Commercial Law Centre
Harris-Manchester College
Mansfield Road
Oxford OX1 3TD
United Kingdom
Update - November 2015
Comparative Commercial Law Project
This document summarises initial steps in the comparative commercial law project (the CCL Project), a research undertaking under the auspices of the Commercial Law Centre (the Centre)at Harris Manchester College, University of Oxford(HMC).
Transnational commercial law (TCL) is taught in many jurisdictions and law schools worldwide. Research developed throughthe CCL Project aims to fill a critical gap in the teaching of TCL. That gap is the limited knowledge of the students about (i) the underlying transactions (except contracts, which they are likely to have studied) that are the subject of TCL instruments, and (ii) the basic legal principles, more so on a comparative basis, that govern such transactions. Such comparative commercial law (including the underlying transactions, CCL) is central to understanding the process of creating, and content of, TCL instruments, even where the latter seek to advance best international rules rather than set out a common denominator of legal approaches.
There is a need for, if not a complete companion course for TCL, at least a set of basic materials that TCL teachers can provide students, on CCL.
This project, headed by Jeffrey Wool, condon-falknor professor of global business law at the University of Washington School of Law and senior research fellow at HMC, will develop such basic and/or course materials on CCL. This is an open project in the sense of inviting collaboration with interested others. Collaboration with UW law school is being explored. The results of the CCL Project would be shared globally, including, without restriction, with teachers of TCL.
Separate from its key linkage to TCL, CCL merits study and development as an academic end in itself.
Annexed hereto are:
--A schematic depiction of the CCL Project (Annex I)
--An outline of first step in the CCL Project: the development of basic materials for a new course, which, alternatively, can be assigned materials in TCL, called ‘Comparative Commercial Law: Transactional Perspectives’ (Annex II)
--The initial archetype transaction and fact pattern to be used in that new course (described further below)(Annex III)
--The template for jurisdictional outlines and bibliographies related to that transaction and fact pattern(described below) and the form for compiling the jurisdictional replies (Annex IV-A and IV-B, respectively)
To make CCL Project both practical and efficient, we have secured the support of major international law firms with global expertise (the supporting firms)to provide support in terms of content. These firms, listed alphabetically, are: Abogados Sierra y Vazques; Clyde & Co.; Freshfields Bruckhaus Deringer; Holland Knight; King & Wood Mallesons; and Weil, Gotshal & Manges. The University of Paris has also contributed on equal footing with the supporting firms and is viewed in similar terms in the balance of this memo. Others may be added.
The supporting firmswill be publicly recognised as the firms supporting the CCL Project, including on the HMC/Centre website and in correspondence and communications.
The supporting (each doing pieces, not jointly) have done the following (the supporting firms’ tasks) under Professor Wool’s supervision:
(1)draftedsets of transaction documents (transaction documents) reflecting hypothetical fact patterns covering archetype transactions and raising basic legal issues in such transactions (as set out below, and which correspond to TCL instruments, the archetype transactions),
(2)prepared outlines, following a common format based on a set of questions, on the basic legal concepts applicable to, and sources of law that govern, the archetype transactions and applied the same to the fact pattern under the laws of each of England New York, France, Germany, Mexico, New York, United Arab Emirates, and China (the subject jurisdictions), and helped to build the bibliography and provided source materials relating to the foregoing for each subject jurisdiction (jurisdictional outlines and bibliographies). The subject jurisdictions were selected to cover a cross section of common law, civil law (Napoleonic and Roman-Germanic), Islamic-impacted law, and developing jurisdictional law.
The initial archetype transaction and fact pattern coverscontracts, security,insolvency, and surety. It is set out in Annex III.[1] The initial jurisdictional outlines and bibliographies would follow the template attached as Annex IV-A.
These materials – in draft form – were used in a CCL tutorial [Comparative Commercial Law: Transactional Perspective] taught this summer at the University of Washington School of Law. Student (JD and (non-US) LLM) . Feedback from the students was obtained. That feedback, and the observations from the tutorial set on in Annex V, will be considered in further development of the materials.
A presentation on the CCL Project will be made to the next TCL teachers’ conference (Perth, November), where others will be asked to develop other archetype transactions and fact patterns and more generally become involved in the CCL Project.
