2.1 Introduction
In recent years, fiduciary law has moved toward the center of scholarly attention in the common law world.Footnote 1 In spite of its “elusive” nature,Footnote 2 enough instances of fiduciary relationships occur across a wide variety of legal areas that many – with good cause – describe it as a distinctive field.Footnote 3 Courts as well as scholars in common law jurisdictions deal concepts and ideas concerning fiduciary law back and forth.Footnote 4 Although civil law countries have no tradition of the trust as a legal institution,Footnote 5 courts and scholars alike term relationships based on some kind of personal or professional trust “fiduciary.”Footnote 6 German law subjects guardians,Footnote 7 trustees in bankruptcy,Footnote 8 attorneys,Footnote 9 and others to a specific set of fiduciary duties, the most important of which is a duty of loyalty.Footnote 10 France has introduced “la fiducie,” a substitute for the common law trust.Footnote 11 Indeed, civil law countries have long combined property and contract law in order to fashion substitutes for the common law trust. Contract-based Treuhandverhältnisse – that is, relationships of trust – have been a staple part of the German legal discourse for several decades, if not centuries.Footnote 12 And in recent years, the trust as a legal institution is gaining ground in civil law jurisdictions, following national recognition of the Hague Trust Convention by countries such as Italy and the Netherlands.Footnote 13
Some scholars even argue for progressing toward a hybrid system of fiduciary law, built on unified principles applicable both in common law and civil law jurisdictions.Footnote 14 There is some precedent for this hybrid approach. For instance, East Asian countries with a strong civil law background such as Japan have adopted (and adapted) the trust as a legal institution.Footnote 15 Mixed legal systems in the United States (Louisiana) and Canada (Quebec) have done the same.Footnote 16 Nor is this hybridity limited to domestic law. International institutions such as the Organization for Economic Co-operation and Development (OECD), the United Nations Environment Programme (UNEP) Finance InitiativeFootnote 17 (e.g., the OECD Principles of Corporate Governance,Footnote 18 and the UN report on “Fiduciary Duty for the Twenty-first Century”Footnote 19) are shaping fiduciary norms across national borders, even though these initiatives do not have the force of law themselves – at least when viewed from traditional Hartian or Kelsenian accounts of law.
In short, even a cursory review shows ample evidence of the importance of fiduciary-related norms not only in common law and civil law jurisdictions, but also beyond the nation-state. Additionally, many norms are created through national or quasi-national legislation on a supranational level as, for example, in the European Union, while others are developed by nongovernmental actors.
In other areas of the law with regulations and rules spreading beyond the nation-state, scholars have been trying to spell out a concept of transnational law, determined to map the reality of “something being there” that does not quite fit the bill of either national law or international law.Footnote 20 In the well-known words of Philip Jessup:
[T]he term “international” is misleading since it suggests that one is concerned only with the relations of one nation (or state) to other nations (or states)…. Part of the difficulty in analyzing the problem of the world community and the law regulating them is the lack of an appropriate word or term for the rules we are discussing. Just as the word “international” is inadequate to describe the problem, so the term “international law” will not do…. I shall use, instead of “international law,” the term “transnational law” to include all law which regulates actions or events that transcend national frontiers. Both public and private international law are included, as are other rules which do not wholly fit into such standard categories.Footnote 21
Given the phenomena described, the rather obvious question driving this chapter is subsequently: Is there such a thing as transnational fiduciary law? Answering this question and mapping a research agenda proves to be a thorny issue, however, because the object of analysis is difficult to grasp. It is not only fiduciary law that is “elusive,”Footnote 22 but also transnational law and transnational legal theory. More than one scholar attempting to capture the concept of transnational law ends up with playing a fugue in a minor key: “Transnational law remains an imprecise notion.”Footnote 23 Anyone slogging through the heap of literature on transnational legal theory ends up in “a jungle without a map.”Footnote 24 Given that “[t]here is no unicity of its sources and no systemic form of justification” and that “it does not conform to a general or universal model,”Footnote 25 it is no wonder that definitions of transnational law have multiplied over the years.Footnote 26
Moreover, some lawyers, especially those with a common law background, may question if the project is not seriously limited from the start. If the trust is a creature born and bred in the common law, how can a transnational fiduciary law framework encompass both civil law and common law countries? This is a question traditionally allocated to the comparativist’s breadbasket. But again, the scholar seeking to stand on the shoulders of others is in danger of a misstep. Comparative law and transnational law have a lot in common. Not even the latest edition of the Oxford Handbook of Comparative Law,Footnote 27 arguably one of the most sophisticated and far-reaching volumes on the subject, contains a distinct section on the relationship of comparative law and transnational law, let alone one on comparative fiduciary law.Footnote 28 Methodologically, this makes thinking about transnational fiduciary law a daunting task. It cuts across transnational law, fiduciary law, and comparative law with only one certainty: Even fundamental issues are unclear, elusive, and hotly debated. At least at first glance, the endeavor of finding a vantage point puts the author in a legal cockleshell without oars in the middle of the Atlantic, drifting along on an ocean of literature.
Grappling with all these issues, this chapter aims to make a threefold contribution: First and foremost, it lays a foundation stone for transnational fiduciary law as a field, existing at the intersection of transnational law and fiduciary law and including both common law and civil law traditions. It shows that from a functional comparative perspective it is possible to bridge the common law/civil law divide in fiduciary law. Germany, to give but one example, solves many problems located in fiduciary law and equity in the common law through contract. Second, methodologically, this chapter connects transnational law and comparative law inquiries, arguing that inquiries into transnational legal ordering (TLO) require a comparative, functional approach to legal problems and institutions. This problem-focused approach complements TLO theory’s focus upon the construction of legal orders in response to social problems. Third, and relatedly, this chapter expands both transnational law and fiduciary law by establishing new perspectives on how law develops transnationally and how fiduciary law in particular has developed in both common law and civil law jurisdictions. It explores how transnational law may evolve out of national norms through horizontal entanglement of national legal orders. Moreover, it demonstrates how the diffusion and implementation of nonnational norms engender transnational legal orders through vertical integration. The argument proceeds as follows.
Section 2.2 deals with a significant preliminary. According to many a common lawyer’s intuition, the divide between common law and civil law with respect to equity and the trust as a legal institution gives cause to question the project as a whole. From a functional perspective, however, the different legal traditions do not present a significant obstacle. Both civil law and common law countries have to deal with the phenomenon of one person enjoying some sort of discretionary power over the interests or position of another. Comparatively speaking, this establishes a common tertium comparationis and therefore a point of entry for transnational fiduciary law.
Anyone talking about transnational law needs to take a stand and clearly set out their premises, otherwise they run the risk of becoming incoherent. Accordingly, Section 2.3 takes a deeper look into the methodological toolbox and scrutinizes the horizontal and vertical ordering of fiduciary law. On the horizontal level, transnational fiduciary law may come into existence as a consequence of entangled national legal orders. The starting point is a blind spot left by conventional transnational legal theory. Concentrating on “norms beyond the nation-state,” most scholars neglect that national laws themselves might be a suitable basis for the emergence of a transnational legal order. Drawing on the theory of histoire croisée and connected histories, this chapter argues that transnational law may come into existence through the entanglement of national laws. Spreading out from Japan, the trust has been diffused over South Korea, Taiwan, and China – all countries with a strong civil law background. Close historical ties and traditions shared among the “East Asian four” have established connections between the legal systems and a strong sense of awareness as to how the respective others develop their national laws – allowing legal reforms in one country to echo changes in the laws of the others. Going far beyond standard comparative fare, these coevolutions make it impossible to understand national norms without taking into account this background of entangled laws.
