Interpretation of EU Law

Interpretation of EU Law primary law, such as the creation of a common market. Considering the spirit and purpose of a Hannes Rösler 1. Subject and purpose provision as well as the comprehensive pro- gramme of the European Community can be Neither primary nor secondary EU law contains problematic when different purposes (eg free interpretation rules similar to those in Arts 7–9 market and protection interests) conflict. This CISG, Arts 5:101–5:107 PECL, Arts 4.1–4.8 applies to those directives that serve the overall UNIDROIT PICC and Arts 31–33 VCLT (→ inter- interest of achieving the internal market but also pretation of international uniform law). Instead, address issues such as employee or consumer the → European Court of Justice (ECJ) was protection. created as an independent and supranational On the whole, the judgments often reflect effet court with exclusive jurisdiction over the inter- utile. The practical effectiveness of EU law fre- pretation of European Community and Union quently seems to be the main objective of the law (Art 220 EC, now largely replaced by Art 19 court in its interpretation and development of TEU). This non-political body promotes unity, law (→ principle of effectiveness). This approach continuity and acceptance of EU law. The ECJ can be witnessed in the extending of employ- with its power to provide authoritative inter- ment protection to part-time workers by classi- pretation became a ‘motor of integration’ en- fying them as employees (ECJ Case 53/81 – Levin suring and extending the primacy of EU law. [1982] ECR 1035, para 15). The ECJ mainly uses the grammatical, sys- There is very little reference to → comparative tematic and purposive methods of interpretation. law in the ECJ’s judgments. References to the le- Von Savigny’s fourth method, the historical-po- gal systems of Member States can more often be litical approach, is rarely employed. The reasons found in the opinions of the Advocate General. for this are the often complex and incompletely The lack of references to comparative law in the published legislative history as well as the fact ECJ’s judgments may appear somewhat surpris- that European legislation often represents the ing given that directives are often based on com- result of compromises. However, the EU legisla- parative law. It also seems natural to assume that ture does list recitals which the ECJ employs in its a panel consisting of judges from different legal purpose-oriented interpretation. On the other systems would employ this tool. However, com- hand the ECJ refuses to consider the minutes of parative considerations are not explicitly incor- the Commission, the Council or Parliament that porated in the judgments to prevent the EU’s are not reflected in the legislation (ECJ Case C- autonomous legal texts from being undermined 404/06 – Quelle [2008] ECR I-2685, para 32). by references to particular legal systems. First and foremost, the ECJ uses the literal Nonetheless, comparative law has a role to method. In particular, it uses coordinate versions play in filling gaps and developing general prin- of texts in the different official languages. This ciples. For example, the ECJ explained state li- shows the influence of the French Conseil d’Etat ability with reference to general legal principles, which also explains the concise and deductive existing in international law and found in all the style of reasoning employed by the ECJ. This ap- Member States (ECJ Joined Cases C-46/93 and C- proach limits the Court’s ability to make a con- 48/93 – Brasserie du pêcheur [1996] ECR I-1029, tribution to legal theory and to the systematic paras 29 ff). Furthermore, Art 11(3) TEU/6(2) EU development of European private law. The apo- invites comparative references in providing that dictic and self-referential nature of the judg- the common constitutional traditions of the ments to some extent follows from the nature of Member States are a source of fundamental the Court as an international panel of judges that rights (see also Art 340(2) TFEU). has to reconcile different legal cultures and lan- A distinctive feature of EU law is the fact that it guages. It follows from this that an approach fo- is perceived of as an autonomous body of law. cused on the interpretation of the grammatical This is similar to the other Conventions over context and the analysis of common parlance which the ECJ also has jurisdiction. In order for within (autonomous) EU law must necessarily be the rules and concepts of European law to be im- limited. plemented consistently, their application has to This is why, crucially, the ECJ often employs be independent of national preconceptions. The purposive considerations, an approach not only Member States also have an obligation to uphold used for resolving disputes caused by diverging the autonomy of EU law. However, in the main it versions of texts. This method is also suggested is the ECJ that creates interpretational guidelines by the functional perspective chosen by the EU, having legally binding force (→ precedent, rule trying to achieve the goals determined in the of). For this the ECJ depends on the willingness

Hannes Rösler 979 Interpretation of EU Law and case-based obligation on Member State can have a ‘vertical’ direct effect for the state. courts to refer cases according to Art 267 TFEU/ However, a direct ‘horizontal’ effect, ie between 234 EC. private parties, does not exist (ECJ Joined Cases C-397/01 to C-403/01 – Pfeiffer [2004] ECR 2. Interpretation of primary law I-8835, para 108). This rule is based on the sys- Regarding law with constitutional status, the ECJ tematic reasoning that a horizontal effect of di- is willing to practice judicial activism. Judges are rectives would override the distinction between no longer la bouche de la loi as demanded by directives and regulations set out in the EC Montesquieu, but exceed the possible literal Treaty and now in the TFEU (ECJ Case C-91/92 – meaning and thus cross the line to the further Faccini Dori [1994] ECR I-3325, para 24). development of law (→ judge-made law). No- where—not in the interpretation of EU law nor in 3. Rules of interpretation for national courts other legal systems—is this line drawn clearly. These legal developments on the constitutional However, a distinction should be drawn between level affect European private law. Besides the interpretation and innovation since the judicial relevance of the state liability doctrine for the law development of law demands an unintended of torts, this is also true for the obligation of na- regulatory gap and thus a higher effort of rea- tional courts to interpret national law in accor- soning. According to Art 220(1) EC, which is now dance with European law. Acting as a kind of mainly replaced by Art 19(1)(I) TEU, the role of meta-rule, this influences and controls the four the judges of the ECJ is to develop EU law. This is above-mentioned methods of interpretation and justified on the basis that the Court has to ‘en- does so in a way that is similar to the interpreta- sure that in interpretation and application of this tion in conformity with the constitution (verfas- Treaty the law is observed’ and the fact that the sungskonforme Auslegung) known to German ‘law’ transcends the rules expressly stipulated in law. Furthermore, the obligation of the Member the treaties. States to interpret law in accordance with Euro- The most important legal principles devel- pean law includes the compatibility with primary oped through this process by the ECJ to comple- law and the conformity with secondary law. In ment the written primary law are the primacy particular, the Member States’ courts are obliged (ECJ Case 26/62 – Van Gend & Loos [1963] ECR 3) to interpret their laws in a way that conforms to and the direct effect of EU law (ECJ Case 6/64 – the directives. This has to be done by applying Costa/E.N.E.L. [1964] ECR 1141). Also significant their own national methods of interpretation are the application of fundamental rights in the (ECJ Joined Cases C-397/01 to C-403/01 – Pfeiffer EU (ECJ Case 29/69 – Stauder/Stadt Ulm [1969] [2004] ECR I-8835, para 116). ECR 419), the specification of fundamental free- Accordingly, the national law has to be inter- doms (ECJ Case 120/78 – Cassis de Dijon [1979] preted on the basis of the wording and the pur- ECR 649), state liability (ECJ Joined Cases C-6/90 pose of the directive in question as far as feasible and C-9/90 – Francovich [1991] ECR I-5357) and under national rules (ECJ Case C-106/89 – Mar- the extent of EU citizenship (ECJ Case C-184/99 – leasing [1990] ECR I-4135, para 8; also ECJ Grzelczyk [2001] ECR I-6193). Case 14/83 – von Colson and Kamann [1984] By developing these principles the Court is ECR 1891, para 28). Such interpretation in accor- creating and specifying those elements of the dance with a directive can directly affect and, rule of law required by a fully-fledged legal sys- therefore, disadvantage private individuals. This tem. Ultimately, according to the conception of leads, in effect, to a horizontal effect which is the ECJ, European law is not part of international otherwise excluded. The more generously this law, which is characterized by a strong consid- way of interpretation is permitted, the more the eration of national sovereignty. Although con- actual scope of state liability for legislative injus- cluded by way of an international agreement, the tice is minimized (cf, however, for a mistake by E(E)C Treaty is—in contrast to more common the judiciary ECJ Case C-224/01 – Köbler [2003] international treaties—the constitutional charter ECR I-10239; ECJ Case C-173/03 – Traghetti del of an autonomous community based on the rule Mediterraneo [2006] ECR I-5177). of law (ECJ Opinion 1/91 – EEA I [1991] ECR I- The obligation to interpret national law in 6079, para 21). This is why the ECJ expounded in conformity with directives, which commences Francovich that state liability is inherent in the upon expiration of the time limit for implemen- EU legal system. tation (ECJ Case C-456/9 – Centrosteel [2000] ECR Case law regarding the effects of → directives I-6007, para 17), is a consequence of the obliga- is also fundamental. For example, once the time tion to general loyalty under Art 4 TEU as the limit for implementation has expired, a directive main replacement for Art 10 EC, Art 15(6)(I)(d)

980 Hannes Rösler Interpretation of EU Law

TEU as the main replacement for Art 4(3) EU, TFEU/234 EC and thereby ease the strain on its and the obligation to a precise transposition of (adjudicative) capacity. directives under Art 288 TFEU/249(3) EC. Be- cause it allows the national court to guarantee b) Dealing with catch-all clauses full effect of European law within its jurisdiction, The desire to ease the strain on its capacity also this obligation is also ‘inherent’ in the treaties explains ECJ Case C-237/02 – Freiburger Kom- (see ECJ Joined Cases C-397/01 to C-403/01 – munalbauten [2004] ECR I-3403 which author- Pfeiffer [2004] ECR I-8835, para 114). izes the national court to decide whether a pre- The primacy of an interpretation and devel- formulated contractual term is unfair in terms of opment of law in accordance with European law, Art 3(1) Dir 93/13. On the other hand, ECJ Joined which applies to the entire national law, is lim- Cases C-240/98 to 244/98 – Océano Grupo [2000] ited by the allocation of rights and duties be- ECR I-4941 and ECJ Case C-473/00 – Cofidis tween legislature and judiciary. Therefore, the [2002] ECR I-10875 suggested a deeper review of obligation to interpret in conformity with a di- contractual terms by the ECJ itself. However, in rective must not lead to a contra legem interpre- Océano Grupo the jurisdiction clause in question tation of a national norm (ECJ Case C-212/04 – challenged the effectiveness of legal protection Adeneler [2006] ECR I-6057, para 110). In such a by the courts regardless of the type of contract. case, the national courts have to refer the norm This is why the ECJ was able to affirm the unfair- for examination to the ECJ or declare it inappli- ness of the contract clause. In Cofidis, the ECJ cable. (The underlying principle of separation of then declared a limitation period in consumer powers also applies at the EU level. The ECJ can- credit law, as contained in the French Code de la not ‘cure’ Union law that is contrary to primary consummation, to be incompatible with Dir 93/ law by way of interpretation, but has to declare it 13, due to the Union law principle of effective- void in the course of an action for nullity or a ref- ness, although the directive itself does not stipu- erence for a preliminary ruling, ECJ Case 314/ late any periods of limitation or foreclosures. 85 – Foto-Frost [1987] ECR 4199 4230 ff). In order In Freiburger Kommunalbauten the Court to determine the appropriate understanding of a draws a distinction based on whether a contrac- directive, a national court does not only have to tual term can be found to be unfair without ex- observe the judgments of the ECJ, but also—as amining all contractual circumstances and with- far as possible—the interpretation practised in out evaluating the advantages and disadvantages other Member States. of the contractual term according to national law. In accordance with Freiburger Kommunalbauten 4. Range of interpretation concerning it is therefore for the ECJ to interpret the ‘general secondary law criteria’ that are used in the directive in order to define the concept of unfairness. The actual ex- a) General amination of contractual terms, however, is the With the exception of the decisions mentioned task of the national courts. Nevertheless, the above, where the ECJ is regularly practising con- answer to the question of how exactly to distin- stitutional activism, the Court usually oscillates guish this competence remains as unclear as the between effet utile orientation and judicial re- general criteria to be used in reviewing contrac- straint—this being the reason why the decisions tual terms for unfairness. Any social, political or are in practice often hard to predict. Examples of economic consequences are left out of consid- judicial activism in private law are the decisions eration by the ECJ because their observation in ECJ Case C-168/00 – Leitner [2002] ECR I-2631, would require examining the national particu- according to which Art 5 Package Travel Direc- larities. tive (Dir 90/314) also constitutes a claim for non- material damages and ECJ Case C-350/03 – c) Implementation by over-compliance— Schulte [2005] ECR I-9215 and ECJ Case C-229/ gold-plating 04 – Crailsheimer Volksbank [2005] ECR I-9273, Sometimes referred to as the practice of gold- dealing with consumer rights in a credit-financed plating, a particular problem is presented by the sales contract of real estate according to the transposition of directives beyond the minimal Doorstep Selling Directive (Dir 85/577). The ECJ, level of protection required in the case of mini- which first and foremost is a court in con- mum harmonization (→ consumers and con- stitutional and administrative matters, employs sumer protection law) or when the scope of a self-restraint in civil cases. Such an approach directive is extended in the course of national also allows the ECJ to limit the increasing num- transpositions. The modernization of the Ger- ber of preliminary rulings according to Art 267 man law of obligations led to many transposi-

