University of Pennsylvania Carey Law School Penn Law: Legal Scholarship Repository Faculty Scholarship at Penn Law 4-23-2020 Commercial Law Intersections Giuliano Castellano University of Hong Kong, Faculty of Law Andrea Tosato University of Nottingham; University of Pennsylvania Follow this and additional works at: https://scholarship.law.upenn.edu/faculty_scholarship Part of the Banking and Finance Law Commons, Business Organizations Law Commons, Commercial Law Commons, Comparative and Foreign Law Commons, Contracts Commons, Corporate Finance Commons, Legislation Commons, Political Economy Commons, and the Public Law and Legal Theory Commons Repository Citation Castellano, Giuliano and Tosato, Andrea, "Commercial Law Intersections" (2020). Faculty Scholarship at Penn Law. 2175. https://scholarship.law.upenn.edu/faculty_scholarship/2175 This Article is brought to you for free and open access by Penn Law: Legal Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship at Penn Law by an authorized administrator of Penn Law: Legal Scholarship Repository. For more information, please contact [email protected]. COMMERCIAL LAW INTERSECTIONS Giuliano G. Castellano* & Andrea Tosato** Commercial law is not a single, monolithic entity. It has grown into a dense thicket of subject-specific branches that govern a broad range of transactions and corporate actions. When one of these events falls concurrently within the purview of two or more of these commercial law branches – such as corporate law, intellectual property law, secured transactions law, conduct and prudential regulation – an overlap materializes. We refer to this legal phenomenon as a commercial law intersection (CLI). Some notable examples of transactions that feature CLIs include bank loans secured by shares, supply chain financing, patent cross-licensing, and blockchain-based initial coin offerings. CLIs present a complex and multi-faceted challenge. The convergence of commercial law branches is frequently beset with failures in coordination that both distort incentives for market participants and increase transaction costs. Crucially, in the most severe cases, this affliction deters business actors from entering into the affected transactions altogether. The cries of scholars, judges, and practitioners lamenting these issues have grown ever louder yet methodical, comprehensive solutions remain elusive. This article endeavors to fill this void. First, it provides a comprehensive analysis of CLIs and their coordination failures. Drawing from systems theory and jurisprudence, it then identifies the deficiencies of the most common approaches used to reconcile tensions between commercial law branches, before advancing the concepts of “coherence” and “unity of purpose” as the key to addressing such shortcomings. Finally, it formulates a two-step interpretive method that unties the Gordian knot created by CLI coordination failures. _____________________________ * Associate Professor, University of Hong Kong, Faculty of Law; Deputy Director, Asian Institute of International Financial Law (AIIFL). ** Associate Professor, University of Nottingham, School of Law; Lecturer, University of Pennsylvania, Law School. April 2020] COMMERCIAL LAW INTERSECTIONS 1 TABLE OF CONTENTS INTRODUCTION ........................................................................................................ 2 I. THE EMERGENCE OF COMMERCIAL LAW INTERSECTIONS (CLIS) ......................... 8 A. The Fragmentation of Commercial Law .................................................. 9 B. The Birth and Proliferation of Commercial Law Intersections ............. 16 C. Coordination Failures ............................................................................ 20 II. UNDERSTANDING COORDINATION FAILURES: THE LEGAL THEORY PERSPECTIVE ............................................................................................................................... 25 A. Venturing Beyond Legal Consistency .................................................... 25 B. Legal Coherence .................................................................................... 29 C. Finding Purpose ..................................................................................... 31 III. A NOVEL METHOD ........................................................................................... 34 A. The First Step: Deconstructing the context ............................................ 35 B. The Second Step: Fostering legal coherence ......................................... 48 CONCLUSION .......................................................................................................... 