was lent.42 Damdupat is, to this day, a rule of finality designed to terminate indefinite and overwhelming accumulation of familial debt. Indefinite liability of family members was also found during Biblical days in the defension clauses in land deeds executed by Jewish soldiers stationed near Aswan, Egypt.43 These clauses pledged the liability of the grantors' heirs, often ad infinitum, to defend the grantee's quiet enjoyment of the land against any adverse claimant. Hand-in-hand with indefinite and collective liability in agricultural survival society, was opposition to conveyance of valuable ancestral family property. Because liability in India was so ominous and unpredictable in pre-Damdupatdays ancestral family property had to be preserved by making it unmarketable as possible, otherwise the only relatively certain source of family survival could be lost. This does not mean that valuable family property was never sold or mortgaged. It was sold and mortgaged, either openly or by circumventing prohibitions or excessive formalities, particularly as "extended" families started breaking up.44 The market for valuable

41. On the "dense" nature of kinship relations in these societies and on the impact on law, see A. Hoaaa, THE LAW OF PMrrIVE MAN (1954). At pages 53-55 Hoebel gives examples involving the Yurok people, at page 104 Hoebel discusses the jural postulates of the Ifugao people and states as "Corollary 2: the kinship group is responsible for the acts of the individual members;" but cf., the tendencies to limit liability for tortious or accidental death since Biblical times in Finkelstein, supra note 41, at 169. 42. For ascholarly discussion of the doctrine of Damdupat,see J. DERRETr, INTRODUCION TO MODERN HINDU LAW 520-24 (1963). For an illustrative contemporary decision involving Damdupat, see Bapuroa v. Anant Kashinath, 1946 Indian L.R. (Nagpur) 407, 413. 43. In the fIrst decade of the 20th century, Aramaic papyri were found in the island of Elephantine, not far from the present location of the Aswan Dam. The oldest known papyrus is dated 495 B.C. Some of the papyri contained conveyances of land in which the grantor-seller assumed two obligations: not to interfere with the grantees enjoyment, and to defend the grantee's enjoyment should it be contested by a third party. For an analysis of these documents, see R. YAARON, INTRODUCrONTO THE LAW OF ARAMAIc PAPYRI, 79-92 (1981), for a comparison of the defension clauses in the papyri with the Roman auctoritas or tacit warranty against eviction, see KozoIchyk, Transfer,supra note 2, 1463-66. 44. See Yoffee, Aspects of Mesopotamian Land Sales, AM. ANrnToPoLoGsT, March 1988, at 119 for a very interesting description of Mesopotamian land sales in the second millennium B.C. Yoffee provides translations of sale agreements, and references to simulatory practices where creditors "were regularly adopted by debtors in order for property to be transferred." Id. at 127. Arizona Journalof Internationaland ComparativeLaw [Vol. 8 family property was, generally, a market of necessity, and one not officially 45 encouraged by law. Trade reflected a more optimistic outlook on life: the best defense against necessity was to trade actively in the marketplace. Limiting liability to amounts loaned or invested, as in the Roman and Mediterranean fenus nauticum'46 or the sharing of maritime losses by shippers or joint venturers, as in the lex rhodia,47 helped to manage some marketplace risks and rendered commercial ventures more predictable. During Mansfield's times, the limitation of risk and the assurance of predictability was assumed by key institutions such as the incipient trading companies; it was also enunciated 48 in cases such as Price v. Neal.

B. Second Principle: Equality of Treatment of Merchants

The second principle states that the participants who contributed equal value to each other or to a third party in a commercial transaction should be treated as equals. The equal treatment of all market participants played a crucial organizational role, as noted by Levin Goldschmidt. 49 This principle helped bring about the essential condition of medieval trade fairs known as 50 "peace of the market." Roman, and to a large extent medieval law, was personal in nature.5 1 Itinerant or travelling merchants "carried their law on their backs." This created the possibility of imprisonment or death resulting from conflicts between the "host" and "home" countries. Equal treatment protected itinerant merchants not only from political retaliation, but also from imprisonment or death resulting from attempts to collect debts from the

45. According to the Hindu legal doctrine of necessity, a sale of ancestral family property by its lawful administrator is valid when there is legal necessity to sell, and is invalid if the sale was for "frivolous" purposes, such as to support a mistress or to purchase liquor. For a judicial exposition of this doctrine, see Rajeshwar v. Nangiran Gangabishan, 142 Indian Cas. 242, 244 (1932); Ram Khelawan v. Rain Nares Singh 51 Indian Cas. 52 (1919); and Protap Chandra v. Jagadish Chandra 1925 Indian L.R. (Cal.) 118, 125. 46. This was a loan given for the transportation of merchandise by vessels. It was a conditional and limited liability loan in the sense that it had to be repaid only when the ship arrived safely in port with the cargo. The lender assumed, among other, the risks of shipwreck and piracy. On this loan and on thepecunia traiecticia(money travelling overseas), see Digest of Justinian 22.2 [hereinafter DIG.], and the classic study by F. PRINGSHEIM, KAUFMITFREMDEM GELD 143 (1916). 47. 8 W. HOLDSWORTn, supra note 34, at 264 citing DIG. 14.2.1 states "[iltis provided by the Rhodian law that if merchandize is thrown overboard to lighten the ship, the loss occasioned for the benefit of all must be made good by all." 48. 97 Eng. Rep. 871 (K.B. 1762). Lord Mansfield held that a drawee of two forged bills of exchange who paid one and accepted the other could not collect monies he paid to the payee because the drawee had the duty "to be satisfied that the bill drawn upon him was [of] the 'drawer's hand' before he accepted or paid it." Thus, liability was placed on the one who could have prevented the loss by diligence. 49. L. GOLDSCHMIDT, supra note 22, at 23. 50. Id. 51. Id. at 31-32. 19911 Commercial Law at the End of the 20th Century

trader's friends, neighbors, or colleagues. Equal treatment, therefore, enfranchised merchants to enter into transactions in a manner previously reserved only for nationals or permanent inhabitants of a city or State. In Mansfield's day, equal treatment of foreigners meant not only freedom from political retaliation and collective liability, but also the right to be 52 regulated by the same standards of fairness applicable to local merchants. Thus, equality in the eyes of commercial law meant measurement by the same elemental standard of marketplace fairness; contributors of equal value deserved equal treatment. When the law did not define value, it was defined by spokesmen for the marketplace. The measurement of equal treatment became possible by: 1) a determination of what was the stereotypical behavior; 2) the imposition of archetypal duties upon stereotypical behavior, such as the duty to disclose the truth about transactional facts; and 3) the lawmakers' elaboration of synthetic formulations of stereotypical and archetypal rights and duties with the aid of geometric logic. Equality of treatment, in turn, was responsible for the creation of protected stereotypical and archetypal categories of merchants, associated with various branches of commercial law. The bona fide purchaser of personal or real property, the secured creditor with a perfected security interest, the beneficiary of an irrevocable letter of credit, the minority stockholder, the holder of a recorded patent, trademark or copyright, the honest banker, and trustworthy fiduciary all became members of protected categories, once their contributions of marketplace value became ascertainable by legal and marketplace standards.