END
SEE ANNEXES
AnnexII
Comparative Commercial Law: Transactional Perspectives
Subject Matter Overview
There are three objectives of this course / these materials (CCL):
i)to introduce students to the form, substance, and commercialpurpose of a range of commercial transactions,
ii)to provide students with a comparative perspective on the rules of law applicable in major systems of law to such transactions, and
iii)to extract general principles of law applicable to such transactions, to be studied in a subsequent course, Transnational Commercial Law (TCL), which addresses harmonization of international commercial law.[2]
It is recommended that students take CCL prior to taking TCL, but, if that is not possible, materials from the former can be used as introductory and background reading in the latter.
The following will be addressed in the initial archetype transaction (the transaction): (1) basic contract, (2) secured transaction, (3) surety, and (4) insolvency.Dispute resolution issues will be included. The transactions will be domestic (or, at least, domestic law will be deemed to apply), given the comparative law objective. The students will work through the transactions, the intended commercial objectives of the parties, and the role of lawyers in such transactions.
The comparative element will be addressed through outlines, materials, and reading introducing basic rules of law applicable to the transactions from (a) common law jurisdictions (New York and England),(b) civil law jurisdiction (France, Germany, and Mexico), (c) an Islamic law jurisdiction (United Arab Emirates), and (d) a mixed law systems (China)(the subject jurisdictions).
Fundamental and recurring themes, concepts, questions will be identified and assessed (the commercial law themes).[3]The resulting synthesis or lack thereof regarding general principles applicable to commercial transactions wouldbe taken up in the TCL course.
Format and Materials
Each archetype transaction would be the subject of a detailed hypothetical transaction, which raises core legal issues in many of the subject jurisdictions.
There will be an outline from each of the subject jurisdictions, addressing the basic legal concepts applicable to, and sources of law that govern, the archetype transactions under the laws of that jurisdiction. They will be centred on a set of legal questions posed for each hypothetical.
Topics for Course / Materials
A.Preliminary General Topics
Introduction
Topic1Introduction to commercial transactions
Topic2Comparative law and its relevance to international commercial law
B.Archetype Transactions
Topic 3Contract
Topic4Secured transaction
Topic5Surety / guarantees
Topic 6Insolvency
C.Commercial Law Themes
Topic7Identification and assessment of commercial law themes
Basic Resource Materials[4]
Abbreviation / CitationDalhuisen, Comp. Commercial law / J. Dalhuisen, Dalhuisen on Transactional and Comparative Commercial, Financial and Trade law (Hart, 2013), volumes 1 – 3
Goode, Commercial law / R. Goode, Commercial Law (FourthEdition, Penguin, 2010). Editor E. McKendrick
Goode at al, TCL / R. Goode, H. Kronke, and E. Mckendrick, Transnational Commercial law (Oxford University Press, 2007)
Kozolchyk, Comp. Commercial Contracts
V & K, Int'l Commercial Contracts / B. Kozolchyk, Comparative Commercial Contracts (West Academic Publishing, 2014)
S. Vogenauer & Jan Kleinheisterkamp, Commentary on the Unidroit Principles of International Commercial Law Contracts, Oxford University Press, 2009)
Wood, Principles of Insolvency / P. Wood, Principles of International Insolvency (2nd Edition, Sweet & Maxwell, 2007)
Wood, Legal Maps / P. Wood, Maps of World Financial Law (2th Edition, Sweet & Maxwell, 2008)
Wood, Comp. Security Law / P. Wood, Comparative Law of Security Interests and Title Finance (2nd Edition, Sweet & Maxwell, 2007)
END
Annex III: ARCHETYPE TRANSACTION
CONTRACTS, SECURITY, GUARANTEES, INSOLVENCY
1 January – 15 February 2010
1.Cyber Systems (‘Supplier’) develops, manufacturers, services, and sells computer networks designed to prevent cyber-attacks. It is an industry leader. On 1 January 2010, it entered into preliminary discussions to sell its main product, the Cyber Attach Prevent Network (‘CAP’), to a small but profitable company, Investco, that invests and manages funds for high net-worth individual. During these negotiations, Investco’s external lawyer was told that there was a ‘very small probability’ that CAP might be included in a government inquiry relating to cyber security. CAP uses a component (‘progressive scanner 7’) that could initiate, as well as defend, cyber attacks. Within Supplier, there were some speculation that, if so included, the government might take steps to regulate, or increase the cost of owning, progressive scanner 7.