54 2 COMMERCIAL LAW INTERSECTIONS [April 2020 INTRODUCTION Commercial law is not a single, monolithic entity. Over time, it has evolved into a fragmented bundle of subject-specific, legal and regulatory regimes that govern non-consumer transactions and corporate actions.1 Some of these branches of commercial law stem from ancient mercantile practices, such as the law of sales, the law of agency, secured transactions law and corporate law.2 Others have emerged in recent centuries to protect intellectual property, safeguard competition from unreasonable trade restraints and monopolies, and maintain the safety and soundness of the financial system.3 Reflecting the progressive decline of the common law, commercial law branches are increasingly codified in statutes and delegated administrative enactments.4 These sources of law are articulated in rules and principles. Rules are specific directives that are either prescriptive or proscriptive. Principles are general 1 The idea of legal fragmentation was originally birthed in public international law literature; see INTERNATIONAL LAW COMMISSION, FRAGMENTATION OF INTERNATIONAL LAW: DIFFICULTIES ARISING FROM THE DIVERSIFICATION AND EXPANSION OF INTERNATIONAL LAW: REPORT STUDY GROUP ON THE FRAGMENTATION OF INTERNATIONAL LAW (finalized by Martti Koskenniemi), UN Doc. A/CN.4/L.682, 10-28 (2006) [hereinafter Koskenniemi Report] (providing an exhaustive analysis of the notion of “fragmentation of international law”); see generally Eyal Benvenisti & George W. Downs, The Empire’s New Clothes: Political Economy and the Fragmentation of International Law, 60 STAN. L. REV. 595 (2007); Martti Koskenniemi, Fragmentation of International Law? Postmodern Anxieties, 15 LEIDEN JOURNAL OF INTERNATIONAL LAW 553 (2002). For its application in commercial law in the sense of sectorial fragmentation see generally Giuliano G. Castellano & Marek Dubovec, Credit Creation: Reconciling Legal and Regulatory Incentives, 81 LAW & CONTEMP. PROBS. 63 (2018). (focusing on the fragmentation of legal and regulatory regimes governing secured credit); Joshua Karton, Sectoral Fragmentation in Transnational Contract Law, 21 U. PA. J. BUS. L. 142 (2018) (describing how commercial law has split across sectorial lines both at domestic and international level); Andrea Tosato, Intellectual Property License Contracts: Reflections on a Prospective UNCITRAL Project, 86 U. CIN. L. REV. 1251 (2018) (analyzing the fragmentation of the legal framework governing IP licensing); Panagiotis Delimatsis, The Fragmentation of International Trade Law, 45 JOURNAL OF WORLD TRADE 87 (2011) (exploring the phenomenon of fragmentation in international trade law); ROYSTON MILES GOODE, COMMERCIAL LAW IN THE NEXT MILLENNIUM 3–8 (1998) (providing an historical account of the fragmentation of English commercial law). 2 See infra notes 27-35 and related discussion in text. 3 See infra notes 38-55 and related discussion in text. 4 On the codification of commercial law see generally WILLIAM D. POPKIN, STATUTORY INTERPRETATION: A PRAGMATIC APPROACH ch. 1 (2018) (for an exhaustive historical analysis); GOODE, supra note 1, at 3–7 (charting the trajectory of this phenomenon and describing the advent of commercial law codifications as the “pre-eminence of dispositive law”); Karl Llewellyn, Why a Commercial Code, 22 TENN. L. REV. 779 (1951–1953) (expounding the reasons for a commercial code in the US); Charles A. Bane, From Holt and Mansfield to Story to Llewellyn and Mentschikoff: The Progressive Development of Commercial Law In Honor of Dean Soia Mentschikoff, 37 U. MIAMI L. REV. 351 (1982) (offering a US perspective on this phenomenon). April 2020] COMMERCIAL LAW INTERSECTIONS 3 indications that set out an objective which can be legal, economic, social or even moral in nature.5 Through the lens of general systems theory,6 commercial law branches can be understood as autonomous systems of rules and principles that supplement and derogate general doctrines of contract, tort and restitution law, to realize determinate policy aims.7 When a transaction or a corporate action falls concurrently within the purview of two or more commercial law branches an overlap materializes. We refer to this legal phenomenon as a commercial law intersection (CLI). For example, a transaction in which a bank extends a loan to a company and concurrently takes a security interest in the debtor’s shares, gives rise to a CLI between secured 5 The terms “rules”, “principles” and “standards” do not have fixed and universally accepted meanings in scholarly literature. In this article, we use the terms “rules” and “principles” borrowing from the terminology adopted by John Braithwaite, Rules and Principles: A Theory of Legal Certainty, 27 AUSTL. J. LEG. PHIL. 47, 47–49 (2002); and Duncan Kennedy, Form and Substance in Private Law Adjudication, 89 HARV. L. REV.