C. Third Principle: Possessionas the Title to CommercialProperty

According to the third principle, the title to commercial property is nothing more than what the participants in the marketplace deem as the most trustworthy, reliable, or certain type of possession. In the majority of commercial transactions, property is not dependant upon "diabolical proof of title," or proof of the "ultimate" or "historical" ownership. Possession of the good, document, or instrument under specified conditions of market inspired legitimacy is all that commercial law requires. While commercial law increasingly relies on certificated or recorded forms of ownership, recordation is only treated as the source of property rights when the recorder contributes to its marketplace value. Thus, even where a statutory provision stated that the mere registration of a trademark conferred ownership upon the registering party, another party's well known use of the trademark and

52. The beneficiary of Mansfield's rule in Pillansv. Van Mierop that nudumpactum does not exist in the law merchant was a Dutch banker who had extended credit to an English merchant. Arizona Journalof Internationaland ComparativeLaw I Vol. 8 contribution to its market value, was significant enough to void the non- 53 user's, non-contributor's registration. Title as a market approved and trust inspiring possession, not only protects contributors of original value, such as the developer and well-known user of an unregistered trademark, but also third parties who rely on the appearance of legitimacy that possession provides. There are many third parties entitled to such protection: bona fide purchasers of personal or real property, and holders in due course of negotiable instruments, documents of title, and equity and debt securities. The effect of protecting this third party possession, is to protect negotiability and encourage a massive and reliable acquisition of goods and services, whether of a tangible or intangible nature. In this sense, nemo plus iuris ad alium transferrepotest quam ibse habet (one cannot transfer what he does not have) did not foster commercial law since it hindered negotiability, whereas hand muss hand wahren (the trusted hand must protect the entrusting hand) encouraged and fostered both. Similarly, the French Civil Code principle of freedom of contract encouraged the acquisition of commercial property, as did its market ouvert rule,54 while the 55 limitation on the methods for acquiring property did not. The limitation on the methods of acquiring property is anticommercial because it does not take into account the co-existence and independent marketability of full or fee simple ownership, possessory rights, and security interests. It did not anticipate, for example, that the holder of a perfected security interest may acquire a "special" type of ownership by recording a security agreement and financing statement in the appropriate registry. Nor did it foresee that this special type of ownership would authorize the creditor's peaceful repossession and private (non-judicial) resale of collateral, even though the title to the collateral was held by the debtor.56 Openness in the manner of acquiring rights of repossession and disposition, short of full or fee simple ownership, is essential in a marketplace where virtually anything, whether tangible or intangible, can be the object of commercial law property. From a technical standpoint, all that is required is that the rights on that object be unconditional, or certain enough so that they can be exercised upon acquisition of either physical or symbolic possession.

53. See the decisions of the Costa Rican Supreme Court in Alpizar Morales v. The Greyhound Corporation, Sent. Casacion, 15:30 horas, 11Noviembre 1959, 11 Sem., T. II, pagina 1318; and "J & P. Coats Ltd." v. "Luis Jimenez A. Sucs. Ltda.," Sent. Casacion, 16 horas, 9 Agosto 1956, 11 Sem., T. I, pagina 1255. These decisions are respectively summarized in 1 B. KOZOLCHYK & 0. TORREALBA, CURSO DE DERECHO MERCANTIL 224-29, 234-49 (1974). 54. Article 2280 of the French Civil Code (Q. Crabb trans. 1977) states: "If the present possessor of a thing stolen or lost bought it at a fair or at a market or at a public sale, or from a merchant selling similar things, the original owner may have it returned to him only by reimbursing the possessor for the price which it cost him." 55. See id. at arts. 711, 712. 56. See, e.g., U.C.C. §§ 9-503 to -504 (1988). 1991] CommercialLaw at the End of the 20th Century

. D. FourthPrinciple: On Freedom of Contract and Seriousnessof Intent

The principle that contracts lawfully entered into have the force of law between the parties, was discussed earlier in connection with the emergence of the nineteenth century marketplace.17 The very codification of this principle in 1804 implied a reorganization of the French marketplace. As 58 noted earlier, it opened the marketplace to large segments of society. One of the most difficult marketplace corrections is to respond to the abuses that arise under the freedom of contract principle. These abuses occur when a party attempts to attain a dominant position and takes advantage of the contractually weak or inexperienced. Today, antitrust and consumer protection laws act as correctives of the nineteenth century enfranchisement of contractual freedom. The determination of seriousness of contractual intent is another correc- tive function of commercial law. This correction is not as infused with public law implications as is the protection of the weak, but is equally as important. If commercial law were to follow the dictates of non commercial conveyance law, such as the law on wills or the law of intervivos transfers of real property, formality would have been of the essence. On the other hand, if commercial law were to listen to the marketplace itself, it would have done away with formalities in many contractual undertakings. In many cases, commercial law has listened to the marketplace and chosen informality. Whenever formality was chosen, it was for functional reasons, such as the requirement of a writing to preserve the original promisor's intent vis a vis both distant promisees and also unknown third parties. Lord Mansfield's decision in Pillans v. Van Mierops9 reflects this attitude. After determining that the purpose of the requirement of consideration in contracts was evidentiary in nature; i.e., to establish the seriousness of the intent of the parties, he held that among merchants, such seriousness was usually signified by a writing. Consequently, lack of consideration could not be invoked to avoid liability 60 under a written promise. By and large, informality in the expression of commercial intent continues to prevail, especially with regard to massive and expeditious transactions. Billions of dollars worth of securities are validly traded each day among United States customers, brokers, dealers, and their "floor" agents with only the formality of a phone conversation, a confirmation "slip," or a hand signal. Similarly, public or private "clearing" banks all over the world validly debit

57. See supra text accompanying note 31. 58. Id. 59. 97 Eng. Rep. 1035 (K.B. 1765). 60. Id. Arizona Journalof Internationaland ComparativeLaw [Vol. 8

and credit the accounts of their correspondents for enormous sums with just an electronic impulse, preceded by a telex, or telephone authorization. This does not mean that formality has disappeared from commercial law. Loan agreements, security underwritings, and insurance or re-insurance "treaties" are highly verbose and largely unintelligible formal writings. Similarly, in the civil law world, the conveyance of real property or of commercial enterprises, or the creation of corporations continues to rely on formalistic notarial deeds. Yet, commercial law formality, as a means to express the seriousness of commercial contractual intent, is as Mansfield intuited, not ritualistic but determined by function and context. Consistent with the delegation of the determination of seriousness of contractual intent to the marketplace, eighteenth and nineteenth century commercial law preferred interpretations that favored the enforcement of a seriously expressed contractual intent. Once the intent had been expressed in a manner which the marketplace considered serious, adjudicators were directed to enforce, whenever possible, the commercial bargain. Presump- tions in favor of the parties' good faith, and doctrines such as contra proferentum and severability of void or unenforceable terms were all intended to encourage the enforcement of commercial bargains.