Vertical ordering of fiduciary law occurs whenever norms “beyond the state” become implemented in multiple national systems. A good example is the standards and principles concerning environmental, social, and governance (ESG) issues. These standards and principles, generated by the United Nations, the OECD, and other nonstate actors, contain a rich body of norms on fiduciary law, aiming at integrating stakeholder interests into the fiduciary duties of corporate boards and investment managers. They address policy makers and legislators all over the world and purport to provide benchmarks for the creation of legal norms on the national level.Footnote 29 Given their intended scope of application and transformation into laws within multiple nation-states, such frameworks potentially provide the basis for transnational legal orders and, in the present context, for transnational fiduciary law. The question remains, however, as to whether and how these norms turn from nonbinding standards and principles into law, at least from a socio-legal perspective. Pundits close to the Delaware approach in corporate law and traditional US investment managers’ fiduciary law are quick to deny the legal relevance of ESG standards. Both the loi PACTE, a recent piece of French legislation, and EU ESG reporting standards prove them wrong, however. Nation-states with stakeholder-oriented governance systems provide doors that allow so-called soft law to enter and settle down as hard fiduciary law.
However, merely looking at the spaces of legal ordering is not enough. Transnational legal orders “articulate … a set of norms for legal subjects over a given territory.”Footnote 30 Consequently, a transnational legal order is not only defined by its regional extension or geographic scope, but also by its normative elements or what may be called its intension. In other words, talking about “orders” implies being able to define an order’s legal scope.Footnote 31 This can only be done by identifying the relevant norms at play in a specific area of legal ordering spanning a certain geographic space. Therefore, Section 2.4 engages with different elements in the transnational ordering of fiduciary law. Viewing fiduciary law(s) through the lens of transnational legal theory helps to shed some light on its confines, even within the common law world. Fiduciary law is defined by specific elements, specific traditions, and the extent to which it binds actors in a particular type of social relationship. Two examples serve as illustrations, the first relating to the duty of loyalty and the second to the duty of care: Whereas the duty of loyalty serves as the distinctive marker of fiduciary relationships in the common law, set apart from contract and contract law principles, it cannot do comparable work in civil law countries. Many of contract law’s shortcomings in the common law do not exist in a civil law regime. Therefore, the duty of loyalty is not distinctive in the way it is in England, the United States of America, and other regions of the globe resting on equity traditions. Loyalty is distinctive, however, in that it separates fiduciary relationships from other agreements by implementing an obligation unknown to “regular” contracts. Again, the trust in East Asia illustrates how this plays out as a socio-legal matter. As the example of the duty of care shows, different orders of fiduciary law evolve even in the common law world. Whereas, for example, the United States recognizes the duty of care as a fiduciary obligation, English and Australian courts explicitly deny this possibility. Courts communicating across the borders of England and Australia have built an entangled regime of national fiduciary law, producing a transnational version of fiduciary law to a certain extent set apart from other nations of the common law.
Section 2.5 concludes by summarizing the chapter’s findings concerning transnational legal ordering of fiduciary norms.
2.2 Theorizing Transnational Fiduciary Law and the Civil Law/Common Law Divide
Anyone theorizing about transnational fiduciary law must grapple with a challenge absent from the conventional legal material that transnational legal theory addresses. A strong line in transnational legal theory relates to transnational legal orders established by contract. For Western nation-states, freedom of contract is a core principle of their respective private laws; thus, talking about contract law and contractual models does not encounter significant obstacles with respect to methodology. Fiduciary law, with its strong roots in equity traditions not known in civil law jurisdictions, is different. As shown in Section 2.2.1, comparative law and the functional method it relies on provide tools for overcoming differences in doctrine and legal traditions.Footnote 32 What remains to be elucidated, however, is the relationship between transnational law and comparative law. It will be argued in Section 2.2.2 that transnational law necessarily involves comparability. After these methodological preliminaries, Section 2.2.3 deploys the tools. Given that the comparative literature is sparse and gives a bird’s-eye view of civil law regimes,Footnote 33 and, alas, is not always very precise, it seems useful to discuss a specific example in greater detail in order to show the mechanisms at work. Regarding Germany’s position as one of the major and most traditional civil law orders, it seems especially suitable as the basis for a case study.
2.2.1 The Challenge of Theorizing Transnational Fiduciary Law
Many of those thinking about transnational legal theory take their cue from commercial practice and the web of social norms fostered and stabilized by standardized contractual arrangements. The staple examples looming large in the literature emanate from what many coin “law merchant” or lex mercatoria.Footnote 34 Examples abound, such as the Uniform Customs and Practices for Documentary Credits and the INCOTERMS (both issued by the International Chamber of Commerce in Paris),Footnote 35 the International Swaps and Derivatives Association’s master agreements for derivatives,Footnote 36 Internet Regulation by ICANN,Footnote 37 and standards set by the International Organization for Standardization (ISO).Footnote 38 An important factor driving the success story of transnational private legal ordering is freedom of contract. At least in Western capitalist democracies, market participants enjoy considerable leeway to shape their relations with others and act under obligations they choose to undertake. Discrepancies in detail notwithstanding, most common law and civil law countries share a baseline.Footnote 39 As a consequence, there is no need to build a bridge between the legal systems in order to have a starting point for research.
Fiduciary law is different. Common law lawyers may question the endeavor of transnational fiduciary law from the start because of their own fiduciary law’s specific background and history.Footnote 40 It evolved on a general level out of equity and equitable remedies and is tightly bound to the trust as a legal institution.Footnote 41 Civil law systems, by contrast, traditionally lack both equityFootnote 42 and the trust institution,Footnote 43 though a number of civil law countries recognize the trust as a matter of private international law (e.g., Italy, Netherlands) or have adopted the trust (e.g., Japan).Footnote 44 How can there be “real” transnational fiduciary law if the latter group lacks equity and traditionally does not know the trust as a core institution? Furthermore, fiduciary duties, especially the duty of loyalty, have a strong anchor in national law and parties may not, at least according to conventional wisdom, contract out of it.Footnote 45 Establishing a framework constituting fiduciary standards beyond the nation-state is thus apparently much more challenging in jurisdictions putting fiduciary relationships in the vicinity of contract law. After all, the Hague Trust Convention has not met with much approval in the civil law world.Footnote 46
On the other hand, however, no one can deny the successful diffusion of the trust in East Asia. Starting out in Japan, the trust as a legal institution spread via South Korea and Taiwan to China.Footnote 47 Regardless of their legal family background, the respective trust laws include a duty of loyalty or at least duties requiring a trustee’s loyal behavior.Footnote 48 There are attorneys, corporate directors, trustees in bankruptcy, guardians, and a plethora of other persons working in positions and exercising functions similar to their fiduciary counterparts in Australia, England, and the United States of America.Footnote 49 German courts and scholars, to give one example from one of the most “civilistic” of the civil law countries, employ the rhetoric of fiduciary law, even though, for lack of an established model such as the trust in common law jurisdictions, it is impossible to go forward by analogy to an archetype serving as a guidepost.Footnote 50 In many instances, what is called “fiduciary duty” and “fiduciary law” in the United States is mirrored by Treuepflicht in Germany.Footnote 51 The fact remains, however, that many of the relationships deemed “fiduciary” in Germany and other civil law countries are governed by contract or quasi-contractual mechanisms. At first glance, this contrasts starkly with the majority opinion in common law fiduciary law scholarship according to which fiduciary law is not contract.Footnote 52 Before pondering whether comparative law’s functional approach may help to resolve this predicament (Section 2.2.3), an intermediate step has to be taken. Resorting to comparative law in the context of transnational law requires exploring the relationship between these two.
