Commercial law is the legal backbone of markets and economies. Yet, over time, it has evolved into a fragmented bundle of subject-specific legal and regulatory regimes that govern non-consumer transactions and corporate actions. Some of these branches of commercial law have ancient origins, while others are more recent emergences. The laws governing secured transactions and business organizations, for instance, have evolved over the course of centuries – if not millennia – to reach their current state. By contrast, other commercial law branches have arisen more recently in response to novel needs and challenges. Examples include financial regulation, aimed at maintaining the safety and soundness of the financial system, and antitrust law, which safeguards competition from unreasonable trade restraints and monopolies.
When a transaction or a corporate action falls concurrently within the purview of two or more commercial law branches, an overlap materializes. In our paper, we focus on this legal phenomenon and refer to it 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 transactions law and the legal regimes regulating securities and banking activities. We posit that CLIs should be understood as systems of rules and logical deductions and that their coordination failures can only be conquered through the careful consideration of the underlying socio-economic policies and political objectives of the intersecting branches.
Commercial Law Intersections: Emergence, Proliferation, and Coordination Failures
The intensifying fragmentation of commercial law, coupled with the ascent of novel types of business interactions, has caused CLIs to multiply. No longer a phenomenon relevant solely to sophisticated actors, overlaps between commercial law branches are have proliferated across an expanding range of business sectors, affecting market participants of all guises. Financing arrangements designed to facilitate inclusive access to credit for small and medium enterprises (SMEs), individuals, and start-ups, increasingly feature the convergence of multiple branches of commercial law. For instance, in the agricultural sector, SMEs increasingly rely on warehouse receipts financing, a type of commercial transaction that spawns a complex CLI between the laws of agency, negotiable documents of title, insurance, secured transactions and financial regulation. In a similar vein, transactions that involve the issuance or transfer of novel securities (e.g. digital tokens and stablecoins) engender a multiplicity of CLIs between capital markets law, prudential and conduct of business regulation, and payments system law.
The proliferation of CLIs poses significant challenges. In principle, such convergences should spawn composite regimes that synergistically enable persons to carry out their desired transaction. In practice, CLIs often suffer from failures in coordination that have far-reaching consequences. In some cases, the intersecting commercial law branches neither explicitly nor implicitly address the possibility of their overlap, spawning an ambiguous gap in the law that shrouds the transaction in question either partly or entirely. For example, the use of trademark licenses as collateral is hindered by the absence of clear and dispositive statutory provisions which regulate conflicts between secured creditors and transferees. This legislative vacuum has a chilling effect, deterring market participants from using these assets as collateral (see Tosato 2018). In others, the intersecting commercial law branches give rise to an incongruous legal framework that is either rife with internal conflicts or impedes the achievement of the parties’ intended outcomes. A case in point is offered by the CLI between secured transactions law and prudential regulation. When a bank secures a loan against a movable asset, the ensuing transaction attracts the attention of both secured transactions law and the prudential regulatory framework enacted for the calculation of capital requirements. In this scenario, conflict may ensue because secured transactions law qualifies this dealing as secured credit, whereas the applicable regulatory regime might treat it as unsecured (see Castellano & Dubovec 2018a). This incongruence yields a distortion of incentives, hindering the use of movable assets as collateral for access to credit (see Castellano & Dubovec 2018b).
Notably, interpretive approaches that are commonly used to overcome gaps and incongruences in the law typically do not offer useful tools to tackle CLI coordination failures. This is because the hermeneutical canons designed to achieve consistency between multiple legal regimes, such as lex specialis and lex superior, lead to one of the regimes bluntly prevailing over the others involved in the CLI in question. Such an approach does not integrate cohesively the applicable provisions of the intersecting branches, but rather spawn a markedly unbalanced regime that exacerbates coordination failures and their negative consequences.
Addressing Coordination Failures: A Two-step Method
Drawing from legal theory and philosophy of mathematics, we advance the view that “legal coherence” is the key notion for addressing CLI coordination failures. We propose that the rules and principles forming a CLI should be construed to be simultaneously consistent both with each other and their appertaining commercial law branches, and that such consistency should be achieved through a “unity of purpose”. To this end, we argue that such unity of purpose should be understood as the underlying socio-economic policies and political objectives that the CLI in question is intended to achieve. Moreover, in line with an ample body of jurisprudence theories, we posit that it should be extrapolated from a combined assessment of textual and contextual elements.
