The Law and Governance of Decentralised Business Models: Between Hierarchies and Markets 0367345870, 9780367345877

Table of contents :
Cover
Half Title
Series Page
Title Page
Copyright Page
Dedication Page
Contents
List of figures
List of tables
List of contributors
1 Introduction
2 Decentralised business models and the role of the law of organisations and governance
3 Three approaches to the governance of decentralised business models: contractual, regulatory and technological
4 The organisational and governance needs of networks
5 Towards sustainable supply chain networks: mandatory human rights due diligence as a new governance tool?
6 Public–private partnerships and the role of the law of organisations and governance
7 The platform economy and the law of organisations and governance
8 Social enterprise law in the platform economy
9 Blockchain technology-enabled business arrangements
10 Conclusion: improving the resilience and accountability of decentralised business models
Index

Citation preview

The Law and Governance of Decentralised Business Models

This book draws together themes in business model developments in relation to decentralised business models (DBMs), sometimes referred to as the ‘sharing’ economy, to systematically analyse the challenges to corporate and organisational law and governance. DBMs include business networks, the global supply chain, public–private partnerships, the platform economy and blockchain-based enterprises. The law of organisational forms and governance has been slow in responding to changes, and reliance has been placed on innovations in contract law to support the business model developments. The authors argue that the law of organisations and governance can respond to changes in the phenomenon of decentralised business models driven by transformative technology and new socio-economic dynamics. They argue that principles underlying the law of organisations and governance, such as corporate governance, are crucial to constituting, facilitating and enabling reciprocality, mutuality, governance and redress in relation to these business models, the wealth-creation of which subscribes to neither a frm nor market system, is neither hierarchical nor totally decentralised, and incorporates socio-economic elements that are often enmeshed with incentives and relations. Of interest to academics, policymakers and legal practitioners, this book offers proposals for new thinking in the law of organisation and governance to advance the possibilities of a new socio-economic future. Roger M Barker is Director of Policy and Corporate Governance, Institute of Directors, UK, and Honorary Associate, Centre for Ethics and Law, University College London. Iris H-Y Chiu is Professor of Corporate Law and Financial Regulation, Faculty of Laws, University College London.

Routledge Research in Corporate Law

Available titles in this series include: Shareholder Primacy and Global Business Re-clothing the EU Corporate Law Lela Mélon Corporate Law, Codes of Conduct and Workers’ Rights Vanisha H. Sukdeo Insolvency Law and Multinational Groups Theories, Solutions and Recommendations for Business Failure Daoning Zhang Employee Rights in Corporate Insolvency A UK and US Perspective Hamiisi Junior Nsubuga Shareholder Protection Reconsidered Derivative Action in the UK, Germany and Greece Georgios Zouridakis Corporate Takeover Law and Management Discipline Francis A Okanigbuan Jnr Shareholder Activism and the Law The Future of US Corporate Governance Ekrem Solak The Law and Governance of Decentralised Business Models Between Hierarchies and Markets Edited by Roger M Barker and Iris H-Y Chiu See more at www.routledge.com/Routledge-Research-in-Legal-History/ bookseries/CONTEMPCJP

The Law and Governance of Decentralised Business Models Between Hierarchies and Markets

Edited by Roger M Barker and Iris H-Y Chiu

First published 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 selection and editorial matter, Roger M Barker and Iris H-Y Chiu individual chapters, the contributors The right of Roger M Barker and Iris H-Y Chiu to be identifed as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identifcation and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Barker, Roger M, editor. | Chiu, Iris H.-Y., editor. Title: The law and governance of decentralised business models : between hierarchies and markets / edited by Roger M Barker, Iris H-Y Chiu. Other titles: Law and governance of decentralised business models Description: Milton Park, Abingdon, Oxon ; New York, NY : Routledge, 2021. | Series: Routledge research in corporate law | Includes bibliographical references and index. Identifers: LCCN 2020037350 (print) | LCCN 2020037351 (ebook) | ISBN 9780367345877 (hardback) | ISBN 9780429340772 (ebook) Subjects: LCSH: Corporate governance—Law and legislation. | Public-private sector cooperation—Law and legislation. | Decentralisation in management. | Corporation law. Classifcation: LCC K1327 .L394 2021 (print) | LCC K1327 (ebook) | DDC 346/.065—dc23 LC record available at https://lccn.loc.gov/2020037350 LC ebook record available at https://lccn.loc.gov/2020037351 ISBN: 978-0-367-34587-7 (hbk) ISBN: 978-0-429-34077-2 (ebk) Typeset in Sabon by Apex CoVantage, LLC

Iris dedicates this volume to co-editor Roger – thank you for your wonderful friendship and the coincidence of many shared and valuable perspectives on our favourite topics! Roger dedicates this volume to Iris, whose legal rigour, humour and patience has underpinned the fulflment of this project.

Contents

List of fgures List of tables List of contributors 1 Introduction

ix x xi 1

RO G E R M B A R KE R AN D IRIS H - Y CH IU

2 Decentralised business models and the role of the law of organisations and governance

20

IRIS H-Y CHIU

3 Three approaches to the governance of decentralised business models: contractual, regulatory and technological

51

RO G E R B ROW N SWO RD

4 The organisational and governance needs of networks

88

RO G E R M B A R KE R

5 Towards sustainable supply chain networks: mandatory human rights due diligence as a new governance tool?

116

A N D R E A S RÜ HMKO RF

6 Public–private partnerships and the role of the law of organisations and governance

149

RO G E R M B A R KE R AN D IRIS H - Y CH IU

7 The platform economy and the law of organisations and governance IRIS H-Y CHIU

189

viii

Contents

8 Social enterprise law in the platform economy

244

N I N A B O E GE R

9 Blockchain technology-enabled business arrangements

271

I R I S H - Y C HIU AN D AL E XAN DRA SCH N E IDERS

10 Conclusion: improving the resilience and accountability of decentralised business models

307

RO G E R M B ARKE R A N D IRIS H - Y CH IU

Index

323

Figures

1.1 2.1 2.2 2.3 4.1

Mapping of bodies of law onto the market/hierarchy binary Framework for organisational and governance choice for economic groupings Default legal architecture for platforms and distributed ledger-based economies of a commercial nature Economic-social realities in the organisation of many platform and distributed ledger-based economies Implications of formality and hierarchy for organisational behaviour

6 35 41 41 93

Tables

4.1 4.2 4.3 4.4 6.1 8.1

Networks versus hierarchies and markets Nature of relationship between participants in differing network taxonomies Alternative forms of network governance Types of governance failure List of acronyms and corresponding functions for the PPP Capital and community platform ownership (ideal types)

91 97 99 102 152 247

Contributors

Roger M Barker is Director of Policy and Corporate Governance at the Institute of Directors. He is Honorary Associate at the Centre for Ethics and Law at University College London and a visiting lecturer at numerous academic institutions, including Saïd Business School, Cass Business School, Tokyo University and Seoul National University. Dr Barker is the holder of a doctorate from Oxford University and the author of numerous books and articles on corporate governance and board effectiveness, including: Corporate Governance and Investment Management: The Promises and Limitations of the New Financial Economy (with Iris H-Y Chiu, 2017), The Effective Board: Building Individual and Board Success (2010) and Corporate Governance, Competition, and Political Parties: Explaining Corporate Governance Change in Europe (2010). A former investment banker, Dr Barker spent almost 15 years in a variety of equity research and senior management roles at UBS and Bank Vontobel in the UK and in Switzerland. Nina Boeger is Reader in Law at the University of Bristol Law School and director of the Law School’s Centre for Law and Enterprise, which she founded in 2015. She is a qualifed solicitor and German lawyer. Before joining academia, Nina worked in commercial legal practice. Her expertise lies in the feld of corporate law and governance (with a focus on UK, US and European systems), particularly the development of sustainable forms of company ownership, including social and cooperative enterprises and steward-owned frms. Nina’s work considers how we might develop the role of company law and, more generally, the law of business organisations, in supporting and nurturing the evolution of sustainable economies. She has previously worked on issues of regulatory governance and the development of European regulatory networks, especially the regulation of public services and utilities. For her work she has received a series of external research grants and awards, including from the AHRC, ESRC and the EU Commission, and she has held a number of advisory positions and fellowships. Roger Brownsword holds professorial positions in Law at King’s College London (where he is Director of TELOS) and at Bournemouth University.

xii

Contributors He is an honorary Professor in Law at the University of Sheffeld, and he is currently a visiting professor at City University Hong Kong. His many publications include Contract Law: Themes for the Twenty-First Century (2006), Rights, Regulation and the Technological Revolution (2008), Law, Technology and Society: Re-imagining the Regulatory Environment (Routledge, 2019) and, most recently, Law 3.0: Rules, Regulation and Technology (Routledge, 2020). He is the founding general editor (with Han Somsen) of Law, Innovation and Technology as well as being on the editorial board of international journals, including the Modern Law Review. In addition to serving as a specialist adviser to parliamentary committees, he has been a member of various working parties, most recently the Royal Society Working Party on Machine Learning.

Iris H-Y Chiu is Professor of Corporate Law and Financial Regulation at University College London. She is Director of the UCL Centre of Ethics and Law and advances the public and stakeholder engagement of the Centre’s agenda in relation to a wide range of issues in relation to law, regulation, governance and ethics in business and fnance. She has published extensively in the areas of corporate governance and fnancial regulation, including The Foundations and Anatomy of Shareholder Activism (2010), Corporate Governance and Investment Management: The Promises and Limitations of the New Financial Economy (with Roger M Barker, 2017); Regulating (From) The Inside: The Legal Framework for Internal Control in Banks and Financial Institutions (2015) and Banking Law and Regulation (with Joanna Wilson, 2019). She has interests in fnancial regulation and governance, law and technology, corporate law and governance and the law and policy for business and fnance generally. She is a Research Fellow of the European Corporate Governance Institute, and most recently a Senior Scholar at the European Central Bank’s Legal Research Programme. Andreas Rühmkorf is a Senior Lecturer in Commercial Law at the University of Sheffeld. Andreas has a PhD from the same institution, and he is also admitted to the bar in Germany (Rechtsanwalt). His research focuses on the legal regulation of CSR and sustainability in global supply chains as well as on company law and corporate governance. Andreas is the author of Corporate Social Responsibility, Private Law and Global Supply Chains (2015) as well as of several chapters and articles about global supply chains. Alexandra Schneiders is a Research Associate at the University College London Energy Institute. Her research focuses on the policy and regulatory aspects of peer-to-peer energy trading using distributed ledger technologies (DLTs). More broadly, she is interested in the interaction between industry, government and consumers within peer-to-peer (P2P) platforms. Alexandra has degrees in law and politics. Before joining UCL she worked

Contributors

xiii

as a policy and legal consultant for energy sector clients and the European Commission in Brussels. As of September 2019, Alexandra is the Operating Agent of the Global Observatory on Peer-to-Peer, Community Self-Consumption and Transactive Energy Models (GO-P2P), an Annex of the User-Centred Energy Systems Technology Collaboration Programme (Users TCP) by the International Energy Agency (IEA). The Observatory will study pilots of these new business models across the world for three years. Its main aim is to produce outputs that will promote evidence-based policymaking on these models nationally and internationally.

1

Introduction Roger M Barker and Iris H-Y Chiu

This volume showcases a range of increasingly ubiquitous business models that can be regarded as falling in between the notions of ‘markets’ and ‘hierarchies’.1 To date, the legal conceptualisation of business models that can be characterised as ‘between markets and hierarchies’ is limited, as such business models are fraught with ‘categorisation’ problems. Cafaggi opines that these are ‘located at the intersection between exchange and organisational contracts, thus, in the conventional view, between contract and company law’.2 This is despite the fact that some of these business models such as business networks date back to historical periods.3 In this introductory chapter, we provide an overview of a range of business models ‘between markets and hierarchies’ that are discussed in this book. We collectively call them ‘decentralised business models’, which is an imperfect collective term, but which highlights a common legal consequence. Decentralised business models discussed in this volume include business networks, the multinational global supply chain, the platform economy and its more decentralised sister version, the blockchain-based platform and public–private partnerships. The use of the term ‘decentralised’ business model characterises the business model as not falling within the scope of a legally recognised organisational form such as the corporation. This results in the decentralised business model being considered to be legally ‘closer’ to the conceptualisation of the market. This conceptualisation focuses on the micro and often bilateral relationships between various parties in the decentralised business model, but such a picture is incomplete, as decentralised business models do feature multilateral and governance aspects. The legal institutions that support the economic concept of the market, i.e. contract

1 Theorised extensively in Oliver Williamson, ‘Markets and Hierarchies: Some Elementary Considerations’ (1973) 63 The American Economic Review 316. 2 Fabrizio Cafaggi, ‘Contractual Networks and the Small Business Act: Towards European Principles?’ (2008) 4 European Review of Contract Law 493 at 507. 3 Simon Deakin, ‘The Return of the Guild?’ in Marc Amstutz and Gunther Teubner (eds), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart Publishing 2009), ch3.

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Roger M Barker and Iris H-Y Chiu

law, have by default been treated as more relevant to such business forms4 but often do not extend to multilateral and governance aspects of such arrangements. This binary treatment in law has reinforced the under-theorisation and lack of institutional development in the law with regard to decentralised business models. Although European legislation has introduced a legal innovation in the form of the European Economic Interest Grouping (EEIG)5 to cater for decentralised European business arrangements, this legal innovation caters for certain rather specifc business-to-business arrangements within the geographical boundaries of Europe and does not capture the wider international dimension.6 Further, the EEIG is generally viewed as unable to cater for newer organisational developments in more commercially oriented decentralised business models such as peer-to-peer economic arrangements. It is time to consider a form of re-theorisation and new institutional developments in the law so as to cater for the needs of economic and social transformations that give rise to these organisational innovations.7 In particular, this chapter argues that wisdom can be drawn from governance norms which already exist for legally recognised organisational forms in order to meet some of the needs of decentralised business models, i.e. from features of the mainstream corporate governance paradigm. We do not claim that the law of organisations and governance developed for hierarchies such as the corporate form is necessarily the only paradigm for the decentralised business model.8 What we argue is that it is misleading to conceive of the law of organisations and governance for decentralised business models as irrelevant. Existing governance principles contain insights and solutions that are relevant for the future effectiveness and legitimacy of the decentralised business structure. This chapter provides new theoretical anchoring for the development of organisational and governance norms (in hard or soft law) applicable to the decentralised business model. This is important in order to provide a basis for developing governance for such business models as a normative

4 Generally, Amstutz and Teubner (2009). 5 Council Regulation EEC No 2137/85 of 25th July 1985 on the European Economic Interest Grouping (EEIG) and transposed in the UK European Economic Interest Grouping Regulations 1989. Upon the UK’s withdrawal from the EU, the existing EEIGs registered in the UK are grandfathered and can be converted into a UK Economic Interest Grouping. However the provision for only UKEICs after Brexit limits the usefulness of such a legal form, as interfrm networks can be global in nature and not just European. See The European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018. 6 See Chapter 2. 7 Mark Thomas Kennedy, Jade (Yu-Chieh) Lo and Michael Lounsbury, ‘Category Currency: The Changing Value of Conformity As a Function of Ongoing Meaning Construction’ in Greta Hsu, Giacomo Negro and Özgecan Koçak (eds), Categories in Markets: Origins and Evolution (Bingley: Emerald Insight 2010) at 369–397. 8 Amstutz and Teubner (2009).

Introduction

3

and not merely as a contractual order. We do not advance an agenda supporting a complete reversion to ‘centralised’ governance frameworks for decentralised business models as such but instead argue that the recognition of ‘organisational’ aspects of these business arrangements and their needs for governance provide a basis for developing thinking about the design of governance frameworks and tenets, which is ultimately likely to consist of a mixture of hierarchical and heterarchical aspects.9

Law, markets and hierarchies Markets and hierarchies are often conceived as representing a binary choice for economic activity organisation. This dates back to the Coasean question of why there is a need to establish a frm in the frst place, instead of carrying out all economic transactions directly on a relevant market.10 The market is regarded as a place for exchange by rational actors acting instrumentally to maximise their own utility and is therefore the starting point for organising economic activity effciently.11 Coase was of the view that market-based economic activity was not always the most effcient, as transactions such as repeat ones may be more optimally taken off-market and internalised within the structure of a ‘frm’. The frm becomes an ‘internal marketplace’ that coordinates certain transactions more optimally, as the ‘transaction costs’12 in relation to discrete economic activities can be reduced. This view of the frm has also led to an ‘aggregate’ or contractarian view of the frm13 as merely an umbrella structure whose reality is comprised of the internalised mediation of a variety of contractual arrangements, which eventually results in a hierarchical arrangement. The Coasean choice paradigm for organising economic activity has been further expounded by Williamson, whose work details under what circumstances (such as bounded rationality and market failures) transactions should best be organised within the ‘hierarchy’, although the hierarchy can give rise to subordination and subjugation.14 Hence the frm is a conceptual derivative of the market and not a polar

9 For example, see Will Sutherland and Mohammad Hossein Jarrahi, ‘The Sharing Economy and Digital Platforms: A Review and Research Agenda’ (2018) 43 International Journal of Information Management 328 in relation to many combinations of hierarchical and heterarchical features in the platform economy; see more in Chapter 7. 10 Ronald Coase, ‘The Nature of the Firm’ (1937) 4(16) Economica 386–405. 11 James G Carrier, ‘Introduction’ in James G Carrier (ed), The Meanings of the Market (Oxford: Berg Publications 1997). The Introduction presents this depiction as an economic perspective which is caricatured and ignores the relational dimensions in the workings of markets. 12 Williamson (1973) and Oliver Williamson, ‘Corporate Governance’ (1984) 93 Yale Law Journal 1197. 13 Frank H Easterbrook and Daniel R Fischel, ‘The Corporate Contract’ in The Economic Structure of Corporate Law (Cambridge, MA: Harvard University Press 1991), 1ff. 14 Williamson (1973).

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Roger M Barker and Iris H-Y Chiu

opposite, and whether economic activity is organised as ‘frm’ or ‘on market’ depends on transaction costs.15 The conceptual binary of markets and hierarchies is refected in legal institutions, although this is not to suggest that legal institutions have necessarily followed economic conceptions. The law of contract applies to each discrete transaction that is an exchange and not a gift,16 and foundational precepts in contract law assume the volition of a (rational) economic actor entering into an arms-length transaction that the individual has considered for himself/herself.17 These legal concepts have theoretical resemblance and affnity with the free market economy, where the individual has the freedom and exercises his/ her own will to transact based on market signals such as supply, demand and price.18 Although the ‘freedom of contract’ that matches the ‘free market’ is an over-simplifcation, and developments in law and regulation have struck new balances of rights and remedies in contractual transactions, depending on market context,19 what can be broadly agreed on is that the key legal institution that underlies markets is the law of contract. Relations conducted on a market are governed by its framework and norms. However, for a hierarchy, the most popular legal form of which is the corporate form, corporate law governs the establishment and relations conducted in and with the corporate form. Nevertheless, it is arguable that ‘corporate law’ is distinct from the law for markets. Corporate law evolved from partnership law in England, which provided the early basis for a hybrid contractual and organisational law.20 A partnership is an association of persons for the purposes of carrying out business with a common view to proft,21 and partnership law strikes a balance between facilitating partners’ arrangements between themselves22 and providing mandatory rules to govern partners’ relations with third parties and inter se.23 The absolute freedom of contract for a partnership is not countenanced in the UK, nor in the US.24 The continuing relational

15 Above. 16 As a valid contract requires consideration or ‘quid pro quo’. 17 The concepts of ‘offer’ and ‘acceptance’ typify that depiction; see Jonathan Morgan, Great Debates in Contract Law (London: Palgrave Macmillan 2015), ch1. 18 Samuel Cregg, ‘Natural Law, Scholasticism and Free Markets’ in Stephen Copp (ed), The Legal Foundations of Free Markets (London: Institute of Economic Affairs 2008), ch3. 19 PS Atiyah, The Rise and Fall of the Freedom of Contract (Oxford: Clarendon 1985); FH Buckley (ed), The Rise and Fall of the Freedom of Contract (Durham and London: Duke University Press 1999) at Parts I and VI. 20 Partnerships Act 1890, especially provisions such as s4 on the ‘frm’ as a quasi-collective entity and s20 on the priority of ‘partnership property’. 21 S1, Partnerships Act 1890. 22 E.g. s24. 23 E.g. s5–12, 25–30. 24 Leo Strine Jnr and Leo Travis Laster, ‘The Siren Song of Unlimited Contractual Freedom’ in Robert W Hillman and Mark J Loewenstein (eds), Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Cheltenham: Edward Elgar 2015), ch1.

Introduction

5

dimension of the partnership seems to justify the imposition of norms in relation to reasonably expected behaviour in relation to trust reposed by third parties and between partners inter se. This relational dimension also accounts for why corporate law is not as fully ‘contractarian’ as some commentators argue. A school of thought in corporate law views corporate law as ‘contractarian’ in nature, refecting the hypothetical bargains that parties would optimally have made.25 Corporate law does have facilitative aspects, where choices are presented to incorporators to structure their powers and relations, but it also includes many mandatory aspects which provide for norms of conduct and accountability that are not merely standardised hypothetical contracts.26 Incorporation and the privilege of limited liability are granted by the state, hence there is a public interest dimension in how the corporate form should be governed.27 Further, both theoretical and empirical accounts of corporate law development challenge the view that corporate law is merely contractarian. For example, Moore’s account of corporate law as governing the exercise of administrative power on the part of managers brings in a public law characterisation of corporate law in relation to its core concepts of governance.28 Further, the existence of mandatory provisions that divide power in corporate decision making between the Board and general meeting29 (that cannot be ‘contracted’ out of) and the increasing advent of corporate governance standards as quasi-hard law30 (imposed usually by securities exchanges) refects a state of corporate law as a body of norms

25 William A Klein, ‘The Modern Business Organization: Bargaining Under Constraints’ (1982) 91 Yale Law Journal 1521; David Charny, ‘Hypothetical Bargains: The Normative Structure of Contract Interpretation’ (1991) 89 Michigan Law Review 1815; Easterbrook and Fischel (1991). 26 Above. But see Lucian Ayre Bebchuk, ‘The Debate on Contractual Freedom In Corporate Law’ (1989) 89 Columbia Law Review 1395; ‘Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments’ (1989) 102 Harvard Law Review 1820; Victor Brudney, ‘Corporate Governance, Agency Costs, and the Rhetoric of Contract’ (1985) 85 Columbia Law Review 1403; Melvin von Eisenberg, ‘The Structure of Corporation Law’ (1989) 89 Columbia Law Review 1461; Thomas Lee Hazen, ‘The Corporate Persona, Contract (and Market) Failure, and Moral Values’ (1991) 69 North Carolina Law Review 273. 27 This is the concession theory of the frm that justifes imposing mandatory law on corporations for having the privilege to incorporate as a separate legal person and enjoy limited liability. 28 Marc Moore, Corporate Governance in the Shadow of the State (Oxford: Hart 2013). 29 The division of powers such as in Arts 3 and 4 of the Model Articles for Private and Public Companies, powers reserved for the general meeting such as s168, 239 and s188–214, Companies Act 2006. 30 The UK Corporate Governance Code 2018; see www.frc.org.uk/directors/corporategovernance-and-stewardship/uk-corporate-governance-code. The norms of the Code can be treated as quasi-legalised; see Marc T Moore, ‘“Whispering Sweet Nothings”: The Limitations of Informal Conformance in UK Corporate Governance’ (2015) 9 Journal of Corporate Law Studies 95.

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Markets

Law of contract

Hierarchies (e.g. corporations)

Law of organisations/ corporate law (incorporating some contractual elements)

Figure 1.1 Mapping of bodies of law onto the market/hierarchy binary

that govern the use of the corporate form and its internal governance, and not merely as a rack of convenient options for businessmen who choose the corporate form to conduct their economic activities. In sum, we characterise corporate law as attaining an ‘organisational’ character, providing governance norms for the discrete organisational form of the corporation, whether of a facilitative or mandatory nature. Indeed, corporate law has also increasingly made distinctions within its body of norms pertaining to publicly traded companies (also governed by securities regulation) and private companies.31 The ‘large private company’, which features relational characteristics closer to the publicly traded company, is also coming under distinct treatment.32 The law mapping onto the binary choice between markets and hierarchies looks as shown in Figure 1.1. This legal mapping suggests that law reinforces the broad binary choice, although the two bodies of law have related conceptual foundations. We discuss below that the law’s binary treatment has not kept up with developments in business organisation and that new ‘technologies’ in business organisation are not yet refected, so the law is forced to adapt from its

31 E.g. the written resolutions regime for private companies that provide convenience for members to agree on matters without the need to call a general meeting in the traditional way, e.g. s288–300, Companies Act 2006. 32 Large private companies can be subject to more obligations resembling those imposed on publicly traded companies, such as corporate disclosures: of directorial discharge of responsibility, s414CZA, of corporate governance arrangements, Part 8, Schedule 7, Companies Act 2006 amended by the Companies (Miscellaneous Reporting) Regulations 2018, of stakeholder and non-fnancial performance, s414CA, and under the Modern Slavery Act 2015, s54.

Introduction

7

existing premises. The consequence is that organisational law that is tied to recognised organisational forms such as the company, partnership or limited liability partnership applies discretely within those contexts, and organisational arrangements falling outside of the scope of legally recognised organisational forms are governed by the default law that governs markets, i.e. contract law. These arrangements are discussed below. Decentralised business models as neither hierarchies nor markets The universe of decentralised business models we look at in this volume is increasingly diverse and may be defned through a variety of legal arrangements. For example, decentralised networks of associated companies can be established through webs of equity stakes and cross-ownership linkages. Business networks may also be created by interfrm alliances of autonomous business or not-for-proft enterprises without any ownership linkages but who nonetheless work together to pursue a shared business or social purpose, e.g. in relation to R&D, marketing, lobbying or healthcare provision. We look in more detail at this relatively innovative form of business decentralisation in Chapter 9. A particular focus of this book is the contractual mechanisms used to build global supply chains and outsourcing arrangements across the multinational business model. We also evaluate efforts to adopt a similar approach in the public sector, driven by the imperative of moving away from historical ‘command-and-control’ structures through organisational innovations such as public–private partnerships, Subsequently, we look at newer developments in networks in terms which directly connect consumers  – often framed as peer-to-peer, such as in the platform-based sharing economy and more recently, technologically driven transformations in business such as the distributed ledger-based model of disintermediated business. The above business models can all be regarded as ‘decentralised’, as their characteristics in terms of boundary-defnition (legal personalities), hierarchicalisation (in terms of rights and powers of decision making) and legalisation of relationships to facilitate enforcement (duties, rights and remedies, with third parties or inter se) are not always determinate. The indeterminacy is as a result of such arrangements not falling within the scope of organisations law such as corporate law. What we increasingly observe is that the corporate form and its legal framework are not a good ft for the purposes or effciencies of many emerging business arrangements, and these arrangements revert or migrate to being framed and understood within the realm of contract rather than company law.33 We now turn to each of these specifc arrangements in more detail.

33 F Cafaggi (ed), Contractual Networks, Interfrm Cooperation and Economic Growth (Cheltenham: Edward Elgar 2011) at Introduction, chs 4, 5 and 7.

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Roger M Barker and Iris H-Y Chiu

A frst way in which a centralised hierarchical entity might seek to decentralise its activities is by creating a network of subsidiary, special-purpose or joint-venture (JV) entities in which the apex corporate entity takes equity stakes, either alone or with business partners. This may allow it to share risk or mobilise external investment or know-how for specifc activities and to operate more fexibly or legitimately in specifc markets with local partners and/or local regulators. The creation of various localised legal entities with separate legal personality from that of the holding entity may also provide a shield against the transmission of unforeseen shocks and potential liability across and up the group – an issue that we explore with respect to DBMs’ liability for human rights practices in Chapter 5. Such a structure based on ownership linkages between legal entities can maintain many of the authority characteristics of a traditional hierarchical entity – with many of its relational features based on obligations defned in company law (e.g. the shareholder voting rights controlled by the holding company). This may make it an attractive option from the holding company perspective. However, the involvement of third-party equity investors in the structure, e.g. in the form of minority or JV partner equity stakes, may result in demands for a renegotiation of the governance and decisionmaking structure  – often in the form of bespoke shareholders or JV contractual agreements. The result is a hybrid arrangement mixing elements of company and contract law which are both necessary in order for such business arrangements to be acceptable to the various equity participants. Business networks or interfrm alliances are usually arrangements of joint investment, cooperation, learning and mutual beneft entered into between corporate entities in order to exploit combined capacities and economies of scale and to develop expensive but potentially socially benefcial innovation.34 In these arrangements, discrete organisational entities such as different corporations or, for example, corporations and universities could enter into agreements to develop research and learning capacity with a view to product development in the future, often in the face of uncertainty in terms of prospects and cost.35 There are many business, industry and institutional factors in different jurisdictions driving the formation of networks, such as the need to enhance specialisation and effciency as well as economic and resource interdependence. There are also relational paradigms driving such networks such as institutional factors and ties in kinship or common fnancial ownership.36 These networks are usually formalised alliances with

34 Walter W Powell, ‘Learning from Collaboration: Knowledge and Networks in the Biotechnology and Pharmaceutical Industries’ in Nicole Woolsey Biggart (ed), Readings in Economic Sociology (London: Blackwell 2002), ch14. 35 Above. 36 Sebastian Zander, Simon Trang and Lutz M Kolbe, ‘Drivers of Network Governance: A Multitheoretic Perspective with Insights from Case Studies in the German Wood Industry’ (2016) 110 Journal of Cleaner Production 109.

Introduction

9

a view to the medium or long term. However these alliances are not necessarily or ultimately ‘corporatised’ as would occur if the various entities were to proceed to a fully fedged corporate merger or acquisition.37 Although they may be founded on a relatively informal basis, business networks become increasingly governed by contract as the intensity of cooperation between the various entities grows. However, as these arrangements are highly relational,38 meaning that there are multiple parties who commit to each other in goodwill and over a long term, contractual governance often does not refect all the needs of such arrangements. Multiple parties in a business network may not all be parties to one contractual arrangement, and there may be a collection of contractual arrangements among different parties in the same arrangement in relation to their specifc roles.39 Contractual analysis is very much based on a bilateral assumption and does not cater very well for a ‘collection’ of multilateral arrangements.40 The enforceability of contracts for external parties to contracts has been facilitated under the Contract (Rights of Third Parties) Act 1998 in the UK,41 but even the Act does not provide for the notion of a collection of contracts in a network as all related to each other. Contractual analysis in many jurisdictions faces challenges in relation to each contract’s discreteness. Further, contractual analysis is highly ex ante in nature and does not provide for the recognition of networks’ needs in ex post negotiations and the formation of afterward expectations or norms.42 Shared understandings and expectations can arise in an ex post manner in the network,43 and it is queried if the legal framework governing network relations can refect and advance this ‘sociological’ reality. Further, it may be argued that although contract law by default governs network relations, contractual enforcement is not practicable, as litigation is too damaging and disruptive to such long-term relations.44 This lacuna in practical enforcement can give rise to diffculties

37 Zhiang (John) Lin, Mike W Peng, Haibin Yang and Sunny Li Sun, ‘How Do Networks and Learning Drive M&As? An Institutional Comparison between China and the United States’ (2009) 30 Strategic Management Journal 1113. 38 Gunther Teubner, ‘Coincidentia Oppositorum: Hybrid Networks Beyond Contract and Organisation’ in Amstutz and Teubner (2009), ch1; Cordula Heldt, ‘Internal Relations and Semi-spontaneous Order: The Case of Franchising and Construction Contracts’ in above, ch8. 39 Such as multilateral or linked contracts, see F Cafaggi (ed), Contractual Networks, Interfrm Cooperation and Economic Growth (Cheltenham: Edward Elgar 2011), ch4. 40 Teubner (2009). 41 Roger Brownsword, ‘Network Contracts Revisited’ in Amstutz and Teubner (2009) at ch2; Marc Amstutz, ‘The Constitution of Contractual Networks’ in above, ch16. 42 F Cafaggi (ed), Contractual Networks, Interfrm Cooperation and Economic Growth (Cheltenham: Edward Elgar 2011) at Introduction, ch7. 43 Heldt (2009); Peter W Heermann, ‘The Status of Multilateral Synallagmas in the Law of Connected Contracts’ in Amstutz and Teubner (2009), ch6. 44 Gillian Hadfeld and Iva Bozovic, ‘Scaffolding: Using Formal Contracts to Support Informal Relations in Support of Innovation’ (2016) Wisconsin Law Review 981.

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if disputes arise.45 We argue below that an ‘organisational’ perspective in law for business networks may be useful for catering to needs that are not clearly met by contractual governance alone. The ‘vertically’ integrated frm is a phenomenon that has been written about since the 1970s.46 This phenomenon challenges the atomistic Coasean frm as a self-suffcient ‘internal market’ coordinating all of its component economic activities. Firms that produce widgets may specialise in the manufacturing aspect and would have to tie up with suppliers for raw materials and components and with downstream distributors and a marketing network for sales. This picture of the vertically integrated frm represents a truer depiction of economic activity than the Coasean one. Further, the development of long-termist supply and distribution relationships makes such relationships not ‘market-based’ in nature, as they develop relational characteristics and individual entities are not always autonomous units dealing at arm’s length with each other.47 With the advent of globalisation and free trade since the 1980s, the vertically integrated frm has become a more complex and larger cluster, spanning the world. In particular, the global supply chain is a network of many discrete corporate forms – small and large – across the globe. For example, a large corporation may have a global supply chain of substantial networks of frms across jurisdictions, numbering in hundreds or even thousands, as outsourcing, subcontracting and sub-subcontracting layers are constructed.48 The supply chain can be a tightly woven network, as some suppliers are key and maintain long-term contractual relationships. However, contractual governance applies throughout the supply chain between the discrete corporate entities, and there is no ‘collective’ framing of relations inter se. The operation of corporate law doctrines such as separate legal personality and contractual privity insulate each frm’s responsibility and liability, including the multinational corporations’ responsibilities and liabilities

45 It has been queried if the involvement of criminal law in Nissan’s ousting of Carlos Ghosn, could in part be attributed to his bringing to bear pressures regarding a formal merger between Renault and Nissan, a prospect that Nissan resisted but lacked formal channels within the network to address. See Robert Ferris, ‘Nissan Executives Allegedly Orchestrated Carlos Ghosn’s Arrest to Kill Merger with Renault’ (CNBC, 28 March 2019) at www.cnbc. com/2019/03/28/nissan-executives-allegedly-sought-ghosns-arrest-to-kill-renault-merger. html. 46 GB Richardson, ‘The Organisation of Industry’ (1972) 82 (327) Economic Journal 883–896. 47 Filipe J Sousa, ‘Markets-as-networks Theory: A Review’ in Arch G Woodside (ed), Organizational Culture, Business-to-Business Relationships, and Interfrm Networks (Bingley: Emerald 2015), ch8. 48 Douglas M Lambert and Martha C Cooper, ‘Issues in Supply Chain Management’ (2000) 29 Industrial Marketing Management 65.

Introduction

11

too,49 although there may in reality be high levels of interdependencies. For example, Uniqlo was not directly liable to compensate a subcontractor factory’s unpaid seamstresses in Indonesia when the factory collapsed.50 However, the avoidance of any responsibility for this episode has been criticised from the perspective of business ethics.51 A similar story unfolded in relation to unpaid factory workers in Turkey who were working on clothes to be supplied to Zara, owned by the Inditex group, one of the largest and most proftable retail giants in the world.52 The strict application of contractual governance, which focuses on bilateral relations and responsibilities, is increasingly seen as inadequate in dealing with the realities of the global supply chain.53 Further, new regulatory law in the EU and UK impose an unsatisfactory and indeterminate form of responsibility on publicly traded corporations.54 We argue below that an ‘organisational’ perspective can offer new wisdom in looking at the global supply chain and legal doctrines for responsibility and liability. In relation to public–private partnerships, it may be queried why this category is included in this volume. Although public goods and services are usually involved, the arrangements are often underpinned by economic calculus

49 The UK has no doctrine of enterprise liability, see Adams v Cape Industries plc [1990] Ch 433; Prest v Petrodel Resources Ltd [2013] UKSC 34. But there is increasing concern as to whether certain parent companies may, by virtue of control or involvement in setting policy for subsidiaries, owe a duty of care to subsidiary employees directly; see Chandler v Cape plc [2012] EWCA Civ 525. This seemed to be applied narrowly in Okpabi and others v Royal Dutch Shell Plc and another [2018] EWCA Civ 191, where the court did not regard the CSR policies of the parent company as necessarily inferring that the parent company had the requisite level of control or involvement in subsidiaries or affliates to be owing a duty of care directly to subsidiary or affliate employees or stakeholders. But the Supreme Court decision of Vedanta Resources plc & another v Lungowe & others [2019] UKSC 20 opined that where such policies are accompanied by a parent company’s involvement in implementation in a subsidiary, the parent company could owe a direct duty of care to the subsidiary’s claimants. The opinion is not the ratio of the case, as the case involved whether there was a triable issue in relation to the existence of the duty of care. 50 Cleanclothes.org, ‘Statement on the Refusal of Uniqlo to Pay What is Owed’ (22 February 2018) at https://cleanclothes.org/news/2018/02/22/statement-on-the-refusal-of-uniqloto-pay-what-is-owed. 51 Above. 52 Cleanclothes.org, ‘Zara, Next, Mango Slammed for Leaving Workers Without Wages in Turkish Factory’ (25 September 2019) at https://cleanclothes.org/news/2017/09/25/zaranext-mango-slammed-for-leaving-workers-without-wages-in-turkish-factory. It appears that Zara has since set up a voluntary ‘hardship fund’ for workers. 53 Jennifer Bair, ‘The Corporation and the Global Value Chain’ in Grietje Baars (ed), The Corporation (Cambridge: CUP 2017), ch20. 54 Due diligence procedures for global supply chains are to be disclosed under s414CA, Companies Act 2006; also s54 Modern Slavery Act. Further, disclosure and certifcation are required for mineral importation that may be tainted by confict in the Democratic Republic of Congo, see EU Confict Minerals Regulation, in force in 2021. See Iris H-Y Chiu, ‘An Institutional Theory of Corporate Regulation’ (2019) 71 Current Legal Problems 279 and citations within.