E. Fifth Principle: Viable CommercialLaw Lawmaking

The label of "lawmaking" includes all the rules that help to organize and correct a marketplace, whether legislative, judicial, customary, or doctrinal in origin. The principle of viable lawmaking states that commercial lawmaking is derived from stereotypical commercial behavior, and is formulated with the aid of archetypal duties and geometric-legal logic. An archetypal duty is generally utilized when it becomes necessary to provide prospective participants to the transaction with a significant measure of reassurance. An archetypal duty would be invoked when the participant is required to entrust his goods or assets to another party acting in a fiduciary capacity. Stereo- typical behavior, as discussed earlier, is the behavior of the ordinary merchant applying his customary utilitarian, albeit cooperative, morality. Archetypal behavior is inspired by an altruistic morality that often demands brotherly types of duties. Elsewhere I have referred to this process as the "civilization" of commercial law. 61 It reflects the necessity of protecting, and thereby encouraging, consumer marketplace participation in order to protect and enlarge the marketplace itself. Brotherly duties are often demanded when there is full entrustment of property or of decision making over another's property. This entrustment occurs either because it is the only manner in which the transaction in question can be conducted (usually as a result of distrust of other merchants)

61. Kozolchyk, Commercialization, supra note 7, at 37-46. 1991] Commercial Law at the End of the 20th Century or because the entruster is too weak or inexperienced to act otherwise. In either case, the entrusted merchant is no longer governed by the usual standard which answers the question, "what would an ordinary profit seeking merchant have done under the circumstances?" Viable commercial lawmaking may require not only bonafides (good faith) but also uberrimafides(or the "punctilio of an honor most sensitive" as Justice Cardozo once referred to it).62 Accordingly, the archetypal standard for the entrusted merchant answers the inquiry "what would a prudent reasonable banker, insurer, or corporate director have done under the circumstances," or more rigorously, "what would a prudent reasonable banker acting as a fiduciary, and as if his own interest was adverse to that of the entruster or beneficiary, have done."

IV. THE ORGANIZATION AND CORRECTION OF THE PRESENT DAY MARKETPLACE A. Marketplace Characteristics

The twentieth century marketplace is characterized, first, by its openness or unrestricted access. In comparison with the marketplaces discussed earlier, the contemporary marketplace is accessible to an ever increasing number of participants, merchants and consumers alike. Not only is the volume of consumer transactions increasing, but so is the volume of commercial investment and lending by non-merchants. The prominence attained in recent years by the Hong Kong and Tokyo stock exchanges, and by Australian, Korean, Japanese and Singapore banks, indicates the widespread participation of merchants and non-merchants in financial markets throughout the global economy. A second characteristic of the commercial marketplace is the concentra- tion of high technology production in a smaller number of capital intensive producers. Spurred by the success of the Japanese model of governmental cooperation with private producers in the financing, production, and distribution of high technology items, a reassessment of anti-monopolistic "corrections" is underway in the United States and Europe. Accordingly, production and distribution giants are pooling, or considering pooling, key resources in order to be able to compete more effectively. Thus, while the pyramid of commercial markets is widening at the consumer, merchant, and non-merchant bottom, it is shrinking at the high technology producing top. A third characteristic of this market is its participants' freedom to set the terms and conditions of their transactions, including prices. Just prices are set by lawmakers only to protect weak or inexperienced consumers, or more rarely, inexperienced merchants. When this is the case, price correction is effected either directly, or by applying the doctrines of unconscionability or usury.

62. See In re James' Estate, 86 N.Y.S.2d 78, 89-90 (1948) Arizona Journalof Internationaland ComparativeLaw [Vol. 8

A fourth characteristic is the globalization of the financial and shipping marketplace. One of the main forces leading to the globalization of the financial marketplace was the change in the attitude of corporate treasurers toward short term investment of their liquid assets. This change took place approximately twenty years ago following the introduction, by large United States commercial banks, of negotiable certificates of deposit and of other forms of short term interest earning deposits. Huge sums of money started 63 flowing to United States financial institutions from all over the world. Improvements in telecommunications technology and the introduction of computer to computer communications made it possible to handle these transactions as instantaneous bookkeeping entries. Thus, "bookkeeping" money was sped to the highest and safest bidder from one comer of the world marketplace to the other. The list of these banking products, often reported as "off balance sheet" transactions, is constantly growing. It includes transactions such as interest rates and currency swaps that involve buying, borrowing, or trading (swapping) any source of steady short term revenue, in reliable currencies. Users and participants in these transactions are no longer limited to corporate treasurers; participants now include governmental or quasi-governmental agencies in market as well as in non-market economies. The driving force behind these practices is the need of users to place their liquid assets in an earning mode during each hour of the day. The goal of ceaseless earnings is placing an ever increasing emphasis on the choateness or certainty of commercial property, as well as on its mobility and "mobilization." To become a tradeable commodity on a world wide basis, the asset must yield a stream of income for a specified period of time in a reliable fashion. This requires that the asset be easily transferable, and that it be as negotiable as money itself. As computers continue to take over traditional record keeping functions, the asset in question must be susceptible of being transformed into electronic data that are able to function as "certificated" documentary securities or "hard copies" of documents of title. The need for easy transfer and negotiability of reliable income producing assets is accelerating the transformation of many real property rights, previously characterized as immovable property in many civil law countries, into moveable or "personal" property. This "transformation" of immovable or real property rights occurs when the possessory rights to the real property are lodged exclusively with the holder of mortgage bonds, negotiable documents of title, or other documents which confer an undisputed right to the possession of the asset, its income, or its proceeds. Whether embodied in a hard copy or in an electronic format, these documents become at least as