2.2.2 Transnational Law and Comparative Law
The relationship between transnational law or transnational legal theory and comparative law and its methodology has mostly evaded scholarly attention so far. Although many scholars of transnational law heavily invest in exercises in comparative law, the methodological premises are rarely made explicit. Two books on transnational legal theory which have been (justifiably) widely perceived as important contributions to the fieldFootnote 53 do not put their finger on the issue. The rare book chapter here and there pointing to comparative law as a necessary tool for transnational lawFootnote 54 sketches an idiosyncratic definition of the latter that stands square to conventional theory. Others tackle the rapport between transnational law and comparative law from the direction of the latter and either declare comparative law to be transnational lawFootnote 55 or want to enrich comparative law by integrating insights from transnational legal theory.Footnote 56
The necessary starting point for thinking through the relationship between transnational law and comparative law is a definition of transnational law accepted by the majority of authors working in the field. According to many pundits, it transcends national law, but is not international law – or at least not limited to it.Footnote 57 Additionally, there has to be some connection of the transnational norm to national law or national lawmaking.Footnote 58 If transnational legal orders unfold through “the adoption, recognition, or enforcement of the norms” by legal institutions within multiple nation-states,Footnote 59 tracing these various instances of norm-acceptance must employ the conceptual apparatus of comparative law. As not all legal orders are alike, not even within one legal family, the means by which the process of norms being “uploaded” from or “downloaded” into national legal ordersFootnote 60 are unique to the environment originating or receiving them. Different conceptions of public and private law, diverging boundaries of contract and tortFootnote 61 – these and other rifts in the legal landscape inevitably lead to a broad variety of instruments and strategies for placing transnational norms within a given national legal order. Locating the transnational norm in question thus presupposes an exercise in comparative law and searching for functional equivalence of legal institutions.Footnote 62 Institutions are comparable if they serve similar purposes (function) in the systems compared.Footnote 63 A function, at least according to a popular definition in the comparatist’s methodological quiver, is the relation between institutions and problems.Footnote 64 Therefore, one first has to nail down the problem, which then may serve as the constant for the comparative work.Footnote 65
As a result, the fact that relevant relationships in civil law countries are governed wholly or in part by contract law does not take them out of the equation a priori. The heart of the problem lies in the question as to whether, for example, the German contract law provisions serve the same purpose as the rules of fiduciary law in the United States or in England. Similitude or difference in remedies may well count as circumstantial evidence. From a methodological point of view, however, neither the one nor the other is decisive. Factual or purely descriptive methods do “not tell us whether these [similarities or differences] are accidental or necessary, or how they relate to society.”Footnote 66 They “simply” have to fulfill the same purpose.Footnote 67 The next section illustrates this point.
2.2.3 Fiduciary Law in Civil Law Jurisdictions: Germany as a Case Study
Even though the exact confines and definitions of a fiduciary relationship are still subject to a lively debate,Footnote 68 nearly all theories agree on the core problem: the other-regarding powers conferred or taken by one person over another’s interests (broadly construed), combined with an element of discretion.Footnote 69 In the language of law and economics, this gives rise to a principal-agent problem.Footnote 70 The person having the interests in question, i.e., the principal, is vulnerable. They cannot sufficiently observe the agent’s actions and, in many situations, will lack the skill for monitoring the agent.Footnote 71 That creates an opportunity to engage in opportunistic behavior or, in the famous phrase coined by Oliver Williamson, “self-interest seeking with guile.”Footnote 72 The agent may engage in hidden actions under conditions of moral hazard.Footnote 73 They can, for example, misappropriate assets belonging to the principal or act despite having a conflict of interests. This leads into the question as to whether and how a given legal systems addresses these risks. In the common law system, it is first and foremost the duty of loyalty. The duty of loyalty prohibits incurring profits other than those agreed upon when the parties entered the relationship and requires the agent to avoid conflicts of interest.Footnote 74 These “no conflict” and “no profit” rules build the fiduciary loyalty’s core in the common law.Footnote 75 They serve as entry points for more specific duties such as to ask for consent in conflicted transactions and remedies such as disgorgement of profits.Footnote 76 German law reacts to a similar set of real-world problems by means of functionally equivalent rules.
Contracts between attorneys, investment advisors, tax consultants and their clients, distribution agreements (Vertriebshändlervertrag), commercial agency agreements (Handelsvertretervertrag), construction management contracts (Baubetreuungsvertrag), the duties of corporate directors vis-à-vis the corporation, duties of trustees in bankruptcy (Insolvenzverwalter) to creditors, to name but a few examples – they all create the problems sketched earlier. In these relationships, one person enjoys discretionary powers over the interests of another, followed by the danger of the agent acting opportunistically. In Germany, just as in other civil law countries, the knot tying these and comparable relationships together is primarily the mandate contract.Footnote 77
The German Civil Code (Bürgerliches Gesetzbuch – BGB) provides default rules for an agreement to act on another person’s behalfFootnote 78 in the shape of a mandate contract (Auftrag).Footnote 79 These rules are the foundation for the development of a functional equivalent to fiduciary duties in the common law world. Just like the legal norms governing a common law fiduciary relationship, the provisions of the mandate contract deal with the rights and duties of a person in a position of power over rights and interests of another. The German Civil Code subjects the agent to a regime of contract law rules governing, inter alia, the agent’s duty to notify the mandator if they want to deviate from instructions and then to wait for a decision,Footnote 80 a duty to provide the mandator with information on the status of the transaction and, after carrying out the mandate, to render account for it,Footnote 81 the disgorgement of profits,Footnote 82 and a penalty in case the agent misappropriates assets under his management.Footnote 83 Generally, it is an accepted (if unwritten) basic rule that the agent has to put the principal’s interests before their own and avoid conflicts of interest.Footnote 84
The mandate contract in itself is of limited practical significance because it covers only those relationships in which the agent acts without remuneration. Its importance results from a regulatory choice. The rules of the mandate contract form a nucleus other provisions piggyback on. Other types of contract do not have their own provisions about an agent’s duties, but only refer to the agent’s duties as defined by the norms of the mandate contract. They are applied by analogy. One example is section 675(1) of the BGB, a linchpin of German contract law regulating what – reluctantly – may be called agency agreements:Footnote 85
Nongratuitous management of the affairs of another
(1) The provisions of sections 663, 665 to 670 and 672 to 674 apply to a service contract or a contract to produce a work dealing with the management of the affairs of another to the extent that nothing else is provided in this subtitle and, if the person obliged is entitled to terminate without complying with a notice period, the provisions of section 671 (2) also apply with the necessary modifications.
