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A few years ago, Katharina Pistor published a book that presented a powerful illustration of the profound political, economic and social consequences that have resulted from a depoliticised and market-centric approach to private law. In The Code of Capital: How Law Creates Wealth and Inequality, Pistor shone a spotlight on the role of lawyers in fashioning a malleable roster of legal ‘modules’, predominantly of a private law character – contract law, property rights, collateral law, and trust, corporate, and bankruptcy laws – that create capital assets and protect private wealth. By means of a number of case studies that explore the ‘coding’ of land, nature, corporations, debt, knowledge and financial contracts as capital, Pistor demonstrated that by lending their powers of enforcement and legitimacy to privately driven process of legal innovation, states have collectively – and effectively! – undermined their own democratic duties to govern the economy in the interests of the wider citizenry. They have enabled the holders of capital to ‘rule’ the global economy ‘by law’ (p. 22). 

The Organisers of this Symposium are seeking to revitalise the important debate on the very public and political roles that private law is playing in and beyond the European Union (EU) today. Reacting specifically to Pistor’s analysis, Martijn Hesselink has argued that a progressive European code of private law (EPL-code) could be part of the solution to ‘reconstituting capital’ and to addressing the ‘staggering economic inequalities’ and antidemocratic consequences of financialisation.

In this blog post, I take up Professor Hesselink’s call to probe into the question of ‘what exactly is wrong with how private law shapes capitalism’ (p. 318) with the goal of discerning how a progressive code of private law might serve to ‘reconstitute’ capital. In line with my earlier work, I focus on the relationship between private law and the operations of global financial markets, with a particular focus on financial derivatives. I seek to identify – in a very rudimentary fashion – possible principles or rules that might form part of a new EPL-code. 

Contractual Injustice: Issues of Concern in Financial Markets

One of the key issues that has emerged in the aftermath of the global financial crisis is the extent to which financial actors and their lawyers have used private law to enable practices of dubious social value, or, indeed, practices that would have been illegal under other legal and regulatory regimes. As Pistor has underlined in a recent contribution, Credit Default Swaps (CDS) ‘could be used to make bets against the market by buying insurance on assets investors did not own (something that would be strictly illegal under ordinary insurance regulations, from which CDSs were exempt’. Another example is the development of a new array of financial instruments that have facilitated processes of speculation in markets for ‘underlying’ commodities, including food commodities as well as oil and gas, despite the fact that, historically, such contracts were categorised as illegal gambling contracts and were acknowledged to unduly influence processes of price formation for important resources.

As I have argued elsewhere, one of the problems with the EU’s current technocratic processes for ‘regulating’ finance, and indeed, one of the problems of extant models of private law is that no investigation is made of ‘what’ is being traded in financial contracts. As long as procedural and formal requirements about the formation of the contract are respected the contract will be enforced, and questions about the broader economic and social effects of these financial instruments are sidelined by a regulatory agenda focused overwhelmingly on mitigating various species of risk. Writing in the US context, Saule Omarova has argued that a pre-approval process for new financial contracts should be introduced so that their social purpose can be understood before they are released into the economy.  Possible EPL-code Rule/Principle: New financial contracts must meet a ‘social and economic effects test’ prior to release on the EU’s market.

Another significant dilemma inheres in the inequitable approach that has been normalised with regard to contractual enforcement in the arena of financial markets. As Pistor’s earlier work – A Legal Theory of Finance– illustrates, in the run up to the global financial crisis contracts were enforced ‘as written up’ until the point when the collapse in the value of financial contracts threatened the survival of the financial system, when the players at the ‘core’ of the financial system were granted the flexibility that had been previously denied to smaller players on the ‘periphery’. Possible EPL-code Rule/Principle: Courts reserve the right to decline to enforce financial contracts based on pre-identified grounds of public policy, which include considerations of financial stability and distributive justice.