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and effciency considerations,55 and these are entered into as contractual arrangements governed by private and not public law. The public–private partnership is an arrangement that defaults to contractual governance, as the state is regarded as entering into a transaction with a private entity. This is in spite of the fact that the private entity is to step into the state’s position in relation to the provision of public goods and services.56 In a contractual governance framework, there is likely an inadequate refection of the public interest in the ultimate delivery of the outsourced good or service. The provision of public goods and services will inevitably have been framed by private contractors in terms of how they can be instrumentalised in pursuit of private corporate objectives,57 and various models of public–private risk allocation may be fnancially motivated and inadequately designed to address the incompatibility between private-sector incentives and the delivery of public goods or services.58 The failure of private provision of probation services in the UK,59 for example, raises timely challenges to a purely contractual governance model for the public–private partnership. Also, the self-interested behaviour of executives, boards and shareholders of private companies engaged in delivering outsourcing contracts for the public sector has been particularly criticised in the wake of the failure of key government contractor Carillion plc in early 2018.60 We therefore explore in Chapter 6 if an organisational perspective of these arrangements may help us to conceive of a new dimension of organisational objectives and norms in order to address the defcits left unaddressed by contractual governance in the public service outsourcing sector. Next, we turn to newer business forms that have arisen in the ‘decentralised’ space, but are different in character from the ‘business-to business’ or ‘business-state’ forms discussed above. Increasingly, decentralised business forms bring together consumers or retail level participants to join in

55 E.g. Martijn van den Hurk, ‘Public Private Partnerships: Where Do We Go From Here? A Belgian Perspective’ (2018) 23 Public Works Management and Policy 274. 56 Andreas Abegg, ‘Regulation of Hybrid Networks at the Intersection between Governmental Administration and Economic Self-Organisation’ in Amstutz and Teubner (2009), ch14; Terence Daintiff, ‘Mixed Public-Private Networks as Vehicles for Regulatory Policy: Comments on the Chapter by Andreas Abegg’ in above at Chapter 15. 57 Erik-Hans Klijn and Geert R Teisman, ‘Governing Public Private Partnerships’ in Stephen Osborne (ed), Public-Private Partnerships: Theory and Practice in International Perspective (Oxford: Routledge 2007), ch5; A Ng and Martin Loosemore, ‘Risk Allocation in the Private Provision of Public Infrastructure’ (2007) 24 International Journal of Project Management 66. 58 Roger Wettenhall, ‘The Rhetoric and Reality of Public-Private Partnerships’ (2003) 3 Public Organisation Review 77. 59 ‘Private Probation Contracts Ended Early by Government’ (BBC News, 27 July 2018) at www.bbc.co.uk/news/uk-44973258. 60 ‘Carillion Collapse Exposed Government Outsourcing Flaws  – Report’ (The Guardian, 9 July 2018) at www.theguardian.com/business/2018/jul/09/carillion-collapse-exposedgovernment-outsourcing-faws-report.

Introduction

13

economic activity in multiple capacities, to consume as well as to produce. These business models rely on the network effects of mass decentralised participation and turn retail level participants into ‘peers’ for the purposes of commercial activity. First, we look at platform business models, or what is commonly referred to as the ‘sharing economy’. Platform business models introduce the commercialisation of what may hitherto not be commercialised or commodifed due to barriers to entry, such as the need for commercial premises, stock, investment, access to markets or regulatory approval, and allow what Sundarajan61 calls ‘underutilised assets’ or what Benkler62 refers to as ‘excess capacity’ to be made marketable via new means of access and connection. Such underutilised assets or excess capacity are often found in the hitherto uncommercialised spheres of retail level asset ownership or productive capacity. Morgan63 defnes two main developments in the platform economy. One is to support new ways of accessing and demanding commercial goods or services, such as peer-to-peer lending for small business or personal lending outside of the banking sector, or the oft-cited Uber or AirBnB model that deploys people’s spare capacities to be commodifed into chauffeuring or temporary lodging services. Second, the platform economy can be non-commercial in nature, chiefy concerned with bringing together people in communities or globally to participate in non-monetary exchange, co-creation of a bigger project, etc., supporting new ways of co-creating socio-economic goods. One example is the online neighbourhood platform that helps dog owners look for temporary sitters,64 and others would be the global network of participants that creates open source software and Wikipedia.65 Platform-based business models bear many characteristics of marketplaces, as they are often open to mass participation. However, it is arguable that they are not merely marketplaces but are communities, as participants conform to certain eligibility and transaction standards.66 The platformbased business models are often themselves incorporated as corporate forms and deal with participants on the basis of contractual governance. They often carry out extensive self-governance and contractual governance with

61 Arun Sundarajan, ‘The Economic Impact of Crowd-sourced Capitalism’ in The Sharing Economy (Cambridge, MA: MIT Press 2016), ch5. 62 Yochai Benkler, ‘Peer Production and Sharing’ in The Wealth of Networks (New Haven, CT: Yale University Press 2006), ch3. 63 Bronwen Morgan, ‘The Sharing Economy’ (2018) 14 Annual Review of Law and Social Science 351. 64 Devyani Prabhat, ‘“BorrowMyDoggy.Com”: Rethinking Peer-to-peer Exchange for Genuine Sharing’ (2018) 45 Journal of Law and Society 84. 65 Yochai Benkler, ‘The Economics of Social Production’ in Benkler (2006), ch4. 66 See Chapter 7.

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users, such as in the cases of eBay,67 AirBnB68 and Uber69 in order to maintain the social capital of reputation and the economic capital of network effects. However, as rightly pointed out in the volume edited by McKee, Makela and Scassa,70 governance arrangements relating to platforms leave a number of issues unanswered. Contractual governance often obscures the inequalities of bargaining power between platform operators such as Uber or AirBnB and participants.71 For example, Uber drivers in India regard their work as a full-time job and not casual labour and commit to personal risks such as car fnance. They have been severely affected by company policies that reduce fares in the face of competition, such policies being contractually permitted, although they give rise to issues of stakeholder justice.72 Further, contractual governance leaves certain issues in grey areas of legality, as these equivalent matters would have been framed more clearly as amounting to regulatory obligations in a corporate context. One example is whether platform participants need to be treated like their licensed counterparts, such as hotels in the hospitality industry or licensed taxis,73 and another is whether participants in the sharing economy are ‘workers’ benefting from employment law.74 The moves made by Uber and Lyft to give shares in the platform operator’s company to the most committed drivers at the companies’ initial public offers75 refects an interesting dilemma for the companies themselves, as they seem to accept organisational perspectives regarding their relationship with participants and yet formally maintain an arm’s-length contractual governance narrative that is advantageous to them. Indeed, the onset of the Covid-19 crisis in early 2020 affected the sharing economy acutely as lockdowns and social distancing threatened the livelihoods of those dependent on freelance labour provided via platforms such as Uber or TaskRabbit. The crisis sharpened the need for platforms

67 Arun Sundarajan, ‘Digital and Socio-economic Foundations’ in Sundarajan (2016), ch2. 68 Giulia Leoni and Lee D Parker, ‘Governance and Control Of Sharing Economy Platforms: Hosting on Airbnb’ (2019) 51 British Accounting Review 100814. 69 Eric Tucker, ‘Uber and the Unmaking and Remaking of Taxi Capitalisms: Technology, Law, and Resistance in Historical Perspective’ in Finn Makela, Derek McKee and Teresa Scassa (eds), Law and the Sharing Economy (Ontario: University of Ottawa Press 2018), ch11. 70 Above. 71 Harry Arthurs, ‘The False Promise of the Sharing Economy’ in Makela et al. (2018), ch2. 72 ‘“My Life is Spent in this Car’: Uber Drives Its Indian Workers to Despair’ The Guardian (4 February 2018). 73 Derek McKee, ‘Peer Platform Markets and Licensing Regimes’ in Makela et al. (2018), ch1. 74 Sabrina Tremblay-Huet, ‘Making Sense of the Public Discourse on Airbnb and Labour: What about Labour Rights?’ in Makela et al. (2018), ch12. 75 ‘Uber, Lyft to Offer Some Drivers Shares in Stock Market Listing’ (Reuters, 28 February 2019) at www.reuters.com/article/us-uber-ipo/uber-lyft-to-offer-drivers-shares-in-stockmarket-listing-wsj-idUSKCN1QH1S6.

Introduction

15

to respond as to whether they would take on more ‘organisational’-type responsibility for their participants’ welfare or whether they would maintain a merely arm’s-length contractual relationship. We observe that Uber in the UK offered to provide 14 days of fnancial assistance for self-isolating drivers.76 This would be consistent with organisational responsibility for employed personnel. TaskRabbit introduced a webchat model to allow tradesmen to teach householders how to carry out certain tasks, for a fee,77 adapting its business model for the beneft of all of its participants. It may be argued that platforms are only responding to corporate citizenship expectations from society or indeed, utilitarian motives in order to preserve business continuity. However, being citizenly itself blurs the boundaries between market-driven behaviour and behaviour driven by recognition of asymmetry in power and capacity to provide. The platform business model gives rise to many issues in the interface of markets and hierarchies that are not fully addressed by the extant state of contractual governance.78 The advent of distributed ledger technology has taken the platform economy one step further by enabling and empowering a disintermediated economic model. The Bitcoin blockchain79 frst allowed a new cadre of economic actors to be introduced (nodes),80 defned a new paradigm of production and wealth creation (mining),81 and created a unique environment for exchange and community without the need for centralised institutions of trust and enforcement.82 The Bitcoin blockchain ushered in a new technology for economic interaction that is potentially disruptive, representing a step beyond the platform economy. It represents a distinct revolution moment, as the blockchain offers a disintermediated way of connection and is yet maintained by automation protocols that foster trust and reliability,83 challenging the notion that economic actorhood and activity need to be conventionally organised or ordered.

76 77 78 79 80 81

82 83

www.uber.com/gb/en-gb/coronavirus/. https://support.taskrabbit.com/hc/en-gb/articles/360040752692. See Chapter 7. Satoshi Nakamoto, ‘Bitcoin: A Peer to Peer Electronic Cash System’ (2008) at https://bitcoin.org/bitcoin.pdf. I.e. anyone who wished to connect his/her computer to the blockchain. New value can be created on the blockchain by performing maintenance tasks based on cryptographic validation, i.e. the performance of those tasks led to reward in value that can be used on the blockchain. This is because the blockchain relies on a system of decentralised work of verifcation and validation that is aimed at being tamper-proof. The distributed ledger is a concept whereby all nodes maintain the same copy of transactions and last-done status of the ledger, so that all records are immutable, indelible and cannot be arbitrarily adjusted. This is described as ‘trustless trust’, but see limitations discussed in Kevin Werbach, ‘Trust, But Verify: Why the Blockchain Needs the Law’ (2018) 33 Berkeley Technology Law Journal 489.

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The development of the Ethereum blockchain84 is the next signifcant and crucial step for the revolutionising potential of distributed ledger technology (DLT). The blockchain can now support a variety of economic activity more complex than the initially dominant activity of payment transfer, allowing for smart contracts85 to be coded and executed to effect a range of economic activity, including future or conditional contractual performance. This development facilitates new business and commercial activity conducted over the blockchain, and new businesses have arisen to innovate in that space.86 For example, the Ethereum blockchain can be used to create a global network of disintermediated providers of (largely) virtual goods, such as CryptoKitties. We discuss how blockchain facilitates peer-to-peer trading of excess solar energy harvested by individuals for example, so that buying and selling are executed on the blockchain but delivery is carried out by connections that are ‘off-chain’.87 Core to these new business models is the use of ‘tokens’, which are the native ‘coin’ in the ledger. What this means is that the ‘coin’, a standardised piece of code, embodies an entitlement to participate in the ledger as well as a unit of value for transfer. The issuance, holding and transfer of tokens are powered by the smart contract code in the token, automating most of the participatory actions in the DLT-based business model. This gives rise to a phenomenon of ‘code as law’,88 where contractual governance is taken to an automated level. Commentators query how this form of extreme closed contracting can accommodate wider contractual governance issues such as open-textured contracting and dispute resolution.89 Further, ‘code as law’

84 See www.coindesk.com/information/who-created-ethereum. 85 These are pieces of code or algorithms designed to execute certain commands if certain conditions are met, resulting in the execution or formation of legal obligations, hence ‘smart contracts’, see Nick Szabo, ‘Smart Contracts: Building Blocks for Digital Markets’ University of Amsterdam (1996) at www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/ Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html. 86 Developmental businesses have also come into the limelight, as they engage in development fnancing, soliciting funds from the public by preselling their native coin; see Bastien Buchwalter, ‘Decrypting Cryptoassets: A Classifcation and Its Implications’ (2019) at https:// ssrn.com/abstract=3271641. There is a lot of literature mapping the universe of token sales, also known as ‘initial coin offerings’; see S Adhami et al., ‘Why Do Businesses Go Crypto? An Empirical Analysis of Initial Coin Offerings’ (2018) 100 Journal of Economics and Business 64; Dirk Zetzsche et al., ‘The ICO Gold Rush: It’s a Scam, It’s a Bubble, It’s a Super Challenge for Regulators’ (2017) at http://ssrn.com/abstract=3072298. 87 Such as WePower, or Electron. 88 Primavera de Filippi and Aaron Wright, Blockchain and the Law (Cambridge, MA: Harvard University Press 2018), ch9. 89 Florian Möslein, ‘Legal Boundaries of Blockchain Technologies: Smart Contracts as SelfHelp?’ in A De Franceschi, R Schulze, M Graziadei, O Pollicino, F Riente, S Sica and P Sirena (eds), Digital Revolution: New Challenges for Law (Cambridge: Intersentia 2019); Michèle Finck, Blockchain Governance and Regulation in Europe (Cambridge: CUP 2018); Daniel Kraus, Thierry Obrist and Olivier Hari (eds), Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law (Cheltenham: Edward Elgar 2019).

Introduction

17

may not cater for ‘off-chain’ legs of the contractual transactions. It is further queried if the DLT-based business model is a ‘marketplace’ or indeed a ‘community’ where participants co-create goods and services and therefore enhance the value of the collective community by their creative efforts and network effects.90 If so, the needs for relational contracting may not be fully catered for in the smart contracting mode.91 Although the above business models are all different, and distinct discussions in law can be made extensively in relation to each of them, this book offers the unifying theme that the relative lack of applicability of the law of organisations to them should be critically questioned. We have only provided an outline of the gaps in contractual governance, as this work has been carried out in previous literature,92 and our focus is on what the law of organisations and governance can offer to DBMs. Further, we also discuss in this volume the need to develop a menu of business models in the law of organisations and governance, due to the perceived limitations of the for-proft corporate form.93 The development of the Community Interest Company in the UK under the Labour government in 200594 and the more recent development of the beneft corporation model in the US95 signal the need for entrepreneurs and investors to consider business forms that are distinguished from the for-proft corporation, which may prove to be unattractive due to its baggage of intellectual framing, such as shareholder primacy.96 These developments are both exciting and emerging, as governance

90 Alyse Killeen, ‘The Confuence of Bitcoin and the Global Sharing Economy’ in David Lee (ed), The Handbook of Digital Currencies (Singapore: Elsevier 2015), ch24. 91 See Chapter 9. 92 Amstutz and Teubner (2009), Cafaggi (2011). 93 Leo Strine Jnr, ‘Our Continuing Struggle with the Idea that For-Proft Corporations Seek Proft’ (2012) 47 Wake Forest Law Review 135; in relation to the debate regarding whether corporations should serve a narrowly defned interest to maximise shareholder wealth. 94 Companies (Audit, Investigations and Community Enterprise) Act 2004. 95 Model Beneft Corporation Legislation v2017, which is used as the basic template for most of the US States’ beneft corporation legislation, at http://beneftcorp.net/sites/default/fles/ Model%20beneft%20corp%20legislation%20_4_17_17.pdf, s102, 201 for example. 96 Henry H Hansmann and Reiner H Kraakman, ‘The End of History for Corporate Law’ (2000) 89 Georgetown Law Journal 439 arguing that the shareholder-centric model of corporate governance is regarded as the ‘end of history for corporate law’, as such a model, focused singularly on private economically driven interests, seemed best placed to drive economic purpose, productivity and organisation in companies. In the UK, see Andrew Keay, ‘Shareholder Primacy in Corporate Law: Can it Survive? Should it Survive?’ (2009) at http://ssrn.com/abstract=1498065. See critical accounts, for example, in Benedict Sheehy, ‘Private and Public Corporate Regulatory Systems: Does CSR Provide a Systemic Alternative to Public Law’ (2016) 17 UC Davis Business Law Journal 1; Lyman Johnson, ‘Corporate Law and the History of Corporate Social Responsibility’ (2017) at http://ssrn.com/ abstract=2962432. The general lack of a wider socially facing dimension in corporate law is analysed in Jingchen Zhao, ‘Promoting More Socially Responsible Corporations Through a Corporate Law Regulatory Framework’ (2017) 37 Legal Studies 103.

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and relational norms in these alternative organisational forms are still in development.97 However, one of the conclusions of our book is that a larger menu of options in terms of corporate forms needs to developed by the law of organisation in order to cater for the business transformations that are observed in DBMs.

Structure and progression of the book This volume brings together a host of decentralised business models that are framed by a combination of existing organisation laws and contractual governance, which cater on the one hand for the ‘organisational’ aspects of such business models that are legally recognised and on the other hand for the ‘market-based’ aspects of such business models that tend towards atomisation of transactions and self-governance. The combination of legal framing is, however, inadequate, as neither organisations nor contract law refect the holistic needs of such business models in terms of their relational dynamics and the micro-foundations of economic activity in these models. These models present a suite of realities in economic sociology that are inadequately interrogated in law, although we do not argue that the law must follow and map such realities as such. Chapter 2 discusses the default modus of governance in DBMs, which is contractual governance, and its inadequacies. We argue that the law of organisations and governance is relevant for conceptualising DBMs and draw upon theoretical frameworks in economic sociology. We also make broad proposals in relation to business-business models and peer-to-peer models in relation to organisational innovation and governance norms. Chapter 3 focuses on the limitations of private law, especially contract law, in governing decentralised business models. In view of technological evolutions that are likely to introduce more change to the way business relations and arrangements are confgured, this chapter raises the question how far regulatory laws which represent an order from the vantage point of public interest should provide a governing order. Chapter 4 turns its focus to business networks/interfrm alliances and interrogates needs in relation to the fundamental tenets of legal personality and relational governance. We propose that organisational and governance reforms may be needed to cater for the needs of business networks/ interfrm alliances. Chapter 5 deals with the global supply chain and discusses business needs and their interface with externalities. The chapter also looks at whether solutions in organisational reform such as parent company responsibility, enterprise liability or governance, such as in supply chain

97 Dana Brakman Reiser, ‘Beneft Corporations: A Sustainable Form of Organisation?’ (2011) 46 Wake Forest Law Review 591; Dana Brakman Reiser and Steven A Dean, Social Enterprise Law (Oxford: OUP 2017).

Introduction

19

management, may be effective. Chapter 6 then takes on the networkedarrangements between the public and private sector, usually in terms of engaging the private sector to deliver public services. Chapter 6 discusses the weaknesses of the predominantly contractual governance of public– private partnerships, which involves private-sector fnance, risk-taking and operational capabilities to different extents in providing public goods and services. While such combinations provide for fnancial, effciency and risk allocation needs, they often neglect the embedded needs of public expectations and stakeholders in relation to public goods and services. The chapter refects upon incremental reform in the governance of UK public–private partnerships to show how organisational and governance needs are being addressed, and should be reformed. Chapter 7 then deals with peer-to-peer business models in the platform economy. Online platforms are discussed as straddling ambiguously between being marketplaces and organisational phenomena. The interposition of the platform as a corporate giant can also be distorting for governance and distribution needs. Chapter 8 discusses alternative business vehicles for the platform economy, arguing that alternative ethos underpinning these business vehicles can reshape the organisational and governance tenets in platform economies in different ways. Chapter 9 then continues with the theme of peer-to-peer business models by discussing the new economic phenomena in the space powered by distributed ledger and blockchain technology. This new infrastructure allows decentralised economic activity and innovations to fourish, but these spaces are currently highly contractually constructed, in particular relying on automated smart contracts. This chapter critically discusses the issues arising in permissionless blockchains which raise signifcant governance issues, and how permissioned blockchains are developing a middle way to become both marketplaces as well as to sustain shared governance standards and expectations. The chapter critically discusses the need for regulative order, echoing the discussion in Chapter 3. Finally, Chapter 10 draws together the insights and arguments in the foregoing chapters and concludes the volume.

2

Decentralised business models and the role of the law of organisations and governance Iris H-Y Chiu

This chapter provides a theoretical framework for discussing why the ‘organisational’ perspective is important and necessary for decentralised business models. In particular, we draw upon the literature from economic sociology. We do not argue that these insights alone should result in the law ‘following’ and constructing an organisational paradigm for each ‘organisational’ form that is stabilised in sociological understanding.1 Rather, we argue that certain stabilised observations of ‘organisational’ characteristics in sociological understandings should be mapped against the law’s treatment of equivalent characteristics, especially in the law of organisations and its governance norms, to consider if these may give rise to legal concepts that can ultimately meet the business and social expectations of such decentralised business models.

Why the law of organisations and governance is relevant to decentralised business models The law of organisations and governance is relevant to decentralised business models, as it can offer a ‘stabilised’ governing framework which respects the realities of business arrangements discussed in the literature in economic sociology. We are not suggesting (in the manner opposed by Teubner) that economic sociological classifcations are themselves legal concepts. However, as economic-sociological classifcations have challenged the binary paradigm of market-hierarchy (which the law has largely aligned with), lawyers should critically question whether the legal frameworks for contract law on the one hand, and organisations law on the other hand, are able to interrogate those characteristics that lie in between markets and hierarchies and meet the facilitative and governing needs of such arrangements.

1 As Teubner reiterates that ‘a network is not a legal concept’, see Marc Amstutz and Gunther Teubner (eds), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart Publishing 2009), ch1. This statement argues that the law does not simply adopt sociological classifcations and legalise them but instead interrogates them within the concepts of law.

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Contract law is the default frame of reference but suffers from limitations dealing with the collective and multilateral nature of arrangements which are not well accommodated in the bilateral foundations in contract law. Further, contractual governance does not accommodate analyses of power dynamics that are an important source for the limitations of contractual governance. We turn to some key tenets offered by economic sociologists in relation to decentralised business models (DBMs) that highlight the need for a structured ‘organisational’ perspective for these models. It is emphasised at the outset that by adopting an ‘organisational’ perspective or framing of DBMs, we are not necessarily advocating that collective or multilateral relationships between stakeholders must be governed by a hierarchical or centralised legal framework. We are open to the full spectrum of governance perspectives for an ‘organisational’ space, from hierarchical to heterarchical to a mixture of them. In this manner, relevant insights from discrete bodies of organisational law may be drawn, not to conform to those bodies of law altogether and not to suggest that legal aspects can be readily disembodied from their whole context. We suggest that specifc legal insights from organisational laws provide inspiration in this emerging space for reform and thought development. Insights from economic sociology Economic sociology is a branch of sociology that regards the organisation of economic activity as not purely based on production2 but based on the relational dynamics and content in relation to productive processes.3 There are three modern tenets4 in an economic sociologist’s perspective of organising economic activity: ‘embeddedness’,5 ‘power and institutional’ contexts shaping relational dynamics6 and the micro-foundations for economic activity (beyond merely incentives).7 These three tenets are able to provide

2 Richard Swedberg, ‘Economic versus Sociological Approaches to Organization Theory’ in Christian Knudsen and Haridimos Tsoukas (eds), The Oxford Handbook of Organization Theory (Oxford: OUP 2005), ch14. 3 Fernando J Paris Bonet, Marta Peris-Ortiz and Ignacio Gil Pechua´n, ‘Basis for a General Theory of Organisations’ (2011) 49 Management Decision 270. 4 Nina Bendelj, ‘Thinking about Social Relations in Economy as Relational Work’ in Patrik Aspers and Nigel Dodd (eds), Reimagining Economic Sociology (Oxford: OUP 2015), ch10. 5 Mark Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’ (1985) 91 American Journal of Sociology 481. 6 Neil Fligstein, ‘Markets as Politics: A Political-Cultural Approach to Market Institutions’ in Woolsey Biggart (2002), ch11; Stewart Clegg, ‘Managing Organization Futures in a Changing World of Power/Knowledge’ in Knudsen and Tsoukas (2005), ch21. 7 Jens Beckert, ‘Re-imagining Capitalist Dynamics: Fictional Expectations and the Openness of Economic Futures’ in Aspers and Dodd (2015), ch3; and George Simmel’s theory on how economic relations and representations are socially conditioned, discussed in Carlo Trigilia, Economic Sociology (Oxford: Blackwell 2002), ch2.

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understandings in relation to the nature and key characteristics of DBMs that can be interrogated in and through the law. ‘Embeddedness’ is explained in Granovetter’s classic work8 as a perspective of economic activity that is not ‘overly socialised’ nor ‘under-socialised’. ‘Under-socialisation’ relates to the depiction of economic activity by economists in reductionist terms of being incentive-driven and instrumentally motivated at the individual level.9 There is little conception of individuals being engaged in economic activity for reasons other than for being rational and instrumentally calculative. ‘Over-socialisation’ relates to a view of economic activity that is too dependent on social forces and contexts such that the individual will is underplayed. Granovetter sees economic activity as being embedded in social contexts, situations and institutions somewhere between the under-socialised and over-socialised ends of the spectrum. In his study of business networks,10 a variety of ‘embeddedness’ phenomena is introduced, and these form both the drivers and contexts for such business networks. One phenomenon is a shared sense of purpose or norms driving business activity organisation, due to kinship ties or ‘moral’ purpose. However, other embeddedness phenomena could be more instrumental in nature but result in the construction of interdependencies, such as resource-based needs. Yet another set of embeddedness phenomena could be driven by institutional or political contexts such as state orchestration for business arrangements or business arrangements aligned with institutional tenets such as bank-business relationships in more coordinated economies.11 The observation of characteristics such as ‘shared norms’, ‘collective purpose’ or interdependencies are important, as they constitute an often ‘soft’ or tacit order for relations within the business network. These are also precisely the phenomena that contractual governance has found challenging to accommodate.12 We draw from Granovetter’s work on ‘embeddedness’ the need to distil the relational and collective features in business arrangements

8 Granovetter (1985). 9 Neil J Smelser and Richard Swedberg, ‘Introduction to Economic Sociology’ in The Handbook on Economic Sociology (Princeton, NJ: Princeton University Press, 2nd ed 2005), ch1 pointing out that the starting point of economic sociology is a critique of the economist’s view of the economic man and of economic transactions. 10 Mark Granovetter, ‘Business Groups and Social Organisation’ in Smelser and Swedberg (2005), ch19. 11 Sigurt Vitols, ‘Varieties of Corporate Governance: Comparing Germany and the UK’ in Peter A Hall and David Soskice (eds), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: OUP 2001), ch10. 12 For example, contractual theorists wonder if ‘network’ contracts can overcome the limitations of bilaterally focused contractual governance, suggesting the need for a ‘collective’ or ‘organisational’ framework; see Brownsword and Heldt, respectively, in Amstutz and Teubner (2009).

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in order to consider the aspects of those arrangements that refect shared expectations and the need for a collective order. Next, Fligstein’s work13 explains how economic activity is shaped by power dynamics and institutional contexts. His account enriches the incentive-driven and instrumentally motivated account of economic activity undertaken by frms, as it shows how frms, motivated to outcompete each other, would engage in lobbying and other activities in order to shape institutions to favour themselves. Firms would also undertake economic activities and business arrangements in order to secure control and stabilise such control over their positions in the market. Although his account related to why frms engaged in mergers and acquisitions, this analysis can also be extended to why frms choose network alliances instead of formal mergers. Where different parties in the alliance may be key players in different markets, the prospects for direct competition may be less threatening, and these dynamics may be key to shaping the nature of business arrangements. Other commentators have also written on how power dynamics is important to economic activity and how they shape the landscape for rules and the institutions for economic activity.14 The need for power or for ‘stabilising one’s sense of security over control’ is a more political account, and this aspect complements the explorations of collective and shared notions discussed above, as forging closeness does not preclude economic competition.15 Contractual governance does not inherently deal with power structures, as its starting point is the ideal assumption of equally rational contracting entities applying arm’s-length contracting. Arguably, incremental doctrines in contract law have dealt with power structure issues such as whether an onerous clause can be incorporated into a contract if a retail party’s attention is not reasonably drawn to it.16 However, the more radical interventions are external, such as the advent of consumer protection regulation.17 The law of organisations is more adept at dealing with power through mandatory provisions that expect trust to be

13 Neil Fligstein, ‘Markets as Politics: A Political-Cultural Approach to Market Institutions’ in Woolsey Biggart (2002), ch11. 14 Stewart Clegg, ‘Managing Organization Futures in a Changing World of Power/Knowledge’ in Knudsen and Tsoukas (2005), ch21; Tuomo Peltonen, ‘Critical Organisation Theory’ in Organisation Theory (Bingley: Emerald Insight 2016), ch6; Graham Sewell, ‘Control’ and Campbell Jones, ‘Management and Its Others’ in Raza Mir, Hugh Willmott and Michelle Greenwood (eds), The Routledge Companion to Philosophy in Organization Studies (Oxford: Routledge 2015), chs 26 and 42. 15 Teubner in Amstutz and Teubner (2009), ch1. 16 Thornton v Shoe Lane Parking Ltd [1970] EWCA Civ 2 but modern applications have tended to narrowly interpret what unusually onerous clauses are; see Goodlife Foods Limited v Hall Fire Protection Limited [2018] EWCA Civ 1371. 17 Such as the distribution of risk in the Sale of Goods Act 1979, Consumer Rights Act 2015.

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reciprocated and respected18 and power to be subject to self-restraint19 and accountability.20 We therefore see the law as having a role in critical interrogations of power structures in business arrangements that fall between markets and hierarchies. This could lead us to consider if adaptation, reform or innovation in the existing bodies of the law of organisations is relevant to DBMs. For example, an issue that will be discussed shortly is the power structures in platform or DLT-based business models.21 Finally, the micro-foundations for economic activity relate to sense-making by individual constituents in relation to engaging in economic activity. Such sense-making transcends the rational and calculative assumptions made by economists22 and is based on the more holistic and socialised individual. Sociological literature showcases the development of micro-foundations from a functional role-based approach relating to one’s ‘role’ or ‘place’ in economic arrangements23 to a more refexive bottom-up view in relation to one’s sense-making of economic situations and activities.24 The latter perspective, which challenges economic arrangements as necessarily ordered,

18 Such as mandatory duties in a partnership, s25–30, Partnerships Act 1890, which deal with a duty to account and not to proft. 19 Such as directors’ duties in relation to exercising powers for a proper purpose, to avoid conficts of interest for example, s171, 175, 177 and 182, Companies Act 2006. 20 Such as reporting obligations in relation to directors’ duty to sign off fnancial accounts as true and fair, s393, Companies Act 2006, directors’ business review, s414A and 414CZA, Companies Act 2006. 21 Chapters 7 and 9. 22 Robert Chia, ‘Organization Theory as a Postmodern Science’ and Michael Reed, ‘The Agency/Structure Dilemma in Organization Theory: Open Doors and Brick Walls’ in Knudsen and Tsoukas (2005), chs 5 and 11; Dionysios D Dionysiou and Haridimos Tsoukas, ‘Understanding the (Re)creation of Routines from Within’ and Haridimos Tsoukas, ‘A Dialogical Approach to the Creation of New Knowledge in Organizations’ in Haridimos Tsoukas, Philosophical Organisation Theory (Oxford: OUP 2018), chs 2 and 6. 23 The Weberian organisational order and the Parsonian functionalist approach to organisation; see Tuomo Peltonen, Hugo Gaggiotti and Peter Case, ‘Introduction: In Search of Alternative Origins of Organizing’ and Tuomo Peltonen, ‘Revisiting the Sociological Origins of Organization Theory: The Forgotten Legacy of Pitirim Sorokin’ in Tuomo Peltonen et al. (eds), Origins of Organising (Cheltenham: Edward Elgar 2018) at x and ch2; Randall Collins, ‘Weber’s Last Theory of Capitalism’ in Woolsey Biggart (2002), ch10; Tuomo Peltonen, ‘Classical Organisation Theory’, ‘Cultural Modern Organisation’, and ‘Rational Modern Organisation’ in Peltonen (2016), chs 2, 3 and 4. 24 Peter Edward, ‘Decision-making’ in Raza Mir, Hugh Willmott and Michelle Greenwood (eds), The Routledge Companion to Philosophy in Organization Studies (Oxford: Routledge 2015), ch29; Haridimos Tsoukas, ‘Organisation as Chaosmos’, ‘Making Strategy: Meta-theoretical Insights from Heideggerian Phenomenology’, and ‘Strategic Decision Making and Knowledge: A Heideggerian Approach’ in Tsoukas (2018), chs 1, 4 and 5; Tuomo Peltonen, ‘Interpretive Organisation Theory’ and Tuomo Peltonen, ‘Postmodern Organisation Theory’ in Peltonen (2016), chs 5 and 7; Mary Jo Hatch and Dvora Yanow, ‘Organization Theory as an Interpretive Science’ in Knudsen and Tsoukas (2005), ch3.

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whether rationally25 or hierarchically,26 brings about a more complex view of economic arrangements as forms of persuasion,27 coping28 or even domination.29 These micro-foundations highlight the intricacies that ought to be interrogated by law; Cotterell30 argues for the law to be able to identify and theorise precise linkages in ‘networks of communities’. Sociological micro-foundations are important for richer understanding of the nature of economic arrangements. They can be useful in feshing out certain intricacies in relation to business arrangements falling in between markets and hierarchies, such as in relation to functionality, division of roles/ labour, control and managerial aspects, reciprocity, integrity, accountability, mutual respect, peace/bridge-building as well as dispute resolution and justice. These intricacies are arguably not well accommodated within contractual governance frameworks, as references to these, if any, may be vague and open-ended.31 A spectrum of formalisation and fexibility, based on a range of tenets in the law of organisations may be a useful lens for interrogating these micro-foundations, as the law of organisations comes with a history of development in legalised tenets as well as soft law, such as in corporate governance32 and stewardship norms.33 In our discussion with respect to the DBMs canvassed in Chapter 1, we attempt to identify aspects of ‘embeddedness’, power structures and microfoundations that can be interrogated through legal perspectives for organisations and their governance. This means that we look beyond specifc bodies of the law of organisations as applicable to precise organisational forms such as corporations or partnerships,34 but distil the key features of ‘organisational’

25 Jens Beckert, ‘Re-imagining Capitalist Dynamics: Fictional Expectations and the Openness of Economic Futures’, Victor Nee and Sonja Opper, ‘Economic Institutions from Networks’ and Nina Bendelj, ‘Thinking about Social Relations in Economy as Relational Work’ in Aspers and Dodd (2015), chs 3, 7 and 10; 26 Hugh Wilmott, ‘Organization Theory as a Critical Science? Forms of Analysis’ and ‘New Organizational Forms’ in Knudsen and Tsoukas (2005), ch4; Haridimos Tsoukas, ‘Don’t Simplify, Complexify: From Disjunctive to Conjunctive Theorizing in Organization and Management Studies’ in Tsoukas (2018), ch16; Behlül Üsdiken, ‘History and Organization Studies: A Long-Term View’ in Marcelo Bucheli and R Daniel Wadhwani (eds), Organizations in Time: History, Theory, Methods (Oxford: OUP 2013), ch2. 27 Tsoukas (2018), chs 4 and 5. 28 Mir, Wilmott and Greenwood (2015), chs 26 and 29. 29 Tuomo Peltonen, ‘Critical Organisation Theory’ in Peltonen (2016), ch6; Wadhani (2013), ch2; Tsoukas (2018), ch2. 30 Roger Cotterrell, ‘Rethinking Embeddedness: Law, Economy, Community’ (2013) 40 Journal of Law and Society 49. 31 Hugh Collins, ‘The Weakest Link: Legal Implications of the Network Architecture of Supply Chains’ in Amstutz and Teubner (2009), ch10. 32 The UK Corporate Governance Code, and see Chiu (2015). 33 The UK Stewardship Code, and see Chiu (2013). 34 One notes, however, that the legal conceptualisation of ‘organisation’ is often tied to a recognised legal form such as corporation, cooperative, etc., while in organisation studies,

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tenets that are or can be legally framed. Our approach is not ‘disembodied’ or ‘cherry-picking’ aspects of organisational and governance laws out of context but instead distilling organisational and governance needs of DBMs in order to develop, at a normative and high level, tenets that can be analogised with extant legal norms. In so doing we hope to make a theoretical contribution towards rethinking the purposes served by the law of organisations and facilitate thinking towards frameworks for organisational innovation and reform. Nevertheless, we address three possible concerns with respect to our approach. The frst is that there is no need to apply the law of organisations and governance to DBMs, as this has not been demanded by the business community. The second is that corporate law and its theoretical and practical economic realities make it inapplicable to these business forms. The third is that it is unrealistic to say that we should endeavour to apply the law of organisations and governance, as they cannot apply neatly to DBMs without adaptation (theoretically and practically) and reform. We address these below. Responding to three objections to our approach One may object to our attempt to link the law of organisations and governance to DBMs, as economic development has moved forward just fne so far. It may be argued that contractual governance is organic and has evolved to provide terms, norms and templates for business alliances and networks35 and the global supply chain.36 Further, these arrangements are intended to be privately managed and not intended to enrol the public in discourse, so the private law of contractual governance is apt for these arrangements. We do not discount the achievements in contractual governance, but even commentators in favour of contractual governance as a starting point recognise

an ‘organisation’ can be recognised when there is a stabilised external perception or ‘legitimacy’ in maintaining boundaries for the collective/form and where there is internal agreement on such boundaries and identity. Such theorising tends to be more conceptual than policy driven. See Giacomo Negro, Özgecan Koçak and Greta Hsu, ‘Research on Categories in the Sociology of Organizations’ and Sandy Bogaert, Christophe Boone and Glenn R Carroll, ‘Organizational Form Emergence and Competing Professional Schemata of Dutch Accounting, 1884–1939’ in Hsu, Negro and Koçak (2010) at 3–35, 115–150; David Kirsch, Mahka Moeen and R Daniel Wadwhani, ‘Historicism and Industry Emergence: Industry Knowledge from Pre-emergence to Stylized Fact’ in Bucheli and Wadhwani (2013), ch9. The currency of a ‘category’ of organisation is discussed in Mark Thomas Kennedy, Jade (Yu-Chieh) Lo and Michael Lounsbury, ‘Category Currency: The Changing Value of Conformity As a Function of Ongoing Meaning Construction’ in Hsu, Negro and Koçak (2010) at 369–397. 35 Laurel Smith-Doerr and Walter W Powell, ‘Networks and Economic Life’ in Smelser and Swedberg (2005), ch17. 36 Amstutz and Teubner (2009), ch10.

