THE INTEGRATION OF MERCANTILE LAW

Western mercantile law acquired in the late eleventh, twelfth, and early thirteenth centuries the character of an integrated system of principles, concepts, rules, and procedures.

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negotiable instruments, secured credit, and joint ventures, together with many older legal institutions that were then refashioned, were all seen as forming a distinct and coherent system.

The following distinctive characteristics of Western mercantile law were introduced during these centuries:

the sharp separation of the law of movables (chattels) from the law of immovables (land and fixtures attached to land);

recognition of rights in the good-faith purchaser of movables superior to those of the true owner; ³⁰

replacement of the older requirement of delivery of goods in order to transfer ownership by the device of symbolic delivery, that is, transfer of ownership (and of risk of loss or damage) by transfer of transportation documents or other documents;

the creation of a right of possession of movables independent of ownership; ³¹

recognition of the validity of informal oral agreements for the purchase and sale of movables;

limitation of claims for breach of warranty, on the one hand, and development of the doctrine of implied warranties of fitness and of merchantability (marchandise loyale et marchande), on the other hand;

the introduction of an objective measure of damages for nondelivery of goods, based on the difference between the contract price and the market price, together with the introduction of fixed monetary penalties for breach of some types of contracts;

the development of commercial documents such as bills of exchange and promissory notes and their transformation into so-called abstract contracts, in which the document was not merely evidence of an underlying contract but itself embodied, or was, the contract and could be sued on independently;

the invention of the concept of negotiability of bills of exchange and promissory notes, whereby the good faith transferee was entitled to be paid by the drawer or maker even if the latter had certain defenses (such as the defense of fraud) against the original payee;

the invention of the mortgage of movables (chattel mortgage), the unpaid seller's lien, and other security interests in goods;

the development of a bankruptcy law which took into account the existence of a sophisticated system of commercial credit;

the development of the bill of lading and other transportation documents;

the expansion of the ancient Graeco-Roman sea loan and the invention of the bottornry loan, secured by a lien on the freight or by shares in the ship itself, as means of financing and insuring a merchant's overseas sales; ³²

the replacement of the more individualistic Graeco-Roman concept

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of partnership (societas) by a more collectivistic concept in which there was joint ownership, the property was at the disposition of the partnership as a unit, and the rights and obligations of one partner survived the death of the other;

the development of the joint venture (commenda) as a kind of jointstock company, with the liability of each investor limited to the amount of his investment;

the invention of trademarks and patents;

the floating of public loans secured by bonds and other securities;

the development of deposit banking; ³³

Thus a great many if not most of the structural elements of the modern system of commercial law were formed in this period.

Credit devices. As payment in kind became exceptional in the twelfth century, there was a proliferation of new types of commercial contracts involving the use of credit. Indeed, payment in cash was itself a kind of credit transaction because there was no sovereign state to guarantee the value of money and many different kinds of coins were in circulation.

The chief forms of credit extended by sellers to buyers were promissory notes and bills of exchange. Either the buyer signed a document addressed to the seller, promising to pay him a certain sum of money either at a certain time in the future or upon presentation of the document; or else he issued a draft (bill of exchange) on a third person ("To X, pay Y for my account.. which was also payable either on a certain date or on presentation. Commercial instruments had been used by the Arabs in Mediterranean trade between the eighth and tenth centuries, but they were apparently not then treated as "abstract contracts," that is, as obligations independent of the contractual relations that gave rise to them. When they became common in the West in the late eleventh and twelfth centuries, they not only acquired the character of independent obligations, like money itself, but they also acquired another characteristic of money, namely, negotiability. The maker of the note (or drawer of the bill) made the instrument payable to the payee "or to his order." ³⁴ This meant that any person to whom the payee transferred the instrument (whether by endorsement or otherwise) had an unconditional right to be paid by the maker (or drawer), even if the latter had a valid defense (such as the defense of fraud) against the original payee -- provided only that the transferee had taken the instru-

350- ment in good faith and without knowledge of the fraud or other defense.

