uropean corpor ecg ernance institute Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory Law Working Paper Katharina pistor October 2002 Columbia law School Chenggang Xu London school of economics Political science (LSE) and CEPR C Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit per- mission provided that full credit, including C notice. This paper can be downloaded without charge from: http://ssrn.com/abstractid=343480 www.ecgi.org/wp
Law Working Paper N°. 01/2002 October 2002 Katharina Pistor Columbia Law School Chenggang Xu London School of Economics & Political Science (LSE) and CEPR © Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. This paper can be downloaded without charge from: http://ssrn.com/abstract_id=343480 www.ecgi.org/wp Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory
european corporate governance instituto ECGI Working Paper Series in Law Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory* Working Paper N. 01/2002 October 2002 Katharina pistor enggang Au *We are indebted to Dimitri Gavriline, Moscow(Russia), and Professor Stanislaw Soltysinski Warsaw(Poland) for locating relevant case law. We would also like to thank participants at the authors' workshop and the conference on"Global Markets, Domestic Institutions: Corporate Law ind governance in a new era of cross-border deals"held at Columbia law school in October 2001 and April 2002 respectively. Special thanks to our commentator at the conference, Reinier Kraakman, and to the participants at the seminar on Politics, Law and Development and NYU Law School, in particular to the chair of that seminar, Lewis Kornhauser. All remaining errors are those of the authors o Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including C notice, is given to the source
ECGI Working Paper Series in Law Working Paper N°. 01/2002 October 2002 Katharina Pistor Chenggang Xu Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory* *We are indebted to Dimitri Gavriline, Moscow (Russia), and Professor Stanislaw Soltysinski, Warsaw (Poland) for locating relevant case law. We would also like to thank participants at the authors’ workshop and the conference on “Global Markets, Domestic Institutions: Corporate Law and Governance in a New Era of Cross-Border Deals” held at Columbia Law School in October 2001 and April 2002 respectively. Special thanks to our commentator at the conference, Reinier Kraakman, and to the participants at the seminar on Politics, Law and Development and NYU Law School, in particular to the chair of that seminar, Lewis Kornhauser. All remaining errors are those of the authors. © Katharina Pistor and Chenggang Xu 2002. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source
Abstract In Anglo-American law, fiduciary duty is the core legal concept to address conflicts among directors/managers and shareholders. The concept is developed and constantly refined by courts in the process of adjudication. By contrast, most civil law jurisdictions, including many transition economies, either lack the procedural rules that would enable parties to bring such cases to courts, or have not developed a sufficient body of case lay to determine the contents and meaning of this concept. This paper asks, whether courts should be allocated the right to define and enforce fiduciary duty principles. Based on our theory of the incompleteness of law, this paper argues that when law is highly incomplete, but the expected harm can be contained and does not cause externalities, allocating lawmaking and law enforcement to courts is optimal. Breaching fiduciary duty is such an area, as harm is typically limited to shareholders of a given company. While courts in transition economies may have difficulties living up to the task of exercising lawmaking rights in this area, we propose that there are few alternatives and that encouraging an active learning process should therefore be encouraged. We investigate emerging case law on the duty of loyalty in Poland and Russia and draw some comparisons to German case law Keywords: incomplete law, transition economies, fiduciary duty, law enforcement JEL Classifications K10 K23 K40. K42 P3 Katharina pistor Columbia Law school 435 West 116th Street New York NY 10027 United States phone:212-854-0068,fax:212-854-7946 e-mail: kpisto@law. columbia. edu Chenggang Xu Department of Economics London School of Economics Political Science(LSE) Houghton Street London wc2a 2AE United Kingdom phone:+44-207-7955-7526,fax:+44-207-7831-1840 e-mail: cxu@lse. ac uk
Abstract In Anglo-American law, fi duciary duty is the core legal concept to address confl icts among directors/managers and shareholders. The concept is developed and constantly refi ned by courts in the process of adjudication. By contrast, most civil law jurisdictions, including many transition economies, either lack the procedural rules that would enable parties to bring such cases to courts, or have not developed a suffi cient body of case law to determine the contents and meaning of this concept. This paper asks, whether courts should be allocated the right to defi ne and enforce fi duciary duty principles. Based on our theory of the incompleteness of law, this paper argues that when law is highly incomplete, but the expected harm can be contained and does not cause externalities, allocating lawmaking and law enforcement to courts is