Part I outlined the raison d’ être of this study. It addressed the significance of the concept of hybridity within the comparative debate on legal change. In doing so, it examined the theory that describes the movement of law from one country to another by using the metaphor of legal transplant. Two irreconcilable approaches were discussed. The first one suggested that the evolution of law is largely autonomous from society as it consists primarily of a function of rules being imported from another legal system. The second one established that the development of law cannot take place through borrowing because law mirrors, and is responsive to, situated linguistic, cultural and moral national frameworks. Both views were found to fall short: the first one ignores the relationship between legal comparison and sociology of law, and the second one over-simplifies the concepts of language and culture.

Chapter 1 offered a proposal to tackle the comparative conundrum. The inquiry opened with the observation that borrowing is not necessarily a legal phenomenon, but that it reflects a common trend of social life, a mechanism of culture diffusion. It applies to law because law is itself a form of culture. Building on this, it was, however, noted that the fact of borrowing per se has a mere descriptive value and says little about culture interaction and the assimilation process.

For this reason, Chapter 2 considered recent contributions on culture contact and culture change and concluded that they provide an interesting explanation for the process of borrowing and legal evolution. The analysis centred on the notion of hybridity, a fundamental theme in cultural and post colonialist studies that highlights the ‘in-betweenness’ of people and their actions in colonial situations. By complying with colonial norms and standards and at the same time maintaining the indigenous perceptions, colonial people develop new cultural norms and standards of their own. They create new traditions. The process of hybridisation was illustrated by reference to cases taken from archaeological studies. It was argued that the same dynamics can be used to explain the reception mechanism in law. As with colonial norms and standards, legal paradigms borrowed outside their original meanings become unsettled.

This final substantive chapter draws on the discussion on the general law reform developed in Chapter 6. It considers in greater depth the specific property law issue of whether the innocent purchaser for value of intermediated shares is adequately protected under English law. In line with the FMLC and the Law Commission, section 1 argues that this is not the case. Existing legal concepts do not adequately meet the practical needs of investors in intermediated shares and legislative intervention is highly desirable to keep up with changing financial practice.

Without dwelling on the possible defences against equitable personal claims, section 1 contends, in particular, that there is a disparity in the degree of protection available along the chain of indirect holding, apparently without justification. Building on this inconsistency, section 2 confronts the situation with the Italian legal framework and UCC Article 8 in order to offer a critical comparative background for the discussion on legal change addressed in section 3. It is in that context that the law reform proposals are examined and how they reflect a process of hybridisation of national models is shown. This outcome is consistent with the general analysis presented in Chapter 6 and reiterates with greater emphasis and depth the arguments of this study on the significance of comparative law to understand the pattern of legal evolution in terms of a process of cultural interaction and hybridisation.

The English Legal Framework

As stated in Chapter 6, section 1, the conventional legal characterisation of indirectly held shares in England is based on the device of trust. In the indirect holding system, account holders retain an equitable interest in the pool of shares held by the relevant intermediary. This is different from the pattern of direct holding where investors enjoy a direct relationship with the issuer and maintain an absolute right in the shares.

The distinguishing elements of holding and transfer directly held shares have been spelt out in Chapter 4. This section clarifies the significance for an account holder of having an equitable interest in shares rather than a legal title, and specifies how equitable interests circulate under English law (section 1.1). It is only against this background that the legal position of the innocent purchaser of directly held shares can be evaluated (section 1.2) and properly compared with the one available for the transferee of intermediated shares (section 1.3).

The conventional view is that the genealogy of the modern English limited liability company (and the mechanism of transfer of registered shares) has its roots in the scheme of the partnership and of the unincorporated joint stock company formed by contract or under a deed of settlement. This view identifies an important thread in explaining the history of the current legal framework and highlights the relevance of legal tradition in shaping legal change. It is suggested in this chapter that this view offers, however, a partial representation of the process of legal evolution. This is done in three steps. Section 1 presents the founding elements and characteristics underlying the modern law of registered shares. Section 2 sets out the orthodox interpretation of the immediate genealogy of the modern English company and of the techniques of transfer of membership. Building on this analysis, section 3 argues that the current legal characterisation of the circulation of registered shares has been shaped to a significant extent by legal borrowing from the Genoese model of maritime partnership (the societas maris) employed for part-ownership in ships in England starting from the seventeenth century. It also argues that the reception of that scheme did not occur in its original form, but that it was adapted through a process of hybridisation in accordance with the indigenous fellowship traditions of the guilds.

