Part I - The Transnational Formation and Institutionalization of Fiduciary Law

2 Transnational Fiduciary Law Spaces and Elements

Thilo Kuntz

2.1 Introduction

In recent years, fiduciary law has moved toward the center of scholarly attention in the common law world.¹ In spite of its “elusive” nature,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.³ Courts as well as scholars in common law jurisdictions deal concepts and ideas concerning fiduciary law back and forth.⁴ Although civil law countries have no tradition of the trust as a legal institution,⁵ courts and scholars alike term relationships based on some kind of personal or professional trust “fiduciary.”⁶ German law subjects guardians,⁷ trustees in bankruptcy,⁸ attorneys,⁹ and others to a specific set of fiduciary duties, the most important of which is a duty of loyalty.¹⁰ France has introduced “la fiducie,” a substitute for the common law trust.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.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.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.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.¹⁵ Mixed legal systems in the United States (Louisiana) and Canada (Quebec) have done the same.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 Initiative¹⁷ (e.g., the OECD Principles of Corporate Governance,¹⁸ and the UN report on “Fiduciary Duty for the Twenty-first Century”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.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.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,”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.”²³ Anyone slogging through the heap of literature on transnational legal theory ends up in “a jungle without a map.”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,”²⁵ it is no wonder that definitions of transnational law have multiplied over the years.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,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.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.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.”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.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.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,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.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),³⁵ the International Swaps and Derivatives Association’s master agreements for derivatives,³⁶ Internet Regulation by ICANN,³⁷ and standards set by the International Organization for Standardization (ISO).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.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.⁴⁰ It evolved on a general level out of equity and equitable remedies and is tightly bound to the trust as a legal institution.⁴¹ Civil law systems, by contrast, traditionally lack both equity⁴² and the trust institution,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).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.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.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.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.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.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.⁵⁰ In many instances, what is called “fiduciary duty” and “fiduciary law” in the United States is mirrored by Treuepflicht in Germany.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.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 field⁵³ 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 law⁵⁴ 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 law⁵⁵ or want to enrich comparative law by integrating insights from transnational legal theory.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.⁵⁷ Additionally, there has to be some connection of the transnational norm to national law or national lawmaking.⁵⁸ If transnational legal orders unfold through “the adoption, recognition, or enforcement of the norms” by legal institutions within multiple nation-states,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 orders⁶⁰ are unique to the environment originating or receiving them. Different conceptions of public and private law, diverging boundaries of contract and tort⁶¹ – 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.⁶² Institutions are comparable if they serve similar purposes (function) in the systems compared.⁶³ A function, at least according to a popular definition in the comparatist’s methodological quiver, is the relation between institutions and problems.⁶⁴ Therefore, one first has to nail down the problem, which then may serve as the constant for the comparative work.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.”⁶⁶ They “simply” have to fulfill the same purpose.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,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.⁶⁹ In the language of law and economics, this gives rise to a principal-agent problem.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.⁷¹ That creates an opportunity to engage in opportunistic behavior or, in the famous phrase coined by Oliver Williamson, “self-interest seeking with guile.”⁷² The agent may engage in hidden actions under conditions of moral hazard.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.⁷⁴ These “no conflict” and “no profit” rules build the fiduciary loyalty’s core in the common law.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.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.⁷⁷

The German Civil Code (Bürgerliches Gesetzbuch – BGB) provides default rules for an agreement to act on another person’s behalf⁷⁸ in the shape of a mandate contract (Auftrag).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,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,⁸¹ the disgorgement of profits,⁸² and a penalty in case the agent misappropriates assets under his management.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.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: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 activity⁸⁶ of an economic character⁸⁷ on behalf of another within a foreign⁸⁸ sphere of interest.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.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.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.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 ward⁹³ and the trustee in bankruptcy (Insolvenzverwalter).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.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 advisors⁹⁶ and attorneys⁹⁷ 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,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.”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 BGB¹⁰⁰ by way of analogy – for example, in case of a guardian letting entailed land after receiving a “commission”¹⁰¹ or an insolvency trustee holding monies in an escrow account on behalf of the debtor.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).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)¹⁰⁴ or a trustee in bankruptcy appropriating the debtor’s corporate opportunities.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 spaces¹⁰⁶ 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.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.¹⁰⁸ Its extension varies¹⁰⁹ 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.¹¹⁰ Pointing this out, many scholars conclude that transnational orders vary in geographic scope.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,¹¹² the overwhelming majority of writers, while stressing the importance of national laws,¹¹³ take this as a given.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.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.”¹¹⁶ Even though transnational law cannot forego exercises in comparative law,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.¹¹⁸ Theorizing transnational legal ordering moves the “construction, flow … and settlement of legal norms”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.”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,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.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.¹²³ (National) international private law, so their argument goes, “engage[s] institutions in foreign states, too.”¹²⁴ Stressing the political – and therefore regulatory – nature of international private law,¹²⁵ these authors conclude that international private law and cross-border litigation engender transnational (private) law.¹²⁶ National law can also turn into transnational law, or so some propose, through national judges developing common private international law principles.¹²⁷

Delving into the debate’s details is not of interest for the purposes of this text.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,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).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.¹³¹ This distinguishes them from their common law siblings: Hong Kong, Singapore, and Malaysia.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 1922.¹³³ As part of its colonial rule over Taiwan, acquired from China in 1895, and Korea, annexed in 1910,¹³⁴ Japan imposed its trust legislation.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 2001.¹³⁶ Both Taiwan and South Korea kept the trust after Japanese colonial rule ended.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.¹³⁸ At the same time, the trust laws of the group members echo US models on trust.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.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.¹⁴¹ Reviewing these common points of departure, it comes as no surprise to find solutions closely resembling each other.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.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”?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,¹⁴⁵ connected histories,¹⁴⁶ and histoire croisée.¹⁴⁷ Moving forward from comparative history, these scholars emphasize the element of interaction and echo-chamber effects resulting from shared narratives and histories.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.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.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.”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.¹⁵² Paying close attention to how norms gain transnational character according to leading legal theorists proves the point.

Transnational norms are norms “adapted transnationally.”¹⁵³ They do not necessarily have to originate outside the nation-state.¹⁵⁴ Transnational legal orders are transnational if they (at least) have social effects in more than one jurisdiction¹⁵⁵ and “engage legal institutions within multiple nation-states.”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.¹⁵⁷ What is important is that multiple nation-states lace into each other as a consequence of recognizing norms with an international scope.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.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.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.”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,¹⁶² but also for fiduciary norms. Given that the movement of norms stands at the center of transnational legal theory,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) matters¹⁶⁴ in corporate law.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.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),¹⁶⁷ which delivered a report on “Fiduciary Duty for the Twenty-first Century” in 2015¹⁶⁸ – a follow-up on an earlier report delivered in 2005.¹⁶⁹ 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.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.”¹⁷¹ The G20/OECD 2015 principles on corporate governance recommend that corporate boards should take stakeholder interests into account.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.’s¹⁷³ progeny seems to prove these critics right, especially its modern Delaware offspring.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 France¹⁷⁵ and Germany,¹⁷⁶ to name but two.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.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.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,¹⁸⁰ known in shorter form as the loi PACTE,¹⁸¹ contains, inter alia, new provisions on fiduciary duties.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,¹⁸³ replacing the old focus on the common interest of the shareholders.¹⁸⁴ PACTE relies to a considerable extent on the Notat-Sénard report,¹⁸⁵ prepared by two high-profile individuals – one representing an ESG- and Union-perspective (Nicole Notat), the other “big business” (Jean-Dominique Sénard).¹⁸⁶ Notat and Sénard explain their ESG-led reform proposals, inter alia, with reference to UN frameworks.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.¹⁸⁸ The relevant Directive 2014/95/EU goes back to a strategy paper of the EU Commission.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].”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,¹⁹¹ among them the UN Guiding Principles.¹⁹² The EU regulation partly builds on a French role model on ESG reporting, enacted in its earliest form in 2001.¹⁹³ 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.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.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.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.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 …”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.¹⁹⁹ BlackRock has been a signatory to the United Nations-backed Principles for Responsible Investment (PRI) since 2008.²⁰⁰ 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.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),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 work²⁰³ 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,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.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.²⁰⁶ There is good cause to question the motives behind corporate ESG-commitment.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.”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.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.”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.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”²¹² or “global law.”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.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 orders²¹⁵ seems the more promising road to travel.

This is corroborated by the fact that, as Clifford Geertz famously put it, law is local knowledge.²¹⁶ Searching for and then comparing abstract legal principles therefore does not amount to much,²¹⁷ especially in transnational law or so-called “global” law. “[G]lobal doctrine becomes clothed in local knowledge.”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.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.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 …”²²¹ It “is a part of what gives the field its distinctive qualities.”²²² Millet J, in the seminal decision Bristol & West Building Society v. Mothew, held it to be the “distinguishing obligation of a fiduciary …”²²³

Embracing a particular obligation as part of the duty of loyalty²²⁴ 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.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.²²⁶ Beneficiaries have rights against the fiduciary, whereas (English) contract law protects only the parties of the contract.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.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.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.²³⁰ That was taken up by the English High Court and Millet J in the also seminal decision Bristol & West Building Society v. Mothew.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 relationships²³² or even deny it.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.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,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.²³⁶ Once more, the “East Asian Four” provide an example.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.²³⁸ Combined in a bundle, however, they yield the idea of loyalty.²³⁹ Moreover, they “impose the core trust obligations on a trustee.”²⁴⁰ This turns the common law doctrine on its head; instead of loyalty as a ground rule from which courts extract more specific duties,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.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.²⁴³ Nevertheless, the Japanese Supreme Court held the general agency provision to comprise a duty of loyalty, rendering the later corporate law provision superfluous.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.²⁴⁵ Nevertheless, Japanese courts do not use this provision extensively²⁴⁶ and still seem to cling to the old Supreme Court decision.²⁴⁷ Corporate and comparative law scholars weigh different reasons for this reluctancy.²⁴⁸ One of these reasons, however, unsurprisingly seems to be the legal environment into which the duty of loyalty was transplanted.²⁴⁹ The idea was already there²⁵⁰ 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.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.

3 A Narrow View of Transnational Fiduciary Law

Andrew F. Tuch

^*

3.1 Introduction

Fiduciaries frequently confront transnational situations. Lawyers – an archetypal class of fiduciary – have long counseled participants in cross-border transactions and conducted their own activities transnationally.¹ Financial institutions – firms that often act in a fiduciary capacity² – have provided products transnationally for centuries.³

Yet, even as people, products, and capital have become more mobile, scholars have until recently given little attention to the transnational dimensions of fiduciary law. Instead, they have focused on activities occurring within the borders of legal systems.⁴ Scholars have explored fiduciary obligations by examining when they arise, what they require, and how they apply and have applied in various substantive fields and legal systems,⁵ but they have rarely examined how fiduciary law applies to conduct spanning national systems or to disputes that transcend national frontiers. Even the application of private international law principles to fiduciary law, an exercise that examines problems with transnational dimensions, has largely gone unexplored by fiduciary scholars.

This chapter conceptualizes “transnational fiduciary law,” a term that marries the fields of fiduciary and transnational law. Transnational fiduciary law warrants attention because of the growing frequency and significance of transnational business problems and the inevitability that many such problems have fiduciary dimensions. This chapter identifies two primary understandings of the concept and explores their scope and possible content.

Under the first interpretation of this composite concept, the term “transnational” qualifies what fiduciary scholars have conventionally understood as fiduciary law. Transnational fiduciary law, on this view, encompasses the application of fiduciary law to transnational problems and situations. The directors of a Delaware corporation that does business in Venezuela may face such problems. A US mutual fund advisor who invests in UK companies on behalf of US investors fulfills a fiduciary role. In the course of their work, these actors will owe fiduciary duties under US law, even though their operations may occur outside the United States. This sense of transnational fiduciary law further encompasses the global spread of fiduciary laws, as jurisdictions learn from each other or perhaps reform or develop their laws, converging with those of another system.

Under the second interpretation, transnational fiduciary law refers not to fiduciary law as applied in transnational contexts but rather to transnational law governing the conduct of fiduciaries. Transnational law lacks a universally accepted definition.⁶ Nevertheless, here we seek some wider notion of a “legal order” that is said to govern the behavior of parties operating within it. This order incorporates formal laws but also “regulatory instruments and mechanisms of governance that, while implicating some kind of normative commitment, do not rely on binding rules or on a regime of formal sanctions.”⁷ As such, this understanding largely encompasses the first interpretation but extends more broadly to include norms, contractual constraints, customary practices, official guidance, and assorted voluntary schemes, all of which might achieve similar objectives to fiduciary law.⁸

In this chapter, I argue that scholarly attention to the transnational dimensions of fiduciary law ought, in most instances, to be bounded by the first interpretation. Fundamentally, I question whether transnational law governing fiduciaries generally can be equated with fiduciary law at all without causing significant confusion. Fiduciary duties are distinctive in ways that prevent non-fiduciary law – to say nothing of vague and shifting norms – from serving as substitutes. Keep in mind that much of the law that governs fiduciaries is not fiduciary law; nor does it purport to be fiduciary law. Similarly, many of the duties fiduciaries owe are not fiduciary duties.⁹ What makes them fiduciaries, then, is precisely fiduciary law, not the wider range of laws and norms to which they may also be subject.¹⁰

Another difficulty with the second interpretation is that legal norms and practices that appear to serve similar functions as fiduciary law may be rarely stated and therefore difficult to verify. When they are stated, they may be vague and provisional. It is, therefore, hard to determine whether transnational fiduciary law in this second sense exists at all in practice. The chapter provides case studies illustrating the difficulty of isolating the second interpretation in practice, except as it reduces to the first through its incorporation of fiduciary law applied in transnational contexts.

To be clear, I do not claim that the transnational dimensions of fiduciary law are irrelevant. Far from it: Fiduciaries find themselves more and more involved in deals across jurisdictions, which can raise thorny questions about how they must behave in order to meet fiduciary obligations. Nor do I reject the importance of transnational law or transnational legal ordering. However, I suggest that we treat transnational fiduciary law as an application of fiduciary law rather than as a field deserving independent study, at least until we can establish that transnational fiduciary law – in the first interpretation – is itself distinct from fiduciary law.

3.2 Definitional Issues

Although transnational fiduciary law simply marries the concepts of fiduciary law and transnational law, defining the term poses challenges. Scholars in each of these fields conceive of law differently, with transnational law scholars adopting a more capacious understanding.

To fiduciary scholars, fiduciary law means “hard” law. Hard law imposes “legally binding obligations that are precise (or can be made precise through adjudication or the issuance of detailed regulations) and that delegate authority for interpreting and implementing the law.”¹¹ First, fiduciary law imposes legally enforceable obligations, requiring loyalty and, under American law, due care.¹² Second, fiduciary obligations are precise or capable of being made precise through adjudication or rulemaking. As Seth Davis notes, fiduciary “duties of loyalty and care can be specified in these relationships by reference to a specific maximand and a discernible set of decision rules.”¹³ Third, authority for interpreting and implementing fiduciary law is delegated to courts. It is an oft-stated principle that parties themselves do not determine whether a fiduciary relationship exists; courts do.¹⁴

To scholars of fiduciary law, therefore, fiduciary law is state-enforced law, the product of common law or legislative principles.¹⁵ This is so even when fiduciary law is applied to non-fiduciaries functioning in a fiduciary-like manner or to duties that are analogous to fiduciary duties.¹⁶ Of course, fiduciary law may reflect various policies and rationales,¹⁷ enable the development of social norms,¹⁸ and be seen as codifying moral intuitions or reasoning.¹⁹ But no matter what is contained in the larger sphere of goals and justifications surrounding fiduciary law, it is conventionally understood as state-enforced law.

In contrast to fiduciary law as conventionally understood, transnational law is both hard – state-enforced – and “soft.” It need not be the product of legislative, regulatory, or judicial determinations but can instead result from “customary practices, norms, and patterns of behavior regulation.”²⁰ These are enforced not by the state but “through such social and political processes as economic sanctions, ‘shaming,’ and reputational effects.”²¹ Transnational law may also be created in an ad hoc manner by the parties through private legal ordering, which they can accomplish through private contract or standard-setting.²² Such law is transnational because it applies to parties located in multiple national systems,²³ or targets events or situations that occur in more than one national system,²⁴ or “regulates actions or events that transcend national frontiers.”²⁵

This is one way to conceptualize transnational law: as a substantive body of law – with the notion of law broadly conceived – applied in transnational contexts. Another focus of study is transnational legal ordering, which focuses upon processes of normative settlement across national borders, which can occur through “hard” or “soft” law as the result of interactions among actors and institutions in multiple jurisdictions.²⁶ Developed by Terence Halliday and Gregory Shaffer, this theoretical framework addresses how legal norms are produced transnationally and migrate across borders, shaping legal practice.²⁷ Here the focus of study is the transmission of laws “across borders, regardless of whether they address transnational activities or purely national ones” and the roles of networks and institutions in constructing them.²⁸

How to fuse these disparate notions of law into a single composite concept? In fact, I believe it is necessary to develop more than one composite, as no one sense of transnational fiduciary law fully embraces what is traditionally understood as fiduciary law alongside both approaches to transnational law. I therefore develop two interpretations of transnational fiduciary law.

In the first, the term “transnational” qualifies what fiduciary scholars have conventionally understood as fiduciary law. Here, transnational fiduciary law encompasses the application of fiduciary law to transnational problems and situations. A scholar exploring transnational fiduciary law in this sense will seek to understand how particular fiduciary laws operate across national boundaries or jurisdictions, as parties transact in multiple national systems or create business arrangements that implicate parties in multiple national systems. This scholar may also take interest in the changing practice of fiduciary law within a given national system as its legislators, regulators, jurists, and practitioners learn from their experiences in contact with other national systems or find their domestic business environments altered by foreign laws governing parties doing business in an increasingly globalized financial milieu. For instance, scholars may note the extension of US fiduciary practices to other parts of the world where US fiduciaries, such as mutual fund managers, are required to follow US fiduciary law even as they operate abroad. Halliday and Shaffer’s theoretical framework of transnational legal orders provides a framework for studying these processes. Section 3.3 examines transnational fiduciary law on this understanding: hard law as applied in transnational contexts.

Under the second interpretation, transnational fiduciary law encompasses transnational law understood as a corpus of law or as the production and transmission of law that governs fiduciaries. Law may be hard or soft. Section 3.4 considers this interpretation and explains why I regard it as overinclusive.

3.3 Fiduciary Law with Transnational Dimensions

Among fiduciary law scholars, fiduciary law has a decidedly national orientation. Assumed prototypes for the accepted or status-based categories of fiduciary relationship – those between partners, agents and principals, lawyers and clients, trustees and beneficiaries, and directors or officers and the corporations they serve – are rarely considered to exhibit transnational dimensions. If they do, those dimensions rarely feature in the questions that fiduciary scholars address. Other relationships, though not fiduciary relationships by default, may also have fiduciary character because, say, a party reposes trust or confidence or is vulnerable to opportunism.²⁹ These, too, rarely have transnational legal dimensions. Questions that tend to concern fiduciary scholars – fiduciary standards of conduct; how those standards vary across relationships, jurisdictions, and time periods; and the remedies available for fiduciary breach – usually do not involve transnational activities or situations. And while comparative fiduciary law attracts strong scholarly attention, it too lacks transnational dimensions, since it tends to consider the law of one national system alongside that of another rather than the law that spans those systems or that governs actors located in or problems arising in both national systems. One measure of this scholarly indifference is the recently published Oxford Handbook of Fiduciary Law. Its forty-eight chapters offer one of the most comprehensive accounts of the subject, but none of them deals substantively with transnational fiduciary law.³⁰

Yet fiduciary law, understood in its conventional sense, often has transnational dimensions. A fiduciary’s activities may span borders, or a fiduciary may face problems arising in multiple national systems. A fiduciary itself may reside in multiple national systems. The fiduciary law governing fiduciaries may apply across national borders. And scholars undertaking comparative studies of fiduciary law examine how fiduciary law in one national system may migrate to and influence law in other systems.³¹ In Section 3.3.1, I explore circumstances such as these, in which fiduciary law has transnational character.