One of the key contractual devices that has empowered capital with respect to elected governments relates to the principle of party autonomy, which is furnished under Private International Law and Conflict of Laws regimes, and, in the case of the EU, under the Rome I Regulation. As Horatia Muir-Watt writes, ‘The contrat sans loi—the contractual creation of law soaring above the reach of public regulation—has emerged, then, from the combination of free choice of law and forum’ (p. 46). Guido Comparato has explored a line of case law in which national courts (notably in Italy in the Dexia case) have sought to govern contractual disputes over derivatives but have been undermined by choice of law rules contained in the Master Agreement of the International Swaps and Derivatives Association (ISDA). As he underscores, referring to the work of Moritz Renner and the judgement of the English Court of Appeal in the Dexia case, ‘the most characteristic feature of the case is the way in which the MA was conceptualised: the reference to a transnational instrument enshrining the right to choose the governing law was enough to give the case an international dimension sufficient to remove the dispute from national law’ (p. 468-70). Possible EPL-code Rule/Principle: Rights to party autonomy are not decisive and EU courts and the courts of Member States reserve the right to adjudicate financial disputes that have a bearing on their economies.

Concluding Reflections:

In this brief contribution, I have identified number of specific issues that would need to be considered if a new EPL-Code is to ‘re-embed’ global finance within a socially progressive regime of contract law, and I have offered tentative suggestions regarding possible new rules or principles that might address these structural issues. I agree with Professor Hesselink that for such a code to be legitimate it requires a ‘constituent power’ that includes those ‘who currently own no capital’ and ‘non-citizens to whom the code would apply’ (p. 328), and I very much like the idea of trying to re-code capital using innovative legal strategies.  Nevertheless, I want to conclude with a few short reflections on the scale of the challenge of developing an EPL-Code to try to re-programme financial capital to produce more egalitarian outcomes. 

  • Professor Hesselink argues that a new EPL-Code should take the form of ‘fundamental principles’ not ‘detailed rules’ (p. 343), in order to prevent processes of regulatory co-optation and to empower EU courts to be adaptive in responding to specific cases. There are strengths to this argument, but it perhaps underweights a few issues:
    • Acts of judicial balancing involving fundamental principles – in both International Law, and EU Law – have operated consistently to produce market-friendly interpretations when principles conflict, and can, as Toni Marzal argues with regard to proportionality in the EU, and Martti Koskenniemi has suggested with regard international legal discourse more broadly, structurally tilt outcomes in favour of more powerful litigants. Looser principles have the benefit of conferring more power on judges, if that is desired, but are arguably more indeterminate than more specific rules, which creates opportunities for socially regressive interpretations to prevail. The insights of Legal Realism and Critical Legal Studies would suggest that the make-up of the judiciary would be a crucial element in determining how egalitarian a principles-based code would turn out to be.
    • In spite of their status as fundamental rights, the rights protected under International Human Rights Law (IHRL), which are also based on foundational principles such as non-discrimination, have failed to become norms that ‘trump’ regimes of International Economic Law (IEL), despite considerable efforts by scholars, Special Rapporteurs, and civil society actors to ensure that IEL is normatively embedded within IHRL. This is arguably due to absence of effective courts that have clear jurisdiction to adjudicate on these inter-regime conflicts. Nevertheless, as I have argued in other work, these interactions point to inherent tensions between laws that facilitate capitalist political economy and the protection of human rights. Capitalism for many scholars is an economic system that intrinsically depends on exploitation. The question as to whether a progressive EPL-code can counteract structural tendencies within capitalism to produce highly inegalitarian outcomes warrants further consideration.
  • The current system of elaborate financial contracts plays an important institutional function in the post-Bretton Woods global political economy of floating (in core countries) exchange rates, and trade and financial liberalisation. Contract law functions as a decentralised mechanism that facilitates evaluation of exchange rates and offers forms of protection to government economic institutions and private economic actors from sources of macroeconomic instability, such as capital flight and balance of trade issues. The development of an EPL-Code might therefore need to be complemented with broader institutional reforms for monetary and economic governance, which would presumably need to be international in character. I.e. can we re-code finance without a new Bretton Woods system?
  • As Yochai Benkler has recently argued, big part of the problem with how law constitutes and shapes capitalism is that it provides concepts and mechanisms that have translated political claims and social struggles over the distribution of resources into a juridical discourse concerned with competing ‘rights’ that take a formal character and are disconnected from the historical circumstances that shaped patterns of ownership and control in the first place. Addressing historical processes of dispossession would seem to be a vital requirement for a new European code of private law to be truly progressive, otherwise surely by further legitimising current patterns of ownership and ignoring historical injustice the code would actually be regressive? Yet this would appear to be a problem that private law structurally cannot solve because the issues may need to remain political – and to be removed from the depoliticising realm of competing ‘rights’ – in order for a just outcome to be reached.

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