The Notions of Certainty, Finality and Predictability

[Jan H. Dalhuisen is Professor at King’s College in London, the Miranda Chair of Transnational Financial Law at the Catholic University in Lisbon, and is Visiting Professor at UC Berkeley]

Professor Dalhuisen is guest-blogging with us this week on the transnationalization of private law. Links to his other posts can be found under “Related Posts” below.

Reliance on transnational immanent law formation, even if supported by some treaty law, coupled with the concept of a dynamic contract and movable property law, naturally raises issues of legal certainty under the modern lex mercatoria even if the question of the hierarchy of norms is sorted out. In this connection it is often argued that there is at least certainty when domestic law is applied to international cases pursuant to the canons of conflicts of law, but this certainty, even if it results, can be of such a low quality that it destroys everything. It was already said that domestic law is seldom meant for international transactions and does not mean to serve their needs or dynamics. In any event, it cannot cover whole portfolios of assets in different countries, nor international cash flows or the movement of assets trans-border. Combinations of national laws must then be used about which there remains much doubt. The result risks remaining not only unsuitable, but indeed also uncertain.

Even if this is all true, there nevertheless remains the question of certainty under the new lex mercatoria to consider. Certainty itself is ephemeral in the law. We would not need ever more lawyers if it could be attained. There remains much doubt in the application of all law because the factual configurations differ all the time and we can have certainty only in pure repeat, therefore perhaps in conveyancing or in most traffic offenses, but not much else in a fast moving world. The cry for certainty is therefore ignorant of the world in which we live and is childish, as has often been pointed out (to start with Jerome Frank) but especially in transactions and payments, there is an overriding and public policy need for finality.

The issue of finality goes well beyond the search for certainty and is particularly important in commerce and finance, as they are per definition transactional and dependent on payment. Finality of this kind is in nature largely a property concept and is quite different from the illusion of certainty, which is based on the idea that the past rules the present and that domestic laws know all. It was already said before that it is likely to amount to law of a low quality in international transactions and could be quite destructive.

But it is a key requirement that transactions once concluded and payments once made must be final. That does not mean that they cannot be undone but that would require a separate cause of action; it means that they cannot simply be reversed. Thus a transfer of property made pursuant to a contract that was subsequently found to be void for lack of payment or otherwise, would not automatically be undone but a retransfer of title could only follow upon a further action. It means that damages would be the more likely remedy unless there was fraud. Life must go on, the commercial flows must be protected as a matter of the highest public order. We cannot have too much legal sophistry and must not unsettle title more than is absolutely necessary.  That is undoubtedly also the view of the international market place.

The way to get there legally is to assume the independence of the transfer – that is the German system of abstraction. This cuts the transfer of title from the arrangements out of which it arises. We see that principle also in letters of credit, bills of lading and bills of exchange which all operate also regardless of how they came into being. An alternative way is to protect the bona fide transferee but in civil law that has never been unconditional and does not apply to the acquisition of intangible assets, whilst in common law the principle is exceptional except in equity and limited to the sale of goods (by statute) and to negotiable instruments.

A similar need for finality arises for payments. That is clear for cash payments. We need not be concerned about the origin of our own money or that of what we receive unless we were in the plot. For payment through the banking system, again we need not concern ourselves with the validity of all intermediate instructions. Once we receive in our account the money that was indubitably owed to us we can keep it even if the original instruction of the payer was faulty or invalid. Here there may also operate the principle of reliance.

Transnational law is likely to reinforce finality in these ways as a mandatory market principle, whilst local laws may still remain confused. Here again the draft common frame of reference (DCFR) in the EU may be used as an example of such confusion. Surprisingly, it abandons the principle of independence or abstraction in property transfers and shows in this way complete ignorance of what is truly needed in the international market place.

Outside the areas of transactions and payments, we must look for predictability rather than for the nebulous concept of certainty. Predictability is quite different and is itself dynamic. It looks at the law in action rather than to the law in litigation on which much modern legal analysis in private law is now based.  This leads to an excessive attention for precedent which is always the past. The predictability we are here talking about is a matter of the daily living with the applicable law and has much to do with the sophistication and discipline of the participants themselves and, at least in commerce and finance, the way they experience risk especially of the ordinary but unforeseeable turn of events. For them the law in contract and personal property is risk management.  They have a say in the distribution of these risks through party autonomy but they will also have to live with the result unless it becomes manifestly unreasonable taking into account in this respect the overall position of the complaining party. Going beyond that would destabilise everything.  Hence the stricter and literal interpretation of contract in the professional sphere.  It was already noted before that good faith is here also a different concept. Rather than asking for more protection as it often does in consumer dealings, in business to business dealings it demands itself that kind of strictness, again as a matter of (international) public order. That is then considered fair between professional parties.