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Uncertainty in Commercial Law

Document Cited authorities 37 Cited in Related
Vincent
Published date01 January 2009
Date01 January 2009
Pages68-99
DOI10.3366/E1364980908000966
INTRODUCTION

Considerable attention has recently been devoted to examining the relationship between law and uncertain future events. Particularly prominent in that debate has been the role of law in managing and allocating risk. In the field of contract and commercial law there now exists an extensive literature examining the incomplete nature of contracts and the extent to which contracting parties rely on mechanisms other than law in dealing with contingency. Within that literature, the focus is primarily on uncertainty arising from the unpredictability of events or developments that lie in the future. Much less attention has focused on the problem of legal uncertainty.

This article attempts to develop a working definition of legal uncertainty and to examine its effect in commercial law. It is based on the premise that lawyers in the commercial world have to deal with and contract around not only future contingencies but also legal uncertainty. The article attempts to explain why uncertainty may persist over relatively long periods of time in commercial law, despite the perceived need for legal certainty to facilitate commercial transactions. It also attempts to explain, both in general terms and by reference to specific examples, how uncertainty can be limited or removed. Underlying much of the discussion is the argument that there is a close link between the effectiveness of responses to uncertainty and the persistence of uncertainty over time.

 THE MEANING OF LEGAL CERTAINTY Predictability and consistency

It is often said that business activity is facilitated by legal certainty.1

See e.g. L S Sealy and R J A Hooley, Commercial Law: Text, Cases and Materials (2003) 10: “Businessmen have special needs … they require the decisions of the courts on commercial issues to be predictable so that they know where they stand.”

This implies that the law should be predictable and should treat similar cases consistently.2

In this sense, legal certainty is not directly concerned with the substance of the law, a point made by Lord Mansfield in Vallejo v Wheeler (1774) 1 Cowp 143 at 153: “In all mercantile transactions the great object should be certainty: and therefore, it is of more consequence that a rule be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon.”

 Predictability allows those subject to the law to judge the law's reaction to their conduct (such as when making a choice between legal and illegal action).3

See generally R Goode, “The philosophy and concepts of commercial law” (1988) 14 Monash Law Review 135.

 The content of any particular law can only be understood in a meaningful way if its application to particular circumstances can be predicted.4

In some instances, predictability has been characterised as serving legal advisers as much as persons subject to the law. See e.g. O'Neill v Phillips [1999] 2 All ER 961 at 967 per Lord Hoffmann.

 Consistency is closely related to predictability, but focuses less on the outcome of a particular adjudication by comparison with what the law is generally understood to be and more on the relative outcomes of different adjudications that apply the same law

Legal uncertainty differs from legal risk in that the latter focuses on the chances of being sued or being the subject of a claim or the possibility that a technical defect in a transaction will result in loss.5

See e.g. R McCormick, Legal Risk in the Financial Markets (2006) 10 for a definition of legal risk.

In that sense risk is a much broader concept than uncertainty because it arises even where the law is clear. Legal uncertainty is that subset of risk which focuses on circumstances in which it is the lack of clarity in the law that poses risks for markets, transactions and legal structures. Two forms of legal uncertainty are important for commercial law. The first is where some doubt remains unresolved over a substantial period of time. This may arise because the doubt is not the subject of litigation before a court.6

One explanation of how this may occur is offered in B.(5) below.

 It may also arise from the process of clarification, testing and interpretation that is represented by case law that does not claim to change the existing law but which nevertheless carries implications for its reliability.7

See S Waddams, Dimensions of Private Law (2003) 206 regarding the distinction between clarifying or applying an existing rule and creating a new rule.

 While this form of uncertainty may not appear to pose a substantial risk for the commercial world, it does raise issues regarding the extent to which precedent can provide a reliable guide for future transactions.8

For discussion of how this may operate when courts choose to distinguish or “not follow” previous authority, see R H S Tur, “Time and law” (2002) 22 OJLS 463.

