Worldwide: The Judge, The Classicist And Modern Cell Company Laws

Last Updated: 3 February 2017
Article by Nigel Feetham

In many of my writings I try to bring together my fascination for history with my professional and academic interest in the law. I have a particular interest in the subject of risk in commercial activity and the attendant evolution of limited liability. Interestingly, the ancient Greeks were well aware of the concept of risk and reward and the need to balance them (in other words, risk management). We can turn to Herodotus (484 BC - 425 BC), the Greek historian widely known as the 'father of history' (a phrase first coined by Cicero), for evidence of this. For it was Herodotus who wrote: "Great deeds are usually wrought at great risks. Great things are won by great dangers. He is the best man who, when making his plans, fears and reflects on everything that can happen to him, but in the moment of action is bold." (The Histories). Such words are, conceptually, the foundation upon which the capitalist system was gradually built over two thousand years later, without which much of the social and economic progress of the modern era would not have occurred. But only legal principle which recognized protection from personal liability for those willing to deploy capital in commercial enterprise could provide the incentive necessary for the building blocks to rise above the conceptual foundation.

In researching my co-authored book "Protected Cell Companies: A Guide to Their Implementation and Use" (Nigel Feetham & Grant Jones, 2d ed. Spiramus Press 2010) I came across an old law report of the United States District Court for the District of Maine. I have read very many law reports throughout by life, first as a law student and then as a lawyer and academic writer, but few court judgments have kept me turning the pages with such intense interest. The judgment was delivered by Judge Ashur Ware and the case is The Rebecca 1831 U.S. Dist. LEXIS 5; 20 F. Cas. 373; 1 Ware 187. I should point out that the judgment was not available online when I first read it but is now thanks to Google.

In The Rebecca, after giving an extensive account of the history of the relevant legal principle under maritime law, Judge Ware held that a shipowner's liability was limited to the value of the ship and its freight. This was quite remarkable given that the date was 1831 and long before there was federal statue on the subject, whereas today it is easy to take the legal principle for granted. But that is not all. In style and language, the judgment reads like a work of literature. It could have been penned by any leading scholar of the day; such is the clarity of thinking and his detailed knowledge of historical records. In quoting from, commenting on and analysing all the ancient authorities and codes, the judge undoubtedly proved himself to be an eminent jurist. He deserves no less acclamation for his awareness of the socio-economic importance of the principle of limited liability for the deployment of capital in the expansion maritime commerce. This is most evident from the following passage of his judgment:

"The maritime law... has, on principles of general policy, restricted him [a creditor] to a particular fund, it not only permits him to proceed directly against it in specie, but gives him a privilege against it over the general creditors of his debtor [shipowner]. This privilege, so far from being dangerous and embarrassing to commerce, as it was represented at the argument, appears to me to be perfectly natural and just, and entirely in harmony with the general spirit of maritime law...This form of contract was probably suggested by the extreme perils attending on all commercial operations, in those ages of barbarism and disorder, and more particularly on those of maritime commerce. The profits of trade in those times were great and tempting, in proportion to the greatness of the risk, and by this contract men of capital were enabled to participate in these profits, without putting at hazard their whole property. It therefore had a direct and powerful influence in drawing out dormant capital, and putting it into a state of activity, and by thus giving a new impulse and greater extension to commerce, to render capital at once more productive to the owner and more beneficial to the community. This contract was the more important in maritime commerce, as the contract of insurance, which has so great an influence in giving extension to commerce in our time, was then unknown, that being an invention of later times. It was, in fact, in the primitive ages of trade, one of the most powerful springs by which maritime commerce was carried on."

A person's background can often tell you a lot about the individual. It was evident to me that Judge Ware could not have written his judgment in The Rebecca without a profound knowledge of historical sources from the earliest days of commercial enterprise. So I decided to undertake some research. Not surprisingly, I found that he was a very well read scholar and former professor of Greek. He was also well published outside the law reports both in his writings for newspapers as well as scholarly works.

In his contemporary book (available from official archives) "A History of the Law, the Courts, and the Lawyers of Maine, from Its First Colonization to the Early Part of the Present Century. Portland, Maine" (Bailey & Noyes, 1863) William Willis dedicated pages 634-646 to the life of Ashur Ware. He summed up Ware's brilliance most eloquently as follows: "Judge Ware has never lost the relish for the classical studies and general literature; he is an indefatigable student; reading and study are his meat and drink; he gives himself to them and is absorbed in them. No young man is more engrossed by pleasure, than he is by study: at the age of eighty, his devotion to it seems to increase, and with it, the accumulation of his store of knowledge and erudition. His pen is constantly employed, and upon subjects of the deepest interest to the community."

Willis quotes extensively from Judge Ware's extrajudicial writings, revealing a man with deep knowledge of classical literature and familiarity with the works of Greek and Roman historians and orators. One such passage of his writings quoted by Willis is this: "The intellect of mankind, which had long been held in chains, was set free, and received an impulse, of which it still feels the force. The Grecian and Roman writers became the established model of taste. They still continue to do so. If, in some things they have been surpassed, it has been in following the path which their example had pointed."

Willis also notes (perhaps with some amusement) that "Judge Ware had been but six years at the bar, and was a lawyer without briefs; his business in the courts had been very limited; he had devoted himself to politics, which had superior attractions for him, over the law... he had not the ease and freedom of public speaking requisite to make a good advocate, although he had the learning and ability to make a good lawyer; and happily for him and the public, he fell into the right place."