The Current Legal Framework

The paragraphs below set the boundaries and identify the subject matter of the inquiry. The investigation focuses on the legal nature and the (possible) physical manifestation of registered shares, establishing how legal title is transferred (sections 1.1 and 1.2).

Although this necessarily involves separate studies of the law of certificated and uncertificated shares (section 1.3), the underlying legal characterisation of the nature of the transfer in terms of novation remains identical (section 1.4). Finally, some attention is dedicated to the ‘bona fide purchaser’ defence as a fundamental rule for understanding the nature of transactions related to registered shares (section 1.5). This specific issue will be discussed again in Part III when comparing it with the protection available for innocent purchasers of intermediated shares.

Legal Nature

In order to describe how registered shares are transferred it is first necessary to establish what shares are and, in particular, what their legal nature is. The Companies Act 2006 states that shares are personal property.

These conclusions review the fundamental themes discussed in the preceding Parts and draws together the findings of the investigation.

Part I dealt with the conceptual framework of this study. It examined the comparative debate on the pattern, meaning and significance of the circulation of legal paradigms across national frontiers. The discussion centred on whether it was appropriate to describe the movement of law from one country to another by using the metaphor of a ‘legal transplant’. Broadly, two approaches to this question were explored. The first one, relying on historical evidence, suggested that the evolution of law is largely autonomous from society, as it primarily consists of a function of rules being imported from another legal system driven by legal elites. The second approach was sceptical about the role of history and of comparative law as tools to detect the pattern and the drivers of legal change. It pointed out that the development of law does not take place through borrowing because law mirrors, and is responsive to, situated linguistic, cultural and moral national frameworks. The two approaches are irreconcilable with each other. And both views were found to be misleading, as they overlook the relationship between legal comparison and sociology of law and over-simplify the concepts of language and culture, respectively. To address these shortcomings an original interpretation of the pattern of legal change was offered.

The underlying theme put forward was that the practice of borrowing is not exclusively a legal phenomenon; it reflects a common trend of social life, a mechanism of culture diffusion. It applies to law because law is itself a form of culture. Building on this understanding, Part I proposed a new perspective for considering the significance of legal borrowing and for explaining legal evolution. The main argument was that the movement of legal paradigms from one country to another rarely consists of a mere transplantation of rules. Instead, it generally involves a complex and gradual process of interaction between legal and social consciousness, between imported models and indigenous traditions. From that perspective, specific attention was paid to recent studies on acculturation, colonialism and contact situations in general. The focus of the analysis was on the notion of ‘hybridity’.

Chapter 1 showed the boundaries of the current debate on the diffusion of law and explained the limits of the most influential works in the area. It also introduced the contribution of this study to the comparative discussion. The present chapter develops this. In particular, it addresses the theoretical grounds for explaining the process of legal change through the appropriation of foreign legal paradigms and ideas. In doing so, it focuses on the notion of ‘hybridity’ as shaped in postcolonial studies, and tests it against a number of possible applications, as well as in ‘pseudo-colonial’ situations outside the modern imperialist pattern. A clarification of the impact and relevance of this investigation within the specific debate on legal borrowing will be provided in the next chapter.

The Concept of Hybridity

Foundation

The term hybridity originated in the mid-nineteenth century in the context of biological and evolutionary debates to describe a cross between animal or plant species. Although it has also been occasionally used as a metaphor to indicate a lack of racial purity, the term today defines a research theme in cultural and postcolonial studies involving ‘processes of interaction that create new social spaces to which new meanings are given’.

The Theoretical Background

The concept of cultural hybridity is usually associated with the pioneering works of Homi Bhabha who attempted to overcome the rigid dualist perception of culture in the colonial contexts that neatly distinguished between colonisers and colonised. Bhabha, developing the ‘orientalist’ discourse initiated by Said, essentially criticised the conventional way of binary thinking whereby the inhabitants of a colonised region are regarded as either colonial or indigenous.

