Although much modern commercial activity occurs through corporations incorporated by registration, general incorporation statutes were passed only in the middle of the nineteenth century. But, as Televantos points out, “much of the modernisation of production in leading sectors had already happened by [then]” (p. 2). To what extent, then, did English law facilitate trade before the advent of general incorporation and modern securities law? This is the central question addressed by Capitalism Before Corporations (p. 3). In a well-written and interesting monograph, Televantos skilfully melds doctrinal legal history with analysis of contemporary political economic thought between 1790 to 1827 (the “Regency era”). Capitalism Before Corporations weaves an intriguing story about the interplay between competing demands and tensions; the role of prevailing commercial practices, the public's views about the morality of trading and profit-making, and the technical complexities of the law are deftly handled. With admirable clarity, Televantos succinctly explains difficult topics such as partnership's jingle rule, bona fide purchase, ostensible authority and how trust creditors can access trust property by subrogation to the trustee's liens. Despite its complex subject matter, the result is a very accessible volume which is full of insights.
The book concludes that in some, but not all respects, the law facilitated trade. The common law provided a variety of business forms, enabling businesses to be treated separately from individuals in some respects despite the lack of general incorporation. To some degree, this enabled traders to separate business assets from personal assets, giving business creditors priority over business assets. These developments lowered transaction costs for traders. However, courts did not see their role as confined solely to encouraging commercial activity. They were also heavily influenced by political economic thinking at that time – that there was a “right” level of responsible trading. “Too much” trading was thought to be inefficient. It also carried negative connotations of fraud, and the bribery of politicians (pp. 29–30, 172). Thus, “judges echoed the wider political economic concerns that forcing traders to be personally liable for their business debts was crucial to stabilising the company's economy, [and thus placed] hard limits on the extent to which businesses were treated as separate from their owners” (p. 12). These limits mean that the law only partially facilitated trade.
The book is divided into three parts, loosely modelled around the life cycle of a business. After a short introduction, Part I introduces the two main business forms used in the Regency era: the partnership and the trust. Chapter 1 provides an overview of the partnership. This was generally the leading business form used where there was more than one trader. Chapter 1 shows how the partnership facilitated trade by providing a way for partnership assets to be “partitioned” or separated from the partners’ personal assets. These assets would be distributed to partnership creditors in priority to the partners’ personal creditors. As Televantos explains, this “facilitated trade by reducing the cost of partnerships obtaining credit” (p. 24). Chapter 2 moves on to examine the trust, explaining how trusts were also used in business structures. To remedy deficiencies in partnerships, trusts were used to supplement partnerships in “deed of settlement companies”. Trusts were also used in testamentary trading trusts. Chapters 1 and 2 show how the legal structure adopted determined the degree to which business assets were available to business creditors, and how they were “shielded” from the personal creditors of traders.
Part II examines how and when the assets of businesses are “bonded” to the creditors of the business. In “binding” assets, courts sometimes facilitated trade, but they did not always do so. Rather, courts assessed whether transactions with creditors ought to “bind” the business assets based on prevailing political and economic ideas about good trading. Part II's focus can be summarised in a single question: If B purports to act for A in taking a loan from C, when is A bound? The answer turns on B's role. Where B is an agent or a partner, acting for A, his principal or the partnership, the answer turns on ostensible authority. This is dealt with in Chapters 3 and 4. But the answer is different if B is a trustee or executor, as the excellent Chapter 5 shows. A trustee cannot have ostensible authority from trust beneficiaries, since the latter do not hold the trustee out as having authority. The same is true of executors, who are not held out by their testators as having authority. Where B was a trustee or executor, bona fide purchase was the doctrine protecting C and binding A.
The last part of the book, Part III, deals with business failure and bankruptcy. The same conclusion is reached. Courts sometimes facilitated trade by enabling trusts to be used to avoid some effects of bankruptcy (ch. 6). They also enabled partnership creditors to have access to partnership assets to satisfy their debts in priority to the partners’ personal creditors, while partners would be personally liable for the debts of the firm (ch. 7). But courts did not always uphold creditors’ expectations, particularly when dealing with bankruptcy of partnerships (ch. 7). Chapter 8 concludes, tying up the central arguments and themes of the book.