63. For a readable chronicle of what is summarized in the principal text, see M. MAYER, THE BANKERs 189-209 (1976). 1991] Commercial Law at the End of the 20th Century valuable, if not more, than the underlying asset, be it a Manhattan skyscraper or a Venezuelan oil shipment. Improvements in electronic communications and computer technology have made it possible to "globalize" shipping and documentary operations. Central electronic registries for bills of lading have been tried for selected shipping trades, such as oil.64 Banks and other financial intermediaries are beginning to introduce services which allow seller-shippers to instantane- ously track their shipments, documentation, and payments. This has been made possible by the use of a uniform electronic language and "envelopes," passed on to each successive participant in the sequence of shipment, payment, and distribution of goods. Each participant adds its electronic data to the envelope, starting with the purchase order, and followed by letters of credit, invoices, bills of lading, insurance policies, and so on until the process is complete. The globalization of 9hipping practices, with its emphasis on speed and reliability of communications, was responsible for the widespread use of the "air waybill" in the 1950's. Presently, globalization is behind the use of electronic "sea waybills" in the North Atlantic shipping trade. A fifth characteristic of the contemporary marketplace is its free amalgamation of previously specialized functions, especially those in the financial marketplaces. Traditional roles are being abandoned by traditional players, or are being assumed by non-traditional players. Banks in major trading centers are beginning to issue insurance policies, or their functional equiva- lents. These banks are also acting as underwriters of equity and debt securities, freight forwarders, and facilitators of shipments and documentation of trade. Insurance companies are acting as commercial lenders, and are issuing standby letters of credit. Securities brokers are acting as depositors of short term funds. Major retailers are issuing credit cards, insurance policies, and providing other financial services. Computerization has made this amalgamation possible because it allows transactions to be expedited by conforming them to a uniform pattern. Uniformity and standardization of transactions allow a more realistic evaluation of the transaction's efficiency, risk, and profitability.

V. ASSESSING THE MISSION OF COMMERCIAL LAW; PROBLEMS AND SOLUTIONS A. Finality of Liability,Risk Sharing, and Equality of Treatment

Limitation of liability continues to be an essential organizer of the contemporary commercial marketplace. A mere glance at contemporary attempts to revise the United States Uniform Commercial Code reflects the

64. On the electronic documentation and central bill of lading registry, see Kozolchyk, Is Present Letter of Credit Law Up to its Task, 8 GEO. MASON U.L.R. 285, 298-304 (1986) [hereinafter Kozolchyk, Letter of Credit). Arizona Journalof Internationaland ComparativeLaw [Vol. 8 continued emphasis on extending the rules on limitation of liability and finality of payment. Consider, for example, the revision of one of the key sections of U.C.C. art. 3 on commercial paper. 65 Former U.C.C. § 3-310(1) dealt with certified or official bank checks given in payment of an obligation. Authorities were divided on whether a certified check constituted final payment by the drawer, or amounted to a discharge of his liability to the holder.66 The prevalent view was that if the holder requested the check be certified, certification would constitute final payment of what was owed him. 67 In contrast, if the certification was requested by the drawer, certification alone would not amount to final payment. According to the revised U.C.C. § 3-310(a), however, when such a check is taken, regardless of who requested the certification, the obligation will be discharged as if it had been 68 finally paid. Also consider the proposed revision of U.C.C. art. 6, on bulk sales. Article 6 presently applies, for the most part, to any transfer in bulk "of an enterprise whose principal business is the sale of merchandise from stock." 69 The revised version would apply to sales of nearly all kinds of businesses. 70 Finally, consider the effects of the enactment of the U.S. Bankruptcy Code in 1978. This code has universalized what was once the strictly commercial privilege of discharge of private debts. As pointed out by J. Ziegel "statistics on the major western powers over the last five years indicate that bankruptcy is a booming business, one of the few growth industries of the western 7 1 world." Yet, as more marketplace participants seek to clarify finality of payment and limitation of liability, other participants become less protected by principles equally essential to the commercial law mission. This tension between limitation of liability and other principles is the result of the inherently conflictive nature of legal principles. By design, the scope of application of legal principles should be broad enough to inspire or encompass multiple rules or sets of rules. Tension among principles, however, also results from the increased opening of the commercial marketplace; as the number of merchants and consumer participants increases so does friction among principles. Equality of treatment is seriously affected by claims to limited liability. Take, for example, revised U.C.C. § 3-310(a). Is a holder who promised to

65. See Uniform Commercial Code Progress Reports, April 20, 1988, A.L.I. 11-12 [hereinafter ALI ProgressReport]. 66. See U.C.C. § 3-802(1) and Official Comments 1,2, and 3. On the division of authority on cashiers' checks, see Travi Construction Corp. v. First Bristol County Nat'l Bank, 405 N.E.2d 666 (Mass. App. Ct. 1980). 67. Travi Construction,405 N.E.2d 666. 68. See ALI ProgressReport, supra note 65, at I 1-12. 69. Id. at 46, U.C.C. § 6-102(1), (3) (1988). 70. ALI ProgressReport, supra note 65, at 46. 71. See Ziegel, Presentationon Secured Claims in Bankruptcy, 4 ARIZ. J. INT-L & COMP. L. 147 (1987). 19911 CommercialLaw at the End of the 20th Century be satisfied if he received a certified check as payment, equal to a holder who made it clear to the drawer that he was taking the check "subject to collec- tion." To treat both holders alike introduces inequality and costly uncer- tainty. Unequals are also treated as equals when solvent debtors, who fear that lawsuits or labor demands will render them prospectively insolvent, are allowed to obtain bankruptcy protection designed for actual insolvency. A similar inequality is apparent when statutory or customary law exempts certain classes of merchants from liability, for example, banks that negli- corporate directors gently translate the terms of foreign letters of credit, or 72 who negligently advise a certain course of corporate action. Not all the preceding corrections of inequality are alike, A significant difference exists between the corrections involved in the new certified check rule, and in the availability of bankruptcy to prospectively insolvent debtors, or the exemptions from liability for the banker and corporate director. While commercial law is ideally suited to resolve the certified check inequalities, it can only assist other disciplines in correcting the latter inequalities that result from granting or withdrawing class privileges. For the inequality that involves the grant or withdrawal of a class privilege, affects participants as well as non-participants in the commercial marketplace. In democratic societies, this correction becomes a political choice delegated to the legisla- ture, or to the courts that decide on the constitutionality of legislative, administrative, or judicial actions. Once the political choice is made and the grant or withdrawal of the privilege is effective, the mission of commercial law is to ascertain that those claiming the limited liability protections are true members of the privileged class. In contrast to its marginal role as grantor of limited liability privileges, commercial law continues to play the central role in determining limited liability formats. Throughout the history of commercial law, the introduction of new business methods has required that persuasive reassurances regarding risk assumption be given to prospective participants. At times, it has sufficed to allocate risks among the participants themselves, as was done by the lex rhodia73 with respect to certain maritime journey losses, by the commenda74 among medieval active and passive investors, and by Lord Mansfield's decision in Price v. Nea175 with regard to victims of forged drafts. When significant losses can result from any one in a countless number of instantaneous transactions (as with the one trillion dollars transferred electronically