The claim for a hierarchical purity of cultures is untenable in colonial situations. So is the picture of a rigid process of acculturation where one group becomes more like another by borrowing discrete cultural traits. Rather, there are areas of ‘in-betweenness’ of people and their actions, and it is the ‘in-between’ space that carries the burden and meaning of culture.

The Contents and the Effects

Building on the above-mentioned findings, Bhabha suggested that the notion of cultural hybridity expresses the result of cross-cultural exchange or ‘the effect of an ambivalence produced within the rules of recognition of dominating discourses as they articulate the signs of cultural difference’.

Understanding the pattern, meaning and significance of the circulation of legal paradigms and ideas across national frontiers is a central theme in comparative law. Recently, this has attracted a great deal of academic interest especially under the impetus of studies on globalisation, convergence among legal systems and the unification of private law.

Many themes and views have emerged, but, for the most part, the debate has centred on the appropriateness of describing and explaining the phenomenon in terms of legal transplants. There is concern both over this mode of innovation in law and over the conceptual framework suggested by the terminology. It is said in particular that borrowing and imitation are not relevant in understanding the pattern of legal evolution and that ‘since a transplanted institution continues to live on its old habitat as well as having been moved to a new one, the choice of the word transplant is inappropriate’.

A critical overview of the theory of legal transplants and a discussion of its major criticisms are presented below.

The Terms of the Debate

Legal Transplants

Orthodoxy

The notion of ‘legal transplant’ as metaphor for the movement of law from one country to another belongs to Alan Watson's pioneering works on legal change. It was later adopted by many and today it represents the predominant terminology.

Observing the historical and comparative pattern of the reception of Roman law in most countries of medieval, renaissance, and nineteenth century continental Europe, Watson suggested that borrowing had been the most fertile source of legal growth. Legal evolution, he maintained with a variety of accents, rarely stems from isolated national innovation (creatio ex nihilo), but is rather the result of borrowing from other jurisdictions, or the ‘moving of a rule […] from one country to another, or from one people to another’. More fundamentally, by contrast to one of the most established preconceptions of modern legal thought, according to which legal development is a rational response to existing social, economic and political circumstances, Watson argued that the scale of the empirical evidence of legal transplants shows that law has a vitality of its own and does not necessarily progress in a rational way. In other words, he rejected the postulate that law is a mirror of society, that there must be a close relationship between law and the society in which it operates.

This is a book on comparative law and legal change. With a focus on corporate law and the law of personal property, it reviews the current state of the comparative debate on the evolution of law.

It takes as a starting point the similarities and differences between legal systems as a means to understand the factors that shape legal growth and tests the well-established thesis according to which law tends to develop as a consequence of the movement of legal rules from one country to another. The analysis carried out in the first part of the book finds this thesis perplexing, as, above all, it does not put forward a persuasive account of the mechanisms of legal reception. In attempting to fill that gap, this study contends that recent contributions on culture contact and culture change offer an interesting explanation for the circulation of juridical models across national boundaries.

In brief, this book suggests that the notion of ‘hybridity’, as originated in postcolonial theory, provides a valid conceptual means to examine the intricacies of legal evolution, to refine and to give content to the observation of the reception of law. The notion of hybridity overcomes the rigid dualist perception of culture in the colonial contexts that neatly distinguished between colonisers and colonised and promotes the view that cultural norms in colonial contexts are more than the result of the fusion of features of colonial and indigenous background. They are neither colonial, nor indigenous ‘in disguise’, but they occupy a ‘third space’ between colonial and indigenous cultures. In this light, hybridity is a powerful tool in explaining the pattern of cultural change in social sciences in general and in law in particular. Borrowing reflects a general trend of social life, a mechanism of culture diffusion. It applies to law too because law is itself a form of culture. As with colonial norms and standards, borrowed legal paradigms outside their original meanings become unsettled. They interact at different levels with local traditions, with certain indigenous perceptions, and do not survive in their original identities. A new legal tradition, a hybrid space that is peculiar to the specific contact situation is therefore created. Borrowed legal paradigms become almost the same as the original ones, but not quite.