3.3.1 The Effect of Conflict-of-Laws Principles

Under conflict-of-laws principles, fiduciary law can apply transnationally, such as to parties whose conduct occurs across national borders. One instance in which fiduciary law was applied transnationally under these principles was Sinclair Oil Corp. v. Levien,³² an iconic corporate law case. Sinclair Oil was a New York-incorporated oil exploration and production company that operated internationally through various subsidiaries. One of these, the Delaware-incorporated Sinven, was Sinclair’s subsidiary in Venezuela.³³ Minority shareholders in Sinven sued Sinclair, alleging that, as the dominant shareholder in Sinven, it had breached its fiduciary duties to minority shareholders. Specifically, the minority shareholders alleged that Sinclair had allowed one of its wholly owned subsidiaries to breach contracts with Sinven and, in turn, as controller of Sinven, had failed to enforce Sinven’s rights against that subsidiary. According to the Delaware Supreme Court, Sinclair owed fiduciary duties to the Sinven minority shareholders as a controlling shareholder and, having failed to establish the fairness of the relevant transactions, had breached those duties. The court rejected other claims brought by minority shareholders, including the claim that Sinclair had breached its duties by allocating opportunities for developing oil fields in Alaska, Canada, and Paraguay to the company’s other subsidiaries.

The case illustrates the reach of Delaware corporate fiduciary law to activities occurring in multiple national systems. The key under conflict-of-laws principles was the status of Sinven as a Delaware corporation. According to Delaware law’s internal affairs doctrine, corporate governance matters – such as disputes between directors and shareholders – are governed by the law of a company’s state of incorporation.³⁴ This meant that Sinven was subject to Delaware law, even though its activities were in Venezuela. The same would be true of any Delaware-incorporated company; the doctrine applies Delaware law to directors’ conduct occurring in other national systems or in multiple national systems, giving transnational character to Delaware fiduciary law. Similar conflict-of-laws principles apply in other states,³⁵ as well as in England.³⁶

However, apart from the internal affairs doctrine, conflict-of-laws principles apply with some uncertainty to fiduciary questions. The Restatement (Second) of Conflict of Law gives no explicit guidance about the applicable law for resolving disputes under fiduciary law, except for agency relationships, in which case the Restatement would determine the parties’ rights and duties using the law of the jurisdiction with the most significant relationship to the parties of the transaction.³⁷ Leading treatises have little substantive discussion of conflict-of-laws principles for fiduciary questions, except tangentially in discussing choice-of-law clauses for contract claims.³⁸ Nor does legal scholarship appear to address these conflicts-of-laws questions as regards fiduciary disputes.

To the extent courts do consider choice-of-law in resolving fiduciary disputes, they often characterize such disputes as either tort of contract cases. Because fiduciary duty has been characterized as a tort, we would expect choice-of-law principles for torts to resolve fiduciary claims.³⁹ According to the Restatement (Second) of Conflict of Laws, the relevant law is that with “the most significant relationship to the occurrence [of the tort] and the parties.”⁴⁰ However, instead of applying first-principles analysis to determine the governing law to resolve a fiduciary claim, courts may follow the law specified in a choice-of-law clause in a contract between parties to a fiduciary relationship. Before taking this approach, courts must determine whether the relevant choice-of-law clause governs noncontractual issues – such as fiduciary breach – arising from the contractual relationship to which the clause applies.⁴¹ Courts have taken different positions on whether such clauses govern fiduciary issues.⁴² According to a leading treatise, “the most logical inference” from the Restatement (Second) of Conflict of Laws is that such clauses apply only to contractual issues and therefore not to fiduciary breach.⁴³ But the legal position is unsettled.⁴⁴ Still, because cases often turn on interpretations of the contract in question,⁴⁵ clauses are often given their intended effect. The result is that clauses written to apply to disputes “whether based on contract, tort, or otherwise” – an increasingly common formulation in some business contexts – apply to claims of fiduciary breach. Even in the absence of such clear language, Delaware courts have been willing to apply the law specified in a choice-of-law clause to tort claims in order to avoid “uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid.”⁴⁶

For a recent case involving a transnational situation, consider Veleron Holdings, B.V. v. Morgan Stanley.⁴⁷ In resolving an insider trading claim, the question arose of when a fiduciary relationship existed between the French bank BNP Paribus and its contractual counterparty, the US bank Morgan Stanley. Morgan Stanley had undertaken to act as BNP’s agent in a transaction involving the acquisition of Magna International, a Canadian entity listed on the New York Stock Exchange and Toronto Stock Exchange, by Russian Machines (RM), an entity owned by a Russian oligarch. To facilitate the acquisition, RM formed Veleron B.V., a Dutch special-purpose vehicle. BNP agreed to lend $1.2 billion to Veleron; in turn, Veleron purchased some 20 million shares of Magna, pledging them to BNP as security for the loan. BNP appointed Morgan Stanley as an agent under an “Agency Disposal Agreement” (ADA); Morgan Stanley was to sell Veleron’s Magna shares if Veleron defaulted on the loan from BNP. The French bank also entered into a credit default swap with Morgan Stanley under which Morgan Stanley assumed some risk of BNP’s loan to Veleron.

In September 2008, during the turmoil of the global financial meltdown, BNP informed Morgan Stanley that Veleron was experiencing financial difficulties and needed to restructure its loan from BNP. Using this information, Morgan Stanley decided to “short sell” Magna stock, allowing it to profit if Magna’s stock price fell. When Veleron later defaulted, BNP sold the pledged Magna stock, Magna’s price fell, allowing Morgan Stanley to profit under its short sale arrangement.

Veleron commenced suit against Morgan Stanley, raising the question whether Morgan Stanley was a fiduciary of the French bank under the ADA. The US District Court for the Southern District of New York denied in part Morgan Stanley’s motion for summary judgment, finding that there was a genuine issue of material fact on the fiduciary question. Observing that New York law governed the ADA, the court applied New York law in examining the fiduciary question, effectively applying the choice-of-law test for contract cases.⁴⁸ Fiduciary law thus applied to a situation implicating actors in multiple national systems.

3.3.2 Fiduciary Law with Transnational Application: Extraterritoriality

Fiduciary law, as conventionally understood, may also have extraterritorial effect and therefore apply to transnational problems. This is thanks in part to the enormous global influence of US mutual funds.⁴⁹ The managers of mutual funds owe fiduciary duties, according to the Investment Advisers Act of 1940.⁵⁰ These duties govern their conduct even if it spans national systems or occurs in another national system.⁵¹

In practice, that conduct will often be transnational because mutual funds may, and commonly do, vote in corporate elections held by their portfolio companies – companies that are often based outside the United States. Frequently fund managers will “vote by proxy.” In 2003, the Securities and Exchange Commission adopted Rule 206(4)-6 of the Investment Advisers Act,⁵² making clear that investment advisors are fiduciaries even when deciding whether and how to vote their funds’ proxies and creating powerful incentives for advisors to vote their proxies.⁵³ Indeed, investment advisors vote virtually all of their shares, usually voting in-line with the recommendations of proxy advisors.⁵⁴ Indeed, investment advisors vote virtually all of their shares, usually voting in-line with the recommendations of proxy advisors. The largest US mutual fund families – Blackrock, Vanguard, and State Street Global Advisors – have significant holdings in foreign corporations. For example, BlackRock, the largest US manager of mutual funds, invests some $1.6 trillion in Europe, the Middle East, and Africa and a further $428 billion in the Asia Pacific,⁵⁶ together representing around 30 percent of BlackRock’s total assets under management.⁵⁷ Data from the United Kingdom illustrates the increasingly transnational nature of investment advisors’ activities. Figure 3.1 shows the holdings of UK public companies from 1963 to 2020 by various categories of shareholder, including individuals/households, insurance companies, pension funds, mutual funds, and foreign shareholders (labelled “rest of the world”). Over this period, individual/household ownership decreased as ownership by institutional investors increased. Foreign ownership rose from 7 percent in 1963 to 56.3 percent in 2020, giving foreign investors significant influence over UK companies through voting and other stewardship activities.⁵⁸ Of these international investors, US mutual funds are the largest category, accounting for some 30 percent of all foreign investor holdings in UK public companies.⁵⁹ When the investment advisors of these US mutual fund advisors vote their shares in UK companies, US fiduciary law governs their decisions.⁶⁰

Figure 3.1. Share ownership patterns in the United Kingdom, 1963–2020⁶¹

The same applies to US investors voting on boards of companies outside the United Kingdom. US fiduciary law follows US investors across the globe, ensuring that US fiduciary law has considerable transnational presence and effect.

3.3.3 Fiduciary Law as Process

This first interpretation of transnational fiduciary law also encompasses the spread of fiduciary laws across national boundaries, as national laws develop, converging with those of another system. Fiduciary law is often transmitted across boundaries and evolves by reference to fiduciary law in other national systems. These sorts of influences across jurisdictions are explicitly studied in comparative law work on fiduciary law.⁶² Examples of this sense in which fiduciary law has transnational character are given below.⁶³

3.4 Transnational Law Governing Fiduciaries

Section 3.3 focused on fiduciary law that is transnational in character. In Section 3.4, the analysis widens to encompass transnational law governing fiduciaries and therefore applies broader conceptions of law. Here, law means not just the hard law of legislation, regulation, and judicial decisions, but also private legal ordering through contract and standard-setting by parties. Terence Halliday and Gregory Shaffer theorize what they call a “transnational legal order” (TLO), defined as “a collection of formalized legal norms and associated organizations and actors that authoritatively order the understanding and practice of law across national jurisdictions.”⁶⁴ Halliday and Shaffer explain that “state law … becomes TLO law in subject areas when transnational legal norms are adopted and practiced in a settled, concordant way so that a new normal arises regarding the social understanding of the legal norms that apply.”⁶⁵ And, as we saw, the focus of transnational law also can be on the production of norms and their transmission across borders – not just the body of law or the legal order, but the ways in which interaction across jurisdictions affects the development of laws and legal norms within national jurisdictions.⁶⁶

Under this interpretation, transnational fiduciary law is not so much the application of fiduciary law across borders as transnational law that governs the conduct of fiduciaries or the transnational legal ordering of fiduciaries. Conceiving of transnational law in this way would bring a broader range of legal instruments within transnational fiduciary law than does the first interpretation⁶⁷ and would attend more to the role of transnational institutions and networks in the development of legal norms. Below I explore these understandings of transnational law by sketching a few brief examples of transnational norms, practices, and patterns of behavior that may govern the conduct of fiduciaries. These examples exclude cases that would also fall within the first interpretation through their incorporation of fiduciary law applied in transnational contexts.⁶⁸ I then consider whether these arrangements are firmly enough established across borders to amount to transnational law and, more fundamentally, whether they may sensibly be described as fiduciary law at all. The framework of TLO theory helps us assess the extent to which such norms have settled transnationally from a socio-legal perspective.

3.4.1 Examples

3.4.1.1 Private Ordering and Standard-Setting

Firm-Level Conflict-of-Interest Management. In performing various functions, financial conglomerates often act as fiduciaries.⁶⁹ Although they are loathe to admit this, they readily claim to have extensive internal procedures and controls for “addressing” conflicts.⁷⁰ In fact, financial conglomerates inevitably face conflicts of interest, a function of their business model, which sees them “act[ing] for numerous clients across a broad and diverse range of financial activities, all the while acting as principals in a similarly broad and diverse range of activities.”⁷¹ These firms seek to address conflicts to avoid potential fiduciary liability but they do so also to avoid reputational harm, which may be severed, and these measures therefore go further than fiduciary law would require.

Major financial conglomerates operate transnationally. Their activities span the globe, often involving transactions involving actors and capital flows that span national borders. Their internal procedures and controls governing conflicts would seem to apply firm-wide.⁷² The objective is often to “mitigate” conflicts of interest, rather than necessarily to avoid them.⁷³ Firms do not publicize their internal policies, other than to describe them in general terms, and deal on a client-by-client basis, leaving observers uncertain about the precise norms applicable to addressing conflicts. In addition to internal controls, common measures include the disclaimer of liability for conflicts (to the extent possible) and the disclosure of actual and expected conflicts.⁷⁴ Policies also include information barriers to stem internal flows of information.⁷⁵ A strict fiduciary regime requiring conflict avoidance appears not to govern; rather, through a combination of measures, primarily internal limits and controls on conflicts but also the elimination or waiver of fiduciary duties, firms hold themselves to a standard of conflict “mitigation” or “management.”

These various norms and practices governing fiduciaries’ conduct may well span national systems, having transnational dimensions. Still, these norms and practices are difficult to identify and verify outside these firms.

Advice on Mergers and Acquisitions. The field of firms advising on mergers and acquisition (M&A) transactions provides another concrete example of private legal ordering by parties that may be fiduciaries. Highly lucrative, these services are provided by financial conglomerates or smaller financial firms dedicated to providing advice. These transactions can have transnational elements since the companies involved often operate transnationally and may be in different national systems from their counterparty in a transaction. M&A transactions have high-stakes for the corporations involved, each of which will typically be advised by a financial advisor and legal advisor, and often several of each. M&A advisors may be ad hoc fiduciaries of their clients.⁷⁶ In light of the risk of fiduciary characterization, financial advisors routinely disclaim the existence of fiduciary duties in their client engagement letters.⁷⁷ As a further measure, they disclose the possibility that they will face conflicts of interest, an attempt to establish informed consent by their clients for conduct that would otherwise violate fiduciary duties.⁷⁸ Nevertheless, financial advisors adopt internal procedures and controls to mitigate conflicts of interest. Though not publicly disclosed, these policies typically include obtaining client consent to conflicts arising during the course of an engagement. Moreover, engagement letters attempt to insulate financial advisors from liability “except to the extent that any losses, claims, damages, liabilities or expenses incurred by the Company result from the willful misconduct, gross negligence or bad faith of [the financial advisor] in performing the services that are the subject of [the engagement] letter.”⁷⁹ Put simply, rather than needing to act in their client’s sole or best interests, M&A advisors and their clients have crafted a regime that purports to impose liability on advisors only for “willful misconduct, gross negligence or bad faith.”⁸⁰ Such engagement letters are common in developed markets internationally.⁸¹

Other norms of conduct have developed among financial advisors and their M&A clients beyond those required to avoid fiduciary liability. These practices are observable in financial advisors’ conduct but firms have no reason to publicly explain their conduct or disclose their policies. M&A advisors advise a single “side” to the transaction; they virtually never advise both parties in a deal. An M&A advisor will not lend to its client’s counterparty to finance a transaction without its client’s informed consent. When advising a buyer, a financial advisor will not trade on its own account in the stock of the target corporation.

Though the norms are rarely stated, difficult to verify, and somewhat vague, in practical effect they protect clients from more severe conflicts of interest, conflicts that fiduciary law might not prevent. They thereby protect financial advisors from reputational harm as well as potential fiduciary liability. This especially benefits financial conglomerates because they adopt a structure in tension with strict fiduciary doctrine. Given the cross-border nature of many M&A deals, these norms and practices may be shared across borders. By and large, these norms and practices are not legally enforceable. Nor are they capable of being made precise through adjudication or rulemaking.

Law Firms’ Restrictions on Insider Trading. Another norm intended to curb conflicts of interest, which may be regarded as transnational law governing fiduciaries, is the use of firm-level policies to prevent lawyers from engaging in insider trading. Because major law firms advise public companies on important transactions, lawyers working for these firms may obtain nonpublic information about their clients and other companies, information they can use to trade public securities in violation of their fiduciary duties or other laws, including insider trading law. Firms therefore routinely require their lawyers to seek approval from an internal “conflicts committee” before buying or selling stock or other securities. Such approval policies guard against risks of conflicted transactions and violations of duties owed to clients. A guide for lawyers describes the routine law firm practice as follows:

Most [law] firms will have a clear securities trading policy outlining the steps you need to take to clear a trade.… [The policy] will probably involve you conducting a search through a database to see whether the firm believes it has any relationship with the security that you wish to trade. If it does, you’ll likely need to submit a form to the conflicts department where they will vet the relationship. If you can trade in the security, they’ll let you know. If you can’t, they’ll let you know that as well.

Once you receive approval, you’ll usually get a small window where you can execute the trade.⁸²

The practice of imposing this layer of firm approval likely arose at US law firms, given the intensity with which US regulators and market participants enforce insider trading laws. The practice may have spread as US law firms and lawyers ventured abroad. This would be an example of legal norms being exported and imported across borders as law firms in non-US jurisdictions observed the practices of US firms in an effort to meet the expectations of US clients. While norms requiring lawyers to get firm approval for trading in client stock are rarely publicly stated (law firm policies typically remain nonpublic) and therefore difficult to verify, they probably have broad acceptance among major law firms internationally. They serve similar functions to fiduciary law in promoting lawyers’ loyalty toward their clients.

3.4.1.2 International Organizations and Standard-Setting

Transnational law governing fiduciaries may also arise from the work of International standard-setters and organizations. The Organisation for Economic Co-operation and Development (the OECD) first published its Principles of Corporate Governance in 1999, intending these nonbinding principles of “good” corporate governance to serve as benchmarks for improved corporate practice.⁸³ In 2004, the OECD updated these principles, which by then had become an “international benchmark for policy makers, investors, corporations and other stakeholder worldwide,”⁸⁴ having been designated by the Financial Stability Forum as key standards for sound financial systems and used by the World Bank and IMF in their reports assessing countries’ compliance with internationally recognized standards.⁸⁵ Companies, especially those in developing economies, may apply the principles voluntarily or be subject to provisions under local law modeled on them.⁸⁶ The current iteration of the Principles of Corporate Governance, published in 2015 in collaboration with G20 countries, is of immediate relevance because it purports among other things to govern the conduct of directors, an established category of fiduciary.⁸⁷

The OECD and G20 identify seven broad principles for boards, which it states as recommendations or guidelines that “should” be followed.⁸⁸ One principle provides that board members “should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.” The accompanying comments suggest that the principle reflects practices in many, but not all, jurisdictions. The discussion is general, failing to articulate the rule in the sort of detail one would expect to resolve disputes. The discussion also avoids certain basic issues (on which jurisdictions may disagree), such as to whom duties are owed, leaving some ambiguity as to the content and application of the principle.

Other OECD principles of corporate governance formulate board responsibilities that would typically be on the fringes of or clearly beyond the substance of fiduciary law. These principles are also stated as recommendations while purporting to reflect existing “good” governance practices in many (unspecified) jurisdictions.⁸⁹ The preamble explains that “there is no single model of good corporate governance.”⁹⁰ They are similarly non-prescriptive. For example, the board “should apply high ethical standards,” “should take into account the interests of stakeholders,” “should fulfil certain key functions,” such as guiding corporate strategy and overseeing major expenditures, “should be able to exercise objective independent judgement on corporate affairs,” and “should have access to accurate, relevant and timely information.” Other principles broadly guide directors on matters concerning the treatment of shareholders, account for the interest of stakeholders, oversight of risk management and other systems, and board accountability.⁹¹ These principles are broadly expressed, lacking the specificity or clarity one would expect to see in a statute or in judicial opinions. The principles are nonbinding on member and nonmember countries alike, and nowhere do they purport to be fiduciary law.

The International Organization of Securities Commissions, IOSCO, an association of national securities regulatory agencies and other organizations, promulgates principles and standards to govern capital markets. It is well known for its Objectives and Principles of Securities Regulation, first published in 1998 after the Asian financial crisis and updated in 2010.⁹² These objectives and principles state high-level principles that IOSCO asserts “need to be practically implemented under the relevant legal framework” to achieve certain specified objectives.⁹³ Representatives of national regulators populate the organization’s committees, giving these committees considerable industry credibility and subject matter expertise. However, like the OECD, the organization lacks state-level rule-making authority and its principles and standards are unenforceable except to the extent they are enshrined in state laws, in which event one would expect the principles to be expressed with greater specificity and precision. The principles are wide-ranging, applying to regulators, self-regulatory organizations, issuers, auditors, credit rating agencies, collective investment schemes, and market intermediaries.⁹⁴ The principles most closely related to the conduct of fiduciaries concern corporations in their activities as issuers and therefore implicate the conduct of directors. These principles provide that issuers “should” disclose financial, risk and other information that is “full, accurate, and timely”; that they “should” treat their shareholders “in a fair and equitable manner”; and that the accounting standards they use in preparing financial statements “should be of a high and internationally acceptable quality.”⁹⁵ These principles indirectly concern directors’ conduct; they are, in fact, expressed to govern the conduct of corporations issuing securities, a role in which actors owe fiduciary duties.