 For example, the seminal company law case Salomon v Salomon9

[1897] AC 22, discussed at F. (1) below.

 did not overturn any of the previous authorities yet is widely regarded as marking an important turning point in the recognition of limited liability and separate corporate personality.10

Similarly, the decision of the Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] QB 679 dealt with the problem of reconciling the respective approaches of common law and equity to mistakes in law by “disapproving” the leading decision made under the equitable jurisdiction, Solle v Butcher [1950] 1 KB 671.

 From the perspective of the law in practice, uncertainty may be reduced or removed by expert consensus. This is likely to be important in areas where a relatively small community of legal advisers is engaged in innovative transactions which have not been tested in the courts but rely for legal certainty on consensus among those advisers, perhaps combined with the development of standard documentation.11

The growth of securitisation in recent years is an example of such a process.

The second form of uncertainty occurs when a “settled view” of the law is subsequently changed by the courts.12

Subsequent change effected by statute does not pose a risk as legislation does not have retrospective effect.

Although this happens only infrequently,13

A modern example is In re Spectrum Plus Ltd (In Liquidation) [2005] 2 AC 680. In that case the House of Lords provided a justification for overturning settled law on the basis that (a) those who rely on a decision at first instance must be taken to be aware of the possibility of it being overturned and (b) the statutory priority given to the holder of a fixed charge over preferential creditors must be regarded as superior to the need to preserve legal certainty through upholding prior case law.

 it can have a serious impact. For example, Morgan Guaranty14

Morgan Guaranty Trust Co of New York v Lothian Regional Council 1995 SC 151.

 and Kleinwort Benson15

Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349. For criticism, see M Bridge, “Restitution and retrospective law: Kleinwort Benson v Lincoln City Council” (1999) 14 Butterworths Journal of International Banking and Financial Law 5.

 established that it is possible to recover a payment made under a mistake of law.16

In Kleinwort Benson Lord Hope (at 410B) distinguished a mistake of law from the presence of some doubt over the law. Moreover, as is made clear by Brennan v Bolt Burdon [2005] QB 303, it is a matter of interpretation whether a party to an agreement or compromise has surrendered rights of which that party is unaware or could not be aware because they have not yet been recognised by the courts. See also Mahmud v BCCI [1998] AC 20.

 The rationale is that, while there may have been no mistake of law at the time the obligation to make the payment was concluded, re-interpretation of the law in a later case applies retrospectively, opening up the possibility of a case based on mistake.17

Kleinwort Benson at 378 per Lord Goff. It remains something of a mystery why so few cases based on mistake of law come before the courts. In some areas, such as insurance law, where the law has been in flux in recent years, there would seem to be scope for claims paid or refused on the basis of the law at the time of payment to be re-opened on the basis of a mistake of law. While Brennan v Bolt Burdon [2005] QB 303 can be viewed as restricting the scope for holding a contract void as a result of mistake, it does make clear that a compromise of a claim can also be held void as a result of a mistake of law. A rare example of the application of the principle is BCCI v Ali [2002] 1 AC 251.

The significance of legal certainty, and the cause of much of the debate as to the extent to which it is achieved,18

See e.g. K Kress, “Legal indeterminacy” (1989) 77 Cal L Rev 283.

lies in its link with legitimacy. Kress explains that link in the following terms:19

Kress (n 18) at 285.

Indeterminacy matters because legitimacy matters. Many legal scholars hold that the legitimacy of judicial decision-making depends upon judges applying the law and not creating their own. They claim that judicial decisions are legitimate only if judges are constrained either completely or within narrow bounds.

 On this view, legal certainty has a role to play in ensuring that courts resolve disputes according to established legal norms and, in that sense, act in a legitimate manner. While not the source of legitimacy, legal certainty is nevertheless closely linked with it, through its role in limiting arbitrary judicial decision-making. A related issue is the extent to which the subjects of law are able to gain access to and understand the process of legal reasoning through which cases are resolved: that may exert just as powerful an influence on the exercise of rights and the resolution of disputes as the content of the law itself.20

See e.g. A Halpin, Reasoning with Law (2001) 104, arguing that there may be questions posed...

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