2.On 15 January 2010, Investco’s external lawyer and Supplier’s legal department verbally agreed that, to minimize the risks associated with the low-probability government inquiry, Investco should lease, rather than purchase, CAP. That, it was thought, would avoid the risk of an ownership-based restriction or cost. Moreover, the lease should be between parties without knowledge of this regulatory risk. The lease would be from an independent intermediary leasing company, Financo (‘Lessor’), to a new subsidiary of Investco, InvestX (‘Lessee’). Lessor is in the business of buying, then leasing, sophisticated computer systems and networks.
3.On 1 February 2010, senior executives of Supplier and Investco initiated a broadly worded memorandum of understanding setting out the basic structure and financial and select other terms of contemplated transaction. No mention was made of the regulatory risk associated with progressive scanner 7, and no party assumed that risk. The contemplated structure is as follows. Supplier would sell CAP to Lessor, would provide product support to Lessee or its assignee, under a supply and support contact. Lessor would finance that purchase by borrowing funds from Global Credit (a bank, acting as agent and security trustee for several lenders, ‘Bank’) as further advance under an existing credit and security facility between Bank and Lessor. Lessor would lease CAP to Lessee under a ten (10) year leasing contract. Investco would have its relationship bank, Surety National (‘Guarantor’) issue a guarantee in favour of Lessor payable in the event Lessee defaulted under the leasing contract.
4.On 15 February 2010, definitive documents effecting the contemplated transactions (the ‘transactions’) were signed. They were neither notarized nor formally witnessed. Lessor’s signatures on all documents were forged by the personal assistant to Lessor’s President after signed originals were lost during the closing. All parties assumed the signatures were authentic and relied on them in taking actions under the transactions.
All of the parties are all companies organized under the laws of, and located in, the same country. That country’s laws govern the transactions. That country’s courts settle all disputes relating to the transactions.
[The transactions are depicted in appendix 1-A. The memorandum of understanding is set out as appendix 1-B. The commercial and legal objectives of the parties are summarized in appendix 1-C. The documentation for the transactions is set out as appendix 2.]
1 January – 15 April 2014
5.On 1 January 2014, the government sent a letter to Supplier advising that –
a) further to its letter to Supplier dated 10 February 2010, the result of the government’s cyber security product assessment is that progressive scanner 7 has been placed on the restricted product list (the ‘restricted list’),
b) since the interim use of progressive scanner 7 pending finalization of the assessment was not discontinued, as demanded by the government in the 10 February 2010 letter, the owner of any system that uses progressive scanner 7 must pay a substantial monthly penalty (the ‘penalty’),
c)from 1 March 2016, the continued use of progressive scanner 7 is prohibited.
6.On 5 January 2014, Supplier informed Lessor, Lessee, and Invesco of the content of the government’s letter of 1 January 2014, and offered to modify CAP by replacing progressive scanner 7 with progressive scanner 8, a new component (which cannot initiate cyber attacks) that is not on the restricted list. Progressive scanner 8 is 15% percent less effective that progressive scanner 7 in preventing a breach of cyber security.
7.On 10 January 2014, Lessee wrote to Lessor demanding that –
(a)as formal owner and title holder of CAP, and, thus of progressive scanner 7, Lessor is obligated to pay the penalty (which, if payable by Lessee, would effectively increase the cost to Lessee of using the CAP by 500%, making it an economic hardship and producing a contractual imbalance),
(b)with effect from 1 March 2016, the leasing contract must be renegotiated to include a substantial reduction of rent to reflect to inferior quality of progressive scanner 8, and
(c)pending resolution of this matter, Lessee would hold back 50% of its monthly rental payments.
The letter concluded by stating that absent Lessor’s agreement to points (a) and (b) above by 15 January 2014, Lessee would view the leasing contract as (i) requiring judicial modification, or (ii) given the forged signatures on the contract (which were since discovered), void ab initio, in the latter case, with no further rights or obligations for either party.