This – if read out of context admittedly slightly cryptic – piece of legislation contains an essential set of duties. An agreement in the sense of section 675(1) of the BGB is a contract for services or work and labor in exchange for remuneration. “[D]ealing with the management of the affairs of another” is understood by the BGH, the Federal Court in private law matters, as an independent activityFootnote 86 of an economic characterFootnote 87 on behalf of another within a foreignFootnote 88 sphere of interest.Footnote 89 This section does not define the duties applying to agency agreements, but refers to provisions of the mandate contract, inter alia those governing notification and information duties and disgorgement of profits. Moreover, the agent is subject to a duty of loyalty, which is deemed to be the decisive characteristic distinguishing a Geschäftsbesorgungsverträge from other contracts, for example, regular service contracts and contracts for work and labor.Footnote 90
German scholars observe that Geschäftsbesorgungsverträge fit well into concepts of economic contract theory and demand a specific set of duties in order to counter the various problems discussed under the rubric of agency theory and in the incomplete contracts literature.Footnote 91 The rules governing mandate contracts and agency agreements address exactly those problems fiduciary law addresses in the United States. Therefore, from a functional point of view, it is completely legitimate to categorize the German contract law provisions just discussed as fiduciary law from a comparative perspective.Footnote 92
The mandate contract, however, is not the only way to establish a fiduciary relationship and a duty of loyalty. In addition to contract law, other parts of German law also provide for fiduciary obligations. Examples already mentioned in this chapter’s introduction are the relationship between guardian and wardFootnote 93 and the trustee in bankruptcy (Insolvenzverwalter).Footnote 94 A director on the executive board of a public corporation (Vorstand der Aktiengesellschaft) owes specific fiduciary duties to the corporation itself. These duties are not grounded in the employment contract, but in the corporate relationship of the director and the corporation.Footnote 95 Moreover, public law enriches and subjects several relationships to a special fiduciary law regime, even though the parties are bound by contract, as is the case with investment advisorsFootnote 96 and attorneysFootnote 97 toward their clients. Several courts and authors even underscore that fiduciary duties are stricter than those flowing from the covenant of good faith and fair dealing,Footnote 98 echoing the well-known adage coined by Judge Cardozo who famously expected a trustee to show the “punctilio of an honor the most sensitive.”Footnote 99 Even though the relationships just mentioned are not mandate contracts in terms of legal doctrine, this does not mean that the trustee in bankruptcy or a guardian enjoys the privilege of a more lenient regime. Either the relevant specific regulations contain supplementary rules or courts draw from the rules governing mandate contracts by analogy.
The no-profit rule may serve as an example: In cases where no express reference is made to this rule, courts apply the relevant section 667 of the BGBFootnote 100 by way of analogy – for example, in case of a guardian letting entailed land after receiving a “commission”Footnote 101 or an insolvency trustee holding monies in an escrow account on behalf of the debtor.Footnote 102 Should the fiduciary engage in illegal competition, German law provides another set of norms serving as no-profit rule, for example, in section 88 of the German Stock Corporation Act (Aktiengesetz) with respect to the board of directors of a stock corporation (Aktiengesellschaft).Footnote 103 These and other prohibitions of engaging in competition with the principal are also applied analogously, for example, to the directors of a limited liability company (Gesellschaft mit beschränkter Haftung)Footnote 104 or a trustee in bankruptcy appropriating the debtor’s corporate opportunities.Footnote 105
In the end, German contract law and other legal institutions address problems arising out of relationships in which one party enjoys other-regarding powers over another’s interests, combined with an element of discretion. From a comparative perspective, this establishes the functional equivalence of these solutions to the common law approach. That means that the differences between equity-based common fiduciary law and German civil law, as significant as they are in general, do not stand in the way of the current project. Given the same set of problems that both civil law and common law must solve, the differences in the regulatory “technique” are irrelevant as far as concerns the establishment of transnational law. Everyone knows that many, if not all, roads lead to Rome.
2.3 Spaces of Transnational Fiduciary Law
Transnational law exists in different spacesFootnote 106 and so does transnational fiduciary law. Notwithstanding the ubiquity of fiduciary law, there is no “world” or “global” fiduciary law, as will be discussed in Section 2.2.3. Legal ordering of fiduciary law rather occurs in two dimensions. Entanglement of national laws can entail the emergence of transnational legal orders on the horizontal level (Section 2.2.1). On the vertical plane, norms created “beyond the state” may trickle down into national legal systems either because legislators and courts transform them in national laws or actors make use of them in enforcing rights and remedies (Section 2.2.2).
2.3.1 Horizontal Transnational Ordering of Fiduciary Law
The horizontal transnational ordering of fiduciary law is a consequence of several national legal orders becoming entangled through norms flowing back and forth between the respective systems. This claim rests on a nontrivial premise – namely, the assumption that national law can provide a basis for transnational legal ordering. Considering national law’s uncertain status in transnational legal theory, this is a point in need of some elaboration as a first step. Having cleared the ground, a second step then helps to chart the territory, taking up the example of the diffusion of the trust as a legal institution in East Asia.
2.3.1.1 National Law’s Uncertain Status in Transnational Legal Theory
Workers in the vineyard of transnational legal theory have long been underlining that transnational law has a distinctive geographic component.Footnote 107 Contrary to traditional national law, it reaches beyond the nation-state and expands beyond the confines of a legally defined territory and scope of application.Footnote 108 Its extension variesFootnote 109 and remains to be determined case by case, depending on the market participants, legislators, courts, and other institutions applying and subjecting themselves to transnational law.Footnote 110 Pointing this out, many scholars conclude that transnational orders vary in geographic scope.Footnote 111 This geographic approach is rooted in the idea of transnational law being based on norms “beyond” the nation-state as a starting point. Building their theories on normative arrangements like the contract models typically collected under the umbrella term lex mercatoria,Footnote 112 the overwhelming majority of writers, while stressing the importance of national laws,Footnote 113 take this as a given.Footnote 114 Whatever their respective position on what transnational law actually “is” may be, these scholars – at least implicitly – carve out orders exclusively based on national laws.
At first glance, this strategy of erecting a dichotomy not only provides for a manageable definition of transnational law, but also sensibly divides labor between transnational law on the one hand and comparative law on the other. Just having two or more national legal orders look alike does not imply norms reverberating across borders and beyond the nation-state. Legal transplants are not transnational law either, at least according to typical view of the field.Footnote 115 Even though such repotting of a legal rule or legal institution from one national system and into another national bed refers to a border-crossing movement, the issue is not so much the creation of an additional point of reference. The question is rather whether the receiving system accepts or rejects the transplant. Legal transplants thus appear “as elements of local law reform.”Footnote 116 Even though transnational law cannot forego exercises in comparative law,Footnote 117 the latter remains reduced to the status of an auxiliary discipline to the former. Methodologically speaking, comparative law does not gain anything or grow just by being employed for the purposes of the transnational enterprise.
And still, there is a curious ambiguity in many established narratives on how transnational law comes into being and which role national law may play. One does well to bring to mind that riding the transnational train does not add value in generating another substantive body of norms. What makes the trip worth the while is the methodological aspect of giving process pride of place.Footnote 118 Theorizing transnational legal ordering moves the “construction, flow … and settlement of legal norms”Footnote 119 into the spotlight and helps to understand how the production of national laws interacts with “different levels of social organization, from the transnational to the local” – for example, “the migration across borders, … contestation and homologies among the transnational, national, and local levels.”Footnote 120
Nation-states create “true” legal norms in the sense of classical positivist legal theory. Consequently, contrary to what is the case concerning norms of transnational law, the theoretical puzzle to ponder is not normativity in a legal sense,Footnote 121 but this: If several nation-states generate trust law, and this process of norm production is interdependent, because legislators and courts of each of the states look at what the other is doing, does this not also constitute transnational law? After all, transnational law is “transnational” not because of the norm-giving involved or because the norm-producing institutions are non-state actors, but because of its reach in terms of geography.Footnote 122
In a more recent turn of events, a group of scholars has already started moving into this direction, grounding their approach in international private law.Footnote 123 (National) international private law, so their argument goes, “engage[s] institutions in foreign states, too.”Footnote 124 Stressing the political – and therefore regulatory – nature of international private law,Footnote 125 these authors conclude that international private law and cross-border litigation engender transnational (private) law.Footnote 126 National law can also turn into transnational law, or so some propose, through national judges developing common private international law principles.Footnote 127
Delving into the debate’s details is not of interest for the purposes of this text.Footnote 128 What is of interest, however, is the fact that scholars are able to attribute international private law – state law – to a popular definition of transnational legal orders. This undergirds the conjecture of conventional accounts of transnational law having blind spots with respect to the “transnational potential” of national laws. Entanglement of national laws is another entity, highly relevant for fiduciary law, as will be argued in Section 2.3.1.2.