Hannes Rösler 981 Interpretation of International Uniform Law tions of this nature in the field of consumer law. (2007) 71 RabelsZ 495; Katja Langenbucher, This raised the question of whether a divided ‘Europarechtliche Methodenlehre’ in Katja interpretation or a consistent one should be em- Langenbucher (ed), Europarechtliche Bezüge des ployed. Privatrechts (2nd edn, 2008) 1; Michael Schillig, In a case involving doorstep sales, the ‘The Interpretation of European Private Law in German Federal Supreme Court (BGH) decided the Light of Market Freedoms and EU Fun- in favour of the latter (BGH 9 April 2002, BGHZ damental Rights’ (2008) 15 MJ 285; Mattias 150, 248). In contrast to the directive, the Derlén, Multilingual Interpretation of European → Bürgerliches Gesetzbuch (BGB) does not re- Union Law (2009); Jürgen Basedow, ‘The Court quire the contract to be concluded in a typical of Justice and Private Law: Vacillations, General doorstep situation for a right of withdrawal to Principles and the Architecture of the European arise (§ 355 BGB). According to § 312(1)1 BGB, it Judiciary’ (2010) 18 ERPL 443. is sufficient that the contract was initiated in Hannes Rösler such a situation and concluded later. As the BGH points out, the need of coherence and the pre- vention of contradictory valuations are the argu- Interpretation of International ments against a divided interpretation. Uniform Law In ECJ Case C-3/04 – Poseidon Chartering Jan Asmus Bischoff [2006] ECR I-2505, the ECJ affirmed that a refer- 1. Fundamental issues of interpretation and ence to the ECJ is possible in this context. The application of international uniform law case concerned the implementation of the In order to promote greater legal certainty Commercial Agents Directive (Dir 86/653) in the through the international unification of laws, the → Burgerlijk Wetboek (BW). The ECJ argued that mere adoption of conventions on → uniform law it is in the Community interest to avoid diver- is insufficient. It is also necessary to ensure the gences and to interpret terms consistently. Fur- uniform application and interpretation of such thermore, the ECJ only controls the relevance of conventions by the courts. Although legal schol- questions referred to it for a preliminary ruling to ars and courts do not dispute the necessity of a limited extent. The ECJ will only reject an ap- uniform application and interpretation, legal plication when the requested interpretation is practice shows a clear homeward trend that is self-evidently not related to the reality or the likely to endanger the project of legal unification. subject matter of the initial lawsuit or when the Of the factors which are crucial to achieving question is of general or hypothetical nature. uniform application and interpretation, three This adds to an extensive influence of the ECJ on, stand out in particular. First, an autonomous for example, sales law (→ sale of consumer definition of legal terms is required that is not goods), which is implemented beyond the mini- overly infused with preconceptions imported mal level of obligation in the German civil code from the respective jurist’s domestic legal edu- (→ Bürgerliches Gesetzbuch (BGB)), and opens a cation. Secondly, the autonomous meaning of dialogue between the ECJ and the national terms ought not to be discerned through appli- courts—also concerning the interpretation of cation of domestic legal methodology. Instead, national law. the interpretation must be found through an international, autonomous methodology. Third- Literature. Joxerramon Bengoetxea, The Legal ly, international uniform application of conven- Reasoning of the European Court of Justice— tions requires that courts pay due regard to the Towards a European Jurisprudence (1993); findings of other countries’ courts. Article 7(1) of Reiner Schulze (ed), Auslegung europäischen the CISG, as well as similar provisions in other Privatrechts und angeglichenen Rechts (1999); conventions, oblige contracting states and their Claus-Wilhelm Canaris, ‘Die richtlinienkonforme courts to act accordingly. However, considering Auslegung und Rechtsfortbildung im System der foreign courts’ rulings not only requires the juristischen Methodenlehre’ in Festschrift Franz willingness of domestic courts to do so, but also Bydlinski (2002) 47; Jürgen Basedow, Nationale the access to foreign judgments and the ability to Justiz und Europäisches Privatrecht—Eine Ver- understand them. netzungsaufgabe (2003); Gil Carlos Rodríguez As to uniform private law conventions (re- Iglesias, The Court of Justice, Principles of EC garding the interpretation of Union law see: Law, Court Reform and Constitutional Adjudica- → interpretation of EU law), a dichotomy in the tion (2004) 15 EBLR 1115; Hannes Rösler, nature of these conventions affects the choice of ‘Auslegungsgrundsätze des Europäischen Ver- method of interpretation. While these conven- braucherprivatrechts in Theorie und Praxis’ tions aim at governing the legal relations be-

982 Jan Asmus Bischoff Interpretation of International Uniform Law tween private persons, the source of law is an the distinction between contractual treaties and international treaty, obliging contracting states to law-making treaties that sometimes appeared in harmonize their respective laws. Due to the lack international legal scholarship before the adop- of an authoritative international judiciary, it is tion of the VCLT. Instead, Art 31(1) VCLT gives left to domestic courts to rule on these conven- preference to the objective literal meaning over tions. Moreover, these courts must obey their re- the subjective will of the parties as evidenced in spective constitutional provisions on the rela- the travaux préparatoires. VCLT rules on inter- tionship of public international law and domestic pretation and resolution of conflicts between law, which may significantly influence the inter- conventions are thus not only pertinent and pretation of conventions. applicable, but also widely accepted by courts in practice. However, it must be admitted that the 2. Applicable rules of interpretation applicability of the VCLT to many different types Before the entry into force of the Vienna Con- of treaties necessitates a certain flexibility which vention on the Law of Treaties (VCLT), legal may give rise to conflicts with the interest in legal scholarship disagreed as to whether the public certainty. Nevertheless, the VCLT offers a frame- international law rules on the interpretation of work upon which legal scholarship can further treaties could apply to uniform law conventions. build. However, after the VCLT (which does not ex- clude uniform law conventions) entered into 3. Rules on the interpretation of treaties force, the applicability of Arts 31 to 33 of the and their application to uniform private VCLT is now beyond serious challenge. Even law conventions where the Vienna Convention itself is not appli- According to Art 31(1) VCLT, a treaty ‘shall be cable due to its limited temporal scope (see Art 4 interpreted in good faith in accordance with the VCLT), its rules on interpretation apply as part of ordinary meaning to be given to the terms of the customary international law, as the International treaty in their context and in the light of its object Court of Justice has confirmed (see Oil Platforms and purpose’. By adopting textual, contextual, (Islamic Republic of Iran v United States of Ame- and also purposive methods of construction, the rica), Preliminary Objection, Judgment [1996] ICJ VCLT takes an objective approach. As Art 32 803 para 23). VCLT makes clear, the original intent of the par- The criticism regarding the application of ties as reflected by the travaux préparatoires is public international law rules on the interpreta- only accepted as a supplementary means of in- tion of treaties is founded on the argument that terpretation when the methods under Art 31(1) these rules are addressed to legal relations be- leave the meaning ambiguous or obscure, or lead tween states, but not between individuals. The to a result which is manifestly absurd or unrea- former would be governed by the sovereign will sonable. of states, the latter by the → freedom of contract. The subjective and narrow interpretation ori- a) Textual interpretation ented at the sovereign will of states would en- The starting point for treaty interpretation ac- danger the aim of → uniform law conventions, ie cording to the Vienna Convention is the ordinary the creation of legal certainty in international meaning of the treaty’s terms at the time of its commercial relations. Instead, a more objective conclusion, unless the parties intended, per understanding would be required. The rules of Art 31(4) VCLT, that a special meaning should be public international law should apply only when given to a term. However, even the determina- interpreting the concluding provisions that are tion of the ordinary meaning can be difficult in directly aimed at states. the case of a multilingual convention. Though Even in the hypothetical absence of the VCLT, Art 33 VCLT provides for some rules on the this criticism must be emphatically rejected. treatment of multilingual treaties, it cannot en- Those who oppose VCLT’s application argue in tirely solve problems arising from the use of sev- favour of canons of construction yet to be devel- eral languages for the same text. If a treaty has oped by legal scholarship. It is questionable been authenticated in two or more languages, whether this method of interpretation de lege fer- the text in each language is equally official en- enda serves legal certainty. Though public inter- tailing a presumption that the terms of the treaty national law rules on interpretation are indeed have the same meaning in each. If, nevertheless, not suitable for contracts between private indi- ambiguities remain and cannot be eliminated by viduals, it is the uniform law treaty and not the adherence to Arts 31 and 32 VCLT, an interpreta- → contract whose interpretation is in question tion in the light of the treaty’s object and purpose here. In addition, the VCLT does not adhere to shall be decisive. Interpretation is by no means

Jan Asmus Bischoff 983 Interpretation of International Uniform Law limited to the lowest common denominator for ties, customary law and general principles of law, all authentic textual versions. In the case of di- but not non-binding restatements. This provision vergent meanings, it seems advisable to choose thus offers at least to a certain extent a means to the text that best corresponds with the treaty’s resolve terminological inconsistencies between object and purpose. Despite some argument in different conventions (see 4. below). As the ap- legal scholarship before the adoption of the plication of uniform law by courts is also part of Vienna Convention, Art 33 VCLT does not privi- the parties’ subsequent practice in the sense of lege the languages that were used in drafting. Art 31(3)(b) VCLT, a consistent application by Nevertheless, the drafting languages become courts can also become relevant for interpreta- determinative when the travaux préparatoires tion, obviating the need for recourse to provi- are consulted as a supplementary means of inter- sions like Art 7(1) CISG. Nonetheless, it cannot pretation. be denied that subsections (a) and (b) of Art However, these prescriptions must be con- 31(3) have a certain subjective connotation, fined as far as it concerns the application of uni- which is undesirable for the purpose of uniform form law conventions in domestic courts—their law since the boundary between interpretation of primary field of application. The practitioner in a treaty and its revision is likely to be blurred. general will neither be able nor competent to perform a comparison of all authenticated texts. c) Interpretation consistent with aims and Instead, he will rely on the authenticated text purposes version in his national language, or even a mere Interpretation in the light of the convention’s official translation supplied by his government if objective and purpose is of utmost importance no authenticated text version in this national with respect to uniform law conventions. Al- language exists, even though the latter has no though Art 31(1) VCLT only mentions the treaty binding value under international law. To the as a whole, it also applies to the treaty’s individ- extent that divergences exist between these texts, ual provisions that must be read in the light of domestic courts may—depending on the mode their relation to the whole treaty. According to of incorporation of international treaties into the International Law Commission, the purpose domestic law under their respective constitu- of a given rule must be found within the para- tions—be obliged to apply the official text version meters set by the plain meaning of its terms. De- in their respective national language, thereby spite this strict textual approach, some interna- breaching international law. Even where the tional legal scholars endorse a more extensive or constitution prescribes an interpretation of do- dynamic interpretation, especially for law-mak- mestic law in the light of international law, tex- ing treaties (and therefore, inter alia, uniform law tual divergences will not be evident to the judge. conventions), that can be similarly found in Consequently it remains for legal scholarship to European Union law. But examples also exist in assist and clarify the interpretation of uniform case decisions, like the famous Fothergill v Mon- law conventions. arch Airlines judgment (House of Lords [1980] 2 All ER 696) in which the court rejected on the ba- b) Contextual interpretation sis of purposive considerations a possible result Article 31(2) and (3) of the VCLT further clarifies under a strict textual construction. Indeed—con- the meaning of ‘context’ as mentioned in para 1 sidering the difficulty of the revision of uniform of Art 31. In addition to the text of the treaty, in- instruments once they are adopted—a more dy- cluding its preamble and annexes, para 2 addi- namic interpretation would facilitate constant tionally incorporates interpretative agreements adjustment to changing economic needs and so- or declarations made by one or more state par- cial values. But one should not forget that one ties. When considering interpretive declarations would at the same time open up a wide discre- by the parties, it is necessary, however, to bear in tion for judges, thus endangering the uniformity mind the thin line separating interpretive decla- of treaty application. In addition, the adjustment rations and reservations. Paragraph 3 enlarges to existing needs and values would face difficul- the scope of materials to be used in contextual ties if the uniform instrument itself only reflects a interpretation to a) specific (even informal) minimum consensus among contracting states. agreements the parties concluded subsequently Nevertheless, whether the wording is unambigu- with regard to the treaty, b) to the subsequent ous or not is a question of degree and not to be practice in the application of the treaty, and assessed by a simple ‘yes’ or ‘no’. Thus, whether c) any relevant rules of international law appli- a purposive argument can outweigh a reasonably cable in the relations between the parties. Rules precise plain meaning depends on the impor- of international law in this sense comprise trea- tance of the particular objective at issue.

984 Jan Asmus Bischoff Interpretation of International Uniform Law d) Historical interpretation argued that comparative legal analysis helps to Although Art 32 VCLT stipulates that preparatory fix the reading of treaty provisions in the varying works and the circumstances of the treaty’s con- contexts of different domestic legal systems. clusion are only a supplementary means of Moreover, comparative analysis helps to identify, interpretation, recourse to the travaux prépara- among all the possible solutions in domestic toires actually plays an important role for the legal systems, the ‘best’ one or at least a solution interpretation of uniform law conventions. This that is common, and thus acceptable, to all con- paradox, however, cannot be gainsaid insofar as tracting states. In general, extensive comparative the notion of ambiguity or obscurity in Art 32(a) legal reports are submitted during the drafting VCLT is itself quite ambiguous. Compared to process of a convention, forming a part of the domestic legislative materials like records of par- travaux préparatoires in the sense of Art 32 liamentary debates, whose interpretive value is VCLT. Moreover, by its functional character, doubtful at times, the quality of preparatory legal comparison helps to discern the underlying works published by the drafting organization (social) conflict that the convention’s rule ad- generally gives a better clue as to the ‘correct’ dresses, thereby elucidating its object and pur- understanding of the convention. Nonetheless, a pose. But even in the case of identical wording, textual interpretation that is buttressed by con- the necessity of an autonomous interpretation textual and purposive arguments can hardly be necessarily excludes automatically transferring rebutted by invocation of the parties’ original findings regarding national law to uniform law intent as reflected in the travaux préparatoires. conventions. Although comparative studies are Even if recourse is made to the preparatory pa- therefore somewhat useful in the interpretive pers for an interpretation based on historical process, one should not forget that courts are considerations, the result must be, to some ex- generally not in a position to base their judg- tent, based on an interpretation consistent with ments on extensive comparative studies. Art 31 VCLT. Legal maxims, like lex specialis or—in the case of subsequent revision—lex posterior, can apply 4. Additional methods and maxims when interpreting the same convention. Other of interpretation legal maxims customary to some domestic legal International legal scholarship has suggested systems, like expressio unius, argumentum e con- additional means of interpretation such as com- trario, as well as general principles of logic are in parative interpretation for uniform law conven- conformity with the Vienna Convention. How- tions. Though the Vienna Convention does not ever, as to the former it is imperative to recall that refer to them, they are not necessarily incom- they lack the mandatory character as found in patible. Moreover, they can be used at least to a some domestic legal systems. Their role is merely certain extent within the frame set by the above- limited to arguments that can be referenced in mentioned canons. systematic and purposive reasoning. The appli- Several authors call for an interpretation that cability of public international legal maxims, like considers the use of terms in the context of the in dubio pro mitius, or contra proferentem, to respective convention as well as in other similar law-making treaties, and thus uniform law con- conventions. The terminology in a whole field of ventions, remains contested insofar as their ex- uniform private law would be thereby harmo- istence is accepted at all. nized, thus promoting the uniformity of applica- 5. Gap-filling and analogical reasoning tion. Article 31(3)(c) VCLT is amenable to this approach, as long as the resulting interpretation While more recent conventions provide rules for is buttressed by context as well as object and filling gaps within the respective conventions purpose. However, this approach would require themselves (see Art 7(2) CISG), the extent to that all contracting states are also parties to the which gap-filling is permissible as to older con- other conventions containing the same termi- ventions remains unsettled. Some authors reject nology. If the drafters intended to refer to the the use of analogies in public international law terminology of other conventions, this intent founded upon sovereignty. However, one might may be considered in the light of a historical wonder whether arguments based on the sover- interpretation to the extent permitted by Art 32 eign will of states are pertinent insofar as they VCLT. concern uniform law conventions. In general, ef- It remains unsettled in legal writing the extent forts to revise unsatisfactory conventions fail not to which → comparative law may itself furnish a because of the contentious positions of the con- separate canon of interpretation. It has been tracting parties, but rather because of a lack of interest on the part of their respective domestic