3.4.2 Certainty

Although I have attempted in these examples to show how norms and practices governing various categories of fiduciaries have transnational dimensions, I question whether these norms and practices comport with theories of transnational law from a legal positivist perspective. Although broad agreement seems to exist among market participants and policymakers in numerous national systems that financial institutions should “manage” or “mitigate” conflicts of interest and that corporate directors should engage in various matters of “good” governance, it is unclear precisely what these norms mean and whether they are so firmly established across borders as to amount to transnational law. As Shaffer explains, it is “when norms become concordant and settle transnationally” that “one can speak of a TLO.”⁹⁶ At least in the financial services industry, norms governing fiduciaries’ conduct are rarely clearly stated by firms and difficult to identify and verify, which may prevent this sort of settlement from emerging. And when norms do operate, they may be provisional, developed in response to particular, shifting regulatory concerns. Moreover, it may be that the norms described above can only be formulated in broad terms.

3.4.3 Distinguishing Fiduciary Law

More fundamentally, even if the dissemination of these norms and practices comports with theories of transnational law, it is reasonable to question whether they may be rightly regarded as fiduciary law, or even as functional substitutes for fiduciary law. Not any law is fiduciary law. As explained above, fiduciary law is conventionally understood by scholars and courts as “hard” law, as binding obligations “that delegate authority for interpreting and implementing the law.”⁹⁷ Fiduciary law is precise, or capable of being made so.⁹⁸ The obligations it imposes are legally enforceable since they are the product of the state, typically the common law or legislative principle.⁹⁹ And authority for interpreting and implementing fiduciary law is delegated to courts.¹⁰⁰

Fiduciary scholars take the fiduciary concept seriously.¹⁰¹ They regard fiduciary law as distinct from other fields of law. This has been clearly recognized in Australia, where “[i]t is essential to bear in mind that the existence of a fiduciary relationship does not mean that every duty owed by a fiduciary … is a fiduciary duty.”¹⁰² In the law of corporations, for example, directors owe distinct fiduciary duties and statutory duties. Discussing directors’ duties, Matthew Conaglen cautions that “[t]he fiduciary principles themselves can only be soundly understood if one differentiates carefully between differences kinds of duties owed by fiduciaries. In other words, it is important to acknowledge that not all of the duties owed by a fiduciary, such as a company director, are necessarily fiduciary duties.”¹⁰³ The reason is that the fiduciary duties of directors “spring from the general principles, developed in courts of equity, governing the duties of all fiduciaries – agents, trustees, directors, liquidators and others.”¹⁰⁴ And keeping the duties distinct is important because they interact in complex ways with non-fiduciary duties.

In England, courts are similarly clear that not any law is fiduciary law. In Bristol & West Building Society v. Mothew, Lord Justice Millett cautions that “[T]his branch of law has been bedeviled by unthinking resort to verbal formulae. It is therefore necessary to begin by defining one’s terms. The ‘fiduciary duty’ is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties.”¹⁰⁵ The House of Lords has endorsed this approach, with Lord Walker observing in Hilton v. Barker Booth & Eastwood that “not every breach of duty by a fiduciary is a breach of fiduciary duty.”¹⁰⁶ Reviewing these and other authorities, Professor Conaglen observes that this careful or “refined” use of “fiduciary” label is “wide-spread”;¹⁰⁷ it is “entrenched” in England¹⁰⁸ and has been broadly endorsed in Australian courts.¹⁰⁹

While fiduciary doctrine has developed differently in the United States from other jurisdictions, there is broad agreement that fiduciary law has distinctive characteristics.¹¹⁰ To be sure, fiduciary principles have been considered “subsidiary elements” of other non-fiduciary fields of law;¹¹¹ for example, the fiduciary duties of agents or trustees may be considered under the categories of agency law or trust law, respectively. Nevertheless, scholars generally, and increasingly, recognize that fiduciary law is distinctive. Deborah DeMott observes that “fiduciary law is distinctive because it imposes a duty of loyalty that ‘supports the main purpose of fiduciary law: to prohibit fiduciaries from misappropriating or misusing entrusted property or power.’”¹¹² Focusing on the duty of care, John C. P. Goldberg asserts that “[t]he role of fiduciary is defined in part by the distinctive duties that attend it.”¹¹³ In particular, duties of care – owed by fiduciaries and non-fiduciaries alike – “have special dimensions in the fiduciary context.”¹¹⁴ To similar effect, Daniel Markovits distinguishes between fiduciary and contract law, arguing that a fiduciary’s orientation after being engaged is necessarily other-regarding and must adjust open-endedly to the interests of the other as circumstances develop, whereas a contract promisor’s posture is based on self-interest, depends on the terms of the contract, and need not adjust open-endedly.¹¹⁵ Robert Clark has similarly argued that the fiduciary relationship has “major distinctive attributes,” among other things, judicial enforcement of affirmative duties to disclose and open-ended duties to act.¹¹⁶

Some scholars see fiduciary duties through an economic lens and regard them as gap-filling terms in incomplete contracts.¹¹⁷ The contractarian approach has become a pervasive influence in scholarly analysis of fiduciary doctrine and has influenced certain judges,¹¹⁸ but it is not a mainstream view among judges generally.¹¹⁹ In any case, even scholars who do not regard fiduciary law as distinct from, say, contract law, suggest it is nothing other than “hard” law. Consider the case studies above. The private ordering adopted by financial firms may involve practices and norms adopted in response to prevailing fiduciary and other rules, but they are not themselves fiduciary law. Even if the procedures and controls are intended to apply to fiduciaries, they cannot be said to impose anything like fiduciary duties.

One might refer to these norms and practices as transnational law governing fiduciaries or the transnational legal ordering of fiduciaries. But they cannot be described as transnational fiduciary law without denuding fiduciary law of its distinctiveness and without causing significant confusion.

3.4.4 Transnational Fiduciary Law as Process

Transnational law also encompasses the process by which legal norms and practices flows across national boundaries. As the case studies suggest, it does not seem controversial that legal norms and practices do indeed flow – that interaction occurs between lawmakers, practitioners, and others across legal systems, influencing legal development. Fiduciary laws may converge or diverge, be exported or imported, imposed or received. As hard law, fiduciary law is often transmitted across boundaries, in the sense that fiduciaries may be bound by their home law when operating abroad. Fiduciary law also evolves by reference to developments in other national systems. For example, American fiduciary law evolved from English law. Australian and English jurists routinely make references to each other’s judicial decisions on fiduciary law.¹²⁰ Policymakers are sometimes more explicit in learning from other system’s legal norms and practices. In the 1990s, Australian rule makers made clear that they were revamping directors’ duties and other corporate law principles on the basis of fiduciary principles borrowed from the United Kingdom and United States.¹²¹ In the United Kingdom, recent commissions of inquiry formed to consider corporate-law reforms examined corresponding fiduciary laws in the United States.¹²² One does not need a broad interpretation of fiduciary law to accept that such law may flow across state borders in this way, potentially resulting in a degree of convergence among jurisdictions.¹²³

These sorts of influences across jurisdictions are often remarked upon in fiduciary scholarship. They are explicitly studied in comparative law work on fiduciary law. They also sensibly fall within the first interpretation of transnational fiduciary law, in which the term describes hard law applied similarly in varying jurisdictions, or the transmission of hard law by virtue of its application to international deals or by virtue of exchanges among rule makers.

3.5 Conclusion

Although fiduciaries frequently confront transnational situations, the topic of transnational fiduciary law has attracted little scholarly attention. This chapter identifies two primary interpretations of the term, one limited by a conventional understanding of fiduciary law, the other taking a broad understanding of transnational law and applying it to fiduciaries. I prefer the former meaning since it is more attentive to the distinctiveness of fiduciary relationships and duties. The interpretation is broad enough to capture the process by which fiduciary law develops, including by reference to developments in other systems. However, I would not equate the second interpretation – transnational law that governs fiduciaries – with transnational fiduciary law. Doing so would overlook the distinctive character of fiduciary law. It would also create confusion. And it is not apparent how much that interpretation would advance analysis beyond the first interpretation. A better term for scholars interested in transnational law governing fiduciaries may be the transnational legal ordering of fiduciaries or transnational fiduciary legal orders, as theorized by Halliday and Shaffer, since these terms are less apt to lead to confusion. A further benefit lies in reliance on the term “legal order,” which is often used in transnational law scholarship and has a fairly settled meaning.

I do question the merit of investigating transnational law governing fiduciaries as an independent field, as distinct from, say, transnational law in commerce, unless we can first establish whether there is something distinctive about transnational law as it applies to fiduciaries. Instead, I would regard transnational fiduciary law as a particular application of fiduciary law that must develop in a manner consistent with general principles of fiduciary law and with the substantive legal areas in which fiduciaries operate.

4 Transnational Fiduciary Law in Financial Intermediation: Are We There Yet? A Case Study in the Emergence of Transnational Legal Ordering

Jens-Hinrich Binder

^*

4.1 Introduction

In both common and civil law jurisdictions, fiduciary duties (in the broadest sense) have long been recognized as a key element of the relationships between financial intermediaries and their customers. If one defines fiduciary relationships as including “important social and economic interactions of high trust and confidence that create an implicit dependency and peculiar vulnerability of the beneficiary to the fiduciary” (to borrow a definition suggested by Leonard Rotman),¹ a broad range of financial services clearly match the description.² From a comparative – and, particularly, from a Trans-Atlantic perspective – a useful starting point for analysis can be found in the statutory definitions of financial activities subject to specific prudential and conduct-of-business regulations. Wherever intermediaries hold money or other assets on behalf of clients in connection with transactions carried out on their behalf,³ or agree to provide expert advice with regard to investments⁴ or the conditions of a loan taken out by a customer,⁵ the existence of both a high level of trust and a high level of dependency and vulnerability on the part of the client is not just a characteristic feature of the intermediary-customer relationship, but provides the very rationale for public intervention, particularly in the form of conduct-of-business regulation. From a common law perspective, such activities usually will be qualified as agency relationships, which, given the functional nexus between fiduciary law and the law of agency in common law generally,⁶ helps explain why common law courts have frequently held that financial intermediaries are under fiduciary duties of loyalty and care, as well as duties to disclose certain information, to their customers.⁷ This doctrinal analysis can be backed up by an economic analysis of the agency problems between the intermediary (acting as “agent” for less knowledgeable investors) and the customer (as a “principal” who, almost by definition, can hardly protect himself against the fallout from information asymmetries and conflicts of interest on the part of the former).⁸ Even in civil law jurisdictions, where the legal basis for financial services contracts usually consists of, or is derived from, statutory categories of general contract law,⁹ the concept of fiduciary duties increasingly has come to be accepted as an analytical framework.¹⁰ For a number of reasons to be explored in detail later, both the substantive laws pertaining to the provision of financial services and, indeed, their doctrinal interpretation can be seen to have converged in a large number of jurisdictions over the last few decades.

With international standard-setters – in particular, the International Organization of Securities Commissioners (IOSCO) – as a driving force behind these developments,¹¹ the emergence of an increasing body of an internationally agreed-upon set of standards applicable to intermediary-customer relationships in financial services seems to showcase transnational legal ordering, in terms of the causes of convergence and the underlying institutional arrangements that facilitate the transmission process, as well as the substance of such duties and their adaptation in different legal systems. On closer inspection, however, the picture is more nuanced. As rightly observed in a recent contribution by Howell Jackson and Talia Gillis, we have to distinguish between the regulatory regimes applicable to the provision of financial services, consisting of “elaborate set[s] of ex ante requirements and supplemental open-ended duties that govern the operations of regulated entities and police their interactions with the public,” on the one hand, and parallel, overlapping or indeed conflicting, fiduciary duties proper, which are derived from general principles of private law and imposed ex post by courts in individual lawsuits.¹² As will be discussed in Section 4.2, while the structure and content of regulatory regimes have been converging over the past decades, the relevant fiduciary principles, in terms of substance, interpretation and, indeed, their functions within the respective private law regimes, continue to vary among different jurisdictions. This is certainly true within the European Union, where EU law has gone some way to harmonize the regulatory framework, whereas the applicable private law remains defined by the laws of the Member States, many of which had established transactions-oriented principles long before the first harmonization efforts at the European level.¹³

However, in addition to the international harmonization of regulatory conduct-of-business standards, their interaction with the applicable private law regimes can also be identified as a common theme: Whether and to what extent principles of general contract law are influenced by regulatory requirements, and which of the two regimes prevails in cases of conflicting duties – such questions will ultimately influence which duties can be enforced by customers in private lawsuits against the intermediary. The answers may differ from jurisdiction to jurisdiction, depending on the doctrinal basis. Yet, the very fact that regulatory requirements and duties under general contract law coexist and that the potential for tensions between the two regimes clearly is a recurring phenomenon provides sufficient grounds for the hypothesis that, in the end, fiduciary activities by financial intermediaries are the object of an emerging transnational legal order.

Focusing on conduct-of-business standards for securities services providers,¹⁴ this chapter explores the emergence of a transnational body of fiduciary duties of financial intermediaries. Section 4.2 examines the interaction between regulatory requirements and fiduciary principles and explains the transnational character of the former. Section 4.3 then looks into the process of how transnational regulatory principles have been adapted by European legislation, which in turn has triggered a process of convergence also of the underlying contract law regimes. In this process, substantive and organizational duties of care and loyalty have changed their nature: Principles derived from the common law doctrine of fiduciary law are adapted to different contract law regimes, while retaining their functions and meaning for the individual customer. As demonstrated by ongoing disputes concerning the relevance of regulatory duties for individual contractual relationships in several European jurisdictions, this process is by no means frictionless – but it is, for that very reason, an interesting case study in the emergence of a transnational legal order. Section 4.4 concludes.

4.2 Fiduciary Law in Financial Intermediation: A Transnational Legal Order?!

4.2.1 Conduct-of-Business Standards as Transnational Law: Origins, Nature, and Legitimacy

The modern development of converging conduct-of-business standards for the provision of financial services (and, thus, toward standards for the regulatory treatment of relationships that qualify as “fiduciary” within the meaning defined before) can be traced back (at least) to the late 1980s and early 1990s.¹⁵ Following preparatory work, in particular, by the French Commission des Opérations de Bourse (COB), which had published a report of self-regulatory principles for the provision of securities services in 1988,¹⁶ the International Organization of Securities Commissions (IOSCO) promulgated a set of genuinely international, rather high-level and basic conduct-of-business standards, entitled “International Conduct of Business Principles,”¹⁷ in July 1990.¹⁸ With this “soft law” document, IOSCO made a first step toward the global recognition of conduct-of-business regulation as an integral part of securities regulation generally, implemented and enforced in the interest of customer protection and market integrity and distinct from market conduct regulation (e.g., regulation relating to insider trading and market abuse), on the one hand, and the prudential regulation of intermediaries’ capital and liquidity positions, on the other hand.¹⁹ The report justified the need for global convergence of such standards against the backdrop of the internationalization of securities markets since the 1970s, driven by technological progress but also the institutionalization of portfolio management in the widest sense, whereby not just issuers’ and intermediaries’, but also investors’ activities extended increasingly beyond national boundaries.²⁰ Significantly, in this context, the report argued that global harmonization of conduct-of-business standards was in the interest of market participants themselves, as universally applicable common principles

should facilitate cross border business, encouraging competition among firms, with increased customer choice and lower costs. Commonly agreed principles should also enhance investor understanding, and hence confidence, and so increase investor participation in international markets.²¹

Conduct-of-business principles, in the report, were defined

as those principles of conduct which govern the activities of those who provide financial services and which have the objective of protecting the interests of their customers and the integrity of the markets.²²

To that end, the “Principles” established, in particular, the following duties of an investment firm:

• to “act honestly and fairly in the best interest of its customers and the integrity of the market” (which expressly included “any obligation to avoid misleading and deceptive acts or representations”);

• to “act with due skill, care and diligence in the best interest of its customers and the integrity of the market” (which expressly included “any duty of best execution”);

• to provide for and effectively employ the necessary resources;

• to “seek from its customers information about their financial situation, investment experience and investment objectives relevant to the services to be provided” (to “know one’s customer”);

• to “make adequate disclosure of relevant material information in its dealings with its customers” (in order to provide the customer with all relevant information needed to make informed investment decisions and in order to keep her informed as to the execution of orders); and

• to “try to avoid conflicts of interest, and when they cannot be avoided, [to] ensure that its customers are fairly treated.”²³

These principles were later taken up, and refined further, by the IOSCO “Objectives and Principles of Securities Regulation,” first promulgated in September 1998,²⁴ the last comprehensive update of which was published in 2003.²⁵

To be sure, conduct-of-business standards as part of regulatory (as distinct from contract law) frameworks for the provision of investment services are considerably older than these international standards. Within the United States, they were first introduced by federal securities legislation in the 1930s and 1940s, most notably the Securities Exchange Act of 1934²⁶ and the Investment Advisers Act of 1940,²⁷ which, in conjunction with SEC Rules adopted under the Securities Exchange Act, prescribed transaction-oriented standards for the provision of investment services (in a wide, nontechnical sense).²⁸

Given not just the global importance of the City of London, but also – at the time – the United Kingdom’s considerable influence on the content of European legislation, the comprehensive reform of the regulatory framework for financial services undertaken by the British legislature in the 1980s can be identified as yet another important milestone in the process of global convergence of such standards. Replacing the former, exclusively self-regulatory arrangements with an integrated system of self-regulatory bodies and oversight by a public authority, Part I, Chapter V of UK Financial Services Act of 1986 established the statutory basis for a complex set of conduct-of-business requirements that had to be developed by the Financial Services Authority (formerly, the “Securities and Investments Board”) and a number of recognized (sector-specific) self-regulatory organizations (SROs).²⁹

Within the European Economic Community (as it then was), article 11 of the Investment Services Directive (ISD) of 1993³⁰ first established an obligation for Member States to introduce a range of harmonized, yet rather broadly defined conduct-of-business standards for the provision of investment and related services. Significantly, the requirements, to a large extent, were a verbatim adaptation of the 1990 IOSCO “Principles,” reflecting not just the latter’s usefulness as a technical source of inspiration for legislators worldwide, but also their relevance as a driving force for the trend toward global convergence. The requirements were later taken up, and refined further, by the successors to the 1993 ISD, namely the (first) markets in Financial Instruments Directive (MiFID) of 2004³¹ and the current regime, laid down in articles 24 and 25 of MiFID II.³²

Against this backdrop, the publication of the first version of the IOSCO Principles, in 1990s, clearly was not the trigger of global convergence, but merely a reflection of a growing convergence among national authorities that had started sometime before. For three reasons, however, the significance of the “Principles” goes far beyond a mere formal recognition of that trend and helps explain the successful emergence of genuinely transnational standards in the field.

First, the Principles’ origins in an institutionalized cooperation of securities authorities clearly distinguishes them from other initiatives for the global harmonization of laws, as they do not just reflect the perspective of an impressive range of important jurisdictions, but also reflect these jurisdictions’ willingness to coordinate their respective laws and enforcement regimes accordingly. Originating from the Inter-American Conference of Securities Commissioners (established in 1974), IOSCO had been created as a global institution with an impressively broad membership base in the mid-1980s.³³ By instituting an international “working group on Principles of ethical conduct,” with members from Hong Kong, Italy, Japan, Quebec, Sweden, Switzerland, the United Kingdom, Germany, as well as the Securities and Exchange Commission and the Commodity Futures Trading Commission of the United States, with Australia as a correspondent member,³⁴ IOSCO’s Technical Committee had, in fact, brought together authorities from the most important financial markets worldwide. While in itself the result of technocratic regulation without participation of democratically elected political actors, this background undoubtedly helped enhance the legitimacy of the Principles in the eyes of legislators of participating jurisdictions, inasmuch as they could be interpreted as reflecting the accumulated expertise of leading authorities in the field of securities regulation. In this respect, the IOSCO standards fall in line with the development of international standard-setting in the area of financial regulation more generally (sometimes referred to as “The Global Financial System”), which was first associated mainly with the activities of the Basel Committee on Banking Supervision in the 1970s and was reinforced through various policy initiatives by the G-20 nations under the auspices of the newly created Financial Stability Board after the global financial crisis.³⁵ To be sure, IOSCO’s influence on global legislative developments has been limited so far, especially by comparison with the output generated by the Basel Committee and its impact on the convergence of regulatory frameworks in the field of prudential banking regulation.³⁶ Although national interpretations of the standards and enforcement practices continue to differ considerably between individual jurisdictions at a more granular level,³⁷ the relevance of IOSCO’s work on conduct-of-business standards is hardly disputable, precisely because the “Principles” reflected (and reinforced) earlier trends toward global convergence, which were then taken up also in incoming European legislation.