2.3.1.2 Transnationalization through Horizontal Entanglement of National Laws
The starting point for the following discussion of the meaning and consequences of entanglement is the diffusion of trust law in East Asia. The legal systems of Japan, South Korea, Taiwan, and China have a civil law core. Nevertheless, Japan introduced the trust as a legal institution, which then spread over East Asia for various reasons. It would be a mistake, however, to qualify this as a problem of transplanting law from one national legal system to another. Doing so would seriously neglect the fact that these East Asian countries’ laws are in many ways connected and intertwined. As a consequence, to truly understand trust law in East Asia – and with it, large portions of fiduciary law – presupposes an understanding of the trajectories that these national legal orders share. Building on the case study of trust law in East Asia, the section moves forward by exploring the consequences for transnational fiduciary law more generally. It constructs the theoretical framework for understanding how entanglement and histoire croisée establish a process of transnationalization.
(a) Introductory Example: The Diffusion of Trust Law in East Asia
Japan, South Korea, Taiwan, and China not only share a rich history as a region,Footnote 129 they also share a common legal framework as they are all civil law jurisdictions with strong historical roots in the German civil code (Bürgerliches Gesetzbuch).Footnote 130 As a consequence, these East Asian countries lack equity courts and are historically situated within a framework built around the concept of single ownership, which runs counter to a core element of trust architecture: dual ownership.Footnote 131 This distinguishes them from their common law siblings: Hong Kong, Singapore, and Malaysia.Footnote 132 Nevertheless, after the Secured Bond Trust Act of 1905 was introduced as a piece of specific legislation, Japan followed through with the enactment of the Trust Business Act of 1922.Footnote 133 As part of its colonial rule over Taiwan, acquired from China in 1895, and Korea, annexed in 1910,Footnote 134 Japan imposed its trust legislation.Footnote 135 China, the latest addition to the East Asian civil law and trust family, included the trust as an institution only after the Opening Up policy implemented by Deng Xiaoping in 1979; the legal institution based on the Trust Act entered into force only in 2001.Footnote 136 Both Taiwan and South Korea kept the trust after Japanese colonial rule ended.Footnote 137 What did not end, however, was the influence of Japanese trust law. Given its status as the root of modern trust regulation in these two jurisdictions, it still oftentimes served as a pacesetter for Taiwanese and South Korean trust law and exercises some influence on the 2001 Chinese legislation.Footnote 138 At the same time, the trust laws of the group members echo US models on trust.Footnote 139
The implementation of a common law institution into a jurisdiction with a solid civil law background led to shared problems and points of departure for doctrinal development. There is no constructive trust on traceable assets.Footnote 140 Additionally, even though there are functional equivalents of the duty of loyalty in the respective trust laws, the content and extent of these rules awaits further clarification compared to their common law counterparts.Footnote 141 Reviewing these common points of departure, it comes as no surprise to find solutions closely resembling each other.Footnote 142
Bearing in mind the historical development of trust legislation of the “East Asian Four” means that a traditional comparative approach is not enough. The individual legal orders do not simply stand alongside each either nor did they each on their own “simply” accept a legal transplant which now becomes part of the national body of law.Footnote 143 They rather interlace on several levels and form a discernible space of trust law and fiduciary regulation. Trust legislation in South Korea, China, Taiwan, and Japan develops with a view to the respective other(s). Comparative studies typically neglect this element of interaction and the accompanying echo-chamber effect. This case leads to a challenging methodological issue: Does the obvious and persistent connection between national laws and national legal institutions give rise to a transnational legal order, even though there is no set of rules or standards “produced by, or in conjunction with, a legal organization or network that transcends or spans the nation-state”?Footnote 144 As will be shown later, the answer is affirmative.
(b) Entanglement, Histoire Croisée, and Transnational Legal Spaces
The evolution of the legal frameworks over time and the historical intersections generated what historians writing about transnational history term histoires connectées,Footnote 145 connected histories,Footnote 146 and histoire croisée.Footnote 147 Moving forward from comparative history, these scholars emphasize the element of interaction and echo-chamber effects resulting from shared narratives and histories.Footnote 148 With this changed perspective comes an interest not in the merger of institutions or hybridizations of formerly singular institutions, but in how the crossings affect the parties involved and create something new.Footnote 149 What historians working in this methodology’s ambit want to achieve is a transnational view on history, not by adding another layer on top of regional, local or national history, but rather through readjusting the focus on how the interaction and connections came into being, which specific logic lies behind them, and how they structure space.Footnote 150 Apparently, there is something unique in these histoires croisées worth looking at in its own right. All the issues and vantage points just mentioned surface in East Asian trust regulation, making it a fine example of a transnational phenomenon.
A historian researching the entangled developments and evolution of trust law and trust-related fiduciary law in East Asia has to retrace the “construction, flow … and settlement of legal norms,” the production of national laws and the latter’s interaction with “different levels of social organization, from the transnational to the local,” including “the migration across borders, … contestation and homologies among the transnational, national, and local levels.”Footnote 151 This is where histoire croisée and transnational legal theory meet. Even though historians (with the arguable exception of legal historians) do not operate in the shadow of questions of legal normativity, historians grapple with issues surprisingly similar to what legal scholars have to address. Conventional comparative history and comparative law both follow a static approach and tend to neglect interactive processes. Insofar, historical methodology undergirds the claim that the entanglement of national laws may constitute transnational law. It adds a vertical dimension to comparative law’s horizontal plane.Footnote 152 Paying close attention to how norms gain transnational character according to leading legal theorists proves the point.
Transnational norms are norms “adapted transnationally.”Footnote 153 They do not necessarily have to originate outside the nation-state.Footnote 154 Transnational legal orders are transnational if they (at least) have social effects in more than one jurisdictionFootnote 155 and “engage legal institutions within multiple nation-states.”Footnote 156 The ways in which legal institutions engage with the norms – bottom-up, top-down, or horizontally – does not matter, at least not for their qualification as parts of transnational legal orders, because the concept of transnational law comprises processes in all directions.Footnote 157 What is important is that multiple nation-states lace into each other as a consequence of recognizing norms with an international scope.Footnote 158 Law enacted by a foreign state and then transplanted into and adapted to the needs of another nation-state’s legal system fits the description of “rules of extra-state origin.” From the transplanting nation-state, this foreign state law is just as nonbinding as any model law or framework drafted by an international organization or informal network of private actors. Furthermore, leading theorists increasingly point out the importance of persuasive authority in transnational law, such as engagement with and references to foreign law and judicial opinions.Footnote 159 According to these criteria, trust regulation in Japan, Taiwan, South Korea, and China spawns transnational fiduciary law insofar as trust law contains fiduciary norms.
