Some Legal Determinants of External Finance in Scotland: A Response to Lord Hodge
| Date | 01 January 2017 |
| Pages | 30-54 |
| Author | |
| Published date | 01 January 2017 |
| DOI | 10.3366/elr.2017.0388 |
Two apparently unconnected events inspired the author of this paper to write it. First, the author read Lord Hodge's article “
The central tenet of this paper is that Lord Hodge is undoubtedly correct that “[i]t cannot be in Scotland's commercial interest to promote legal particularism which will add to transactional costs”.
The aim of this paper is to build on Lord Hodge's analysis with a view to proposing a guiding principle for any future reforms of elements of Scots commercial law. Accordingly it is necessary to examine Lord Hodge's argument before building on his conclusions.
Before we examine whether Scotland needs to have its own commercial law, it is important to identify what commercial law is. Indeed, it has been stated that, when discussing commercial law in general, it is “customary” to ask what commercial law is.
that branch of law which is concerned with rights and duties arising from the supply of goods and services in the way of trade. Its scope is not clearly defined, and no two textbooks adopt the same approach as to the spheres of commercial activity that ought properly to be included in a work on the subject. There are, indeed, some who question whether commercial law is a subject at all, suggesting that the apparent monolith is in reality no more than an agglomeration of distinct subjects (sale, negotiable instruments, carriage of goods and the like), the boundaries of which may overlap but which otherwise share little in common beyond the underlying foundations of the law of contract.
The law affecting business transactions is not a seamless web, nor is it a jigsaw in which, with careful study and some luck, all the pieces can be fitted neatly together to make a harmonious whole. Rather it is a collocation of ill-assorted statutes bedded down on an amorphous mass of constantly shifting case law.
But if we view the commercial law as the totality of the law's response to the needs and practices of the mercantile community, then, indeed, commercial law exists and flourishes in England, adapting constantly to new business procedures, new demands.
The central character in discussion on commercial law must be ‘the business’, as commercial law is the collection of laws that apply to any activity a business undertakes. Thus it must encompass interactions between individuals and business (consumer law), interactions between businesses and their staff (labour law), law that govern the assets a business owns (property), voluntary dealings between businesses and others (contract), involuntary dealings between business and others (delict) and dealings between a business and the state (regulatory law).
The theme running through all of those categories is that commercial law is relevant whenever a business tries to do anything – i.e. whenever it undertakes a transaction. Goode on Commercial Law goes on to state:
It is conventional to treat commercial law as confined to personal property and the provision of services….services include the provision of finance, which is frequently secured on land by a mortgage or by a fixed or floating charge; and no treatment of commercial interests can be considered complete without at least some consideration of the nature of a floating charge and priority problems arising from conflicting security interests.
Thus commercial law is not just interested in the interaction between incorporated (and unincorporated) businesses and individuals, but also between businesses and other businesses – the interaction between corporate businesses and their (normally corporate) providers of debt finance also forms part of the nexus of commercial laws. What about corporate vehicles themselves? Goode states:
In Continental Europe commercial law is considered to include company law, whereas English lawyers treat the latter as a distinct branch of law and regard commercial law as concerned primarily with transactions rather than with institutions.
Similarly, Scottish texts on commercial law often do not include company law, although not necessarily as a matter of principle.
Accordingly, the general question Lord Hodge posed and answered is whether or not Scotland needs its own law in relation to transactions undertaken by businesses.
Lord Hodge answers his own question with a mixed answer. Whilst he acknowledges the role for Scots specific rules in certain fields (such as property), he questions their value in the context of commercial law.
If commercial law is fundamentally the law of transactions undertaken by businesses; then transaction costs are inextricably linked to commercial law. It is therefore necessary to consider what transaction costs are. Transaction costs have been defined as including:
the costs of identifying the parties with whom one has to bargain, the costs of getting together with them, the costs of the bargaining process itself and the costs of enforcing any bargain reached.
Why, then, are transaction costs important to the economy as a whole? Coase has demonstrated that without transaction costs, efficient outcomes will occur regardless of how legal rules allocate risk amongst parties.
This is usually taken as meaning that there should be an
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