72. See INTERNATIONAL CHAMBER OF COMMERCE, PUB. No. 400, UNrFORM CUSTOMS AND PRACTICES FOR COMMERCIAL DOCUMENTARY CREDIrs art. 18 (1983). The subject of corporate directors' exemption of liability for negligent, as opposed to disloyal advise has been the subject of an increasing number of state statutory exemptions in the United States. This subject was one of the most hotly debated issues at the American Law Institute's Sixty-sixth Annual Meeting on May 16-19, 1989. 73. 8 W. HOLDSWORTH, supra note 47, at 264. 74. Id. at 275. 75. Price v. Neal, 97 Eng. Rep. 871 (K.B. 1762). Arizona Journalof Internationaland ComparativeLaw [Vol. 8 in a single day in the United States alone) 76 the risk calls for insurance or widespread risk sharing schemes. Many of the new marketplace transactions alluded to above require widespread risk sharing. The wholesale and retail electronic transfer of funds, the worldwide circulation of uncertificated securities, electronic letters of credit, drafts, invoices, bills of lading, and insurance documents require comprehensive and sophisticated insurance schemes. Typically, the risks inherent in these transactions are related to questions of establishment, revocation, and acceptance of payment orders, fraudulent or negligent payments prompted by unauthorized insiders or unknown interlopers, improper verification of statements, invalid signatures, and authorization codes or symbols.77 In addition, once central registries for transfers of property and perfection of and security interests on commercial property become widespread insurance will need to cover the validity of recordings and issuance of "PINs" (personal identification number) or other electronic authorizations to purchasers or creditors. Moreover, the type of transaction involved mandates quick payment by the insurance carrier. Otherwise, the victims may well decide not to continue to participate in transactions which presup- pose the immediate availability of liquid assets. Take, for example, the chain of assurances normally associated with a banker's acceptance. A purchaser of a New York bank's acceptance in Hamburg will not purchase this acceptance unless he is assured of immediate payment upon presentation to the acceptor in New York. The New York acceptor, in turn, will not accept the seller's draft unless he is able to obtain prepayment or quick reimburse- ment from the issuing bank in Barcelona. The issuing bank, in Barcelona, in turn, will not be willing to issue the credit reassuring the preceding creditors in New York and Hamburg, unless it is assured that, even if the "PIN" that triggered issuance of the final copy of the bill of lading was fraudulently procured, it will obtain possession of the goods, or will be paid their insured value.

B. ContractualIntent, ElectronicallyProgrammed Usages of Trade, and Equality of Treatment

Much has been written in contemporary Anglo-American legal literature about the present state of contract law, including its supposed death and transfiguration into equitable and tort law doctrines of reliance. As of this writing, Grant Gilmore's book The Death of Contract, alone has generated more than 120 comments in legal periodicals. 78 Considerable print would

76. See A.L.I., UNIFORM COMMERCIAL CODE, ARTICLE 4A - FUNDS TRANSFERS, PROPOSED FINAL DRAFT xv (April 20, 1989) [hereinafter A.L.I. 4A]. 77. See id. at xvii-xxii. 78. G. GILMORE THE DEATH OF CONTRACr (1974). The LEXIS "lawrev" library was searched using "'death of contract' w/25 'Gilmore"' as the query. 1991] CommercialLaw at the End of the 20th Century had been saved had the commentators focused on the meaning of commercial contract and on the challenge to traditional contract doctrine posed by contemporary electronic practices. The commercial law of major trading centers, including the United States, has for a considerable period of time rejected the notion that there is a fixed, immutable, documentary, or oral embodiment of the parties' commercial contractual intent, known as "the contract." As I stated elsewhere Parmenides would have had a very hard time with the U.C.C., for he would have insisted on the notion that in each contractual relationship there is only one contract, the "true" contract. The U.C.C., however, treats the sales agreement as if it were Heraclites' river, in a state of constant flux leading to many possible true contracts depending upon the stage of the contractual relationship in issue before the court. If the problem concerns the formation of the contract, then the contract could be said to be the firm offer (with or without consideration), the oral conversation followed by a written confirmation (accepted or unac- cepted by the recipient thereof), or the substantial commencement of the manufacture of certain goods. If the problem related to the adequacy or sufficiency of performance by either party, the contract may be said to be embodied in the parties' course of dealing or the prevailing usage of trade or custom. Finally, if the issue is one of adequate measure of damages for a contractual breach, the U.C.C. has inspired courts to look at hypothetical agreements which would compensate the aggrieved party even for its lost volume or future sales, an item as to which the parties never truly bargained.7 9 The river of commercial contracts, far from being metaphysical, flows over territory carved out by usage of trade, custom and course of dealing. Because of stereotypical commercial behavior, courts as well as legislators, tend to think not of individual contracts, but rather of types or forms of contracts in a given trade or area of trade. When the meaning of contractual terms is at variance with that of the marketplace, parole evidence becomes the source of marketplace intent. In this light, actionability based upon misrepresentation, economic harm, estoppel, and reliance considerations is not a creature of tort law, but a traditional "corrector" of commercial marketplace inequities. Actionability only becomes a creature of tort law when the applicable standard is not that of a stereotypical or archetypal merchant, but of the more inclusive, lay "prudent reasonable man." This is an archetype whose morality transcends the morality of the marketplace. It demands a brotherly concern for the welfare of both market participants and strangers; it includes amongst these strangers a buyer or user of an unreason-