Jan Asmus Bischoff 985 Interpretation of Statutes, History of policymakers. Otherwise, fundamental notions Ulf Linderfalk, On the Interpretation of Treaties of justice, as well as the guarantee of uniform (2007); René David, ‘The International Unifi- autonomous interpretation (instead of recourse cation of Private Law’ in IECL II (1971) ch 5, to the respective applicable domestic law) speak paras 247 ff; Franco Ferrari, ‘Interpretation of the in favour of gap-filling by the judge. Despite its Convention and Gap-filling: Article 7’ in Franco merits, the admissibility of analogical reasoning Ferrari, Harry Flechtner and Ronald A Brand varies widely among domestic legal systems. (eds), The Draft UNCITRAL Digest and Beyond Therefore, it remains unclear as to which gaps in (2004) 138; Michael P Van Alstine, ‘Dynamic international conventions are amenable to the Treaty Interpretation’ (1998) 146 University of judicial use of analogical reasoning. Pennsylvania Law Review 687; Jürgen Basedow, ‘Uniform Private Law Conventions and the Law 6. Conflict of conventions of Treaties’ [2006] Uniform Law Review 731. As a large number of conventions govern similar Jan Asmus Bischoff subjects, there is potential for conflict among these conventions. When conflicts arise, they diminish legal certainty, thereby endangering the Interpretation of Statutes, History of whole project of legal unification. The Vienna Stefan Vogenauer Convention offers limited help. Insofar as the 1. History of statutory interpretation and its parties do not themselves provide for a solution importance for European Private Law (eg by including compatibility clauses), the lex European private law, like any other modern law, posterior principle as enshrined in Art 30(2) and is laid down in written legal texts. Each of these (3) VCLT will govern the relationship. Neverthe- rules must be interpreted in order to decide less, ‘mutual rights and obligations’ under the whether it applies to a given set of facts. The older treaty remain valid in relation to states that interpretative problems arising with regard to did not join the more recent treaty. As far as they European private law primarily concern the concern uniform law conventions that are not → interpretation of EU law and the → interpreta- based on strict reciprocity, conflicting obligations tion of international uniform law. They also in- must co-exist. If a state becomes a party to two clude the interpretation of national law in areas incompatible uniform law conventions, it will that have been harmonized by the implementa- necessarily breach its obligations under public tion of → directives. By contrast, traditional pub- international law if this conflict cannot be solved lic international law treaties (which are inter- by interpretation. In that event, the judge himself preted according to principles that have a certain must decide which convention to apply and overlap with those applied in the → interpreta- which to ignore. Legal scholarship has tried to tion of contracts in private law) are hardly of develop criteria to address this issue: (1) the relevance in European private law. more efficient convention should prevail over the So far, there is no consensus on the rules and less efficient; and (2) the more specific conven- principles of interpretation of European private tion should prevail over the more general. Al- law. One of the most pressing tasks of legal though this question remains unsettled, it is scholarship is therefore to develop a European largely accepted that substantive uniform law legal method. This must include, inter alia, com- conventions take priority over conventions on mon categories, rules and principles of inter- the conflict of laws. Purposive considerations pretation, whilst taking into account national and Art 31(3)(c) VCLT support this result. methods—which themselves are part of a long and common European tradition that left its Literature. International Law Commission, ‘Re- mark on the interpretative methods of modern port of the International Law Commission on its EU law and international uniform law. eighteenth session, UN Doc A/6309/Rev 1’ [1966- Tapping this tradition can help to find meth- II] Yearbook of the International Law Commis- odological solutions that have a chance of being sion 217; FA Mann, ‘Uniform Statutes in English generally accepted today and in the future. It lets Law’ (1983) 99 LQR 377; Rudolf Bernhardt, us see the existing commonalities of national ‘Interpretation in International Law’ in Rudolf legal methods. Many commonly accepted rules Bernhardt (ed), Encyclopedia of Public Inter- and maxims of statutory interpretation can be national Law, vol II (1995) 1418; Christophe traced back to the Middle Ages and sometimes Bernasconi, ‘Rules of Interpretation Applicable even to ancient → Roman law. This includes fea- to Private International Law Treaties: An tures which had fallen into disuse at some stage Overview’ in Wybo Heere (ed), International Law of legal history but that are again of importance and the Hague’s 750th Anniversary (1999) 139; in EU law, like the notion of taking into account

986 Stefan Vogenauer Interpretation of Statutes, History of the effet utile of a provision. Further maxims decades or so, possibly inspired by the ongoing which are prima facie innovative have at least legal developments in Europe. structurally analogous precursors in legal history, eg the ‘doctrine of indirect effect’ (ie the interpre- 2. Interpretation of legal rules in Roman law tation of national law in conformity with EU law) We do not know much about the interpretation or the frequently suggested maxim, according to of legal texts in Greek antiquity. By contrast, the which European consumer law (→ consumers numerous provisions on interpretation in the and consumer protection law) must be inter- → Corpus Juris Civilis give an indication as to preted in dubio pro consumatore. how the matter was dealt with in ancient In a similar vein, the consistent rejection of → Roman law. The compilers of Justinian’s code certain methodological features across legal sys- slotted most of the relevant fragments into four tems frequently the result of shared historical titles of the codification, thereby mostly ignoring experiences that hold at least limited lessons for their provenance and their original context. The the future. Since the days of the → Corpus Juris respective titles are C. 14,1 (De legibus et consti- Civilis, for example, legislatures have often tried tutionibus principum et edictis), D. 1,3 (De legibus to ensure that the courts were not to decide cases senatusque consultis et longa consuetudine) and that were not clearly covered by the wording of the two final titles of the Digest (D. 50,16 and a legislative provision. They did so by enacting 50,17). (De verborum significatione) contains prohibitions on interpretation or, alternatively, altogether 246 fragments concerning the ques- obligations to refer such cases to the legislative tion of how to define certain legal terms and authorities. The practicability of such models phrases—a catalogue of statutory definitions of always proved to be limited in the day-to-day concepts such as ‘dispute’, ‘parents’, ‘heirs’, business of lawyers, and it would be unwise to ‘debtor’, ‘insolvent’ or ‘gross culpability’ that was ignore such experiences in establishing a Euro- to be used in the interpretation of statutes, pean legal method. contracts and wills. A host of more general The historical perspective not only assists in interpretative maxims can be found in the title uncovering similarities but also explains the dif- De diversis regulis iuris antiqui (D. 50,17) that ferences between legal systems and helps to as- consists of 211 regulae iuris. It is not clear what sess them. Structural divergences in national precise function these ‘rules’ had in Roman law, legal methods (such as variations in the taxon- although it may be assumed that they served as a omy and classification of interpretative rules) can convenient shorthand for older legal doctrines be ascribed to varying national developments of and, as such, were relevant for legal practice. a model that was commonly accepted in Europe Neither the classical jurists nor Justinian’s up to the late 18th century. Specific domestic compilers developed a comprehensive theory of rules of methodology can also be explained by legal interpretation. They did not even make a reference to particular historical circumstances. strict distinction between the rules for the con- A well-known example is the traditional reluc- struction of → wills, contracts (→ interpretation tance of English law to take into account parlia- of contracts) and pieces of legislation. Various mentary debates in the interpretation of statutes, fragments of the Corpus Juris spelt out rules that or the French particularity of giving the Foreign contradicted each other. This was, for example, Office exclusive interpretative competence in the the case with two sources that proved to construction of international treaties. A historical be extremely influential throughout European perspective helps to understand the origin of legal history. According to the lex Scire leges such rules in the context of the national meth- (D. 1,3,17), ‘knowing statutes’ does not mean ‘to odological tradition and legal culture. Con- cling to their wording’. It is rather their reason versely, it also shows that many of these parti- and purpose that is decisive. By contrast, the lex cularities do not necessarily make sense, or at Ille aut ille (D. 32,25,1), a fragment on the inter- least are not compelling, in the context of Euro- pretation of wills, provided that in the case of a pean (private) law. clearly and unambiguously worded legal text the Although the history of legal method is of intention of the author of the text was irrelevant: great relevance to the interpretation of European Cum in verbis nulla ambiguitas est, non debet private law, it is a relatively young branch of the admitti voluntatis quaestio. discipline of legal history. While there have long Today we assume that many of the types of been some detailed examinations of individual argument used in statutory interpretation in aspects of the topic, major studies that cover Roman law were influenced by ‘the theory of various periods of history across legal systems stasis’ of Greek rhetoric. A common stasis (‘point have only been undertaken in the past two at issue’) corresponding to the two fragments just

Stefan Vogenauer 987 Interpretation of Statutes, History of cited concerns the relationship between the iuris. Most of the regulae spelt out therein had a written word and the intention or ‘will’ of the counterpart in D. 50,17; roughly a fifth corre- legislator or the legislative text, ie between verba sponded verbatim to a fragment in the Digest. and voluntas or scriptum and sententia. Many of these were maxims of interpretation that In the centuries following the fall of the were included in the widely used collections of Roman Empire, the somewhat incomprehensive legal brocards. Canon lawyers were particularly and unsystematic interpretative maxims from the concerned with promoting the requirements of Codex and the Digest were forgotten. Neither the aequitas (equity) in interpreting statutes. Until early medieval folk laws nor the early canon law- the 16th century the Liber Sextus played an im- yers of the 7th and the 9th centuries, such as portant role in the first year syllabus of many Isidor of Seville and Hincmar of Reims, con- European law faculties, equalled only by the In- cerned themselves with statutory interpretation. stitutes and the two concluding titles of the Up to the turn of the millennium there were only Digest. a few canon law maxims for cases of obvious From the 18th century onwards, the impor- contradictions between certain legal rules. tance attached to the regulae and brocardica di- minished. However, earlier legal writers had al- 3. Statutory interpretation in the Middle Ages ready begun to rationalize and systematize the and in early modern law heap of interpretative maxims handed down In the wake of the rediscovery of the Digest in the through the centuries. The legal commentators 11th century the regulae iuris assumed a pivotal (→ legal scholarship) invented new classifica- role in → legal scholarship that remained in tions. From the mid-15th century onwards a place until the beginnings of the modern natural number of textbook-style legal monographs with law movement. The glossators put D. 50,17 at the an exclusive focus on statutory interpretation heart of academic teaching and produced a were published in northern Italy. Although based number of treatises concerning one or the other on maxims of Roman law, this historical origin interpretative maxim whilst remaining faithful to was no longer examined. Instead the basic cate- the approach of the Roman lawyers in that they gories of interpretation were developed and be- did not develop a comprehensive doctrine of came more sophisticated, eg the distinction be- interpretation. The working method of the tween ‘declaring’, ‘extensive’ and ‘restrictive glossators not only entailed a → reception of the interpretation’ (interpretatio declarativa, exten- Digest’s rules and principles of statutory con- siva et restrictiva) which can be traced back to struction, but also generated new maxims of Bartolus. interpretation. From the 12th century onwards The 16th century marked the beginning of the the sources that had been glossed received fur- golden age of theories of interpretation. Ques- ther marginal annotations, the so-called bro- tions of statutory construction were not only cardica or generalia. These were short and suc- dealt with in specific treatises, but also at the out- cinct maxims with normative content which set of comprehensive overviews of the law and in emerged from the pros and cons of academic special collections of arguments called ‘topics’. discourse and summarized the content of a The latter had emerged in the 12th century and fragment of the Corpus Juris. Towards the end of became increasingly popular—with their help, the century the first collections of legal brocards lawyers found the ‘place’ (topos, locus) of the were published. They reproduced the maxims in argument they needed. Well-known types of systematic or alphabetic order, although without argument which are still used today included the resolving contradictions between them. Before topoi ad absurdum, a simili, e contrario, ex mate- long lawyers stopped distinguishing clearly be- ria, ex effectu and ex coniunctis; the best known tween the regulae which were the authoritative topic of this age was written by the Dutch jurist texts and the brocardica which were mere com- Nicolaus Everardus. Twenty-eight editions were mentaries on these texts. For centuries these published between 1516 and 1604, and 131 topoi compilations of brocards, which set out dozens were analysed over nearly 800 pages. These were of interpretative maxims, remained an essential still based on the Roman sources but they were part of legal literature and provided practitioners ordered in a more accessible way and were en- with useful armouries of arguments in litigation. riched with examples drawn from ancient litera- A further strand of the European interpreta- ture, particularly from rhetoric. tive tradition can be traced back to → canon law. Like the Digest, two important books of the Cor- pus Juris Canonici, the Liber Extra (1234) and Liber Sextus (1298), closed with a title De regulis