Building on this understanding, we formulate a two-step method for addressing CLI coordination failures. The first step is deconstructive in nature, isolating the elements of the intersecting branches that generate a CLI. The second step aims to address coordination failures by fostering legal coherence within the CLI under consideration.
Step one: deconstructing the CLI
As a preliminary operation, it is necessary to identify which commercial law branches are involved in the CLI under consideration. The base case will typically involve two branches. For example, a transaction in which a newly-formed corporate entity sells blockchain tokens that are intended to confer contractually determinate voting and participation rights to their buyers produces a CLI between corporate law and financial regulation, including securities and capital markets law. More demanding cases will present CLIs that feature multiple intersecting branches. For instance, let us consider a transaction in which a special purpose vehicle acquires a pool of residential mortgages and concurrently sells securities (i.e. mortgage-backed securities) to investors under which it contractually promises to distribute the ensuing mortgage payments. This transaction forges a CLI between corporate law, secured transactions law, and financial regulation. Similarly, in a transaction in which a bank extends a loan secured by all the borrower’s present and future patents, a CLI emerges between secured transactions law, patent law, and financial regulation.
Once the intersecting commercial law branches have been recognized, attention can shift to the deconstruction of the problematic CLI in question. This requires precise identification of the rules and principles that engender the coordination failure under consideration as well as an appraisal of their relevance within their appertaining commercial law branch. For this assessment, we propose that each commercial law branch should be viewed as a tripartite spherical structure formed of a Core, a Middle Sphere, and an Outer Sphere. Each rule and principle involved in the CLI under consideration should be classified within one of these concentric Spheres depending on its systemic relevance.
The Core is the nucleus encircled by the Middle and Outer Sphere. It comprises the purpose pursued by a commercial law branch, intended as its underlying social and economic policies and political objectives (we refer to the rules and principles contained in the Core Sphere as “policy aims”). The Middle Sphere comprises the dispositive rules and principles that articulate the legal framework necessary to realize the policy aims of a commercial law branch (we refer to the rules and principles contained in the Middle Sphere as “key tenets”). These key tenets are generally embedded in statutory instruments but can also stem from case law. Their function is to supplement general law or another commercial law branch and introduce exceptions where necessary. Typically formulated at a high level of generality and abstraction, they articulate the fundamental concepts and doctrines of their appertaining system. The Outer Sphere encircles the Middle Sphere and forms the outermost layer of the structure. It comprises rules and principles that build upon the concepts and doctrines forged by the underlying key tenets. Albeit in varying measure, these operative propositions have a narrow scope and govern their subject matter with a high level of determinacy (we refer to the rules and principle contained in the Outer Sphere as “operative propositions”).
Step two: fostering legal coherence
The second step of our method focuses on fostering legal coherence. In our suggested visual systemization, CLIs can be viewed as the junctures at which the Spheres of intersecting commercial law branches come into contact. Observed in this light, coordination failures are the result of gaps and incongruences between policy aims, key tenets, and operative propositions belonging to different commercial law branches. Through this prism, CLI coordination failures can be divided into two broad categories: those that involve a Core Sphere and those that do not. This division reflects our view that the path to legal coherence – in terms of the assessments to be conducted, the consideration to be pondered and the range of possible solutions to be adopted – varies markedly if the CLI coordination failure in question involves the policy aims of one of the intersecting branches.
The first category comprises coordination failures that involve policy aims. There are two types of such failures: “multi-Core” and “single-Core”. Multi-Core CLI coordination failures are characterized by gaps or incongruences that stem from tension between the Core Spheres of two or more of the converging branches. Notably, though it is unlikely that commercial law branches with fundamentally conflicting policy aims will develop and co-exist within a single legal order, frictions may arise within circumscribed facets of their scope of application. When faced with CLI coordination failures of this nature, fostering legal coherence will require particularly delicate interventions. In some cases, tensions between the Core Spheres of two or more intersecting branches will be symptomatic of an overt incompatibility between their underpinning social, economic, and political objectives. Here, the path to legal coherence will necessitate a prioritization of the policy aims of one branch over those of another. In others, discord between the Core Spheres of the intersecting branches in question will not be the product of such an overt incompatibility, and legal coherence within the CLI should be sought through interventions that mitigate and de-escalate frictions, while maintaining equilibrium and alignment between the underlying policy aims.