79. Kozolchyk, Commercialization,supra note 7, at 28. Arizona Journalof Internationaland ComparativeLaw [Vol. 8 ably dangerous product, who has never dealt directly with the manufacturer or original seller. The causal connection between a credit marketplace and contractual reliance actions is verified by the fact that reliance actions are simply unnecessary in a market where only existing goods are sold, and then only on a "cash on the barrelhead" basis. In some of these markets orders for future deliveries are not accepted or taken seriously.80 What would be the use of contractual reliance actions in markets where executory promises are 8 not used. 1 Conversely, where unilateral declarations of intent, such as in firm offers to extend credit, are commonly relied upon there are good reasons for allowing causes of action for detrimental reliance. This would be true regardless of whether the minds of the banker, seller, and buyer actually met on the literal (as opposed to the true) terms of the declaration to form "a" or 82 "the" contract. The Heraclites river analogy is increasingly suitable to the world of electronic commercial contracts. Rivulets, each carrying courses of dealing or usages peculiar to the sales, transportation, insurance and banking trades, merge into the larger stream of an electronically programed method of doing business. A recent study on electronic messaging describes a standardized type of sales transaction using a method for exchanging business and shipping data from computer to computer known as Electronic Data Interchange (EDI): When EDI is used to purchase goods, a buyer may electronically send standardized electronic documents such as purchase orders to a manufacturer's computer. When these are received, the manufacturer can begin ordering shipment of the goods and preparation and communication of the remaining paper work on an expedited basis. The entire transaction, from order to payment, can be conducted electronically and without the exchange or generation of a single piece of paper. Computers can monitor a customer's inventory level, determine that

80. During the late 1960's and early 1970's Indian jewelry was quite popular in the western United States. Chester Jones, a former student and Zuni jewelry trader spent a semester describing Zuni trade customs and law and comparing it with U.C.C. art. 2 law. One of his first conclusions was that executory contracts or contracts for future performance where unknown to the Zunis and deemed unenforceable. Unless one bought the jewelry that was available then and there, even a deposit for future manufacture was deemed legally meaningless. See C. Jones, Zuni Sales Law (1978) (available in the University of Arizona Law Library). When I reported my student's findings to Salomon Nahmad, one of Mexico's leading cultural anthropologists, he confirmed the same patterns of trade among Mexico's Oaxaca Chatinos and Mije Indians. Professor Nahmad attributed the absence of executory contracts to the Indians' connection between the assumption of obligations and their agricultural cycles, each cycle serving as a natural boundary of what one undertakes to do or to give. 81. Id. 82. See German Civil Code art. 133 on the binding effect of the true as opposed to the literal intent of a unilateral declaration of intent. 19911 Commercial Law at the End of the 20th Century

the inventory is low and without human intervention, send a purchase order or message to the vendor, computers can automatically83 issue instructions to manufacture or ship the ordered goods. Assume that following the EDI order procedure, customer "A" in accordance with a "master application" agreement with "Bank B," and in reliance on a computer program that drafts letters of credit supplied by "Bank B," generates a text of a letter of credit which "A's" computer sends to "Bank B's" computer. Assume further that upon a pre-established or programmed verification of credit authorization, "Bank B" informs "A" that unless "A" has any objections to the present text, "Bank B" will release it for "Bank C's" confirmation in the seller's place of business. Assume further, that "Bank C" has a service that obtains the necessary data to comply with the terms of "Bank B's" credit. Thus, includes an electronic bill of lading, whose identification or call number "Bank C" transmits to "Bank B" for use by "A" once "Bank B's" computer has verified the compliance of the data forwarded by "Bank C." Assume, finally, that "Bank B" reimburses "Bank C" by an electronic fund transfer that authorizes "Bank D" to credit "Bank C's" account for the amount of the credit it confirmed and paid on behalf of "Bank B." The continuous flow of performances and payments just described is notable both for its lack of paper and of reciprocal promises, traditionally found in the bilateral contracts of classroom fame "promises for promises." In this transactional flow, discrete promises are not exchanged for discrete promises. Discrete "acts" are performed, and exchanged for promises inherent in a pre-established or programmed method of doing business. Thus, when the seller's computer responds to the buyer's purchase order, and requests the freight forwarder's computer to obtain shipping space for the buyer's shipment, it is responding to a pre-existing promise of purchase, given certain electronically established conditions. When the buyer's bank releases its electronic letter of credit, it is acting in accordance with a pre-existing master application agreement, which determines whether certain electronically established have been met. By performing the action the program requires, the participant becomes entitled to certain rights, and assumes certain duties. These rights and duties are usually embodied in a document, often worded in terms reminiscent of a power of attomey. Depending upon the stage at which the transactional stream is joined, and that stage's function (ordering goods, shipping, paying, collecting etc.), the document may be labelled a "pre-authorization agreement," a "master application for the issuance of credits," or "an agency for

83. M. Baum, A. Boss, & P. Fry, Electronic Messaging, A Report of the Ad Hoc Subcommittee on Scope of the UCC 6 (American Bar Association, 1988). In almost missionary fashion, M.S. Baum is pioneering the most significant efforts to clarify the legal implications of the new technology. Arizona Journalof Internationaland ComparativeLaw [Vol. 8 the processing of documents." This initial authorization, which may be provided by a buyer or his bank, enables the stream to flow. As a buyer, he can order goods from the seller. As a seller, he can obtain shipping space from a freight forwarder or carrier, or an advance on the purchase price from a negotiating bank. If he is a freight forwarder or a carrier, he can arrange for shipment. If he is an insurer, he can issue his policy or acknowledge coverage under a master policy, and so on. This electronically programmed method for doing business is both more and less than the traditional unilateral, bilateral, or multilateral contract. It is more in the sense that it confers powers of management and disposition over the grantor's property upon known and unknown parties. It is less because the binding intent of each transaction, or phase thereof, is not peculiar to each contracting party, but to the usage of the trade in question. A shipper and a carrier are not bound as a result of negotiations amongst themselves or through brokers. They are bound because of their willingness to join the transactional stream of pre-established terms and conditions. The electronically programmed method of dealing is also less than the traditional contract, because there is no privity among some, if not many, of the participants; for example, between "Customer A" (the buyer) and "Bank C" (the confirming bank in the seller's place of business), or between "Customer A" and "Bank C" and "Carrier D" (the combined transport operator, in yet a third country). Hence, the ultimate source of law, on many issues formerly covered by a traditional contract, is the usage of trade inspired by a pre-established, electronically programmed method for doing business. Judicial interpretation of this electronically inspired usage cannot rely on some of the most common tools for the interpretation of traditional contracts, such as the contracting parties' expressed intent. It will have to rely on parole evidence to establish the purpose of each segment of the transaction, in light of the overall scheme. Otherwise, a contracting party to a sale contract may well be saddled with impossible conditions. For example, a North American buyer may require in his contract of sale that his Scandina- vian seller procure a traditional ocean bill of lading. Yet, given the type of electronic program and usage of shipping trade that governs the shipments of Scandinavian goods in North Atlantic trade, such a bill of lading may simply be unobtainable, having been replaced by an electronically processed sea waybill. Conversely, a European seller may stipulate in his sales agreement with his Canadian buyer that the latter procure and mail an original letter of credit, only to receive a hard copy of a computer issued letter of credit. Since a countless number of computer issued letters of credit, or documents can all be considered either originals or copies (depending upon one's legal metaphysics), contractual insistence on originals may amount to an impossible condition. 1991] CommercialLaw at the End of the 20th Century

Perhaps the most difficult challenge posed by the electronically programmed method of doing business is to insure the adjudicator's ability to correct inequalities created by the design and operation of the program. Unless the adjudicator is equipped to correct the resulting inequalities, those who commissioned or designed the software may end up imposing unfair or zero sum terms upon other users of the program.