Critics might ask what is added by the transnational approach as developed in the preceding sections. The answer is that given by many scholars of transnational legal theory: It shows the flow, diffusion, and construction of norms across national borders, fostering a deeper understanding of the process of lawmaking in a globalized world.Footnote 160
2.3.2 Vertical Transnational Ordering of Fiduciary Law
Vertical transnational legal ordering involves norms, as some scholars succinctly put it, “downloaded” from a domain beyond the nation-state into national legal systems or “uploaded, then downloaded.”Footnote 161 In the course of their voyage, norms created by non-state actors may gain normative force comparable to state law. This is one of the basic insights of transnational legal theory, not only true for lex mercatoria,Footnote 162 but also for fiduciary norms. Given that the movement of norms stands at the center of transnational legal theory,Footnote 163 the following section can forego another exercise in theorizing transnational law. Instead, it explores the issue based on a case study centering on fiduciary law. Specifically, it discusses the potential of transnational legal ordering in the area of environmental, social and (corporate) governance (ESG) mattersFootnote 164 in corporate law.Footnote 165 ESG regulation unfolds normative force from a socio-legal perspective. This is true even for the United States, regardless of critiques pointing to the requirements of national law. Standards and principles on ESG relevant for corporate law have been floating around for a while now. Even though they are “soft law” (i.e., not law in the sense of classical positivist accounts of law), these norms find their way into national legal systems, either by way of legislation or through enforcement by private actors.Footnote 166
2.3.2.1 Standards and Principles
Two important international organizations, the United Nations (UN) and the OECD, have been setting standards for corporate law and corporate fiduciaries for some time. The UN Environment Program joined with more than 200 private institutions to form the UNEP Finance Initiative (UNEP/FI),Footnote 167 which delivered a report on “Fiduciary Duty for the Twenty-first Century” in 2015Footnote 168 – a follow-up on an earlier report delivered in 2005.Footnote 169 The report lays out a framework under which it would be not only legal to take ESG-matters into account, but which even requires fiduciaries to pay attention to ESG. A broader perspective is employed by the 2011 UN Guiding Principles on Business and Human Rights (UN Guiding Principles), holding business enterprises obliged to respect human rights.Footnote 170 These UN Guiding Principles aver that the responsibility to respect human rights “is a global standard of expected conduct for all business enterprises wherever they operate.” According to the UN Guiding Principles, this responsibility “exists independently of States’ abilities and/or willingness to fulfill their own human rights obligations and does not diminish those obligations.” The guideline commentary positions it “over and above compliance with national laws and regulations protecting human rights.”Footnote 171 The G20/OECD 2015 principles on corporate governance recommend that corporate boards should take stakeholder interests into account.Footnote 172
2.3.2.2 Normative Effects of Nonbinding Rules
Notwithstanding the purported softness and the nonbinding character of the rules, it would be a mistake to discard them as politics or mere wishes of non-governmental actors, thereby carving them out of transnational fiduciary law. They are highly influential in shaping practice and legislation, especially in the last twenty years and increasingly so after the financial crisis of 2007/2008. As a consequence, they stand at the beginning of what appears now as the emergence of a transnational legal order. It is somewhat beside the point to argue that actions like a self-commitment to invest in line with ESG standards run counter to actual law requiring directors to maximize shareholder wealth. Clearly, Dodge v. Ford Motor Co.’sFootnote 173 progeny seems to prove these critics right, especially its modern Delaware offspring.Footnote 174 Two things have to be borne in mind, however. Regardless of the “strictly legal point of view,” the critique carries only so far. It does not reach beyond state law pursuing the Delaware take on corporate directors’ fiduciary duties. Many jurisdictions outside the United States do follow a different path, among them major economies like FranceFootnote 175 and Germany,Footnote 176 to name but two.Footnote 177 Even in the United States, a number of state corporate laws establish a stakeholder-oriented model of corporate governance, which at least makes it possible to take stakeholder-interests into account on the same footing with those of the shareholders.Footnote 178
Three examples may help to undergird the general claim expressed above that “soft law” on ESG exercises a normative thrust which has to be reckoned with, both from a more technical legal perspective and as a matter of socio-legal impact.Footnote 179 The first example concerns recent French legislation on corporate law, the loi PACTE; the second one concerns ESG-disclosure rules in the EU, and the third concerns acknowledgment through enforcement of rights and remedies and the exercise of power.
(a) The French “Loi PACTE”
The French law on the growth and the transformation of businesses,Footnote 180 known in shorter form as the loi PACTE,Footnote 181 contains, inter alia, new provisions on fiduciary duties.Footnote 182 Pursuant to the reformed Chapter 1833 of the French Code Civil, a corporation has to be managed in its social interest, taking into consideration its activities’ social and environmental effects,Footnote 183 replacing the old focus on the common interest of the shareholders.Footnote 184 PACTE relies to a considerable extent on the Notat-Sénard report,Footnote 185 prepared by two high-profile individuals – one representing an ESG- and Union-perspective (Nicole Notat), the other “big business” (Jean-Dominique Sénard).Footnote 186 Notat and Sénard explain their ESG-led reform proposals, inter alia, with reference to UN frameworks.Footnote 187 Even though these and other international guidelines and principles are not the sole reason or even the main driving force behind the French bill, they serve as an important reference point and anchor linking national French law and transnational perspectives. The PACTE firmly integrates these into national legislation and corporate fiduciary law.
(b) EU ESG-Reporting Standards
EU law requires large companies to disclose certain information regarding the way they operate and manage social and environmental challenges.Footnote 188 The relevant Directive 2014/95/EU goes back to a strategy paper of the EU Commission.Footnote 189 It grounds its policy approach, inter alia, in the UN Guiding Principles, qualifying them to be one element of “authoritative guidance … provided by internationally recognised[sic] principles and guidelines” and belonging to a “core set of internationally recognised[sic] principles and guidelines represents an evolving and recently strengthened global framework for CSR [i.e., corporate and social responsibility].”Footnote 190 Companies subject to the Directive’s reporting and disclosure regime may rely on international frameworks in order to structure their non-financial disclosure document,Footnote 191 among them the UN Guiding Principles.Footnote 192 The EU regulation partly builds on a French role model on ESG reporting, enacted in its earliest form in 2001.Footnote 193 Even if these reporting requirements, as the more reserved-minded argue, are just that and not fiduciary duties in the narrow sense, fiduciaries still have to explain themselves.Footnote 194 Whereas this might not affect the legal grid of the fiduciary’s obligations directly, the normative expectations it has to cater to will change. This clearly is the EU’s idea, describing the disclosure requirements as part of a broader agenda.Footnote 195
Inhabitants of the planets Hart and Kelsen may still stress that legally, the fiduciary duties in a technical sense have not changed at all. But this argument does not prove much in the context of transnational law (and thus transnational fiduciary law) which conceives “norm” in a broader sense.Footnote 196 What is relevant here is that the EU legislator clearly acts based on an understanding of the UN Guiding Principles and other international ESG standards as “authoritative” and “internationally recognised[sic] principles” for CSR and CSR-related duties in general.Footnote 197 Disclosure rules concerning nonfinancial information are just one element of a broader strategy to push “enterprises [to adopt] a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders …”Footnote 198 They represent an expression of this broader conception rather than being an exception to the rule. From a policy point of view, these guidelines and principles unfold normative thrust, especially in countries with already more stakeholder-oriented approaches in corporate law.