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the limitations discussed above.37 As business networks and global supply chains involve business-to-business arrangements, the argument for leaving to private contractual governance may have some traction. However, even in these B2B arrangements, there are new social pressures for more collective cognition of norms which refect public policy priorities as well as responsible business practices and social/legal accountability.38 We are of the view that new phenomena and pressures challenge the notion that a change from accepting the suffciency of contractual governance is unnecessary. Further, the proven nature of contractual governance is more arguable for newer business models in the platform economy and DLT-based business models. These models feature relational paradigms closer to ‘business to consumer’ or ‘peer to peer’, where both the notions of business (savviness or assumed competence in contracting) and consumer (such as in relation to consumer protection, assuming the inequalities of information and bargaining power) are not clearly applicable. Business innovations give rise to new spaces for both the development of contractual and organisational governance, and it is thus premature to dismiss the relevance of the law of organisations and governance. Next, it may be argued that it is a futile exercise to apply corporate law and theory to DBMs. These business enterprises may have explicitly selected their arrangements so as not to fall within the scope of national corporate legal frameworks, and this could be because of the need to maintain self-governing fexibility or for securing regulatory advantages. However, our approach is not one of advocating that corporate law frameworks must always apply to DBMs, but rather that widely accepted governance principles – such as the need for accountability, transparency and socially legitimate business conduct – which are typically interrogated in the context of corporations and other kinds of hierarchical organisations, are nonetheless a relevant assessment benchmark for DBMs. Reference to corporate and other organisational laws such as social enterprises, partnerships, etc. are not for doctrinal application but for theoretical exposition in order to distil relevant tenets and norms that can be developed for DBMs. Hence we make no assumption that the corporate form is the ‘right answer’, nor that shareholder primacy for the for-proft enterprise is a right theoretical foundation for organisational structures, governance and distribution. This leads us to the next point that articulates our endeavour in calling for more imaginative and responsive policy innovations in relation to organisational frameworks in law. We do not advocate a mapping of existing organisational and governance doctrines in law onto DBMs just because economic sociologists have distilled ‘organisational’ aspects of such arrangements that show social

37 Amstutz and Teubner (2009). 38 Chapter 5.

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embeddedness, power dynamics and economic-socio drivers for economic action. What we seek to argue is that the insights distilled by economic sociologists should inform legal concepts that have something to say about the nature of economic-social relations. Many of these legal concepts are found throughout the law of organisations and governance, and they underpin discrete bodies of doctrines developed for particular legal forms such as the for-proft corporation. We endeavour to argue for a higher-level legal conceptualisation of those organisational and governance norms39 and to advocate that such conceptualisation can form a new basis for policy reform in the law of organisations and governance so that innovations in the law of organisations and governance40 may meet modern needs. For example, Benkler discusses the rise of not-for-proft productive activity that defes characterisation by property rights, i.e. the production of a commons such as open source software.41 These developments inspire us to develop higher-level concepts for collective productive activity so as to further social advancements and the common good.42 Legal conceptualisation paves the way for articulating a range of normative tenets that can be expressed in a hard or soft framework and can contribute to generating more access to and certainty in carrying out new economic activity. Next, we turn to constructing the connection between DBMs and the law of organisations and governance.

What the law of organisations and governance has to say about business-to-business arrangements Business-to-business arrangements discussed in this volume refer to interfrm alliances/business networks and the vertically integrated frm with particular focus on modern global supply chains. They are sustained by contrarian forces that are dynamically balanced, and we argue that insights from the law of organisations and governance can complement the contractual governance in these arrangements to cater for the needs of such a dynamic balance. First, business-to-business arrangements are sustained by the contrarian forces of ‘collective versus autonomy’. This is often also described as the phenomenon of ‘co-opetition’, where frms in a business network/alliance are sharing information, sharing resources or co-producing research, knowledge and outputs while also maintaining their own identities and autonomy for competitive purposes. The co-opetition phenomenon represents a

39 E.g. see Cotterrell (2018). 40 Giovanni Dosi, Luigi Orsenigo and Mauro Sylos Labini, ‘Technology and the Economy’ in Smelser and Swedberg (2005), ch29. 41 Yochai Benkler, The Wealth of Networks (New Haven, CT: Yale University Press 2006), ch3 and 4; Casper Hoedemaekers, ‘Commons and Organisation’ in Mir, Willmott and Greenwood (2015), ch24. 42 Robin Paul Malloy, Law and Market Economy (Cambridge: CUP 2000), chs 4 and 5.

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delicate balance between the interdependencies suggested in Granovetter’s embeddedness framework and the power-dynamics paradigm offered in Fligstein’s work discussed above. In order to successfully exploit joint resources and capacities, networks/ alliances need to frame shared goals and agendas,43 and they have to commit resources, personnel and investment to the collective pursuit.44 Empirical research fnds that a suffcient amount of commitment is important for ultimate ‘new value creation’ or successful innovation.45 Hence the need to commit and see through to the success of collective efforts and aims may require trade-offs in the maintenance of individual identities and autonomies, so that the embrace of a collective identity can take place.46 However, individual participants in business networks/alliances also need to be able to be ‘satisfed’47 in relation to what each ‘takes away’ from the network. Such a delicate balance is likely to be an ongoing dynamic, as the network/alliance needs to respond to external forces as well as the micro-foundations of sense-making.48 This leads us to the second point, that business-to-business arrangements need a balance of formal and informal structures or institutions to sustain the network/alliance. Networks/alliances move from initial impressions49 and explorations50 to deeper cognitive understandings of relational dynamics.51 Empirical research documents that successful networks exhibit qualities of trust and commitment,52 but these may be embedded in different contextual factors, such as complementarities (or ‘distance’ mitigators),53 that reinforce such trust and commitment. Trust and commitment are also sustained by structures and institutions such as rules/norms. Rules/norms are derived from a spectrum of informal to formal understandings54 as well as structures of management.

43 Juri Matinheikki, Teemu Pesonen, Karlos Artto, Antti Peltokorpi, ‘New Value Creation in Business Networks: The Role of Collective Action in Constructing System-Level Goals’ (2017) 67 Industrial Marketing Management 122. 44 Above. 45 Robert van der Graaff Randolph, ‘A Multilevel Study of Structural Resilience in Interfrm Collaboration: A Network Governance Approach’ (2016) 54 Management Decision 248. 46 Above. 47 Sergio Biggemann, ‘Modeling the Structure of Business-To-Business Relationships’ in Woodside (2015), ch3. 48 Above and Sergio Biggemann, ‘Structure and Dynamics of Business-To-Business Relationships’ in Woodside (2015), ch5. 49 Impressions of similarities or competencies are important for attracting towards a network, see van der Graaf Randolph (2016). 50 Sergio Biggemann, ‘Understanding and Modeling the Dynamics of Business-To-Business Relationships’ in Woodside (2015), ch4. 51 Mouzas and Henneberg (2015). 52 Van der Graaf Randolph (2016). 53 Biggeman in Woodside (2015), ch3. 54 Douglas Wegner, Susana Costa e Silva and Greice de Rossi, ‘The Development Dynamics of Business Networks’ (2018) 13 International Journal of Emerging Markets 27.

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Informal and formal understandings form a spectrum of cognitive awareness and reciprocal expectations as to rules, norms and regulations, which can be explicit and formalised/legalised.55 Even enforcement can be informal or semiformalised, such as gradual exclusion from the network for unreliability.56 Structures of management may include certain centralised points of decision, information communications or mediation57 and even institutions of the network/alliance.58 Further, there may be structures or institutions of formality or informality that refect the network’s character in terms of being open to changes in membership or tending towards being closed but stable. Networks that are formed to exploit new information and innovation may optimally beneft from being more open than closed59 and may admit of membership changes readily and more frequently. Networks that are more closed, such as where co-production or exploitation of property rights takes place, may be relatively stable and long-termist in relation to membership. Networks develop to make choices in relation to structures and institutions, and various factors shape the development of informal or formal structures and processes, such as contracts, multilateral contracts, memoranda of understanding, circulars, communications, shared meanings, governance and management structures and processes, etc. In other words, although contractual governance is the default realm for governing network/alliance relations, in reality they develop organisational features and governance structures to meet their needs. This is not refected in legal conceptualisation, and we do not assume that non-legalisation of structures and institutions certainly meets the needs for network governance.60 There is a need to consider the conceptualisation of governance norms as law or soft law which can cement common expectations of trust, reciprocity, commitment and accountability. Further, such a legal conceptualisation may be useful for networks as they face new challenges in regulatory obligations, discussed below. One of the developments provided in European law for networks/alliances is the 1985 Regulation for the formation of European Economic Interest Groupings.61 The EEIG legislation is enabling in nature, as it provides for

55 Mouzas and Henneberg (2015), Peters et al. (2016). 56 Victor Nee and Sonja Opper, ‘Economic Institutions from Networks’ in Aspers and Dodd (2015). 57 Wegner et al. (2018). 58 Linda D Peters, Andrew D Pressey and Wesley J Johnston, ‘Contagion and Learning in Business Networks’ (2017) 61 Industrial Marketing Journal 43. 59 Antonella La Rocca and Ivan Snehota, ‘Relating in Business Networks: Innovation in Practice’ (2014) 43 Industrial Marketing Journal 441. 60 Hugh Collins, ‘The Weakest Link: Legal Implications of the Network Architecture of Supply Chains’ in Amstutz and Teubner (2009), ch10. 61 Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG).

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legal and natural persons to be able to form such a grouping for a notfor-proft purpose that is also not a form of fnancial engineering,62 while being able to enjoy legal personality for the grouping63 and a set of basic governance norms for certainty and fairness. Governance norms include the appointment of a manager to conduct external relations, the equal powers of members in decision making and voting, equal sharing in profts and the joint and several liability of members to third parties.64 There are numerous EEIGs that have been formed; many of them are research or trade association type networks as well as vertically integrated arrangements.65 The EEIG is a useful organisational framework that can provide for a cluster of entities that wish to maintain their distinct legal personalities, e.g. as companies, and yet be able to enjoy at the same time a collective identity with a cluster. The Regulation also provides for the grouping’s governance needs on a continuing basis so that new decisions can be made that bind every member. It provides a certain stability of structure with suffcient fexibility, and there is a position on internal and external liability. However, the key drawback is that the EEIG is unable to accommodate non-European members,66 and in the case of the UK after withdrawal from the European Union, the usefulness of the UKEIG67 would be even more limited if confned to members that are legal or natural persons in the UK only. As Chapter 4 discusses, many business networks and interfrm alliances are international in nature. It is also envisaged that the EEIG is appropriate or attractive only for members of equivalent stature due to its default governance mechanism of equality in exercising power and decision making. It is likely to be unappealing to business arrangements or the vertically integrated frm with unequal participants. However, it is not necessary that a single ‘organisational’ form or governance set-up be the right answer for networked business arrangements to cater for their structural and governance needs. We suggest below that a framework of a menu of options may be more useful. This menu allows networks/alliances to navigate their needs along the collective-autonomy spectrum and the informal-formal spectrum. Before we turn to that, we also observe that new regulatory challenges have brought about new pressures for networks/alliances, and in meeting these challenges, it may be timely to consider organisational/governance frameworks to address new legal risks. Although a high degree of voluntariness exists in the formation of business-to-business arrangements, recent developments have introduced

62 63 64 65 66 67

Art 3, 23, above. Art 1(3), above. Arts 9, 16–35, above. See www.libertas-institut.com/en/eeig-information-centre/. Art 4 of the EEIG Regulation above. The European Economic Interest Grouping (Amendment) (EU Exit) Regulations 2018.

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new factors that may change the ‘self-regulatory’ nature of networks and their organisational or governance needs. Globalisation and international trade have liberalised opportunities for worldwide sourcing, production and distribution of goods and services but have also brought about opportunities for questionable means of economic exploitation of resources and labour.68 Global sourcing can lead to fuelling regional conficts over control of resources like oil and minerals,69 and exploitation of human beings in search of economic opportunities,70 such as through human traffcking, modern forms of slavery and abject labour conditions.71 Whether or not corporations are directly complicit in armed gangs’ or gangmasters’ evil exploits, they have, to an extent, been able to take advantage of cost advantages by outsourcing and procuring on the basis of their global buying power.72 The abuses in such exploitation have been brought to light by the determined efforts of civil and non-governmental organisations, highlighting the inextricable engagement amongst corporations with each other in their supply chains.73 It may be argued that in global supply chains there are multiple tiers of contractual relationships spanning many geographical locations, and it may be diffcult for intermediate organisations and even the ultimate multinational procurer, such as Walmart, to monitor each member in the chain.74 However, empirical literature shows that there is a high degree of integration in modern supply chains due to the effciencies of co-involving members of the chain to perform extended enterprisal functions such as marketing, planning, inventory management, etc.75 High degrees of coordination are needed in order to minimise cost or to coordinate the maximisation of regulatory advantages such as tax.76 The organisational phenomenon of the

68 Kate Manzo, ‘Modern Slavery, Global Capitalism & Deproletarianisation in West Africa’ (2005) 32 Review of African Political Economy 521; Kevin Bales, Disposable People: New Slavery in the Global Economy (Berkeley: University of California Press 1999). 69 Katarzyna Kryczka, Sarah Beckers and Tineke Lambooy, ‘The Importance of Due Diligence Practices for the Future of Business Practices in Fragile States’ (2012) 9 European Company Law 125. 70 Chandran Nair, ‘The Developed World is Missing the Point About Modern Slavery’ (Time. com, 20 June 2016) at http://time.com/4374377/slavery-developed-developing-world-indexslave-labor/. 71 Galit A Sarfarty, ‘Shining Light on Global Supply Chains’ (2015) 56 Harvard International Law Journal 419. 72 Jennifer Bair, ‘The Corporation and the Global Value Chain’ in Grietje Baars (ed), The Corporation (Cambridge: CUP 2017), ch20. 73 Gary Gereff, ‘The Global Economy: Organization, Governance, and Development’ in Smelser and Swedberg (2005), ch8. 74 Above. 75 Martin Christopher, Helen Peck and Denis Towill, ‘A Taxonomy for Selecting Global Supply Chain Strategies’ (2006) 17 International Journal of Logistics Management 277. 76 Mary J Meixell and Vidyaranya B Gargeya, ‘Global Supply Chain Design: A Literature Review and Critique’ (2005) 41 Global Logistics 531.

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multinational corporation network can manifest different degrees of interdependencies and the need for managing stakeholder relationships.77 Hence the externalities that ‘leak’ from global supply chain activities such as human rights or labour abuses in weak labour jurisdictions,78 or the social costs of fuelling confict in fragile jurisdictions which produce important minerals,79 are increasingly being seen as issues not capable of being self-governed or regulated, and there is regulatory action afoot to require corporate internalisation of responsibility. UK legislation and EU legislation have now started to address different issues in the supply chain after decades of voluntary and soft law initiatives in the transnational sphere. These laws are in relation to the importation of confict minerals,80 human traffcking and modern slavery81 (UK) and more generally, the protection of human rights.82 To different extents, under the UK Modern Slavery Act 2015 and EU Non-fnancial Disclosure Directive 2014,83 the corporation is expected to disclose how they manage their supply chains based on their implementation of ‘due diligence’.84 The EU Directive, transposed in the UK Companies Act,85 requires reporting of non-fnancial performance by publicly traded companies, including their due diligence procedures and the deployment of non-fnancial performance indicators, in relation to environmental, human rights and anti-bribery aspects. Although the UK’s implementation shapes the reporting towards ‘material’ matters in non-fnancial performance so that they dovetail with what a reasonable investor needs to know,86 the

77 Fiona Moore, ‘Altered States of Consciousness: MNCs and Ethnographic Studies’ in Christoph Dörrenbächer and Mike Geppert (eds), Multinational Corporations and Organization Theory: Post Millennium Perspectives (Bingley: Emerald Insight 2017). 78 Sargarty (2015), Bales (1999) above. 79 Elif Härkönen, ‘Confict Minerals in the Corporate Supply Chain’ (2018) 29 European Business Law Review 691. 80 The EU Confict Minerals Regulation 2017. 81 Modern Slavery Act 2015. 82 The UN Guiding Principles for Business and Human Rights (2011) provide the basis for implementation by countries, as a matter of state responsibility, laws to protect human rights and to stipulate corporate responsibility for preventing and remedying relevant abuses. The EU Non-fnancial Disclosure Directive 2014 dealing with the company’s footprint in these matters, and only indirectly to its supply chain as a result of the policies it pursues. 83 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-fnancial and diversity information by certain large undertakings and groups, Art 19a. 84 Iris H-Y Chiu, ‘Unpacking the Reforms in Europe and UK Relating to Mandatory Disclosure in Corporate Social Responsibility: Instituting a Hybrid Governance Model to Change Corporate Behaviour?’ (2017) 5 European Company Law 193. 85 Section 414CA, inserted into the Companies Act 2006 via the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 (S.I. 2016/1245). 86 Financial Reporting Council, Guidance on the Strategic Report (June 2014) at Section 5. See also p17, FRC, [Draft] Amendments to Guidance on the Strategic Report (August 2017) at www.frc.org.uk/getattachment/9e05c133-500c-4b98-9d76-497172387bea/;.aspx.

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obligation can potentially affect voluntary network relations so that multinational companies that procure globally may start to exert more control/governance over suppliers to ensure that the environmental and human rights impacts are mitigated.87 The UK Modern Slavery Act explicitly requires both public and private frms above certain employment and fnancial thresholds to report on their due diligence procedures to ensure that there is no human traffcking and modern slavery in their supply chains.88 The reporting obligation started as light-touch, and empirical research has found no signifcant change in business practices yet in exerting new forms of governance in the supply chain.89 This is, however, reviewed by the government, and more explicit reporting demands and enforcement against non-compliance are likely to be fashioned.90 Where regulation has been more explicit about the need to manage the supply chain or the frm’s third-party relations, such as under the Bribery Act 2010,91 empirical research92 shows that frms, in response not only to the reporting obligation but to potential liability for facilitating bribery under the Bribery Act 2010, have overhauled their relations with third-party agents and supply frms in the network in order to address risks. New explicit legal risks can profoundly shape inter-frm arrangements and their governance needs. Institutional and regulatory changes in relation to anti-corruption, environmental and human rights monitoring can reshape the extent of voluntariness in network/alliance relations, forcing responses in relation to collective endeavour and formalisation in order to mitigate legal risk. Business-tobusiness arrangements face organisational and governance needs due to not only ‘voluntary’ factors such as their collective characteristics, power dynamics, and micro-foundations for economic action beyond incentives but also external institutional changes such as regulatory obligations and legal risk. We propose that a menu of options along a spectrum of organisational and governance arrangements that can provide a high-level framework for

87 Irene-Marie Esser, Iain MacNeil and Katarzyna Chalaczkiewicz-Ladna, ‘Engaging Stakeholders in Corporate Decision-Making through Strategic Reporting: An Empirical Study of FTSE 100 Companies’ (2018) 29 European Business Law Review 729. 88 S54, Modern Slavery Act 2015. 89 LeBaron and Rühmkorf (2017). 90 Independent Review of the Modern Slavery Act 2015: Final Report (May 2019) at paras 2.1–2.5 on making reporting against six aspects of supply chain management explicit, on the use of a reporting template and the monitoring and enforcement by the Independent AntiSlavery Commissioner. See https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/803406/Independent_review_of_the_Modern_ Slavery_Act_-_fnal_report.pdf. 91 S7. 92 Genevieve LeBaron and Andreas Rühmkorf, ‘Steering CSR Through Home State Regulation: A Comparison of the Impact of the UK Bribery Act and Modern Slavery Act on Global Supply Chain Governance’ (2017) 8 Global Policy 15.

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collective

Mission statement Structures/ management Social relationships

Constitution Structures and management Dispute resolution Dissolution

informal

formal Principles Equal representation in committee Entry/exit

Contracts and constitution Power and accountability Distribution Entry/exit

autonomy Figure 2.1 Framework for organisational and governance choice for economic groupings

networks/alliances to consider their organisational and governance needs. Such a framework can facilitate explicit choice, ongoing refections and ex post adjustments at different stages of the network/alliance’s maturity.93 Figure 2.1 suggests that networks/alliances should consider their organisational and governance needs along two axes and four quadrants along the collective-autonomy axis and formality-informality axis. Indeed, each participant in the network may perceive their needs differently along the axes, and this provides a broad template for communication and negotiation within networks/alliances in order to help shape governance and institutional choices that meet their needs. Where needs in business arrangements tend towards the collective and formal, such as where there is a pooling of knowledge and resources to exploit a joint and foreseeable innovation, or where there is legal risk for

93 Sebastian Zander, Simon Trang and Lutz M Kolbe, ‘Drivers of Network Governance: A Multitheoretic Perspective with Insights from Case Studies in the German Wood Industry’ (2016) 110 Journal of Cleaner Production 109.

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various members in the network, such as in a global supply chain, it may be effcient and effective to ensure that a shared goal is explicit and enshrined at a high level, securing commitment from involved participants. Clearer lines of decision making, governance, accountability and management could be put in place, respecting each participant’s level of power, commitment and comfort. Formal thinking may also need to be directed at co-monitoring in order to address legal risk exposure, confict management and dissolution prospects if high stakes are involved. Where needs in business arrangements tend towards the informal and promoting autonomy, such as where high levels of co-opetition exist, then perhaps a less formal set of principles can be instituted, such as involving sharing and communication, conduct, reciprocity, confdentiality, etc., accompanied by fatter structures of governance and decision making and clearer conditions and expectations of entry and exit of members. More detailed discussions of the factors relevant for network governance choices are found in Chapter 4. We believe that our framework can be a form of soft law, or a set of high-level principles for ‘Economic Groupings’ in general, addressing organisational tenets such as collective purpose, power and accountability; structures for managing relationships; governance norms for conduct, trust and reciprocity as well as ex post adjustments to relational dynamics, confict management and changes in membership. These organisational tenets are thematically similar to what is provided under existing bodies of organisations law, such as for corporations and other legal persons, but not doctrinally identical. For example, a Grouping ‘constitutional’ document can be a meta-level document refecting high-level understandings but would not be the same as the corporate constitution.94 More on the practical relevance and implementation of this framework is found in Chapter 4 in this volume. Chapter 5 takes on the theme of global supply chains and the challenges in terms of internal governance vis-à-vis external pressures for international governance of public interest issues such as human rights abuses and environmental degradation. It also deals with conceptualisations of the enterprise and thinking on enterprise liability.

The law of organisations and governance for peer-to-peer arrangements We turn now to peer-to-peer business arrangements which we distinguish from business-to-business arrangements. Peer-to-peer arrangements of a business or commercial nature often involve retail-level participation as both suppliers and consumers of goods and services. Peer-to-peer business platforms have the potential to disrupt the usual supply and distribution channels

94 S33, UK Companies Act 2006.

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in business and compete to offer on-demand goods and services to consumers, therefore broadening choice and energising market competition.95 An early example is eBay, which started in the 1990s offering a platform for retail-level participation to sell used goods. However, developments in this space now raise questions about the ‘peer’ characterisation of such business models and what ‘peer-to-peer’ really means. There are contrarian forces that shape peer-to-peer arrangements, refecting both market and hierarchy characteristics, and these are not refected in the default contractual governance that is found in peer-to-peer arrangements. We argue that insights from the law of organisations and governance may provide perspectives for organisational phenomena and governance norms in such arrangements. First, a justifcation for the self-regulatory state of contractual governance in peer-to-peer business arrangements may be based on the peer status of participants, making it inappropriate to consider frameworks based on hierarchy, such as the law of organisations and governance. However, the defnition of ‘peer’ is highly fuid in these business arrangements. Commercial outfts do operate on the peer-to-peer business platform, as eBay hosts not only the casual householder who is trying to offoad pre-loved goods after a spring-clean but also established antiques shops, wholesalers that are trying to reach a retail audience directly and even chain stores such as Argos in the UK.96 Similarly, more recent peer-to-peer business platforms such as AirBnB feature not only hosts who have a spare bedroom or second fat to let but also boutique hotels.97 This development blurs the line between businessconsumer relations and peer-to-peer relations and raises questions regarding whether regulatory arbitrage is taking place. Peer-to-peer platforms such as TaskRabbit allow individuals seeking handyman services to get in touch directly with individuals who are able to offer such services, apparently maintaining a peer-to-peer ethos. However, individuals on TaskRabbit can also be professionals in trade, and this is not disclosed on the profles of ‘Taskers’, although one may guess from the level of experience that ‘Taskers’ present. It becomes uncertain, for example, if business-customer regulations and protections such as insurance obligations apply in peer-to-peer contexts. Business participation in peer-to-peer business models could be a means of coping with potential disruption, as peer-to-peer platforms revolutionise a way of presenting choice and provide a level playing feld between established providers and challengers. Power dynamics become uncertain in what may hitherto have been a familiar market.98 The peer-to-peer platform

95 Bronwen Morgan, ‘The Sharing Economy’ (2018) 14 Annual Review of Law and Social Science 351. 96 Argos Outlet is an eBay shop; indeed the eBay Shops category refects the development of this platform to move beyond peer-to-peer to just being a fattened online marketplace. 97 We do not see a wholesale move of hotels onto AirBnB, as many are hosted more appropriately on ‘fattened’ online marketplaces such as Booking.com or Hotels.com. 98 Arun Sundarajan, The Sharing Economy (Cambridge, MA: MIT Press 2016).

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transforms the nature of participants, and it is queried if it should be left to self-regulatory governance. Is it suffcient that eBay provides a category of ‘eBay shops’ that cater for a category of business participants that are better resourced and need to offer consumer protection terms more aligned with regulatory standards?99 Peer-to-peer business arrangements also create a variety of socioeconomic relations that require more conceptualising and thinking regarding the needs of governance of the ‘community’. Peer-to-peer platforms can foster economic activity embedded in virtual social relations, as TaskRabbit and Childcare.co.uk can create communities of inter-dependence, and more altruistic platforms such as Wikipedia and Freecycle can help foster community ethos in new ways.100 In these arrangements, there may be greater needs for community norms and governance to cater for expectations of mutuality, reciprocity, trust, etc. Peer-to-peer businesses could also be effciencyand incentive-driven, plugging into the modern culture of on-demand101 and instant gratifcation.102 Should these platforms be driven by greater consumer protection and service standards? What impact will there be for the casual peer who occasionally creates economic activity on the platform? For example, eBay’s policies tend towards offering consumer protection aligned with consumers’ institutional familiarity with Western standards of consumer protection regulation, and this can exert onerous expectations on individual sellers. In this landscape, it is uncertain if the contractual rules developed by peer-to-peer platforms, largely self-governing and in an incremental manner, cater for the variety of sociological characteristics in economic activity. We discuss this issue in greater detail in Chapter 7.103 Considering an organisational perspective for peer-to-peer platform economies is also timely. Peer-to-peer business models are often touted as ‘marketplaces’, but in reality there are relational and socio-economic dynamics that are not interrogated adequately in the largely atomised contractual governance arrangements that are the default legal architecture for such business arrangements. Although the platform economy is presented to the world as a peer-topeer marketplace/community, the underlying organisational structures of most for-proft platforms are made up of a corporate owner of the platform

99 100 101 102

Such as aligned with the EU Distance-Selling Regulations. Benkler (2006). Sundarajan (2016), Morgan (2018). Lee McGuigan and Vincent Manzerolle, ‘“All the World’s a Shopping Cart”: Theorizing the Political Economy of Ubiquitous Media and Markets’ (2015) 17 New Media and Society 1830. 103 Jun Gu, ‘Consumer Rights Protection on the Online Auction Website  – Situations and Solutions: A Case Study of EBay’ (2007) at https://www.bileta.org.uk/wp-content/ uploads/Consumer-Rights-Protection-on-the-Online-Auction-Website-Situations-andSolutions-A-Case-Study-of-EBay.pdf

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that treats the platform as its asset and contractual arrangements between participants on the platform and the corporate entity. For example, Uber is a corporate personality that develops, maintains and owns its platform as its asset. Drivers that join Uber are contractually connected to Uber, the company. Drivers are not in a position to participate in the strategic or management processes/structures in Uber, the company, and are usually at the receiving end of contractual policies determined by Uber.104 Despite the community appearance of platform economies, the legal characterisation of their organisational phenomena is extremely atomistic and arguably oppressive.105 The platform economy is sustained by its critical mass participation and network effects, yet there is no legal recognition given to the community participants in relational terms vis-à-vis the platform owner/developer, such as under the constitutional effect of company law106 or the member doctrines applicable to mutual organisations such as cooperatives.107 The drivers’ relationship with platform owners/developers is contractual in nature, and this often means accepting the platform’s rules as offered. This lack of legal recognition makes it impossible for individual participants on the platform to be empowered to infuence its rules and institutions, unless by voluntary collective action to exert pressure for change, which may be diffcult to organise. This fact affects not only participatory fairness but ultimately distributive fairness in relation to the wealth created over the platform.108 Chapter 7 discusses the issue of anomaly in the structures of peer-to-peer platform economies in greater detail. For example, we query whether the legal architecture is severely disconnected from the economic sociology of platform economies in relation to the collective characteristics and power dynamics of participation. It is arguable that platform ‘economies’ such as Facebook exacerbate the disconnect between the legal architecture for platform economies and its economic sociology, i.e. the society/community of users relating to the platform and to each other inter se. Users are legally characterised as atomised participants in the vast platform, remaining relatively powerless against the concentration of power and wealth amassed in the hands of the corporate owner of the platform.109 But such legal characterisation causes economic and social alienation for individual participants and can precipitate economic and social injustices.110

104 105 106 107 108

This is discussed in much more detail in Chapter 7. Harry Arthurs, ‘The False Promise of the Sharing Economy’ in Makela et al. (2018), ch2. S33, UK Companies Act 2006. Discussed shortly. Uber’s power over taxi fares and competitive fare cuts have driven many drivers to anger and despair; see, for example, ‘“My Life is Spent in this Car’: Uber Drives its Indian Workers to Despair’ (The Guardian, 4 February 2018). 109 Jonathan M Barnett, ‘The Costs of Free: Commodifcation, Bundling and Concentration’ (2017) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2916859. 110 Miriam Cherry, ‘Cyber Commodifcation’ (2013) 72 Maryland Law Review 381.

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A step along the development of the peer-to-peer platform economy is the distributed ledger-based economy where participants join as nodes on a blockchain and are treated as digital peers vis-à-vis each other in supplying and consuming goods and services. The distributed ledger-based platform can be ‘owned’ and developed as an asset by its corporate owner such as Axiom Zen Ltd in relation to CryptoKitties. However, some distributedbased ledger platforms posit a more democratic or empowering ethos, so that wealth production is decentralised and platform developers do not aim at capitalising profts at the level of the corporate entity that develops that platform.111 The technologically automated manner of participation, refecting in a ‘code as law’112 and ‘trustless trust’113 environment affects the economic sociology of the blockchain economy in new ways. For example, such environments may create more atomisation, emphasising individual choice and faceless transactions. But the opposite may be true, too, i.e. repeat transactions and interdependencies on such platform economies can develop. Embeddedness characteristics such as social ties rooted in ‘Silicon Valley’ connections may remain important, although distributed ledger-based business models seem to be borderless and global.114 New manners of virtual ties over global distances can also be created based on similarities in ethos and interest rather than geographical proximity or cultural closeness. The variety of organisational ethos and phenomena arising in the space for distributed ledger-based economies is emerging,115 and such communities can attain very different characters along the spectrum of cohesive community to marketplace. New power dynamics and micro-foundations for participation need to be investigated. It may also be timely to consider organisational innovation and new governance models for platform and distributed ledger-based economies. Figures 2.2 and 2.3 show that the default legal architecture of corporatising the platform owner and contractualising platform governance for participants does not necessarily refect the richness of relational dynamics. It may be argued that platform and distributed ledger technology-based economies do not feature such complex interrelationships as Figure 2.3 shows, as many participants such as Uber drivers or eBay participants do not interact with each other as a community but only vis-à-vis the platform owner/developer and in the bilateral transactions involving customers/

111 112 113 114

For example the Iungo platform seems to declare such as specifc intention. De Filippi and Wright (2018). Werbach (2018). Giovanni Dosi, Luigi Orsenigo and Mauro Sylos Labini, ‘Technology and the Economy’ in Smelser and Swedberg (2005), ch29. 115 Sinclair Davidson, Primavera de Filippi and Jason Potts, ‘Disrupting Governance: The New Institutional Economics of Distributed Ledger Technology’ (2016) at https://papers. ssrn.com/sol3/papers.cfm?abstract_id=2811995.

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Participant/node

Corporate entity that owns and manages platform/ledger

Participant/node

Participant/node

Participant/node

Figure 2.2 Default legal architecture for platforms and distributed ledger-based economies of a commercial nature

Platform owner/ developer

Participant/ node

Participant/ node

Participant/ node

Participant/ node

Figure 2.3 Economic-social realities in the organisation of many platform and distributed ledger-based economies

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sellers. But this is overly simplistic. Community relations can deepen for frequent users through community fori and feedback systems, and commercial relations need not revolve only around the object of the commodity in the economic system concerned.116 The fgure above also shows that although the platform owner/developer is a central location for the relational dynamics in the economic ecosystem, the web of horizontal and vertical relationships may be more complex than in Figure 2.2. Chapter 9 will interrogate the roles and limits of contractual governance, particularly smart contracts in the blockchain economy. Further, a distinguishing aspect between the distributed ledger-based economy and the platform economy is that participants in a blockchain generally hold tokens in order to execute any economic activity. These tokens are usually tradeable on secondary markets,117 as the developmental fnance needs of distributed ledger-based businesses have frst led to the creation of tradeable tokens supported by secondary market liquidity.118 In this manner, token-holders, who are also participants in the blockchain ‘community’, are empowered in a marketised manner as an individual node who maintains control over its entry and exit. As long as there is secondary market liquidity and price formation for the tokens concerned, the market value of the token represents the ‘asset’ value of membership in the blockchain. Hence participants in the distributed ledger-based economy are all members and asset-holders at the same time, uncannily similar to the corporate membership model, which facilitates both voice and exit. If this similarity holds, then the economic sociology of distributed ledger-based economies is likely to be varied, as nodes can be keen on voice or can be apathetic and keen on exit. The concentration and motivations of token-holders would play a part in shaping the relational environment of the distributed ledger-based economy and the power dynamics within. In light of these observations, a continued lack in thinking and development in relation to the architecture of organisational and governance frameworks for the distributed ledgerbased economy may be suboptimal.119 The need to think about whether new organisational and governance paradigms are needed for distributed ledger technology-based economies is imminent. This is because the developmental fnancing needs of distributed

116 Aurélien Acquier, Thibault Daudigeos and Jonatan Pinks, ‘Promises and Paradoxes of the Sharing Economy: An Organizing Framework’ (2017) 125 Technological Forecasting and Social Change 1. 117 There can be non-fungible tokens such as CryptoKitties, but even CryptoKitties is moving towards embedding fungible and non-fungible elements in order to enable secondary trading on digital asset exchanges; see https://blockonomi.com/non-fungible-tokens/. 118 Discussed above. 119 Jenny Kassan and Janelle Orsi, ‘The Legal Landscape of the Sharing Economy’ (2012) 27 Journal of Environmental Law and Litigation 1 and discussed in forthcoming article . . . CHK.

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ledger technology-based business models have entailed a form of fundraising, known as ‘Initial Coin Offerings’120 and ‘Securities Token Offerings’121 that have raised questions122 in many capital markets jurisdictions as to whether they should be regulated as securities.123 The characterisation from securities regulation has a profound impact on organisational and governance characterisation of distributed ledger technology-based business models, as it can result in such business models being defaulted to adopting the corporate form in order to ft their developmental fnance needs within corporate and securities regulation. We do not think this is optimal, as Chapter 9 discusses in greater detail. We also argue that organisational and governance characterisations should not merely follow fnancial phenomena such as fundraising. The pre-eminence of fnance has shaped conventional corporate governance in predominantly economic terms,124 and this has been criticised to be relationally myopic.125 As we are at the cusp of organisational innovation in the advent of the distributed ledger technologically based economy, we should allow ourselves more room126 to consider reform in organisational and governance norms to refect a richer account of economic sociology.127

120 Philip Hacker and Chris Thomale, ‘Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law’ (2018) ECFR 645; Dirk Zetzsche, Ross P Buckley, Douglas Arner and Linus Foehr, ‘The ICO Gold Rush: It’s a Scam, it’s a Bubble, it’s a Super Challenge for Regulators’ (2017) at http://ssrn.com/abstract=3072298; Jonathan Rohr and Aaron Wright, ‘Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets’ (2017) at http://ssrn.com/abstract=3048104. 121 Such as the securities token offering that is now ‘collateralised’ by corporate assets, see https://thetokenist.io/security-tokens-explained/. 122 E.g. ‘FINMA publishes ICO Guidelines’ (16 Feb 2018) at https://www.fnma.ch/en/ news/2018/02/20180216-mm-ico-wegleitung/; FCA, ‘Guidance on Cryptoassets’ (July 2019) at www.fca.org.uk/publication/policy/ps19-22.pdf. 123 SEC, ‘Statement on Digital Asset Securities Issuance and Trading’ (16 November 2018) at www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading; M Todd Henderson and Max Raskin, ‘A Regulatory Classifcation of Digital Assets: Towards an Operational Howey Test for Cryptocurrencies, ICOs, and Other Digital Assets’ (2019) at https://ssrn.com/abstract=3269295. 124 Armen Alchian and Harold Demsetz, ‘Production, Information Costs and Economic Organisation’ (1972) 62 The American Economic Review 777; Michael C Jensen and William H Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305. 125 Margaret Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (Washington, DC: Brookings Institute 1994); Margaret M Blair and Lynn A Stout, ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia Law Review 247; Arturo Capasso, ‘Stakeholder Theory and Corporate Governance: The Role of Intangible Assets’ at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=610661. 126 Iris H-Y Chiu, Regulating the Crypto-economy: Business Transformations and Financialisation (Oxford: Hart Publishing, 2022 forthcoming). 127 Granovetter (1985).

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The menu of options in the law of organisations and governance In the UK, the most popular legal framework that economic actors use to organise their economic or industrial activity is the corporate form.128 The corporate form offers separate legal personality129 and limited liability,130 and it caters for a fnancing structure that allows the corporate entity to raise debt and equity, having the option to separate management from fnanciers. Further, corporate law has over time developed a set of default governance options for private,131 large private132 and publicly traded companies.133 Even many alternative legal forms are based on these basic tenets of legal personality, liability of participants, fnancing and governance rules. Limited liability partnerships134 offer separate legal personality and limited liability, while not excessively catering for fnancing and governance needs. The professional organisations that use this form have fewer needs to formalise the latter aspects and prefer fexibility to tailor-make their arrangements within certain basic tenets of mutuality and reciprocity. Community interest companies135 have separate legal personality, limited liability and fnancing and governance default rules that cater to the social nature of their goals and the need to maintain a closed and co-trusting group of members and fnanciers. Hybrid or alternative-purposed corporate forms are popular,136 as the corporate form is regarded as insularly focused on effciency and proft137 and does not meet the needs of social enterprises. For example, the cooperative model promotes member ownership and limits on share capital subscription to promote a more egalitarian ethos. However, many of its regulatory obligations resemble those of the company except that there are special rules in relation to fnance and fexibility for governance

128 For example, there were over 600,000 incorporations in the six months leading to March 2018; see www.gov.uk/government/publications/companies-register-activities-statisticalrelease-2017-to-2018/companies-register-activities-2017-to-2018. 129 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22. 130 Since the Limited Liability Act 1855. 131 The UK Companies Act contains provisions specifcally tailored for private companies such as written resolutions for general meetings and less onerous fling obligations; e.g. see s288–300, for example. 132 Such as the development of soft law for corporate governance in the Wates Principles. 133 Such as obligations in both company and securities law, the FCA Listing Rules and DTR chapters of the Handbook. 134 Limited Liability Partnerships Act 2000. 135 Companies (Audit, Investigations and Community Enterprise) Act 2004. 136 Such as the beneft corporation developed in the US under the Model Beneft Corporation Legislation v2017, which is used as the basic template for most of the US States’ beneft corporation legislation, at http://beneftcorp.net/sites/default/fles/Model%20beneft%20 corp%20legislation%20_4_17_17.pdf. 137 Leo Strine Jnr, ‘Our Continuing Struggle with the Idea that For-Proft Corporations Seek Proft’ (2012) 47 Wake Forest Law Review 135.