C. The Needfor Uniform Global Solutions

The combined usages of the various trades involved in the electronically programed methods of doing business are the sources of the stereotypical and archetypal formulas which commercial law shapes into concepts, rules, and principles of interpretation. Concepts such as acts, events of acceptance, release of promise, and establishment of liability must accurately capsulize stereotypical and archetypal behavior.8' By far, the most demanding challenge posed by computerized methods of doing business is that of obtaining international legal uniformity. Given the increasingly global nature of the marketplace, and the reliance of computers on software to communicate with other computers, a uniform electronic language is of the essence. If a computer's order of goods is interpreted by another as a termination of the business relationship, business cannot be conducted with the aid of computers. Uniformity of electronic language is only one of the many levels of uniformity needed. The next level of uniformity entails a more inherently legal type of communication; i.e., a formula that capsulizes a series of acts or statements endowed with legal significance. Take, for example, the seller's communication of an electronic commercial invoice in response to the buyer's electronic order of goods. Not all commercial invoices are alike. In some countries, like Brazil, invoices have doubled as assignable promises of payment, duplicatas. A duplicatamay contain more or may contain less than what is required from a commercial invoice by a buyer, a customs broker, or by customs officials. This means that if a Brazilian coffee exporter is required to submit a commercial invoice he will not be able to format his duplicataelectronically. From the standpoint of Brazilian law, then, a distinction will need to be drawn between a uniformly formatted invoice, and a duplicata. As more customs services around the world adopt computerized methods of processing import and export documents, the pressure for format uniformity will make it impossible to use formats other than those acceptable to or compatible with customs computers. Format uniformity, in turn, will

84. See, e.g., A.L.I. 4A, supra note 76, at § 4A-207, on the various new meanings of acceptance: execution of a payment order (§ 4A-207(1)); notification to the beneficiary of the receipt of the order(§ 4A-207(2)(a)); beneficiary's bank receipt of the entire amount of the payment order(§ 4A-207(2)(b)); the opening of the next funds transfer business day of the bank following the payment date of the order (§ 4A-207(2)(c)). Arizona Journalof Internationaland ComparativeLaw [Vol. 8 force the attainment of a an additional level of legal complexity in the required uniformity. As in the case of the Brazilian duplicata, a modicum of underlying substantive and procedural law uniformity will be required for the format uniformity to be effective. Certain representations will be required for an electronic message to be deemed the equivalent of an invoice, and certain possessory rights will be required from the message purporting to be the sea or air waybill. Eventually, those electronic messages which are most consistent with their stereotypical or archetypal models will displace those messages that are only superficially consistent therewith. Consider, for example, the fate of an electronic bill of lading that does not empower the holder to obtain possession of the goods versus one that does. Predict- ably, the marketplace will replace the former by the latter. Nor is it difficult to predict that conceptualization will play a central role in the brave new world of electronic trade. After all, the Romans taught us that legal concepts are nothing more than synthetic formulations of rules and principles of interpretation, based upon stereotypical and archetypal behavior. Thus, the concepts that can best synthesize such behavior are the most likely to be used as the uniform electronic commands that will, in turn, trigger business, as well as legally responsive behavior.

D. Title, Possession, and the Personal Versus Real PropertyDichotomy

The principle that commercial law title is marketplace trusted possession is showing strains from excessive application. Paradoxically, the more this principle is applied, the more it needs assistance from its once rejected progenitor, the principle that ownership is historical, or "once an owner, always an owner." 85 The twentieth century has witnessed an extraordinary proliferation of possessory interests over assets that yield reliable income. In order to preserve a semblance of order for the multitudinous transfers and liens, commercial law has increasingly turned toward recordation, both as a method to certify title and as a method to provide notice to bona fide purchasers and creditors. When the objects involved are costly and the volume of transaction is high, as with motor vehicles and airplanes, commercial law has relied upon the principle of historical ownership, and its sequel of certification of title. Recent attempts to centralize notice on oil shipment bills of lading have also relied upon recordation, followed by the issuance of an electronic number or code to enable subsequent negotiation of the bill and final presentation at the port of discharge. This increased reliance on recording, certificates of title, and right of transfer certification has been hampered by the age old personal-real property dichotomy.

85. For a contrast between these two principles, see Kozolchyk, Transfer, supra note 2, at 1462-69. 1991] Commercial Law at the End of the 20th Century

This dichotomy seems to exist in large measure because of the sharp disparity of the respective market values of real and personal property.86 For many centuries real property was assumed to possess significant value whereas personal property was assumed to be insignificant, if not "vile" (res movilis res vilis). Accordingly, "the accessories" (movables or fixtures) were supposed to follow and be absorbed by "the principal" (the immovable or real property). This should no longer be the case. The increased reliance on paper or electronic data (personal property) that confers ownership or possessory rights over real or personal property in order to convey or encumber assets has "mobilized" real property and "unvilified" moveable or personal property. Many, if not most, of the valuable assets traded in the global financial market are by traditional civil law definitions of property no longer real, but moveable or personal property. After all, is possession of all the stock of a corporation, whose only asset is Blackacre, less valuable than the possession of Blackacre itself. Are patent rights to the original transistor less valuable than the building and fixtures that first manufactured the transistors. Moreover, isn't a perfected security interest on that patent recorded in "registry A" more economically and legally significant than a recorded real estate mortgage on the building and fixtures recorded in "registry B." This dichotomy coupled with the separate systems of recordation and priorities for real estate and personal property transactions has become an obstacle to the operation of important contemporary institutions such as floating liens, fixtures financing, and more recently, financial leasing.8 7 It has also made the development of internationally uniform law and language much more difficult. A floating lien lender, or financial lessor of fixtures in Country A cannot feel protected by his perfected security interest on equipment, fixtures, inventory, or proceeds, when a real estate mortgage, in Country B, is granted priority on the equipment or fixtures even though it is recorded later.88 In some civil law countries the earlier real estate mortgage subsumes a subsequent fixture filing, whereas in the United States under U.C.C. § 9-313(4) a perfected security interest in fixtures is superior to an earlier real estate mortgage. Far more important than the immobility of property for commercial recording purposes is the property's market value, the speed with which it is likely to be transferred or mortgaged, its identifiability, and the commercial or consumer status of the likely purchasers or secured creditors. The twenty-first century commercial registry will have to be a registry of rights in real property, as well as in personal property and fixtures. 86. Id. at 1479-82. 87. On international financial leasing, see R. Cuming, Legal Regulation ofInternational Financial Leasing: The 1988 Ottawa Convention, 7 ARIz J. INT'L & CoMP. L. 39 (1989). 88. See, the French Civil Code of 1800 at arts. 2114, and 517-526; these articles set forth the absorbing nature of real estate mortgages over fixtures. See also the Spanish Civil Code of 1889 at arts. 334, 1874, and 1877. These two formulations are among the most influential in the civil law world. Arizona Journal of Internationaland ComparativeLaw [Vol. 8