optimal. Breaching fi duciary duty is such an area, as harm is typically limited to shareholders of a given company. While courts in transition economies may have diffi culties living up to the task of exercising lawmaking rights in this area, we propose that there are few alternatives and that encouraging an active learning process should therefore be encouraged. We investigate emerging case law on the duty of loyalty in Poland and Russia and draw some comparisons to German case law. Keywords: incomplete law, transition economies, fiduciary duty, law enforcement JEL Classifications: K10, K23, K40, K42, P3 Katharina Pistor Columbia Law School 435 West 116th Street New York NY 10027 United States phone : 212-854-0068 , fax : 212-854-7946 e-mail : kpisto@law.columbia.edu Chenggang Xu Department of Economics London School of Economics & Political Science (LSE) Houghton Street London WC2A 2AE United Kingdom phone : +44-207-7955-7526 , fax : +44-207-7831-1840 e-mail : c.xu@lse.ac.uk
Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete law Theory Katharina pistor Chenggang Introduction Fiduciary duty is a core concept in Anglo-American corporate law for delineating the rights and responsibilities of directors and managers, as well as dominant shareholders vis-a-vis minority shareholders. Yet its precise meaning is difficult to discern without reference to a large body of case law. Judge-made law has over time carved out a subset of specific obligations and standards of conduct derived from this principle. Most widely accepted are the duty of care and the duty of loyalty, where the duty of loyalty refers to situations in which conflict of interest is present. The meaning of each of these obligations is explained by referring to a subset of more specific obligations. Some of these obligations have been codified This is true in the US, for example, for the duty to disclose material information to investors and shareholders. Those that have not. or where codification still left sufficient room for I The Securities and Exchange Act includes numerous provisions that could be regarded as a pecification of directors duties vis-a-vis their investors. Similarly, state takeover rules specify the standards of behavior of directors in a takeover situation. Yet, most of these provisions remain rather ambiguous and require further specification by courts
Fiduciary Duty in Transitional Civil Law Jurisdictions Lessons from the Incomplete Law Theory Katharina Pistor and Chenggang Xu Introduction Fiduciary duty is a core concept in Anglo-American corporate law for delineating the rights and responsibilities of directors and managers, as well as dominant shareholders vis-à-vis minority shareholders. Yet its precise meaning is difficult to discern without reference to a large body of case law. Judge-made law has over time carved out a subset of specific obligations and standards of conduct derived from this principle. Most widely accepted are the duty of care and the duty of loyalty, where the duty of loyalty refers to situations in which conflict of interest is present. The meaning of each of these obligations is explained by referring to a subset of more specific obligations. Some of these obligations have been codified.1 This is true in the US, for example, for the duty to disclose material information to investors and shareholders. Those that have not, or where codification still left sufficient room for 1 The Securities and Exchange Act includes numerous provisions that could be regarded as a specification of directors’ duties vis-à-vis their investors. Similarly, state takeover rules specify the standards of behavior of directors in a takeover situation. Yet, most of these provisions remain rather ambiguous and require further specification by courts
ambiguity as to the scope and meaning of the law, are derived by courts in the process lJuaication Thus, in Anglo-Saxon countries, courts are in charge of determining the boundaries of managers' obligations to shareholders boundaries. which are inherently difficult to circumscribe exhaustively. As Clark puts it, this general duty of loyalty is a residual concept that can include factual situations that no one has foreseen and categorized"( Clark 1986: 141). The broad and encompassing nature of Fiduciary Duties appears to be a crucial factor in explaining the importance it has acquired in Anglo-American jurisdictions( Clark 1986: Coffee 1989, Eisenberg 2000 Johnson et al. 2000). It has allowed courts to take account of the changing nature of the business enterprise while maintaining at least the semblance of undisputed principles for determining what is right and what is wrong in corporate conduct As many have pointed out, the corporate law in the U.S., especially in Delaware has developed from a(fairly) prohibitive, or mandatory law into an enabling corporate law, which allows shareholders to opt out of many legal provisions and substitute their own contractually determined arrangements( Coffee 1989);(Black and Kraakman 1996). Nevertheless, shareholders (or rather those controlling the process of charter and by-law making) have not been able to opt out of the principle of fiduciary duty, which has gained in importance as the law has become more enabling (Coffee 1989). The contrast with corporate law in many civil law jurisdictions is stark. German law, for example, explicitly states that all provisions of the corporate law are mandatory, except where otherwise stated, and courts have not played an Compare Sec. 23 of the German Law on Joint Stock Companies(AktG)