Second, and relatedly, the interplay between international standards with incoming EU regulation certainly played an important role as a driving force toward global convergence. Because the IOSCO Principles, as noted before, were formative for the development of harmonized conduct-of-business standards under the European Investment Services Directive of 1993³⁸ and, subsequently, MiFID I and MiFID II,³⁹ their importance as a global benchmark was reinforced. At the same time, the representation of European jurisdictions in the working group arguably was instrumental to shape the Principles’ character as a product of genuinely transnational collaboration between legal systems of different origins. Motivated by the objective to create a common Internal Market for financial services among the Member States of the European Economic Community and, subsequently, the European Community and the European Union,⁴⁰ European legislation and European institutions thus contributed to, and reinforced, a more general trend toward global convergence of financial law and regulation and established themselves as an important driving force toward the globalization of markets and relevant legal frameworks. At the same time, the rise of European financial markets began to balance out the dominance of US law and regulation as the dominant rule-maker for global transactions. In this respect, the development of transnational conduct-of-business standards for the fiduciary relationship between financial intermediaries and their customers mirrored a broader trend in international financial regulation, which can be observed particularly clearly in the field of banking regulation.⁴¹

Third, by taking the form of an easily accessible, concise, indeed rather simple document, the standards certainly were highly conducive to application across a wide variety of different jurisdictions. As formulated in the IOSCO Principles, the conduct-of-business standards do not even purport to provide a comprehensive legal framework for the formation and execution of contracts between intermediaries and their customers, or, indeed, for specific means of enforcement of duties arising thereunder. With a focus on individual aspects of the intermediary-customer relationship, they merely establish minimum qualitative standards addressing agency problems in general, and conflicts of interests and information asymmetries in particular, between the two parties – standards that can (and, indeed, are designed to) be implemented and enforced differently in different legal and institutional environments. This approach was clearly motivated by residual differences among IOSCO member states in terms of both substantive law and enforcement mechanisms.⁴²

Importantly, this background reflects a need to redefine what is actually meant by “fiduciary law” in a transnational context. Despite obvious parallels and similarities between the regulatory standards and traditional concepts of the common law of fiduciary relationships,⁴³ transnational conduct-of-business standards pertaining to the fiduciary relationship between financial intermediaries and their customers are generic in the sense that they can, and will, apply irrespective of whether or not the legal environment is constituted by common law principles. As illustrated by the IOSCO Principles, transnational law governing fiduciary relationships in the field of financial intermediation, in order to be adaptable across different jurisdictions with different systems of private law, inevitably has to be defined exclusively by its object and objectives rather than by reference to the doctrinal roots of fiduciary law in common law legal systems. The quest, in other words, has been for universally acceptable solutions to common problems deriving from the status of the relevant parties to contractual relationships (which, in a common law environment or in law and economics terminology influenced by concepts of common law, can be characterized as “agency” or “fiduciary” relationships). In order to be adaptable, the relevant standards therefore had to establish “functional” (as distinct from doctrinal-technical) fiduciary law. By contrast, a mere “transplantation” of common law fiduciary law into other legal environments – that is, the application of the same set of substantive rules without regard to the specific nature of the applicable contract law regime – would inevitably create coordination problems between conflicting regimes.⁴⁴

4.2.2 From Fiduciary Law to “Functional Fiduciary Law”: The Fiduciary Roots of Conduct-of-Business Regulation (and Some Implications on the Relevance of Regulatory Fiduciary Duties for the Intermediary-Customer Relationship)

If, as discussed before, converging conduct-of-business standards in the field of securities intermediation can be interpreted as the establishment of transnational fiduciary law in the field of financial intermediation, this finding, as such, tells us little about the functions of the relevant rules within the broader legal framework that governs the rights and duties of parties to relevant contracts, especially vis-à-vis the applicable contract law regime. This caveat should not come as a surprise: Precisely because the relevant standards address only selected, if crucial aspects of the intermediary-customer relationship, and because they do so at a rather abstract level, their technical relevance (and doctrinal interpretation) is bound to differ depending on the nature and content of the relevant contract law environment.

In order to facilitate the understanding of the core characteristics of transnational fiduciary law in the field of financial intermediation in substantive as well as in functional terms, however, the analysis clearly cannot stop here. In this context, it is particularly important to note that conduct-of-business regulation for financial services has never – and nowhere – been developed, or applied, independently from principles or doctrines of general private law, originating outside the regulatory sphere. Rather, such standards can be said to have complemented general principles of contract or, indeed, fiduciary (or agency) law: Both from a historic perspective and in terms of substantive content, they were developed in order to enhance the protection of investors against intermediaries. As a result, investors were protected as the beneficiaries of agency relationships in a wider sense, who otherwise could rely only on general principles of contract, tort, agency, or, again, fiduciary law.⁴⁵ Historically, the emergence of conduct-of-business standards in US securities regulation certainly was revolutionary less in terms of the substantive content (which, in many respects, can be traced back to general principles of common law), but rather in terms of the transformation of such principles into mandatory requirements, to be operationalized in each securities firm’s operations and business practices and to be monitored by public authorities ex ante. In other words, it is hardly surprising that the gradual recognition of duties of care, knowledge, and skill in the applicable regulatory frameworks, to some extent at least, mirrored preexisting general principles of law, including core principles of the common law of fiduciary duties. Nor should it come as a surprise that regulatory rules may come to be interpreted, and applied, by recourse to general principles of law (including, again, principles of fiduciary law) – and may even influence the interpretation and further development of such general principles in ex post litigation. Historically, the interplay between regulatory and legal conduct-of-business standards in US law provides ample evidence of this development of regulatory rules by reference to general norms of fiduciary law. In the United States, both regulatory agencies (in particular, the Securities Exchange Commission) and courts, respectively, have repeatedly (a) reinforced existing regulatory norms by adapting fiduciary principles in the course of their interpretation in specific circumstances, (b) transformed fiduciary principles into new regulatory requirements, or (c) “filled the gaps” left by regulatory requirements through imposing additional restrictions on intermediaries based on general principles of fiduciary law.⁴⁶

Against this backdrop, it is also not surprising that the IOSCO Principles’ restatement of conduct-of-business requirements in some ways paralleled traditional common law fiduciary norms. The Principles focused on establishing “functional fiduciary law” – that is, a duty of care and skill in the interest of customers and on preventing or, at least, mitigating potential conflicts of interests on the part of the intermediary and their implications for the customers. Of course, one should not press the point too far. Differences between traditional concepts of fiduciary law on the one hand and the individual conduct-of-business standards on the other hand certainly exist, and the regulatory standard often deviates substantially from generally accepted principles of fiduciary law.⁴⁷ Nonetheless, the parallels are particularly obvious with regard to the fiduciary duty to avoid conflicts of interests, the fiduciary’s duty not to exploit his position at the expense of the beneficiary, and the duty of loyalty to the beneficiary.⁴⁸

It follows that regulatory requirements and private law, including fiduciary principles, pertaining to the same activities – different types of financial services – cannot and should not be conceptualized as functionally separate regimes. Rather, they are functional complements, designed to work together to ensure adequate levels of investor protection. Conduct-of-business regulation and parallel principles of private law thus illustrate the more general observation that the purposes of modern private law, almost inevitably, are not confined to defining the rules for private contracting in full freedom (“private autonomy” in a civil law perspective), but usually include (semi-)regulatory objectives to ensure fairness between unequal parties.⁴⁹ Fiduciary law, with its focus on the protection of “vital interactions of high trust and confidence resulting in one party’s implicit dependency upon and peculiar vulnerability to another” certainly has a regulatory element to the extent that it imposes “strict duties requiring fiduciaries to act honestly, selflessly, with integrity, and in the best interests of their beneficiaries.”⁵⁰

Thus, conduct-of-business regulation facilitates additional enforcement and sanctions mechanisms to duties at least some of which, in substance, existed previously in fiduciary law or elsewhere in general private law. These regulations recognize and address agency problems between intermediaries and their customers, particularly structural information asymmetries and conflicts of interests inherent in the business model of financial intermediaries and the resulting incentives for the expropriation of customers by intermediaries. Of course, within the EU as well as elsewhere, regulatory standards apply in their own right and irrespective of the applicable private law. In view of existing regulatory enforcement powers, it may therefore appear pointless to discuss their private law implications.⁵¹ However, private law – and private enforcement – matter for the effectiveness of regulatory norms from a customer perspective. After all, public authorities’ enforcement of norms will be limited, not just due to limited resources, but possibly also to the incentive structures of public officials.⁵² Private law may replicate the substance of regulatory norms in some cases. And where private law does not do so, the effectiveness of regulatory norms crucially depends on whether or not private enforcement of the regulatory norms is possible.

The aforementioned analysis should not be misinterpreted as suggesting that regulatory requirements, as enforced by public authorities ex ante, and general principles of law, as enforced by courts in private lawsuits ex post, are functionally identical sides of the same coin. They are, in fact, not just operationalized in different ways, but may also serve partly different objectives.⁵³ Nor should it be forgotten that the substantive content of the two regimes may differ and, indeed, conflict.⁵⁴ At the same time, though, it is important to recall that even in the United States, as the country of origin of modern conduct-of-business regulation, where relevant principles had been developed long before the trend toward global convergence of securities laws in the 1980s and 1990s arose, the regulation of the intermediary-customer relationship has transcended traditional concepts of fiduciary law from the very origins of modern securities regulation in the 1930s and 1940s. The emergence of what we could describe as “functional fiduciary law,” a set of rules and requirements addressing the specific agency problems of the relationship between intermediaries and investors, thus took place long before the relevant substantive rules became exported to, and adapted by, foreign jurisdictions in the course of the globalization of securities regulation at a later stage. As a consequence, the analysis of fiduciary principles in the area of financial intermediation inevitably has to rely on a nontechnical, “functional” understanding of fiduciary principles – an understanding that is determined by the protective objectives of fiduciary law⁵⁵ rather than by its traditional emanation in common law.

Similar considerations apply with regard to the resulting tensions between regulatory standards and private law – and thus the need to determine whether and to what extent the applicable regulatory standards should have a bearing on the individually enforceable private law duties arising within intermediary-customer relationship (whether these follow from general contract law or, for that matter, other general principles of law, including tort, agency, or indeed fiduciary law in the technical sense).

Problems of coordination inevitably arise. Regulatory standards and private law duties will in some cases differ from and, potentially, conflict with each other. The need to reconcile regulatory duties – “functional fiduciary law” within the meaning defined previously – with each jurisdiction’s private law environment therefore has to be considered as part and parcel of the emerging body of transnational fiduciary law in the area of financial services regulation. In a transnational context, defining a solution to these problems of coordination will be particularly difficult precisely because the operation of “functional fiduciary law” or, at least, its impact on the intermediaries’ privately enforceable duties vis-à-vis their customers, is inevitably contingent on how each individual jurisdiction will coordinate regulatory duties on the one hand and the applicable private law on the other hand. One could characterize this problem as the fundamental “contingency problem” for the development of transnational fiduciary law in the field of financial services: the problem that a truly transnational understanding of what constitutes fiduciary obligations of financial intermediaries toward their customers and how these obligations affect the customers’ position in their individual contractual relationships is contingent on the interplay between regulatory rules and the applicable private law.

Given the long-standing trend toward international cooperation between supervisory authorities and convergence of regulatory standards as well as supervisory practices in all fields of financial regulation and supervision, there is no reason to doubt that the implementation and supervisory enforcement of regulatory conduct-of-business standards, as such, can be accomplished effectively and consistently. The convergence of applicable standards, developed within the institutional framework of IOSCO, provides ample evidence in this regard. The “contingency problem” identified earlier, by contrast, is inevitably more difficult to resolve – and it clearly presents a rather complex impediment for the development of transnational fiduciary law in the field. The case of conduct-of-business regulation in the European legislative framework, to be considered in Section 4.3, illustrates the point.

4.3 Making Transnational Law Apply Transnationally: The Case of European Financial Law

4.3.1 European Financial Law and Conduct-of-Business Regulation: A Primer

With far-reaching powers to enact legislation designed to harmonize national laws or, indeed, to create universal rules for application across no less than twenty-eight (post-Brexit: 27) jurisdictions with different legal traditions, substantive laws, and enforcement institutions, the European Union⁵⁶ indisputably is an important driver toward convergence in all areas of law and regulation covered by the mandate (and corresponding powers) laid down in the Treaty on European Union (TEU) and, in particular, the Treaty on the Functioning of the European Union (TFEU). It is an open question whether or not (and, if so, to what extent and subject to which qualifications) European financial law would qualify as a “transnational legal order.” To be sure, EU law generally constitutes a legal order, and a highly developed one for that matter, considering the specific constitutionalization of the European Union (not quite a federation of states, but certainly more than an international organization), the comprehensive perimeter of European economic lawmaking as a whole (which covers legislation in all areas of economic activity), the existence of European (as distinct from national) regulatory and supervisory agencies, and the corresponding high level of harmonization of national laws and regulations.⁵⁷ Taken together, though, these aspects certainly distinguish European financial law from other areas of international cooperation of legislators, authorities and/or courts in different jurisdictions.⁵⁸ More specifically, it could be argued that, owing to the high level of integration of national jurisdictions the EU Member States, EU lawmaking, even though it formally involves a multitude of jurisdictions, is structurally closer to coordination problems within a single jurisdiction and thus lacks the characteristics of genuine transnational legal ordering. In this context, it is worth noting that, under the European Treaties, compliance with, and implementation of, legal rules adopted at the European level takes place within a pre-defined legal framework, in which Member States are bound to give effect to EU legislation, and judicial powers to resolve any controversy as to its legality and substantive content are allocated to the European Court of Justice, which issues decisions that are binding on the Member States.⁵⁹

It is neither possible nor necessary to fully explore the nature of EU financial law within this chapter. It is important here to stress two points. First, European financial law and the relevant institutional arrangements established within the EU may have to be qualified for the purposes of transnational law theory. Second, however, it is certainly true that the EU and its institutions have played an important role not just in shaping the “transnational financial legal order”⁶⁰ established at a global level, but also in terms of implementing the work promulgated by international standard-setters. In the field of securities regulation, as in financial regulation more generally, European legislation has thus been instrumental to turn international “soft law” standards promulgated by international standard-setting bodies (such as IOSCO) into “hard law,” be it in the form of Directives (which harmonize the national laws of the Member States) or of Regulations (which apply directly and universally in all Member States).⁶¹ Both as an increasingly powerful negotiating party in working groups responsible for the development and the reform of regulatory standards and in view of its powers to render such standards effective across a large and important market, the EU has contributed to the effectiveness and success of that legal order, making it a useful object of study for present purposes irrespective of whether European law itself qualifies as a transnational legal order in its own right or merely as a (partly autonomous) subset of a larger system.

Moreover, EU legislation in the field of financial services regulation, irrespective of the constitutional environment and its embeddedness in an institutional structure defined in the Treaties, arguably is also a showcase for more general problems of coordination between different legislators, authorities, and courts, problems pertaining to the national “operationalization” of legal rules and norms originating at a supranational level. The ongoing controversy about the need for private law implications of regulatory conduct-of-business standards established by EU law⁶² is a particularly illustrative case in point. These problems, which – as noted before – inevitably come with implications for the effectiveness of any attempt to apply solutions developed at a supranational level to circumstances within a national turf, are likely to be more or less identical with those observable in the context of transnational legal orders proper.⁶³ Irrespective of the idiosyncratic characteristics of EU financial law and regulation (and EU economic lawmaking more generally), an analysis of the conditions for and the functioning of the harmonization of conduct-of-business standards for financial intermediaries established in EU law can thus be expected to contribute to our understanding of transnational legal orders more generally. Much the same applies with regard to the interplay between the different levels of rule-makers and standard-setters, and its implications on the interpretation and implementation of both legal rules and principles of supranational origin in the national legal environments, respectively.⁶⁴

Against this backdrop, it should be recalled that conduct-of-business regulation has been a core element of EU financial law ever since the introduction of harmonized principles for the regulation of investment services with the Investment Services Directive of 1993. The relevant legal acts – the Investment Services Directive, MiFID I and MiFID II⁶⁵ – were all enacted on the basis of Treaty provisions mandating the adoption of directives for the harmonization of national conditions for market entry by individual providers of goods or services or for companies from other EU Member States.⁶⁶ Significantly, the relevant provision (just as its predecessors in earlier Treaties)⁶⁷ is confined to the removal of differences in the conditions for market participation in order to facilitate the creation of an integrated “Internal Market” for goods and services, historically the core policy objective of the European Union (cf. art. 3(3) TEU), which requires a regulatory “level playing field” and, thus, harmonized rules governing the provision of financial services across all Member States.⁶⁸ Just as with other aspects of EU financial regulation, the harmonization of conduct-of-business standards for investment firms, which (at least initially) accomplished the liberalization of national regulations, served as an instrument to facilitate the mutual access of financial intermediaries licensed in one of the Member States to what used to be reclusive domestic markets.⁶⁹ Given that this clearly served the interests of the regulated industry, it is fair to note close parallels between the development of European financial regulation on the one hand and the driving forces behind the emergence of global (“transnational”) conduct-of-business standards identified earlier:⁷⁰ At both levels, the standards were driven by the desire to provide a mutually acceptable basis for market access and market integration, and at both levels, this motive may have helped to enhance the industry’s readiness to adapt and comply.

While allowing for a comprehensive harmonization of the regulatory frameworks (not just) for securities intermediaries, however, this constitutional background also accounts for an important limitation to the role of EU legislation as a catalyst for convergence in the conditions for the provision of such services across the Member States. Because the focus was on the harmonization of conditions for market access, EU financial law has never aimed at a full harmonization of all norms of relevance for the contractual relationship between intermediaries and customers – an attempt that would not just have been technically difficult (given residual differences in the national private laws of the Member States) and fraught with political controversies. Arguably, it also would have exceeded the scope of the relevant legislative powers, which (at least expressly) do not provide for a comprehensive harmonization of general private law, even when confined to individual areas of particular relevance to the Internal Market.⁷¹

To be sure, as will be explored in Section 4.3.2, significant aspects of the European conduct-of-business standards (just as the original IOSCO Principles of 1990) bear close similarities with traditional concepts of fiduciary relationships recognized by common law. Given the restrictions of their legal basis in European Treaty law, the relevant provisions, nonetheless, must not be misinterpreted as mandating the introduction of fiduciary duties in a technical sense, that matter being outside the scope of the relevant instruments and left to the discretion of the Member States.⁷² Just as the IOSCO Principles, the relevant standards therefore can be characterized as “functional fiduciary law” within the meaning defined previously. While the regulatory standards clearly address core problems of the principal-agent relationship between intermediaries and clients and apply to relationships that would qualify as fiduciary in common law, the interplay between these standards and the applicable private law environment of the Member States is not specified in detail by European law. Whether or not at least some form of private law implications, for example, in the form of contractual, damages for violations of regulatory obligations still ought to be recognized as a matter of European law, remains an open question.⁷³

4.3.2 What Has Become of the IOSCO “Principles”: Conduct-of-Business Regulation in Current EU Legislation

While a detailed analysis of the current version of conduct-of-business requirements for investment firms in European law, laid down in articles 24 and 25 of MiFID II (as well as in delegated legal instruments adopted by the European Commission in connection with these provisions),⁷⁴ would be outside the scope of this chapter,⁷⁵ the close parallels between the substantive content of relevant duties and the early precedents in the IOSCO Principles of 1990 are nonetheless worth noting. Although formulated in significantly more complex terms and in far greater detail, the relevant provisions take up all aspects of the original principles. As a general duty that also seeks to fill the gaps left by more specific requirements,⁷⁶ article 24(1) MiFID II first establishes a general duty of investment firms,

when providing investment services or, where appropriate, ancillary services to clients, [to] act honestly, fairly and professionally in accordance with the best interests of … clients ….