Neither the concept nor the practice of negotiability of credit instruments was known to the older Roman law or to the Germanic law, nor was it a developed concept or practice among the Muslims and other traders of the Mediterranean between the eighth and tenth centuries. Its invention by Western merchants of the late eleventh and twelfth centuries was, of course, a response to the emergence at that time of a developed market for goods. Yet to produce the response, more than the economic stimulus was needed. There had to be a reservoir of, credit itself, for without credit, that is, without confidence in the future of the community of persons that constituted the market, there could not have been either credit instruments or the extra credit embodied in their negotiability. Credit, of course, means belief or faith or trust in someone or something. A system of transferring a debtor's future obligation from one creditor to another could not have been developed and maintained if there had not been a strong belief or faith or trust in both the integrity and the duration of the community to which all creditors and debtors belonged. Indeed, it was only such a belief in the future of the mercantile community that made it possible to measure the value of immediate payment against the value of payment at a later date.

As Robert S. Lopez has written, "Unstinting credit was the great lubricant of the Commercial Revolution. It was altogether a novel phenomenon... the Graeco-Roman economy was well supplied with cash of all kinds but ill-suited for commercial credit on a larger scale, and... the economy of the barbarian age was deficient both in cash and in credit; it never got far off the ground. The take-off of the following period was fueled not by a massive input of cash, but by a closer collaboration of people using credit.

Credit flourished in many forms in this period, not only in Italy but throughout western Europe. In addition to the extension of credit by sellers to buyers through negotiable instruments and other devices, buyers also extended credit to sellers through various types of contracts for the purchase of goods to be delivered in the future, to be purchased by the seller and resold, and the like. Once again, such contracts presupposed the existence not only of a developed market but also of a belief in the future of the community that made up the market and a concept of time as a factor to be valued in commercial transactions.

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The extension of credit by the seller to the buyer, or by a third party (for example, a banker) to the buyer, was much more common than the extension of credit by the buyer to the seller, and as a result devices were sought to protect the lender against default. The most important such device was the mortgage of movables (chattel mortgage), under which the party that extended the credit retained a security interest in the goods so that they could not be resold or otherwise disposed of until he was paid, and if he was not paid he could take possession of the goods and resell them to satisfy the debt. Neither Roman law nor Germanic law had had such a sophisticated security device. Once again, the existence of a cohesive mercantile community with a developed body of mercantile law was essential to the effectiveness of such a mortgage of movables, for there was a danger that the same goods would be fraudulently pledged to more than one lender. This danger was met in many of the European cities by the development of a system of registration of chattel mortgages with public officials, so that potential lenders could discover any preexisting encumbrances.

Essential to the developed system of commercial credit which was created in the West in the late eleventh and twelfth centuries was a law of bankruptcy which, on the one hand, took security interests into account in protecting creditors and, on the other hand, was not ruinous to debtors. The Germanic law had been especially harsh on the defaulting debtor; his creditors took everything he had and could even come to live in his house, exploit his servants, and consume his crops. The Roman law of Justinian, on the other hand, had been very humane to the defaulting debtor but had left the creditors poorly protected. The bankruptcy law of the West from the twelfth century on struck a balance between these two extremes. It permitted limitation of the liability of debtors and at the same time gave preferences to secured creditors. In Levin Goldschmidt's words, the bankruptcy law of this period "forms an original and extremely influential stage of European legal development." 37

Types of business associations: joint ventures. A new type of business arrangement, the commenda,

came to be used in Italy, England, and elsewhere in Europe in the late eleventh century, by which capital was mobilized for long-distance trade overseas and, less frequently, overland. The earliest forerunner of the commenda may have been a Muslim commercial practice which found its way into Byzantium, including the seaports of southern Italy, in the eighth to tenth centuries. In northern Italy and beyond the Alps, the commenda probably started in the eleventh century as a loan contract, but it soon developed into a partnership agreement for a single venture, usually a round-trip voyage to the Middle East, Africa, or Spain. One partner, called the stans, supplied the capital but stayed at home; the other partner, called the trac- 352- tator, did the traveling. In return for making the difficult and perilous voyage, the traveling partner usually received one_fourth of the profits, while the partner who risked his money received the remaining threefourths.