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structures.138 It is to be noted that the nature of business organisation in the UK has changed in the last couple of decades to signifcant levels of corporatisation and the accompanying focus on proft maximisation, even for membership-based organisations, where commercial opportunities may be exploited.139 However, there is also a pushback in the reforms towards hybrid-purpose corporate forms in order to cater for more socially oriented or embedded enterprises, which will be discussed in Chapter 8. At the other end of the spectrum, organisational forms like partnerships140 and variants of partnerships such as limited partnerships141 and private-fund limited partnerships142 do not offer separate legal personality and limited liability but offer fnancing and governance fexibility. These may cater for investment entities and their relationships with benefciaries, as well as the needs for constructing different portfolios for asset allocation. The partnership as a business model may also cater for a form of community ethos, such as the John Lewis partnership.143 The menu of options for legally recognised organisational forms features combinations of choices amongst the basic tenets of legal personality, limited liability, fnancingandrelational governance. Where a legal form enjoys separate legal personality, there tends to be more legalisation of rules regarding internal governance so that there is certainty as to when liability of the separate legal person may be attracted. There tends to be greater levels of self-regulation/governance (or less legalisation) for organisational phenomena that do not opt for separate legal personality (partnership) or are restricted in relation to fnancial capital (cooperative, community interest company). Where there are wider participatory levels of fnancing (such as for the publicly traded company), there tends to be greater levels of legal prescription for relational governance so that there is clarity and certainty in relation to how powers are distributed and exercised and how assets are used. These fundamental concepts can be seen in a more modularised manner in terms of thinking about novel organisational or governance reforms for decentralised business models that do not ft neatly with existing organisational forms in the law. In other words, we do not see decentralised business arrangements as necessarily ftting in with the extant menu of options, and

138 Co-operative and Community Beneft Societies Act 2014. 139 De-mutualisation has taken place on a massive scale since the 1980s, with membership clubs such as the RAC and the London Stock Exchange having demutualised and fnancial institutions that are ‘community-based’ such as building societies having demutualised, too. See Robin Klimecki and Hugh Wilmott, ‘From Demutualisation to Meltdown: A Tale of Two Wannabe Banks’ (2009) 5 Critical Perspectives on International Business 120. 140 Partnerships Act 1890. 141 Limited Partnerships Act 1907. 142 The Legislative Reform (Private Fund Limited Partnerships) Order 2017. 143 www.johnlewispartnership.co.uk/.

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the development of the law of organisations and governance to date can provide insights into reform and new developments. DBMs often adopt a combination of legal forms and contractual governance, partly due to avoiding the strictures of the law catering for legal forms such as the company, but also partly because the legal forms on offer may not meet the relational and organisational needs of decentralised business models. Instead of the patchwork manner in which organisational and governance needs of decentralised business models are addressed, we argue that it is time to take stock of what fundamental tenets for organisation DBMs need and to consider organisational and governance reforms in appropriate cases, along a spectrum of legalisation and soft law.

Bibliography Acquier, Aurélien, Daudigeos, Thibault and Pinks, Jonatan, ‘Promises and Paradoxes of the Sharing Economy: An Organizing Framework’ (2017) 125 Technological Forecasting and Social Change 1 Adhami, S et al, ‘Why do Businesses Go Crypto? An Empirical Analysis of Initial Coin Offerings’ (2018) 100 Journal of Economics and Business 64 Amstutz, Marc and Teubner, Gunther (eds), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart Publishing 2009) Aspers, Patrik and Dodd, Nigel (eds), Reimagining Economic Sociology (Oxford: OUP 2015) Atiyah, PS, The Rise and Fall of the Freedom of Contract (Oxford: Clarendon 1985) Baars, Grietje (ed), The Corporation (Cambridge: CUP 2017) Bales, Kevin, Disposable People: New Slavery in the Global Economy (Berkeley: University of California Press) Bebchuk, Lucian Ayre, ‘The Debate on Contractual Freedom in Corporate Law’ (1989) 89 Columbia Law Review 1395; Bebchuk, Lucian Ayre, ‘Limiting Contractual Freedom In Corporate Law: The Desirable Constraints on Charter Amendments’ (1989) 102 Harvard Law Review 1820 Benkler, Yochai, The Wealth of Networks (New Haven, CT: Yale University Press 2006) Bonet, Fernando J Paris, Peris-Ortiz, Marta and Pechua´n, Ignacio Gil, ‘Basis for a General Theory of Organisations’ (2011) 49 Management Decision 270 Brakman Reiser, Dana, ‘Beneft Corporations: A Sustainable Form of Organisation?’ (2011) 46 Wake Forest Law Review 591 Brakman Reiser, Dana and Dean, Steven A, Social Enterprise Law (Oxford: OUP 2017) Brudney, Victor, ‘Corporate Governance, Agency Costs, and the Rhetoric of Contract’ (1985) 85 Columbia Law Review 1403 Bucheli, Marcelo and Wadhwani, Daniel R (eds), Organizations in Time: History, Theory, Methods (Oxford: OUP 2013) Buchwalter, Bastien, ‘Decrypting Cryptoassets: A Classifcation and Its Implications’ (2019) at https://ssrn.com/abstract=3271641 Buckley, FH (ed), The Rise and Fall of the Freedom of Contract (Durham and London: Duke University Press 1999)

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Cafaggi, Fabrizio, ‘Contractual Networks and the Small Business Act: Towards European Principles?’ (2008) 4 European Review of Contract Law 493 Cafaggi, Fabrizio (ed), Contractual Networks, Interfrm Cooperation and Economic Growth (Cheltenham: Edward Elgar 2011) Carrier, James G (ed), The Meanings of the Market (Oxford: Berg Publications 1997) Charny, David, ‘Hypothetical Bargains: The Normative Structure of Contract Interpretation’ (1991) 89 Michigan Law Review 1815 Cherry, Miriam, ‘Cyber Commodifcation’ (2013) 72 Maryland Law Review 381 Chiu, Iris H-Y, ‘An Institutional Theory of Corporate Regulation’ (2019) 71 Current Legal Problems 279 Chiu, Iris H-Y, ‘Unpacking the Reforms in Europe and UK Relating to Mandatory Disclosure in Corporate Social Responsibility: Instituting a Hybrid Governance Model to Change Corporate Behaviour?’ (2017) 5 European Company Law 193 Chiu, Iris H-Y and Greene, Edward F, ‘The Marriage of Technology, Markets and Sustainable (and) Social Finance – Insights from ICO Markets for a New Regulatory Framework’ (2019) 20 European Business Organisations and Law Review 139 Christopher, Martin, Peck, Helen and Towill, Denis, ‘A Taxonomy for Selecting Global Supply Chain Strategies’ (2006) 17 International Journal of Logistics Management 277 Coase, Ronald, ‘The Nature of the Firm’ (1937) 4(16) Economica 386–405 Copp, Stephen (ed), The Legal Foundations of Free Markets (London: Institute of Economic Affairs 2008) Crane, Andrew and Matten, Dirk, Business Ethics: Managing Corporate Citizenship and Sustainability in the Age of Globalization (Oxford: OUP 2015) de Fillippi, Primavera and Wright, Aaron, Blockchain and the Law (Cambridge, MA: Harvard University Press 2018) De Franceschi, A, Schulze, R, Graziadei, M, Pollicino, O, Riente, F, Sica, S and Sirena, P (eds), Digital Revolution – New Challenges for Law (Cambridge: Intersentia 2019) Dörrenbächer, Christoph and Geppert, Mike (eds), Multinational Corporations and Organization Theory: Post Millennium Perspectives (Bingley: Emerald Insight 2017) Easterbrook, Frank H and Fischel, Daniel R, The Economic Structure of Corporate Law (Cambridge, MA: Harvard University Press 1991) Esser, Irene-marie, Iain MacNeil and Katarzyna Chalaczkiewicz-Ladna, ‘Engaging Stakeholders in Corporate Decision-Making through Strategic Reporting: An Empirical Study of FTSE 100 Companies’ (2017) at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3049203 Fenwick, Mark, van Uytsel, Steven and Wrbka, Stefan (eds), Networked Governance, Transnational Business and the Law (Heidelberg: Springer 2014) Finck, Michèle, Blockchain Governance and Regulation in Europe (Cambridge: CUP 2018) Friedman, Thomas L, The World is Flat (New York: Picador/Farrar, Straus and Giroux 2005) Granovetter, Mark, ‘Economic Action and Social Structure: The Problem of Embeddedness’ (1985) 91 American Journal of Sociology 481 Greenfeld, Kent, ‘New Principles For Corporate Law’ (2005) 1 Hastings Business Law Journal 89

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Hacker, Philip and Thomale, Chris, ‘Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law’ (2018) ECFR 645 Hadfeld, Gillian, Rules for a Flat World (Oxford: OUP 2016) Hadfeld, Gillian and Bozovic, Iva, ‘Scaffolding: Using Formal Contracts to Support Informal Relations in Support of Innovation’ (2016) Wisconsin Law Review 981 Hall, Peter A and Soskice, David (eds), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press 2001) Hansmann, Henry H and Kraakman, Reiner H, ‘The End of History for Corporate Law’ (2000) 89 Georgetown Law Journal 439 Härkönen, Elif, ‘Confict Minerals in the Corporate Supply Chain’ (2018) 29 European Business Law Review 691 Hazen, Thomas Lee, ‘The Corporate Persona, Contract (and Market) Failure, and Moral Values’ (1991) 69 North Carolina Law Rev 273 Henderson, Todd M and Raskin, Max, ‘A Regulatory Classifcation of Digital Assets: Towards an Operational Howey Test for Cryptocurrencies, ICOs, and Other Digital Assets’ (2019) at https://ssrn.com/abstract=3269295 Hillman, Robert W and Loewenstein, Mark J (eds), Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Cheltenham: Edward Elgar 2015) Hsu, Greta, Negro, Giacomo and Koçak, Özgecan (eds), Categories in Markets: Origins and Evolution (Bingley: Emerald Insight 2010) Johnson, Lyman P Q, ‘Corporate Law and the History of Corporate Social Responsibility’ (2017) at http://ssrn.com/abstract=2962432 Kassan, Jenny and Orsi, Janelle, ‘The Legal Landscape of the Sharing Economy’ (2012) 27 Journal of Environmental Law and Litigation 1 Keay, Andrew, ‘Shareholder Primacy in Corporate Law: Can it Survive? Should it Survive?’ (2009) at http://ssrn.com/abstract=1498065 Klein, William A, ‘The Modern Business Organization: Bargaining Under Constraints’ (1982) 91 Yale Law Journal 1521 Klimecki, Robin and Wilmott, Hugh, ‘From Demutualisation to Meltdown: A Tale of Two Wannabe Banks’ (2009) 5 Critical Perspectives on International Business 120 Knudsen, Christian and Tsoukas, Haridimos (eds), The Oxford Handbook of Organization Theory (Oxford: OUP 2005) Kraus, Daniel, Obrist, Thierry and Hari, Olivier (eds), Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law (Cheltenham: Edward Elgar 2019) Kryczka, Katarzyna, Beckers, Sarah and Lambooy, Tineke, ‘The Importance of Due Diligence Practices for the Future of Business Practices in Fragile States’ (2012) 9 European Company Law 125 Lambert Douglas M and Cooper, Martha C, ‘Issues in Supply Chain Management’ (2000) 29 Industrial Marketing Management 65 La Rocca, Antonella and Snehota, Ivan, ‘Relating in Business Networks: Innovation in Practice’ (2014) 43 Industrial Marketing Journal 441 LeBaron, Genevieve and Rühmkorf, Andreas, ‘Steering CSR Through Home State Regulation: A Comparison of the Impact of the UK Bribery Act and Modern Slavery Act on Global Supply Chain Governance’ (2017) 8 Global Policy 15 Lee, David (ed), The Handbook of Digital Currencies (Elsevier 2015) Leoni, Giulia and Parker, Lee D, ‘Governance and Control of Sharing Economy Platforms: Hosting on Airbnb’ (2019) 51 British Accounting Review 100814

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Lin, Zhiang (John), Peng, Mike W, Yang, Haibin and Sun, Sunny Li, ‘How do Networks and Learning Drive M&As? An Institutional Comparison between China and the United States’ (2009) 30 Strategic Management Journal 1113 Makela, Finn, McKee, Derek and Scassa, Teresa (eds), Law and the Sharing Economy (Ontario: University of Ottawa Press 2018) Malloy, Robin Paul, Law and Market Economy (Cambridge: CUP 2000) Manzo, Kate, ‘Modern Slavery, Global Capitalism & Deproletarianisation in West Africa’ (2005) 32 Review of African Political Economy 521 Martin, Chris J, Upham, Paul and Klapper, Rita, ‘Democratising Platform Governance in the Sharing Economy: An Analytical Framework and Initial Empirical Insights’ (2017) 166 Journal of Cleaner Production 1395 Matinheikki, Juri, Pesonen, Teemu, Artto, Karlos and Peltokorpi, Antti, ‘New Value Creation in Business Networks: The Role of Collective Action in Constructing System-Level Goals’ (2017) 67 Industrial Marketing Management 122 McGuigan, Lee and Manzerolle, Vincent, ‘“All the World’s a Shopping Cart”: Theorizing the Political Economy of Ubiquitous Media and Markets’ (2015) 17 New Media and Society 1830 Meixell, Mary J and Gargeya, Vidyaranya B, ‘Global Supply Chain Design: A Literature Review and Critique’ (2005) 41 Global Logistics 531 Mir, Raza, Willmott, Hugh and Greenwood, Michelle (eds), The Routledge Companion to Philosophy in Organization Studies (Oxford: Routledge 2015) Mitchell, Lawrence E (ed), Progressive Corporate Law (Boulder: Westview Press 1995) Moore, Marc T, Corporate Governance in the Shadow of the State (Oxford: Hart 2013) Moore, Marc T, ‘“Whispering Sweet Nothings”: The Limitations of Informal Conformance in UK Corporate Governance’ (2015) 9 Journal of Corporate Law Studies 95 Morgan, Bronwen, ‘The Sharing Economy’ (2018) 14 Annual Review of Law and Social Science 351 Morgan, Jonathan, Great Debates in Contract Law (London: Palgrave Macmillan 2015) Nakamoto, Satoshi, ‘Bitcoin: A Peer to Peer Electronic Cash System’ (2008) at https:// bitcoin.org/bitcoin.pdf Ng, A and Loosemore, Martin, ‘Risk Allocation in the Private Provision of Public Infrastructure’ (2007) 24 International Journal of Project Management 66 Osborne, Stephen (ed), Public-Private Partnerships: Theory and Practice in International Perspective (Oxford: Routledge 2007) Parkinson, John E, Corporate Power and Responsibility: Issues in the Theory of Company Law (Oxford: Clarendon Press 1995) Peltonen, Tuomo, Organisation Theory (Bingley: Emerald Insight 2016) Peltonen, Tuomo et al (eds), Origins of Organising (Cheltenham: Edward Elgar 2018) Peters, Linda D, Pressey, Andrew D and Johnston, Wesley J, ‘Contagion and Learning in Business Networks’ (2017) 61 Industrial Marketing Journal 43 Prabhat, Devyani, ‘“BorrowMyDoggy.Com”: Rethinking Peer-to-Peer Exchange for Genuine Sharing’ (2018) 45 Journal of Law and Society 84 Richardson, G B, ‘The Organisation of Industry’ (1972) 82 (327) Economic Journal 883–896 Rohr, Jonathan and Wright, Aaron, ‘Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets’ (2017) at http:// ssrn.com/abstract=3048104

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Sarfarty, Galit A, ‘Shining Light on Global Supply Chains’ (2015) 56 Harvard International Law Journal 419 Sheehy, Benedict, ‘Private and Public Corporate Regulatory Systems: Does CSR Provide a Systemic Alternative to Public Law’ (2016) 17 UC Davis Business Law Journal 1 Smelser, Neil J and Swedberg, Richard (eds), The Handbook on Economic Sociology (Princeton, NJ: Princeton University Press, 2nd ed 2005) Strine, Leo Jnr, ‘Our Continuing Struggle with the Idea that For-Proft Corporations Seek Proft’ (2012) 47 Wake Forest Law Review 135 Sundarajan, Arun, The Sharing Economy (Cambridge, MA: MIT Press 2016) Sutherland, Will and Hossein Jarrahi, Mohammad, ‘The Sharing Economy and Digital Platforms: A Review and Research Agenda’ (2018) 43 International Journal of Information Management 328 Szabo, Nick, ‘Smart Contracts: Building Blocks for Digital Markets’ University of Amsterdam (1996), at www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/ CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/sm Trigilia, Carlo, Economic Sociology (Oxford: Blackwell 2002) Tsoukas, Haridimos, Philosophical Organisation Theory (Oxford: OUP 2018) van den Hurk, Martijn, ‘Public Private Partnerships: Where Do We Go From Here? A Belgian Perspective’ (2018) 23 Public Works Management and Policy 274 van der Graaff Randolph, Robert, ‘A Multilevel Study of Structural Resilience in Interfrm Collaboration: A Network Governance Approach’ (2016) 54 Management Decision 248 von Eisenberg, Melvin, ‘The Structure of Corporation Law’ (1989) 89 Columbia Law Review 1461 Wegner, Douglas, Costa e Silva, Susana and de Rossi, Greice, ‘The Development Dynamics of Business Networks’ (2018) 13 International Journal of Emerging Markets 27 Werbach, Kevin, ‘Trust, But Verify: Why the Blockchain Needs the Law’ (2018) 33 Berkeley Technology Law Journal 489 Wettenhall, Roger, ‘The Rhetoric and Reality of Public-Private Partnerships’ (2003) 3 Public Organisation Review 77 Wheeler, Sally, Corporations and the Third Way (Oxford: Hart 2002) Williamson, Oliver, ‘Corporate Governance’ (1984) 93 Yale Law Journal 1197 Williamson, Oliver, ‘Markets and Hierarchies: Some Elementary Considerations’ (1973) 63 The American Economic Review 316 Woodside, Arch G (ed), Organizational Culture, Business-to-Business Relationships, and Interfrm Networks (Emerald 2015) Woolsey Biggart, Nicole (ed), Readings in Economic Sociology (London: Blackwell 2002) Zander, Sebastian, Trang, Simon and Kolbe, Lutz M, ‘Drivers of Network Governance: A Multitheoretic Perspective with Insights from Case Studies in the German Wood Industry’ (2016) 110 Journal of Cleaner Production 109 Zetzsche, Dirk et al, ‘The ICO Gold Rush: It’s a Scam, it’s a Bubble, it’s a Super Challenge for Regulators’ (2017) at http://ssrn.com/abstract=3072298 Zhao, Jingchen, ‘Promoting More Socially Responsible Corporations Through a Corporate Law Regulatory Framework’ (2017) 37 Legal Studies 103

3

Three approaches to the governance of decentralised business models Contractual, regulatory and technological Roger Brownsword

Introduction In the space between markets (where the rules and principles of contract law govern) and hierarchy (where the rules and regulations of company law govern), we fnd a variety of business arrangements and practices which, following the terminology of this collection, we can refer to as ‘decentralised business models’ (DBMs).1 To a certain extent, these DBMs – which include hub and spoke franchises, global supply chains, the connected transactions that enable the carriage of goods by sea or major construction projects, various kinds of platforms in the share economy and (at least prospectively) distributed autonomous organisations – are ‘misfts’. Quite simply, this is because they do not ft neatly with either contract law or company law, nor are they business models for which there are bespoke legal templates. In some cases, DBMs predate recent developments in online and automated transactional technologies, but these developments are signifcant because not only do they enable new kinds of business organisation and practice but they intensify concerns about the appropriate governance of DBMs. These remarks invite three sets of questions about the governance of DBMs. First, does contract law, which is typically pressed into service as the default governing law for disputes involving parties to DBMs, have the capacity to respond more fexibly when such disputes arise? To what extent are judges who apply the law of contract to disputes between parties to DBMs able and willing to be responsive to the practice-based and relational expectations of the disputants? Secondly, if bespoke regulatory regimes are to be articulated for DBMs, where do we fnd the right balance between regulation and innovation,2 between benefts and risks, between acceptable and

1 See Roger M Barker and Iris H-Y Chiu, ‘Decentralised Business Models and the Role of the Law of Organisations and Governance’, Chapter 1 of this book. 2 See Orly Lobel, ‘The Law of the Platform’ (2016) 101 Minnesota Law Review 87; and, on the challenges presented to regulators by innovative regulatees (particularly in the fnancial sector); see Cristie Ford, Innovation and the State (New York: Cambridge University Press, 2017).

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unacceptable use of transactional power and between the competitive and cooperative dimensions of DBM relationships?3 Moreover, how are we to keep the regulatory provisions properly connected to such a dynamic feld of technological development and social and economic application, and how are regulators to ensure compliance when they are dealing with enterprises that have the resources of a nation state and that operate across the world?4 Thirdly, where DBMs employ new technologies, and where these technologies (such as smart contracts) have self-regulatory effects, to what extent should governance be left to these technologies? In particular, how does governance by technology relate to contract law and regulation through rules? In this chapter, I will not attempt to answer these many different questions, which are indicative of the broad range of inquiries that are prompted by rapid changes in economic and social practice as well as by the development of technologies that mediate the relationship between contracting parties. Instead, I will focus on just two questions. The frst question is the familiar one of whether the law of contract has the capacity to respond more adequately to the expectations of parties who engage in DBMs. If there is some doubt about this, as seems to be the case in English law, then should we be looking for a more regulatory approach (as has been the case ever since contract law was found to be wanting in relation to protecting the reasonable expectations of consumer contractors), or should we perhaps consider a turn to technology? The second question takes us into uncharted waters: if parties to DBMs see technology as a solution to their governance problems, and if the technologies that are employed have practical transactional effects that would not be ordered by courts applying the law of contract, is this problematic? To the extent that the technology is compatible with the law, it would not seem to be problematic. However, where the technological effects are ones that a court, guided by the law of contract, would disallow, is it the law or the technology that governs? This chapter is in four principal parts. In the frst part, I outline the legal, regulatory and technological landscape which is the backcloth for my discussion.5 In that landscape there are three dominant conversations: one conversation is doctrinal and ‘coherentist’ (typifed by the question: how do the

3 Generally, see Roger Brownsword, ‘Law, Regulation, and Technology: Supporting Innovation, Managing Risk and Respecting Values’ in Todd Pittinsky (ed), Handbook of Science, Technology and Society (New York: Cambridge University Press, 2019) 109. 4 For the range of regulatory challenges presented by emerging technologies, see Roger Brownsword, Rights, Regulation and the Technological Revolution (Oxford: Oxford University Press, 2008) and Roger Brownsword and Morag Goodwin, Law and the Technologies of the Twenty-First Century (Cambridge: Cambridge University Press, 2012). 5 See Roger Brownsword, Law, Technology and Society: Re-imagining the Regulatory Environment (Abingdon: Routledge, 2019) and especially Law 3.0: Rules, Regulation and Technology (Abingdon: Routledge, 2020).

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general principles of contract law apply to DBMs?), the second is regulatory and instrumentalist (typifed by the question: which rules of law would best serve whatever regulatory purposes we have in relation to DBMs?), and the third is ‘technocratic’ (typifed by the question: are there non-rule technological tools that will serve the regulatory purposes that we have in relation to DBMs?). The second part of the chapter presents a short recap on the modifcations and corrections that have been made to the classical principles of the law of contract. Today, we have a body of contract law that has long since abandoned a purely ‘transactional’ model of agreement for business dealing, and we have a consumer marketplace that is heavily regulated, being governed by contract law only in name. In the third part of the chapter, three approaches to the governance of business networks are considered: a contractual approach guided by contextualist and relationalist thinking, a regulatory approach that has been adopted for consumer transactions and a technological approach. Finally, in the fourth part of the chapter, the relationship between, on the one hand, the application of contract law and, on the other, whatever (different) applications are achieved by the technology, is considered. My general conclusions are as follows. First, although there is some support in the recent case law for a more fexible contextual and relational approach to contracts, we cannot rely on these green shoots for a more responsive approach that seeks, case-by-case and DBM-by-DBM, to adjust to the reasonable expectations of the parties. On the surface, there are concerns about trading doctrinal certainty and outcome-predictability for fexibility, but at a deeper level there are concerns about modifying the underpinning ethic of individualism as well as about switching from contract law as a set of rules that governs and guides practice to a body of standards that refects practice. Secondly, even if the judges were willing to embrace contextualist and relationist thinking, we should not rely on the courts to address issues raised by DBMs where those issues demand a carefully considered regulatory solution. For the courts and the judges who adjudicate in contracts cases are neither resourced nor mandated to pursue new policy initiatives or to create new legal frameworks that attempt to broker acceptable accommodations of a range of competing and conficting interests. If anyone has the responsibility for developing new legally approved transactional templates where the governing expectation is that parties will act in a way that is neither entirely self-interested nor altruistic, it is the legislature, and the determination of policy and its implementation is for those (such as legislative bodies and regulatory agencies) who have the mandate to decide whether and how the economic power of the leading DBM players should be qualifed as well as whether and how vulnerable DBM participants should be protected. Thirdly, as we come to see technology not so much as a regulatory problem but as a solution to our regulatory problems (because it closes the gap between the normative signals and the desired acts of compliance), we will increasingly rely on technological

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fxes to do the regulatory work. Fourthly, there will be some turbulence and uncertainty as we move away from reliance on principle-based contract law and towards policy-focused regulatory and technological measures the effects of which are not always congruent with the effects of judicial orders, awards or decisions as mandated by the classical rules and principles of contract law.6 Accordingly, the bottom line is that the classical principles of contract law are likely to be of diminishing relevance whether the question concerns the regulation of DBMs or the moderation of technological measures employed by parties to DBMs. There are two fnal introductory points to be made, one concerning the sense in which I employ the terms ‘regulation’ and ‘regulatory’, and the other concerning the signifcance of transactional technologies. With regard to the frst of these matters, by ‘regulation’ I refer to measures that are intended to serve particular purposes or policies primarily by channelling the conduct of human agents but also by designing the environments in which they act. Such measures might be introduced in a variety of ways, ranging from top-down imposition to bottom-up adoption. As in the standard account of ‘regulation’, the channelling measures include rules, standards and principles,7 but unlike the standard account, in my account, the measures also include technological instruments.8 Since we aspire to put in place smarter regulatory environments, automating processes and embedding connected devices, it is the technological measures that bear an increasing regulatory burden. For example, ‘nudges’,9 as part of the choice architecture, can be in the form of default rules but it is increasingly the

6 Of course, while the rules and principles that make up the law of contract mandate various judicial orders, awards and decisions, neither contract law itself nor, for the most part, its rules are mandatory (in the sense that they are not at the option of the contracting parties). Parties have the option of trading in accordance with their own informal codes of governance; they can make their own choice of law and many of the rules of contract law are defaults. Once a more regulatory approach to transactions is taken (as is conspicuously the case with consumer transactions), the signals in the regulatory environment are much more complex and in many cases much more prescriptive. Those parties who supply into the consumer marketplace are subject to a multitude of mandatory requirements and constraints (relating to information, the quality and ftness of goods and services, cooling-off periods, advertising, aggressive practices and so on). 7 Compare, e.g. Julia Black, ‘What is Regulatory Innovation?’ in Julia Black, Martin Lodge and Mark Thatcher (eds), Regulatory Innovation (Cheltenham: Edward Elgar, 2005) 1 at 11: ‘[Regulation signifes] the sustained and focused attempt to alter the behaviour of others according to standards or goals with the intention of producing a broadly identifed outcome or outcomes, which may involve mechanisms of standard-setting, information-gathering and behaviour modifcation’. 8 Seminally, see Lawrence Lessig, Code and Other Laws of Cyberspace (New York: Basic Books, 1999) (introducing the idea of coding as a regulatory modality [along with laws and other normative signals]). 9 Seminally, see Richard H Thaler and Cass R Sunstein, Nudge (New Haven: Yale University Press, 2008).

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nudges embedded in the design of regulatory environments (both offine and online environments) that are critical.10 When a ‘regulatory’ approach is engaged, policy is focal, and where (as in the present context) the spotlight is on new business practices that often are enabled by new technologies, such an approach involves a process (1) that assesses both benefts and risks, (2) that considers how to incentivise (not merely permit) innovative technologies and business practices, (3) that manages unacceptable risks (both to individuals and to systems and infrastructures) and (4) that communicates risks.11 As to the second matter, because new technologies can, and do, insinuate themselves into transactional contexts, much of my discussion of DBMs assumes that such technologies are increasingly a part of the landscape. However, it is not the case that these technologies are necessarily problematic for contract law. Indeed, as Eliza Mik has recently argued, contract law is ‘not only form agnostic but also technology neutral’.12 The cornerstone ideas of intention, exchange, reasonableness and so on are fexible enough for contract lawyers to recognise a deal when they see one.13 That said, while technology per se is not a challenge for contract law, some technological applications do create problems. Mik anticipates problems in engaging with pervasively automated transactional environments, but for present purposes my point is that contract law and the courts are not geared for making regulatory assessments and regulatory responses where they are needed. Contract law and the courts did not systematically help consumers when they needed protection against arguably unfair terms; crucially, the protective laws that were put in place were not simply a product of the legislature, they refected a regulatory rebalancing of the interests of parties to what, at the time, were slowly becoming recognised as B2C contracts. Similarly, in the feld of DBMs enabled by various transactional technologies, while some aspects of these technologies might take contract law out of its comfort zone, it is the nature of the business practices (blending competitive and cooperative elements, and encouraging reliance by third parties who might be physically distant from the immediate contracting parties) that invites an explicitly regulatory assessment and resolution. When this is so, then, to repeat, we should not be looking to contract law and the courts for our answers.

10 See Roger Brownsword, ‘Recommended Reading: Smarter Regulation Required’ (2020) 9 Journal of European Consumer and Market Law 49. 11 For elaboration of the regulatory environment conceived in this way, see Brownsword (n 5); and for elaboration of a ‘regulatory’ mindset see my discussion under ‘Law 2.0 and regulatory-instrumentalism’. 12 Eliza Mik, ‘The Resilience of Contract Law in Light of Technological Change’ in Michael Furmston (ed), The Future of the Law of Contract (Abingdon: Routledge, 2020) 112 at 112. 13 A good example, albeit one not involving new technology, is Wells v Devani [2019] UKSC 4.

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Law 3.0: the new legal landscape The backcloth for my discussion is what I will call ‘Law 3.0’. While Law 3.0 is a particular kind of regulatory conversation (and mindset), to be compared and contrasted with two other legal conversations (and mindsets), Law 1.0 and Law 2.0, it also a shorthand for an extended feld of legal interest – a feld that features these three coexisting and interacting conversations (and mindsets). We have arrived at this point as a result of two major technological disruptions of law. In the frst disruption, the traditional coherentist mindset of Law 1.0 is destabilised by the emergence of a Law 2.0 mindset, the logic of which is more purposive and regulatory-instrumentalist. This is followed by a second disruption when regulatory-instrumentalism is taken in the more technological direction of Law 3.0. With each mindset, there are different questions that are focal, different framings and different conversations that ensue. To understand the new legal landscape, and to understand how the ‘law of contract’ might relate to DBMs, we need to understand the distinctive nature of the mindsets associated with Law 1.0, Law 2.0 and Law 3.0, respectively. This is the purpose of this part of the chapter. Law 1.0 and coherentism Law 1.0 is the default mode of ‘thinking like a lawyer’. Law 1.0 is what law schools teach their students to do; it is what lawyers do when, given a particular set of facts, they are asked to advise on the legal position, and it is what judges do when they apply precedents and principles to the cases in their courts. The discourse of Law 1.0 not only is doctrinal but is guided by a coherentist mindset. For present purposes, we can treat the following fve characteristics as the salient features of such a mindset.14 First, for coherentists, what matters above all is the integrity and internal consistency of legal doctrine. This is viewed as desirable in and of itself. Second, coherentists are not concerned with the ftness of the law for its regulatory purpose. That said, there are occasions when coherentist-minded judges will respond in a more regulatory way to pressing policy concerns. For example, Cristie Ford notes that, in the absence of railroad legislation, Courts were the primary public players, and it was courts that solved the railways’ short-term cash fow problem(s). In view of the perceived public interest in keeping the railroads running, judges modifed existing security contracts and the law of liens, often to the bewilderment of the business community.15

14 Compare Roger Brownsword, ‘After Brexit: Regulatory-Instrumentalism, Coherentism, and the English Law of Contract’ (2018) 35 Journal of Contract Law 139. 15 Ford (n 2) at 174.

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Third, coherentists approach new technologies by asking how they ft within existing legal categories (and then try hard to ft them in) – for example, developments in biotechnology, in information technology and in cryptotechnology, have raised (coherentist) questions about the way in which fundamental concepts and distinctions in property law map onto a range of ‘things’, such as cell lines, gametes, personal data and cryptoassets. Fourth, coherentists believe that legal reasoning should be anchored to guiding general principles of law.16 In the case of questions about the enforcement or non-enforcement of transactions, the foundational principles are that parties should be free to make their own deals (in accordance with freedom of contract) and that it is the fact that parties have freely agreed to a deal that justifes holding them to the bargain (in accordance with sanctity of contract and refecting a transactionalist approach). Fifth, coherentists assume that the function of private law, together with its guiding principles, is largely concerned with ex post correction (of transactional and interactional wrongs) and compensation. It is worth lingering over the coherentist tendency to ask not whether the prevailing (and disrupted) rules are ft for purpose but how new phenomena can be ftted into traditional classifcation schemes or how they comport with general principles of law. For coherentists, the focus is on the recognised legal concepts, categories and classifcations, and this is accompanied by a certain reluctance to abandon these concepts, categories and classifcations with a view to contemplating a bespoke response. For example, rather than recognise new types of intellectual property, coherentists will prefer to tweak existing laws of patents and copyright. As Julie Cohen explains: [O]pponents of [the expansion and proliferation of intangible intellectual entitlements] have offered two very different types of arguments. Some [coherentists] defend the existing boundaries by reference to tradition and originalist understanding, while others [regulatory instrumentalists] argue that continued expansion and proliferation . . . will undermine both competition and continued innovation.17 Similarly, in transactions, coherentists (guided by existing law) will ask whether e-mails are to be classifed as instantaneous or non-instantaneous forms of communication (or transmission), they will want to apply the standard contracts template to online shopping sites and platforms,18 they

16 Famously, see Frank H Easterbrook, ‘Cyberspace and the Law of the Horse’ (1996) University of Chicago Legal Forum 207. 17 Julie E Cohen, Between Truth and Power (New York: Oxford University Press, 2019) at 24. 18 See, e.g. the careful contractual analysis in Christian Twigg-Flesner, ‘Legal and Policy Responses to Online Platforms – A UK Perspective’, available at SSRN: https://papers.ssrn. com/sol3/papers.cfm?abstract_id=3087311 (last accessed April 27, 2020).

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will want to draw on traditional notions of agency in order to engage electronic agents and smart machines, they will want to classify individual ‘prosumers’ and ‘hobbyists’ who buy and sell on new platforms (such as platforms that support trade in 3D printed goods) as either business sellers/traders or consumers and they will have a host of questions about whether smart contracts qualify as fat contracts recognised by the law of contract.19 That said, the standards and principles of contract law are resilient and fairly elastic.20 Indeed, the UK Jurisdiction Taskforce (associated with the LawTech Delivery Panel) has recently claimed that the ‘great advantage of the English common law system is its inherent fexibility’, that ‘judges are able to apply and adapt by analogy existing principles to new situations as they arise’ and that ‘[t]ime and again over the years the common law has accommodated technological and business innovations, including many which, although now commonplace, were at the time no less novel and disruptive than those with which we are now concerned’.21 On the other hand, as Lord Wilberforce famously put it in The Eurymedon, this accommodation of business practice and technological innovation has sometimes involved procrustean measures to force ‘the facts to ft uneasily into the marked slots of offer, acceptance and consideration’.22 What we surely can say is that, as the infrastructure for transactions becomes ever more technological and connected, and as DBMs proliferate, the diffculties in applying the general principles and distinctions of classical contract law will intensify. Quite simply, the rules of the classical law of contract were written for discrete marketplace transactions between humans, not for clusters of connected transactions that increasingly relegate humans to the background.23 Law 2.0 and regulatory-instrumentalism Law 2.0 is both ‘regulatory’ in its approach and ‘instrumentalist’ in its rationality. However, it continues to treat rules and standards as the measures to be used in the governance of human conduct. In contrast with coherentism,

19 For discussion of the last example, see Roger Brownsword, ‘Smart Contracts: Coding the Transaction, Decoding the Legal Debates’ in Philipp Hacker, Ioannis Lianos, Georgios Dimitropoulos and Stefan Eich (eds), Regulating Blockchain: Techno-Social and Legal Challenges (Oxford: Oxford University Press, 2019) 311. 20 See Mik (n 12). 21 LawTech Delivery Panel (UK Jurisdiction Taskforce), ‘Legal Statement on Cryptoassets and Smart Contracts’ (2019) para 3, available at https://technation.io/about-us/lawtech-panel. 22 New Zealand Shipping Co Ltd v AM Satterthwaite and Co Ltd (The Eurymedon) [1975] AC 154, at 167. 23 See Mik (n 12).