Article 24(2), subpara. (2) MiFID II then requires that investment firms

understand the financial instruments they offer or recommend, assess the compatibility of the financial instruments with the needs of the clients to whom it provides investment services, also taking account of the identified target market of end clients (…), and ensure that financial instruments are offered or recommended only when this is in the interest of the client.

Pursuant to article 24(3) MiFID II (specified further and complemented with detailed duties to inform and warn of risks in para. (4) of the same provision),

[a]ll information, including marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading. Marketing communications shall be clearly identifiable as such.

Article 24(5) MiFID II then continues to define the format and quality of the required information, which has to

be provided in a comprehensible form in such a manner that clients or potential clients are reasonably able to understand the nature and risks of the investment service and of the specific type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis. Member States may allow that information to be provided in a standardised format.

Article 24(8) and (9) MiFID II restrict the acceptability of commissions or other benefits by investment firms for the marketing and recommendation of financial products and thus address an important source of conflicts of interest that could impair the quality of investment advice and related services. In a similar vein, article 24(10) MiFID II prohibits incentive structures that could induce staff to offer financial products whose acquisition would not be in the client’s best interest. Complementing these provisions, article 25(1) MiFID II then establishes requirements for the qualification of natural persons providing investment advice and related services, while article 25(2)-(4) MIFID II specify the obligations of investment firms to explore their clients’ interest prior to the provision of services.

4.3.3 The Functions and Enforcement of Conduct-of-Business-Regulation in Europe: A German and a European Perspective

4.3.3.1 German Law

If the effectiveness of “functional fiduciary law” crucially depends on the interplay between regulatory standards and the relevant private law environment,⁷⁷ EU financial law certainly is a highly illustrative case in point. Just as in other areas of EU legislation, the introduction of harmonized conduct-of-business standards since 1993⁷⁸ had to be implemented in Member States with different legal traditions, different contract laws, and, in particular, fundamentally different legal regimes governing the relationship between financial intermediaries and their customers. Among these, only a small fraction – namely, the United Kingdom and Ireland – are common law jurisdictions, the remainder being variants of civil law legal systems. While it is, for obvious reasons, impossible to develop a full account of the relevant private law environments in each and every Member State within this chapter, it is probably safe to assume that at least in the majority of them, the relevant aspects of intermediary-client relationships (general duties of care and skill, principles governing conflicts of interests, as well as duties to inform and disclose) had already been addressed in the applicable contract law (to some extent, as the case may be, complemented by general principles of private law).⁷⁹ It should come as no surprise that the interplay between regulatory conduct-of-business standards and private law has been debated for some time in response to incoming European legislation, with only few jurisdictions having developed clear-cut solutions for the reconciliation of regulatory and private law regimes.⁸⁰

German law illustrates the point. Building both on general contract law, which does not provide a bespoke regime addressing intermediary-client relationships, and on general principles of private law, including on misrepresentation prior to or in the course of contractual relationships, German courts, in particular in the aftermath of a landmark decision in 1993,⁸¹ have over time defined a rather complex set of duties of care and skill with regard to the provision of investment advice, which includes both prescriptive and proscriptive elements. As established in a large body of case law,⁸² investment firms are required (a) to ensure that any advice given has to be commensurate with the investor’s profile and risk preference, (b) to explore their clients’ expertise, financial position, and risk preference prior to the provision of investment advice, (c) to inform their clients of all aspects that are material for their investment decisions, (d) to explore the characteristics and risk profile of any investment recommended to clients, and (e) to warn clients if, on the basis of the exploration of their individual expertise and risk profile, they perceive the client to be unaware of specific risks arising in the context of a proposed investment. Even though fiduciary law, in the common law interpretation of the concept, does not exist in German private law, the parallels between these principles and fiduciary duties in the common law understanding are obvious.

Nonetheless, the functional interplay between these principles and the regulatory requirements enacted in order to transpose the incoming European Directives (first in sections 31–34 and, since 2017, in sections 63–71 of the Wertpapierhandelsgesetz [Securities Trading Act]⁸³) has been debated controversially in German legal doctrine ever since the transposition of the Investment Services Directive 1993, while the courts have been reluctant to recognize any implication of the regulatory regime for the construction of the contractual relationship between intermediaries and their clients.⁸⁴ Prior to the transposition of MiFID into the German Securities Trading Act, the Federal Supreme Court did acknowledge, albeit somewhat imprecisely, that the regulatory requirements, although based in public law, could have a bearing on contractual duties to the extent that their objective was to protect the clients; even so, the Court did not construe duties of care independent from those established under general contract law.⁸⁵ In some decisions, the Federal Supreme Court and other courts have also referred to provisions of earlier versions of the WpHG as a basis for a duty to avoid adverse consequences of conflicts of interests for clients.⁸⁶ The practical consequences of this approach, however, remain obscure. In the academic literature, which is frequently cited as persuasive authority by German courts, the controversy continues about whether, and to what extent, implications of regulatory conduct-of-business standards on the private law relationships between intermediaries and customers ought to be recognized. The prevailing opinion is that regulatory conduct-of-business standards, qua rooted in public law, cannot be considered as authoritative for the determination of obligations arising in private law. But in recent years an increasing number of scholars have argued for reconciliation of both regimes.⁸⁷

Given residual differences between the two regimes, this state of affairs is clearly unsatisfactory, and strong arguments have been advanced supporting a further realignment between the two regimes. Nonetheless, German law as it currently stands continues to interpret both regimes as functionally and doctrinally separate.⁸⁸ German courts still hesitate to reconcile their interpretation of the applicable contract and general private law with the substance of conduct-of-business regulations to the extent these are designed to protect investors. As a result, the “functional fiduciary law” established by the transposition of European law in the German Securities Trading Act, has not yet transformed into obligations under German private law, although, on occasion, it has had an influence on the interpretation and doctrinal analysis of the applicable private law regime.

4.3.3.2 European Law

Similar problems of coordination have arisen in other European jurisdictions. As discussed earlier, different national approaches will come with different results not just in terms of the rights of individual investors, but also in terms of the effectiveness of the regulatory standards as such. It therefore is hardly surprising that the implications of the harmonized conduct-of-business standards should have become the object of a general discussion that transcends the national jurisdictions of the Member States. Significantly, the question whether or not these standards should be interpreted as influencing also the obligations of intermediaries under national contract (and/or general private) laws has been debated not just as a matter of national doctrine (e.g., in order to ensure consistency of obligations and to avoid contradictory sanctions), but also as a matter of EU law.

At first sight, this may appear to be inconsistent both with the fact that the relevant European legislation has never itself prescribed specific sanctions, let alone the introduction of fiduciary principles proper in the national laws of the Member States, and with the lack of legislative powers for the harmonization of general private law in the EU Treaties.⁸⁹ Yet, while both aspects remain largely undisputed, it is obvious that differences in terms of obligations under national private law may come with implications for cross-border competition in the Internal Market in at least two respects.⁹⁰ First, if and to the extent that national private law imposes a stricter standard on financial intermediaries than the standards defined in the harmonized regulatory frameworks, intermediaries operating in this jurisdiction face higher costs than they would incur in other jurisdictions where the applicable private law is more closely realigned with the harmonized regulatory standards. And, second, where national private laws are less strict than the regulatory regime, the absence of private law enforcement as a sanctions regime complementing oversight and enforcement by supervisory authorities may impair the effectiveness of the regulatory standards, which in turn may create competitive disadvantages for similar activities carried out in other Member States. Either scenario would be problematic in view of the EU’s overarching policy objective to create an integrated Internal Market with harmonized “rules of the game.”⁹¹ Moreover, the latter scenario would be inconsistent with the principle of effectiveness, a core principle of European law developed in case law by the Court of Justice of the European Union (ECJ), whereby the duty of Member States to comply with European law implies their duty to provide for effective implementation (including by sanctions in national law).⁹²

Interestingly, in spite of these rather obvious consequences, ECJ case law has remained vague in this regard. In a prominent case addressing the question whether MiFID I required the Member States to provide for individually enforceable sanctions for a violation of the know-your-customer requirements stated therein, the Court held that, in the absence of specific EU legislation, the Member States, subject to the principles of equivalence and effectiveness, remained entitled to define the sanctions regimes according to their own preferences.⁹³ This authority arguably includes the freedom to restrict implementation to regulatory requirements without direct implications for obligations under general private law. With the doctrinal debate ongoing, it remains to be seen whether this principle will be upheld in future cases, even if it could be established that the lack of individually enforceable private law duty, in the circumstances, reduces the effective implementation of the regulatory standards.

Whatever the future may bring, both the ongoing doctrinal debate on the private law implications of regulatory standards and the different approaches in place across the EU Member States clearly illustrate that the “transnationalization” of fiduciary rules for the relationship between financial intermediaries and their customers, despite the high level of global convergence of regulatory conduct-of-business standards, is a process that has not yet reached its end. Only some jurisdictions thus far have resolved the problems of coordination between the two regimes, transforming “functional fiduciary law” into private law obligations in one way or another. In others, the two regimes continue to operate separately, sometimes on the basis of rather vague principles, which creates legal uncertainty for both intermediaries and their customers. It is at least conceivable that future developments, either through changes in the applicable EU legislation or in the form of a revision of ECJ case law, could trigger further convergence in this respect. For the time being, however, convergence with international trends so far has been restricted to the regulatory sphere.

4.4 Conclusions

Over many decades, regulatory frameworks for the provision of financial services – in particular, vis-à-vis retail customers – have come to complement national contract laws with conduct-of-business standards designed to establish minimum qualitative standards of care, skill, and honesty for the provision of a wide range of services to customers. At least parts of this regime mirror and, to some extent, replicate duties that have also been recognized as fiduciary duties in general private law, particularly because (and to the extent that) the underlying contractual relationships qualify as agency relationships in common law. Modern conduct-of-business standards, developed in order to facilitate the effective protection of investors through ex ante supervision and enforcement of qualitative requirements, thus have come to complement (and, in part, to supersede) functionally parallel duties that would otherwise be enforceable ex post, within the context of individual lawsuits brought by customers against their intermediary. Historically, this development can be explained with the desire to balance out deregulatory developments in US state legislation since the beginning of the twentieth century through the imposition of harmonized standards in federal securities regulation in the 1930s.

This process has been taken up by a global trend toward converging regulatory standards since the 1980s, which – both in international standards (in particular, the IOSCO “Principles”) and European legislation – has been driven by the desire to open national financial markets and facilitate cross-border competition for financial services intermediaries. Though certainly onerous in terms of compliance cost, the adaptation and implementation of a growing body of transnational conduct-of-business standards thus certainly has served industry interests. In this regard, securities regulation clearly is in line with the emergence of international standards in other fields of financial regulation, including, in particular, the area of prudential requirements for the establishment and ongoing operations of banking institutions – and it is reflective of the relevance of “soft law” as a driving force behind the development of transnational legal orders more generally.⁹⁴

With regulatory (as distinct from contract) law as a platform and transmission mechanism for the emergence of a transnational regime for the regulation of fiduciary relationships between intermediaries and customers, the respective provisions have changed their nature. While the understanding of fiduciary duties and, indeed, their relevance for the solution of problems in the individual contractual relationships differ considerably, especially between common and civil law jurisdictions, the emerging body of principles and duties can nonetheless be described as “functional fiduciary law” – that is, legal solutions to economic problems that arise in agency relationships irrespective of the respective underlying contract law frameworks and their links toward more general principles (good faith, duties of care, skill, and honesty) in the respective legal systems. In this sense, the emergence of a universally accepted body of conduct-of-business standards certainly can be characterized as a successful example of transnational legal transplants.

Apart from the incentives of the regulated industry to accept and implement such standards as a price for unrestricted access to foreign markets, two interrelated aspects in particular appear to have facilitated this development: First, regulatory law is, almost by definition, generic in nature, and thus less contingent on functional interlinkages with general principles of contract law, be they rooted in common or statutory civil law. Second, precisely because the inclusion of transaction-oriented conduct-of-business standards originally served to compensate for weaknesses in the protection of investors under general principles of fiduciary law, the applicable regulatory standards were at the same time more focused on specific aspects of the intermediary-customer relationships – and simpler to administer. Regulatory conduct-of-business standards apply independently from general principles of contract law. At the same time, they are not intended to provide a legal basis addressing all aspects of the relevant relationships, but merely add to general contract law by imposing certain protective duties and facilitating their ex ante supervision by public authorities. This allows the implementation and enforcement of regulatory requirements in a way that is functionally and operationally separate from the application of general contract law, which in turn facilitates their “export” to, and adaptation by, jurisdictions with different contract law regimes.

Against this backdrop, however, problems of coordination between the regulatory sphere and the respective contract law environment are inevitable, and it is hardly surprising that such problems can be identified as a common concern in many jurisdictions, including the Member States of the European Union. Realigning regulatory standards with the technical content of applicable contract law and, indeed, general principles of contract law (including, for that matter, the common law of agency and fiduciary duties) continues to be difficult, especially in cases where the substantive content diverges. In this respect, ongoing discussions on the private law implications of the harmonized body of European conduct-of-business regulations is just one illustrative showcase. As long as national differences in the treatment (and resolution) of such conflicts continue to exist, the process of “transnationalization” of what could be described as “functional fiduciary law” clearly remains incomplete – with potentially significant results in terms of substantive outcomes. Although the transnational convergence of regulatory standards that can be described as “functional” fiduciary law has made enormous progress over the past decades, the private law regimes applicable to the intermediary-customer relationship continue to differ considerably. International “soft law” instruments are highly relevant, and transnational cooperation of regulatory institutions acting under highly politicized mandates and corresponding restrictions, and influenced by strong market forces, continues. The resulting emergence of transnational standards for the regulation of financial intermediation reflects an ongoing process of transnational legal ordering, but does not represent a mature transnational legal order, yet.

5 Transnational Fiduciary Law in Bond Markets A Case Study

Moritz Renner

5.1 Introduction

The aim of this chapter is twofold. First, it is a comparative study on the potential benefits and limitations of applying fiduciary law in a “hard case.” This analysis is inductive in nature. It aims at contributing to a better understanding of fiduciary law doctrines in both common and civil law jurisdictions. Second, the chapter focuses on specific transnational processes that may shape fiduciary norms. In particular, it analyzes the influence of transnational private ordering on the establishment of fiduciary duties in state law.

Centering on a case study, the chapter discusses the legal aspects of “net-short debt investing” on global bond markets through the lens of transnational fiduciary law. Generally, the term “net-short” refers to the positioning of an investor who benefits as the price of a specific financial asset falls. Net-short debt investing is an increasingly popular investment strategy that enables bondholders (i.e., holders of a company’s debt) to cash in on the default of the bond-issuing company by building up a net-short position in credit default swaps (Section 5.2). The strategy raises the question whether the net-short investor has a fiduciary duty of loyalty toward (1) the issuer of the bond, (2) other bondholders, and (3) the counterparty of the credit default swap (CDS) (Section 5.3). This legal question has a transnational dimension: large-scale bond sales do not only involve a number of different jurisdictions, but also heavily build on mechanisms of private ordering (Section 5.4).

The chapter argues that any legal conceptualization of net-short debt investing must consider this transnational dimension (Section 5.5). Specifically, the chapter will make the case that the concept of fiduciary duties should be interpreted with a view to facilitating mechanisms of transnational private ordering.

To make this argument, this chapter assesses a case study – the Windstream v. Aurelius dispute involving net-short debt investing – one that, at first glance, seems an unlikely candidate for the application of fiduciary norms. One thing is clear: The practice of net-short debt investing may have adverse effects on issuers of bonds, other bondholders, and credit default swap counterparties. Yet “hard” fiduciary law – that is, the domestic legal norms of common law and civil law countries that fiduciary theorists typically focus upon – is unlikely to apply fiduciary duties to net-short debt investing, leaving market participants largely without viable remedies. The picture may change, however, if we take seriously the transnational dimension of bond market cases such as Windstream v. Aurelius. Transnational bond markets are a prime example of transnational private ordering, one with a fiduciary dimension, as this chapter argues.

5.2 Case Study: Net-Short Debt Investing

The problems of net-short debt investing have received considerable media attention: the Financial Times opines that US companies face “a growing threat from activist investors,” whereas others critically discuss the role of “hedge-fund debt cops.”¹ Even more pointedly, an opinion piece in the New York Times claims, “What Hedge Funds Consider a Win Is a Disaster for Everyone Else.”² What, then, is net-short debt investing? The phenomenon is well illustrated by the much-discussed Windstream v. Aurelius case, which was decided by a federal trial court in New York.³

The (stylized) facts of the case are as follows. In 2013, Windstream, a telecoms company, issued bonds in order to finance its operations. As is standard market practice, the bond documentation contained a number of so-called covenants. Bond covenants, as an instrument of creditor protection, are clauses that oblige the bond issuer to comply with certain financial ratios, such as a specific debt-to-earnings ratio, and to refrain from risky financial activities.⁴ One of the bond covenants prohibited Windstream from transferring any assets to affiliated companies. Windstream violated this prohibition when it transferred a considerable number of its network services to a holding company in 2015, allegedly for regulatory purposes. Given this violation of a covenant, the bondholders, with a quorum of 25 percent, would have been entitled to declare an “event of default” after a sixty-day cure period and demand immediate repayment of the bonds (acceleration).⁵

However, the bondholders took no action after Windstream violated the covenant. Their decision not to act was in line with common bond market practice. Triggering an event of default and accelerating repayment of the bond is considered the bondholders’ “nuclear option,” as it almost invariably leads to the bankruptcy of the bond issuer. Thus, bondholders mostly use covenant violations as bargaining chips for adjusting the financial conditions of the bond and restructuring the company’s debt rather than enforce the clauses by demanding immediate repayment (Section 5.4).

In this regard, the facts leading to the Windstream v. Aurelius dispute were unusual. Aurelius, a US hedge fund, bought 25 percent of the Windstream bonds in 2017 – that is, well after the covenant violation. It then took swift action by declaring an event of default and demanding immediate repayment of the bond, causing Windstream to fall into bankruptcy. Why did Aurelius act this way? It is hard to know from publicly available information. On one account, one based upon unproven market rumors, Aurelius had built a net-short position on Windstream’s debt by buying credit default swaps worth ten times the amount of its bond exposure.⁶ Thus, Windstream’s default – which Aurelius had triggered itself (a so-called manufactured default) – allowed Aurelius to cash in on the credit default swaps. Aurelius effectively relied on the letter of the bond covenant in order to benefit from Windstream’s bankruptcy.

Perhaps Aurelius was acting strategically in this way. Perhaps not. The most that one can say – and all that needs to be said for this chapter’s argument – is that for Aurelius, such a strategy certainly would have made business sense. Whether it made sense from a broader economic perspective seems rather questionable, given that Windstream as the bond issuer (as well as its shareholders and employees), other bondholders and the counterparty of Aurelius’ credit default swaps all stood to lose.⁷ On the other hand, one could argue that broader market benefits in the form of deterrence effects for potential covenant violators achieved through Aurelius’ “policing” role outweighed these individual losses.⁸ As a matter of law, the question is what duties Aurelius had toward other market participants (Section 5.3). Both the economic and the legal assessment of the case, however, are contingent upon the structure of transnational bond markets and the reasonable expectations of market participants (Section 5.4). This chapter now turns to those topics, arguing that fiduciary law can play an important role in translating market structures and expectations into legal categories.

5.3 Fiduciary Duties: A Comparative Analysis

As the Windstream v. Aurelius dispute shows, the legal implications of net-short debt investing concern at least three different relationships: those between bondholder and issuer, relationships within the group of bondholders, and relationships between bondholder and CDS counterparty. Different laws may apply to each of these relationships under conflict-of-laws rules. The legal framing of the relationships might particularly differ between common law and civil law jurisdictions.

5.3.1 Between Bondholder and Issuer

In the Windstream v. Aurelius dispute, the bonds were issued under New York law. Depending on the nationality of the issuer and the relevant market, bonds are subject to different applicable laws. For German companies, for example, it is not uncommon that bonds are issued under German law, even if the majority of investors is domiciled in other jurisdictions. In any case, the bond covenants will likely be based on transnational standard documentation.