988 Stefan Vogenauer Interpretation of Statutes, History of

4. Interpretation of statutes according to the prevails in France, although it does not perform a schools of natural law and the law of reason useful function in modern French law. In a simi- The writers of the schools of modern natural law lar vein, French doctrine has preserved the di- and the law of reason still drew on the same chotomy of ‘grammatical’ and ‘logical’ interpre- sources. Hugo Grotius and Samuel von Pufen- tation that had been developed by the natural dorf were primarily interested in the interpreta- lawyers. In Germany this was slowly superseded tion of contracts; according to their view, this by a categorization introduced by Friedrich Carl exercise was mostly aimed at ascertaining the von Savigny that divided the aids to interpreta- intention of the parties. Christian Thomasius tion into four ‘elements’ (‘grammatical’, ‘histori- adopted this position in the interpretation of cal’, ‘systematic’ and ‘logical’). German legal statutes. He became the ancestor of an approach methodology has also embraced another funda- that would become prevalent in the 19th century mental distinction first suggested by Savigny, the and that would be called ‘intentionalist’, ‘orig- rigid conceptual separation of ‘statutory inter- inalist’ or ‘subjective’ by today’s lawyers. Even pretation’ and ‘further development of the law’ (a more importantly, Thomasius attempted to euphemism for judicial law-making). This dis- rationalize the unsystematic catalogues of argu- tinction has never gained prominence in France. ments in the topics; he devised a new classifica- It is an endless source of irritation for English and tion that distinguished between ‘grammatical’ German lawyers that the → European Court of and ‘logical’ aids to interpretation, the former Justice (ECJ) has adopted the French terminol- being based on the wording of the statute and the ogy and claims to ‘interpret’ EU law even when it latter being based on external factors, including clearly engages in judicial law-making. the intentions of the legislature. Despite the different terminologies and cate- gorizations of national theories of interpretation, 5. Methods of statutory interpretation in even the 19th and 20th centuries saw a number 19th century nation states of common European trends in legal methodol- Up to the late 18th century similar rules and ogy. Until the late 18th century a fairly liberal ap- principles of statutory interpretation were ap- proach to statutory interpretation had prevailed plied all over Europe; even England was but a across the continent. The judiciary enjoyed the province of the → ius commune with respect to power to deviate from the literal meaning of stat- statutory interpretation: at the beginning of the utes by way of ‘extensive’ or ‘restrictive’ interpre- 19th century, there was not a single interpretative tations. Towards the end of the century conti- maxim that did not have a counterpart in the nental legal systems adopted a much more text- continental theory of construction. based legal method. This approach was perhaps The unity of the European doctrine of statu- not as rigid as has been assumed by later genera- tory interpretation only broke up in the wake of tions of scholars who gave it labels such as ‘exe- the major → codifications. This was not neces- getical school’ or ‘conceptual jurisprudence’. sarily owed to the scarce and fragmentary codifi- Nevertheless, it entailed a manifest readjustment cation of particular rules of interpretation, such of the weight accorded to different interpretative as §§ 46–49 of the Introduction to the → Allge- criteria and, thus, a clear break with the inter- meines Landrecht für die Preußischen Staaten pretative methods of the earlier → ius commune. (ALR), Arts 4 and 5 of the French → Code civil A similar, possibly even more radical, movement and §§ 6–9 of the Austrian → Allgemeines Bürger- towards a ‘literal’ or ‘plain meaning rule’ oc- liches Gesetzbuch (ABGB). It was rather a conse- curred in English law with a certain time lag, ie in quence of the nationalization of → legal scholar- the first third of the 19th century. Similar paral- ship. Depending on the legal system, the inter- lels can be observed in the respective counter- pretative maxims of Roman law were pushed movements towards more ‘liberal’, ‘purposive’ back to a greater or lesser extent without ever approaches to statutory interpretation, which are being completely forgotten. open towards evaluative and normative consid- National legal methods developed their own erations, including arguments of fairness, rea- taxonomies and theories of interpretation. For sonableness and equity. In continental Europe, example, the distinction between interpretatio this renewed emphasis on purposive reasoning authentica, usualis et doctrinalis (developed by and policy arguments emerged in the last quarter Bartolus and referring to the institutional frame- of the 19th century, whilst in England it only work of statutory interpretation and the compe- regained acceptance in the second half of the tences that are attributed to the legislature, the 20th century. As a result, there is today a fun- judiciary and legal scholars, respectively) still damental unity in the interpretative practice throughout the European legal systems, despite

Stefan Vogenauer 989 Invalidity the prevailing differences in classification and vate → juridical act: Germany). As the → Prin- terminology displayed in national writings on ciples of European Contract Law (PECL) and the statutory interpretation. → UNIDROIT Principles of International Com- mercial Contracts (PICC) are confined to con- Literature. Wolfgang Fikentscher, Methoden des tract law they only deal with the invalidity of Rechts in vergleichender Darstellung, 5 vols contracts. Yet, judgments, statutes or adminis- (1975–1977); Peter Raisch, Juristische Methoden trative acts may also be invalid. When bringing (1995); William D Popkin, Statutes in Court the degrees of invalidity into a coherent system (1999); Jan Schröder, Recht als Wissenschaft should these legal acts therefore also be in- (2001); Stefan Vogenauer, Die Auslegung von Ge- cluded? There are, indeed, common historical setzen in England und auf dem Kontinent (2001); roots: the action for retrial of a case, for instance, Jan Schröder (ed), Theorie der Interpretation vom developed from the Roman restitutio in integrum, Humanismus bis zur Romantik (2001); Jan and the restitutio in integrum was also applicable Schröder, ‘Zur gesamteuropäischen Tradition if a contract was to be set aside on the basis of der juristischen Methodenlehre’ in (2002) 2 Aka- one of the contract parties being a minor. How- demie-Journal—Magazin der Union der deut- ever, it would lead to a level of abstraction too schen Akademien der Wissenschaften 37; Benoît high for practical purposes if one tried to bring Frydman, Le sens des lois (2005); Stefan the degrees of invalidity for all legal acts into one Vogenauer, ‘Eine gemeineuropäische Methoden- coherent system; and such attempts have in the lehre des Rechts: Plädoyer und Programm’ past, indeed, proven to be unsuccessful. (2005) 13 ZEuP 234. Even within contract law and the rules relat- Stefan Vogenauer ing to Rechtsgeschäfte (→ juridical act) one will often find special rules for the invalidity of spe- cial legal acts, such as for example in family law Invalidity (marriages), → succession law (→ wills), labour Phillip Hellwege law (contracts of employment) or company law 1. Degrees of invalidity (shareholders’ resolutions and articles of incor- All European legal systems know different de- poration). In such cases, however, the question grees of invalidity. These are distinguished on the as to who may invoke the invalidity, how it is in- basis of who may invoke the invalidity, how it is voked, and what its consequences are may re- invoked and what its consequences are. Nor- ceive different answers. European legal scholar- mally, the pertinent provisions do not define ship needs to identify the reasons which justify these degrees. It is left to legal scholarship to such departures from the general principles. conceptualize them and to bring them into a co- Only then will it be possible to pave the ground herent system. Legal scholarship has tackled this for a coherent intellectual integration of these task since the 19th century. In contrast, a coher- exceptions in future attempts at legal harmoni- ent system of degrees of invalidity was unknown zation. to Roman law and the earlier ius commune. To- If the parties to an invalid contract have al- day, European legal scholarship has to engage in ready exchanged their performances, the con- this task for the following three reasons. First, tract may be unwound (→ unwinding of con- there are terminological and conceptual differ- tracts). Invalidity and the process of unwinding ences between the different European legal sys- are distinct. Only legal acts can be invalid. The tems which must be understood. Secondly, there performance of a contract does not need to be a is a multitude of different terms at the European legal act. It may also be a real act which can be level that are in need of systematization: the draft undone but which cannot be invalid. Moreover, of a → Code Européen des Contrats (Avant– the questions of the invalidity of a contract and of Projet), for example, speaks of nullité, inefficacité, its unwinding are often conceptualized differ- inexistence, annulation, rescision, extinction, ently. Nullity is a degree of invalidity; it does not [cesser] d’avoir effet. Finally, legal scholarship describe the process of unwinding the contract. should work towards a coherent use of the differ- Whether a contract is null and void is a question ent degrees of invalidity in future projects of legal of contract law; a contract which is null and void harmonization. has to be unwound, and that is a question of the law of restitution, or unjustified enrichment. In 2. What are the objects of invalidity? other instances, invalidity and the process of un- Invalidity is often discussed within the general winding the contract are not as clearly separated principles of contract law (Italy, England, France) and conceptual overlaps exist: the Spanish ac- or as a problem relating to Rechtsgeschäfte (pri- ción de nulidad aims at nullifying a contract, eg

990 Phillip Hellwege Invalidity for mistake, and is at the same time directed at ther failing (fully or partially) to create its in- undoing the contract; in England if a party tended legal effects or as losing them subse- wishes to rescind and, thus, to invalidate a con- quently. A ground for invalidity is a cause that tract, it has to make restitutio in integrum, and generates such response. According to this defi- the term rescission is thus often used also to in- nition unenforceability is a degree of invalidity. clude the process of unwinding the contract. Fi- This definition simplifies comparison: today it is nally, the PECL and UNIDROIT PICC, as part of more and more frequently acknowledged that their respective rules on validity, also deal with termination for non-performance and initial im- the unwinding of the contract as an effect of in- possibility do not nullify a contract; they merely validity. excuse the parties from making performance, and a terminated contract does not allow the 3. What are the reasons for invalidity? parties to keep what they received under the In their chapter on validity, the PECL name the contract (Germany). Yet, in some European legal classical grounds for invalidity: lack of → capa- systems initial impossibility still renders the city, immorality, → illegality of contracts, → mis- contract void (France, Italy, Portugal, Hungary), take, → fraud and threats. All of these defects and in others termination annuls the contract ex exist at the time of formation of the contract and tunc (France, Spain, Austria). With the proposed avoid it ex tunc. Thus, invalidity seems to consist definition, these differences only appear as dif- of three elements: it nullifies the contract, it has ferent degrees of invalidity. They do not demar- retrospective effect and the reason for invoking it cate a fundamental divide in the approaches to exists at the time of the formation of the contract. initial impossibility and termination. The pro- The literature in many European legal systems posed definition also simplifies future efforts of follows a similar concept, and in Germany one legal harmonization as it provides draftsmen finds a parallel approach to the invalidity of with a graded system of degrees of invalidity to Rechtsgeschäfte. European legal scholarship, choose from. Finally, the definition does not however, needs to be aware of its limits. For a stand in opposition to any legal system in number of reasons these three elements are only Europe. Even though they all make use of the an approximation to, but not a definition of, concept of invalidity, they do not define it as a invalidity: if one wanted to systematize the pos- generic term; nor do they presuppose a certain sible defects that may arise in the formation of definition. European legal scholarship is free to contracts, invalidity is the wrong concept to start develop a concept of invalidity that best serves with as it denotes a consequence and not a de- the purposes of comparative research and legal fect. Fulfilment of a resolutive → condition, for harmonization. example, also invalidates it even though it occurs only after the contract has been concluded. On 4. Who may invoke the invalidity? the other hand, not all initial defects are included If only one of the parties can invoke the invalidity (eg → impossibility, initial) but only those which this is referred to as relative invalidity. The inva- nullify the contract ex tunc. There is also no cor- lidity is absolute if either party, or even third par- relation between the time of a defect and its ef- ties, may rely on it. Sometimes only certain third fect, as many legal systems hold that defects in parties may invoke the invalidity, as is the case the formation of contracts of employment, for with challenges to a will. This may also be re- example, only operate prospectively. If one were ferred to as relative invalidity. The borderlines to focus only on the nullifying effect in order to between absolute and relative invalidity, on the define invalidity, then unenforceability would be one hand, and between voidness and voidability, excluded (which is, at least in England and Scot- on the other hand correlate in most, but not all, land, considered to be a degree of invalidity); in cases. Absolute invalidity does not necessarily addition, all cases in which the parties are only equal voidness just as relative invalidity does not excused from performing of the contract (initial necessarily equal voidability. Under the PECL il- impossibility, → non-performance) would equally legality can have the effect that only one party is be excluded. Similarly, the PECL in their chapter barred from enforcing the contract. Invalidity is on validity refer to illegality as a reason for thus relative in such cases. However, the judge invalidity, but in their chapter on illegality they will consider ex officio that the contract is only designate illegal contracts only as ineffective and enforceable by one party. The contract is neither provide a flexible list of degrees of invalidity, void nor voidable. In Germany, if a marriage has including unenforceability. been entered into although impediments to mar- Invalidity should be defined as a response riage existed, the marriage may be annulled by whereby an invalid contract is understood as ei- judicial decision. It is voidable. Yet an action can

Phillip Hellwege 991 Invalidity be filed by a public authority, and this corre- but the latter is the paradigmatic case. All legal sponds to an absolute invalidity, as the public au- systems which, as a rule, allow avoidance by no- thority will represent the general public. tice provide for exceptions, especially for those Whether a contract is absolutely or relatively → juridical acts that affect the status of a person invalid depends on the policy considerations or for acts affecting a multitude of parties. In underlying each individual ground for invalidity: Germany, for example, shareholders’ resolutions does it protect the interests of the general public in → stock corporations and marriages can only or only those of a specific person? European legal be invalidated judicially. Where rescission by systems find different answers to these questions notice is sufficient, usually no special form needs for the different grounds of invalidity, as for ex- to be observed (PECL, UNIDROIT PICC, DCFR). ample in the case of lack of → capacity (absolute: In some legal systems the notice has to be in Germany, Poland, Greece; relative: France, Italy, writing (Poland). In others a special form only the Netherlands) and unconscionability (unfair needs to be observed when certain types of con- advantage-taking) (absolute: Germany; relative: tracts are to be avoided, for example in Germany France, Italy, Poland, Hungary, the Netherlands, in case of the avoidance of a contract of inheri- PECL). tance. In addition to judicial avoidance and avoidance by notice, a third way to avoid juridi- 5. How is invalidity invoked? cal acts was known in legal history. Savigny dis- In some cases one party, or a third party, needs cussed the possibility of avoidance in the form of to take special steps before the legal act in ques- an ‘obligation to execute a legal act that is di- tion can be disregarded; in other cases invalidity rected at the result that is contrary to an earlier may be taken into account without such special legal act’. Today, this kind of avoidance is of little steps having to be taken. The former is true for importance. voidability, the latter for voidness. The distinc- Many modern legal systems strictly distin- tion between void and voidable acts is known to guish between avoidance, termination for → non- most legal systems (Portugal, Italy, England, performance and a → right of withdrawal (Eng- Scotland, Ireland, the Netherlands, Germany, land, Scotland, Germany). In these legal systems PECL, UNIDROIT PICC, Draft → Common one only refers to avoidance if the contract is Frame of Reference (DCFR). However, the term avoided ex tunc. Yet, avoidance has this narrow ‘void’ does not only point to the fact that the act meaning only within the general principles of the is considered automatically as invalid, but it also law of contract. Outside of this field the term denotes that it is null and void in every respect ab avoidance is often used in a much wider sense initio. Thus, the term ‘void’ also points to the (Germany). In England the term rescission was consequences of this degree of invalidity. More- until recently also used to encompass termi- over, voidness is not the only degree of invalidity nation. If one simply defines rescission as that which will take effect without the need first to in- degree of invalidity of which a judge only takes validate the legal act: the same is true for unen- account after one party has invalidated the con- forceability. tract, by notice for example, then there is no There are different ways to rescind a voidable problem with including termination in such a contract. Many legal systems regard avoidance as wide concept of rescission. a judicial remedy: the party who is entitled to ask The modern model rules do not draw further for the contract to be avoided has to bring an distinctions within avoidance, narrowly con- action, and only the judge may nullify the con- ceived (PECL, UNIDROIT PICC). Some European tract (France, Belgium, Greece, Spain). If an ac- legal systems, however, still distinguish between tion is brought against this party, it may rely on different forms of avoidance, such as for example the invalidity also by way of defence. These legal English law between rescission at law and at systems stand in the tradition of the → ius com- equity, and as Italy, France and the draft of a mune. During the time of the ius commune → Code Européen des Contrats (Avant–Projet) avoidance was also, as a rule, enforced by way of which all recognize a special type of avoidance actio and exceptio. Yet, in recent times the idea for lesion. has prevailed that avoidance is a self-help rem- Most European legal systems distinguish be- edy: the contract is avoided by notice to the other tween voidness and voidability. However, there party (Germany, Poland, PECL, UNIDROIT PICC, are exceptions (France, Spain). In France, for ex- DCFR). Thus, the English discussion to abolish ample, the distinction is rather drawn between rescission as a self-help remedy (O’Sullivan) nullité absolue and nullité relative. Nullité ab- seems to be regressive. Dutch law recognizes solue is said to correspond to voidness, but it is a both judicial rescission and rescission by notice, judicial remedy. To speak of nullity if the invalid-