In this review I will focus on the book's implications for those interested in modern trusts and agency law. The book certainly has much to interest modern trusts lawyers. The dominant narrative is that trusts in the eighteenth and early nineteenth centuries were invariably family trusts, with trusts only being used later in commerce. Chapter 2 suggests that this dominant narrative is incorrect, showing that trusts were used for commercial purposes even during that period. This evidence casts doubt on whether a rigid distinction can really be drawn between “traditional” trusts and “commercial” trusts. In Target Holdings Ltd. v Redferns [1996] A.C. 421, the House of Lords controversially drew a distinction between the two to explain when courts would not order a trustee who committed a breach of trust to reconstitute the trust fund. This distinction between “traditional” and “commercial” trusts does not seem to be borne out by the older cases. As Televantos rightly warns us, “Modern trusts lawyers who seek to distinguish nineteenth and late eighteenth-century authorities simply on the basis that the trusts law of that age was uncommercial therefore need to exercise extreme care” (p. 60). When and why courts will not order reconstitution is still problematic, as the more recent cases of AIB Group (UK) plc v Mark Redler & Co. [2014] UKSC 58, [2015] A.C. 1503, Interactive Technology Corp Ltd. v Ferster [2018] EWCA Civ 1594 and Auden McKenzie (Pharma Division) Ltd. v Patel [2019] EWCA Civ 2291 show. However, the answer should not turn on this distinction between traditional and commercial trusts.
The use of trusts very similar to the modern Quistclose trust is also noteworthy (pp. 132–41). What appears to be new may not in fact be so new after all. This certainly seems to be the case where the Quistclose trust is concerned, as the historical explanation for these types of trusts is very similar to the one eventually proposed by Lord Millett in Twinsectra Ltd. v Yardley [2002] 2 A.C. 164. There is also interesting material showing that common law courts were willing to enforce trusts during the Regency period, which may pose problems for those firmly opposed to the fusion of law and equity (pp. 140–41). Other interesting points are also made. For example, executors were not always treated as a species of trustee, contrary to modern thinking (p. 106). In the Regency era, bona fide purchase was wider than its modern equivalent, protecting the purchase of any interest, while the modern law only protects purchases of legal title (p. 103). However, the reason for this change is not explained.
Agency lawyers may find the discussion of ostensible authority in Chapter 4 especially thought-provoking. As Televantos explains, “the court in its jurisprudence came to frame its examination of fault within the question of whether A had created the appearance of B's authority, a question resolved by asking what the expectation of a commercial party in the normal course of business would have been” (p. 70). To a modern lawyer, these two formulations are not identical. The former, focusing on A's creation of the appearance of B's authority, is much more in line with today's orthodox view of ostensible authority. Ever since Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd. [1964] 2 Q.B. 480, it has been widely accepted that ostensible authority is a species of estoppel by representation. This requires that the principal represents to the third party that the agent has authority. If the principal has not so represented, then it is not bound, no matter how reasonable the third party's reliance on the appearance of the agent's authority (e.g. British Bank of the Middle East v Sun Life Assurance Co. of Canada (UK) Ltd. [1983] 2 Lloyd's LR 9). The latter formulation is subtly different. It focuses primarily on what the third party's expectations were, rather than on what the principal did. It seems more akin to an independent doctrine of “usual authority”, where one examines what an agent in the same position would usually have authority to do in the ordinary course of business. Accounts of ostensible authority today swing between more principal-friendly approaches and more third-party-friendly approaches, with the most recent statements going back in favour of the principal in assessing when a third party has “reasonably relied” on representations: compare Akai Holdings Ltd. v Kasikornbank Public Co. Ltd. [2010] HKCFA 64 and East Asia Company Ltd. v PT Satria Tirtatama Energindo [2019] UKPC 30. Chapters 4 and 5 show that which approach should be preferred has been a difficult question for several centuries.
How ostensible authority is understood sometimes affects the conclusions reached on narrower points. At pp. 72–75, there is a discussion of the relevance of past conduct in establishing a holding out, which explains that if B, to the knowledge of relevant third parties, has regularly acted on A's behalf in a particular way, then the holding out can be inferred. But the modern law is not so clear. Some cases, which emphasise the importance of conduct coming from the principal, such as Pole v Leask (1863) 33 LJ Ch 155 and Armagas Ltd. v Mundogas S.A. [1986] A.C. 717, suggest that past conduct does not create apparent authority. In other words, what the principal has done in the past about previous transactions does not necessarily say anything about B's authority in the future. The answer today may turn on whether past conduct can be construed as a continuing representation as to B's authority, a difficult question of fact.
The modern lawyer will find much else to think about in the pages of Capitalism Before Corporations. Televantos is to be congratulated on producing an eminently readable book which should be of interest to anyone interested in companies, trusts, agency and partnership.