(c) Acknowledgment through the Enforcement
Even in nation-states without comprehensive ESG legislation such as the United States, ESG standards start becoming influential in shaping fiduciary law, at least from a socio-legal perspective. Institutional investors increasingly put ESG on the corporate policy agenda, calling for boards to disclose and act according to established international frameworks such as the UN Guiding Principles. BlackRock, one of the world’s largest investment firms, professes to monitor and engage “with companies to encourage them to adopt business practices consistent with sustainable long-term value creation,” citing ESG as a prime example.Footnote 199 BlackRock has been a signatory to the United Nations-backed Principles for Responsible Investment (PRI) since 2008.Footnote 200 Given this changing environment, corporate boards not dealing with ESG matters will more likely slide between a rock and a hard place, with nongovernmental organizations such as OxFam as additional watchers on the wall.Footnote 201
Institutional investors like BlackRock and other groups hold a rich set of cards in their hands. They can submit shareholder proposals, initiate campaigns against incumbent directors at annual meetings or divest of their holdings in a corporation, to name but a few examples. Imagine Carl Icahn “tweeting” not that he had a “cordial dinner with Tim” (Cook),Footnote 202 but his dissatisfaction with management’s approach to environmental issues – “will divest US$ 1 bill. in shares tomorrow.” Publicly asking management to explain why poultry workers – not in Bangladesh, but in the United States – have to wear diapers at workFootnote 203 will not slip away unattended on a corporate board agenda’s backside. In these and other circumstances, reality in the boardroom will prevail over the courtroom, even in Delaware. Notwithstanding the Delaware creed of shareholder primacy and shareholder value only,Footnote 204 measures like those mentioned before have to be addressed by corporate directors. Not doing so creates more bad publicity and, at least in many cases, causes stock prices to take a dive. Recent surveys suggest that the majority of corporate boards engage seriously and regularly with ESG-issues.Footnote 205 One hundred eighty-one CEOs signed the 2019 statement of the “Business Roundtable” in the United States, proclaiming publicly a commitment to all stakeholders.Footnote 206 There is good cause to question the motives behind corporate ESG-commitment.Footnote 207 In 2022, BlackRock backed down from their grand agenda and announced that it was more reluctant in supporting sustainability shareholder proposals, arguing that “many of the climate related shareholder proposals coming to a vote in 2022 are more prescriptive or constraining on companies and may not promote long-term shareholder value.”Footnote 208 But there is no denying the fact that companies are implementing and debating ESG policies following the standards and principles outlined above.
Moreover, most pundits agree that shareholder primacy statutes such as the Delaware General Corporation Law leave room for paying attention to stakeholder interests in the course of ordinary business decisions.Footnote 209 Whereas the norms in their purest form – “shareholders only” versus mandatory inclusion of stakeholders – grind against each other, the business judgment rule typically works as the sheet anchor, “though [management] may have to be just a bit careful about what they say.”Footnote 210 Change of control and corporate takeovers are the scenarios in which Delaware courts require boards to act single-mindedly in the interests of shareholders.Footnote 211 They do not happen on a daily basis.
2.3.3 Transnational, Not Global Fiduciary Law
Not a few authors mining the veins of transnational legal theory posit the emergence of “world law”Footnote 212 or “global law.”Footnote 213 Tamar Frankel, arguably the founder of the field of fiduciary law in the common law world, sees universal fiduciary principles at work and argues for the adoption of a hybrid system of fiduciary law.Footnote 214 Whereas the functional approach builds a bridge over the troubled waters separating common law and civil law, unifying the two worlds with respect to fiduciary law may appeal to many as a matter of legal politics, but is likely to run into serious trouble in practice. In light of the remaining differences between civil law and common law systems (and the considerable differences between legal systems within the respective families), a more cautious approach allowing for the emergence of several transnational legal ordersFootnote 215 seems the more promising road to travel.
This is corroborated by the fact that, as Clifford Geertz famously put it, law is local knowledge.Footnote 216 Searching for and then comparing abstract legal principles therefore does not amount to much,Footnote 217 especially in transnational law or so-called “global” law. “[G]lobal doctrine becomes clothed in local knowledge.”Footnote 218 It is enmeshed in prior customs and legal traditions. Different legal systems may coexist side by side or tie the knot, leading to a hybrid, neither common law nor civil law, built on layers upon layers of regime changes and shifting political environments.Footnote 219 There is no peeling off the eggshells of common law or civil law and out comes the global fiduciary law chick. Acknowledging and accepting principles of fiduciary duty or, more generally, fiduciary law in any given system, no matter whether bred within it or transplanted from the outside, will work only if the relevant rules and principles latch on to what is there already. Transnational legal orders most likely arise based on preexisting bonds and shared traditions.
2.4 Elements of Transnational Fiduciary Law
Transnational legal orders unfold in terms of geographic and legal scope.Footnote 220 Until now, this chapter has dealt with the geographic scope as the first prong of transnational legal ordering. The following section takes up the second prong, the elements of transnational legal orders.
Employing a transnational perspective not only uncovers multiple spaces of transnational legal ordering of fiduciary law. It also reveals how fiduciary law on the transnational plane develops elements different from national legal orders, either as variations on common themes, such as the duty of loyalty, or because the content of fiduciary obligations diverges from national law. First of all, as Section 2.4.1 will show, the distinctiveness of the duty of loyalty, an issue of the highest importance in national common law legal orders, may play out differently, depending on the scope of contract. Secondly, Section 2.4.2 demonstrates that even within the common law, court communication between individual nation-states may engender several fiduciary legal orders. Thirdly, Section 2.4.3 argues that the duty of loyalty does not necessarily become manifest in a single norm which, when applied to a fact-pattern, unfolds in more fine-grained specific rules, but may also be the result of bundling together a number of particular rules. In other words, different legal orders may construct the duty of loyalty differently. Again, East Asia provides an example.
2.4.1 The Fiduciary Duty of Loyalty and the Scope of Contract in Common Law and Civil Law
Given the peculiarities of fiduciary obligations compared to contract law in the common law world, the outcome of a case hinges on which drawer a judge opens. It is most importantly the duty of loyalty where fiduciary law and contract law part ways. Loyalty “is one of the most prominent features of fiduciary law[,] … often considered essential to fiduciary relationships …”Footnote 221 It “is a part of what gives the field its distinctive qualities.”Footnote 222 Millet J, in the seminal decision Bristol & West Building Society v. Mothew, held it to be the “distinguishing obligation of a fiduciary …”Footnote 223
Embracing a particular obligation as part of the duty of loyaltyFootnote 224 is of double import in the common law. At least historically, it helps to overcome several shortcomings of contract law. Fiduciary duties arise without having to follow a certain set of rules governing formalities of forming an enforceable agreement.Footnote 225 Other than a party to a contract, the beneficiary of a fiduciary obligation may compel the fiduciary to specific performance and not only claim damages.Footnote 226 Beneficiaries have rights against the fiduciary, whereas (English) contract law protects only the parties of the contract.Footnote 227
Contract law in civil law jurisdictions typically requires specific performance and knows third-party beneficiaries. Consequently, there is no need for fiduciary duties enforcing specific performance and protecting third parties. The job is done by contract. As a result, at least to a certain extent, speaking of a duty of loyalty and fiduciary obligation(s) loses its significance in civil law jurisdictions. Sorting a breach into the register of “contract” instead of “loyalty” then does not make much of a difference, as long as the judge qualifies the fiduciary’s behavior as a breach of their obligations.