992 Phillip Hellwege Invalidity ity has to be enforced by way of action seems at legal systems the will of the parties is decisive first sight surprising. But outside the field of gen- (Greece); in other jurisdictions the answer to this eral contract law other legal systems also refer to question depends on whether the invalidity con- voidness, even though the invalidity needs to be cerns an integral part of the contract or not enforced by means of a legal action: in Germany (France), or whether the part affected by invalid- a court judgment may be void (nichtig), but the ity and the remainder are inseparable (the voidness has to be enforced by bringing an action Netherlands). Under the PECL, the UNIDROIT (Nichtigkeitsklage). In Austria the same is true for PICC and the DCFR, the answer to this question void marriages. turns on reasonableness: the invalidity will not It is generally accepted throughout Europe only be partial if it would be unreasonable to up- that non-compliance with a → formal require- hold the remaining contract. Finally, in all legal ment will make a contract void whereas defects systems the policy considerations behind the in consent will make the contract only voidable. ground for invalidity will be of importance. In contrast, there is again no agreement as to Furthermore, there is the question of whether whether lack of → capacity and unconscion- the invalidity of a contract will also affect the ability (unfair advantage-taking) will lead to validity of a conveyance which was executed in voidness or voidability. Under the PECL, unfair fulfilment of the contract. Legal systems which contract clauses which were not individually adopt the principle of abstraction will, as a rule, negotiated are voidable rather than void. In gen- answer this question in the negative (Germany, eral, it will again depend on the policy consid- Scotland); legal systems where this principle is erations underlying the ground of invalidity unknown will answer it, as a rule, in the affirma- whether a contract, or a contractual term, is void tive (Italy, France, the Netherlands, Portugal). or only voidable: does it protect the interests of One may also make a distinction on the basis of the general public or only those of a specific per- whether the invalidity is final or whether there is son? However, other considerations will also in- a state of pendency. Finally, if one considers ter- fluence this decision. Important or complex legal mination and withdrawal as being merely differ- acts and legal acts that affect a multitude of per- ent degrees of invalidity, further distinctions sons will often not simply be void but will need to have to be drawn concerning the effect of these be avoided by (perhaps formal) notice or by remedies for the contract. Voidness and voida- bringing an action. bility regularly nullify the contract ex tunc in every respect. Termination, as a rule, nullifies the 6. What are the consequences of invalidity? contract ex tunc in so far as it provides a cause With regard to the consequences of invalidity allowing the parties to keep what they have re- there is first the question of whether it should ceived under the contract: the contract will have work retrospectively or only prospectively. In to be unwound. In other respects, eg with regard general, the term ‘void’ entails ex tunc effect, as to limitation, exclusion, and arbitration clauses, does avoidance for defects in the formation of a termination usually only operates prospectively. contract. However, all European legal systems know exceptions to this rule as, for example, in 7. How can an invalid contract be rescued? the case of contracts of employment or articles of All European legal systems provide for various incorporation. instruments to remedy invalidity, eg convales- Then there is the question of partial invalidity: cence, conversion, ratification and confirmation. if only part of a contract is invalid, will the rest of Furthermore, in many European legal systems it remain in force? During the time of the ius and according to the PECL, an interpretation commune it was deduced from the Roman which leaves the contract intact is to be preferred sources that the invalidity was, as a rule, indeed over an interpretation which would render it in- only partial (utile per inutile non vitiatur). In Ger- valid. many § 139 → Bürgerliches Gesetzbuch (BGB) departed from this rule: a partial invalidity will Literature. Friedrich Carl von Savigny, System normally render the entire contract invalid. Yet, des heutigen Römischen Rechts, vol IV (1841) both case law and legal scholarship have, in 536 ff; Friedrich Hellmann, ‘Zur Terminologie accordance with the predominant position in der römischen Rechtsquellen in der Lehre von Europe, again adopted the reverse position: if der Unwirksamkeit der juristischen Thatsachen’ only part of a contract is invalid the rest of it will, (1902) 23 Zeitschrift der Savigny-Stiftung für as a rule, remain in force. The question of what Rechtsgeschichte—Romanistische Abteilung 380 factors will justify exceptions to this rule is (1903) 24, 50 ff; Alfred Manigk, ‘Unwirksamkeit. answered differently within Europe: in some Ungültigkeit’ in Fritz Stier-Somlo and Alexander

Phillip Hellwege 993 Investment Funds

Elster (eds), Handwörterbuch der Rechtswissen- the Anglo-Saxon → trust. Later, in the 19th cen- schaft, vol 6 (1929) 292; Manfred Harder, ‘Die tury, the idea of collective investment in invest- historische Entwicklung der Anfechtbarkeit von ment companies spread to continental Europe, Willenserklärungen’ (1973) 173 AcP 209; Reinhard namely to Switzerland and the Netherlands. It Zimmermann, The Law of Obligations (1996) seems that in Germany, two entities existed in 678 ff; Janet O’Sullivan, ‘Rescission as a Self-help the 1920s which could be classified as investment Remedy: A Critical Analysis’ (2000) 59 Cam- funds. At the beginning of the 1930s, an attempt bridge LJ 509; Peter Schlechtriem, Restitution was made to establish so-called capital man- und Bereicherungsausgleich in Europa, vol I agement companies. Ultimately this led to the tax (2000) 403 ff; András Földi, ‘Zur Frage der obstacles for investment funds merely being re- Gültigkeit und der Wirksamkeit im modernen laxed rather than abolished, and investment Zivilrecht’ in Festschrift Ferenc Benedek (2001) 73; funds only asserted themselves in Germany after Bruno Schmidlin, ‘Der Rücktritt vom Vertrag: World War II. Investment funds were codified for Von der Nichtigkeit ex tunc zum vertraglichen the first time in the United States with the In- Liquidationsverhältnis—ein dogmengeschichtli- vestment Company Act of 1940, which heavily in- cher Wandel’ in Festschrift Theo Mayer-Maly fluenced the German Investment Companies Act (2002) 677; Dominic O’Sullivan, Steven Elliott of 1957. and Rafal Zakrzewski, The Law of Rescission (2008). 2. European regulations Phillip Hellwege At the European level, investment funds have since 1985 been subject to the directive on the coordination of laws, regulations and adminis- Investment Funds trative provisions relating to undertakings for Markus Roth collective investment in transferable securities 1. Meaning and development of investment (UCITS Directive, Dir 85/611), which was revised companies several times before being substituted recently by Investment funds serve as legal entities for joint Dir 2009/65. The UCITS Directive was one of the investment, especially in securities. They enable first directives to achieve the desired internal investors to spread the investment risk by in- market and, in particular, provides for a → Euro- vesting small amounts. At the end of 2007, almost pean passport for investment funds. In No- €8 trillion (€7,909 billion) were held by European vember 2006, the European Commission issued a investment funds. Due to the financial crisis, this White Paper as part of a fundamental review of value was reduced by almost two trillion Euros to the UCITS Directive. One question currently €6.088 trillion in 2008, while by the end of 2010 under review is whether to harmonize in- the amount had risen again to €8.025 trillion. vestment funds not currently covered by the Equity was the class of assets that experienced UCITS Directive, such as open-ended real estate the sharpest decline, although it still remains the investment funds. This would make all invest- most important investment type. Quite remarka- ment funds subject to common rules, thus enti- bly, a truly European market for investment tling them to a European passport. A further funds has emerged. The largest European market proposition is to facilitate the investment by for investment funds is in Luxembourg, followed professional investors in non-mutual funds and by France, Germany, Ireland and the United to liberalize such cross-border transactions. Fi- Kingdom. In 2006, Luxembourg ranked as the nally, new rules are being put forward to facilitate world’s second largest location for investment cross-border merger of funds. funds, trailing only behind the United States. The Directive 2009/65 consolidates the text of the bulk of the investment funds in Europe are sub- UCITS Directive and carefully develops the ject to the European → directive relevant in this UCITS Directive itself. The numerous amend- regard. ments to the UCITS Directive in 1985 are inte- The origins of the investment business go grated in the new UCITS Directive. Furthermore, back to the 19th century. As early as the first half the new directive includes provisions for national of the 19th century, business trusts in the United and cross-border mergers of investment funds. States were in practice closely linked to the in- Also included are new provisions for mas- surance business and many banks were founded ter/feeder structures, in which a UCITS (feeder- as ‘Trust & Banking Companies’. In Europe, the UCITS) invests all or almost all assets in another first investment companies emerged in the sec- UCITS (master-UCITS). Another focus is on the ond half of the 19th century in Scotland and provisions of investor information. The reporting England. They shared many characteristics with requirements, which make possible the Euro-

994 Markus Roth Investment Funds pean-wide distribution of UCITS, have been Directive, the Financial Services Markets Act of simplified and improved. 2000 prescribes that the functions of the trustees Undertakings for the collective investment in and the managers of unit trusts be separated. transferable securities (UCITS) have the sole Luxembourg’s first investment fund was purpose of investing and managing joint ac- founded in the 1950s. Investment funds are now counts with funds that have been raised from the regulated by the Loi du 20 décembre 2002 concer- public. Under national law, the collective in- nant les organismes de placement collectif. The vestment in transferable securities may assume a companies covered by the UCITS Directive are contractual form (managed by the management described as OPCVM (organisme de placement fund), a trust form (unit trusts) or the form of an collectif en valeurs mobilier soumises à la Direc- investment company. The principle of risk diver- tive 85/611). Investment companies, described as sification is essential. The investment policies SICAF (société d’investissement à capital vari- and barriers are included in the UCITS Directive able), have been regulated since 1980 and are as well as in an implementing directive. Securi- thus the oldest of their kind in the European ties within the meaning of the UCITS Directive Union. are shares and other securities equivalent to In France, investment funds are regulated in shares, bonds and other forms of securitized the Code monétaire et financier, Art L 214-1-146. debt, and all other marketable securities that Much emphasis in French legal literature is authorize the acquisition of securities within the placed on the regulation by the Financial Super- meaning of the directive by subscription or ex- vision Authority, the Autorité des Marchés Finan- change. UCITS are subject to approval and the ciers (AMF). As is the case in Luxembourg, the approval is valid for all Member States. The safe- investment companies are called SICAF. Other keeping of the assets of a UCITS is transmitted to investment funds exist by the name of FCP a depositary. (Fonds Commun de Placement). 3. Historical development of selected 4. Public and special funds national rules The European UCITS Directive regulates only The German law of investment, which was ini- those investment funds that raise money from tially contained in the Investment Company Act the public. In principle, two types of investment of 1957 and is now found in the Investment Act, companies exist, namely investment funds and is characterized by the management of several special funds. Management in mutual funds is a investment funds through one company and, es- sub-form of standard asset management. In pecially, the so-called investment triangle. In ad- Germany, special funds which are subject to the dition to the investment fund and the investor, Investment Act are used particularly by private the deposit bank is a compulsory part of the in- pension institutions as a special investment vehi- vestment triangle. The investment company in- cle for pooled assets. These investment vehicles structs the custodian with the safekeeping of the are thus aligned with a particular investment fund and the issuance and redemption of units strategy. Since no investment in securities occurs on the subject. The involvement of a custodian is in real estate investment funds, the latter are not modelled on the US Investment Company Act of subject to the UCITS Directive. 1940, in terms of which the unit investment trusts must install a bank as trustee or custodian. Ac- 5. Use of investment funds for occupational cording to the German legislation on investment and individual pensions companies, the UCITS Directive requires a de- The use of investment funds as a vehicle for oc- positary, which also has supervisory tasks. The cupational and individual pensions has thus far redemption obligation and the prohibition on not been regulated at the European level. The borrowing were also based on the US model and Pension Funds Directive regulates only → pen- are now subject to the UCITS Directive. sion funds as vehicles for → occupational pen- In England, the UCITS Directive constituted sions. In its White Paper, the Commission nev- an impetus for the creation of investment com- ertheless recognizes the importance of greater panies. The traditional unit trust schemes, in investment for retirement as a means of ex- which the assets are held for the investors in panding the single market for investment funds. trust, were also further developed. For unit trust Internationally, the investment in investment schemes to participate in the European market funds is widespread in the context of individual using the single passport, special provisions for and occupational pensions since no (biometric) authorized unit trust schemes have been created. guarantees must be given for preferred tax treat- In order to comply with the rules of the UCITS ment. Based on this phenomenon, the European