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we can treat the regulatory-instrumentalism of Law 2.0 as being defned by the following six features.24 First, regulatory-instrumentalism is not concerned with the internal consistency of legal doctrine.When regulatory-instrumentalists raise questions about consistency, they are typically making sure that particular regulatory interventions will complement others in serving specifed regulatory objectives. Second, regulatory-instrumentalism is entirely focused on whether the law is effective in serving specifed regulatory purposes. Regulatory-instrumentalists do not ask whether the law is ‘coherent’ – other than in the sense of asking whether a group of related interventions pushes in the required regulatory direction – but whether it works. Third, regulatory instrumentalism has no reservation about enacting new bespoke laws if this is an effective and effcient response to a question raised by new transactional technologies. Of course, there might be some disagreement about whether a particular regulatory intervention will prove to be effective and effcient, but their differences notwithstanding, each party to such a dispute has the same kind of mindset.25 Fourth, the anchoring points for regulatory-instrumentalists are not the general principles that are established in the jurisprudence but current policy purposes and objectives. Fifth, alongside its policy focus, regulatory-instrumentalism in relation to new technologies tends to be orientated towards striking an acceptable balance between benefts and risks. Sixth, the tilt of the risk-management mindset that goes with regulatory-instrumentalism is towards ex ante prevention rather than ex post correction. Regulatory-instrumentalism is thus the (democratically) mandated language of legislators, policymakers and regulatory agencies who talk the talk of Law 2.0. Conversely, while judges might have some responsibility for applying the spirit of policy-driven legislation, it is precisely the setting of regulatory policy that we think falls beyond the mandate of unaccountable judges.26 Law 2.0 is relentlessly instrumentally rational. The question is: what works, what will serve certain specifed purposes? When a regulatory intervention does not work, it is not enough to restore the status quo; instead, further regulatory measures should be taken, learning from previous experience, with a view to realising the regulatory purposes more effectively. Hence the purpose of the criminal law is not simply to respond to wrongdoing (as corrective justice demands) but to reduce crime by adopting whatever measures of deterrence promise to work. Similarly, in

24 Compare Roger Brownsword (n 5). 25 For example, compare Cohen (n 17) at 24. It seems that the regulatory-instrumentalist opponents of expansion of IP entitlements ‘have been unable to marshal substantial empirical evidence to support [their] claims’, leaving those who argue that expansion will promote innovation to prevail. 26 See, e.g. the ‘bewilderment of the business community’ in Ford (n 15).

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a safety-conscious community, the purpose of tort law is not simply to respond to wrongdoing but to deter practices and acts where agents could easily avoid creating risks of injury and damage. And to the extent that the purpose of contract law is to minimise the fnancial risks associated with non-performance by a counter-party, a regulatory-instrumental approach will aspire to develop improved ways of mitigating such risks and, if possible, preventing them from arising in the frst place. For regulatoryinstrumentalists, the path of the law should be progressive: we should be getting better at regulating crime, at improving levels of safety and at reducing instances of non-performance. According to Edward Rubin, in the modern administrative state, the ‘standard for judging the value of law is not whether it is coherent but rather whether it is effective, that is, effective in establishing and implementing the policy goals of the modern state’.27 Certainly, one of the striking features of the European Union has been the Law 2.0 spirit that has informed the single market project and that continues now in the digital Europe project. As the Commission puts it: The pace of commercial and technological change due to digitalisation is very fast, not only in the EU, but worldwide. The EU needs to act now to ensure that business standards and consumer rights will be set according to common EU rules respecting a high-level of consumer protection and providing for a modern business friendly environment. It is of utmost necessity to create the framework allowing the benefts of digitalisation to materialise, so that EU businesses can become more competitive and consumers can have trust in high-level EU consumer protection standards. By acting now, the EU will set the policy trend and the standards according to which this important part of digitalisation will happen.28 In the EU, what this means is that the Commission will stay focused on its regulatory objectives, harmonising the law across Member States (even though, notoriously, there might be some friction between the harmonising requirements and local law)29 and not being unduly concerned about crossmeasure coherence other than in the sense that the measures complement one

27 Edward L Rubin, ‘From Coherence to Effectiveness’ in Rob van Gestel, Hans-W Micklitz and Edward L Rubin (eds), Rethinking Legal Scholarship (New York: Cambridge University Press, 2017) 310 at 328. 28 European Commission, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee, ‘Digital Contracts for Europe  – Unleashing the Potential of E-Commerce’ COM(2015) 633 fnal (Brussels, 9.12.2015) 7. 29 For discussion, see Leone Niglia, The Transformation of Contract in Europe (The Hague: Kluwer Law International, 2003) and Roger Brownsword, Hans Micklitz, Leone Niglia

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another in serving the particular regulatory objectives. Post-Brexit, we can expect regulators in the United Kingdom to pursue broadly similar objectives in relation to the digital economy, and although harmonisation will not be one of the imperatives in the UK, we can expect the coherence of the law with traditional principles to be very much a secondary concern. Law 3.0 and technocratic thinking The third mindset, refecting the distinctive conversation in Law 3.0, evolves from a regulatory-instrumentalist view but in a way that is sensitised to the use of instruments other than rules. Taking a distinctively technocratic approach,30 solutions are sought in architecture, in the design of products and processes, in automation and in the coding of hardware, software and even persons. In response to the demand that ‘there needs to be a law against this’, the technocratic mindset, rather than drafting new rules, looks in a sustained and focused way for technological solutions. Such a mindset is nicely captured by Joshua Fairfeld when, writing in the context of nonnegotiable terms and conditions in online consumer contracts, he remarks that ‘if courts [or, we might say, the rules of contract law] will not protect consumers, robots will’.31 Of course, in communities that are still committed to traditional values or to regulating by rules, there is likely to be some resistance to a technocratic mentality and to technical solutions. Thus, with rapid developments in AI, machine learning and blockchain, a question that will become increasingly important is whether, and if so how far, a community sees itself as distinguished by its commitment to governance by rule rather than by technological management. In some smaller-scale communities or self-regulating DBM groups, there might be resistance to a technocratic approach because compliance that is guaranteed by technological means compromises the context for trust – this might be the position, for example, in some business communities (where self-enforcing transactional technologies are rejected).32 Or,

and Steven Weatherill (eds), The Foundations of European Private Law (Oxford: Hart, 2011). 30 To term this approach ‘technocratic’ does assume that expert technical groups will be parties to Law 3.0 conversations. This means that there will be challenges in opening such conversations to non-expert participants, in establishing where non-expert input is essential or desirable and in holding the experts accountable. Moreover, it does mean that we might anticipate some resistance to this kind of approach (see text below). 31 Joshua Fairfeld, ‘Smart Contracts, Bitcoin Bots, and Consumer Protection’ (2014) 71 Washington and Lee Law Review Online 36, at 39. 32 See the excellent discussion in Karen E C Levy, ‘Book-Smart, Not Street-Smart: BlockchainBased Smart Contracts and The Social Workings of Law’ (2017) 3 Engaging Science, Technology, and Society 1.

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again, a community might prefer to stick with regulation by rules because rules (unlike technological measures) allow for some interpretive fexibility, or because the community values public participation in setting standards and is worried that this might be more diffcult if the debate were to become technocratic. On the other hand, in some DBMs and other self-regulating groups, technological management might appeal as just the answer to their governance problems.33 While the contrast between a technocratic regulatory approach and the coherentism of Law 1.0 is sharp  – the former not being concerned with doctrinal integrity and not being entirely focused on restoring the status quo prior to wrongdoing – the contrast with regulatory-instrumentalism is more subtle. For both regulatory-instrumentalists and technocrats the law is to be viewed in a purposive and policy-orientated way; and, indeed, the latter can be regarded as a natural evolution from the former. In both mindsets, it is a matter of selecting the tools that will best serve desired purposes and policies; and, so long as technologies are being employed as tools that are designed to assist with a rule-based regulatory enterprise the technocratic approach might be viewed as merely an offshoot from the stem of regulatory-instrumentalism. However, as a more sustained focus on technological solutions develops in Law 3.0, together with a push towards technological fxes that displace and supersede rules, the contrast with Law 2.0 is also sharpened. Taking stock The new legal landscape comprises three overlapping conversations (and mindsets). In this landscape, we can hear some people asking how the general principles of the law apply to some phenomena, others asking whether the legal rules are ft for regulatory purpose (and, if not, how they should be changed) and yet others wondering whether regulatory purposes might be better served by a technological fx (or by a combination of rules and technological instruments). The coexistence of these conversations, the interactions between them, the feedback loops, the further technological disruption of law and the overall direction of travel invite further work, but for present

33 Compare Marta Cantero Gamito, ‘Regulation.Com. Self-Regulation and Contract Governance in the Platform Economy: A Research Agenda’ (2017) 9 European Journal of Legal Studies 53, 57–59, contrasting ‘analogue’ regulation – extending the ‘scope of existing rules and regulations to include the new transactions and players (e.g. extending existing consumer protection rules, devised for the offine world, to peer-to-peer transactions)’ – with a new generation of regulation, Regulation 2.0, ‘based on information transparency and data-driven accountability’. From this Regulation 2.0 perspective, ‘self-regulation and reputational mechanisms stand as suitable mechanisms for regulating the new types of transactions facilitated by online platforms’.

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purposes we have to treat it simply as a dynamic backcloth for our refections on the governance of DBMs.34

Classical contract law: modifed, corrected, bifurcated In the new legal landscape, we can say that it is in Law 1.0 that we fnd conversations about the application of the general principles of contract law and in Law 2.0 that we hear debates about a more regulatory approach to transactions. In what respects, though, has the regulatory-instrumentalism of Law 2.0 overtaken the coherentism of Law 1.0? The cornerstone (Law 1.0) principles of the classical law of contract are freedom of contract and sanctity of contract; the basis of the parties’ obligations is ‘transactional’ (the obligations are grounded in the deal that the parties have agreed); a contract is conceived of as a reciprocal exchange between two parties, A and B – where, as Ian Macneil put it, ‘A and B had better be the only parties; adding C, D, and other such riffraff is bound to create complicated relations outside the transaction’35 and, in the English version of the classical theory, the underpinning ethic is one of robust individualism. If the classical law ever truly subscribed to a subjectivist account of a deal that is agreed, this articulation of transactionalist thinking was decisively modifed in the Victorian years. Famously, in Smith v Hughes,36 it is an objective approach to agreement that is adopted (a party’s ‘real intention’ is no longer critical) subject only to the subjectivist proviso that an apparent deal should not be enforced where it is clear that one party was aware that the other had misunderstood the terms of the offer. Again, in another landmark case in the common law jurisprudence, Parker v South Eastern Railway Co,37 Mellish LJ held that a jury should be directed that the legal test for the incorporation of terms and conditions by notice is not so much whether a customer actually was aware of the terms and had agreed to them but whether the notice given by the railway company was reasonable. Indeed, as Stephen Waddams has pointed out, Parker very nearly went a step further to the point of abandoning transactionalism in favour of a reasonableness standard.38

34 For some of the tensions and turbulence, see Law, Technology and Society: Re-imagining the Regulatory Environment (n 5) Chapters 9–11. 35 Ian R Macneil, The New Social Contract (New Haven: Yale University Press, 1980) 61. 36 Smith v Hughes (1871) LR 6 QB 597. 37 (1877) 2 C.P.D. 416. 38 Stephen Waddams, Principle and Policy in Contract Law (Cambridge: Cambridge University Press, 2011) at 39, pointing out that the emphasis of Bramwell LJ’s judgment in Parker is ‘entirely on the reasonableness of the railway’s conduct of its business and on the unreasonableness of the customers’ claims; there is no concession whatever to the notion that they could only be bound by their actual consent’.

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About 100 years later, with the development of a mass consumer market for new products (cars, televisions, kitchen appliances and so on), it was necessary to make another fundamental correction. This time it was the cornerstone principles of ‘freedom of contract’ and ‘sanctity of contract’ that were in tension with the reasonable expectations of consumers, and this time a reasonableness standard was adopted. Even if suppliers had given consumers reasonable notice of their boilerplate terms and conditions, there could be no reliance on the most egregious exclusions, and the less egregious exclusions and limitations could be relied on only if they were judged to be reasonable. Over the last 50 years, a regulatory approach to consumer contracts, aided and abetted by the UK’s membership of the EU and culminating in the Consumer Rights Act 2015, has become more and more conspicuous such that we can say that consumers engage, not so much in contracts, but in regulated transactions – the reality is that there is, quite simply, a clear bifurcation between the treatment of commercial (business to business) contracts and consumer contracts. While a regulatory regime for consumer contracts, including for online consumer contracts,39 took shape, the law relating to business contracts remained broadly classical. However, it refected a tension familiar in the US jurisprudence between the formalism associated with Williston and the contextualism (and protection of reasonable expectations) associated with Corbin.40 At the turn of the century, starting fairly modestly  – in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd41 and Investors Compensation Scheme Ltd v West Bromwich Building Society42 – the seeds of a modern contextualist approach were sown. Initially, contextualism was limited to correcting errors that had clearly been made in the drafting of contracts, but it soon established itself as the standard approach to the interpretation of commercial contracts,43 before then being proposed as the appropriate approach to the implication of terms,44

39 See, Roger Brownsword, ‘The E-Commerce Directive, Consumer Transactions, and the Digital Single Market: Questions of Regulatory Fitness, Regulatory Disconnection and Rule Redirection’ in Stefan Grundmann (ed), European Contract Law in the Digital Age (Antwerp: Intersentia, 2018) 165. 40 See, e.g. Lawrence A Cunningham, Contracts in the Real World, 2nd ed (New York: Cambridge University Press, 2016) 6–8. 41 [1997] 3 All ER 352. 42 [1998] 1 All ER 98. 43 For example, in Rainy Sky v Kookmin Bank [2011] UKSC 50, the UK Supreme Court decided that regardless of how the shipbuilding contracts (that were at the root of the dispute) might be read under a literal approach, the context demanded that the performance bonds taken out for the beneft of the buyers must be interpreted as covering the risk of the shipbuilders’ insolvency. Or, to put this in other words, the context supported the proposition that the buyers had an honest and reasonable expectation that the performance bonds covered them against the most obvious commercial risk that they were taking (given the advance payments to which they were committed), namely, the risk of the shipbuilders’ insolvency. 44 Attorney General of Belize v Belize Telecom Limited [2009] UKPC 11.

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and (in the much-discussed Yam Seng case) as a vehicle for introducing a (contextually indicated) requirement of good faith in contracts.45 In this way, contextualism challenged long-standing doctrines concerning the literal interpretation of contracts, a restrictive approach to implied terms based on necessity, and of course the adversarial ethic that underwrites such features of contract law.46 For a while, it seemed that contextualism would become the default approach for all commercial contract disputes. However, in a series of landmark cases – notably Marks and Spencer plc v BNP Paribas Services Trust Company (Jersey) Limited47 (on implied terms), and Arnold v Britton48 and Wood v Capita Insurance Services Ltd49 (on interpretation)  – the Supreme Court has pushed back against what was becoming the new orthodoxy. In this most recent case law, we fnd a reaction against expansive implication and interpretation of terms, particularly in carefully drafted commercial contracts.

45 Yam Seng Pte Limited v International Trade Corporation [2013] EWHC 111 (QB). There, Leggatt J said that what good faith requires ‘is sensitive to context’ (para 141), that the core value of honesty might require more or less disclosure depending on the context and that in some contractual contexts the relevant background expectations may extend further to an expectation that the parties will share information relevant to the performance of the contract such that a deliberate omission to disclose such information may amount to bad faith. (para 142) More recently, the gist of these remarks was repeated in Sheikh Tahnoon Bin Saeed Bin Shakboot Al Nehayan v Kent [2018] EWHC 333 (Comm), where Leggatt LJ said that ‘relational’ contracts involve trust and confdence but of a different kind from that involved in fduciary relationships. The trust is not the loyal subordination by one party of its interests to those of another. It is trust that the other party will act with integrity and in a spirit of cooperation. The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standard of good faith. (para 167)

46

47 48 49

On the facts, where the Sheikh and Mr Kent had entered into a joint venture agreement to acquire and run a number of hotels together with an online travel business, Leggatt LJ took the view that this was ‘a classic instance of a relational contract’ (para 174). In other words, while the relationship between the contractors was not fduciary, neither was it arm’s length (as in ordinary commercial dealing); instead, it was one in which the parties reasonably expected heightened levels of candour and cooperation. Applying this standard, Leggatt LJ held that when the joint venture was in deep fnancial trouble and the Sheikh was trying to recoup the considerable investment that he had made in the business, his representatives did not act consistently with the duty of good faith that was owed to Mr Kent. For discussion of this direction of doctrinal travel, see Roger Brownsword, ‘The Law of Contract: Doctrinal Impulses, External Pressures, Future Directions’ (2014) 31 Journal of Contract Law 73. [2015] UKSC 72; confrmed in Wells v Devani [2019] UKSC 4, para 28 (Lord Kitchin). [2015] UKSC 36. [2017] UKSC 24.

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Taking stock, we can say that contract law today sits on two fault lines. First, the tension between a formalist and contextualist approach to business contracts has not been resolved – and, as we will see shortly, the drift away from contextualism is not helpful if we are looking to contract law to engage more satisfactorily with DBMs. Second, although consumer protection has been outsourced to regulatory agencies, contract law still has some responsibility for protecting vulnerable parties. Here, as Stephen Waddams has recently argued, we fnd that, the commitment to sanctity of contract notwithstanding, the courts have employed a variety of techniques and doctrinal devices to decline to enforce contracts that unfairly burden one party or unjustly enrich the other.50 For those who value coherence in contract law, this is not a happy state of affairs, and if (as we will discuss later in the chapter when we deal with the question of congruence) we have to align technological effects with effects indicated by contract law, the uncertain state of contract law does not help us make such an assessment.

The governance of decentralised business models: contract, regulation, technology For a long time, the application of classical contract law principles to DBMs has been problematic. The patterns of contractual connection might vary: there are hubs and spokes, chains and strings, clusters and groups and so on – but the point is that, in all these cases, the transactions are wired for connection. They are networked, and it is unrealistic to read these arrangements as though the parties are not related, as though there are simply so many discrete bilateral exchanges. To paraphrase Ian Macneil, the fact of the matter is that, in DBMs, a host of economically related riffraff are involved. Applying classical principles to DBMs, the parties’ reasonable expectations are likely to be frustrated in two principal ways. First, in a typical network, the parties will not be fully contractually connected. For example, in a hub, spoke and node network (such as in franchising) the parties at the nodes (the franchisees) will not have contracts with one another. Similarly, in chains, downstream subcontractors and suppliers will have no direct contractual link with the head contractors or client contractors. According to classical contract law, these parties can have no contractual claim against one another.51 Second, characteristically, parties in DBMs will have a reasonable expectation of heightened cooperative rights and responsibilities.52

50 Stephen Waddams, Sanctity of Contracts in a Secular Age (Cambridge: Cambridge University Press, 2019). 51 Famously, compare Doe I v Wal-Mart Stores, Inc., 572 F. 3d 677 (9th Cir. 2009) and generally, see Andreas Rühmkorf, Corporate Social Responsibility, Private Law and Global Supply Chains (Cheltenham: Edward Elgar, 2015). 52 See, e.g. Marc Amstutz and Gunther Teubner (eds), Networks: Legal Issues of Multilateral Cooperation (Oxford: Hart, 2009); Gunther Teubner, Networks as Connected Contracts

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Yet if the classical ethic of adversarial dealing applies, this will constrain the way in which the courts interpret terms as well as their willingness to imply terms for cooperation, let alone recognise a general principle of good faith and fair dealing in contracts. If we think that, in these respects, the law is unsatisfactory, the question is whether we can respond. Could a response be generated from within contract law itself? Or are DBMs another problem, like consumer protection, to be outsourced to a regulatory regime? Or is it possible that the emerging technologies for transactions mean that networked parties have it within their own power to overcome this problem?53 We can consider each of these possibilities. Contractual It is clear that a formalist approach, where bright-line rules and settled principles are applied in the standard way, will not do the job. The principles of the classical law of contract are designed to set standards for transactional practice, not to refect whatever standards are actually observed in the practice of transactors. If contract law has a resource to engage with DBMs in a way that is more responsive to practice-based reasonable expectations, it has to revive contextualist thinking and take a relational approach to transactional rights and duties.54 The contextualist approach launched by Lords Steyn and Hoffmann signalled a wide-ranging form of commercial realism that swept all before it in

(Oxford: Hart, 2011); Roger Brownsword, ‘Contracts in a Networked World’ in Larry DiMatteo, Qi Zhou, Severine Saintier and Keith Rowley (eds), Commercial Contract Law: Transatlantic Perspectives (Cambridge: Cambridge University Press, 2012) 116; Roger Brownsword, ‘Contracts with Network Effects: Is the Time Now Right?’ in Stefan Grundmann, Fabrizio Cafaggi and Giuseppe Vettori (eds), The Organizational Contract: From Exchange to Long-Term Network Cooperation in European Contract Law (Aldershot: Ashgate, 2013) 137 and the chapters on networks in Part Two of Roger Brownsword, Rob van Gestel and Hans-W. Micklitz (eds), Contract and Regulation: A Handbook on New Methods of Law Making in Private Law (Cheltenham: Edward Elgar, 2017). 53 Specifcally, on smart contracts and networks, see Florian Idelberger, ‘Connected Contracts Reloaded – Smart Contracts as Contractual Networks’ in Stefan Grundmann (ed) (n 39) 205. But, nb, Stefan Grundmann and Philipp Hacker, ‘The Digital Dimension as a Challenge to European Contract Law – The Architecture’ in Stefan Grundmann (ed) (n 39) 3, at 38 cautioning that we should take care in deriving ‘lessons from arrangements in digital networks (typically highly formalised) for those in the analogue world’. For the question of whether the networked nodes might themselves form a contractual relationship (potentially leading to joint liability to third parties), see the excellent discussion in Dirk A Zetzsche, Ross P Buckley and Douglas W Arner, ‘The Distributed Liability of Distributed Ledgers: Legal Risks of Blockchain’ (European Banking Institute, EBI Working Paper Series 2017No. 14) 26–27. 54 Compare, Roger Brownsword, ‘After Investors: Interpretation, Expectation and the Implicit Dimension of the “New Contextualism”’ in David Campbell, Hugh Collins and John Wightman (eds), The Implicit Dimensions of Contract (Oxford: Hart, 2003) 103.

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cases such as Rainy Sky55 and RTS Flexible Systems Ltd.56 Although, as we have said, it looks as though the courts are now back-tracking, it is worth emphasising the potential signifcance of a contextual-relationist approach. First, such an approach makes explicit the idea that the fundamental purpose of the commercial law of contract is to protect the reasonable transactional expectations of business parties (or, stated more pointedly, to resolve disputes in a way that accords with actual business practice and commercial common sense). Second, in determining whether a commercial contractor’s expectation is reasonable, there are four recognised reference points: (1) the formal rules of contract law, (2) the express terms of the agreement (provided that they are compatible with the formal law), (3) the signals given by a co-contractor (such as the signals of encouragement or acquiescence that base the fair dealing ideas at the root of equitable estoppel or common law waiver) and (4) the implicit understanding of contractors who deal in a particular business sector or whose dealings are structured in a connected but decentralised way. Here, it is points (3) and (4) that are distinctively contextual, and signifcantly, these contextual reference points are applicable across the whole range of transactional disputes between commercial contractors. Third, following Lord Hoffmann’s seminal speech in Transfeld Shipping Inc v Mercator Shipping Inc.,57 unless there are clear policy reasons for treating the formal rules as fxed and non-negotiable (e.g. the rules against penalty clauses or exclusions of liability for negligently caused death or personal injury), they should be treated as defaults liable to be displaced by the

55 Rainy Sky v Kookmin Bank [2011] UKSC 50. According to Lord Clarke (giving the judgment of the Court): [C]onstruction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other. (para 21) At para 45, Lord Clarke concludes that, given two arguable constructions of the provision at issue, ‘the Buyers’ construction is to be preferred because it is consistent with the commercial purpose of the Bonds in a way in which the Bank’s construction is not’. Crucially, on this reasoning, in order to bring the ‘commercial sense’ standard into play, it is not essential that the more natural (literal) reading is commercially absurd or outrageous. It is enough that there is more than one possible reading. 56 RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh and Co (UK Production) [2010] UKSC 14, where (at paras 58, 62 and 86–87) Lord Clarke rejects the Court of Appeal’s view that there was ‘no contract’ between the parties as making no commercial sense. 57 [2008] UKHL 48.

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parties (whether by express terms, by conduct or by implicit understanding as in Transfeld Shipping itself). Potentially, a contextual-relationalist approach with these features would be able to engage in a meaningful way with disputes between parties within a network. A recent indication of this potential was given by Fraser J in Bates v Post Offce Ltd,58 where the Post Offce was in dispute with hundreds of sub-postmasters about shortfalls shown by the Horizon point of sale and accounting system that sub-postmasters were required to use – the former insisting that the shortfalls must have arisen from mistakes or dishonesty by sub-postmasters, the latter arguing that the system suffered from technical faws which led (erroneously) to shortfalls being shown. Against this backcloth, Fraser J argued for a contextually sensitive idea of relational contracts in the following terms: [Various] cases, both appellate and frst instance, all demonstrate in my judgment that there is no general duty of good faith in all commercial contracts, but that such a duty could be implied into some contracts, where it was in accordance with the presumed intention of the parties. Whether any contract is relational is heavily dependent upon context, as well as the terms. The circumstances of the relationship, defned by the terms of the agreement, set in its commercial context, is what decides whether a contract is relational or not.59 Although Fraser J emphasised that good faith can extend beyond matters of honesty,60 it is clear that if there are express terms specifcally preventing the implication of good faith, ‘then that will be the end of the matter’.61 In a passage that surely will become a standard reference point for thinking about relational contracts, Fraser J identifed the following as positive indicators: the contract is a long-term one with the parties intending it to be a long-term relationship; the parties intend ‘their respective roles to be performed with integrity, and with fdelity to the bargain’; the parties are committed to collaborating with one another; the parties repose trust and confdence in one another; and, the contract involves ‘a high degree of communication, co-operation and predictable performance based on mutual trust and confdence, and expectations of loyalty’.62 In the circumstances of Bates, Fraser J found that the contracts between the parties were relational,

58 59 60 61 62

[2019] EWHC 606. At para 721. See paras 710–711. At para 726. Para 725. In the same paragraph, Fraser J also says that one or both of the parties might have made a signifcant investment in the venture and that the relationship between the parties might be an exclusive one. In the middle of Fraser J’s list, we also read that the ‘spirits and objectives of the [parties’] venture may not be capable of being expressed exhaustively in a written contract’.

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that this implied an obligation of good faith and that this meant that the parties should ‘refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people’.63 Had the litigation in Bates run its full course, we might have seen how good faith actually played out in this particular dispute and we might have had a better appreciation of its more general doctrinal implications. However, before the case proceeded any further, the Post Offce settled the claim by agreeing to pay some £57.75 million in damages.64 Although Bates underlines that there is some judicial support for Yam Seng, in the bigger picture, the tide seems to have turned against contextualism. The classical law of contract is what it is – geared for certainty and predictability, resistant to a general principle of good faith and fair dealing, resistant to anything that might move the needle away from an individualist ethic, wedded to setting marketplace standards rather than refecting them and offering a marketable product for adoption by international traders.65 Given these characteristics, there is reason to doubt the capacity of contract law to be systematically responsive to the reasonable expectations of network contractors.66 If the law is to be consistently more responsive, and if there is to be a head-on engagement with the policy questions raised by DBMs – not only doctrinal questions about the relaxation of privity or the implication of terms for cooperation, but also questions about risk management and consumer protection as well as questions about supporting and incentivising novel practices and transactional technologies where they are clearly benefcial – a more regulatory approach seems to be required.67 A regulatory approach Where contract law needs a (policy-serving) regulatory response to resolve a particular diffculty, it will usually require some legislative measure. Such was the case with the Unfair Contract Terms Act 1977, which balanced the interests of both business suppliers and consumers in a way that seemed more acceptable than the relatively unregulated situation licensed by contract law.

63 At para 738. 64 See, Karl Flinders, ‘Post Offce settles legal dispute with subpostmasters, ending 20-year battle for lead claimant’ ComputerWeekly.com, December 11, 2019: available at https:// www.computerweekly.com/news/252475310/Post-Office-settles-legal-dispute-withsubpostmasters-ending-20-year-battle-for-lead-claimant (last accessed October 3, 2020). 65 Compare the thinking of the minority Law Lords in Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] UKHL 12. 66 See, e.g. Catherine Mitchell, Contract Law and Contract Practice (Oxford: Hart, 2013), especially her critique of the Court of Appeal’s reasoning in Tekdata Interconnections Ltd v Amphenol Ltd [2009] EWCA Civ 1209, at 122–124. Also see Catherine Mitchell, ‘Network Commercial Relationships: What Role for Contract Law?’ in Roger Brownsword, Rob van Gestel and Hans Micklitz (eds) (n 52) 198. 67 Compare Marta Cantero Gamito (n 33).

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However, legislative reform of contract law does not necessarily amount to a regulatory response,68 and this was the case with the relaxation of the strict privity principle effectuated by the Contracts (Rights of Third Parties) Act 1999. Although the relaxation was signifcant, the basis of the legislative scheme remained rooted in the idea that contracts should be applied and enforced in a way that is in line with the will of the contracting parties. The parties, as it were, remain masters of their contract, and transactional thinking continues to underpin the rights and obligations of both the contractors and third parties. Primarily, the Act responded to those well-known hard cases, such as Tweddle v Atkinson69 and Beswick v Beswick,70 where family agreements that are intended to confer a beneft on a third party are not enforceable by that third party. However, although the Act also provided (albeit in a somewhat backhanded way) for reliance and enforcement by third-party benefciaries in commercial contexts, it did not attempt to lay out a regulatory framework for the many networks and connected contracts that had become the subject of academic debate.71 Crucially, the thinking behind the Act was not ‘regulatory’ in the sense that there were clear policy objectives, clear assessments of the benefts and risks associated with various options and a serious concern with ‘what works’. After the Act, there was a sense in which the law was more satisfactory, but to ask whether the third-party rules were now more ft for (regulatory) purpose would be either to misunderstand the nature of the reform exercise or to understand all too clearly its limitations. Had the reform of the privity principle been seen as an opportunity to put in place a bespoke regulatory regime for DBMs, the Act would have been very different. Admittedly, such a regulatory fresh start would have required more than an adjustment to the rights of third parties to enforce contracts and to rely on their protective terms and conditions; it would have been a major legislative project. Moreover, if such a project had been approached in a regulatory way, it would have been a break with traditional commonlaw thinking. But then that would have been the point: if the common law could not respond to DBMs in an acceptable way, a regulatory approach needed to be taken. Whether or not the rapid development of platforms and the share economy in which contracts between several parties are again connected might catalyse a new debate about networks is hard to know.72

68 69 70 71

Recall my introductory remarks about the distinctive features of a regulatory approach. (1861) 1 B & S 393 QB. [1968] AC 58. See the critique in John N Adams, Deryck Beyleveld and Roger Brownsword, ‘Privity of Contract – The Benefts and the Burdens of Law Reform’ (1997) 60 Modern Law Review 238. 72 See, e.g. Vanessa Mak, ‘Regulating Contract Platforms, the Case of Airbnb’ in Stefan Grundmann (ed), European Contract Law in the Digital Age (Antwerp: Intersentia, 2018) 87; Larry A. DiMatteo, ‘Regulation of Share Economy: A Consistently Changing Environment’

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In the EU, quite predictably, there has been a concern to ensure that the interests of non-business platform users are protected,73 and regulators have also addressed some of the concerns of smaller businesses who are reliant on platforms.74 However, in the post-Brexit UK, there seems to be no imminent regulatory rescue for networks or for other kinds of DBMs. We should also bear in mind that where a regulatory response is taken, it will be driven by the particular policy and purposes that it is geared to serve. So, for example, in Networks as Connected Contracts,75 Gunther Teubner argues for a regulatory response that refects the various tensions (or institutionalised contradictions) that drive networks – in particular, the tension between hierarchy (organisation) and market (contract), between common purpose and individual interest and between cooperation and competition. According to Teubner, there needs to be a new regulatory approach to networks, aimed not so much at directing or channelling the behaviour of the parties but at supporting ‘stable network expectations by giving them symbolic re-statement in cases where concrete network behaviour contradicts them’76 Adopting such an approach, it remains to articulate the relevant legal consequences (1) as between the parties to the network and (2) as between network parties and those non-network parties with whom they contract.77 Teubner’s discussion of the former (internal network questions) opens with the Apollo (Optik) case where a number of German courts were faced with fxing the extent of the franchisor’s responsibility to pass on to franchisees the beneft of discounts negotiated by the former with suppliers to the network. The Federal High Court eventually ruled in favour of the claimant

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in Reiner Schulze and Dirk Staudenmayer (eds), Digital Revolution: Challenges for Contract Law in Practice (Baden-Baden: Nomos, 2016) 89 and Christian Twigg-Flesner, ‘The EU’s Proposals for Regulating B2B Relationships on Online Platforms – Transparency, Fairness and Beyond’ (2018) 7 Journal of European Consumer and Market Law 222. For the Commission’s outline of the required regulatory environment, see European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, ‘Online Platforms and the Digital Single Market  – Opportunities and Challenges for Europe’ COM(2012) 288 fnal (Brussels, 25.5.2016). For a useful overview of both traditional contractual and regulatory options, see Piotr Tereszkiewicz, ‘Digital Platforms: Regulation and Liability in EU Law’ in Larry di Matteo, Michel Cannarsa and Cristina Poncibò (eds), The Cambridge Handbook of Smart Contracts, Blockchain Technology and Digital Platforms (Cambridge: Cambridge University Press, 2019) 143. EU Regulation 2019/1150 on promoting fairness and transparency for business users of online intermediation services, June 20, 2019. Gunther Teubner, Networks as Connected Contracts (Oxford: Hart, 2011) (translated by Michelle Everson, and with an introduction by Hugh Collins). Ibid., at 103. The analysis in this part of the chapter draws on Roger Brownsword, ‘Post-Technique: The New Social Contract Today’ in David Campbell, Linda Mulcahy and Sally Wheeler (eds), Changing Concepts of Contract (Basingstoke: Palgrave Macmillan, 2013) 14.

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franchisees, holding that multilateral connectivity within the franchise may create an obligation to pass on advantages to members of the network. Approving this outcome, Teubner remarks that it is no answer to resolve the dispute in either a one-sided market way (so that the standard contracts rule) or in a one-sided hierarchical (corporate) way: such strategies inappropriately ‘force a choice in favour of one of the contradictory business orientations, consigning the other to the obscurity of informality’.78 Hence when, in response to questions concerning the scope and nature of network loyalty, appeals are made to the overarching network purpose, these must be understood, neither from ‘the one-sided perspective of an exchange’, nor from the one-sided perspective of corporate totalisation, but as encompassing ‘the contradiction between the individual and collective elements of networking’.79 In the same way, where there are disputes about the interpretation of standard form contracts that apply to networks, or about the allocation of risk within just-in-time supply networks, or about whether one member of the network may hold another to account (even though there is no direct contractual connection between them), the larger contradictory perspective must be adopted. With regard to the external liability of the network and its members (and, concomitantly, the internal allocation of responsibility in relation to external liabilities), Teubner says that the reaction of networks ‘is one of strategic ambivalence’.80 That is to say, network members can interface with external contractors as disconnected and discrete individual contractors (liable only to their co-contractors) or as mere nodes in the larger network of connected contractors (liability resting with the latter). In German law, there are evidently doctrinal resources to aid external claimants who seek to join defendants from within the network but with whom they have no direct contractual connection, but there remains the problem of apportioning responsibility within the network itself. For this latter purpose, the idea of the overarching network purpose again needs to be relied on. Thus, as Teubner summarises it, questions of external liability should be regulated by reference to a doctrinal constellation involving ‘internal network agreement (agreed third party performance impacts), external client contracts (culpa in contrahendo criteria) and overarching association (network purpose)’.81 Although Teubner’s approach is ‘regulatory’ it is quite similar to the contextual-relationalism that could organically emerge from the common law. However, the approaches are not identical; they do not have quite the same emphasis and certainly not the same priorities. Moreover, viewed in the bigger picture of the Law 3.0 landscape, we should not expect a Law

78 79 80 81

Teubner (n 75), at 183. Ibid., at 185. Ibid., at 239. Ibid., at 261.

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2.0 regulatory response to networks to be identical to an approach that is still essentially Law 1.0. Whereas, in Teubner’s (Law 2.0) account, networks have a distinctively contradictory nature that should always be refected in the regulatory response, (Law 1.0) contextualism sees the network as a selfgoverning business community. Whereas, for Teubner, the legal challenge is to keep faith with the paradoxical logic of networks, for contextualists, the legal challenge is to keep faith with the parties’ understanding of their rights and responsibilities as members of their network. Whereas, for Teubner, it is the logic of the network that grounds stable expectations, for contextualists, expectations are stabilised by a mix of norms, normality and agent interactions. What seems to matter for Teubner is that the law should respect the dynamism and potential benefts of network forms of business organisation; what matters for contextualists is that the law should cohere more closely with practice-based expectations. This contrast notwithstanding, it does not follow that it would be counterproductive or entirely unhelpful for English contract law to specify a set of conditions (as Teubner does)82 for the realisation of a DBM with its own special rules. However, unless this version of a particular DBM and its effects was underwritten by a particular public policy imperative, it would operate merely as a default, as a background reference point for the parties’ reasonable expectations. In this background capacity, it would be brought into play only where the parties’ foreground expectations, articulated in the express terms of their agreement, lacked the clarity needed to settle the particular dispute.83 While contextualists might wish to support self-governing business communities, they need to set limits to self-regulation; business networks cannot be permitted to rule the world. In particular, when networks interface with their clients (whether commercial or consumer contractors), there needs to be a regulatory environment that is sensitive to the larger public interest. As Teubner’s discussion of the external liability of networks highlights, there are questions about both the protection of claimants and the internal apportionment of liability. For contextualists, the latter question can be left to the network’s own self-governing order, but once we address the former question, even though we are thinking about contracts we are moving into the realm of public order and the public interest. At this point, each legal system

82 According to Teubner (n 75), at 158, connected contracts will be recognised where, in addition to the standard requirements for a bilateral contract, the following three features are present: (1) mutual references within the bilateral contracts to one another, either within the explicit promises or within implicit contractual practice (‘multi-dimensionality’), (2)  a substantive relationship with the connected contracts’ common project (‘network purpose’), and (3) a legally effective and close cooperative relationship between associated members (‘economic unity’). 83 Compare the way in which, in Bates v The Post Offce (n 58), it is accepted that (contrary) express term provisions can trump any other relational indications.