Introduction

This quote comes from the introduction of a French PhD thesis published in 1905. It reveals that already at the start of the previous century, at least some scholars considered the Code civil to be outdated. The author continues by giving examples of these inventions: the steam engine, electricity, trains, etc. It goes without saying that our society has evolved at even a much faster pace since then. So which was true in 1905 is a fortiori true in 2012. The contention that (at least some parts of) the French and Belgian Code civil are outdated, amounts to kicking in an open door.

One striking example of the way contracting has evolved is the use of standard terms. Standard terms are sets of contract terms which are drafted in advance, independently of any specific contractual negotiation and to be used in multiple contracts. The codifications of the 19th century, however, envisage a contract which is concluded between two parties after individual negotiations. Together with the industrial revolution and the corresponding development of a mass society came the mass use of standard contracts and standard contract terms. Standard terms are therefore sometimes called a child of the 19th century, but that is not entirely correct. While it is true that at that time the mass application of standard terms began, its origins lie much further back in history. Already in the ancient world, standard terms appeared in rental agreements. In the Middle Ages, pilgrims for the Holy Land often took a boat from Venice. For some time, they could only choose between two shipping companies that used standard terms which were drafted for their sole benefit. To make matters worse, those companies executed their remaining duties poorly. The Mediterranean legislatures of Venice and Genoa therefore intervened with mandatory law.

Introduction: the development of a consumer policy

In 1975 the European Council accepted the first Consumer Policy Programme. As was mentioned in the introduction to a previous book in this series, European consumer law was justified as being a measure to improve the quality of the life of the peoples of the Member States of (then) the European Economic Community. According to the 1975 Consumer Policy Programme the consumer was entitled, among other things, to protection of his economic interests and to redress. With regard to the protection of the consumer's economic interests, it was noted that the consumer needed to be protected against the abuse of power by the seller, in particular against one-sided standard contracts, against the unfair exclusion of essential rights in contracts and harsh conditions of credit, against demands for payment for unsolicited goods and high-pressure selling methods, as well as against damage to his economic interests caused by defective products or unsatisfactory services. Moreover, the presentation, advertising and promotion of goods and services, including financial services, should not be designed to mislead, either directly or indirectly, the person to whom they are offered or by whom they have been requested. Information provided by a producer, seller or service provider should be accurate, and the consumer should be offered an adequate choice between different goods available to him. As regards the right of redress, the European Commission stated that if damage or injury resulted from defective goods or unsatisfactory services, the consumer should receive advice and help in order to file complaints, and that swift, effective and inexpensive procedures were needed in order to allow the consumer proper redress. The right of redress mentioned in the 1975 Consumer Policy Programme therefore reflects what is more commonly referred to as the matter of access to justice. Therefore, the consumer policy program in this respect was justified by the notion that consumers lack equal bargaining power and are entitled to bring their claims in front of a court or tribunal.

From 1975 onwards, consumer policy and consumer protection measures have been on the political agenda. Until the 1992 Maastricht Treaty came into force, consumer policy measures could only be taken with a view to the improvement of the internal market, as there was no other specific legal basis that could be relied on.

1. The purpose of this chapter is to assess possible options for the further harmonisation of rules on business-to-business practices. Whereas Directive 2005/29 ('UCPD’) protects consumers against unfair, misleading and aggressive B2C practices, Directive 2006/114/ EC ('MCAD’) protects businesses against misleading B2B advertising. In the first section of this chapter, a critical analysis of this ‘dualistic’ approach underlying the current European law of unfair commercial practices will be presented. In the second section, the Commission's plan to maintain the dualistic approach through a minor revision of the MCAD will be critically assessed. It will be argued that the best way forward would be to amend the scope of the UCPD so as to cover B2C/B2B practices directly connected with the promotion of products. In the third section, the broader issue of the need and desirability of harmonisation of rules concerning unfair business-to-business trading practices will be dealt with.