4 ambiguity as to the scope and meaning of the law, are derived by courts in the process of adjudication. Thus, in Anglo-Saxon countries, courts are in charge of determining the boundaries of managers’ obligations to shareholders – boundaries, which are inherently difficult to circumscribe exhaustively. As Clark puts it, “this general duty of loyalty is a residual concept that can include factual situations that no one has foreseen and categorized” (Clark 1986:141). The broad and encompassing nature of Fiduciary Duties appears to be a crucial factor in explaining the importance it has acquired in Anglo-American jurisdictions (Clark 1986; Coffee 1989; Eisenberg 2000; Johnson et al. 2000). It has allowed courts to take account of the changing nature of the business enterprise while maintaining at least the semblance of undisputed principles for determining what is right and what is wrong in corporate conduct. As many have pointed out, the corporate law in the U.S., especially in Delaware, has developed from a (fairly) prohibitive, or mandatory law into an enabling corporate law, which allows shareholders to opt out of many legal provisions and substitute their own contractually determined arrangements (Coffee 1989); (Black and Kraakman 1996). Nevertheless, shareholders (or rather those controlling the process of charter and by-law making) have not been able to opt out of the principle of fiduciary duty, which has gained in importance as the law has become more enabling (Coffee 1989). The contrast with corporate law in many civil law jurisdictions is stark. German law, for example, explicitly states that all provisions of the corporate law are mandatory, except where otherwise stated,2 and courts have not played an 2 Compare Sec. 23 of the German Law on Joint Stock Companies (AktG)
important role in determining the rights and wrongs of corporate conduct, at least not for publicly held corporations The same qualities that make the concept of fiduciary duties so resilient over time make it extremely difficult to transplant to other legal systems. The meaning of fiduciary duty cannot easily be specified in a detailed legal document. Attempts to do so will either leave out many actions or factual situations no one has foreseen or categorized(Clark 1986), or will be phrased so broadly that the meaning can be understood only in the context of specific cases. Thus, transplants of substantive rules can at best be partial In this paper, we investigate alternative strategies for countries wishing to develop the institutional framework for effective enforcement of fiduciary duties. A major proposition is that it might be advisable to shift attention from substantive to structural transplants, or put differently, to focus more on the allocation of lawmaking and law enforcement powers(LMlEp)than on the contents of specifi legal rules The process of legal reform in transition economies to date has entailed primarily the transplantation of statutory law from Western European or U.S. legal sources (Pistor 2000). These transplants have focused on the contents of legal rules and principles of corporate law known in the West-that is, on substantive transplants Even when U.S. law was taken as a model, the role of courts was kept at bay, as they were regarded as weak, incompetent or even corrupt(Black and Kraakman 1996). In this paper, we ask whether a superior mode of transplantation might be a structural transplant, defined as the imitation not of substantive rules, but of the allocation of LMLEP. We address this question drawing on our earlier work on the incompleteness of law(Pistor and Xu 2002a; Pistor and Xu 2002b). The thrust of our argument is that As we will discuss below, this is different in limited liability companies( Gmbh), where courts have
5 important role in determining the rights and wrongs of corporate conduct, at least not for publicly held corporations.3 The same qualities that make the concept of fiduciary duties so resilient over time make it extremely difficult to transplant to other legal systems. The meaning of fiduciary duty cannot easily be specified in a detailed legal document. Attempts to do so will either leave out many actions or factual situations “no one has foreseen or categorized” (Clark 1986), or will be phrased so broadly that the meaning can be understood only in the context of specific cases. Thus, transplants of substantive rules can at best be partial. In this paper, we investigate alternative strategies for countries wishing to develop the institutional framework for effective enforcement of fiduciary duties. A major proposition is that it might be advisable to shift attention from substantive to structural transplants, or put differently, to focus more on the allocation of lawmaking and law enforcement powers (LMLEP) than on the contents of specific legal rules. The process of legal reform in transition economies to date has entailed primarily the transplantation of statutory law from Western European or U.S. legal sources (Pistor 2000). These transplants have focused on the contents of legal rules and principles of corporate law known in the West – that is, on substantive transplants. Even when U.S. law was taken as a model, the role of courts was kept at bay, as they were regarded as weak, incompetent or even corrupt (Black and Kraakman 1996). In this paper, we ask whether a superior mode of transplantation might be a structural transplant, defined as the imitation not of substantive rules, but of the allocation of LMLEP. We address this question drawing on our earlier work on the incompleteness of law (Pistor and Xu 2002a; Pistor and Xu 2002b). The thrust of our argument is that 3 As we will discuss below, this is different in limited liability companies (GmbH), where courts have