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will have its own regulatory purposes and priorities which it will seek to advance in its own way.84 A technological approach According to some commentators, contract lawyers should start to imagine a world of automated transactions, where commerce is, so to speak, a ‘conversation conducted entirely among machines’.85 In line with this vision, Michal Gal and Niva Elkin-Koren foresee a world in which [y]our automated car makes independent decisions on where to purchase fuel, when to drive itself to a service station, from which garage to order a spare part, or whether to rent itself out to other passengers, all without even once consulting with you.86 In that world, humans have been taken out of the transactional loop, leaving it to the technology to make decisions that humans would otherwise be responsible for making. Precisely how the law in general and the law of contract in particular will engage with that future is diffcult to know. While some legal rules might be revised and refocused, others might be redirected (from users of transactional technologies to designers and controllers of the same) and yet others might be simply redundant.87 As ever, the future is uncertain. However, one thought is that there might be a technological solution to whatever problems there are with networks or other DBMs. Perhaps the contractors will develop their own smart solution. For example, in the context of carriage of goods by sea, electronic bills of lading promise to be a smart response to the problem of ships reaching the port of discharge before paper bills, and as Paul Todd has argued, the use of blockchain and smart contracts might be part of an even smarter response, overcoming a lack of trust in central registries.88 Similarly, just like imperfect attempts to protect IPRs through contractual provisions, perhaps the required protections can be incorporated in relevant products and processes. So long as smart technological solutions go no further than the law permits, this seems like

84 Compare Roger Brownsword, ‘The Theoretical Foundations of European Private Law: A Time to Stand and Stare’ in Roger Brownsword, Hans Micklitz, Leone Niglia and Steven Weatherill (eds), The Foundations of European Private Law (Oxford: Hart, 2011) 159. 85 Per W. Brian Arthur, ‘The Second Economy’ (October 2011) McKinsey Quarterly, quoted in Nicholas Carr, The Glass Cage (London: Vintage, 2015) at 197. 86 Michal S. Gal and Niva Elkin-Koren, ‘Algorithmic Contracts’ (2017) 30 Harvard Journal of Law and Technology 309, at 309–310. 87 For discussion, see Roger Brownsword (n 39); and (n 5) Ch 11. 88 Paul Todd, ‘Electronic Bills of Lading, Blockchains and Smart Contracts’ (2019) 27 International Journal of Law and Information Technology 339.

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legitimate self-help. However, it is precisely where contract law does not support the reasonable expectations of parties in DBMs that technological workarounds would be most attractive. From a contract law perspective, this might or might not be viewed as permissible self-help. Clearly, we need to consider the relationship between contract law and technological fxes more carefully. This takes us to the next part of our discussion, where we focus on the possible lack of congruence between the legally approved effects (that do not align with reasonable expectations) and technological effects (that are at least better aligned with reasonable expectations).89

The question of congruence In the landscape of Law 3.0, it is clear that the capacity of contract law to adjust is limited, that it has needed assistance from a regulatory Law 2.0 approach and that the development of technological solutions will raise new questions about the relationship between contract law and transactional technologies.90 To be sure, we should not assume that all the problems associated with DBMs – especially problems concerning the reasonably expected level of cooperation – will be amenable to technological solutions (whether employed as part of a top-down or bottom-up regulatory strategy). How are requirements for good faith and fair dealing to be coded into a technological infrastructure, and how are trust and cooperation to be automated? Nevertheless, the possibility of building certain kinds of performance guarantees and securities into a technological infrastructure for transactions is not pure fction, and if parties to DBMs invest in them as solutions to their governance problems, they might quickly become factual and familiar. In this context, how should we begin to think about the relationship between the automated enforcement of contracts, such as that promised by blockchain, and the law?91 Karen Yeung, in an insightful discussion of blockchain and its many applications, highlights three ways in which the law community (and the rule of law) might relate to the blockchain community (and the rule of code).92 First, where the blockchain community challenges

89 Ideally, the reasonable expectations of all parties to the DBM would be acceptably accommodated and embedded in such technological effects. 90 For extended discussion, see Roger Brownsword, ‘Automated Transactions and the Law of Contract: When Codes are Not Congruent’ in Michael Furmston (ed), The Future of the Law of Contract (Abingdon: Routledge, 2020) 94. 91 For discussion, see Roger Brownsword (n 19), ‘Regulatory Fitness: Fintech, Funny Money, and Smart Contracts’ (2019) 20 European Business Organization Law Review 5, and ‘Smart Transactional Technologies, Legal Disruption, and the Case of Network Contracts’ in Larry A. di Matteo, Michel Cannarsa and Cristina Poncibò (eds), The Cambridge Handbook of Smart Contracts, Blockchain Technology and Digital Platforms (Cambridge: Cambridge University Press, 2019) 313. 92 Karen Yeung, ‘Regulation by Blockchain: The Emerging Battle for Supremacy between the Code of Law and Code as Law’ (2019) 82 Modern Law Review 207.

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the authority of the law community, we can expect the relationship to be adversarial as the latter strives to assert its sovereignty; the pressure will be for technological code to yield to legal code. Second, where the technology seeks to complement or supplement the law, the relationship should be positive and supportive. Third, where the technology represents an alternative to the law (being, as it were, ‘competitive’ but not confictual as such), the relationship is more complex and less predictable. In cases of this third kind, Yeung suggests that the relationship is likely to be one of ‘uneasy coexistence’ characterised by an attitude of ‘mutual suspicion’.93 On the face of it, the relationship between the law of contract and automated transactional technologies (including so-called ‘smart’ contract applications that run on blockchain) will be one of uneasy coexistence. For these are not technologies that are designed directly to challenge the authority of the law or simply to complement existing laws but to instead give transacting parties an enforcement option that is an alternative to taking court action. Where technologies offer options that are also ‘workarounds’ relative to the limits of legal assistance, they might or might not be viewed as corrosive or unhelpfully disruptive relative to the law. To the extent that the legal community (guided by the law of contract) and the blockchain community (guided by smart contract coding) operate with their own logics, there is the possibility that there might be a lack of congruence between the legal and the technological view of the transaction. In other words, in the blockchain universe we might fnd that there are some transactional features and effects that would not be supported in the legal universe (by a court applying the law of contract). For example, where the law of contract has restrictive rules in relation to the enforcement of claims by third-party benefciaries, a smart contract (or some other automated process) might achieve a transfer of value to a third party with which the law of contract (and the courts) would not assist. Or, again, the performance of transactions that would not be recognised as legally enforceable because, say, the law treats the parties as lacking the necessary intention might be technologically guaranteed when the agreed payment obligations are committed to a smart contract. Similarly, a smart contract might be coded for particular remedial payments in ways that are out of line with the law of contract’s position on fair and appropriate compensatory awards of damages. What should we make of such a lack of congruence? At one level, we can certainly regard cases of a lack of congruence as exemplifying a state of uneasy coexistence between the technology community and the law community, between a community that relies on blockchain enforcement and a community that relies on court-authorised enforcement in accordance with the law of contract. However, I want to focus on an uneasy coexistence that is internal to, and that goes right to the heart of, the

93 Yeung (n 92) at 210.

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law community itself. This state of affairs arises from the tension between the paradigmatic ‘coherentist’ thinking of lawyers and judges and the ‘regulatory’ thinking that is sometimes refected in the courts but which is more characteristic of legislative and executive reasoning (where the logic is instrumentalist and policy-driven). In other words, what I want to highlight in relation to the question of congruence is not so much a new story about the relationship between the technology community and the law community but a much older story about the relationship between legal thinking that is guided by general principles and that which is guided by particular policies. Putting the matter somewhat schematically, we can say that, from a Law 1.0 perspective, some examples of a lack of congruence might not be seen as problematic in themselves, some might be seen as arguably problematic and some might be seen as clearly problematic. How a court then responds is another question. For instance, where the law of contract has restrictive rules in relation to the enforcement of claims by third-party benefciaries, a smart contract (or some other automated process) might achieve a transfer of value to a third party with which the law of contract (and the courts) would not assist. Or, again, a smart contract might be coded for particular remedial payments in ways that are different to the law of contract’s default position on fair and appropriate compensatory awards of damages. In such cases, if a party were to invite a court to bring the technological effects into line with the principles of contract law (to restore congruence), a court might decline to do so either because it does not regard the deviation as problematic in itself or because it treats the parties as having elected to subject their dealings to a different (but permissible) technological code. In the latter case, where DBMs have invested in technological solutions, some parties at least are likely to be disappointed again by the courts’ response. On the other hand, some cases of a lack of congruence would almost certainly be seen as problematic, particularly where the technological effect is seen as contrary to public policy. For example, it has long been a principle of the common law of contract that provisions that are ‘penal’ in nature should not be enforced. Following the Supreme Court’s decision in Cavendish Square Holding,94 the critical question is whether the party relying on the allegedly penal clause has a legitimate interest in doing so and whether the provision is proportionate relative to that interest. Applying this test to provisions in standard fat contracts is not entirely straightforward, and where smart contract provisions are tied to a cryptocurrency which (as has been the case with Bitcoin) is subject to extraordinary fuctuations, the application of the legal test might be even less straightforward. Nevertheless, it would be surprising if a court declined to adjudicate where a smart

94 Cavendish Square Holding BV v Talal El Makdessi; Parking Eye Limited v Beavis [2015] UKSC 67.

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contract effect was challenged as being ‘penal’, and if the court took the view that the effect was indeed penal, then it would be equally surprising if it did not make an appropriate order disallowing the payment. Public policy also drives the regulatory thinking that underlies the modern law of consumer contracts. In this context, consider how a court might respond to a scenario in which the technology disables the use of goods or services where a consumer is in breach of some restriction in the contract (e.g. relating to the purposes for which the goods or services might be used or where or when they might be used). In such circumstances, how might a court respond to a challenge (brought by an individual consumer or by a representative body) where the complaint rested on the unfair terms provisions in the Consumer Rights Act 2015? While a coherentist-minded court might be tempted to dismiss the case on the ground that the transaction does not qualify as a ‘contract’ within the meaning of the CRA, it is more likely that a court would see this as a problematic lack of congruence. This leads to the question of whether it is public policy to protect consumers who participate in all permitted transactions with traders regardless of whether the transaction is offine, online, smart or otherwise, and regardless of whether consumers are dealing with businesses that are employing centralised or decentralised formats. If so, the protections in the CRA should be applied. Moreover, even if there is no example of an unfair term in the statutory Schedule that squarely fts the case, the asymmetric nature of the technological effect, coupled with its potential unfairness and its lack of proportionality, will probably persuade a court that it needs to take protective action.95 Perhaps, the clearest example of a problematic lack of congruence is where the technology facilitates illegal transactions. Famously, in Holman v Johnson,96 Lord Mansfeld – writing long before transactional technologies had presented questions of non-congruence – remarked: ‘No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act’.97 Taking this principle at face value, we would expect a court, at the very least, to decline to assist a litigant who is party to a transaction that is a means to an immoral or illegal end, and we would expect this to be the case whether the transaction is a fat contract or a smart contract. For example, suppose that A employs B, a contract killer, to kill C for an agreed fee. The contract is committed to a technology that not only hides the identities of A and B but also automatically transfers the agreed fee to B once C has been killed. I take it that such an outcome would not be sanctioned by the law of contract and that the courts should (at minimum) do nothing to encourage such an illegal activity. However, what if the

95 Mateja Durovic and André Janssen, ‘Formation of Smart Contracts under Contract Law’ in Larry di Matteo, Michel Cannarsa and Cristina Poncibò (eds) (n 73) 61. 96 Holman v Johnson (1775) 1 Cowp 341. 97 Ibid., at 343.

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technology ensures that B is paid before B kills C but then B fails to kill C? Should a court assist A to recover the payment made to B? As a matter of general principle, coherentists might think that the courts should do nothing to assist either A or B. However, in the recent case-law – notably in Patel v Mirza (2016)98 and in DC Merwestone (2016)99  – we fnd the Supreme Court taking a somewhat nuanced approach. According to the Court, there are seriously (and intrinsically) illegal acts/transactions and there are merely illegal acts/transactions, and in the context of insurance claims, there are some lies that are more material than others. Instead of a general rule, we have a shift to a case-by-case examination which is sensitive to principles of fairness and proportionality – but an approach, nevertheless, that is still essentially coherentist in nature. Arguably, though, reliance on coherentist principles is not the right way to tackle the questions to which illegal contract cases can give rise. Instead, our approach should be more regulatory, more Law 2.0. For example, imagine that a legislative provision that is designed to protect tenants against rapacious landlords makes it a criminal offence for a landlord to collect ‘ancillary’ charge payments from tenants. The legislation, however, is silent on the question of whether agreements between landlords and tenants concerning the now prohibited charges are legally enforceable. Clearly, the statutory silence notwithstanding, no court would contemplate ordering a tenant to make a prohibited payment to the landlord, and it would be equally out of line with the regulatory policy if a court declined to assist a tenant to recover a prohibited payment to a landlord for the reason that this would be to aid a party to an illegal contract.100 In Patel v Mirza, Lord Neuberger – whose judgment we can treat as being ‘representative’ of the sweep of judicial views in this case101  – hints at a more regulatory approach by noting on several occasions that the relevant law is ‘based on policy’.102 It is not entirely clear, however, whose policy it is – judicial or legislative – or which policy it is that is being relied on. In particular, it seems to be assumed that, in general, it is good policy to return the

98 [2016] UKSC 42. 99 Versloot Dredging BV and anr v HDI Gerling Industrie Versicherung AG and ors [2016] UKSC 45. 100 Compare Lord Neuberger’s general remarks in Patel v Mirza at para 162, and specifcally, see Kiriri Cotton Co. Ltd. v Ranchhoddas Keshavji Dewani [1960] AC 192. More recently, the approach in Hounga v Allen and Another [2014] UKSC 47, might be thought to be analogous. 101 While Lord Neuberger’s judgment starts with a restitutionary approach of the kind favoured by the concurring judges, it also adopts the essence of Lord Toulson’s majority approach. In Lord Neuberger’s rendition of the latter, we read that the courts (in illegal contract cases) should ‘bear in mind the need for integrity and consistency in the justice system, and in particular (a) the policy behind the illegality, (b) any other public policy issues and (c) the need for proportionality’ (at para 174). 102 [2016] UKSC 42, para 161.

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parties to an illegal transaction to the position that they were in ex ante. In favour of such a policy, it can be said that there is no reason why one party to such a transaction should gain at the expense of the other. Yet if these parties are complicit in a prohibited transaction, why should the law take an interest in correcting any inter-party unfairness? Regardless of whether smart contracts are involved – and, indeed, regardless of whether DBMs are employed – why not simply treat the parties as acting entirely at their own risk if they engage in such dealings? What should we conclude about non-congruence? First, where the law of contract is itself in a state of fux, it might not be clear whether the technological effect is out of line with (non-congruent with) the code of law. Second, where the technological effect clearly is non-congruent, it might not be viewed as problematic and the courts might decline to assist a party who invites them to restore congruence. Third, even where the technological effect is clearly non-congruent and problematic, it remains to be seen how far coherentist-minded courts will accept a role in enforcing public policy. Granted, enforcing policy initiated by democratically mandated legislatures is quite different to the courts acting on their own policy preferences. Nevertheless, if the provisions of a regulatory scheme are themselves unclear about how illegal transactions (or how parties to such transactions) should be treated by the courts of civil law, then we cannot be confdent about how judges will respond. As for the uneasy coexistence itself, we should remind ourselves that whatever uneasy coexistence there might be between legal effects (as in Law 1.0) and technological effects, these are more directly resolved as a matter of policy in Law 2.0, and in Law 3.0 they are brought together and ‘internalised’ by a technocratic mindset.103 Finally, it should be emphasised that the questions that have been central to this part of our discussion – namely, whether technological measures employed by DBMs (as governance solutions) are congruent with the law of contract and what follows if they are not – should be placed in the bigger picture of regulatory responsibility and legitimacy. I have suggested in other publications that technological measures, whether employed by public or private parties, will be legitimate only if they satisfy three conditions.104 First, and most importantly, the measures must not compromise the global commons, the conditions which are essential for human existence and the exercise of human agency. While there is no reason to think that DBMs per se or the technologies that they employ are a threat to the global commons, the preservation of the commons is the global priority. Second, the fundamental values that constitute and distinctively identify each group as the particular community that it is should be respected. Again, there is no particular reason to think that DBMs per se or the technologies that they employ are

103 Nb my short comment in (n 89). 104 See further Brownsword (n 5).

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a threat to such values (for example, to respect for human rights or human dignity as understood in the particular community), but no community will license DBMs to employ technologies in ways that are incompatible with their collective values. Third, and most relevantly for present purposes, in communities where there is a plurality of competing and conficting interests, economic and social, technological measures should be employed only in ways that are in line with an acceptable accommodation of the plurality of interests. What is ‘acceptable’, and to whom, is of course a question rather than an answer. In practice, there will often be more than one accommodation that is within the bandwidth of acceptability, but the bandwidth is not unlimited. Regulators must act in good faith, and no expectations which are reasonable can be ignored. It follows that where technological solutions are employed by DBMs, it is not so much their congruence with the law of contract that matters as their coherence with these background conditions of regulatory legitimacy.

Conclusion Viewing the proliferation of new transactional technologies and DBMs, there are many questions for the law of contract. The two particular questions that we have addressed in this chapter are: frst, whether the law of contract is capable of engaging in a more responsive way with the reasonable expectations of parties to DBMs, and second, what the implications are if the parties to DBMs employ technological measures – both as an effective instrument of governance and as a workaround relative to the limits of contract law – where there is a lack of congruence between the technological code and the code of contract law. In response to the frst question, it has been suggested that there are several sources of resistance to the development of a more adequate contextual or relational approach. Contract law, in its classical common law expression, is what it is: it aspires to set out a clear and calculable framework of rules for marketplace transactions; it is predicated on parties acting in a self-interested way; its focus is narrowed to the particular transaction and the particular parties to that transaction; it treats one contracting party just like any other, drawing no distinction between business contractors and consumers and it treats one business model just like any other.105 From this vantage point, DBMs and their parties simply do not stand out as anything special: business is business and, for the law of contract, disputes arising from DBMs are business as usual. Moreover, judges and courts are what

105 Generally, see Roger Brownsword, Contract Law: Themes for the Twenty-First Century (Oxford: Oxford University Press, 2006) and, advocating classical minimalism, see Jonathan Morgan, Contract Law Minimalism (Cambridge: Cambridge University Press, 2013).

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they are: some judges are more imaginative and result-orientated than others; all judges operate within the bounded rationality of the particular dispute, and even the boldest judges are reluctant to take on a general legislative or regulatory role.106 That said, where a regulatory framework has been put in place by a legislative body or regulatory agency, the judges are perfectly capable, and generally comfortable with, treating that framework as the governing law. Accordingly, the right way forward seems to be not to hope that the courts might adopt a more regulatory approach to DBMs but to urge those bodies that have a regulatory mandate to put in place appropriate frameworks for DBMs. In this chapter, I have not considered what such frameworks might look like or addressed the challenges in getting the regulatory environment right for DBMs. That would take another chapter. However, the signifcance of contract law in such a regulatory environment would be marginal, and the role of judges and courts would be dictated by the terms of the regulatory framework – as is already the case in relation to the governance of consumer transactions. With regard to the second question, there might be many cases where technological measures (for example, those that automate the payment of the agreed price) are congruent with the law of contract and entirely unproblematic; there might be cases where the technological measures are not so congruent but are not viewed as problematic (for example, where compensatory payments are calculated in a way that is different to the standard measure in contract law); there might be cases where it is unclear whether the technological measures are congruent with contract law because, on the particular issue, contract law is itself unsettled; and there might be cases where the technological matters are not congruent and are viewed as problematic. It is this last possibility that has been the focus of our discussion. Precisely how judges, guided by the law of contract and by their sense of institutional role and responsibility, might respond to such problematic cases remains to be seen. However, in the bigger picture, it is not congruence between technological measures, employed in DBMs or elsewhere, and the law of contract that is critical. In the bigger picture, the law of contract is not the relevant reference point. Instead, what matters is that the employment of technological measures is compatible with the global preconditions for human social existence, with the constitutive values of the particular community in which the measures are employed and with a regulatory framework that achieves an acceptable accommodation of the plurality of interests in that community. In the fnal analysis, these are the relevant reference points for judges

106 See John N Adams and Roger Brownsword, Understanding Law (4th edn) (London: Sweet and Maxwell, 2006), and Understanding Contract Law (5th edn) (London: Sweet and Maxwell, 2007) (especially in relation to the ideologies of adjudication and the ideologies of contract law).

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who are invited to adjudicate on disputes involving technological measures employed by DBMs. Anticipating the future, my expectation is that our principal mode of engagement with DBMs will be (and should be) regulatory rather than contractual, and that as we come to see technology not so much as a regulatory problem but as a solution to our regulatory problems, we will increasingly rely on technological fxes to do the regulatory work. Finally, I expect that there will be some turbulence and uncertainty as we move away from reliance on contract law and towards regulatory and technological measures whose effects are not always congruent with those mandated by the classical principles of contract law.

References Adams, John N., Beyleveld, Deryck and Brownsword, Roger, ‘Privity of Contract – The Benefts and the Burdens of Law Reform’ (1997) 60 Modern Law Review 238 Adams, John N. and Brownsword, Roger, Understanding Contract Law (5th edn) (London: Sweet and Maxwell, 2007) Adams, John N. and Brownsword, Roger, Understanding Law (4th edn) (London: Sweet and Maxwell, 2006) Amstutz, Marc and Teubner, Gunther (eds), Networks: Legal Issues of Multilateral Cooperation (Oxford: Hart, 2009) Arther, Brian W., ‘The Second Economy’ (October 2011) McKinsey Quarterly Barker, Roger M. and Chiu, Iris H-Y, ‘Decentralised Business Models and the Role of the Law of Organisations and Governance’ [in this book] Black, Julia, ‘What is Regulatory Innovation?’ in Julia Black, Martin Lodge, and Mark Thatcher (eds), Regulatory Innovation (Cheltenham: Edward Elgar, 2005) 1 Brownsword, Roger, ‘After Brexit: Regulatory-Instrumentalism, Coherentism, and the English Law of Contract’ (2018) 35 Journal of Contract Law 139 Brownsword, Roger, ‘After Investors: Interpretation, Expectation and the Implicit Dimension of the “New Contextualism”’ in David Campbell, Hugh Collins, and John Wightman (eds), The Implicit Dimensions of Contract (Oxford: Hart, 2003) 103 Brownsword, Roger, ‘Automated Transactions and the Law of Contract: When Codes are not Congruent’ in Michael Furmston (ed), The Future of the Law of Contract (Abingdon: Routledge, 2020) 94 Brownsword, Roger, Contract Law: Themes for the Twenty-First Century (Oxford: Oxford University Press, 2006) Brownsword, Roger, ‘Contracts in a Networked World’ in Larry DiMatteo, Qi Zhou, Severine Saintier, and Keith Rowley (eds), Commercial Contract Law: Transatlantic Perspectives (Cambridge: Cambridge University Press, 2012) 116 Brownsword, Roger, ‘Contracts with Network Effects: Is the Time Now Right?’ in Stefan Grundmann, Fabrizio Cafaggi, and Giuseppe Vettori (eds), The Organizational Contract: From Exchange to Long-Term Network Cooperation in European Contract Law (Aldershot: Ashgate, 2013) 137 Brownsword, Roger, ‘The E-Commerce Directive, Consumer Transactions and the Digital Single Market: Questions of Regulatory Fitness, Regulatory Disconnection and Rule Redirection’ in Stefan Grundmann (ed), European Contract Law in the Digital Age (Antwerp: Intersentia, 2018) 165

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Brownsword, Roger, Law 3.0: Rules, Regulation, and Technology (Abingdon: Routledge, 2020) Brownsword, Roger, ‘The Law of Contract: Doctrinal Impulses, External Pressures, Future Directions’ (2014) 31 Journal of Contract Law 73 Brownsword, Roger, ‘Law, Regulation, and Technology: Supporting Innovation, Managing Risk and Respecting Values’ in Todd Pittinsky (ed), Handbook of Science, Technology and Society (New York: Cambridge University Press, 2019) 109 Brownsword, Roger, Law, Technology and Society: Re-imagining the Regulatory Environment (Abingdon: Routledge, 2019) Brownsword, Roger, ‘Post-Technique: The New Social Contract Today’ in David Campbell, Linda Mulcahy, and Sally Wheeler (eds), Changing Concepts of Contract (Basingstoke: Palgrave Macmillan, 2013) 14 Brownsword, Roger, ‘Recommended Reading: Smarter Regulation Required’ (2020) 9 Journal of European Consumer and Market Law 49 Brownsword, Roger, ‘Regulatory Fitness: Fintech, Funny Money, and Smart Contracts’ (2019) 20 European Business Organization Law Review 5 Brownsword, Roger, Rights, Regulation and the Technological Revolution (Oxford: Oxford University Press, 2008) Brownsword, Roger, ‘Smart Contracts: Coding the Transaction, Decoding the Legal Debates’ in Philipp Hacker, Ioannis Lianos, Georgios Dimitropoulos, and Stefan Eich (eds), Regulating Blockchain: Techno-Social and Legal Challenges (Oxford: Oxford University Press, 2019) 311 Brownsword, Roger, ‘Smart Transactional Technologies, Legal Disruption, and the Case of Network Contracts’ in Larry A. di Matteo, Michel Cannarsa, and Cristina Poncibò (eds), The Cambridge Handbook of Smart Contracts, Blockchain Technology and Digital Platforms (Cambridge: Cambridge University Press, 2019) 313 Brownsword, Roger, ‘The Theoretical Foundations of European Private Law: A Time to Stand and Stare’ in Roger Brownsword, Hans Micklitz, Leone Niglia, and Steven Weatherill (eds), The Foundations of European Private Law (Oxford: Hart 2011) 159 Brownsword, Roger and Goodwin, Morag, Law and the Technologies of the TwentyFirst Century (Cambridge: Cambridge University Press, 2012) Brownsword, Roger, van Gestel, Rob and Micklitz, Hans-W. (eds), Contract and Regulation: A Handbook on New Methods of Law Making in Private Law (Cheltenham: Edward Elgar, 2017) Brownsword, Roger, Micklitz, Hans, Niglia, Leone and Weatherill, Steven (eds), The Foundations of European Private Law (Oxford: Hart 2011) Carr, Nicholas, The Glass Cage (London: Vintage, 2015) Cohen, Julie E., Between Truth and Power (New York: Oxford University Press, 2019) Cunningham, Lawrence A., Contracts in the Real World (2nd ed) (New York: Cambridge University Press, 2016) DiMatteo, Larry A., ‘Regulation of Share Economy: A Consistently Changing Environment’ in Reiner Schulze and Dirk Staudenmayer (eds), Digital Revolution: Challenges for Contract Law in Practice (Baden-Baden: Nomos, 2016) 89 Durovic, Mateja and André Janssen, ‘Formation of Smart Contracts under Contract Law’ in Larry di Matteo, Michel Cannarsa, and Cristina Poncibò (eds), The Cambridge Handbook of Smart Contracts, Blockchain Technology and Digital Platforms (Cambridge: Cambridge University Press, 2019) 61

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Easterbrook, Frank H., ‘Cyberspace and the Law of the Horse’ (1996) University of Chicago Legal Forum 207 Fairfeld, Joshua, ‘Smart Contracts, Bitcoin Bots, and Consumer Protection’ (2014) 71 Washington and Lee Law Review Online 36 Ford, Cristie, Innovation and the State (New York: Cambridge University Press, 2017) Gal, Michal S. and Elkin-Koren, Niva, ‘Algorithmic Contracts’ (2017) 30 Harvard Journal of Law and Technology 309 Gamito, Marta Cantero, ‘Regulation.Com. Self-Regulation and Contract Governance in the Platform Economy: A Research Agenda’ (2017) 9 European Journal of Legal Studies 53 Grundmann, Stefan and Hacker, Philipp, ‘The Digital Dimension as a Challenge to European Contract Law–The Architecture’ in Stefan Grundmann (ed), European Contract Law in the Digital Age (Antwerp: Intersentia, 2018) 3 Idelberger, Florian, ‘Connected Contracts Reloaded—Smart Contracts as Contractual Networks’ in Stefan Grundmann (ed), European Contract Law in the Digital Age (Antwerp: Intersentia, 2018) 205 LawTech Delivery Panel (UK Jurisdiction Taskforce), ‘Legal Statement on Cryptoassets and Smart Contracts’ (2019) Lessig, Lawrence, Code and Other Laws of Cyberspace (New York: Basic Books, 1999) Levy, Karen E.C., ‘Book-Smart, Not Street-Smart: Blockchain-Based Smart Contracts and The Social Workings of Law’ (2017) 3 Engaging Science, Technology, and Society 1 Lobel, Orly, ‘The Law of the Platform’ (2016) 101 Minnesota Law Review 87 Macneil, Ian R., The New Social Contract (New Haven: Yale University Press, 1980) Mak, Vanessa, ‘Regulating Contract Platforms, the Case of Airbnb’ in Stefan Grundmann (ed), European Contract Law in the Digital Age (Antwerp: Intersentia, 2018) 87 Mik, Eliza, ‘The Resilience of Contract Law in Light of Technological Change’ in Michael Furmston (ed), The Future of the Law of Contract (Abingdon: Routledge, 2020) 112 Mitchell, Catherine, Contract Law and Contract Practice (Oxford: Hart, 2013) Mitchell, Catherine, ‘Network Commercial Relationships: What Role for Contract Law?’ in Roger Brownsword, Rob van Gestel and Hans Micklitz (eds) Contract and Regulation: A Handbook on New Methods of Law Making in Private Law (Cheltenham: Edward Elgar, 2017) 198 Morgan, Jonathan, Contract Law Minimalism (Cambridge: Cambridge University Press, 2013) Niglia, Leone, The Transformation of Contract in Europe (The Hague: Kluwer Law International, 2003) Rubin, Edward L., ‘From Coherence to Effectiveness’ in Rob van Gestel, Hans-W Micklitz, and Edward L. Rubin (eds), Rethinking Legal Scholarship (New York: Cambridge University Press, 2017) 310 Rühmkorf, Andreas, Corporate Social Responsibility, Private Law and Global Supply Chains (Cheltenham: Edward Elgar, 2015) Tereszkiewicz, Piotr, ‘Digital Platforms: Regulation and Liability in EU Law’ in Larry di Matteo, Michel Cannarsa, and Cristina Poncibò (eds), The Cambridge

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Handbook of Smart Contracts, Blockchain Technology and Digital Platforms (Cambridge: Cambridge University Press, 2019) 143 Teubner, Gunther, Networks as Connected Contracts (Oxford: Hart, 2011) Thaler, Richard H. and Sunstein, Cass R., Nudge (New Haven: Yale University Press, 2008) Todd, Paul, ‘Electronic Bills of Lading, Blockchains and Smart Contracts’ (2019) 27 International Journal of Law and Information Technology 339 Twigg-Flesner, Christian, ‘The EU’s Proposals for Regulating B2B Relationships on Online Platforms—Transparency, Fairness and Beyond’ (2018) 7 Journal of European Consumer and Market Law 222 Twigg-Flesner, Christian, ‘Legal and Policy Responses to Online Platforms—A UK Perspective’ (2017), available at SSRN: https://ssrn.com.abstract=3087311 Waddams, Stephen, Principle and Policy in Contract Law (Cambridge: Cambridge University Press, 2011) Waddams, Stephen, Sanctity of Contracts in a Secular Age (Cambridge: Cambridge University Press, 2019) Yeung, Karen, ‘Regulation by Blockchain: The Emerging Battle for Supremacy between the Code of Law and Code as Law’ (2019) 82 Modern Law Review 207 Zetzsche, Dirk A., Buckley, Ross P. and Arner, Douglas W., ‘The Distributed Liability of Distributed Ledgers: Legal Risks of Blockchain’ (European Banking Institute, EBI Working Paper Series 2017-No. 14)

4

The organisational and governance needs of networks Roger M Barker

“Even as we talk incessantly about them, the reality is that most of us have only a very limited understanding of how networks function, and almost no knowledge of where they came from.” Niall Ferguson1

Introduction Networks in which individuals, organisations or companies collaborate around common activities or shared goals are a growing feature of economic, social and political life, particularly in the wake of advances in digital communication.2 In many felds, networks are disrupting the dominance of established organisations due to their ability to innovate, motivate and coordinate the activities of a diverse range of participants and contributors. Network interactions do not primarily arise as the result of contractual obligations or market transactions. Instead, they stem from a desire amongst entities to “work together” on some common issue. Some examples of important networks from everyday life include social media networks (e.g. Facebook, Google, Wikipedia), business alliances or joint ventures (e.g. the Renault Nissan Mitsubishi Alliance or the Star Alliance), transnational governmental organisations (e.g. the European Union or the OECD), research or student exchange networks between universities (e.g. the Erasmus Student Network or the European Life Science Research Network) and policy advocacy and lobbying networks of various interest groups (e.g. BusinessEurope or the Business Roundtable). Collaborative-type networks are increasingly seen as viable means of addressing societal issues or problems that would otherwise have been the province of traditional organisations (e.g. public-sector agencies or

1 Niall Ferguson, The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power (London: Penguin Books, 2017), 14. 2 An earlier version of this chapter appeared in Levrau and Gobert (2019). In relation to that earlier work, the author gratefully acknowledges the input of Lutgart Van den Berghe.

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corporations). For example, networks of organisations are involved in the delivery of health and social care services, environmental management, the research and development of new drugs and technologies, the sharing and storage of knowledge and information and a wide range of manufacturing and service activities. Public policy3 and public–private networks4 are increasingly seen as necessary to pool resources and capacities in order to address issues that are complex and multi-stakeholder in nature.5 In business, collaborative networks refect the needs of individual frms to innovate and compete in global markets. We distinguish these from the vertically integrated frm which is discussed in Chapters 1 and 3. What are networks? A key feature of networks is that they facilitate the interaction of members whilst also respecting their separate existences and identities. Network participants may not necessarily be equal in terms of their size, power and fnancial clout. But even in cases where network participants integrate many aspects of their activities – and thereby sacrifce some degree of autonomy over decision making – they continue to be distinct entities. Maintaining the distinctness of original entities that participate in the network is key, and this results in a sociological classifcation of the network as an ‘organised’ form6 but does not lead to a corresponding legal classifcation. Indeed, avoiding the legal classifcation as ‘one’ organised unit is an essential characteristic of the network. As a consequence, each network participant retains the capacity to potentially exit from the network if they so desire – although as the case of the UK’s departure from the EU demonstrates, this may not be a straightforward process due to high levels of interdependence that can develop over time. As a result of the need for maintaining distinct identities of the participating entities, the legal framework for governing network relations is found in contract law.7 Chapter 1 has discussed where the limitations of contract law lie. This chapter will explore in greater detail the legal personality and

3 E.g. Chris Ansell, Egbert Sondorp and Robert Hartley Stevens, ‘The Promise and Challenge of Global Network Governance: The Global Outbreak Alert and Response Network’ (2012) 18 Global Governance 317; Martina del Molin and Cristine Masella, ‘From Fragmentation to Comprehensiveness in Networked Governance’ (2016) 16 Public Organisation Review 493. 4 Pamela Camerra-Rowe and Michelle Egan, ‘International Regulators and Network Governance’ in David Coen, Wyn Grant and Graham Wilson (eds), The Oxford Handbook of Business and Government (Oxford: OUP, 2010). 5 Jeremy Pittman and Derek Armitage, ‘Network Governance of Land-Sea Social-Ecological Systems in the Lesser Antilles’ (2019) 157 Ecological Economics 61. 6 Mark Granovetter, ‘Business Groups and Social Organisation’ in Nicholas Smelser and Richard Swedberg (eds), The Handbook on Economic Sociology (Princeton, NJ: Princeton University Press, 2nd ed, 2005) at ch19. 7 Marc Amstutz and Gunther Teubner (eds), Networks: Legal Issues of Multilateral Cooperation (Oxford: Hart Publishing, 2009).

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governance needs of networks in order to support the relevance of the role of the law of organisations and governance for networks as proposed in Chapter 1. That said, in some instances it may be appropriate for a network to be treated as a legal personality itself so that it has capacity to carry out a legal act independent of the distinct entities in the network as well as bear its own responsibility and liability. More on this will be discussed shortly. The benefts of networks In the academic literature, networks are often seen as one of the three main modes of organisational coordination – alongside hierarchies and markets. Within classic hierarchical organisations (like a company or government agency), “command and control” from above is the basic instrument of coordination of the various participants.8 In markets, interaction between economic agents takes place through market transactions.9 The distinctive feature of networks is that coordination of organisations or individuals is achieved on a horizontal basis through negotiation and cooperation within a high-trust social community.10 Networks began to be increasingly discussed during the late 1980s and early 1990s in the context of an intensifying debate about the inability of traditional public-sector organisations to achieve public policy goals (particularly in areas such as environmental and healthcare policy). Whereas the Anglo-American world tended to look to markets as a potential solution to some of these concerns, European countries with more corporatist traditions were attracted to collaborative networks as an acceptable “third way” to achieve policy goals in areas where other approaches were perceived to have delivered unsatisfactory outcomes. Table 4.1 provides a stylised description of some of the differences between network forms of organisation and those involving hierarchical organisations or market-based relationships. Why would organisations or individuals choose a network as a way to coordinate their activities in preference to more conventional organisational forms? Proponents of networks in the public policy space claim that they can achieve more effcient outcomes than either pure government or marketbased arrangements. According to this perspective, they can bring together public and private actors (particularly NGOs) to deliver services in a manner

8 Some literature on managerial decision making in corporates, tone from the top, etc. I can look into them. 9 William A Jackson, ‘Markets and Meaning of Flexibility’ (2015) 20 Economic Issues 45. 10 Candace Jones, William S Hesterly and Stephen P Borgatti, ‘A General Theory of Network Governance: Exchange Conditions And Social Mechanisms’ (1997) 22 Academy of Management Review 911–945 at 913.

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Table 4.1 Networks versus hierarchies and markets  

Hierarchy

Market

Network

Examples

The state Corporations Universities National health service Unicentric

Stock markets Retail stores Transactions for goods or services

Business associations Hospital collaborations Business alliances Pluricentric (i.e. multiple actors involved but not infnite) Interdependence

1. Coordination

2. Relations between actors

Multicentric

Independence (i.e. unlimited substitution possibilities) Forces of supply Will of the 3. Decisions based and demand, leadership on market procedures, e.g. law of contract, consumer law, securities law Economic sanctions, Legal sanctions 4. Compliance e.g. civil litigation or bankruptcy Good at delivering 5. Key advantages Highly effective more standardised and disadvantages when authority goods and services. needs to be in coordinating But struggles to exercised, activity coordinate more resilient, good sophisticated access to resources. But can relationships or be bureaucratic, complex services rigid or alienating to stakeholders Subordination

Negotiation

Trust and obligation Can address ‘wicked’ problems that may be diffcult or controversial for hierarchies or markets to manage due to political sensitivity or potential conficts. But potentially fragile and indecisive

Source: Adapted from Torfng (2012)

that is both inclusive and cost-effective.11 But critics also claim that another important motivation may be to assist with governmental efforts to control

11 Rod AW Rhodes, Understanding Governance: Policy Networks, Governance, Refexivity and Accountability (Maidenhead: Open University Press, 1997); Sebastian Zander, Simon Trang and Lutz M. Kolbe, ‘Drivers of Network Governance: A Multitheoretic Perspective with Insights from Case Studies in the German Wood Industry’ (2016) 110 Journal of Cleaner Production 109.