The current European law on unfair commercial practices

UCPD

2. The UCPD is a maximum harmonisation directive covering, pursuant to Article 3(1), all ‘business-to-consumer commercial practices (…) before, during and after a commercial transaction in relation to a product.’ The UCPD contains a particularly wide definition of'business-to-consumer commercial practices (hereinafter also reffered to as commercial practices)’: ‘any act, omission, course of conduct or representation, commercial communication including advertising and marketing, by a trader, directly connected with the promotion, sale or supply of a product to consumers’. The concept encompasses pre-existing EU concepts such as ‘advertising’ and ‘commercial communication’ and in essence covers all ‘commercial acts which clearly form part of an operator's commercial strategy and relate directly to the promotion thereof and its sales development.’ While the MCAD's definition of ‘advertising’ requires the making of a representation ‘in order to promote the supply of goods or services’, the UCPD does not require that a commercial practice aims at promoting the sale of goods or services. There must be a ‘direct connection with the promotion, sale or supply of a product’ meaning that there must be a direct link between the practice and the main economic modalities determining consumers’ transactional decisions (quality, price, after sale service, and so forth). The concepts of'promotion’, ‘sale’ and ‘supply’ simply denote the pre-contractual, contractual and post-contractual stage. The UCPD establishes what might be called a ‘cradle-to-grave regime’, covering commercial practices at the time of promotion, negotiation, conclusion, performance and enforcement of the contract.

1. P.CESL: realizing the internal market. In October 2011 the European Commission published its ‘Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law’ (hereinafter P.CESL). The aim of the Proposal is to create an optional contract law regime or 28th contract law system which the parties to a sales contract can opt for to apply to their contract instead of their national contract law system. Contrary to earlier initiatives taken by the Commission in the area of contract law, a limited number of specific rules that are to regulate commercial relationships in which one or more small and medium-sized enterprises (hereinafter SME) is involved, were incorporated in the P.CESL, alongside a more extensive body of rules which reflect the general law of obligations. These rules are inspired by and to a large extent copied from the Draft Common Frame of Reference (hereinafter DCFR). Underlying their insertion in the P.CESL is the belief that the existence of 27 different national sales regimes, and the transaction costs resulting from dealings with these various national laws, deters SMEs vested in one Member State from offering their goods and related services in another Member State.

2. P.CESL: protecting weaker companies? It is believed by some that the Commission is hereby creating some kind of ‘consumer law for professionals’, meaning that the Commission is attempting to protect SMEs contracting with large enterprises (hereinafter LEs) or with other, more powerful, SMEs. This seems surprising. The number of rules which are specifically applicable to B2B contracts is limited, far more limited than is the case of B2C contracts. Also, the Preamble to the P.CESL clearly states that its SME rules mainly aim at preserving demand in the internal market. Contractual protection of SMEs against other companies is not mentioned as an express aim of the proposal. It goes without saying that the mere establishment of the internal market does not suffice to protect the weaker party in a contractual relationship.

Introduction

Party autonomy is at the heart of contract law. Freedom of contract is, however, not unlimited. Very often, the law will provide protection for weaker parties, such as consumers, employees and tenants. Small and medium-sized enterprises (SMEs) are typically excluded from weaker party protection. However, when the European Commission published its Proposal for a Regulation on a Common European Sales Law (hereafter referred to as the Regulation on CESL), a new distinction was introduced between SMEs and other enterprises. The Regulation on CESL defines an SME in Article 7 as ‘a trader which (a) employs fewer than 250 persons; and (b) has an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million’. This paper aims to discuss this distinction and its rationale. The definition of an SME in the proposed Regulation will be compared to those provisions of private law in the Netherlands which also contain quantitative criteria to determine whether an enterprise may be qualified as a small or a large enterprise. After an introduction to the background of the Regulation on CESL (section 2), this paper will introduce the definition of an SME in the Regulation on CESL (section 3). Secondly, the distinctions used in the private law of the Netherlands will be illustrated (section 4). Finally, a conclusion will be drawn concerning the feasibility of the definition of an SME in the Regulation on CESL.