What makes this interesting from the perspective of transnational legal theory is not the comparative insight. Rather, it is important as a potentially constitutive feature of a transnational legal order. In the end, loyalty keeps pride of place as the distinctive feature of fiduciary law in its transnational version. But it is distinctive first and foremost viewed from an overarching functional perspective – wherever the law specifically requires a person enjoying discretionary other-regarding powers to act loyally toward a beneficiary, transnational fiduciary law emerges. Consequently, transnational fiduciary law knows different shades of loyalty and therefore offers room for different transnational fiduciary legal orders.
2.4.2 Contents of Fiduciary Obligations
Speaking of transnational fiduciary law in the common law world can mean two different things. First, all jurisdictions hold the duty of loyalty near and dear to the heart of the fiduciary relationship.Footnote 228 Commonwealth courts frequently cite and discuss decisions of courts in other nation-states belonging to the same legal family. This horizontal dialogue is unsurprising, as these courts shared a common law background, tradition, and history stemming from the British Empire.Footnote 229 Perhaps somewhat counter intuitively, especially for the civil lawyer dabbling in matters of equity law, it is not only English law and English courts influencing courts in the former dominion. Starting with an Australian case, court communication between Australian and English courts across national borders has led to a transnational legal order in fiduciary law in which the duty of care has lost its quality of a fiduciary duty. It remains part of fiduciary law in the United States of America, however. This means that, as a consequence of transnational ordering, there is no longer a unitary common fiduciary law.
Second, in the seminal case Permanent Building Society (in liq) v. Wheeler, the Australian Supreme Court, led by Ipp J, denied the duty of care having a fiduciary character, qualifying only the duty of loyalty as truly fiduciary in nature.Footnote 230 That was taken up by the English High Court and Millet J in the also seminal decision Bristol & West Building Society v. Mothew.Footnote 231 Just like the example of trust legislation in East Asia, courts in the United Kingdom and Australia watch each other and, sometimes, communicate in their reasoning. This establishes another example of connected histories in the development of the law – fiduciary law in this case – which is the product of shared experiences and legal reasoning across national borders.
A skeptic might argue that even those who think of the duty of care as a fiduciary obligation doubt its quality as a distinctive feature of fiduciary relationshipsFootnote 232 or even deny it.Footnote 233 Starting with this critical view as a premise, one might deny the existence of two transnational orders of fiduciary law in the common law world. Nevertheless, the question remains relevant. Where the duty of care kept its place under the fiduciary roof, it interacts with the duty of loyalty.Footnote 234 Put differently, courts seem to construe the demands of loyalty in light of how the duty of care works, inside or outside the fiduciary relationship – defined narrowly. Vice versa, as the Japanese example shows,Footnote 235 duties of care can gobble up parts of what in Australia is defined in terms of loyalty.
It is open to further research to assess court practice and see to what extent judges following the Australian and English approach allocate issues to the duty of loyalty their US counterparts would solve referring to the duty of care.
2.4.3 Constructing the Duty of Loyalty
Anyone looking for a duty of loyalty as the distinctive feature of transnational fiduciary law has to consider that not all jurisdictions construct this duty comparable to the common law approach, i.e., as a single rule which then is divided into several sub-norms depending on the fact pattern in case. Alternatively, or in addition, the duty of care bears the potential of solving loyalty-related issues. Again, the functional perspective governs the analysis of fiduciary law on the transnational level.Footnote 236 Once more, the “East Asian Four” provide an example.Footnote 237
Until recently, China, Japan, Taiwan, and South Korea did not have an open-ended standard establishing a fiduciary duty of loyalty in trust law. They have implemented a more diverse set of rules, each addressing a more specific aspect of the trustee’s obligation.Footnote 238 Combined in a bundle, however, they yield the idea of loyalty.Footnote 239 Moreover, they “impose the core trust obligations on a trustee.”Footnote 240 This turns the common law doctrine on its head; instead of loyalty as a ground rule from which courts extract more specific duties,Footnote 241 they generate a general rule by induction. As in Germany and other civil law jurisdictions, these duties add to the regular set of contractual obligations without having fundamentally different remedies.
One should hasten to add that, in 2006 and 2011, respectively, Japan and South Korea introduced generic duties of loyalty.Footnote 242 What remains to be seen, however, is the extent to which these duties will be able to lead a life on their own. Taking into account the other and more specific rules on a trustee’s obligations, it is likely that courts will construe a much narrower scope of application and judge cases referring to the more specific duties and other sets of rules.
Experiences with Japanese corporate law corroborate this assumption. Under US military rule, Japan introduced a duty of loyalty in its corporate law in 1950, in addition to an older provision on agency law, also applicable on corporate directors, which imposes a duty of care.Footnote 243 Nevertheless, the Japanese Supreme Court held the general agency provision to comprise a duty of loyalty, rendering the later corporate law provision superfluous.Footnote 244 It was only later, in 1989, that the Supreme Court switched gears in corporate law and now solves at least some loyalty issues by relying on the specific corporate law provision.Footnote 245 Nevertheless, Japanese courts do not use this provision extensivelyFootnote 246 and still seem to cling to the old Supreme Court decision.Footnote 247 Corporate and comparative law scholars weigh different reasons for this reluctancy.Footnote 248 One of these reasons, however, unsurprisingly seems to be the legal environment into which the duty of loyalty was transplanted.Footnote 249 The idea was already thereFootnote 250 and found its way into court practice by other normative means. Outside the corporate law arena, Japanese judges solve loyalty issues based on the general agency provision.Footnote 251
2.5 Conclusion
Viewing fiduciary law from the perspective of transnational legal theory provides important insights into the emergence of legal orders and processes of legal ordering transcending the boundaries of nation-states. All legal systems have to address problems arising out of relationships in which one person enjoys discretionary powers over the interests of another. Interestingly, but perhaps not surprisingly, both common law and civil law jurisdictions have developed a set of tools subjecting the person having powers under loyalty constraints in various ways. Regardless of their differences in traditions and technical approaches, from a functional perspective the divide between common law and civil law may be crossed.
On the one hand, this perspective makes it possible to paint a picture of fiduciary law outside the common law. It shows how norms and institutions taken from the common law (such as the trust) may survive and develop in civil law systems, which lack an equity tradition. On the other hand, using the example of trust law as an instance of fiduciary law shows that conventional transnational legal theory leaves a blind spot, because it concentrates too much on norms “beyond” the nation-state being incorporated or acknowledged in national legal institutions.
Transnational fiduciary law develops in different spaces and may develop in horizontal and vertical dimensions. Horizontal transnational ordering concerns the flow of norms between nation-states. The example of the trust in four East Asian countries, Japan, Taiwan, South Korea, and China, demonstrates that legal orders may evolve in reaction to each other, using and implementing norms created in other nation-states. This recursive process is not captured by traditional accounts of comparative law. Transnational legal theory offers a methodological toolbox, which allows one to better focus on the process of norm creation beyond nation-states. The case study of so-called soft law on ESG is an example of vertical transnational ordering of fiduciary law. Exploring fiduciary law from a transnational angle and its socio-legal approach adds value, because it lays bare several ways in which nonbinding norms created by international organizations like the UN or the OECD have normative thrust, even in legal systems resting on legal concepts like shareholder value.
Last, but not least, employing a transnational perspective provides insights into how the contents of fiduciary obligations may be conceptualized differently in different (transnational) legal orders. Even though the duty of loyalty remains distinct, its import may differ from order to order. Moreover, the contents of fiduciary obligations may vary. Communication between courts in Australia and England led to a transnational fiduciary legal order where the duty of care is no longer considered having the quality of a fiduciary obligation.
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