every legal system must allocate the right to deal with future contingencies that were unforeseen when the law was announced. The reason is that law is intrinsically incomplete, meaning that it is impossible to design a law that would specify all future contingencies. and thus could act as an effective deterrent device When law is incomplete, the effectiveness of law and law enforcement is contingent on how a legal system deals with the right to determine the content and meaning of law when future contingencies arise- how it allocates lmlep to deal with future scenarios. A legal system may allocate these powers to courts or to regulators, or a combination of the two. It may also decide that private parties should resolve these issues by denying (easy) access to the formal legal system. In our other work, we identify three factors that determine the optimal allocation of LMLEP: the degree of incompleteness of the law, the ability to standardize actions that may result in harm ex ante, and the level of expected harm(Pistor and Xu 2002a; Pistor and Xu 2002b). Applying this framework to the problem of fiduciary duty, we argue that courts are the optimal holders of LMLEP for this area of the law. Law is highly incomplete, but actions cannot be easily standardized, thus making it infeasible to allocate LMLEP to regulators Moreover, because the level of expected harm is relatively contained, reactive law enforcement is sufficient for remedying harmful actions The effectiveness of the courts'residual lawmaking powers depends on the willingness of victims to bring cases to court, which in turn depends on the actual or perceived quality of the courts. If courts are weak, they may not be effective residual lawmakers and law enforcers, even if they are vested with extensive residual lawmaking powers. Courts in transition economies are widely perceived to be weak, played a much more active role. We suggest that this is related to procedural rules that make it easier for shareholders in closed corporations to bring judicial action than in publicly held ones
6 every legal system must allocate the right to deal with future contingencies that were unforeseen when the law was announced. The reason is that law is intrinsically incomplete, meaning that it is impossible to design a law that would specify all future contingencies, and thus could act as an effective deterrent device.4 When law is incomplete, the effectiveness of law and law enforcement is contingent on how a legal system deals with the right to determine the content and meaning of law when future contingencies arise – how it allocates LMLEP to deal with future scenarios. A legal system may allocate these powers to courts or to regulators, or a combination of the two. It may also decide that private parties should resolve these issues by denying (easy) access to the formal legal system. In our other work, we identify three factors that determine the optimal allocation of LMLEP: the degree of incompleteness of the law, the ability to standardize actions that may result in harm ex ante, and the level of expected harm (Pistor and Xu 2002a; Pistor and Xu 2002b). Applying this framework to the problem of fiduciary duty, we argue that courts are the optimal holders of LMLEP for this area of the law. Law is highly incomplete, but actions cannot be easily standardized, thus making it infeasible to allocate LMLEP to regulators. Moreover, because the level of expected harm is relatively contained, reactive law enforcement is sufficient for remedying harmful actions. The effectiveness of the courts’ residual lawmaking powers depends on the willingness of victims to bring cases to court, which in turn depends on the actual or perceived quality of the courts. If courts are weak, they may not be effective residual lawmakers and law enforcers, even if they are vested with extensive residual lawmaking powers. Courts in transition economies are widely perceived to be weak, played a much more active role. We suggest that this is related to procedural rules that make it easier for shareholders in closed corporations to bring judicial action than in publicly held ones