Although Herodotus is not mentioned by Willis, given his classicist inclination, for sure Judge Ware would have been familiar with his writings. If that is the case, I would like to think that the socio-economic interests he advanced in The Rebecca were influenced by the words of Herodotus.

Four decades later (in 1871) in the decision of Norwich Company v. Wright - 80 U.S. 104 (1871) the US Supreme Court stated that "The learned opinion of Judge Ware in the case of The Rebecca leaves little to be desired on the subject." An account of the history of the legal principle was again enunciated, this time by Justice Bradley, stating that:

"The great object of the law was to encourage shipbuilding and to induce capitalists to invest money in this branch of industry. Unless they can be induced to do so, the shipping interests of the country must flag and decline. Those who are willing to manage and work ships are generally unable to build and fit them. They have plenty of hardiness and personal daring and enterprise, but they have little capital. On the other hand, those who have capital and invest it in ships incur a very large risk in exposing their property to the hazards of the sea and to the management of seafaring men without making them liable for additional losses and damage to an indefinite amount. How many enterprises in mining, manufacturing, and internal improvements would be utterly impracticable if capitalists were not encouraged to invest in them through corporate institutions by which they are exempt from personal liability, or from liability except to a limited extent? The public interests require the investment of capital in shipbuilding quite as much as in any of these enterprises."

To my mind what this shows is that one should not divorce laws from the historical record. By looking at the experiences of the past, whether contained in some obscure historical source, ancient principle, or old law report, this can often usefully inform judicial decision-making.

I referenced both The Rebecca and Norwich Company v. Wright in my Protected Cell Company (PCC) book and take the liberty to quote from the book in order to explain why I consider them to be relevant in the field of segregated business forms that attempt to limit the liability of creditors to available assets:

"Finally, it is also worth pointing out that the principle of limitation of liability of ship owners in maritime law existed in early modern Europe (with some writers suggesting it actually originated in the Middle Ages) whereby the liability of shipowners was limited to the value of the ship and its freight. The principle was accepted by European maritime countries including Holland and codified in France as early as 1681. The limitation upon the liability of English shipowners was also enacted by the British Parliament through a series of statutes beginning in 1734. A similar principle was adopted by the legislatures in Massachusetts and Maine in 1818 and 1821 and finally by US Congress in 1851 (See the decision of the Supreme Court of the United States in Norwich & N. Y. Trans. Co. v. Wright, 80 U. S. 104, 20 Law. ed. 585, 589-590 for an account of the history of this principle). Further, it was held to extend to both contract and tort losses. Thus, if a shipowner had several vessels, looked at from this perspective his liability seems no different to the liability of a PCC in respect of separate cells.

The legal principle is also an early historical example of preferential treatment for particular creditors against a particular fund, preferred to the right of general creditors. This was not lost on Judge Ware in his insightful 1831 Opinion in The Rebecca, Case No 11,619, District Court, D. Maine, "The maritime law... has, on principles of general policy, restricted him [a creditor] to a particular fund, it not only permits him to proceed directly against it in specie, but gives him a privilege against it over the general creditors of his debtor [shipowner]. This privilege, so far from being dangerous and embarrassing to commerce, as it was represented at the argument, appears to me to be perfectly natural and just, and entirely in harmony with the general spirit of maritime law." In essence, our 1831 claimant run the now familiar argument (and failed) that to limit liability to a particular fund was contrary to public policy. The deployment of capital at a large scale (and therefore the very advent of capitalism) had its origins in this one fundamental principle, namely, that a trader or investor would not lose more than the capital and assets he had chosen to put at risk in respect of a particular business or investment. Maritime law applied this principle long before limited liability under general incorporation law was introduced."

Put another way, if investors pursuing a bona fide commercial activity have sought the benefit of the capital protection laws afforded by PCC legislation (in much the same way they would have done had they decided to conduct their business through an ordinary limited company or limited partnership, or as ship-owners seeking the benefit of maritime limitation of liability laws have done for well over a century), why should they (and the body of creditors who have dealt with the PCC expecting that their rights will be determined in accordance with PCC laws) be deprived of such protection by the Court? Viewed in this way, PCC legislation is, in effect, a capital and creditor protection rule like any other. For a foreign Court to hold otherwise would be to undermine the very principles on which international trade has developed since at least the eighteenth century, namely, the dual principle of limited liability for those that put capital at risk and also acceptance that in a global economy countries must recognise each others commercial laws. As I finished this article I asked myself the rhetorical question, what would Judge Ware have decided if the matter had come before him today? I would like to think he would have carefully and judiciously examined the historical record and not found it wanting.

Postscript: We know that Niccolò Machiavelli was an avid reader of Cicero (the Roman philosopher, politician, orator and lawyer). In turn, Cicero was very well read in the writings of Herodotus; it was he who coined the phrase the "father of history". Surely, therefore, it can be no coincidence that in 'The Prince' Machiavelli states (similar to the words of Herodotus): "All courses of action are risky, so prudence is not in avoiding danger (it's impossible), but calculating risk and acting decisively. Make mistakes of ambition and not mistakes of sloth. Develop the strength to do bold things, not the strength to suffer." We cannot take risk out of risk-taking. We can only manage it. For innovation and entrepreneurship to thrive we have to accept risk and not stigmatise failure.

Nigel Feetham

The views expressed in this article by the author are solely those of the author.

www.gibraltarlaw.com

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