Background of the Regulation on CESL

In 2001, the European Commission expressed its clear interest in European contract law and published a Communication on European Contract Law. This was the start of a process of extensive public consultation on the potential problems arising from the differences between the Member States’ contract laws. Between 2005 and 2009, a network of European contract law experts developed a Draft Common Frame of Reference on the basis of comparative law research. The European Commission examined several options as to how to ease cross-border transactions by making contract law more coherent within the European Union. In 2010, the European Commission decided to set up an Expert Group in the area of European contract law. The task of this group was to assist the Commission by means of a feasibility study and in making further progress in the development of a possible future European contract law instrument.

Introduction

On a policy level the European Union has concerned itself with small and medium-sized enterprises (SMEs) for some time now, as is witnessed by the Small Business Act for Europe and the “Think Small First” principle. In EU contract law, however, there exist practically no rules specifically concerned with SMEs. The proposed regulation on a Common European Sales Law (CESL) aims to change this. In only the first two pages of the Explanatory Memorandum, SMEs are mentioned seven times and Article 7(2) of the proposed Regulation determines that the CESL maybe used even in B2B situations if at least one party is an SME. Interestingly enough, however, SMEs are not mentioned once in Annex I, which contains the material rules of the CESL. To conclude that the CESL would not change anything for the position of SMEs, however, would be a big mistake.

The CESL includes a section on unfair terms in contracts between traders. Accordingly, the terms of a contract between an SME and another business can be tested on its unfairness under the CESL. It is the first time that would be the case in a EU context, as the Unfair Terms Directive only included an unfairness test for B2C contracts. The extension of an unfairness test to B2B situations is not uncontroversial.

In this chapter I will first argue that an extension of the unfairness test of contractual terms is justified in contracts where at least one party is an SME. Two paradigms lie at the basis of much of European contract law: the creation of a well-functioning internal market and the protection of weaker parties. These aim respectively at removing barriers to trade and the prevention of taking advantage of weaker parties. The Commission identifies these two rationales as underlying the CESL and captures both concerns when it says in its Explanatory Memorandum: ‘in their relations with larger companies, SMEs generally have to agree to apply the law of their business partner and bear the costs of finding out about the content of foreign law applicable to the contract.’ I will not discuss the (relative) merits of these - sometimes overlapping, sometimes conflicting - paradigms. Instead I will argue that both paradigms justify an unfair terms test for SMEs.

The importance of SMEs for the European Market

The concept of small and medium-sized enterprises (SMEs) has long been included in the European Union's lexicon. The importance of SMEs for the European Market is irrefutable. According to data from the EUROSTAT quoted by the European Economic and Social Committee, 99.8% of European businesses are SMEs, 92% of which are microenterprises with an average of two employees. The Committee points out that microenterprises export to a small number of Member States after analysing the market in depth, that the standard business model of a microenterprise does not aim to conclude cross-border contracts in 27 Member States, and that there are major barriers to cross-border transactions by SMEs.

SMEs and transaction costs

The Proposal for a Regulation of the European Parliament and of the Council on a Common European Sales Law (the Proposal) pays special attention to SMEs, namely in its Explanatory Memorandum, where it acknowledges that ‘the costs resulting from dealings with various national laws are burdensome particularly for SMEs. In their relations with larger companies, SMEs generally have to agree to apply the law of their business partner and bear the costs of finding out about the content of the foreign law applicable to the contract and of complying with it. In contracts between SMEs, the need to negotiate the applicable law is a significant obstacle to cross-border trade. For both types of contracts (business-to-business and business-to-consumer) for SMEs, these additional transaction costs may even be disproportionate to the value of the transaction’. According to the second recital of the Proposal, the deterrent effect of contract-law-related barriers ‘is particularly strong for small and medium-sized enterprises (SME) for which the costs of entering multiple foreign markets are often particularly high in relation to their turnover. As a consequence, traders miss out on cost savings they could achieve if it were possible to market goods and services on the basis of one uniform contract law for all their cross-border transactions and, in the online environment, one single web-site’. Finally, recital 7 states that ‘the barriers to cross-border trade may jeopardise competition between SME and larger companies. In view of the significant impact of the transaction costs in relation to turnover, an SME is much more likely to refrain from entering a foreign market than a larger competitor’.