Markus Roth 995 Investor Protection investment community has provided a study of 767; Claude Kremer and Isabelle Lebbe, Orga- defined contributions for occupational pensions. nismes de placement collectif et véhicules d’in- In Germany, in order to obtain preferred tax vestissement apparantés en droit luxemburgeois treatment, the contributions made must be (2nd edn, 2007); Alain LeClair, Karel Lannoo and guaranteed. This also applies to an individual Jean-Pierre Casey, Pouring Old Wine into New retirement under the Riester pension regulation Skins? UCITS and Asset Management in the EU as well as cum grano salis for occupational pen- after MiFID: A CEPS-ECMI Task Force Report sions. A pure defined contribution provision is (2008); Alice Pezard, Code monétaire et financier not possible in Germany as both the Occupa- (4th edn, 2009); Markus Roth, Private Altersvor- tional Pensions Act and the related tax provisions sorge: Betriebsrentenrecht und individuelle Vor- in the German Tax Act require guarantees. sorge—Eine rechtsvergleichende Gesamtschau In Germany, since the Riester pension reform, (2009); Michael Blair, George Walker and Robert individual pension investment companies (Al- Purves (eds), Financial Services Law (2nd edn, tersvorsorge-Sondervermögen) are regulated in a 2009); Markus Roth, ‘Employee Participation, special part of the Investment Act. Individual Corporate Governance and the Firm, A Transat- pension investment companies are barred from lantic View Focused on Occupational Pensions being used for a limited duration and from dis- and Co-Determination’ (2010) 11 EBOR 51; tributing their income. They are subject to spe- Christian Szylar, Risk Management Under UCITS cific investment provisions. The investment pro- III/IV—New Challenges for the Fund Industry visions set limits on investment in shares and (2010); EFAMA, Trends in the European Invest- property funds, although it is required that more ment Fund Industry in the Fourth Quarter of 2010 than half the assets be invested in these two asset and Results for the Full Year 2010, Quarterly classes. The individual pension investment com- Statistical Release, March 2011, no 44 (2011). pany has to offer the individual investor a retire- Markus Roth ment-savings plan. As with other descriptions in investment law, the description of the individual pension investment company is specially pro- Investor Protection tected. In German practice, individual pension Klaus J Hopt investment companies play only a minor role. 1. Concept and scope of investor protection They are not accepted as pension vehicles under For many centuries, investor protection has been the German Occupational Pension Act. the reaction to speculation, fraud on investors and stock exchange crashes. Laws for the protec- 6. Publicity tion of shareholders and investors have existed Under the UCITS Directive, prospectuses and pe- since the very beginning of the stock corporation riodic reports are to be published. Investment and the stock exchanges. Traditionally, investor funds are to inform potential and actual custom- protection was primarily shareholder protection ers as well as the market by making available with some specific rules for stock exchange simplified and full prospectuses, as well as an- trading. True investor protection, ie protection of nual and a semi-annual reports. The simplified the investors who buy and sell publicly offered prospectus is to be handed over to potential sub- shares and debentures, has its roots in the United scribers before the conclusion of the contract. States securities regulations of the 1930s. Coun- The essential elements of the simplified and the tries in Europe followed thereafter, first the full prospectus are to be updated. Unlike the United Kingdom and Belgium, and later France. European insurance regulation, the UCITS Di- In Germany, the concept of investor protection rective requires information regarding the in- was only developed in the 1970s (Klaus J Hopt). vestment policy of the investment fund to be The concept of ‘investor’ reaches beyond in- made available. The revised UCITS Directive also vestment in shares, debentures and investment provides for a revised version of the information funds and encompasses the investment in all requirements. publicly offered financial products. The concept of investor protection corresponds to this defini- Literature. Bevis Longstreth, Modern Investment tion. The traditional shareholder protection by Management and the Prudent Man Rule (1986); company law, ie protection within the organiza- Kam Fan Sin, The Legal Nature of the Unit Trust tion, has been complemented with protection by (1997); Klaus Ulrich Schmolke, ‘Institutional In- securities regulation, ie protection on the mar- vestors’ Mandatory Voting Disclosure. The Pro- kets. These markets no longer include just the posal of the European Commission against the stock exchanges but all relevant capital markets. Background of the US Experience’ (2006) 7 EBOR The European term for securities regulation is

996 Klaus J Hopt Investor Protection therefore → capital markets law, also encom- market manipulation or stricter bank supervisory passing → takeover law. In capital markets law, law as has been enacted everywhere as a conse- one can distinguish between investor protection quence of the financial crisis. Though this is in the primary market, ie issuance of the shares, hardly ever openly conceded by the legislatures, and in the secondary markets, ie when the shares it must be seen that most often this is done out of and financial products are traded. fear of incalculable financial risks and an open- Investor protection in a larger sense includes ing of the floodgates to the courts. In any case, it depositor protection, though in legal terms there is true that investor protection, like every legal is a fundamental difference between share- protection, must not be exaggerated since other- holders who are members of the company and wise dysfunctional effects arise. Thus investor creditors who are mere partners to a commercial protection against the wishes of the investor contract. Yet for the investor there is little differ- leads to paternalism, too much disclosure brings ence whether he entrusts his savings to a bank or unnecessary financial burdens for the company invests in an investment fund or buys shares. The or the bank, too much investor protection in the latter is, of course, the most risky investment, but case of takeovers frightens off possible bidders it correspondingly also promises the highest and prevents bids that might be useful for the yields. Even when buying shares, investors usu- shareholders of the target company and for the ally start by being the creditors of a bank that economy as a whole. Similarly, at the stock ex- buys the shares for them at the stock exchange. change there must be segments with fewer re- Looking at the rules on the solidity and respon- quirements and investor protection, eg for start- sible behaviour of banks and other financial in- up companies, risky investments and economi- termediaries that are also performing an impor- cally useful speculation. tant service for the investing public, investor The relevance of investor protection for the protection by company law and capital markets capital markets and the economy has long been law is complemented by protection of the inves- well known. But more recently, American econ- tors through banking law and the law of financial omists (Rafael La Porta, Florencio Lopez de intermediaries. Silanes, Andrei Shleifer, Robert Vishny: LLSV) have even claimed that there is a close relation- 2. Functions of investor protection, ship between the degree and quality of investor corporate governance protection in a country and its financial devel- Investor protection aims at both protection of the opment, and they provide empirical data for this individual investor (or the investor public) as claim: ‘[L]egal protection of outside investors well as protection of the market, called ‘func- limits the extent of expropriation of such inves- tional investor protection’. Typical examples for tors by corporate insiders, and thereby promotes individual investor protection can be found in financial development’ (La Porta et al). They stock corporation law, eg when individual share- conclude that the Anglo-American legal orders holders or a minority of them have rights within are better than the continental European and the organization (voice) or on the market (exit, ie other legal orders, in particular than the French buying and selling). Yet individual investor pro- and other Romanic ones. This is highly contro- tection also contributes to the good functioning versial—particularly, of course, in Europe—but of the capital markets and ultimately promotes also in the United States. One of the questions is the economy. In this sense, individual and func- causality, ie whether investor protection the tional investor protection are but two sides of the cause of financial development or the other way same coin. The key to investor protection is in- around. Under the impression of the financial vestor confidence as shown through all the long crisis, even the partisans of this new theory con- history of the companies and the stock ex- cede that their thesis concerning investor pro- changes. Telling examples are the tulip specula- tection, market, competition and globalization, tion in Amsterdam, the South Sea Bubble or the while being sound in general and for normal Mississippi Company and most recently the fi- times, must still be tested empirically for, and nancial crisis of 2008–10. According to some possibly adapted to, crisis situations. writers, individual and functional confidence Investor protection is not the same thing as protection should be distinguished (Holger → corporate governance, though there are simi- Fleischer). More recently, legislatures seem to larities. Corporate governance concerns not only prefer protecting the investors only via functional the shareholders and investors, but also other investor protection, ie without giving them indi- persons or public goods involved in the govern- vidual rights or standing to sue. For example, this ance of the company, such as labour or environ- is the case for disclosure or the prohibition of ment (stakeholders). But in corporate govern-

Klaus J Hopt 997 Investor Protection ance, too, the protection goes beyond the pro- transaction (eg manipulation of the stock price or tection of individuals and groups and concerns the market (→ market manipulation)). the governance of the corporation more gener- The risk of intermediation arises, for example, ally. While investor protection is basically a legal if investors mandate their bank or another proxy concept, corporate governance reaches out be- to exercise their voting rights at the general yond law and is inherently interdisciplinary. meeting and the intermediary does not act in the interest of the investors. This risk exists particu- 3. Typical investor risks larly if the intermediary has a conflict of interest. No investment is without risk. Typical investor The contract and price risk concerns the price risks are the risk of losing the investment, the in- asked for and the business conditions offered by formation risk, the risk of investment admini- the companies, banks and other financial inter- stration, the risk of intermediation and the con- mediaries. Part of this refers to the clauses of ex- tract and price risk (Klaus J Hopt). The UK Finan- oneration for liability for malperformance or a cial Services Authority speaks of ‘prudential risk, lack of or bad advice. Such clauses are often hid- bad faith risk, complexity or unsuitability risk den in the standard contract terms found in the and performance risk’, and one may add the forms of the bank or financial intermediary. systemic risk of the market (Holger Fleischer). In essence, the question is one of information and 4. Legal and extralegal instruments of control. investor protection Historically, the main risk for investors is the Investor protection, as well as any protection of danger of totally or partly losing their investment the weaker party, eg of consumers, can be carried in the company or their deposit with the bank or out in many different ways, partly by law, partly other financial intermediary. Share fraud and by extralegal instruments. The best investor pro- crashes of companies (eg Enron or Parmalat) or tection is still the personal responsibility of in- of banks and financial intermediaries (eg the vestors themselves. Yet here the insights of mod- German New Market or Lehmann Brothers 2008) ern behavioural finance must be taken into ac- are the most blatant forms of the risk of losing count. This is particularly relevant for the con- one’s investment. But there are less obvious tract and price risk. In a market economy, the forms of this risk, such as disregard of share- most important contract condition—the price— holder rights in the companies, the looting of a is left to the market, with the exception of usury company, the illegal transfer of company assets and other extreme limits. As far as information is or profits by the controlling shareholders to concerned, the personal responsibility of inves- themselves or to companies belonging to the tors is the starting point. Investors may refuse same group (known as tunnelling), the so-called information and advice or may nevertheless starving of shareholders by systematically refus- choose risky investments in hopes of benefiting ing to pay out dividends or the illegal squeeze- from high yields. There is also a collective re- out. sponsibility for market confidence, as shown by Investors need information not only on the → private rule-making and codes of conduct. company itself, but particularly also when they Disclosure and transparency are the legal invest or when they hold an investment (infor- rules that enable investors and the market to mation risk). Without → disclosure and → trans- judge for themselves how things are with the parency, shareholders cannot make proper use company and the investment. They are the least of their rights in the company or of the chance to interventionist and conform most to the market sell their shares and to reinvest their money in economy. Mandatory disclosure rules have a another company or investment. Small investors long tradition. In company law, they date back to are usually not in a position to make sensible the Gladstonian reforms of 1844 in England. As investment decisions by themselves; they need far as the stock exchanges and the capital mar- disclosure and advice from → financial inter- kets are concerned, the US securities regulations mediaries who are knowledgeable and not in a of the 1930s have been the model for all later position of → conflict of interest. capital markets laws and regulations in the The risk of investment administration lies in world. Disclosure is only as good as it is reliable. the various practices that work to the disadvan- Therefore, auditing, voluntary or mandatory, tage of investors when the investment transac- contributes towards creating and maintaining tion is carried out (such as unnecessary fee- the confidence of investors and the market. bringing transactions on behalf of the client, Investor protection rules of a very different called churning), but also independently of a kind exist in company and organizational laws (voice), in stock exchange and capital markets

998 Klaus J Hopt Investor Protection laws (exit), in banking law and the law of finan- rective on statutory audits of 10 April 1984 cial intermediaries, including investment law (Dir 84/253; this Directive has been replaced by and the law of banking, insurance and securities the Directive of 17 May 2006 on statutory audits, markets supervision. The depositor protection Dir 2006/43); the Regulation on the application rules and various insurance schemes also belong of international accounting standards of 19 July here, as well as more generally the regulation of 2002 (Reg 1606/2002); and the two recommen- access to the market, market behaviour, compe- dations concerning the board of 14 December tition and the separation of investment banks 2004 on board members’ remuneration (Rec- and credit banks. ommendation 2004/913, including the modifica- Last but not least, general civil rules protect tion by the recommendation of 30 April 2009 the investors, eg by liability imposed if company (Recommendation 209/385) and of 15 February or capital markets law rules are infringed or in 2005 on directors and committees of the board case of fraudulent behaviour. Procedural law is (Recommendation 2005/162). As to the former, also important for investor protection, eg access see also the recommendation of 30 April 2009 on to court, due process, reasonable length of pro- remuneration policies in the financial sector ceedings and enforcement. Here there are par- (Recommendation 2009/384). The Directive of 11 ticular weaknesses and gaps in the laws of many July 2007 on the exercise of certain rights of the developing countries. shareholders of listed companies (Dir 2007/36) should also be mentioned. The Action Plan of the 5. European harmonization of shareholder European Commission of 21 May 2003, which protection goes back to the work of the High Level Group of European harmonization of the shareholder and Company Law Experts, gives an idea of the work investor protection law consists mainly of a con- envisaged for modernizing company law and en- siderable number of company law harmoniza- hancing corporate governance in the European tion directives. Yet unlike the harmonization of Union. The short-term measures contained in stock exchange and capital markets law, com- the Action Plan have already been enacted by pany law harmonization is less advanced, though several directives and recommendations. It re- it is open to controversy as to whether this is mains to be seen whether the new Commission good (→ competition between legal systems) or will take up some of the other measures. For de- even legally mandated (subsidiarity principle in tails, → corporate governance. European law). In any case, it is a fact that Euro- pean company law with a few exceptions covers 6. European harmonization of investor only listed companies. Unlisted public compa- protection nies, and even less so private companies, are not European harmonization of investor protection covered. Even for listed companies, core parts of that goes beyond shareholder protection is much company law and shareholder protection law are further advanced. Originally this harmonization not or are only very selectively harmonized, eg covered only the stock exchange law with four the law of the company organs (→ board), the Directives of 1979, 1980, 1982 and 1988 con- competences of the general meeting and the law cerning the admission of securities to official of groups of companies. The plans of the → Euro- stock exchange listing (Dir 79/279), the pro- pean Commission to harmonize core company spectuses and other requirements for admission law by a 5th Directive on the structure of the of securities to official stock exchange listing public company and by a 9th Directive on groups (Dir 80/390), the information to be published on of companies have, for now, been abandoned. a regular basis by companies whose shares have For details and more sources of investor pro- been admitted to official stock exchange listing tection and European company law, → company (Dir 82/121) and the information to be published law and → stock corporation. when a major holding in a listed company is ac- European company law usually aims, directly quired or disposed of (Dir 88/627). These Direc- or indirectly, at the protection of shareholders. tives were consolidated in the Stock Exchange Examples are the 2nd Directive of 13 December Listing Directive (Dir 2001/34). For details and 1976 (Dir 77/91); the so-called Capital Directive, further legal sources on investor protection by which mandates the raising and maintenance of European stock exchange law, → exchanges. the capital for the company and most recently More recently, European harmonization has become highly controversial; the 4th and 7th moved its focus from the stock exchange to the Directives of 25 July 1978 (Dir 78/660) and 13 capital markets. In 1993, the Investment Services June 1983 (Dir 83/349) concerning annual ac- Directive was enacted. This Directive was re- counts and consolidated accounts; the 8th Di- placed by Dir 2004/39 of 21 April 2004 on mar-