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public spending in an environment of austerity, or in support of the ideology of a “smaller state”. Networks can sometimes be seen as providing a more democratic or “grassroots” approach to addressing problems, particularly in comparison to faceless bureaucratic organisations or the fnancially driven approach of market transactions. As one idealistic proponent of networks puts it, “[T]he world is changing as networks of relationships form among people who discover they share a common cause and vision of what’s possible.”12 However, networks do not have to be altruistic in nature. As the experience of criminal or terrorist networks – like the Camorra or Al-Qaeda – demonstrates, networks can arise to fulfl a variety of purposes and will fourish as long as they retain the cooperation and support of their key stakeholders. Another signifcant beneft claimed of networks is that, due to low levels of formality and hierarchy, they can more easily innovate or address complex problems by pooling the diverse expertise and resources of their members. This enables them to achieve an organisational profle that is more oriented towards open innovation – in the top-left quadrant of Figure 4.1 – than other kinds of organisations. They may also be able to react relatively quickly, unconstrained by bureaucratic decision-making processes, when unexpected opportunities or emergencies arise. In the business world, network forms of organisation have been adopted for a variety of reasons. One example is that they can allow cooperating companies that wish to beneft from economies of scale to work together without undergoing a formal merger process. For example, networks in the pharmaceutical sector allow the pooling of resources and expertise to engage in costly research and development which take a relatively long time to yield tangible and marketable products (if any).13 The need for networks may stem from a growing awareness that traditional mergers and acquisitions bring with them signifcant post-merger integration risks. These risks may be particularly apparent if the merging companies are large, complex or bring with them diverse corporate cultures. The Renault-Nissan-Mitsubishi Alliance, for example, allowed fagship French and Japanese enterprises to work closely together for many years despite the distinctive and potentially incompatible nature of their national manufacturing traditions and business practices. In recent years, this alliance has faced major challenges – which may have reduced the willingness of the Alliance’s participants to sustain their previous levels of collaboration – and we look in greater detail at this case in our discussion of network governance

12 M Wheatley and D Frieze, ‘Taking Social Innovation to Scale’ (2009) 1 Oxford Leadership Journal 1–5. 13 Walter W Powell, ‘Learning from Collaboration: Knowledge and Networks in the Biotechnology and Pharmaceutical Industries’ in Nicole Woolsey Biggart (ed), Readings in Economic Sociology (London: Blackwell 2002) at ch14.

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Greater formality

Greater hierarchy Open innovation

Power play

Market situation

Normal company

Figure 4.1 Implications of formality and hierarchy for organisational behaviour Note: I acknowledge the kind input of Prof. Lutgart Van den Berghe in the creation of this diagram.

shortly. However, business networks allow cooperation without the trauma of mergers, such as in the case of Daimler-Benz and Chrysler in 1998. The merger was frst touted as a merger of ‘equals’, but in two years this has ended up with the replacement of most of the American executives with German ones and a recognition that a takeover had in reality happened.14 Daimler-Benz, being the more dominant partner, did not integrate with the organisational culture of Chrysler. Severe differences in bureaucratic organisation, staff and benefts policies as well as fnancial reporting cultures left the post-merger halves in confict with each other.15 The merger dissolved in 2007 when the companies were ultimately separated. A network approach can also help overcome the challenges of bringing together enterprises in sectors where it is considered important for so-called national champions to retain their separate corporate identities and not be

14 Jeff Badrtalei and Dinald L Bates, ‘Effect of Organizational Cultures on Mergers and Acquisitions: The Case of DaimlerChrysler’ (2007) 24 International Journal of Management 303. 15 Michael D Watkins, ‘Why DaimlerChrysler Never Got in Gear’ (Harvard Business Review, 18 May 2007) at https://hbr.org/2007/05/why-the-daimlerchrysler-merger.

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swallowed up by foreign competitors. These national champions, however, face severe market competition pressures and therefore work with each other to protect their market shares. The various code-sharing alliances between national airlines (e.g. Star Alliance, Oneworld and SkyTeam) are examples of this motivation. They have allowed airlines to signifcantly extend their product offering to customers without undertaking mergers which would have been politically unacceptable to many national governments. Companies may also only wish to cooperate in specifc areas. In this context, a full-scale merger would be inappropriate. By forming a joint-venture, consortium or alliance which is focused on that specifc activity, private- or public-sector actors can gain access to additional resources and know-how without sacrifcing their existing corporate identity. In the Belgium healthcare system, for example, hospitals are permitted to work together on particular programmes as part of Hospital Associations. These allow participating hospitals to achieve critical mass in particular functions and provide an alternative mechanism of hospital collaboration to that of joining regional Hospital Groups, which involve more extensive partnership across a range of activities.16 One of the big trends in the life sciences sector in recent decades has been the outsourcing of R&D activities from big pharmaceutical companies to smaller, more innovative research entities. These collaborations are often structured in the form of research alliances, whereby Big Pharma provides funding, marketing and regulatory approval capabilities in return for a stake in the intellectual property developed by their external research partners. For their part, smaller research entities avoid being swallowed up by large bureaucratic organisations which might provide a less fertile environment for innovation and creativity.17 Research networks demonstrate that networks do not always have to be ‘horizontal’ collaborations between similar companies. They can also be ‘vertical’ networks which bring together enterprises offering differing or complementary services, resources or capabilities. In effect, involvement in a vertical network allows enterprises to obtain some of the benefts of a vertically integrated organisational structure while at the same time avoiding many of the management challenges of absorbing potentially diverse organisations into a single corporate entity. As a fnal example, networks may offer private-sector actors a means of addressing commonly experienced issues in their overall business environment. For activities such as government lobbying or developing common

16 K De Pourcq, M De Regge, S Callens, M Coëffé, L Van Leuven, P Gemmel, K Van den Heede, C Van de Voorde and K Eeckloo, ‘Governance Models for Hospital Collaborations’ (Health Services Research (HSR) Brussels: Belgian Health Care Knowledge Centre (KCE), 2016) at KCE Reports 277. D/2016/10.273/92. 17 Bernard Munos, ‘Lessons from 60 Years of Pharmaceutical Innovation’ (2009) 8 (12) Nature Reviews Drug Discovery 959–968.

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industry standards, companies may see the beneft of forming collaborative networks  – such as business associations  – which enable the costs of such activities to be more evenly spread across market participants rather than allow some companies to get a ‘free ride’ from the efforts of a few. In addition, networks can be more effective than individual companies in such public policy activities, as the industry will be seen to be speaking with one voice. In effect, networks serve to create a form of ‘public good’ which benefts the industry as a whole and which would not have arisen if individual companies had purely focused on pursuing a narrow conception of their own self-interest.

The diversity of the network landscape Networks are not homogeneous. They emerge to undertake a wide range of activities. Consequently, although they may possess some common characteristics, there is also a great deal of variation across a range of dimensions. For example, networks may exhibit major differences in terms of their purpose, decision-making structure, formalisation and degree of integration. As we have observed, they may also vary in terms of whether collaboration occurs on a horizontal or vertical basis, i.e. between similar or complementary organisations. Furthermore, there may be a signifcant life-cycle dimension to the development of networks. Initially members may cooperate or share information on a limited or informal basis. But over time  – as trust and interlinkages develop  – they may move towards much more intensive coordination or even integration which could lead the network to take on some characteristics of a traditional hierarchical organisation. The converse can also happen, that networks are developed to exploit certain innovations or opportunities, and when these efforts mature, collaboration could come to a natural end, leading to the decline and demise of the network.18 Networks can exist with varying degrees of integration and formality. Hence networks have different needs along the spectrum of legal personality, where more integration is benefcial for the network, and along the spectrum of relational governance needs, where networks may prefer more or less formality, or fexibility. So-called “non-chartered networks” are the least formal. They are not bound by by-laws, constitutions or other documents of incorporation. However, networks may develop into so-called “chartered networks”, which are more formally organised networks and have policies, relationship agreements, centralised secretariats or other institutional features to guide their collaboration. Network policies may describe the network’s purpose, the

18 Douglas Wegner, Susana Costa e Silva and Greice de Rossi, ‘The Development Dynamics of Business Networks’ (2018) 13 International Journal of Emerging Markets 27.

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conditions of network membership, member roles and responsibilities and the process by which new members might join or existing members might leave the network.19 As discussed in Chapter 1, a formalised network could be in the form of the European Economic Interest Grouping (EEIG),20 or upon the withdrawal of the UK from the EU, UKEIGs i.e. the UK Economic Interest Grouping, can be formed. This enabling legislative framework allows European and UK legal and natural persons to form an EEIG or UKEIG, respectively, in order to beneft from a separate legal personality for the network. This is benefcial if the network is envisaged to produce output whose profts are to be shared (based on the default equal sharing model in the Regulation) and assets owned by the network are to be separated from participating entities. The EEIG, however, does not limit participants’ liability, as participants bear joint and several liability to third parties. Many EEIGs have been formed in various member states.21 For example, EEIGs such as the European Federation of Cosmetic Ingredients is a Brussels-based EEIG and a trade association for natural and synthetic manufacturers of cosmetics, and it engages in setting best manufacturing practices, participates in developing and informing of toxicology research and takes part in lobbying and international relations.22 The Bristol-Myers Squibb Pfzer EEIG is a pharmaceutical network for exploring and collaborating on research and development, although little information is publicly available. The Dell Computer EEIG is a grouping of Dell subsidiaries in the marketing and distribution roles in various member states and likely forms a network for overall coordination while maintaining local autonomy. This organisational form has catered for numerous types of groupings, but it is conceivable that not every business network fnds it appealing. Some business networks may not wish to assume separate legal personality for the network if there is no advantage to asset separation or joint ownership, for example. The unlimited liability of the EEIG may also be a factor that does not appeal. However, the EEIG default rules provide for norms such as collective and democratic governance, conditions of entry and exit, the need for a management structure and conduct of external relations. Hence this is a convenient default set of norms to facilitate agreement amongst parties if their choice sets do not differ too much from the scope of the legal framework.

19 Paul Manna, Networked Governance in Three Policy Areas with Implications for the Common Core State Standards Initiative (Washington, DC: Thomas B. Fordham Institute, 2010). 20 Regulation for the European Economic Interest Grouping 1985, transposed in the UK via Regulations in 1989. 21 www.libertas-institut.com/en/eeig-information-centre/. 22 www.effci.com.

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The EEIG is limited in the sense that it does not extend to international collaborations, of which there are many. In this self-regulating landscape, business practices have developed and have been observed in terms of how networks are structured and relations managed. In their recent study on governance models for hospital collaborations, researchers at the Belgian Health Care Knowledge Centre utilise Bailey and Koney’s four level taxonomy of different kinds of network cooperation (‘cooperation’, ‘coordination’, ‘collaboration’ and ‘coadunation’) based on the degree of interaction and formalisation that exists between the network participants. These range from highly informal cooperation between separate organisations up to a full merger and integration at the other end of the interactive spectrum. Table 4.2 summarises what each of these four levels implies for network relationships.

Table 4.2 Nature of relationship between participants in differing network taxonomies Degree of interaction and formalisation

Nature of relationship between participants

Cooperation

• Loose form of partnership between two or more organisations with the same interests • All organisations maintain their own identity • The exchange of knowledge is the most important element in the relationship • Organisations work together but continue to pursue their own goals • Organisations maintain their own identity while a joint body, e.g. a federation or an association, may execute specifc tasks • Examples are funding, training and education, planning, marketing and legal assistance • Organisations bring together resources and knowledge in pursuit of a joint goal • Each participant retains separate legal status • Relationship may be governed by contract (e.g. a consortium) or a joint legal entity (e.g. joint venture) • The most intensive form of collaboration. • Involves a strategic restructuring and a high level of integration • Mergers and acquisitions are the best-known examples of coadunation – one organisation survives as a legal entity and the others dissolve to become part of the surviving organisation

Coordination

Collaboration

Coadunation

Source: Adapted from De Pourcq et al. (2016), Page 11.

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Provan and Kenis23 provide further detail about how different network levels can administer their activities utilising either self-governance, lead organisation governance or network administrative organisation governance. The choice of one form versus another will involve consideration of which form is best suited to network needs and conditions. The most commonly used form, self-governance, in which all network members take an active role in network management, is only appropriate when a small number of organisations are involved, i.e. at the ‘cooperation’ level of formalisation as described in Table 4.2. When many organisations participate in a network, or if network activities become more integrated (such as at the ‘coordination’ or ‘collaboration’ stages), network management becomes more complex, resulting in the need for more centralised network design, either in the form of a lead organisation or a network administration organisation (NAO) form. Each of these three forms and their key characteristics are described in Table 4.3. For the employees of member organisations operating within a network, the governance design can have several implications. First, if a selfgovernance form is adopted, the employees of each entity are relied on to undertake the work of the entire network. Hence managers/employees from all member organisations are expected to work closely with one another to ensure that network-level goals are addressed rather than just the goals of their own organisations. Second, if a more centralised structure is adopted, managers have a responsibility to work closely with a network-level administrator or secretariat. This may mean accepting that some decisions may be made by dedicated bodies appointed for the network, and such decisions may not necessarily be in the immediate interests of individual network members. This would be the case if the lead organisation is entrusted with the power to make certain decisions for the beneft of the network as a whole. However, if this process is not managed in a careful manner, the lead organisation structure may start to suffer from the pitfall of being seen as a locus of power, which undermines the autonomy of individual network participants. Ultimately, if network integration is taken too far or too fast from the perspective of its participants, there is a risk that pressures or sentiments may emerge which are destructive of the continued evolution of the network and which may cause it to unravel. Developments of this nature may have underpinned the troubles that have beset the Renault-Nissan-Mitsubishi Alliance which, until relatively recently, was regarded as a successful example of a well-established business network.24 The loss of member control can

23 Keith G Provan and Patrick Kenis, ‘Modes of Network Governance and Implications for Public Network Management’ Eighth National Public Management Research Conference, Los Angeles, CA, September, Vol. 29 (2005). 24 To be discussed shortly.

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Table 4.3 Alternative forms of network governance  

Self-governance

Lead organisation

Network administrative organisation

Structure

No administrative entity, participation in network management by all members

Administrative entity (and network manager) is a major network member/ service provider

Distinct administrative entity set up to manage the network (not a “service provider”) – secretary general is hired Many

Optimal number Few of members Decision making Decentralised Advantages Participation, commitment by members, ease of forming Problems

Many Centralised Effciency, clear network direction

Mixed Effciency of day-today management, strategic involvement by key members, sustainable Ineffcient, frequent Domination by lead Perception of meetings, diffculty organisation, lack hierarchy, cost of reaching consensus, of commitment by operation, complex no network “face” members administration

Source: Milaward and Provan (2006)

be diffcult to accept, but the benefts of such a process have to be understood if the network as a whole is to continue the process of more intensive integration and cooperation. Where a network administrative organisation is instituted, this is an independent body from all participants and may be looked at as the shared platform for the joint exercise of powers and felding of voice by all participants. An EEIG as discussed above could fulfl the role of a network administrative organisation. In the business world, collaborative networks have assumed various forms. Enterprises may form consortiums or alliances based on contractual agreements in order to work together on particular activities (e.g. developing a shared technology). Where closer integration is needed, businesses may establish a network administrative organisation in the form of a designated corporate entity  – such as a joint-venture company  – through which to undertake shared activities. In comparison with purely contractual relationships, a joint entity offers the chance to more closely share both risks and information. The ground rules of cooperation are likely to be established in the articles of association, in a JV agreement and by means of crossownership stakes in the JV entity.

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For business collaborations that do not adopt a lead organisation or network administrative organisation structure, relational governance inter se is often not merely a matter of fexibility. Contractual governance prevails, but such contractual governance is often incapable of capturing the essence of such collaboration. For example, we look at a business association, where participation may be established by means of a membership structure. For such entities, a membership approach – which goes beyond contractual governance and is distinct from ownership ties – is likely to be a more effective means of building solidarity across the network participants, which is important if they are to project a unifed voice to external stakeholders. Business associations and their members negotiate and forge membership rules such as entry and exit as well as rights and responsibilities, and they may well wish to assess if these arrangements would beneft from some extent of formalisation. For example, where business associations offer standard-setting or qualifying tests or exams, the separate personality of the business association and a set of credible governance structures, such as having a board with independent and suitable composition, could be important for maintaining credibility. Where business associations may be engaged in professional discipline of members so that it has the powers for professional qualifcation or disqualifcation, the public interest in its role would likely entail a greater degree of formality and separation from members, and relations between the association and members would encompass governance norms and structures such as accountability for exercise of powers, reporting, due and transparent processes, scrutiny of decisions and appeals.25

The governance challenges facing networks Although networks are increasingly ubiquitous, they should not be regarded as a panacea for solving every kind of public- or private-sector coordination problem. Networks give rise to their own coordination and governance challenges. Furthermore, in some instances – particularly in the public-policy sphere  – the debate on the effectiveness of networks may have been infuenced by ideological considerations and is still lacking a defnitive evidence base.26 While the terms ‘market failure’ and ‘government failure’ are well known in the literature on economic policy, it is also possible for networks to

25 The Solicitors’ Regulation Authority, for example, and to a lesser extent in terms of powers, the Chartered Financial Analyst Institute. 26 M Ramesh, Xun Wu and Michael Howlett, ‘Second Best Governance? Governments and Governance in the Imperfect World of Health Care Delivery in China, India and Thailand in Comparative Perspective’ (2015) 17 Journal of Comparative Policy Analysis: Research and Practice 342–358.

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experience ‘network failure’. One set of authors summarise some of the problems that may emerge with networks as follows: Networks often lack the accountability mechanisms available to the state, they are diffcult to steer or control, they are diffcult to get agreements on outcomes and actions to be taken, and they can be diffcult to understand and determine who is in charge.27 A network with multiple member organisations or stakeholders may have diffculty agreeing upon core goals. Although a diversity of perspectives can bring fresh ideas, there is also a risk that networks bring together actors with conficting or competing interests – or divergent corporate cultures – which results in paralysis. A number of unsuccessful automotive networks, such as the Ford-Jaguar one which has ultimately resulted in the sale of Jaguar to Indian corporation Tata and the BMW-Rover one which eventually resulted in the sale of Rover to the Phoenix Four and its ultimate failure,28 are discussed elsewhere in the business management literature.29 The reliance of networks on maintaining a high level of consensus and agreement amongst members may also result in a network framework that is both fragile – as members regularly reconsider their commitment to the network – and highly constrained in terms of its ability to make bold decisions. In other cases, a powerful network member, given its superior knowledge or resources, can distort the network’s work programme so that the network’s activities serve the dominant organisation, not the network as a whole. This may threaten the continued existence of the network, as weaker or competing members question their commitment to continued membership. This will be shortly discussed in relation to the Renault-Nissan alliance. These types of issues can place networks at a disadvantage relative to hierarchical forms of organisation (e.g. the state, corporations, clans, universities, the Church and so on) in certain situations, as hierarchical forms of organisations such as the corporate form are framed within legal frameworks in terms of how relations are to be conducted and how power is to be distributed. Although such legally framed organisations may still be dragged into disputes regarding exercises of power, such as in directors’ duties or shareholders’ remedies, in contrast to networks, traditional organisations may be more resilient in terms of their access to resources and their capacity to maintain continuity of business and operations.

27 Keast, Mandell and Brown (2006). 28 ‘The “Phoenix Four” and MG Rover Group’s Long Road to Ruin’ (8 April 2014) at www. europeanceo.com/business-and-management/the-phoenix-four-and-mg-rover-groupslong-road-to-ruin/. 29 R Feast, ‘Automotive Mergers Rarely Meet Expectations’ (2003) 78 Automotive News 6069.

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Table 4.4 Types of governance failure Mode of governance

Type of failure

Examples

Sources

Hierarchical

Corporate governance failure

Le Grand (1991) Wolf Jr (1987) Weimer and Vining (2011)

Market

Market failure

Agency problems Information gaps Inappropriate incentives Poor corporate culture Political interference Externalities Information asymmetries Credible commitments

Network

Network failures

Diffcult to establish in places without experience of this approach Poor steering capacities Weak associational structures

Pigou (1948) Wolf Jr (1987) Weimer and Vining (2011) Tunzelmann (2010) Weiner and Alexander (1998) Provan and Kenis (2008)

Source: Adapted from Ramesh et al. (2015, p. 3).

The coordination problems facing networks are in many ways analogous to the governance issues facing conventional hierarchical organisations, except that there is often a lack of a framework in which to interrogate these issues. Networks do not necessarily remove governance problems  – they merely change their nature (see Table 4.4). For example, networks may feature participants who bring unequal resources to the table, and it may not be clear from the outset if such inequality should entail inequality in decision making and distribution. Such an inequality is often clear in organisational forms that recognise a sharebased structure as the basis for governance and distribution inequalities. Network participants may also bring multiple agendas to the table, and it may become a challenge to negotiate the prioritisation of individual participants’ agendas. Where this happens, disgruntled network members may choose to leave, and it would be imperative to consider if networks have clear rules of entry and exit and what rights and obligations are entailed, such as confdential obligations. There may also be a need to consider what mechanisms of decision making there may be, as well as diplomacy within the network in order to bring about a sense of order and continuity where challenges arise in relational tensions. Another problem with much of the current debate on network governance is that it often assumes that networks are an entirely separate alternative to hierarchical organisations or market-based coordination. However, we have theoretically mapped the sociological tenets in networks that incorporate market and hierarchical characteristics in Chapter 1, and we also observe in practice that there is considerable overlap between each of these approaches. Hierarchies can also contain formal and informal networks.

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Markets may also have networks connecting buyers and sellers along the value chain.30 In many cases, networks may only function effectively if they introduce hybrid elements of hierarchical, contractual or institutional structure into their functioning. These may help them to overcome some of the potential weaknesses of networks – such as fragility, lack of decision-making capability or weak accountability – whilst still retaining many of the benefts of network organisation.

Case study 1 We discuss in greater detail the rise and subsequent challenges of the longrunning business alliance between Renault and Nissan in the automotive industry in order to highlight the issues in network organisation and governance. Renault and Nissan entered into an alliance in 1999 after Nissan encountered severe fnancial diffculties in an intense period of global automotive competition. Renault purchased a stake in Nissan of about 37%. In 2001, after Nissan turned around from near-bankruptcy, Nissan bought a 15% stake in Renault, which in turn increased its stake in Nissan to 44.4%. In 2002, the Renault-Nissan Alliance created the Renault  – Nissan BV (RNBV), a strategic management company that would oversee areas such as corporate governance between the two companies. In this manner, Renault and Nissan adopted the structure of a network administrative organisation to forge their collaborative ties. Based in Amsterdam, it is owned 50/50 by Renault and Nissan and provides a neutral location for the Alliance to exchange ideas, build strategy and help leverage the maximum synergies between the two companies. However, the Alliance was to a great extent sustained by the charismatic Carlos Ghosn, a Brazilian-Lebanese-French business leader who led the Alliance BV as well as being CEO and Chairman of Nissan. It was reported that besides the BV, the Chairman’s offce had personnel dedicated to the Alliance, and top leadership was crucial to the cementing of the Alliance.31 Although the long-running alliance had been seen by many as a successful example in the automotive industry, there were tensions in relation to power dynamics, corporate culture and research and development. The Financial Times reported that although the two companies developed the Nissan X-Trail and Renault Koleos together, the two models refected

30 Lubell M, G Robins and P Wang, ‘Network Structure and Institutional Complexity in an Ecology of Water Management Games’ (2014) 19(4) Ecology and Society 23 at https:// www.ecologyandsociety.org/vol19/iss4/art23/. 31 Peter Campbell and David Keohane, ‘Renault-Nissan: How Long Can the Fractured Alliance Last? A Break-up Would Reverberate across an Already Struggling Industry’ (Financial Times, 19 July 2019).

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diverging design and purchasing decisions on both sides.32 The Nissan Leaf and Renault Zoe, electric cars developed by the two manufacturers, purportedly only shared one common part  – the door handle. That said, Renault has integrated Nissan’s system of production into its operations, and so there are instances of successful collaboration. Nevertheless, Nissan was extremely uncomfortable about the French government stake in Renault and how power was exercised in relation to the government’s stake. To strengthen French shareholder control over French companies, France passed the “Florange law” in 2014 that automatically doubled the voting power of long-term shareholders unless the company opted out, which gave the French government’s 15% stake in Renault signifcantly more voting power and control rights. In April 2015, Renault brought a measure to opt out of the “Florange law” to a shareholder vote. However, the French government made a short-term purchase of an additional €1.23 billion of shares in Renault to enable it to defeat the opt-out, which was widely seen as a corporate raid by the French government. Ghosn was committed to closer integration between Renault and Nissan, and in 2018 there were indications that Ghosn was leading the Alliance into an ‘irreversible’ position, i.e. the ultimate merger of Renault and Nissan. However, in late November 2018 and then again in April 2019, Ghosn was arrested by the Japanese authorities for corruption and embezzlement at Nissan. There were speculations in the media that these arrests had been instigated by Nissan executives and that these executives were hoping that government machinery could be deployed to dispose of Ghosn from the business.33 According to this line of thinking, Japanese executives at Nissan might fear the loss of a national carmaker if it merged with Renault and ‘nationalist’ sentiments were at the heart of the ultimate departure of Ghosn. The departure of Ghosn has affected the alliance profoundly. Although the BV remains, it is questioned if the alliance remains in name only. Renault entered into talks to merge with Fiat Chrysler shortly after Ghosn’s arrest, but Nissan was not consulted or engaged with in relation to those talks. Although the talks failed, as the French government obstructed the merger with Fiat Chrysler, this episode sowed more distrust into an already frail relationship between Renault and Nissan. Top-level executives are purportedly not in dialogue with each other, and Ghosn’s former personnel dedicated to the alliance have been displaced and not given much to do.34

32 Above. 33 ‘Nissan Executives Allegedly Orchestrated Carlos Ghosn’s Arrest to Kill Merger with Renault’ (CNBC News, 28 March 2019). 34 Peter Campbell and David Keohane, ‘Renault-Nissan: How Long Can the Fractured Alliance Last? A Break-up would Reverberate across an Already Struggling Industry’ (Financial Times, 19 July 2019).

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This episode raises a number of issues concerning network governance. First, although alliances may be more successful and effective if there is leadership that fosters such cooperation, such as Ghosn’s commitment and building up of personal leadership and oversight of the alliance, it is imperative to galvanise all the relevant levels of each organisation in cooperative processes. An alliance may not be able to be sustained with a lack of closely forged interdepartmental links or integration at more levels if top-level commitment changes or ceases. Ghosn’s top-heavy management of the alliance at BV level and at Nissan was insuffcient to patch faws in the lack of lower levels of integration, crucially at the levels of research and development as well as decision making and governance. Second, organisational cultural differences at the two organisations may have impeded collaboration at lower levels more closely and may have been unaddressed in the years driven by Ghosn’s top-heavy leadership. This may pose a lesson to networks that the links that matter, such as in research synergies and common decisions in procurement, should be forged with more thought in terms of both structure and governance. Some suggestions are discussed shortly in the section ‘Designing and building a network governance framework that works’. Third, networks and alliances need to confront issues of power dynamics in an open and transparent manner, whether in terms of ex ante agreements on mutual restraint or cooperation in exercise of power, such as in crossshareholdings or in terms of an ex post structure for resolving problems. Networks and alliances are relational in nature and unforeseen issues in relation to exercises of power can arise. It would be benefcial for them to have regard to the need to institute a dispute resolution mechanism in order to negotiate power dynamic changes or frameworks in relation to give and take where power dynamics may result in unfavourable conditions or outcomes to a party. Although such mechanisms may not be foolproof, they may at least promote the frst steps towards amicable dialogue and resolution.

Case study 2 An altogether happier example of a business network is provided by PwC. PricewaterhouseCoopers (PwC) is a multinational professional services network headquartered in London.35 The network consists of accounting and consulting frms in 157 countries employing more than 223,000 people. Globally, it is the second largest professional services frm in the world, and one of the Big Four auditors.

35 Source: PwC website (www.pwc.com/gx/en/about/corporate-governance/network-structure. html).

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In many parts of the world, accounting frms are required by law to be locally owned and independent. For these reasons, the PwC network consists of frms which are separate legal entities. Firms in the PwC network are members in, or have other connections to, PricewaterhouseCoopers International Limited (PwCIL), an English private company limited by guarantee. PwCIL does not practise accountancy or provide services to clients. Instead, its purpose is to act as a coordinating entity for member frms in the PwC network. Focusing on key areas such as strategy, brand and risk and quality, the Network Leadership Team and Board of PwCIL develop and implement policies and initiatives to achieve a common and coordinated approach among individual frms where appropriate. Member frms of PwCIL can use the PwC name and draw on the resources and methodologies of the network. In addition, member frms may draw upon the resources of other member frms and/or secure the provision of professional services by other member frms and/or other entities. In return, member frms are bound to abide by certain common policies and to maintain the standards of the PwC network as defned by PwCIL. The PwC network is hence not one international partnership and PwC member frms are not legal partners with each other. Although many of the member frms have legally registered names which contain ‘PricewaterhouseCoopers’, there is no ownership by PwCIL. A member frm cannot act as agent of PwCIL or any other member frm, nor can they obligate PwCIL or any other member frm. Each member of the network remains liable only for its own acts or omissions and not for those of PwCIL or any other member frm. Such a structure has proven to be highly successful over many years. Individual network entities have retained their autonomy and also reduced their exposure to the legal and regulatory liabilities which have arisen in other parts of the network. However, network cooperation on issues such as branding and professional standards have effectively delivered economies of scale and a prominent industry profle, which have served the interests of individual frms and the network as a whole. Probably the network’s main weakness is its inability to entirely shield network frms from the reputational damage that can arise as a result of scandals or wrongdoing involving specifc parts of the network. In recent years, PwC entities have faced criticism of their audit and non-audit activities in a number of countries – and in some instances this has resulted in legal or regulatory censure.36 Although the network structure may largely protect network members from the legal and fnancial consequences of these scandals, they may still be hit by the reputational externalities arising from

36 For example, in recent years PwC entities have been fned or censured by courts or regulatory authorities in the UK, the US, Luxembourg, Russia, Ukraine, India and Australia.

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the behaviour of their network partners over whom they have relatively little control.

Designing and building a network governance framework that works As we have observed, networks can be a successful means by which to coordinate many types of activity. But they may also exhibit certain vulnerabilities which may affect their effectiveness or longer-term survival chances. In order for them to fourish on a sustainable basis, we argue that networks need to consider the appropriateness of legal personality, such as offered under the EEIG legislation discussed above, as well as an appropriate governance framework that meets their needs along the axes of formality/informality and centralisation/fexibility as discussed above. In particular, networks need to be able to deliver net benefts to each of their participants over an acceptable time horizon. Otherwise, they are likely to fall apart. However, the diverse nature of networks means that there is unlikely to be a ‘one size fts all’ solution to the challenge of network governance. There needs to be a tailored ft between the governance framework and the network’s structure and objectives. Furthermore, the nature of this ft is likely to change over time as the network evolves in terms of changes in its membership or degrees of interdependency between participants. While some networks are created with little conscious thought about governance matters, most networks at some point in their evolution will need to give it careful consideration. Typically, this decision will be made by the members of the network, although a meaningful governance framework may be demanded by external stakeholders who broker the establishment of the network in the frst place (e.g. government or network entrepreneurs). The governance of networks may feature hybrid characteristics of organisational tenets found in markets and hierarchies, and such hybridisation may be created by design. Or it may arise when conventional organisations respond to the competitive threat posed by network innovators, and co-opt them within a hierarchical corporate structure. One example from the business world is provided by the payment networks, Visa and Mastercard. Prior to the mid-2000s, both were successfully operated as memberowned cooperatives of their member banks. However, during the 1990s, they became subject to strong criticism and extensive legal challenges from competitors and antitrust authorities in the wake of claims that they were acting as ‘global private regulators’ and thereby creating an unfair market environment. Both networks ultimately chose to convert themselves into conventional public companies through initial public offers in 2007 and 2006, respectively. Perhaps the classic examples of network hybridisation are social networking companies – like Google and Facebook – which have created vast networks of participating individuals. However, such networks are under the

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control of traditional (i.e. hierarchical) corporate entities, with their founders sitting at their apex. Arguably, it is the hierarchical entities that have beneftted most from the networks due to their ability to assert ownership rights over the network and thereby beneft from the fnancial rents that are generated. We have also suggested in this volume the possibility of looking at these as models in the platform or sharing economy, and such a perspective gives rise to new views as to how the organisation of economic activity ought to be characterised and what governance and organisational norms may address the imbalances we see.37 In contrast, ‘pure’ network organisations – which fail to adopt elements of markets or hierarchy – may be too fragile, indecisive or resource constrained to fourish over the longer term. For example, compare the regular pleas for fnancial donations from Wikipedia – a pure collaborative network – with the fnancial dominance of Google or Facebook. Hence the most effective and sustainable form of network organisation will often be hybrid organisations with network features which also employ hierarchical structures (e.g. a centralised secretariat, consistent corporate policies or a unifed brand identity) and also engage in many market-based transactions and contractual arrangements that refect the need for fexibility where it matters. Two key features of modern corporate governance are (1) a vertical structure of authority and accountability between layers of management and employees and (2) the oversight of management by a largely independent board of directors.38 However, a ‘cut and paste’ application of these mechanisms would not be acceptable or appropriate in most network governance settings. Networks are typically unable to impose hierarchical management control over network members and their employees. And network members tend to demand that the composition of network governing bodies be based on member representation rather than board independence. Consequently, networks need to identify alternative governance mechanisms with which to address these fundamental governance principles. Given the lack of direct hierarchical direction, a key governance issue for networks is the management of commitment of its various participants. It may be the case that not all participants in the network (and their employees) are equally committed to the network and its goals. Networks often consist of many participant organisations with varying levels of involvement. In particular, many participant organisations have multiple activities, only some of which are relevant to the goals of the network. Thus, while it may be formally correct to say that a participant organisation is part of a network, it may be more accurate to say that a particular department is part of the network. Furthermore, in networks that are linked at the programme

37 Chapters 1 and 6 of this volume. 38 Such as under the UK Corporate Governance Code.

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level, a single participant organisation may be involved in several different networks – and may therefore have multiple loyalties and claims on its resources. There are various ways in which the commitment of network members can be developed. The mission and objectives of the network should be clearly stated in order to develop a sense of common purpose.39 Network membership should only be offered to organisations with a good ft to the network and its mission. For example, commentators write about complementarities in relation to ‘geographical distance or proximity’,40 social distance in relation to familiarity with ways of working,41 cultural distance in relation to the institutional contexts the frms are embedded in42 and technological distance, in terms of the technological capabilities of frms.43 Financial commitment and resources can be demanded of members prior to their membership as a means of establishing their degree of commitment. It may also be required that members enter into legal or contractual commitments which in some way constrain their activities or create legal or fnancial liabilities.44 These can bind them to the network and enhance their motivation to make it work. However, ongoing commitment is usually secured by a mixture of motivations on the part of each member45 as well as the informal and soft social ties that bind through social relations, repeated communications46 and the forging of common understandings of norms and expectations.47 Networks may fnd it benefcial to set up a form of a governing body for the network itself. Such a governing body may be a group of liaison persons, a committee or a board. The relative formality or informality of the body is a matter of choice and is refected along the axes of choice sets we explored in Chapter 1 and earlier in this chapter. However, a form of central management can ensure effciency in terms of a roles-based division of labour

39 Robert van der Graaff Randolph, ‘A Multilevel Study of Structural Resilience in Interfrm Collaboration: A Network Governance Approach’ (2016) 54 Management Decision 248. 40 Fiorenza Belussi and Alessia Sammarra (eds), Business Networks in Clusters and Industrial Districts: The Governance of the Global Value Chain (Oxford: Routledge, 2009). 41 Linda D Peters, Andrew D Pressey and Wesley J Johnston, ‘Contagion and Learning in Business Networks’ (2017) 61 Industrial Marketing Journal 43. 42 Granovetter (1985). 43 Sergio Biggemann, ‘Modeling the Structure of Business-To-Business Relationships’ in Woodside (2015) at ch3. 44 These are often entered into as ‘scaffolding’ for substantive commitments but empirical research fnds that they are seldom enforced; see Gillian Hadfeld and Iva Bozovic, ‘Scaffolding: Using Formal Contracts to Support Informal Relations in Support of Innovation’ (2016) Wisconsin Law Review 981. 45 Zander et al. (2016). 46 Peters et al. (2016). 47 Stefanos Mouzas and Stephan C Henneberg, ‘Inter-cognitive Representations in Business Networks’ (2015) 48 Industrial Marketing Management 61.

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and can also act as a central point of contact for negotiation and confict management. Leadership roles at the governing body level should ensure commitment to fair distribution of specifc activities amongst network participants in order to foster a sense of collective ethos and mutual respect and reciprocity. In particular, it may be worthwhile to regularly rotate the chairmanship of the governing body and key committees amongst network members so that the sharing of power appears to be cooperative and facilitative of a negotiative and consultative style. Network rules may also seek to ensure that the benefts and resources of the network are to some extent distributed in a way that refects levels of commitment. Equally, however, resources may also be used to help build the commitment of those network members or potential members who are currently only peripherally involved but whose commitment may be critical for overall network success in the future. Where there is a greater need for structure and management, the organisational tenet of a ‘constitution’ or ‘meta-level’ document of commitment may be useful in order to coalesce commitment of participant organisations. Hadfeld and Bozovic’s research discusses the importance of such ex ante, written commitments, even if they do not intend to be legally enforced.48 Hence networks could choose a degree of formalisation suitable for their needs, whether as a form of contract or document of understanding, to set out a broad framework for the matters listed below. These matters refect the coordination risks that networks face, while at the same time recognising that certain organisational tenets are well-placed to address coordination risks: (1) Objectives (2) Contribution of fnancial, staff and other ex ante resources such as physical facilities (3) Governing body and representation (4) Decision-making structure and ex post adjustment (5) One stop location, such as a liaison staff member or group for communications (6) Allocation of property rights (7) Distribution of benefts (8) Allocation of risk and liability (9) Structures for coordination, including information sharing, reporting, meetings, etc (10) Structures for accountability (11) Conditions for entry and exit, if relevant (12) Management of disputes or disagreements.

48 Gillian Hadfeld and Iva Bozovic, ‘Scaffolding: Using Formal Contracts to Support Informal Relations in Support of Innovation’ (2016) Wisconsin Law Review 981.