5.3.1.1 Common Law

Under New York law, Windstream seemed to have no effective defense against Aurelius’ action. In the New York Federal District Court’s conclusions of law, Judge Furman reasoned that the court’s “sole task is to enforce the Indenture’s plain terms.”⁹ From a common law perspective, this approach was justified as a matter of general principles. Under the common law of contracts, “good faith does not envision loyalty to the contractual counterparty but rather faithfulness to the scope, purpose, and terms of the parties’ contract.”¹⁰ There is no general doctrine of abuse of rights, but “if one has a right to do an act, then one can, in general, do it for whatever reason one wishes.”¹¹ These general common law principles, however, do not control in the field of business law, where the Uniform Commercial Code (UCC), the model code for commercial transactions, expressly incorporates the principle of good faith.¹²

Thus, some courts and commentators have relied on the UCC’s principle of good faith in order to establish lender liability in a wide array of banking law cases. In several decisions, US federal and state courts have held that a lender’s right to accelerate or terminate a loan may only be exercised in good faith.¹³ These decisions were mostly based on the state-law adoptions of section 1-309 of the UCC.¹⁴ Under these standards, courts tend to allow the use of acceleration and termination provisions in loan contracts only as a “shield” rather than as a “sword.”¹⁵ Violations of good faith duties by the lender can give rise to contract claims for damages or potentially also tort-based lender liability.¹⁶ Substantively, the duty of good faith imposes a standard of “commercial reasonableness” on the lender.¹⁷ It seems highly questionable, however, whether such a standard would have prevented Aurelius from accelerating the repayment of the bond in our case. If we merely look at Windstream and Aurelius as two parties in a lending relationship, Aurelius did have a legitimate interest in enforcing the covenant after it was breached by Windstream.

Beyond the principle of good faith,¹⁸ far-reaching duties of loyalty may be imposed on the parties when there is a fiduciary relationship between them¹⁹ – that is, when one of the parties is a fiduciary and therefore “is under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation.”²⁰ In such a relationship, the fiduciary has specific obligations to the extent that the beneficiary “would be justified in expecting loyal conduct.”²¹ From this perspective, the legal conceptualization of the Windstream v. Aurelius dispute hinges on the question whether Aurelius was a fiduciary of Windstream and whether it had a fiduciary duty of loyalty to refrain from enforcing the bond covenant.

The particular question of bondholders’ fiduciary duties toward an issuer has apparently not been discussed in banking law literature. The most relevant articles focus on the inverse situation. They ask – mostly from a corporate governance perspective – whether the management of the issuer has fiduciary duties toward bondholders.²² Windstream v. Aurelius, however, seems much more closely related to relationships where fiduciary duties are imposed on a bank or other debt investors based on their particular role as a lender.

As there is no general doctrine of fiduciary duties in banking law, courts and commentators tend to assume fiduciary duties of banks only in two scenarios: if the bank acted as an agent or trustee, or if there is some “special circumstance” warranting an ad hoc application of fiduciary norms.²³ In the lending business, “special circumstances” typically refers to situations that deviate from the model of an arm’s-length relationship between creditor and debtor.²⁴ Thus, banks as lenders have fiduciary duties toward the borrower if they have “control or an informational advantage over the borrower.”²⁵ Most examples involve cases where banks acted outside of their usual lending role, for example, by giving advice that the borrower relied upon.²⁶

Does the Windstream v. Aurelius dispute fall under this category of cases? Arguably, yes. It might be a “special circumstance” that Aurelius, by virtue of holding 25 percent of the bonds, had particular leverage over Windstream, as it was able to trigger an event of default at will. On the other hand, however, Windstream itself had violated the bond covenant. Aurelius did not overstep the contractual boundaries of its role as a lender. To the contrary, it availed itself of a contractual right that expressly aimed at safeguarding its financial interests. Thus, under the common law, the case for establishing a fiduciary duty that would enjoin Aurelius from triggering a default seems rather weak. Even those who argue for a broad application of fiduciary duties in lending relationships do not discuss a restriction of the lender’s termination rights.²⁷

5.3.1.2 Civil Law

Had Windstream issued the bond under German law, the legal situation would have been quite different at the outset. As in most civil law jurisdictions, there is no elaborate doctrine of fiduciary duties in German law.²⁸ However, there are functional equivalents to such duties with a potentially much broader range of application. Like many civil law jurisdictions,²⁹ German law establishes a principle of “good faith and fair dealings” (section 242 Bürgerliches Gesetzbuch) for all contracts. Legal acts that run counter to this principle are void. At the same time, the law of contracts establishes a general duty to protect the other party’s rights and interests in section 241(2) Bürgerliches Gesetzbuch. Violations of this duty can give rise to contractual claims for damages. These general clauses are open to different interpretations and are mostly given concrete substance on a case-by-case basis.

It is widely agreed, however, that the principle of good faith implies a far-reaching prohibition of the abuse of rights.³⁰ The prohibition is interpreted in a context-specific manner. For instance, relationships of agency and trust give rise to a strong duty of loyalty. By contrast, there are only minimal requirements of consistent behavior for transactional contracts.³¹ Given its adaptability, the abuse-of-rights doctrine potentially has a very wide range of applications.

In banking law, it has specifically been discussed in the scholarly literature whether the principle of “good faith and fair dealings” can effectively enjoin a lender from demanding repayment in certain situations. This problem is often expressly framed as a question of the “fiduciary duties” (Treuepflichten) of the lender.³² The doctrinal foundation of this argument differs from the common law approach to the extent that fiduciary duties are understood as a mere concretion of the general principle of good faith. In substance, however, many of the same considerations apply.

Most commentators agree that even a relationship bank – that is, a bank that has a long-standing business relationship with its customer – is free to terminate the credit line of its customer if the latter is in financial distress.³³ However, the special “fiduciary” role of the bank limits this freedom in two distinct ways. On the one hand, an outright abuse of rights is prohibited: A bank may not terminate a loan if the debtor can still be saved by an extension of the credit line, and if the termination does not even advance the bank’s financial interests.³⁴ On the other hand, the bank may not behave in a self-contradictory way: If – based on past behavior – a debtor can reasonably expect his relationship bank to extend existing credit lines, these can only be terminated for compelling reasons.³⁵

The Windstream v. Aurelius dispute falls under neither category. The termination of the bond by Aurelius was not outright abusive, as it did make business sense for Aurelius to terminate. Furthermore, Aurelius’ behavior was not prima facie contradictory, as – individually – Aurelius did nothing to cause a legitimate expectation on Windstream’s side that the bond covenant would not be enforced. Thus, a civil law perspective on the constellation will likely lead to the same results as the common law analysis.

5.3.2 Within the Group of Bondholders

It is more plausible that, by enforcing the bond covenant, Aurelius violated a fiduciary duty toward other bondholders. In both common law and civil law jurisdictions, the content and reach of mutual duties between lenders or bondholders is highly controversial. Much depends on the conception of the legal relationship constituted by a group of investors: Is it merely contractual, or does a group of investors amount to some form of legal association? In the latter case, individual investors are more likely to be bound by specific fiduciary duties.

5.3.2.1 Common Law

In common law jurisdictions, it is widely held that investors do not form any kind of legal association that would give rise to specific mutual duties. The question has been discussed for syndicated lending in particular, where a number of lenders contribute individual shares to a large-scale corporate loan. Although earlier court decisions have not been unequivocal in this matter,³⁶ most commentators agree that – even in such cases – the arrangement between the lenders is “not a partnership, joint venture, or other association.”³⁷ A fortiori, this also holds true for the relationship between bondholders, where the degree of cooperation between investors is usually much lower than in a syndicated loan. The market standard agreement issued by the International Capital Markets Association (ICMA) expressly provides – for the underwriting banks (“managers”) – that “[n]one of the provisions of this Agreement or any other agreement relating to the Securities shall constitute or be deemed to constitute a partnership or joint venture between the Managers or any of them.”³⁸

Nevertheless, there are situations in which a lender or bondholder might have fiduciary duties toward other investors. This is most evident when the lender or bondholder acts as an agent or trustee of the other investors, a common practice for administering the outstanding debt and facilitating its repayment. Standard loan documentation often contains a disclaimer of fiduciary responsibilities for these functions.³⁹ The validity of such disclaimers is subject to dispute (Section 5.4).

With a view to the Windstream v. Aurelius dispute, however, it is worth noting that courts have discussed the existence of fiduciary duties between investors well beyond relationships of trusteeship and agency. Most notably, the English High Court in the Redwood case⁴⁰ discussed whether a majority of lenders has a fiduciary duty not to take a debt restructuring decision that would harm a minority of the lenders. The High Court held that this may, in fact, be the case – but only to the extent that the majority acts in bad faith and thus abuses the powers conferred to it.

Applied to Windstream v. Aurelius, the result of this “abuse of powers” standard is far from clear. When Aurelius used its 25 percent share of the bonds to declare an event of default and thus triggered Windstream’s bankruptcy, other bondholders that had not sufficiently hedged their exposure were disadvantaged. But Aurelius’ decision to do so was not taken with the purpose of disadvantaging other creditors. Without this subjective element, there is generally no abuse of powers – and thus no breach of a fiduciary duty.

5.3.2.2 Civil Law

In contrast to the common law approach, civil law jurisdictions like Germany consider a lenders’ consortium to be a partnership.⁴¹ As a result, they transpose the corporate law doctrine of fiduciary duties to the relationship between lenders.⁴² However, most commentators clearly differentiate between loans and bonds. Whereas lenders contributing to a syndicated loan are widely regarded as forming a partnership, bondholders are not.⁴³ Therefore, fiduciary duties between bondholders do not reach beyond the minimum standard prohibiting an abuse of rights or self-contradictory behavior. As a result, Aurelius’ behavior is to be judged much along the same lines as under the common law approach – and cannot be considered in breach of a fiduciary duty.

5.3.3 Between Bondholder and CDS Counterparty

CDS contracts are usually made under New York or English law, based on standard documentation by the International Swaps and Derivatives Association (ISDA). In the ISDA Master Agreement under English law, each party expressly represents that “[t]he other party is not acting as a fiduciary for or an adviser to it in respect of the Transaction.”⁴⁴ This is in line with the typical risk allocation of a swap contract, where the parties clearly delineate their respective responsibilities. There is nothing to suggest that this disclaimer of fiduciary duties would be held unenforceable (see Section 5.4), either in a common or a civil law court.

In March 2019, the ISDA published a proposal to the ISDA Credit Derivatives Definitions that aimed to preclude “manufactured defaults” allowing investors to benefit from events of default.⁴⁵ However, these definitions only capture defaults that have been “manufactured” through a collusion of investor and issuer – another increasingly common practice spooking market participants.⁴⁶ It does not encompass defaults brought about by strategies of net-short debt investing such as the one employed by Aurelius.

At the same time, capital market regulators from different jurisdictions have discussed the issues of net-short debt investing and “manufactured defaults” as potential instances of market manipulation.⁴⁷ So far, their inquiries have not led to tangible results. Yet, it might prove to be an interesting test case for the idea of public fiduciary duties of capital market investors.

5.3.3.1 Interim Conclusion

Judged against general principles of common law and civil law, the Windstream v. Aurelius dispute is an unlikely case for applying fiduciary duties. Although the practice of net-short debt investing might have adverse effects on a range of market participants – the issuer of the bond, other bondholders, CDS counterparties – neither common law nor civil law consider it a breach of the investor’s fiduciary duties. This leaves affected market participants largely without viable remedies against the practice.

5.4 The Transnational Dimension of Fiduciary Law

This chapter suggests that we might reach a different conclusion if we take the transnational dimension of the case seriously. It argues that the bond market is a prime example for transnational private ordering. Against this background, it outlines a transnational approach to fiduciary law. Following this approach, it takes a fresh look at the justification and scope of fiduciary duties in both common and civil law jurisdictions. Specifically, it examines the potential of fiduciary law to “enable and bolster social norms”⁴⁸ formed in a transnational context.

5.4.1 Transnational Ordering in the Bond Market

5.4.1.1 Transnational Legal Orders

The concept of transnational law has always been contested. Until today, the discussion is dominated by two opposing camps – to the extent that the existence of transnational law is accepted at all.⁴⁹ On the one hand, there are authors in the tradition of Jessup who aim at developing a functional conception of transnational law as “all law which regulates actions or events that transcend national frontiers.”⁵⁰ On the other hand, there are authors who make the case for a more rigorous definition of transnational law, often taking the ancient lex mercatoria as an example.⁵¹

The “wars of faith”⁵² over the existence and nature of the medieval law merchant and its potential successors shall not be revisited in this chapter. For the chapter’s purposes, it will suffice to acknowledge that there is a cornucopia of mechanisms of legal ordering – with differing degrees of public sector involvement – that are not limited to one national jurisdiction. For this chapter’s purposes, several features of these phenomena are worth highlighting. First, a legal order is transnational when it transcends the boundaries between national and international law, such as when it is neither a creature of purely domestic or purely public international law, but rather interstate law that has effects within multiple states. Second, such ordering is transnational if it transcends the boundary between unity and fragmentation; that is, it does not form a self-sufficient legal order comparable to national legal systems. Finally, transnational legal orders (TLOs) may transcend the boundary between public and private ordering; that is, they may involve mechanisms of private ordering that often rely on public enforcement mechanisms – for example, litigation in state courts.⁵³

The elements of such orders are well captured by Halliday’s and Shaffer’s concept of transnational legal orders (TLOs).⁵⁴ TLOs constitute functional equivalents to state law in the dimensions of rulemaking, adjudication, and enforcement.⁵⁵ In these three dimensions, they involve legal norms, produced by or with legal bodies that transcend nation-states and are engaged with legal bodies within multiple nation-states..⁵⁶

5.4.1.2 Ordering the Bond Market

(a) Formalized TLO

Global bond markets are largely structured as a TLO in this sense. Bond issues heavily rely on standard documentation that is developed by industry associations such as the US-based Securities Industry and Financial and Markets Association (SIFMA) and the Zurich-based ICMA, as well as by globally active law firms. Whereas the SIFMA plays an important role in the market for bonds denominated in US dollar, the ICMA is the leading standard-setter for Euro-denominated bonds. The associations often work together, for example, on interest-rate benchmarks⁵⁷ and on standard agreements for the repo market.⁵⁸ The structure and function of both associations is similar; their membership is constituted by financial institutions from around the world.⁵⁹ The following remarks focus on the example of the ICMA.

Members of the ICMA, mostly banks and other market participants from more than sixty countries, work together in a number of committees in order to set standards for global primary and secondary bond markets. The ICMA’s Legal and Documentation Committee consists of the heads and senior members of the legal transaction management teams of member firms. The standard documentation elaborated by the committee is intended as market “best practice.” Its real impact on market practice can hardly be overestimated. As bonds are heavily traded on cross-border secondary markets, bond documentation needs to be highly standardized in order to generate a marketable financial instrument that is not limited to a single jurisdiction. Therefore, bond issuers usually stick closely to market standard provisions outlined in the ICMA’s Primary Market Handbook when drafting the bond indentures.

The indentures will invariably contain a choice-of-law clause subjecting the bond to the jurisdiction of state courts. However, scope and detail of the bond indentures are such that there is usually not much room for resorting to rules of domestic law.

To the extent that fiduciary duties are assumed by one of the parties – for example, by the lead manager of a bond issue – they are expressly spelled out in the contract or a separate trust deed. If there is no mention of fiduciary duties, there is a high probability that market participants did not deem them necessary or conducive to the functioning of the bond market.

(b) Informal Rules in TLOs?

At the same time, the practice of bond market participants is not determined by contract language alone. It is also embedded in different layers of relational and social norms.⁶⁰ These norms are often informal in nature. They are thus not clearly encompassed by Halliday’s and Shaffer’s concept of TLOs.⁶¹ Yet such rules may structure whole fields of cross-border transactions. Empirical studies on industries as diverse as the international cotton trade and the global software industry have shown the high significance of informal norms of cooperation.⁶²

Most actors in the bond market are repeat players. Global banks cooperate in different settings, as managers of a bond issue or as members of a financing consortium. In the course of cooperation, they form mutual, or relational, expectations of behavior. Many banks active in the primary market are also interested in a stable business relationship with the bond issuer. They know well that “continuity [of cooperation] can be put in jeopardy by defecting from the spirit of cooperation and reverting to the letter [of a formal contract].”⁶³ Thus, in the words of Ellickson, relational norms constitute an effective means of “second-party control” of behavior.⁶⁴

On a wider scale, market participants feel obliged to a number of unwritten rules that are considered necessary for the functioning of the market as a whole. In Ellickson’s taxonomy of private ordering, these norms can be termed mechanisms of “third-party control,” as they extend well beyond bilateral relationships between market participants and can be enforced by third parties.⁶⁵ Sometimes, market participants comply with the unwritten rules of market practice out of mere self-interest. In most cases, they simply have nothing to gain from disruptive behavior. In other instances, market actors comply with the unwritten rules of the industry for fear of retribution by third parties. As in other industries, “black lists” and “white lists” are widely used in financial markets to exclude noncooperating players from future transactions.

Are there any unwritten rules of market practice that might influence the legal evaluation of the Windstream v. Aurelius dispute? Empirical research shows that creditors almost never accelerate a corporate loan or bond in case of a technical event of default.⁶⁶ They mostly refrain from doing so for fear of a domino effect: As soon as one creditor demands immediate repayment, others will follow suit and try to take hold of the borrower’s assets.⁶⁷ Mandatory disclosure of the default will further impair the financial situation of the borrower. Bankruptcy then seems the all-but-inevitable consequence. Therefore, creditors usually coordinate in order to adapt financing conditions when a covenant has been breached, rather than declare an event of default and accelerate the loan or bond.⁶⁸ But can this – factual – standard behavior of bond creditors be regarded a transnational legal norm?

This question points to one of the eternal problems of legal theory, the distinction between law and social norms.⁶⁹ From a functional perspective, much is to be said for the proposition that behavioral norms become law as soon as they are integrated into the communicative structures of the legal system.⁷⁰ For the purposes of this chapter, the question does not need to be answered conclusively. Instead, I suggest that behavioral standards in the bond market can and should be reflected in the traditional categories of contract and fiduciary law doctrine (Section 5.4.3).

5.4.2 Transnational Fiduciary Law

This approach implies that the TLO that has emerged in the global bond market is not an autonomous legal system of its own that could be chosen as applicable law under conflict-of-laws rules. Instead, it constitutes and defines the legitimate expectations of the parties that form the basis of fiduciary duties in both common and civil law jurisdictions.

5.4.2.1 Transnational Fiduciary Law as Non-state Law

When standard contracts and usages in transnational bond markets are conceptualized as a legal order in its own right, it becomes possible for market participants to choose them as the law applicable to their contractual relations, based on general conflict-of-laws rules. As a consequence, the existence and scope of fiduciary duties would have to be discussed solely within the system of these privately made norms. The parties would be able to opt out of the relevant state law,⁷¹ at least within the boundaries of international public policy.

It is disputed whether a choice of law can point to non-state law at all. In the US and UK literature, the question is hardly discussed at all.⁷² In Continental Europe, there has been an intense debate on the matter.⁷³ However, it has been largely settled by the EU legislator. The wording of the relevant Article 3 Rome I Regulation and related provisions were put in a manner that limits the permissible choice of law to the “law of a country,” while earlier drafts of the regulation had expressly allowed for a choice of non-state “rules of law.”⁷⁴

5.4.2.2 Transnational Fiduciary Duties in State Law

Thus, even in a field that is largely determined by transnational legal ordering, such as the global bond market, the rights and obligations of market actors, including their fiduciary duties, are subject to state law. Yet, as I will argue, fiduciary duties under both common and civil law must be defined with a view to the transnational dimension of the social field concerned.