VI. CONCLUSION

For more than a century, commercial law has learned to adjust to the inherent conflict among its guiding principles. In large measure, the adjustment has been accomplished by resort to broad civilizing or equitable principles that forbid the abuse of rights and encourage contracting parties' concern for commercial and non-commercial third parties. The unprece- dented challenge to commercial law now lies in the need to attain global uniformity. The pressures for an internationally uniform commercial law are not only building from below, at the user or usage of trade level, but also from above, at the central banking regulatory level. The Risk-Based Capital Report89 of the Basle (Cooke) Committee on Banking Regulation and Regulatory Practices was issued in final form in 1988. The Basle effort was, in large measure, prompted by the international debt crisis that has plagued developing nations and financial markets alike for almost a decade. It recognizes the extraordinary degree of interdepend- ence amongst these financial markets and the need for banking soundness. It aims to create a "level global playing field" so that no nation or major money center can take advantage of banking regulations (or lack of regulations) that would enable its banks to compete unfairly with those whose capital soundness is more stringently regulated. The agreement has been endorsed in principle by the "Group of Ten"9 central-bank Governors; this group represents the most active and influential financial centers in the world. The Basle regulation focuses on the need for "regulatory convergence" on minimum levels of capital for internationally active banks in the ten jurisdictions involved. Adequacy of bank capital is measured by determining the type and amount of contribution present in the capitalization; i.e., core capital or basic equity (including fully paid common stock, and non-cumulative perpetual preferred stock, but not cumulative preferred stock); supple- mentary capital (including undisclosed and revaluation reserves); general loan loss reserves; and hybrid debt capital instruments.91 Additional significant measures of bank capital soundness are risk adjusted ratios. Accordingly, capital adequacy is also measured against different categories of risks found to be present in various categories of transactions. Risk adjustment takes into account not only the intrinsic risks but also the risk attendant to "country transfer risks. '92 After being catego-

89. See LETEROFCEDrr UPDATE, Sept. 1988, at 17 for the final version of the Basle text [hereinafter BASt]. 90. The group of ten countries consists of Belgium, Canada, the Federal Republic of Germany, France, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States. 91. BASLE, supra note 89, § 1 at 19 (The Constituents of Capital). 92. Id. at 19-21. 19911 CommercialLaw at the End of the 20th Century rized, each asset is given a certain risk factor. There are five categories of transactional risk, partially summarized in the following enumeration: a) loan substitutes such as "general guarantees of indebtedness," bank acceptances, guarantees and standby letters of credit are assigned a 100% credit risk conversion factor; b) contingency related transactions such as performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions, are given a 50% credit risk conversion factor; c) short term, self liquidating trade related contingent liabilities such as documentary credits collateralized by underlying shipments are given a 20% credit risk conversion factor, d) revocable or cancellable short term commitments is given a "nil weight;" [and] e) interest and exchange related items such as "swaps, options and futures" are subject to a dual risk conversion 93 factor. The preceding partial listing illustrates dramatically the degree of uniformity of legal taxonomy already present among the top ten central banking organizations in the world and their public and private constituents. It also reminds us that the success of the regulatory measures will depend upon the true correspondence between labels and reality, or upon the uniformity of legal consequences ascribed to each regulatory category. It will simply not do for "Central Bank A" to claim that a certain type of security labelled "preferred stock" should be counted as net capital, when in effect, it is a standby letter of credit counted as an off balance sheet liability with a 100% risk weight. There cannot be a convergence even at the most basic level unless there is agreement as to what is equity capital, and what is debt. Yet, this is only the beginning. Once there is agreement on what is capital and what is debt, risk weighing requires a common understanding of the legal implications of each category. For example, the difference between the 100% risk factor assigned to bankers' acceptances and the 50% risk assigned to performance bonds, presupposes a clear and uniform understanding of the law of contingencies, or more technically of the conditionality of promises, their abstraction or independence from underlying transactions, and vulner- ability to underlying contract defenses and remedies such as attachments and injunctions. As the central banker is forced to ask "is this truly a banker's acceptance, or a performance bond," the bankers, customers, and their attorneys will need to rely on Basle inspired uniform concepts, rules and 94 principles of interpretation.

93. ld. at 20-21. 94. To a considerable degree, uniformity of judicial interpretation of the validity of standby letters of credit in the United States has been inspired in the regulatory definition of safety and soundness of standby practices provided by the Office of the Comptroller of the Currency. See Interpretive Ruling 7.7016(d), Comptroller of the Currency (May 1977) for its emphasis on the bank's duty as an examiner of documents and not as a judge of factual or legal compliance. On this regulation, see Kozolchyk, The Emerging Law ofStandby Letters of Credit and Bank Guarantees,24 ARm L. REv. 319, 334 (1982). Arizona Journal ofInternational and ComparativeLaw [Vol. 8

Similar consequences will undoubtedly flow from the 1992 European Community regulatory convergence. The regulation of publicly traded securities is already being treated as a prime candidate for regional, and global regulatory convergence. 95 Regulatory convergence of financial marketplaces, therefore, is only the iceberg beneath which lies a growing spectrum of substantive and procedural, commercial law convergence. Of all the challenges posed by 1992 and beyond to commercial law, none is as pressing as that of international uniformity. Genuine substantive and procedural law uniformity requires the highest level of international comparative legal scholarship. It is the type of scholarship that blends the best of great legal traditions - a "geometric" conceptualism that made possible the techniques for legislating on and codifying commercial law, with an empiri- cism and casuistry that maximized the juristic use of stereotypical and archetypal information.

95. Testimony of Mr. Robert Hormats, of Goldman, Sachs & Co. at the United States Senate Hearing on Securities Market, before the Senate Committee on Securities Markets, June 16, 1989, carried on television by C-Span.