Klaus J Hopt 999 Islamic Countries, Influence of European Private Law kets in financial instruments (MiFID, Markets in Islamic Countries, Influence of Financial Instruments Directive). This Directive European Private Law has become the basic law of financial markets in Nadjma Yassari Europe. In the meantime, it has been transposed 1. The uncodified Islamic law into the various Member State laws. Other im- → Islamic law is primarily case law, ie law that portant directives promoting investor protection has mainly been developed by Islamic scholars deal with insider trading, market manipulation on the basis of individual rulings and specific and takeovers. For details and further legal cases. The law books subsequently compiled, the sources on investor protection by European stock fiqh works, have been complemented over the exchange law, → capital markets law. centuries by a multitude of further texts, text- books, commentaries, monographs and legal Literature. Klaus J Hopt, Der Kapitalanleger- opinions by Islamic jurists (fatāw ). These legal schutz im Recht der Banken, Gesellschafts-, bank- works were not systematically arranged accord- und börsenrechtliche Anforderungen an das Be- ing to subject matters. General legal issues were ratungs- und Verwaltungsverhalten der Kreditin- dealt with by means of single provisions. In order stitute (1975); Richard M Buxbaum and Klaus J to solve a legal problem, those applying the law Hopt, Legal Harmonization and the Business En- had to examine the existing material for directly terprise: Corporate and Capital Market Law relevant or comparable cases until a case perti- Harmonization Policy in Europe and the USA nent to their issue was found. This task was ex- (1988); Susanne Kalss, Anlegerinteressen, Der tremely time-consuming and difficult, not only Anleger im Handlungsdreieck von Vertrag, Ver- because of the multitude of fiqh works, but also band und Markt (2001); Holger Fleischer and because of their ponderous language. It was only Hanno Merkt, ‘Empfiehlt es sich im Interesse des at the end of the 19th century when efforts were Anlegerschutzes und zur Förderung des Finanz- made to summarize and codify Islamic law. platzes Deutschland das Kapitalmarkt- und Börsenrecht neu zu regeln?, Gutachten F und 2. The first codifications in the countries of Gutachten G’ in Ständige Deputation des Deut- the Greater Middle East schen Juristentages (ed), Verhandlungen des vier- A first attempt to codify Islamic law had been undsechzigsten Deutschen Juristentages, vol I made at the end of the 8th century in early Is- (2002); High Level Group of Company Law Ex- lamic legal history. In order to ensure legal uni- perts, Report on Issues Related to Takeover Bids formity with regard to the emerging schools of (Report I) and A Modern Regulatory Framework law, Ibn al-Muqaffa’, the foreign minister of ca- for Company Law in Europe (Report II), Reports liph Al-Mansur, suggested codifying Islamic law. of the High Level Group of Company Law Ex- However, this attempt foundered on the resis- perts, European Commission, Brussels, 10 Janu- tance of the scholars who did not want to re- ary 2002 and 4 November 2002, available also in nounce their monopoly on the interpretation Guido Ferrarini, Klaus J Hopt, Jaap Winter and and deduction of law. Only 11 centuries later, in Eddy Wymeersch (eds), Reforming Company and the 19th century, were the first codifications of Takeover Law in Europe (2004) Annex 2, 825 ff the law put into force in the Ottoman Empire and and Annex 3, 925 ff; Paul Frentrop, A History of in Egypt. Additionally, Iran codified its private Corporate Governance 1602–2002 (2003); Guido law at the beginning of the 20th century. Ferrarini and Eddy Wymeersch (eds), Investor Protection in Europe (2006); Stefan Grundmann a) The Ottoman codifications and Florian Möslein, European Company Law, The Ottoman Mecelle of 1876 (turk. Mecelle-i Organization, Finance and Capital Markets Ahkâm-ı Adliye) is the first systematic com- (2007); Klaus J Hopt and Eddy Wymeersch (eds), pilation of Islamic law. The Mecelle may also be European Company and Financial Law, Texts called a restatement of Islamic law. It clothes the and Leading Cases (2007); Klaus J Hopt, ‘Com- Islamic jurisprudence in a new garment bor- parative Company Law’ in Mathias Reimann and rowed from the European legal systematics, Reinhard Zimmermann (eds), The Oxford Hand- namely a code of law. The Mecelle was part of a book of Comparative Law (2008) 1162 ff; Rafael far-reaching reform movement in the Ottoman La Porta, Florencio Lopez de Silanes and Andrei Empire, the tanzimat movement, in which Euro- Shleifer, ‘The Economic Consequences of Legal pean models were used in order to reorganize Origins’ [2008] JEL 285. the legal system and establish legal institutions. Klaus J Hopt Thus, the Ottoman Commercial Code adopted in 1850, the Penal Code of 1858, the Code of Com-

1000 Nadjma Yassari Islamic Countries, Influence of European Private Law mercial Procedure of 1861 and the Code of Mari- date up to 20 competing jurisdictions, the law time Commerce of 1863 are all based on the became more and more fragmented. At the end French model. of the 19th century, in order to unify the law and The Mecelle is mainly based on the Hanafi institutionalize modern courts, two codes of law school of Islamic law. It regulated mainly civil were enacted, the Code civil mixte in 1875 and law, especially contract, tort and procedural law, the Code civil indigène in 1883. Whereas the Code leaving matters of personal status (namely family civil mixte, an extract from the French Code civil, and inheritance law) uncodified under the juris- applied to legal disputes between (all) foreigners diction of the sharīca (sharia) courts. The Mecelle and between foreigners and Egyptians and was separated for the first time ritual law from law applied by the so-called mixed courts, the Code regulating human transactions and was applied civil indigène, based to a large extent on the Code by specially established national courts. It there- civil mixte and only slightly adjusted to Egyptian fore had a visible secularizing effect. Its sys- conditions, was applied by the national courts to tematic structure is similar to European codes, as legal disputes between Egyptians. These laws it is subdivided into books, chapters and articles. were in force until the enactment of the Egyptian Whereas the general part is kept very brief, for Civil Code on 15 October 1949. lack of a general contract theory in Islamic law, In contrast to the Ottoman Mecelle, where detailed regulations on special contract types contract and tort law were based on Islamic law, dominate. Although the system of the Mecelle is the Egyptians followed French law very early on not consistent throughout, it made law clearer and adopted the French texts literally. Further- and easier to access. It is on account of its edito- more, the commercial, procedural and criminal rial style that the Mecelle met with immediate provisions followed the French model as well. As success. with the Mecelle, matters of personal status were In 1917, the family law of the Ottoman Empire not included in these codification efforts and was also codified. In contrast to the Mecelle, the were only codified at the beginning of the 20th Ottoman Family Code was not exclusively based century in piecemeal legislation. on Hanafi rules, but incorporated provisions of other Sunni schools of law as well, especially the c) The Iranian codifications Maliki school. Moreover, it broke with two tradi- Iran has no direct colonial history. However, tions: first by not being applicable to Muslims since the 18th century, the United Kingdom and alone, but also to Christians and Jews, ie the so- Russia have exerted great influence on Iranian called People of the Book, and secondly by as- politics. In search of a politically more honest signing jurisdiction in matters of personal status broker, the Iranians looked towards France. The to state courts. In the Ottoman Empire and later school system as well as the university education in Turkey, the Ottoman family code was only 18 system had already been imported from France. months in force. In the other successor states of Even today, sufficient knowledge of the French the Ottoman Empire, Syria, Jordan, Lebanon, language is a precondition for the admission to Palestine and Iraq, it remained in effect until well doctoral studies in law at Iranian universities. In into the mandate period or until new laws were the years 1928–35, the Iranian Civil Code was enacted. adopted. It regulates all legal fields of civil law The tanzimat reforms thus curtailed the in- and, in contrast to the Mecelle and the Code civil fluence and application of Islamic law in favour mixte and indigène, also matters of personal of secular law. Although care was still taken to status, ie family and inheritance law. The com- link reforms to the sharia, the process of secu- mission charged with drafting the bill was com- larization had reached numerous areas of law. posed of Shiite Islamic scholars and secular Ira- nian jurists who had also been trained in France, b) The Egyptian codifications Switzerland and Belgium. Although the civil laws Although Egypt was nominally part of the Otto- of these countries were consulted, the legal pro- man Empire, the Mecelle never came into force visions of the Iranian Civil Code are predomi- there. Rather, instead of compiling Islamic law, nantly a reproduction of the Islamic Shiite provi- efforts were undertaken to adopt European law. sions, particularly in the field of contract and Since the end of the 18th century, Egypt had de- property law. The European law penetrated the veloped into a centre of European commercial code only to a limited extent and only in certain interests. This led to the emergence of consular fields, such as the law of nationality, the law of jurisdictions. The foreign consuls were exclu- domicile or the regulations on law enforcement. sively competent to hear and adjudicate all legal In some parts, the blending of European and Is- disputes of their nationals. Having to accommo- lamic law becomes quite visible. Thus, the Ira-

Nadjma Yassari 1001 Islamic Countries, Influence of European Private Law nian Civil Code has retained the provisions on mon law system was adopted very early. As early temporary marriage, a particularity of Shiite law, as 1772, British judges were sitting on Indian and those on the divorce by repudiation, whereas benches, assisted by Islamic jurists in matters of the provisions on the registration of all matters of personal status. Thus, the dual court system ex- personal status bear a clear European signature. isting in other Islamic states was avoided and the Codifications in other fields of law, as in criminal, so-called Anglo-Muhammadan law emerged. commercial and procedural law, follow the Furthermore, the British also resorted in some French models as well. fields of law to the codification of English law; thus, in 1860 a penal code, in 1872 the Contract 3. The reception of European law Act and in 1882 the Transfer of Property Act were After the collapse of the Ottoman Empire fol- enacted. lowing World War I and the establishment of the In Sudan, as opposed to Egypt, the British mandates in the Greater Middle East, there were barely found any legal and judicial structures on further receptions (→ reception) of European which to build. Thus, the principles of the com- law. Turkey exhibited the most radical break mon law system, particularly the principles of from its legal tradition, as it abandoned the ‘justice, equity and good conscience’, were Mecelle and thus Islamic law as a whole. The adopted and a unified judicial system was intro- → Turkish Civil Code is thus a reception of Swiss duced. civil law including its family law. Although law In Palestine, the Palestine-Order-in-Council reform also took place in the new Arab states, Is- of 1922 provided for the application of the exist- lamic law was only overtaken in commercial and ing Ottoman laws—particularly the Mecelle and economic law, while it still applied to matters of the Ottoman Family Code—and British law. In personal status. The Mecelle initially remained in addition, the courts were ordered to apply Eng- force in many countries, eg Syria, Palestine and lish common law and → equity by residuary Jordan. In the meantime, the reception of Euro- power. British judges or judges trained in Great pean law and the secularization of law also con- Britain filled the courts and their application of tinued during the mandate period and especially common law quickly became the norm. Appeals thereafter. against their decisions could be lodged with the The reception of European law in Islamic Judicial Committee of the Privy Council in Lon- countries is closely linked to their colonial his- don. tory. However, not all the countries adopted the In Iraq and Jordan, which were under British legal systems of the ruling colonial power. This mandate as well, however, the influence of the holds particularly true for the countries under common law was much weaker. There were British rule and British mandate. Apart from a neither British judges nor could the common law few exceptions, most countries adopted the civil be drawn upon as a gap filler. These countries law tradition. The reasons for this preference are remained mostly influenced by continental Euro- manifold: first, the relatively late British coloni- pean law. zation of the Middle East, compared to the longer In the Maghreb States (Morocco, Tunisia, and presence of the British in India/Pakistan, has to Algeria) and other countries under French be mentioned. Besides, many states had already domination, like Syria and Lebanon, the influ- adopted the French school system and educa- ence of the French Code civil was direct and very tional system. In Lebanon, there were, further- strong. In Lebanon, the Mecelle was substituted more, centuries-old religious ties to Catholic in 1932 by the Code of Obligations and Contracts France. In Egypt, French influence was promi- that had been drafted by French jurists and nent due to the Napoleonic conquest (1798– adapted to Lebanese conditions by Lebanese ju- 1801) and the later construction of the Suez rists. However, Lebanon also consulted the legal Canal; the British, in contrast, came to Egypt at a systems of other European states. Thus, in the time when the legal and judicial system had al- Lebanese Code of Civil Procedure of 1935, the ready been implemented. Ultimately, it was in influence of the Austrian legislation is evident, the nature of things that codified laws were better whereas the Penal Code was inspired by the suited as a model than the casuistic → common Italian Penal Codes of 1890 and 1930. law. Clear, all-embracing codifications were needed in order to regulate the legal systems 4. The codifications after World War II thoroughly and, for this purpose, the continental By the end of World War II and with the emer- European codes seemed to be best suited. gence of independent Arab states, the reception The exceptions were India/Pakistan, Sudan of law continued. This period was particularly and Palestine/Israel. In India/Pakistan, the com- marked by Pan-Arabism and the idea of the Arab

1002 Nadjma Yassari Islamic Countries, Influence of European Private Law unity. Whereas before the focus was mainly di- 5. Impact of European law on contemporary rected on French law, now dual emphasis was economic legislation in Islamic countries being placed on rediscovering Islamic law as a In its initial stage the reception of European law common legal tradition of all Arab Muslim states in many Islamic countries was a reception of its and on consulting other European systems of systematics and structure. Islamic law was meant private law. This extensive legal comparison and to be presented with the methodological tools the endeavour to do justice to the local condi- and systematic approach of European law. Later tions led to the enactment of the Egyptian Civil on, whereas family and succession law still re- Code in 1949 (Law no 131/1948). It was drafted mained Islamic based, European-based secular under the leadership of ’Abd al-Razzaq Ahmad law prevailed in the field of commercial and al-Sanhuri (1895–1971), an Egyptian professor, economic law in all Islamic states, since classical judge, lawyer and politician who had been a dis- Islamic law offered no solutions for many of the ciple of Edouard Lambert in Lyon. Sanhuri complex legal matters that emerged. aimed to blend Islamic law and adopted provi- Even today, European private law continues sions of European law to create a new code. to influence legislation in Islamic countries. Hence, the laws in force in Egypt until 1949, the Many modern economic, company and com- judicature of the Egyptian courts as well as provi- mercial law codifications continue to orientate sions of Islamic law and European codes were themselves on Europe. In addition, the influ- incorporated into the Egyptian Civil Code. As a ences of international agreements are clearly dis- result, provisions of different origin can be found cernible. Thus, the Iranian Commercial Code, in the Egyptian Civil Code. For example, one which had been adopted from the French model finds provisions on the Islamic institution of pre- in 1932, is currently being reformed in view of the c emption (shuf a) along with provisions of tort law membership of Iran in the WTO. This also holds which are a literal reproduction of French tort true in the field of competition law where, for in- law, whereas the objective theory of the declara- stance, the legislative activities closely follow the tion of intention has been adopted from the European models and the international agree- German legal system. ments. Examples to be mentioned are the Tuni- The Egyptian Civil Code has functioned as a sian Competition and Prices Act of 29 July 1991, role model for almost all the subsequent Arab inspired by the French Order no 86–1243 of 1 De- civil law codifications. This is ascribed to the cember 1986 and the Competition Rules of the common Islamic tradition and the similar social EU, as well as the provision on unfair competi- conditions in many Arab countries. So far, it has tion added to the Egyptian Commercial Code in been adopted with or without modifications in 1991 which is similarly based on European legis- more than 10 states having very different politi- lation. The same applies in the field of intel- cal, economic and social structures, and it has lectual property: the Egyptian Law on the Pro- proved itself everywhere. Thus, the Egyptian tection of Intellectual Property Rights of 2 June model influenced the civil law codifications of 2002 is based on the model of the French Code de Syria (Law no 84/1949), Libya (Royal Decree of la propriété intellectuelle and itself served as a 28 November 1953), Algeria (Ordonnance no 75– model to the Jordanian legislature in 2003 for the 78 of 26 September 1975) and Somalia (Law no reform of copyright law. 37/1973) significantly. This also holds primarily true for the civil codes of Iraq (Law no 40/1951), Literature. Charles A Hooper, The Civil Law of Jordan (Law no 43/1976), Afghanistan (Law of 5 Palestine and Trans-Jordan, vol 1; vol 2 (1934– January 1977), Kuwait (Law no 67/1980), Sudan 1936); Herbert Liebesny, ‘Stability and Change in (Law no 6/1984), the United Arab Emirates (Law Islamic Law’ (1967) 1 Middle EJ 16; Enid Hill, ‘Al- no 5/1985) and finally Yemen (Law no 19/1992). Sanhuri and Islamic Law’ (1988) 1 Arab LQ 33 Sanhuri’s Egyptian Civil Code together with his and (1988) 2 Arab LQ 182; BA Roberson, ‘The extensive commentary on civil law al-wasīt  fī Emergence of Modern Judiciary in the Middle sharh  al-qānūn al-madanī al-jadīd, comprising East: Negotiating the Mixed Courts of Egypt’ in about 12,500 pages, virtually have the rank of Chibli Mallat (ed), Islam and Public Law (1993); legal sources in the Arab states. They are con- James ND Anderson, ‘Codification in the Muslim sulted by the courts of Arab states in order to World’ (1996) 30 RabelsZ 241; Hilmar Krüger, interpret their own legal provisions and fill legal ‘Das Zivilrecht der Staaten des ägyptischen gaps. Rechtskreises’ (1997) 14 Recht van de Islam 67; Sami Zubaida, Law and Power in the Islamic World (2003); Aharon Layish, ‘The Transforma-