Single-Core CLI coordination failures are characterized by gaps or incongruences that stem from tension between the policy aims (Core Sphere) of one commercial branch and the key tenets (Middle Sphere) or the operative propositions (Outer Sphere) of another. When grappling with such CLI coordination failures, two elements identified in our preceding analysis should be borne in mind. First, the underlying socio-economic policies and political objectives of a CLI are a function of the Core of each one of the intersecting branches involved. Second, policy aims have the utmost systemic relevance in shaping their appertaining commercial law branch. Accordingly, if the policy aims of one commercial law branch are hindered or negated in a CLI due to tension with key tenets or operative propositions of another intersecting branch, this will likely produce profoundly detrimental effects both in the CLI and the affected branch. Therefore, where a coordination failure arises because of tension between the Core of one branch and the Middle or Outer Spheres of the other, interventions aimed at fostering legal coherence should presumptively seek to prioritize the former. Nevertheless, given that Spheres are not separated by hard borders and the elements composing the Core evolve over time, such prioritization demands caution. Care must be taken to ensure that interventions that favor the policy aims of one branch over the key tenets or operative propositions of another should never go so far as to compromise the policy aims of the latter.
The second category comprises coordination failures that do not involve policy aims. There are two types of such failures: “different-Sphere failures” and “same-Sphere failures”. Different-Sphere failures are characterized by gaps or incongruences that stem from tensions between the Middle Sphere of one of the intersecting branches and the Outer Sphere of the other. When addressing coordination failures of this nature, a path to legal coherence, similar to that suggested above for single-Core failure, should be followed. Specifically, where a coordination failure arises because of tension between the Middle Sphere of one commercial law branch and the Outer Sphere of another, interventions aimed at fostering legal coherence should presumptively prioritize the application of key tenets (Middle Sphere) over the intersecting operative propositions (Outer Sphere).
By contrast, same-Sphere failures feature gaps or incongruences caused by a conflict or tension between rules and principles that belong either to both of the Middle Spheres or both of the Outer Spheres of the intersecting branches. Such cases generate challenges that differ in nature and intensity. When CLI coordination failures feature conflicts or tensions between key tenets, the rules and principles in play are cornerstones of their respective commercial law branches. When operative propositions are involved instead, the structural impact for the intersecting commercial branches is less profound. The combination of these characteristics weighs heavily against any intervention aimed at prioritizing one set of rules and principles over the other, as neither one has greater significance either in their appertaining branch or in the CLI in question.
When a prioritization does not offer a viable solution, fostering legal coherence in the CLI must follow a different path. Resolving this type of coordination failure requires that rules and principles within the CLI are in alignment with the underpinning social, economic, and political objectives of all intersecting branches, identifying a “unity of purpose” that combines the purposes of intersecting branches. Nonetheless, the available maneuvering space and the methods that can be deployed to ensure such co-existence of rules differ markedly, depending on the Spheres involved and on the features of the rules and principles generating incongruences and gaps. Legal coherence between key tenets may often be achieved through interpretive interventions that take advantage of the their open texture and abstract nature. By contrast, rules with a narrower scope and greater determinacy might often necessitate legislative reform or regulatory interventions.
CLIs are pervasive. Our contribution has a twofold impact on the growing debate surrounding this ubiquitous legal phenomenon. At the most basic level, we offer an analytical framework that the legal community can employ to identify transactions which involve CLIs, recognize the presence of coordination failures, and appraise their severity. At a broader level, we aspire to spark a reasoned normative discussion. Scholars, judges and practitioners alike are too often seduced by the temptation of dealing superficially with CLIs suffering from coordination failures. In some cases, they intentionally choose not to engage with the relevant gaps and incongruences. In others, they apodictically advocate that one of the commercial law branches involved in the intersection under consideration should prevail over the others, often motivated by partisan reasons of convenience. Veering away from such a close-minded and parochial approach is paramount at a time when the ascent of distributed ledger technology, digital assets, and artificial intelligence is generating novel CLIs between a multiplicity of legal and regulatory regimes.
Giuliano G. Castellano is an Associate Professor of Law at The University of Hong Kong and a Deputy Director at the Asian Institute of International Financial Law (AIIFL).
Andrea Tosato is an Associate Professor in Commercial Law at the School of Law of the University of Nottingham and an Adjunct Lecturer at the University of Pennsylvania Law School.
This post is adapted from their paper, “Commercial Law Intersections,” forthcoming in the Hastings Law Journal (Vol. 72) and available on SSRN.