(a) Common Law

There is no single overarching theory explaining the imposition of fiduciary duties under the common law.⁷⁵ A particularly convincing attempt at combining the relevant criteria set out by courts and commentators that shall be explored in this chapter has been developed by Finn and further elaborated by DeMott.⁷⁶ The approach has recently gained broader support among courts and commentators in Commonwealth countries.⁷⁷

This approach argues, in brief, that fiduciary duties are based on “justifiable expectations of loyalty.”⁷⁸ Both the identification of fiduciary relationships and the imposition of distinct fiduciary duties rely on this concept. As to the identification of a fiduciary relationship, Finn convincingly argues that it implies an assessment that “cannot be arrived at by any process of strict legal reasoning”⁷⁹: “A variable mix of legal phenomena, factual phenomena, presumptions, and public policy, guide and structure the judgment made when a character is to be attributed to a relationship.”⁸⁰

The expectations-based approach is especially fruitful when applied to the “non-conventional, atypical, fact-based, and informal fiduciary relationships”⁸¹ that might be at play in the Windstream v. Aurelius dispute. Conceptually, it ties in with the often-cited entry in Black’s Law Dictionary, which defines the fiduciary relation as arising “whenever confidence is reposed on one side, and domination and influence result on the other; the relation can be legal, social, domestic, or merely personal.”⁸²

It is rare that fiduciary relationships arise alongside an existing contractual relationship.⁸³ Interestingly, however, Finn makes the case that specifically bank-borrower relationships are prone to give rise to fiduciary relationships: Banks “are not charitable institutions” – yet, the transformation of bank-customer relationships over time, the complexity of financial transactions, and the social role of banks as performing “vital public services” generate justifiable expectations of behavior that are legally protected as a fiduciary relationship.⁸⁴

These justifiable expectations also form the basis for the specific duties arising out of the fiduciary relationship. DeMott identifies a number of circumstances in which an actor has “justifiable expectations of loyalty” toward a potential fiduciary: Such expectations may arise “in the course of the parties’ relationship over time,” based on “an actor’s evident allegiances,” and in case of the beneficiary’s “inability to self-protect.”⁸⁵ Thus, DeMott’s contribution points toward how sociological insights can inform the doctrine of fiduciary duties.

This chapter assumes that a sociologically informed approach to legal doctrine is desirable to the extent that it allows for a “reflexive law” – that is, legal norms that provide legal certainty and at the same time adapt to the circumstances of the social field they regulate.⁸⁶ DeMott’s approach takes an important step in this direction. When she acknowledges the importance of “the course of the parties’ relationship over time,” this comes very close to sociological accounts of the function of “relational norms.”⁸⁷ The concept effectively refers to the mutual expectations of behavior formed by the parties of a bilateral relationship that play a crucial role in transnational legal ordering.

These relational norms are often complemented with expectations of behavior that arise not from the bilateral relationship between two parties, but from the common usage of all market participants. A prime example of the effect of social “roles”⁸⁸: When assuming a certain role, professional or otherwise, or when entering into a specific social field, actors are necessarily subject to a number of generalized expectations of behavior. A lawyer, for example, is expected to behave in a way that is loyal to the interests of her client – because she is a lawyer. In a similar manner, bond market participants are subject to a set of behavioral expectations that are formed by market practice. These generalized expectations play a decisive role in the Windstream v. Aurelius dispute, as will be shown later.

(b) Civil Law

Despite its differing doctrinal framing, the civil law approach to fiduciary duties provides similar “points of entry” for expectations generated in settings of transnational private ordering.⁸⁹ Such a “point of entry” may be found in the prohibition of self-contradictory behavior that forms part of the German concept of fiduciary duties. Similar to the “justifiable expectations” test in the common law approach to fiduciary duties, the principle of consistency may build upon the relational as well as the generalized expectations of behavior held by the actors involved. German commentators expressly refer to the notion of “justifiable expectations” when it comes to spelling out the conditions of the abuse-of-rights doctrine and the prohibition of self-contradictory behavior.⁹⁰

5.4.3 Fiduciary Duties in the Bond Market Revisited

What does this mean for the Windstream v. Aurelius dispute? How can fiduciary law reflect transnational legal ordering in bond markets? The answer turns on the concept of “justifiable expectations” that arguably forms the basis of the relevant doctrines in both common law and civil law jurisdictions. At the same time, it depends on relationship between formal and informal elements in TLOs. The formal rules in transnational standard documentation clearly imply the existence of – very limited – fiduciary duties of bondholders. They do foresee specific situations in which a bondholder might act as a fiduciary of other bondholders. These situations are limited to instances where a bondholder expressly assumes the role of a fiduciary, for example, when they act as an agent of the underwriting banks. In all other instances, bondholders are restrained by majority thresholds or quorums, not fiduciary duties.

In our case, the bond indenture permitted Aurelius to act on Windstream’s covenant violation because Aurelius held 25 percent of the outstanding bonds. Thus, the formalized bond documentation created no expectation on part of other bondholders that Aurelius would not make use of its right to demand immediate repayment of the bond. To the contrary, the imposition of a fiduciary duty restraining Aurelius from doing so would run counter to the declared intentions of the parties.

Informal rules of transnational ordering make the matter more complicated. As market practice diverges from the black letter of the contract, so might the expectations of the parties. If almost all market participants refrain from enforcing bond covenants almost all of the time, this will necessarily give rise to the expectation that a particular covenant will not be enforced in this particular instance.

Is this expectation justifiable in the sense that it should be legally protected by the imposition of a fiduciary relationship and fiduciary duties of loyalty and/or care? This normative question cannot be reduced to a moral evaluation of the conflicting claims of the parties. Instead, it must be answered with a view to the functional rationality of the social field concerned.⁹¹ That bondholders generally make use of covenants only in a coordinated manner is not by chance, and it is neither merely in their self-interest. The factual collectivization of acceleration rights also serves a broader purpose: It helps bondholders to overcome the collective action problem posed by the threat of a creditors’ race. Only if bondholders refrain from accelerating their bonds individually, a solution that is sustainable for all investors can be found.

Thus, it seems highly plausible that both Windstream and other bondholders had a justifiable expectation that Aurelius would not accelerate the bond and cause Windstream’s default. This justifiable expectation should be reflected by fiduciary law doctrine in both common and civil law jurisdictions. Conceptually, it can be framed as a good faith duty to act in accordance with the interests of the bond issuer as well as other bondholders – to the extent that these interests are substantiated in specific expectations of behavior.⁹² Imposing a fiduciary duty on Aurelius to refrain from acceleration would also have a positive side effect on the swap market, as it would limit the potential for information arbitrage for CDS-insured bondholders.

However, imposing on Aurelius a fiduciary duty to refrain from accelerating the bond would mean that the informal expectations formed by participants in transnational markets would effectively render ineffective the formal rules laid down in transnational standard contracts. As these contracts aim at conclusively regulating the collective use of default clauses through majority and quorum requirements, they can be considered as a collective opt-out of fiduciary duties. Is such an opt-out permissible?

The question is highly controversial in both common law and civil law countries.⁹³ In settings of transnational legal ordering, the question needs to be addressed from a somewhat different perspective. If the purpose of fiduciary duties in this context is to preserve the functionality of TLOs, then the bar is set high for justifying the imposition of fiduciary duties on individual market participants. To the extent that formal rules of transnational legal ordering, such as standard contracts, are made and adapted in an inclusive and transparent procedure, it can be presumed that all relevant concerns are adequately reflected in the rules.⁹⁴ Accordingly, it should be left to the transnational rulemaking process to define the reach of fiduciary duties. If formalized transnational rules are silent on the matter, they may be complemented by informal expectations of behavior as default rules. If, in contrast, they clearly aimed at conclusively regulating the duties of market participants, there is no room for imposing fiduciary duties and, through the formalized rules of the standard contracts, market participants opt out of the default rules.

As a consequence, Windstream’s claim against Aurelius would have to be dismissed under both common and civil law rules, as would have to be claims of other bondholders. Even though Windstream and other bondholders had a justifiable expectation based in transnational market practice that the bond would not be accelerated, the relevant transnational standard contracts effectively opt out of the bondholders’ fiduciary duties.

5.5 Conclusion

Under traditional doctrines of fiduciary law in both common and civil law traditions, the practice of net-short debt investing is hard to capture. However, fiduciary law doctrine accepts that justified expectations giving rise to a fiduciary relationship may be formed not only in the bilateral relation between two parties but also in the wider setting of a market or social field. By translating these expectations into legal rights and obligations, fiduciary law can be a powerful tool for enabling and framing private ordering. In this sense, “transnational fiduciary law” stands for an approach that seeks to reinterpret existing doctrines of fiduciary law in light of the specific problems of cooperation arising in transnational settings. Both formal and informal elements of TLOs are thus reflected in the rules and principles of state law.

Under a transnational fiduciary law approach, strategies of net-short debt investing may amount to violations of the fiduciary duty of loyalty. They run counter to the justifiable expectation of bond issuer and other bondholders alike that default provisions in bond indentures are only enforced for securing or facilitating repayment of the bond. This informal expectation of behavior may complement the formalized rules of transnational standard contracts that structure global bond markets. However, market participants may also use standard contracts for collectively opting out of fiduciary duties.

6 The Public Trust as Transnational Law

Seth Davis

6.1 Introduction

The public trust doctrine has been called “the law’s DNA.”¹ The doctrine, it is argued, is rooted in natural law. Its ancient principle – that some waterways are not to be put under private ownership – is one that nearly all peoples have recognized nearly all the time.² Its modern iteration holds that the state is a trustee for natural resources more broadly. Today’s public trust doctrine, some say, “is perhaps the only principle … that can provide a common global platform” for the rule of environmental law in an era of political stagnation and environmental degradation.³ In short, the public trust doctrine “has become internationalized,”⁴ and not a moment too soon.⁵

What, precisely, would it mean to say that the public trust doctrine is internationalized? This chapter addresses that question, which has, as far as I can tell, at least five answers worth examining. My main conclusion is that the public trust doctrine is a transnational legal norm but not a transnational legal order. This thesis will, I recognize, require unpacking. To do that, I apply concepts from Gregory Shaffer and Terence Halliday’s theory of transnational legal orders (TLOs).⁶ My claim is about the processes and degree of transnational normative settlement around the public trust norm.⁷ In a nutshell, the claim is that the public trust doctrine is not a transnational legal order in the way that, say, the rule of law is a transnational legal order.⁸ Put this simply, the claim may seem obvious to anyone familiar with the advocacy of civil society organizations, lawyers, and academics to get governments to embrace the public trust doctrine as an ordering principle for environmental protection and natural resource management.⁹ But my thesis yields nonobvious insights into not only the public trust doctrine but also public fiduciary law.

In using the public trust doctrine as a case study of the transnational dimensions of public fiduciary law, this chapter aims to introduce an empirically focused socio-legal approach into conversations about public fiduciary theory. To date, public fiduciary scholarship has focused upon the juridical properties of fiduciary relationships and the normative values of fiduciary law. Some scholars have made the conceptual claim that public fiduciary law is transnational in scope.¹⁰ In responding to that sort of claim, this chapter suggests the need for rigorous analysis of normative settlement (or lack thereof) around public fiduciary norms. To the extent that public fiduciary theory “outlines an agenda for reform” of transnational law,¹¹ it must confront the challenges of achieving normative settlement in legal practice. The public trust doctrine’s transnational career, so to speak, is a case study in these challenges. And this case study may offer lessons for scholars studying the framing, development, and institutionalization of TLOs, particularly those that draw upon domestic legal norms.

6.2 The Public Trust as a Case Study

The public trust doctrine is a particularly useful case study of transnational normative settlement of public fiduciary norms. Public fiduciary scholars have pointed to the public trust doctrine as an example of the norm of fiduciary government within domestic legal systems.¹² Increasingly, legal actors – particularly, NGOs and legal academics – have framed the problem of transnational environmental regulation in terms of the public trust.¹³

The roots of the modern public trust doctrine are often traced to Roman law through the English common law, although the doctrine has a more limited scope in England today than it does in other common law countries, particularly India and the United States.¹⁴ Contemporary interest in the doctrine owes much to the influence of American legal scholar Joseph Sax, who argued in 1970 that the doctrine may serve as a “tool of general application for citizens seeking to develop a comprehensive legal approach to resource management problems.”¹⁵ In particular, Sax argued that the doctrine authorized courts to “promote equality of political power for a disorganized and diffuse majority” against “self-interested and powerful minorities [who] often have an undue influence” on policymaking.¹⁶

It did not take long for Sax’s vision to influence international lawyers. In 1976, Ved Nanda and William K. Ris argued that the public trust doctrine was a “viable approach to international environmental protection.”¹⁷ More recently, Peter Sand has argued that the public trust can be scaled up from the national to the global level.¹⁸ Mary Christina Wood and Gordon Levitt have described the doctrine as a “macro approach” to natural resource management, suggesting that the “doctrine is perhaps the only principle … that can provide a common global platform of fiduciary duty enforceable by domestic courts.”¹⁹ Raphael D. Sagarin and Mary Turnipseed ask, “[a]s the [doctrine] increasingly manifests in international and comparative contexts, will it … evolve into a central tool for addressing complex global environmental challenges?”²⁰

In this view, which has gained prominence in response to national governments’ failures to address the threat of climate change, there is a problem of politics that traverses all areas of environmental lawmaking and natural resource management and exists at all levels of governance, from the local to the national and the transnational. The problem is one of political dysfunction and myopia.²¹ The public trust is a legal solution to this problem.²²

Thus understood, the public trust doctrine addresses the type of problem that public fiduciary theory aims to address more broadly. Public fiduciary theory holds that public officials generally owe duties of loyalty and care to those subject to their authority, just as a private trustee owes fiduciary duties to her beneficiaries.²³ Thus, public fiduciary theory has aimed to identify the normative entailments of public authority.²⁴ For the normatively oriented scholar, the appearance of trust (or trust-like)²⁵ norms in multiple legal systems across space and time provides some evidence that trust is a constitutive legal concept, and a normatively attractive one at that. This is why discussions of public fiduciary theory may begin by citing examples from classical Greece, the Roman Republic, post-Restoration England, sixteenth-century imperial Spain, the seventeenth-century Dutch Empire, and the League of Nations, among others.²⁶ To the extent that public fiduciary theorists have suggested that fiduciary norms are settled within domestic or international law,²⁷ critics have questioned these suggestions.²⁸

For the most part, however, the question of normative settlement has been neglected with public fiduciary theory. Normative settlement concerns the process by which legal norms become taken for granted by legal actors, particularly those tasked with implementing and applying law.²⁹ Focusing upon normative settlement “can emancipate scholars and practitioners alike from the tenacious premise that a coherent and dominant set of transnational legal norms amounts to anything more than just transnational norms.”³⁰

TLO theory provides a framework for assessing transnational normative settlement. Halliday and Shaffer define a TLO as “a collection of formalized legal norms and associated organizations and actors that authoritatively order the understanding and practice of law across national jurisdictions.”³¹ The aim of a TLO is “to produce order in a domain of social activity or an issue area that relevant actors have construed as a ‘problem’ of some sort.”³² A legal order is “transnational insofar as it orders social relationships that transcend the nation-state.”³³ And an order “is legal insofar as it [1] has legal form, [2] is produced by or in connection with a transnational body or network, and [3] is directed toward or indirectly engages national legal bodies.”³⁴

A transnational norm does not itself constitute a TLO. The existence of a legal norm on the transnational plane does not by itself show normative settlement at national and local levels. When it comes to settlement, the “ultimate test” of the existence of a fully institutionalized TLO is whether actors at the transnational, national, and local levels share “a set of legal norms that they simply take for granted as being appropriate in a particular situation.”³⁵ A TLO, moreover, may be more or less aligned with the problem (or “issue area”) that it aims to address.³⁶

The upshot is that there is more than one sense in which the public trust doctrine, or, more generally, public fiduciary norms, may (or may not) “become internationalized.”³⁷ Some scholars, for example, have focused upon identifying public trust norms in domestic laws and judicial opinions.³⁸ Others focus instead upon international organizations.³⁹ Still others may point to both domestic and international law, often without theorizing the relationship between the two. Joseph Orangias’s recent work makes an important advance through a process-oriented approach that distinguishes between “internalisation,” defined as the spread of public trust norms across national borders, and “transnationalisation,” defined as the application of public trust norms to transnational management of resources.⁴⁰

To preview the analysis that follows in the next two parts of this chapter, there are at least five ways in which we might say that the public trust doctrine is “transnational” or “international.” First, the point might be simply that the public trust doctrine or its functional equivalent appears in multiple legal systems. This comparative law point does not necessarily tell us much, if anything, about transnational processes of normative framing, development, and settlement. Second, we might assess the degree of convergence on the public trust framing across multiple domestic legal systems. That is, we might be interested in whether domestic legal actors themselves frame problems in terms of the public trust. The point here is not simply that there are functional equivalents to the public trust doctrine. Rather, the point is that domestic legal actors, such as courts (but not only courts), have adopted public trust norms to frame and address problems of environmental policymaking and natural resource management. Third, we might go beyond domestic law to say that the public trust doctrine is a transnational norm in the sense that civil society, acting in ways that cross the national borders, employs it as a frame to construct and respond to social problems. The public trust doctrine is a transnational norm both in the sense that we see some convergence upon it across domestic legal system and the sense that civil society has mobilized it as a frame for transnational advocacy. Fourth, we might analyze whether and to what extent the public trust doctrine has been institutionalized in a particular problem area through a TLO. There are “micro-TLOs” for specific resource management problems that incorporate public trust norms.⁴¹ Studying the successes and failures of these TLOs sheds light upon the obstacles to normative settlement around the public trust doctrine. Finally, we might ask whether the public trust doctrine has become a “meta-TLO” that cuts across multiple legal orders and generally frames legal responses to problems of environmental law and resource management.⁴² There have been calls for the creation of a meta-TLO based in public trust norms. But no such meta-TLO exists.

6.3 The Public Trust as a Transnational Norm

All countries face the problem of political dysfunction in environmental policymaking and natural resource management. The public trust doctrine provides a legal solution by authorizing courts to review policymaking for compliance with fiduciary norms. To the extent that multiple legal systems have converged on this solution, especially as the result of transnational processes such as horizontal judicial dialogue and civil society advocacy, the public trust doctrine is a transnational norm.⁴³

In recent years, scholars of environmental law have argued that the public trust doctrine is transnational in this sense. Michael Blumm and Rachel Guthrie argue that the doctrine has been adopted not only in the United States, where it has a long history, but also in eleven other domestic legal systems, including India, where it has a broader scope than in US law.⁴⁴ In each country, they argue, public trust norms have emerged as a solution to a similar problem of environmental policymaking and natural resource management. Sand has similarly argued that the public trust doctrine is emerging as a common legal solution to the problem of politics in environmental law.⁴⁵ As Wood summarizes the scholarship, there has been convergence across multiple legal systems on the general norm that there “is a public property right” in some natural resources “and corollary sovereign obligation” to manage those resources for the benefit of the public.⁴⁶

There are transnational dimensions to the modern convergence around this norm. For one, the cases reveal a “transnational judicial dialogue” concerning the public trust.⁴⁷ In M. C. Mehta v. Kamal Nath, for example, the Supreme Court of India discussed modern US public trust law and Professor Sax’s article at great length before declaring the doctrine to be “the law of the land.”⁴⁸ Recent public trust litigation concerning climate change, much of it brought or at least supported by the Children’s Trust, a US-based NGO, has aimed to foster this sort of transnational dialogue.⁴⁹ International governmental organizations have also lent some support to the transnational dialogue concerning the public trust. In its first-ever Global Report on the Environmental Rule of Law, the United Nations Environment Programme (UNEP) discussed a decision of the Lahore High Court in Pakistan as an example of an effective rights-based approach to environmental protection.⁵⁰ In addition, the UNEP’s compendium of judicial decisions has included and identified public trust cases from various jurisdictions.⁵¹

To the extent that the public trust doctrine’s origins are in Roman law, it is unsurprising to see public trust norms in multiple modern legal systems. Moreover, given British imperialism in the nineteenth and early twentieth centuries, and American hegemony in the twentieth and twenty-first centuries, we might expect to see a doctrine of Anglo-American common law appear around the globe, whether we call that process “transplantation”⁵² or something else. But existing scholarship risks overstating the degree of convergence by understating the complexity of fiduciary law.