Nadjma Yassari 1003 Islamic Law tion of the Shari’a from Jurists’ Law to Statutory protection of widows and orphans, the rule of Law in the Contemporary Muslim World’ (2004) good faith in commercial transactions and the 44(1) Die Welt des Islams, International Journal prohibition of gambling and interest. Since the for the study of modern Islam 85; Chibli Mallat, verses of the Qur’an above all want to set ethic ‘From Islamic to Middle Eastern Law’ (2004) 52 principles, they mostly refrain from ordering Am J Comp L 209; Chibli Mallat, Introduction to worldly sanctions. Wrongdoers will be punished Middle Eastern Law (2007). on the Day of Judgment in the afterlife, as will Nadjma Yassari observants be rewarded. In order to complement and interpret the Qur’an, the traditions, ie the deeds and words of Islamic Law the Prophet, were consulted. The traditions are Nadjma Yassari based on individual narrations or messages 1. Definition (hadīth) about the behaviour and views of the The term ‘Islamic law’ or sharīca (sharia) is Prophet, reports on his decisions as a judge as generally used to refer to the religious law of well as his judgments on particular behaviours Islam. These terms, however, are not synonyms. and deeds. In the course of its development, the It would be an oversimplification to equate validity of the hadīth did not depend on their ‘sharia’ with law. It is rather a generic term for contents, but rather on the reliability of the au- the entire set of rules of conduct imposed on thorities in the chain of transmitters. The nar- Muslims without differentiating between legal, rated material was considered authentic if a moral or ethical norms. The sharia thus en- chain of transmitters (isn d) back to the Prophet compasses more than just legal norms. Islamic gave reason for the conviction that the transmit- law conversely is derived from the sharia; ted event had happened exactly that way and not however, there is no uniform Islamic law. It is otherwise. rather divided into schools of law which have developed at different places and different times. b) Secondary sources Because of the complex language and meanings 2. Sources of Islamic law of the Qur’anic verses and the sunna, it became apparent in the early era of Islamic law that not a) Primary sources all legal questions could be answered by directly The sources of Islamic law are divided into pri- applying provisions from the primary sources of mary and secondary sources according to their law. The task of deducing the law in such cases, origin and their relevance. The primary sources ie interpreting and explaining the Qur’an with are the Qur’an (qur’ n), the holy book of revela- the aid of the traditions, was incumbent on tions, and the traditions, which are narrations of scholars specially trained in grammar and syntax the deeds and words of the Prophet Muhammad of the Arabic language as well as in jurisprudence related by a chain of reliable transmitters and theology, the mujtahid. The work they per- (sunna). The Shiite legal doctrine additionally formed, ijtihād, means ‘making an effort’ in Ara- acknowledges the traditions of the 12 Imams. bic; in the legal sense, ijtihād is the effort of a ju- The secondary sources of Islamic law comprise rist to solve a legal question by independent rea- the consensus of the jurists (ijm c) and the legal soning and interpretation of the sources. If the findings by means of analogy (qiyās) and logic answer to a question was unambiguous in the (caql). sources, the scholar did not need to make an ef- The final compilation process of the Qur’an fort to find the solution, ie exercise ijtihād, but was accomplished under the third caliph could apply the provision directly. In contrast to ’Uthman (AD 644–656). The Qur’an is neither a this, where the rule was not directly apparent scientific work nor a legal text. Of its approximate from the texts, the scholars had to find a solution 6,200 verses, only 500 are declared legal provi- by using their own skills. These findings conse- sions with the majority of these verses dealing quently reflected the scholar’s personal opinion with acts of worship and ritual law, such as on a particular question and had to be specified prayer, washings or fasting. Of these 500 verses, as such (zann). If a majority of the scholars came about 80 to 100 have legal content, primarily as- to the same results or if gained insights met with signed to succession, penal, procedural, mar- the approval of the majority of the scholars, the riage and sales law. These represent areas that subjective assumption of a scholar turned into desperately needed regulation in pre-Islamic secure knowledge (cilm). In a next step, the legal Arabia and include the introduction of inheri- rule supported by the consensus of the jurists, tance and proprietary rights for women, the

1004 Nadjma Yassari Islamic Law ijmāc, was elevated to the status of a source of ommended, the disapproved and the indifferent, law. which, however, are not legally binding and are The doctrine of consensus was crucial for the only of moral importance. development of Islamic law and an important tool for adapting law to social changes. It was the 4. Schools of law basis for many legal concepts emanating neither The first schools of law developed during the first from the Qur’an nor from the traditions. Addi- half of the 8th century, particularly in the com- tionally, it allowed the ruling academic circles to petition between the cities of Kufa (in contempo- express their opinions. Indeed, consensus in the rary Iraq) and Medina. Different interpretations rapidly spreading Islam was regional, often lim- of the primary sources as well as the disparate ited to the respective geographic sphere in which social structures of the two cities led to the devel- the emerging schools of law were particularly in- opment of divergent schools of Islamic thought. fluential. While, for instance, in the consistently homoge- Finally, the fourth source of law is legal rea- neous and tribal society of Medina a young soning through analogy (qiyās) in Sunni Islam woman needed the consent of her legal guardian and through rational analysis (caql) in Shiite Is- for marriage, in the cosmopolitan and more lam. They are better referred to as methods of le- penetrable society of Kufa, women of legal age gal reasoning, since it is actually the application were allowed to marry independently. of ijtihad. Qiyās is the extension of a ruling from Eventually, the connection to geographic re- an original case to a new case due to a similar gions gave way to adherence to the doctrines as- divine reason underlying both. The prohibition sociated with an eminent personality. The four of consuming grape wine, for instance, has been major Sunni schools of law that emerged were: extended to other intoxicating beverages, like the Hanafi school of law, which emerged from date wine, because both dull the senses and the school of thought in Kufa, founder Abu make people incapable of fulfilling God’s com- Hanifa (699–767), prevalent in central Asia, Paki- mandments. The Shiite doctrine, on the other stan, Turkey, Syria, Jordan, Egypt; the Maliki hand, follows the thesis that everything dictated school of law, the former school of Medina, by reason is God’s will as well. In compliance founder Ibn Malik (715–795), prevalent in North with this rule, norms may thus also be obtained and West Africa, Sudan and some Gulf States; the by rational analysis. These include, for instance, Shafi’i school of law, founder al-Shafi’i (767–820), the permission of an act implying the prohibition prevalent in East Africa, Indonesia and Far East; of its opposite and the principle of causality. and the Hanbali school of law, founder Ibn Hanbal (780–855), prevalent in Saudi Arabia and 3. Deducing law Qatar. The result of these deductive efforts is called fiqh. The main difference between these schools The Arabic word fiqh means literally ‘under- lies in the weighting of the hadīth. On the one standing’ or ‘insight’. Islamic jurisprudence dif- side, the so-called people of the traditions (ahl ferentiates clearly between the deduced fiqh law al-hadīth) measured the authenticity of a hadīth and the sharia as such. The sharia is of divine ori- by the formal criterion of the isn d, ie how strong gin and hidden in the revelation without being and reliable the chain of transmitters was, and spelled out in a precise legal manner. The Islamic took the view that the Qur’an could only be un- jurist forms the necessary link between God and derstood with the aid of the traditions. On the men by formulating the fiqh law. This fiqh law is other hand, the so-called people of opinion (ahl the result of human and therefore fallible analy- ar-ra’y) did not confine themselves to the formal sis. Another possible description of this relation- criterion of the isn d when evaluating a hadīth, ship is to refer to the sharia law as God’s law and but measured the hadīth against the yardstick of to the fiqh law as jurists’ law. a rationalistic interpretation of the Qur’an. The fiqh works are not systematically ar- Within the Sunni schools of law, only the Hanafi ranged according to subject matters. Rather, school belongs to the ahl ar-ra’y. Shafi’is and general legal issues are dealt with by reference to Hanbalis adhere to the ahl al-hadīth. The single provisions. These works deal meticulously Malikis, too, are counted among the ahl al- and in detail with a particular problem, thereby hadīth, although they also possess elements of disclosing the method of analysis and the rules of the ra’y school. Nevertheless, the schools of law deduction applied. Fiqh works classify human cannot be clearly classified under categories behaviour into five categories: besides the legally such as ‘static’ or ‘dynamic’. The Hanbali school binding categories of the obligatory and the pro- of law, for instance, is regarded as being very hibited, there are also the categories of the rec- conservative in the field of family law; however, it

Nadjma Yassari 1005 Ius Commune is the only Sunni school of law which acknowl- value system of the European Union. For ex- edges the principle of → freedom of contract ample, provisions on child custody often refer to within the framework of Islamic ethics (prohibi- rigid age boundaries instead of relying on the tion of interest and speculation). principle of the best interest of the child. Fur- Furthermore, there are several Shiite schools thermore, in most Islamic countries, there are of law. The prevailing Shiite school is the Twelver different divorce laws for men and women, and Shia, also called Ja’fari school of law, founder in inheritance law, female heirs are disadvan- Ja’far al-Sadiq, the 6th Shiite Imam (702–765), taged over male heirs simply because of their prevalent in Iran, parts of Afghanistan, in gender. This has led, in Germany, for instance, to southern Iraq and Bahrain. an increased application of the → public policy (ordre public) proviso (Art 6 EGBGB (Introduc- 5. Codification of Islamic law tory Act to the German Civil Code)), according to Until the 20th century, the fiqh works of the re- which a foreign norm does not apply if the result spective schools of law essentially remained the of its application is evidently repugnant to the main sources of law. Although there are move- basic principles of German law (Grundrechte). ments declaring that the process of independent Therefore, family and inheritance law influenced legal reasoning by jurists had come to an end by Islam is applied in European courts subject to after the 11th century and the gates of ijtihād had the guaranteed basic rights. been closed, as a matter of fact, Islamic schol- ars—Sunni as well as Shiite—have continually Literature. Noel J Coulson, A History of Islamic applied ijtihād as a method of legal reasoning Law (1964); Y Linant de Bellefonds, Traité de until today. They have enriched and further Droit Musulman comparé (1965–73); Hossein developed (secondary) law over the past thou- Modaressi Tabatabai, Introduction to Shii Law: A sand years via a multitude of textbooks, com- Bibliographical Study (1985); David S Powers, mentaries, monographs and legal opinions. Studies in Qur’an and Hadīth: The Formation of Only the emergence of the → codification the Islamic Law of Inheritance (1986); Abdullahi movement has challenged the dominance of the Ahmed An-Na’im, Toward an Islamic Reforma- uncodified Islamic legal provisions. Thereby, the tion, Civil Liberties, Human Rights, and Interna- European civil codes, particularly the continental tional Law (1990); Bernard G Weiss, The Search European codes, acted as models. Even today, for God’s Law: Islamic Jurisprudence in the the impact of European private law on the laws of Writings of Sayf al-Dīn al-Āmidī (1992); Parviz the Islamic countries is evident (→ Islamic coun- Owsia (ed), Formation of Contract: A Compara- tries, influence of European private law). Apart tive Study Under English, French, Islamic and from a few exceptions, like Saudi Arabia, today Iranian Law (1994); Laleh Bakhtiar, Encyclopedia justice in Islamic countries is dispensed on the of Islamic Law: A Compendium of the Views of the basis of modern private law codifications. The Major Schools (1996); Barber Johansen (ed), uncodified classical Islamic law only applies Contingency in a Sacred Law: Legal and Ethical where there is a lacuna in the law. Thus, for in- Norms in the Muslim Fiqh (1999); Jürgen stance, Art 3 of the Iranian Code of Civil Proce- Basedow and Nadjma Yassari (eds), Iranian dure refers to ‘the Shiite law’ and Art 1(2) of the Family and Succession Laws and their Applica- Egyptian Civil Code to ‘the principles of Islamic tion in German Courts (2004); Mathias Rohe, Das law’. islamische Recht, Geschichte und Gegenwart (2009) 6. Islamic law in Europe Nadjma Yassari According to the central institute of Islamic ar- chives in Germany (Zentralinstitut Islam-Archiv- Deutschland), in 2008 approximately 15 million Ius Commune Muslims were living in the European Union. Nils Jansen About 2.2 million nationals of Islamic countries 1. The idea of a European common law are living in Germany. Thus, according to the The concept of ius commune designates the provisions of the conflict of laws rule, European ‘European common law’ (gesamteuropäisches courts may have to apply family and inheritance Gemeinrecht, Wieacker) and thus the common laws of these countries in cases involving their object of the learned European legal discourse in nationals (→ foreign law (application)). This the time between the 12th and the 19th centu- sometimes presents the courts with difficult ries. For modern lawyers, this idea of a legal dis- qualification problems and conflicting views on course being independent of the actual rules that the compatibility of the foreign rule with the are applied before the local courts is difficult to

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