inexperienced, or even corrupt(Black and Kraakman 1996, Glaeser et al. 2001) although a number of empirical studies paint a somewhat different picture(Hendley 2001; Hendley et al. 1997). Vesting courts with LMLEP will therefore require extensive institutional reform in many transition economies. Governments wishing to credibly commit to a structural transplant would need not only to change statutory law in order to explicitly allocate lawmaking powers to courts. They would also need to strengthen courts as independent institutions and ensure that they have sufficient resources to fulfill this task. Even this may not be sufficient, as ultimately it will depend on the courts to use the opportunity the law gives to them to engage in lawmaking activities. Our main point is that while this is a difficult task and will take time to accomplish, it cannot be easily circumvented by writing law that limits the role of courts in this crucial area of the law In the second part of the essay, we analyze the statutory and case law in three jurisdictions(Poland, Russia, and Germany) on matters that would fall within the scope of fiduciary duty in Anglo-Saxon countries. The focus of our analysis is the allocation of LMLEP in these jurisdictions and how courts have made use of their empowerments. a hallmark of all three jurisdictions is that case law is scarce, even in Germany, a highly developed market economy with extensive experience with corporations and corporate law. We suggest that case law evolved in these jurisdictions whenever procedural rules gave access to judicial review and substantive rules were sufficiently specified to serve as guidance. Analyzing available case law, we argue that even in civil law countries or countries with a socialist legal past, it is not impossible to vest courts with more expansive LMLEP. Yet, in light of their legal heritage it might be advisable to specify some typical applications of legal principles We recognize that lawmakers have some discretion to determine the relative completeness of law as
7 inexperienced, or even corrupt (Black and Kraakman 1996; Glaeser et al. 2001), although a number of empirical studies paint a somewhat different picture (Hendley 2001; Hendley et al. 1997). Vesting courts with LMLEP will therefore require extensive institutional reform in many transition economies. Governments wishing to credibly commit to a structural transplant would need not only to change statutory law in order to explicitly allocate lawmaking powers to courts. They would also need to strengthen courts as independent institutions and ensure that they have sufficient resources to fulfill this task. Even this may not be sufficient, as ultimately it will depend on the courts to use the opportunity the law gives to them to engage in lawmaking activities. Our main point is that while this is a difficult task and will take time to accomplish, it cannot be easily circumvented by writing law that limits the role of courts in this crucial area of the law. In the second part of the essay, we analyze the statutory and case law in three jurisdictions (Poland, Russia, and Germany) on matters that would fall within the scope of fiduciary duty in Anglo-Saxon countries. The focus of our analysis is the allocation of LMLEP in these jurisdictions and how courts have made use of their empowerments. A hallmark of all three jurisdictions is that case law is scarce, even in Germany, a highly developed market economy with extensive experience with corporations and corporate law. We suggest that case law evolved in these jurisdictions whenever procedural rules gave access to judicial review and substantive rules were sufficiently specified to serve as guidance. Analyzing available case law, we argue that even in civil law countries or countries with a socialist legal past, it is not impossible to vest courts with more expansive LMLEP. Yet, in light of their legal heritage it might be advisable to specify some typical applications of legal principles 4 We recognize that lawmakers have some discretion to determine the relative completeness of law as
in statutory law as guidance for potential litigants and judges alike. At the same time, the law should be clear that judicial review will not be limited to these typified cases Incompleteness of law and the allocation of LmLEP In this part of the essay we explain the core elements of the incomplete law theory we use as a framework to determine the optimal allocation of lmlEp for handling cases related to the proper governance of corporations A. Incompleteness of lay If law were complete if a law could stipulate unambiguously all contingencies, it could fully deter harmful actions, including actions that may result in the violation of fiduciary duties. The key task for such a law would be to stipulate the appropriate level of punishment and to ensure that the probability of detection sufficiently high. Indeed, much of the traditional literature on law enforcement ( Becker 1968; Polinsky and Shavell 2000; Stigler 1964)focuses on these variables and treats law implicitly as complete. By contrast, if law is incomplete, law cannot effectively deter. In this second best world, legal systems need to allocate LMLEP to deal with future contingencies that were unanticipated at the time law was made, in order to enhance(not to perfect) the effectiveness of law enforcement. Absent the allocation of LMLEP, many actions will not be sanctioned, even if they result in substantial harm. Legislative change may make law more complete after assembling suggested in the rules vs standards literature. See Kaplow(1992) and Kaplow(1995). However, even the most ambitious lawmaker would not be able to write a fully complete law