In analyzing the public trust doctrine as a transnational norm, it is important to distinguish between the existence of functional equivalents and convergence upon the public trust doctrine. A comparativist may interpret a law as responding to a social problem.⁵³ From there, “[t]he comparativist will look for a law in a different legal system that can be interpreted to perform a similar function.”⁵⁴ The presumed similarity between functional equivalents is limited. Two legal institutions from different systems may be “similar in one regard (namely in one of the functions they fulfill) while they are (or at least may be) different in all other regards – not only in their doctrinal formulations and concrete modes of resolving a problem, but also in the other functions or dysfunctions they may have besides the one on which the comparatist focuses.”⁵⁵ Thus, a comparative law perspective, if anything, may be important in bringing our attention to the differences between legal norms and institutions.⁵⁶

When it comes to the public trust doctrine, the differences between legal systems may begin with the definition of the general norm. Is the function of the public trust doctrine to address abuses of trust? Or, is the function to recognize public rights? Within common law countries, the public trust doctrine has allocated the ownership of some resources into public rather than private hands.⁵⁷ There are, moreover, similarities between this aspect of the public trust doctrine and principles in some civil law countries, including the concepts of Sozialpflichtigkeit and öffentliche Sachen in German law, not to mention the concepts of domaine public and droit de garde in French law,⁵⁸ as well as concepts within Spanish law, Mexican law,⁵⁹ Ecuadorian law, and Brazilian law.⁶⁰ In particular, the notion that public rights to navigable waterways limit their privatization enjoys widespread acceptance.⁶¹

But treating the “public trust” and “public rights” as synonyms may obscure more than it reveals. It makes a difference whether a legal norm’s aim is to address problems of political dysfunction – that is, whether one’s concern is to constrain the political branches from pursuing private interests and thus abusing the public trust reposed in them. Empowering a national ministry to protect public rights to particular natural resources, as various countries have done, is not the same as empowering the judicial branch to review the political branches’ decision-making for compliance with fiduciary norms.⁶²

As I have argued elsewhere, focusing upon an abstract “public trust” norm tells one little about the law on the books, much less the law in action. The state may be a trustee for natural resources, but what does that mean, and how are its duties implemented? Much of “the bite” of fiduciary law lies in implementation of the conduct and decision rules that specify the duties that the public trust norm entails.⁶³ Across legal systems, there may be significant variation in the relationship between these conduct and decision rules – particularly where, as in the case of fiduciary law, the two types of rules “often diverge.”⁶⁴ And to the extent that fiduciary law rests upon “informal social norms” for its implementation,⁶⁵ comparative legal analysis should highlight variations in such norms and understandings of social roles.

There is significant variation among (and within) jurisdictions in the conduct and decision rules that implement explicit public trust norms. Even within the United States, which, along with India, has one of the most well-developed public trust doctrines, there is considerable variation among the various subnational governments as to which types of resources the public trust covers and what legally enforceable duties are imposed upon public trustees. Some US states hew closely to the historical scope of the doctrine, which was limited to a prohibition on the privatization of watercourses, while others apply the doctrine more broadly to reach resources other than navigable waterways and to impose procedural and substantive obligations on government actors.⁶⁶ There is also considerable variation among common law countries. Though often cited as the source of the public trust doctrine, including in India and the United States, English common law recognizes a much narrower version of the doctrine.⁶⁷ The public trust norm has “had little influence”⁶⁸ in Australia and has played a more limited role in Canada than some comparative analyses suggest.⁶⁹

There is also variation in the public trust (or trust-like) conduct and decision rules across civil law countries and between civil law and common law countries. Indeed, it is a fair question whether the doctrine’s “methodology and terminology is essentially derived from the Anglo-American law of charitable trusts.”⁷⁰ Sand, for example, compares the public trust doctrine in India with the role of the Nature Conservation Board in Sweden and the Environment Ministry in Italy.⁷¹ Here, the differences among the legal systems are instructive. In India, the doctrine imposes robust constitutional duties on government actors regarding a wide range of environmental resources and directs courts to review their actions closely for abuse of trust.⁷² In Sweden, the Nature Conservation Board plays an “Ombudsman” role for the protection of natural resources,⁷³ while the Environment Ministry in Italy may sue on behalf of the public for damage to the environment.⁷⁴ In the Swedish and Italian examples, the Nature Conservation Board and the Environment Ministry involve governmental representation of the public in confronting threats to the environment, while the Indian public trust doctrine is as much, if not more, concerned with the threats that the government may pose to the environment. This is a familiar distinction from a fiduciary law perspective; as I have argued elsewhere, the public trust norm may play the role of empowering government to act or the role of constraining government action.⁷⁵

Finally, there is significant variation in the institutional frameworks for implementing the doctrine and the degree of implementation at the local level. Consider first the role that institutions play. Within US law, the modern public trust doctrine conjures images of private citizens and NGOs litigating on behalf of the public and requesting judicial review of actions taken by the political branches. This image no doubt reflects the important role that impact litigation plays in the politics of the United States. Thus, the public trust doctrine in US law is as much an institutional and cultural choice for litigation to solve social problems, as it is a body of conduct and decision rules. That may also be the case in India, which has a mechanism for direct petition to the Supreme Court in cases of national significance, including the canonical public trust cases in Indian law.⁷⁶ The doctrine does not play the same institutional role elsewhere, as we have already seen.

Implementation of the doctrine at the local level varies as well across and within jurisdictions. Within the United States, where the doctrine is well developed, there is such variation. In the United States, for example, courts have generally not applied the public trust doctrine to the national political branches, which is practically significant insofar as the national government owns and manages a great deal of land in the American West, as much as 90 percent in some states.⁷⁷ There is, to cite another example, no case law in Nigeria on the scope of the public trust doctrine and the duties it entails, though scholars have cited Nigerian law as implicitly recognizing the public trust norm.⁷⁸ And although South Africa has expressly incorporated the public trust into its law, “in the 21 years since the promulgation of South Africa’s constitution and environmental legislation, and there has been little academic and legal recognition of the public trust provisions.”⁷⁹

There has been some convergence around public trust principles across domestic legal systems, particularly around the notion that some resources (such as watercourses) are subject to public rights. But once we move beyond the general public trust norm to consider conduct and decision rules, institutional design, and local implementation, there is significant variation across national legal systems.

6.4 The Public Trust as a Transnational Legal Order

The existence of a transnational norm does not by itself show the existence of a TLO. Put simply, norms may cross national boundaries without settling at the transnational, national, and local levels in such a way as to impact behavior at all these levels. That is the “ultimate test” of a TLO.⁸⁰

The Ramsar Convention⁸¹ on wetlands conservation provides an intuitive and important example of the distinction between a transnational norm and a settled TLO. The Ramsar Convention is about the heartland of the public trust doctrine: wetlands. If anything, then, we would expect to see significant normative settlement around implementation of the Ramsar Convention norms. What we see, however, is a transnational norm that has not settled to shape behavior at the national and local levels. The Convention is one of the first environmental law treaties with a “global scope,”⁸² and has “near-universal membership (171 parties [as of March 2021]).”⁸³ The contracting parties have agreed, among other things, to designate at least one wetland within their borders for conservation, to promote “as far as possible, the wise use of wetlands in their territory,” to monitor the state of wetlands, and to consult and coordinate among themselves regarding wetlands protection.⁸⁴ The Ramsar system includes Advisory Missions tasked with monitoring and reporting on noncompliance.⁸⁵ Yet the data on wetlands protection tells a sobering story: roughly 35 percent of wetlands worldwide have been “lost over the Convention’s life.”⁸⁶

The Convention provides not only evidence of a transnational norm – conservation and “wise use” of wetlands – that is at the core of the public trust doctrine, but also evidence that this transnational public trust norm has not become a TLO. The Convention’s “very general” and “somewhat vague” norms have not induced widespread practices of wetlands stewardship.⁸⁷ Its reliance upon listing and reporting and “shaming states into better protection” has had limited effect.⁸⁸ That is not to suggest that the Convention has no effect. Political actors within a country, as well as transnational NGOs, may use the Convention to frame their advocacy as against “competing domestic concerns.”⁸⁹ Even in those cases where the Convention provides “overarching concepts” for domestic advocacy and negotiation, it may still “play[] a limited role” in actually ordering behavior.⁹⁰ What we do not see is transnational normative settlement at the national and local levels. Instead, “the impact of the Ramsar Convention on national wetlands protection policies has been negligible.”⁹¹

The Ramsar Convention’s failure speaks to the challenge of constituting a TLO based upon fiduciary law. Of course, this failure no doubt has something to do with the Convention’s particular features, such as its choice of voluntary compliance mechanisms. But it also has something to do with the opacity of fiduciary norms. One of the often-observed features of fiduciary law is its moralizing rhetoric. Fiduciary law “embraces abstract moral injunctions of loyalty and care.”⁹² At a high level of generality, there may be normative agreement about fiduciary duties, which may explain why there is near-universal agreement to the “wise use” principle of the Ramsar Convention. But when it comes to the legal ordering of behavior, the challenge is to institutionalize and implement fiduciary law’s moral injunctions. That the Ramsar Convention has failed to do.

In understanding the problem of normative settlement, we can usefully contrast the Ramsar Convention with another contemporaneous TLO that incorporates public trust norms: the 1972 UNESCO Convention Concerning the Protection of the World Cultural and Natural Heritage.⁹³ The initial draft of the Convention, submitted to UNESCO by the head of the United States Council on Environmental Quality (US CEQ), a division of the Executive Office of the President, was titled the “World Heritage Trust Convention.”⁹⁴ The Nixon White House had proposed the creation of a “world heritage trust” the prior year,⁹⁵ as had a 1965 White House Conference on International Cooperation.⁹⁶ US-based environmental NGOs, such as the Sierra Club, repeated these proposals.⁹⁷ Thus, the Convention emerged in no small part from efforts by the United States to upload the public trust norm to the transnational domain.

The Convention can be understood as creating a “transnational public trusteeship.”⁹⁸ The Convention provides for a process for a state to propose that the World Heritage Committee designate a world heritage site within the state’s borders,⁹⁹ requires an accounting from host countries of the steps they have taken to conserve these sites, and has been implemented at the transnational level through the World Heritage Committee as well as international tribunals and at the local level through private enforcement in courts.¹⁰⁰ This regime, which has 194 state parties,¹⁰¹ is a “highly concordant TLO.”¹⁰² It has a high degree of normative settlement at the transnational level (i.e., the World Heritage Committee and international tribunals), the national level (i.e., the state parties, which identify sites for designation and enact implementing legislation),¹⁰³ and the local level (i.e., through judicial enforcement and advocacy by civil society organizations, which may include appeals to local, national, and international media, as well as efforts by private corporations to conserve heritage sites).¹⁰⁴ Such a regime is not a private trust,¹⁰⁵ but the World Heritage TLO resembles the public trust doctrine insofar as it involves a state’s obligations to manage a specific res for the benefit of the public and to account for that management.

The United Nations Convention on the Law of the Sea (UNCLOS)¹⁰⁶ is another example of a TLO that can be understood in public trust terms. This Convention addresses a range of problems arising from the “freedom-of-the-seas” doctrine, which held that the seas and offshore resources were generally open to all. Article 136 of UNCLOS proclaims that the deep seabed and “its resources are the common heritage of mankind.”¹⁰⁷ Much like the traditional common law public trust doctrine, the Convention proscribes alienation of these common resources. It further imposes duties upon states to protect such resources and specifies that activities in the area shall be “for the benefit of mankind as whole.”¹⁰⁸ The Convention established the International Seabed Authority (ISBA) to manage the extraction of mineral resources from the international seabed.¹⁰⁹ Commentators have described this regime in terms of a public trust, with the ISBA acting as trustee of a specific res (namely, submarine mineral resources) for the global public.¹¹⁰ With 167 state parties, the UNCLOS regime is a relatively settled one, though, notably, the United States has signed but not ratified the Convention, which undermines implementation of some of its provisions.¹¹¹

From one vantage, UNCLOS and the World Heritage Convention may be understood as TLOs within separate issues spaces. UNCLOS addresses problems of resource management on and underneath the seas, while the World Heritage Convention addresses preservation of culturally and historically significant sites. They may thus be seen as responding to different social problems and thus as having little to do with one another.

From another vantage, however, UNCLOS and the World Heritage Convention may be understood as micro-TLOs that address different aspects of the same problem. Daniel Bodansky has developed the concept of a “micro-TLO” in the context of assessing transnational legal responses to climate change.¹¹² There is no encompassing TLO that addresses climate change, Bodansky argues, but there are “micro-TLOs … with more limited legal or geographical scope.”¹¹³ Such micro-TLOs may provide order within “one or another part of the issue ‘space.’”¹¹⁴ For instance, within the climate change issue space, there appears to be an emerging micro-TLO for emissions from maritime transport.¹¹⁵

UNCLOS and the World Heritage Convention can be described as micro-TLOs insofar as they both are transnational legal orderings that address the general problem of resource management and environmental protection. Both TLOs respond to the issue of ensuring that governments manage particular shared resources in the public interest. And both address that issue by imposing trust (or at least trust-like) duties.

From the perspective of TLO theory, whether to view UNCLOS and the World Heritage Convention as micro-TLOs depends upon how relevant social actors construct the problem each addresses. If, pace Bodansky, one is concerned with the problem of climate change, UNCLOS and the World Heritage Convention might be seen as micro-TLOs that address different aspects of that problem by incorporating public trust principles into international law.¹¹⁶ To the extent that one thinks of the problem in terms of global environmental regulation and resource management, it makes sense to view the two regimes as micro-TLOs that address different aspects of a common problem. This possibility suggests a more ambitious role for the public trust in transnational law.

In this more encompassing sense, the public trust doctrine might be seen as a “meta-TLO” – that is, a frame for the rule of (environmental) law. Jothie Rajah has developed the concept of a “meta-TLO” to understand transnational rule of discourse, which “frames and contextualizes all efforts to manage and regulate law, legitimacy, and conceptions of legality in the sphere of the transnational.”¹¹⁷ The concept of a meta-TLO thus seeks to describe a TLO that serves as a frame or an “umbrella category” for other TLOs.¹¹⁸

Proponents of an encompassing public trust TLO have suggested that it may serve as a frame for environmental regulation and natural resource management, both domestic and transnational. Civil society organizations as well as legal academics have called for a meta-TLO based upon environmental trusteeship. As Klaus Bosselmann has described, for example, the Ecological Law and Governance Association, a “global network of lawyers and environmental activists,” has established the Earth Trusteeship Initiatives, which published the Hauge Principles for a Universal Declaration on Responsibilities for Human Rights and Earth Trusteeship.¹¹⁹ While the Hague Principles sweep more broadly than the public trust doctrine, as they state trusteeship obligations for all human beings, Bosselmann draws upon public fiduciary theory to make the legal argument for trusteeship as a meta-principle.¹²⁰

The public trust doctrine is not yet a meta-TLO. The most obvious example to prove this point is the failure of proposals to reconstitute the Trusteeship Council as a public trustee for the global environment. The Trusteeship Council was established pursuant to Chapter XIII of the Charter of the United Nations and tasked with monitoring “the political, economic, social, and educational advancement of the inhabitants of each trust territory” administered by UN members.¹²¹ In 1994, the Council was suspended once Palau, the last trust territory, became an independent nation-state.¹²² Several years later, UN Secretary-General Kofi Annan proposed a reconstitution of the Council with a new mandate: global environmental protection.¹²³ Ultimately, the proposal went nowhere. Instead, following the 2005 World Summit, the General Assembly proposed eliminating Chapter XIII of the Charter and with it the Trusteeship Council.¹²⁴ The Trusteeship Council, it concluded, “has no remaining functions.”¹²⁵

The failure of Secretary-General Annan’s proposal may not be surprising. The concept of trusteeship has a long and ignominious colonial history, as does the Trusteeship Council.¹²⁶ Moreover, refashioning the Council’s mandate to focus on environmental protection would require an amendment to the Charter, which is rare.¹²⁷

In imagining other possibilities for the emergence of a meta-TLO, it is worth focusing upon the interaction between international legal commitments and domestic litigation. Particularly interesting is the potential for interaction between the Paris Agreement and domestic litigation. The Paris Agreement itself can be understood in terms of a public trust norm; for example, the Agreement requires states to account for their nationally determined contributions (NDCs),¹²⁸ which might be analogized to a fiduciary’s duty to account. Scholars have begun to chart not only the increase in climate change suits in domestic courts since the Agreement’s adoption,¹²⁹ but also the “cross-level” interactions between the Paris Agreement and domestic climate change litigation.¹³⁰ Litigants use multiple frames for such litigation, including human rights frames, tort law frames, and the public trust doctrine.¹³¹

In domestic public trust litigation, advocates have characterized the public trust as a transcendent principle of sovereignty.¹³² A group of leading American legal scholars, for example, recently described the doctrine as an “inherent limit on sovereignty” in an amicus brief before the US Supreme Court.¹³³ Legal practitioners and NGOs have also pointed to this understanding of the public trust, while courts in multiple countries have expressly incorporated the public trust doctrine as a principle of natural law. The Indian Supreme Court, for example, recognized the doctrine as one “of the laws of nature [that] must … inform all of our social institutions.”¹³⁴ Similarly, the Supreme Court of the Philippines reasoned that the doctrine, which it incorporated into Filipino law, “may even be said to predate all governments and constitutions.”¹³⁵ The more recent Urgenda decision of the Hague District Court, which has garnered global attention, concluded that the state’s duty of care includes an obligation to adopt climate change mitigation measures, a holding that may be understood in public trust terms.¹³⁶

Public trust litigation in various countries occurs in connection with transnational organizations and networks. For example, the United Nations Environment Programme’s first Environmental Rule of Law Global Report pointed to public trust litigation in Pakistan as a case study of the potential for litigation to address climate change.¹³⁷ Echoing Wood’s characterization of the problem of environmental lawmaking today, the UN Report found that while there has been “a dramatic growth” of environmental laws and regulatory institutions, the rule of law is failing the global environment.¹³⁸ Instead of decisive regulatory action by political branches of government, there is widespread delay.¹³⁹ In the face of this delay, the UN Report proposed the adoption of rights-based approaches to environmental protection.¹⁴⁰ As an example, the Report pointed to Ashgar Leghari v. Federation of Pakistan, in which the Lahore High Court held that the Pakistani government’s delay in responding to climate change violated the constitutional rights of Pakistani citizens, including their rights under the public trust doctrine.¹⁴¹ Similarly, in 2017, the UN Environment Programme and the Sabin Center for Climate Change Law at Columbia University published a report on global climate change litigation that discussed the “relevance of the public trust doctrine to governments’ approaches to climate change mitigation and adaptation.”¹⁴²

Despite these connections with governance on a transnational level, it cannot be said that public trust litigation has led to the formation of a settled TLO. Much of the litigation is recent and ongoing. The reticence of some national courts to enforce public trust principles suggests that any emerging normative settlement may be fragile or at least limited in scope. The progression of the Juliana litigation in the United States is an example. In Juliana v. United States, the Children’s Trust, an NGO based in the United States that focuses upon bringing public trust litigation to force governments to take additional steps to address climate change, won a major victory when a US federal district court held that the federal government is a trustee of natural resources with fiduciary duties to current and future generations.¹⁴³ The trial court pointed to the natural law understanding of the doctrine, which it held that had been incorporated into US law through English common law.¹⁴⁴ But a federal appeals court reversed on jurisdictional grounds, holding that the US federal courts did not have authority “to order, design, supervise, or implement the plaintiffs’ requested remedial plan” in light of the “complex policy decisions entrusted, for better or worse, to the wisdom and discretion of the executive and legislative branches.”¹⁴⁵ Thus, in some jurisdictions, including the United States, in which the modern public trust doctrine was born, the future of public trust litigation as a response to transnational environmental problems is in doubt.

6.5 Conclusion

The flexibility of the trust concept invites us to frame a variety of legal relationships in fiduciary terms. But this same flexibility poses a challenge to a socio-legal analysis that seeks to understand the ways in which actors settle (or not) on a legal order to address those problems. From this perspective, which focuses upon normative settlement, the distinction between transnational norms and transnational legal orders matters.

This chapter aimed to clarify the ways in which we might think about the question, “has the public trust doctrine become internationalized?” It showed that public trust doctrines or their functional equivalents appear in multiple legal systems. But the existence of functional equivalents by itself is not evidence of transnational normative settlement. There has been some convergence among relevant actors (domestic courts, but not just courts, for instance) on the public trust framing of problems in environmental law and natural resource management. The degree of convergence is easily overstated, however. The convergence among domestic courts on public trust norms has occurred in part as a response to the advocacy of transnational civil society actors and organizations that have mobilized it as a framework. In so doing, they may point to examples of micro-TLOs that incorporate public trust principles to address specific resource management problems. They may also learn lessons from the failures of some transnational norms, such as the Ramsar Convention’s “wise use” norm for wetlands conservation, to settle into full-fledged TLOs. Whether domestic litigation strategies, shaped in light of international standards such as those in the Paris Agreement, can overcome the challenge of implementing open-ended standards of fiduciary responsibility and lead to the formation of a meta-TLO based upon the public trust remains to be seen.