8.On 15 January 2014, Lessor wrote a response to Lessee’s letter of 10 January 2014 stating that –
(a)given the terms of the leasing contract, Lessee was, in fact, the economic owner of CAP (as a financial lease, the transaction was properly construed as sale to Lessee with Lessor retaining title as security for performance by Lessee), or, alternatively
(b)under the express terms of leasing contract, Lessee is responsible for all increased costs and has indemnified Lessor for any such costs.
In either case, the letter concluded, Lessee is responsible for the penalty. In addition, Lessor views Lessee’s letter as an advance repudiation of the leasing contract, and, now, demands assurances of future performance of that contract by Lessee by 1 February 2014.
9.On 1 February 2014, Lessee responded to Lessor’s letter of 15 January 2014 by –
(a)iterating the content of the Lessee letter of 10 January 2014, and
(b)rejecting contents of Lessor’s letter of 15 January 2014.
The letter added that the cited (increased cost and indemnification) leasing contract provisions were set out in fine print in a Lessor form standard contract, were not negotiated, were abusive, and are unenforceable.
10.On 5 February 2014, Lessor wrote to Lessee declaring a default under the leasing contract. It also sought to terminate the contract and demanded the return of CAP, citing a provision permitting such action on the occurrence of any default. Simultaneously, Lessor, attaching a copy of its default letter to Lessee, wrote to Guarantor demanding full and immediate payment of all amounts owed under the guarantee.
11.On 10 February 2014, Guarantor wrote to Lessor refusing to pay under the guaranty on grounds that –
(a)Lessor made an abusive call on the guarantee by not (i) fully assessing whether there was a default under the leasing contract, or (ii) first diligently pursuing legal remedies against the lessee, and
(b)there was fraud in the underlying transaction and procurement of the demand guarantee.
12.On 1 April 2014, Lessor brought legal action against –
(a)Lessee, for (i) damages for breach of contract and a termination of the contract, and, in addition, (ii) specific performance of a clause in the leasing contract requiring Lessee to publish a notice in Cyber Security Weekly, a leading industry journal, announcing the successful closing of the original transaction and Lessor’s first rate provision of services (an obligation Lessee has refused to perform and which Lessor now views as essential to its reputation given the problems surrounding CAP),
(b)Investco, on grounds that Lessee was effectively an agent of Investco, or alternatively, that the corporate veil between them is not substantive, and, in either case, Lessor has a direct claim against Investco, and
(c)Guarantor, for non-payment under the guarantee.
13.On 15 April 2014, Lessee filed legal papers which –
(a)denied all charges,
(b)claimed that if there was a breach, it was not a fundamental breach justifying contractual termination,
(c)asserted that, as Lessor claimed Lessee was the economic owner of CAP, Lessor cannot demand its return, and
(d)counterclaimed, seeking damages for breach by Lessor of its obligation to (i) provide a 30 thirty grace period following any alleged default, an accepted usage in the IT leasing industry (which was discussed during negotiation of, but was not expressly included in, the leasing contract), and, in addition (ii) act in accordance with principles of good faith and fair dealing as required as a matter of law.
Lessee also asserted that, in any event, its (and Lessor’s) performance is excused from 1 March 2016 on grounds of impossibility, given the prohibited use of progressive scanner 7 from that time forward.
14.At the same time, Lessee sought to join Supplier in the proceeding, claiming that Lessee was a third party beneficiary of (i) the supply and support contract between Supplier and Lessor, and (ii) Supplier’s obligation to engage in pre-contractual negotiations in good faith (both of which Supplier breached by its failure to disclose the content of the government letter of 10 February 2010).
15 May 2014 –
15.As the above litigation was progressing, several other parties that leased CAPs from Lessor made similar demands for Lessor to pay the penalty. That large cumulative liability triggered a technical ‘solvency test’ default (and, in Bank’s view, a material adverse change default) under the credit and security facility.
16.As a result, on 1 May 2014, Bank declared a default under the credit and security facility, and, in accordance with the terms of that agreement, took judicial and extra-judicial action against Lessor to repossess then sell the security granted to it by Lessor (which was all Lessor’s current and future assets of any kind, ‘securitycollateral’). Lessor resisted the extra-judicial action on grounds that it violated public order and its right to due process under law, which are mandatory rules and/or procedural which cannot overridden by contract.