A variation of the commenda was the socielas maris (",sea partnership"), in which the tractator supplied one-third of the capital and the stans twothirds, and the two shared the profits equally.

Lopez points out that the stans was not necessarily a sleeping partner. He might be "an older merchant who no longer went overseas, but who was still actively engaged in business and sometimes undertook the sale of the goods brought back by his partner." Moreover, the tractator of one commenda was often the stans of another reciprocal commenda, so that the two types were not two antagonistic groups of investing and traveling partners, or of exploiters and exploited. On the other hand, there were "numerous cases in which the investing partners were widows and orphans, priests and nuns, public officials and notaries, artisans or other persons without business experience." ³⁹

The commenda and the societas maris had the great advantage that the liability of partners was limited to the amount of their initial investment. In this respect it was like the modern joint-stock company. Also, investors could reduce their risks by dividing their money among several different commendae rather than putting it all in one venture. But the commenda differed from the modern business corporation in that it was generally a short-term arrangement which was dissolved at the completion of the particular voyage for which it had been established.

Long-term overland ventures were often arranged, in the late eleventh, twelfth, and early thirteenth centuries, under a different form of partnership, called a compagnia. This was originally an association of members of the same family who worked together to increase their family wealth. Such "companions" often became involved in trade. Eventually they were joined by outsiders and became a business unit, a "company." In contrast to the commenda, the compagnia did not have limited liability; each partner was fully liable to third parties for the debts of the company. Also, the compagnia usually carried on diverse trading activities over a period of many years. It was often sufficiently large and lasting and flexible to establish branches in various cities.

The short duration of the commenda and the unlimited liability of the compagnia were both subject to some modification by special clauses inserted in the respective contracts by which they were formed. There were also other types of contracts available for forming other kinds of business associations. — However, the commenda and the compagnia were the chief models.

Both the general principle of good faith, which underlay all the legal

systems of the Western legal tradition in its formative era, and the special manifestation of that principle in the credit devices of the new system of commercial law, were reflected in the commenda, the compagnia, and various other forms of commercial partnership in which the partners pooled resources and shared profits and losses. These business associations depended on each partner's confidence that the other partners' promises would be kept. In addition, however, there was another basic legal principle manifested in the developing law of business associations, namely, the principle of the collective personality of the members of the association. Though formed solely on the basis of agreement, the partnership constituted a legal person which could own property, enter into contracts, and sue and be sued. The partners were empowered to act jointly in behalf of the partnership, and they were jointly liable for the debts of the partnership. In addition, however, each partner acting alone could bind the partnership, and each was also severally liable for its debts. Together they constituted a corporation, in the sense that a bishopric or a parish was a corporation and that a university or a guild was a corporation; that is, they constituted a selfgoverning body, a community, whose personality was both transcendent and immanent, that is, both distinct from and linked with the persons of its members.

The form of business partnership of the twelfth century that was most like that of the modern business corporation, namely, the commenda, was created for a short term and for a specific purpose. It was a "secular" association in the full meaning of that word: it was wholly a creature of time. Yet even the commenda was a community; the partners were not mere agents, for under the emerging system of commercial law an agent, unlike a partner, could not bind an undisclosed principal in loans and bailments (though he could in sales and hirings). ⁴¹

Thus it appears, once again, that the integrity of the new system of mercantile law, that is, the structural coherence of its principles, concepts, rules, and procedures, derived primarily from the integrity and structural coherence of the mercantile community whose law it was.