8 in statutory law as guidance for potential litigants and judges alike. At the same time, the law should be clear that judicial review will not be limited to these typified cases. I: Incompleteness of Law and the Allocation of LMLEP In this part of the essay we explain the core elements of the incomplete law theory we use as a framework to determine the optimal allocation of LMLEP for handling cases related to the proper governance of corporations.5 A. Incompleteness of Law If law were complete – if a law could stipulate unambiguously all future contingencies, it could fully deter harmful actions, including actions that may result in the violation of fiduciary duties. The key task for such a law would be to stipulate the appropriate level of punishment and to ensure that the probability of detection is sufficiently high. Indeed, much of the traditional literature on law enforcement (Becker 1968; Polinsky and Shavell 2000; Stigler 1964) focuses on these variables and treats law implicitly as complete. By contrast, if law is incomplete, law cannot effectively deter. In this second best world, legal systems need to allocate LMLEP to deal with future contingencies that were unanticipated at the time law was made, in order to enhance (not to perfect) the effectiveness of law enforcement. Absent the allocation of LMLEP, many actions will not be sanctioned, even if they result in substantial harm. Legislative change may make law more complete after assembling suggested in the rules vs. standards literature. See Kaplow (1992) and Kaplow (1995). However, even the most ambitious lawmaker would not be able to write a fully complete law
sufficient experience, but this will have only prospective effect. Moreover,new actions or factual situations the revised law did not contemplate will undoubtedl arise, leaving it once more incomplete A similar argument has been made in the economics literature with regards to contracts: parties to a contract cannot foresee all future contingencies and therefore cannot write a complete contract(Hart 1995). However, parties can renegotiate the contract in the future once new uncertainties have been resolved and thus make the contract highly complete. Law can be regarded as a grand social contract in that it attempts to offer legal guidance for outcomes to future generations of citizens. In countries governed by the rule of law, law is purposefully designed to address a large number of cases and to last for long periods of time. The use of abstract language in statutory law is a means to ensure its generality. Even case law is made not only for he specific case at hand; the courts ruling applies equally to other cases with similar(not necessarily identical) factual basis(Ginsburg 1996). If contractual parties cannot write complete contracts. lawmakers should be even less able to write complete statutory law. In fact, to write a complete law, lawmakers would need not only unlimited foresight, but should be blessed with unbounded rationality. They would need to be able to anticipate the impact of the rules they make on all poter parties concerned and write rules that can achieve the first-best results from a social welfare perspective An important reason why it is difficult to write even fairly complete law is that the meaning and scope of law is continuously challenged by socioeconomic and technological change. In a static world, law can achieve high levels of completeness Take, for example, the development of criminal and tort law until the mid 19 In this essay we focus on publicly held corporations. However, similar conflicts arise in close
9 sufficient experience, but this will have only prospective effect. Moreover, new actions or factual situations the revised law did not contemplate will undoubtedly arise, leaving it once more incomplete. A similar argument has been made in the economics literature with regards to contracts: parties to a contract cannot foresee all future contingencies and therefore cannot write a complete contract (Hart 1995). However, parties can renegotiate the contract in the future once new uncertainties have been resolved and thus make the contract highly complete. Law can be regarded as a grand social contract in that it attempts to offer legal guidance for outcomes to future generations of citizens. In countries governed by the rule of law, law is purposefully designed to address a large number of cases and to last for long periods of time. The use of abstract language in statutory law is a means to ensure its generality. Even case law is made not only for the specific case at hand; the court’s ruling applies equally to other cases with a similar (not necessarily identical) factual basis (Ginsburg 1996). If contractual parties cannot write complete contracts, lawmakers should be even less able to write complete statutory law. In fact, to write a complete law, lawmakers would need not only unlimited foresight, but should be blessed with unbounded rationality. They would need to be able to anticipate the impact of the rules they make on all potential parties concerned and write rules that can achieve the first – best results from a social welfare perspective. An important reason why it is difficult to write even fairly complete law is that the meaning and scope of law is continuously challenged by socioeconomic and technological change. In a static world, law can achieve high levels of completeness. Take, for example, the development of criminal and tort law until the mid 19th 5 In this essay we focus on publicly held corporations. However, similar conflicts arise in close