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The above matters are distilled from the facilitative aspects of the law of organisations, such as corporate law, but embody much greater fexibility while providing a template for best practice and certainty. Networks need to foster an effective commitment-building process but also need to address risks and coordination problems. In relation to commitment building, there are substantive and procedural aspects that are important. In relation to substantive aspects, the quality of trust and commitment amongst parties can be improved by clear and shared perceptions in relation to resource and attitudinal inputs as well as outputs. Further, common perceptions or embrace of shared norms relating to relationship performance and relationship justice are important, such as clarity in terms of jointly dealing with issues of common interest, clarifying ongoing adjustments of investments of resources and clarifying how profts and benefts may be shared and distributed.49 In relation to procedural aspects, we highlight, for example, that it is important to provide information to members about what the network is doing and how it is contributing to shared goals and interests. Another commitment mechanism is to ensure that multiple people from member organisations are involved in the network’s activities and governance. It would also be imperative to ensure that people involved in network relations are plugged into their own organisational structures in order to act as a bridge between network commitments and each participant organisation’s awareness and commitment. Such personnel should also be responsible for continuity if handover of roles is required. When support for the network is built throughout member organisations, commitment to the network becomes institutionalised, so that if one individual were to leave, network connections would still be maintained. There is a lot of literature on the need for ‘soft’ social relations to help cement trust, commitment and bond-building in networks. Hence the use of structures and procedures as well as communication lines as formal channels are not suffcient. However, social relations may depend a lot on micro-levels of complementarity and chemistry but can be helped by structural constructs such as joint working on particular development projects or products, and the reinforcement of economic commitment and interdependency. Soft cognitive constructs such as affrmations of shared commitments50 at ‘away days’, as well as exchange of staff members and visits to each participant’s sites, may also be relevant. Another critical task for network governance is the management of confict between network members. Confict among network participants may at some point be inevitable. Networks, by their very nature, are composed

49 Biggeman in Arch G Woodside (ed), Organizational Culture, Business-to-Business Relationships, and Interfrm Networks (Bingley: Emerald 2015) ch3. 50 Van der Graaf Randolph (2016).

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of multiple autonomous members with different goals, methods of operation and corporate cultures. Network members will also have their own stakeholder groups and sponsors that may be in direct confict with those of other network members. If confict cannot be successfully managed, then a network is unlikely to survive. Confict need not in itself be detrimental to the network and if managed effectively may contribute to innovative and creative solutions. However, the existence of frequent or disruptive confict among network members often undermines the establishment of trust, which is critical for the collaboration that distinguishes a network from a group of organisations tied together through hierarchical control or market transactions. The institution of a one-stop contact point in the network such as a network administrator or secretary general may be benefcial to network effectiveness. Such a person can be a focal point tasked with the role of coordination and can be devoted to the necessary tasks related to this role. For example, a network administrator or secretary general can play an important role in resolving confict. As the case study in relation to RenaultNissan highlights, it may be helpful to have the key network administrator be an independent individual with professional and management expertise – not one of the chief executives of participant members. S/he must be sensitive to the views of network members and be prepared to intervene through discussion and negotiation to resolve conficts before they become overly intractable. To do this effectively, s/he must be objective and fair while clearly supporting the goals of the network as a whole rather than siding with one organisation or another. Accountability is a potential governance weakness of network forms of coordination. While conventional organisations have clear lines of authority and responsibility based on hierarchy, networks are essentially cooperative endeavours. All network members may agree in principle that they should share in the work, but in practice it is easy to shirk responsibility and assume that someone else will be responsible for particular activities or outcomes. Hence it is worthwhile for networks to consider instituting regular reporting or meeting sessions in order to mitigate coordination risks. Once again, the secretary general can play an important role in monitoring network members to ensure participation and to protect against the “free rider” problem – which arises if members perform little or no work but still seek to enjoy the network’s benefts. Where there are clear inequities in terms of participation, members can bring problems to the attention of the network’s governing body for broader discussion. Finally, it is important to consider networks and their external relations. As networks are both aggregates and maintain collective dimensions in many ways, there may also be a need for networks to present a collective front towards external parties. External relations may be an issue that networks may wish to provide and consider at an ex ante level in a meta-level document, as discussed above.

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The legitimacy of networks in an externally facing context is an important governance challenge. Networks have to be able to attract new members, secure resources (through sponsorship, contracts, etc.), generate good publicity and in general convince outside groups that the network itself is a viable entity. The reputation and social acceptance of networks may be particularly important for not-for-proft networks that engage in activities where performance outcomes are diffcult to measure. The governance of networks by organisational tenets such as by a meta-level document of commitment, structures, processes, best practices and the effective role of a network administrator could all prove to be attractive aspects from an external observer’s point of view. Finally, it is important to emphasise that the secretariat and the member organisations need to work together to build confdence and support amongst external stakeholders. The leaders and key staff at member organisations should represent the network through their involvement with outside groups whilst also maintaining the legitimacy and viability of their own organisation within the network. They hence face a delicate balancing act between the legitimacy needs of their own organisations and the need to be a valued member of the network as a whole.

Conclusion Business networks have various governance needs that are not adequately met by discrete and ex ante contracts. These are ongoing relations that infuse economic and social interdependencies and commitments that are shaped by different contexts of embeddedness, institutional contexts and micro-foundations in economic activity.51 We study a range of network characteristics driven by different needs and argue that there needs to be a recognition of the ‘organisational and governance’ perspective of business networks that can give rise to a more clearly articulated and authoritative framework for meeting networks’ governance needs. Networks need both collective tenets and autonomy for participants, as well as different extents of formality and informality in terms of their governing and management structures and processes. We believe that a framework for choice sets is appropriate and can promote learning and experimentation in a more open-minded manner by networks and their participants.

References Agranoff, Robert, Managing within Networks: Adding Value to Public Organisations (Washington, DC: Georgetown University Press, 2007) Ansell, Chris, Sondorp, Egbert and Hartley Stevens, Robert, ‘The Promise and Challenge of Global Network Governance: The Global Outbreak Alert and Response Network’ (2012) 18 Global Governance 317

51 See Chapter 1.

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Badrtalei, Jeff and Bates, Donald L, ‘Effect of Organizational Cultures on Mergers and Acquisitions: The Case of DaimlerChrysler’ (2007) 24 International Journal of Management 303 Belussi, Fiorenza and Sammarra, Alessia (eds), Business Networks in Clusters and Industrial Districts The Governance of the Global Value Chain (Oxford: Routledge, 2009) Coen, David, Grant, Wyn and Wilson, Graham (eds), The Oxford Handbook of Business and Government (Oxford: OUP, 2010) del Molin, Martina and Masella, Cristine, ‘From Fragmentation to Comprehensiveness in Networked Governance’ (2016) 16 Public Organisation Review 493 De Pourcq, K, De Regge, M, Callens, S, Coëffé, M, Van Leuven, L, Gemmel, P, Van den Heede, K, Van de Voorde, C and Eeckloo, K, Governance Models for Hospital Collaborations. Health Services Research (HSR) (Brussels: Belgian Health Care Knowledge Centre (KCE), 2016), KCE Reports 277. D/2016/10.273/92 European Confederation of Directors Associations (ecoDa), ‘Corporate Governance Guidance and Principles for Unlisted Companies in Europe’ (2010) Ferguson, Niall, The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power (London: Penguin Books, 2017) Ferlie, Ewan, Networks in Health Care: A Comparative Study of their Management, Impact and Performance (Diss. School of Management, Royal Holloway University of London, 2010) Ferlie, Ewan, et al., ‘Public Policy Networks and “Wicked Problems”: A Nascent Solution?’ (2011) 89 (2) Public Administration 307–324 Ghosn, Carlos, ‘Partnerships and Alliances’ (Renault Nissan Press Release, 31 March 2010) at http://blog.alliance-renault-nissan.com/blog/partnerships-and-alliances Hadfeld, Gillian and Bozovic, Iva, ‘Scaffolding: Using Formal Contracts to Support Informal Relations in Support of Innovation’ (2016) Wisconsin Law Review 981 Innes, Judith and Rongerude, Jane, ‘Collaborative Regional Initiatives: Civic Entrepreneurs Work to Fill the Governance Gap’ Institute of Urban & Regional Development (2006) Jackson, William A, ‘Markets and Meaning of Flexibility’ (2015) 20 Economic Issues 45 Jones, Candace, Hesterly, William S and Borgatti, Stephen P, ‘A General Theory of Network Governance: Exchange Conditions and Social Mechanisms’ (1997) 22 (4) Academy of Management Review 911–945 Keast, Robyn, Mandell, Myrna and Brown, Kerry, ‘Mixing State, Market and Network Governance Modes: The Role of Government in Crowded Policy Domains’ (2006) 9 (1) International Journal of Organisation Theory and Behavior 27 Levrau, Abigail and Gobert, Sandra (eds), Governance: The Art of Aligning Interests: Liber Amicorum in Honour of Lutgart Van den Berghe (Cambridge: Intersentia, September 2019) Manna, Paul, ‘Networked Governance in Three Policy Areas with Implications for the Common Core State Standards Initiative’ (2010) Thomas B. Fordham Institute Milward, Brinton H and Provan, Keith G, A Manager’s Guide to Choosing and Using Collaborative Networks, Vol. 8 (Washington, DC: IBM Center for the Business of Government, 2006) Mouzas, Stefanos and Henneberg, Stephan C, ‘Inter-cognitive Representations in Business Networks’ (2015) 48 Industrial Marketing Management 61

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Munos, Bernard, ‘Lessons from 60 Years of Pharmaceutical Innovation’ (2009) 8 (12) Nature Reviews Drug Discovery 959–968 Peters, Linda D, Pressey, Andrew D and Johnston, Wesley J, ‘Contagion and Learning in Business Networks’ (2017) 61 Industrial Marketing Journal 43 Pittman, Jeremy and Armitage, Derek, ‘Network Governance of Land-Sea SocialEcological Systems in the Lesser Antilles’ (2019) 157 Ecological Economics 61 Provan, Keith G, and Kenis, Patrick, ‘Modes of Network Governance and Implications for Public Network Management’ Eighth National Public Management Research Conference, Los Angeles, CA, September, Vol. 29, 2005 Ramesh, M, Wu, Xun and Howlett, Michael, ‘Second Best Governance? Governments and Governance in the Imperfect World of Health Care Delivery in China, India and Thailand in Comparative Perspective’ (2015) 17 (4) Journal of Comparative Policy Analysis: Research and Practice 342–358 Rhodes, Rod AW, Understanding Governance: Policy Networks, Governance, Refexivity and Accountability (Maidenhead: Open University Press, 1997) Scarlett, Lynn, and McKinney, Matthew, ‘Connecting People and Places: The Emerging Role of Network Governance in Large Landscape Conservation’ (2016) 14 (3) Frontiers in Ecology and the Environment 116–125 Smelser, Nicholas and Swedberg, Richard (eds), The Handbook on Economic Sociology (Princeton, NJ: Princeton University Press, 2nd ed, 2005) Torfng, Jacob, Interactive Governance: Advancing the Paradigm (Oxford: Oxford University Press on Demand, 2012) van der Graaff Randolph, Robert, ‘A Multilevel Study of Structural Resilience in Interfrm Collaboration: A Network Governance Approach’ (2016) 54 Management Decision 248 Watkins, Michael D, ‘Why DaimlerChrysler Never Got in Gear’ (Harvard Business Review 18 May 2007) at https://hbr.org/2007/05/why-the-daimlerchryslermerger Wegner, Douglas, Costa e Silva, Susana and de Rossi, Greice, ‘The Development Dynamics of Business Networks’ (2018) 13 International Journal of Emerging Markets 27 Wheatley, M and Frieze, D, ‘Taking Social Innovation to Scale’ (2009) 1 (1) Oxford Leadership Journal 1–5 Willem, Annick, and Gemmel, Paul, ‘Do Governance Choices Matter in Health Care Networks?: An Exploratory Confguration Study of Health Care Networks’ (2013) 13 (1) BMC Health Services Research Woodside, Arch G (ed), Organizational Culture, Business-to-Business Relationships, and Interfrm Networks (Bingley: Emerald, 2015) Woolsey Biggart, Nicole (ed), Readings in Economic Sociology (London: Blackwell, 2002) Zander, Sebastian, Trang, Simon and Kolbe, Lutz M, ‘Drivers of Network Governance: A Multitheoretic Perspective with Insights from Case Studies in the German Wood Industry’ (2016) 110 Journal of Cleaner Production 109

5

Towards sustainable supply chain networks Mandatory human rights due diligence as a new governance tool? Andreas Rühmkorf

Introduction Over the last few decades, globalisation has transformed trade and production. Whilst this development has arguably led to more effciencies, participation and competition, there are also ongoing reports about human rights violations and economic exploitation and injustices. These issues usually occur at the bottom of global supply chains in developing countries. The transnational corporations (TNCs) that are selling the end product to customers in the global North and West devise sophisticated and complex business structures for their sourcing and production. These structures usually include both subsidiary companies and independent suppliers as well as subsuppliers, and they tend to span across countries and continents.1 These international business structures are organised in a decentralised way by the transnational company through ownership of subsidiaries and contractual relationships with suppliers. Although legal concepts such as ownership, limited liability and contracts constitute a formal organisation of these business structures, they are nevertheless used by the transnational corporations as instruments that shield them from liability. Effectively, these legal concepts provide the ground for the ability of transnational corporations to outsource not only the production but also the legal liability. While this chapter will examine questions related to the liability of a parent company for the torts committed by its subsidiary company, its focus will be on supply chain networks.2 The complexity and internationality of the production structures pose challenges for any regulation that aims to address those violations and injustices. Company law as the law of organisations for businesses focuses on the company as a single legal entity and not on network structures. Also, the company is regulated by a national law, whereas global production involves international business structures.

1 L Mosley, Labor Rights and Multinational Production (CUP 2011) 17. 2 For a defnition of corporate groups and networks, see C Witting, Liability of Corporate Groups and Networks (CUP 2018) 3–5.

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In the absence of a binding international human rights framework for corporations, national legislators in the so-called home states of transnational corporations in the global North and West have, in recent years, tried to address human rights violations such as forced labour in global production through national laws.3 The purpose of these laws is to close the so-called governance gap in global production which has allowed transnational corporations at the top of the production process to not be liable for the human rights violations that occur overseas. This chapter is structured in the following way: it frst reviews the regulatory challenges that business models based on global production networks with subsidiaries and suppliers pose for company law as the law of business organisations. This is followed by an assessment of how decentralised business structures, based on subsidiary companies and independent suppliers, constitute challenges for holding the transnational corporation at the top liable in tort law. While human rights violations are used as an example for the application of tort law, the chapter will highlight more generally the limitations of tort law to deal with these decentralised business structures. The chapter will then critically review how, in recent years, national legislation has tried to respond to the decentralised and global nature of international production. The fnal section will then discuss the opportunities of and limitations for mandatory human rights due diligence laws as a new form of supply chain governance. This is a regulatory tool that is often considered to have the ability to cut across the organisational legal instruments that underlie decentral business structures such as ownership of subsidiaries, limited liability and contracts. Mandatory human rights due diligence obligation can require transnational companies to take responsibility for their entire production chain despite the fact that such production chains consist of networks of suppliers and subsidiaries and their sub-subsidiaries. The promise of such laws is that they could overcome the structural complexities of these business organisations and look at them holistically. This is why they are currently discussed in several home states of transnational corporations, including Germany and the United Kingdom. France has recently introduced the law of vigilance. The chapter will critically review to what extent such a law would constitute a new form of governance that could achieve a reconceptualisation of transnational corporations in global business networks. Whilst the chapter specifcally mentions human rights violations and labour conditions, it also often refers to the more general terms ‘sustainability’ and ‘sustainable development’. These are concepts that include human rights and labour standards amongst other things, such as the environment. This chapter adopts the following defnition for sustainability: ‘development

3 See International Labour Organisation, International Labour Conference, 105th Session 2016, Report IV Decent work in global supply chains (2016) 39.

118 Andreas Rühmkorf that meets the needs of the present while safeguarding Earth’s life-support system, on which the welfare of current and future generations depend’.4 With its reference to the Brundtland Commission, the concept encompasses sustainability in its three pillars of social, environmental and economic sustainability, which all have equal standing. Due to reasons of simplicity, the term sustainability is used interchangeably with Corporate Social Responsibility (CSR) in this chapter, which is an overlapping but different concept.5

The challenge of human rights violations in global production for national (company) law Global supply chains of transnational corporations regularly have a sophisticated, international and decentralised structure. Whilst the transnational corporation at the top of such chains is usually based in the global North or West (e.g. in the United Kingdom) the subsidiary companies and suppliers in the business structure often span across countries and continents. The use of overseas subsidiary companies and supply chains with often different tiers of subsuppliers create a complex network of businesses that are involved in the development of the product. The organisation of this production process (i.e. planning and management of, for example, sourcing, procurement and logistics) is the domain of supply chain management.6 The focus of this management is to create effcient and systematic structures aimed at achieving a competitive price and quality for the end product that is sold to the customer.7 Over the last few decades, such chains have become increasingly prevalent, complex and global. Transnational corporations8 have gradually shifted from relying primarily on their overseas subsidiary companies to a network of independent suppliers and their subsuppliers. Whereas both

4 David Griggs et al., ‘Sustainable Development Goals for People and Planet’ (2013) 495 Nature 305, 306, noting the defnition was laid out in a report by the 1987 UN World Commission on Environment and Development (The Brundtland Commission) report ‘Our Common Future’ accessed 20 February 2020. 5 Robert Strand, R Edward Freeman and Kai Hockerts, ‘Corporate Social Responsibility and Sustainability in Scandinavia: An Overview’ (2015) 127 Journal of Business Ethics 1, 2. Strand et al. suggest that ‘sustainability’ is, in some instances, increasingly preferred over CSR, while others note that it depends on the feld which term is being used. 6 Robert M Monczka et al., Purchasing and Supply Chain Management (South-Western, 4th ed 2009) 6. 7 For the management of supply chains, see M Christopher, Logistics and Supply Chain Management (5th edn, Pearson 2016). 8 This chapter refers to transnational corporations as corporations with a business structure that spans over different countries, such as by having overseas subsidiaries. The literature also often uses the term multinational enterprises interchangeably. For an introduction to transnational corporations, see A de Jonge, ‘The Evolving Nature of the Transnational Corporation in the 21st Century’ in A de Jonge and R Tomasic (eds), Research Handbook on Transnational Corporations (Edward Elgar 2017) 9–38.

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forms of business organisation pose regulatory challenges for any attempt to improve labour conditions in the business structure, the supplier companies are not linked to the transnational corporation through ownership but through contracts. Despite these different structures and industries, all these scenarios share the same concrete social problem, i.e. the issue of to what extent transnational corporations can be held legally liable for the violation of human rights in the global production process leading to the development of the goods that they sell. The reason that the transnational corporations have come into the focus for liability is that the countries where production takes place (the so-called host states) are often developing countries with either weak laws and/or weak law enforcement mechanisms.9 This means that there is often a signifcant difference between the access to justice in the countries where the transnational corporations are based (the so-called home states) which are usually in the global North and West and the host states. This situation is often referred to as the ‘governance gap’, which allows transnational corporations to not only outsource the production and save costs but to also outsource legal liability.10 The use of subsidiary companies in corporate groups and networks of suppliers in global supply chains is the backbone of this so-called governance gap, as it separates the transnational corporation from the companies that are linked to the human rights violations. Company law is a national law, based in a jurisdiction such as the UK, and it thus applies to companies incorporated in that jurisdiction. Despite the term ‘transnational corporation’, the corporate form is ultimately still national in legal terms. Moreover, the UK Companies Act focuses on the company as a single legal entity, but it does not have specifc sections intended to capture the sophisticated and decentralised business structures with the overseas subsidiaries and suppliers mentioned above. Whereas German law, for example, has a group law (Konzernrecht), this concept is alien to UK company law. Closely linked to the focus on the single legal entity in the UK Companies Act are two concepts that are the cornerstone of UK company law, i.e. the separate legal entity and limited liability, based on the landmark case Salomon v Salomon & Co Ltd.11 The decision in Salomon v Salomon established

9 This chapter refers to the ‘home state’ as the state in which the transnational corporation is incorporated and where it has its administrative centre. The ‘host state’ is the state in which transnational corporations operate, either directly or through subsidiaries. See B Cragg, ‘Home Is Where the Halt Is: Mandating Corporate Social Responsibility Through Home State Regulation and Social Disclosure’ (2010) 24 Emory International Law Review 735, 751. 10 Luc Fransen and Brian Burgoon, ‘A Market for Worker Rights: Explaining Business Support for International Private Labour Regulation’ (2012) 19 Review of International Political Economy 236. 11 [1897] AC 22.

120 Andreas Rühmkorf that a company is a legal entity separate and distinct from its shareholders.12 The members of the company are only liable for the debts of the company in the amount of their non-paid-up share capital,13 unless courts are willing to pierce the corporate veil, in which case shareholders are liable for the debts of the company. However, the corporate veil is only pierced in rare circumstances, such as agency or fraud.

Tort liability within corporate group structures A corporate group consists of ‘separate legal entities related hierarchically through shareholdings’.14 The hierarchy of shareholding is based on a company being the controlling shareholder in other companies, with control being able to arise from majority voting rights as well as indirect and minority shareholdings.15 Large public limited companies tend to have diverse and sophisticated group structures. The traditional company law approach to the company as a single legal entity and the reluctance to piercing the corporate veil have direct ramifcations for the issue of whether or not transnational corporations as parent companies in corporate groups can be held liable for human rights violations that occur in the production of the goods that they sell at subsidiary companies. This section will review two different scenarios for the liability in tort of transnational companies as parent companies: First, the question of whether the TNC is liable for torts committed by its subsidiaries to their employees (secondary liability through piercing the corporate veil), and second, the question of whether the TNC owes a primary duty of care to the employees of its subsidiaries (direct liability). The next chapter will address tort liability in the scenario of supply chains. Despite the focus on human rights violations, the discussion highlights more generally the limits of tort law to attach liability to transnational corporations in decentralised business structures. Secondary liability of parent company for torts committed by subsidiaries The frst situation concerns the question of piercing the so-called corporate veil between parent and subsidiary company (i.e. secondary liability of the parent company for torts committed by its subsidiary companies). This issue

12 Ibid. 13 S3 (2) CA 2006. Shares are usually fully paid-up. S74 (1) (d) IA 1986 clarifes that, ‘in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member’. 14 C Witting, Liability of Corporate Groups and Networks (CUP 2018) 3. 15 Ibid.

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has been subject to a long-standing debate in English law. The case law covers a range of torts and, in the majority, it is not concerned with human rights violations. The subsequent discussion therefore shows the general inability of tort law to deal with decentralised business structures. In fact, courts have been very strict in their application of the limited liability principle to groups,16 and they have consistently rejected the argument that the veil between parent and subsidiary companies should be pierced solely on the basis of the ownership of the latter by the former. The legal position is that all companies in a group of companies are separate legal entities, even in case of wholly owned subsidiaries with only little paidup share capital and a board of directors which predominately or solely consists of directors who are also directors of the parent company.17 The fact that a parent company owns the majority or indeed all shares of a subsidiary company has not been considered to be a suffcient reason to pierce the veil and to hold the parent company liable for the debts of its subsidiaries. Exceptions to this principle, i.e. instances of veil piercing, in group structures are equally rare, as they are in the case of single legal entities and have, to date, also only be conducted in instances of agency or deceit. It is true that there has been some discussion in the case law about this approach to corporate groups. In DHN Food Distributors Ltd v Tower Hamlets BLC,18 the Court of Appeal pierced the corporate veil, and it considered a group of companies as one economic unit.19 It did so based on the fact that these were tightly controlled. However, in Woolfson v Strathclyde Regional Council,20 the House of Lords expressed ‘some doubt whether in this respect the Court of Appeal had properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts’. Whilst DHN was not overruled, it was distinguished on its facts.21 The leading decision about the question of whether or not the corporate veil can be pierced in the context of a group of companies is the Court of Appeal’s decision in Adams v Cape Industries plc.22 The case concerned a network of subsidiary companies of Cape Industries. The subsidiary companies were all involved in asbestos mining. In its judgment, the Court rejected the idea of treating the companies in the group as a single economic unit. The Court upheld the principle that companies in a group of companies are separate legal entities. It would only be justifable to pierce the corporate veil where there are special circumstances which indicate that the corporate veil is ‘a mere façade

16 17 18 19 20 21 22

Adams v Cape Industries plc [1990] BCLC 479, 520. See B Hannigan, Company Law (5th edn, OUP 2018) para 3–47. [1976] 1 WLR 852. Ibid, per Lord Denning, 860. (1979) 38 P & CR 521. Ibid, 526. [1990] BCLC 479.

122 Andreas Rühmkorf concealing the true facts’, i.e. where the corporate structure is used to evade rights of relief that third parties may in the future acquire. The Court also held that the other main ground for a piercing of the veil in a group situation – where a subsidiary can be considered to be the agent of a parent company – would have to be restricted to those instances where this was factually justifed. Slade LJ noted: There is no general principle that all companies in a group of companies are to be regarded as one. On the contrary, the fundamental principle is that “each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate legal rights and liabilities”: see The Albazero [1975] 3 All ER 21, 28.23 Moreover, Slade LJ stated that the use of the corporate group by a parent company as a means to ensure that legal liability and the risk of enforcement of that liability in respect of future activities of the group will fall on another member of that group was ‘inherent in our corporate law’.24 Moreover, in Re Southard Ltd it was noted that A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies, to change the metaphor, turns out to [be] the runt of the litter and declines into insolvency to the dismay of the creditors, the parent company and other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.25 The idea of a single economic unit between parent and subsidiary companies in a corporate group is therefore strongly rejected by the courts. The piercing of the veil is limited to rare cases. The consequence of this judicial approach is that tort victims of subsidiaries of transnational companies (as

23 Ibid, 508. 24 In this case, the court held that: we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this way is inherent in our corporate law. see [1990] BCLC 479, 520. This issue will be discussed in detail in the next section. 25 See Re Southard Ltd [1998] 2 BCLC 447, 458.

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parent companies) are only in rare circumstances able to hold the parent companies liable, based on secondary liability.26 The following comment by Charlotte Villiers captures well the consequences for victims of torts committed by subsidiaries: The combination of limited liability with separate legal personality makes a lethal cocktail for victims of harmful endeavours in terms of their ability to pursue a company or its shareholders for compensation.27 In a group situation, the risk is therefore allocated to the poorer risk taker, i.e. the employee of a subsidiary.28 However, this strict approach of separating companies in corporate groups for the purpose of (tort) liability conficts with the fact that the UK Companies Act 2006 requires group accounts. The group accounts which a parent company must prepare pursuant to s399 (2) CA 2006 are a consolidated balance sheet and consolidated proft and loss account for the whole group.29 This means that, for accounting purposes, the companies within a group are treated as a single economic unit. The inconsistency of how company law deals with companies within a corporate group shows that it is not given that companies within a corporate group could not be treated as a single economic unit in case of tort liabilities of a subsidiary company. The present entity-based approach which is based on the idea of companies as separate legal entities does not correspond with the business reality where parent companies govern their subsidiaries and beneft from the profits. It is therefore argued here that an enterprise-based approach should be adopted for corporate groups which would lead to the parent company being legally responsible to satisfy the tort obligations of its subsidiaries. Such an approach to introduce enterprise liability in the Companies Act 2006 was rejected by the Company Law Review Steering Group which decided to leave this issue to insolvency law.30 This was a missed opportunity as, under the status quo, tort victims of subsidiaries in general, but victims of human

26 S Baughen, ‘Multinationals and the Export of Hazard’ (1995) 58 Modern Law Review 54, 70. 27 C Villiers, ‘Corporate Law, Corporate Power and Corporate Social Responsibility’ in N Boeger, R Murray and C Villiers (eds), Perspectives on Corporate Social Responsibility (Edward Elgar 2008) 95. 28 P Muchlinski, ‘Limited Liability and Multinational Enterprise: A Case for Reform?’ (2010) 34 Cambridge Journal of Economics 915, 918, 923. 29 S404 CA2006. 30 Company Law Review, Completing the Structure (DTI 2000) para 10.59. For a critical assessment of the Steering Group’s approach see P Muchlinski, ‘Holding Multinationals to Account: Recent Developments in English Litigation and the Company Law Review’ (2002) Company Lawyer 168, 173. More discussions of the issue can be found here: P Muchlinski, ‘Limited Liability and Multinational Enterprise: A Case for Reform?’ (2010) 34 Cambridge Journal of Economics 915, 926; N Mandelson, ‘A Control-Based Approach to Shareholder Liability for Corporate Torts’ (2002) 102 Columbia Law Review 1203.

124 Andreas Rühmkorf rights abuses committed by overseas subsidiary companies of transnational corporations in particular, cannot sue the parent company for the acts of its subsidiaries (secondary liability). Such a change in the law would mirror the economic realities within corporate groups which are usually heavily dependent on the transnational corporation as the parent company.31 As the parent company often exercises control within the group, a rejection of the idea of separate legal entities in groups and limited liability between a parent company and its subsidiaries would acknowledge the economic business realities within groups. At the moment parent companies are able to reap the rewards from the group, but they are not in any danger of being liable for the losses.32 The introduction of enterprise liability would address the inconsistency between the application of the concept of limited liability and separate legal entities on the one hand and the business realities within corporate groups on the other hand. While the discussion in this chapter is focused on English law, it is important to mention that the above-mentioned German group law (Konzernrecht) is focused on protecting contractual creditors and minority shareholders.33 It does not provide tort victims with rights of recourse against parent companies. Primary liability of the parent company in tort to employees of its subsidiaries The discussion so far has focused on the secondary liability of a parent company for torts committed by its subsidiaries. The possible liability of the parent company in such a scenario was based on its control of the group, the usually close connection between companies within a group and the economic strength of the parent. A different issue that can be distinguished from the one that we have just discussed is the question of whether a parent company can be directly liable in tort to employees of its subsidiary companies (primary liability in tort). The basis for a tort claim against the parent company in this scenario would be the conduct of the parent company, such as its failure to protect employees of a subsidiary from hazards where it could have intervened.

31 For the idea that parent companies should be liable for the debts of their subsidiaries, see C Schmitthoff, ‘The Wholly Owned and the Controlled Subsidiary’ [1978] Journal of Business Law 218. For an overview of the ‘enterprise entity’ doctrine, see P Muchlinski, Multinational Enterprises & The Law (2nd edn, OUP 2007) 317. 32 For a discussion of the combination of limited liability with control rights, see P Ireland, ‘Limited Liability, Shareholder Rights and the Problem of Corporate Irresponsibility’ (2010) 34 Cambridge Journal of Economics 837, 853. 33 See A Scheuch, ‘Konzernrecht: An Overview of the German Regulation of Corporate Groups and Resulting Liability Issues’ (2016) 13 European Company Law 191.

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In Chandler v Cape plc, the court held that the parent company, as a separate legal entity, may owe a direct duty of care in tort to an employee of its subsidiary regardless of the corporate group structure and the separate legal personality of the parent company and its subsidiary companies.34 In this case, the court held that a duty of care between a parent company and an employee of a subsidiary company can arise on the basis of the overall, superior knowledge of the parent company. The parent company (Cape plc) was directly and jointly liable in negligence for asbestos-related injuries with its subsidiary. The subsidiary company had been dissolved in the meantime. The key part of the decision is: In summary, this case demonstrates that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary’s employees. Those circumstances include a situation where, as in the present case, (1) the business of the parent and subsidiary are in a relevant respect the same; (2) the parent has or ought to have superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary’s system of work is unsafe as the parent company knew, or ought to have known; and (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may fnd that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example[,] production and funding issues.35 In this case, Cape plc was liable for its own breach of a duty of care owed to the employees of its subsidiary. Although this case opens up opportunities for tort victims in global production chains to hold transnational corporations as parent companies liable, it is important to bear in mind three main limitations. First, in Chandler v Cape, both the parent and subsidiary company were based in the UK. It is unclear to what extent the decision is a precedent to the scenario with an overseas subsidiary. Second, linked to that, subsequent case law has clarifed that Chandler is to be seen in a restrictive manner. In Thompson v Renwick Group Plc,36 which also concerned an asbestos case, the Court of Appeal rejected the argument that there was a duty of care between the parent company and the employees of its subsidiary. In this case, the Court held that the parent company was merely a holding company and the subsidiary provided haulage services. Third, human rights violations in global production often occur at supplier and subsupplier

34 [2012] EWCA Civ 525. 35 Chandler v Cape plc [2012] EWCA Civ 525, para 80. 36 Thompson v Renwick Group Plc [2014] EWCA Civ 635.

126 Andreas Rühmkorf companies and not subsidiary companies. The supplier companies are not linked to the transnational corporation through ownership but through contract. In 2019, the UK Supreme Court decided in the case Vedanta about the tort liability of a parent company for a breach of duty resulting from human rights violations and environmental damage at a subsidiary company.37 The claimants argued that Vedanta had breached its duty of care by failing to prevent its subsidiary company Konkola Copper Mines Plc in Zambia from harming the local communities and the environment. The defendant Vedanta Resources argued that the English courts would have jurisdiction under the relevant European framework of private international law. The Supreme Court held that the claim against Vedanta as the parent company could be brought at English courts and the case will now be decided by them. Substantively, the Court held that there is no general parent company liability but that each case must be considered on its own facts and that a parent company can owe a direct duty of care to those affected by the operations of its subsidiaries.38 The Court took a cautious approach to the question of direct parent liability. It emphasised that being a parent does not, on its own, constitute a direct duty of care to the employees of a subsidiary company. Such a duty can only arise in limited circumstances. The Court also discussed the impact of group-wide policies (such as CSR policies).39 It held that such policies ‘do not of themselves give rise to such a duty of care to third parties’, but they could if the parent ‘does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries’.40 Equally, such group-wide CSR policies could lead to liability where the parent company ‘holds itself out’ in published materials ‘as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so’.41 This discussion effectively suggests that parent companies that say less in their policies and reports and that intervene less, are less likely to be subject to a direct duty of care.

Tort liability of transnational corporations to the employees of supplier companies Questions surrounding tort liability in tort can be differentiated from the issue of whether the transnational corporation at the top of a supply chain is liable in tort to the employees of supplier and/or subsupplier companies

37 38 39 40 41

Lungowe v Vedanta Resources plc [2019] UKSC 20. Ibid. Ibid, para 53. Ibid. Ibid.

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within the supply chain. In this situation, the supplier companies (both direct suppliers and their subsuppliers) are companies which are independent companies that are only linked with the transnational corporation and with each other through contract. The transnational corporation does not own its suppliers and they are therefore not subsidiary companies such as in the Chandler v Cape scenario. So far, English courts have not yet had to decide whether the transnational corporation at the top of the supply chain can owe a direct duty of care to employees of suppliers or subsuppliers.42 In an academic commentary on the issue, Goudkamp is sceptical as to whether such a duty might be established by an English court in the future.43 He bases his assessment on the ‘foundational principle that a duty of care does not arise to control third parties’, i.e. no duty arises to prevent a person from suffering injury at the hands of a third party. Exceptional circumstances are required to displace this rule, and he considers it doubtful that this will be the case in supply chains.44 The fact that the injured person was particularly vulnerable to injury or the fact that the third party could have been prevented from causing the injury would be insuffcient reason to constitute such exceptional circumstances. Moreover, Goudkamp notes that English tort law does not give much consideration to vulnerability and that courts attach great importance to the setting of boundaries.45 In light of the present English case law, it is unlikely that courts will fnd a duty of care between a transnational corporation and the employees of suppliers. The complexity of supply chain structures makes it diffcult to establish two essential requirements for a duty of care to arise, namely, suffcient proximity and foreseeability. Unless Parliament intervenes with legislation, it is therefore doubtful whether a duty of care will be established between a transnational corporation and the employees of one of its suppliers. A key distinction between the question of tort liability in corporate groups and supply chains is that in the former scenario the companies are linked with each other through ownership, whereas in the latter scenario the companies are linked through contract. Through economic control, transnational corporations exercise power and control which could be used as an argument in favour of a duty of care owed by a transnational corporation to employees of a supplier company. However, rather than further engaging

42 In Germany, this issue arose in the so-called KIK case which was, however, time-barred. For information about the KIK case, see accessed 30 May 2020. See also Peter Rott and Vibe Ulfbeck, ‘Supply Chain Liability of Multinational Corporations?’ (2015) 23 (3) European Review of Private Law 415–436. 43 J Goudkamp, ‘Duties of Care between Actors in Supply Chains’ (2017) 4 Journal of Personal Injury Law 205–211. 44 Ibid. 45 Ibid.

128 Andreas Rühmkorf with this issue at this point, we will frst assess the contractual control in the supply chain more to examine whether or not victims of human rights violations at supplier factories can base any claim on the contractual relations within the chain. A subsequent section will connect with the discussions about a duty of care here in the context of debates about the possible introduction of a mandatory human rights due diligence duty.

Global supply chains as business networks: contract law as an enforcement tool for human rights violations? As noted, contracts are the basis of global supply chains. The companies within the chains are independent from each other and only linked with each other through contracts. The chains are therefore governed by contracts (contract governance).46 The reason these contracts might provide an avenue for a human rights accountability framework is that, these days, the majority of large transnational corporations incorporate their sustainability terms into their contracts with their suppliers.47 The phrase ‘sustainability terms’ is used here for provisions that refer to a wide range of issues, such as human rights, labour standards, health and safety, pay and environmental protection. Typically, transnational corporations require their suppliers to comply with requirements related to these issues, such as no use of forced labour, an adherence to maximum working hours per week, etc. The incorporation of these sustainability provisions into the contracts between buyer and suppliers is done in different ways, which is beyond the scope of this chapter.48 Literature elsewhere has looked at the relationship between contract law and CSR/Sustainability clauses from doctrinal, empirical and socio-legal perspectives.49 It is suffcient for this chapter to note that the usual means of incorporation is through reference to the Supplier Code

46 For a discussion of the changing role of contract law, see R Brownsword, R A J van Gestel and H-W Micklitz, Contract and Regulation: A Handbook on New Methods of Law Making in Private Law (Edward Elgar 2017). 47 K McCall-Smith and A Rühmkorf, ‘From International Law to National Law: The Opportunities and Limits of Contractual CSR Supply Chain Governance’ in V Ulfbeck, A Andhov and K Mitkidis, Law an Responsible Supply Chain Management: Contract and Tort Interplay and Overlap (Routledge 2019) 15. 48 See A Rühmkorf, Corporate Social Responsibility, Private Law and Global Supply Chains (Edward Elgar 2015) 89–96. 49 See, for example, K Peterkova Mitkidis, Sustainability Clauses in International Business Contracts (Eleven International Publishing 2015); L Vytopil, Contractual Control in the Supply Chain: On Corporate Social Responsibility, Codes of Conduct, Contracts and (Avoiding) Liability (Eleven International Publishing) 2015; A Beckers, Enforcing Corporate Social Responsibility Codes: On Global Self-Regulation and National Private Law (Hart Publishing 2015).

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of Conduct in the Terms and Conditions of Purchase.50 It is then a matter of the drafting of the Code to determine whether or not the sustainability clauses are binding. A different matter is whether these sustainability provisions can be enforced. The two contractual scenarios are (1) the enforcement down the chain onto suppliers and subsuppliers, and (2) the enforcement up the chain by the employees of the suppliers. The employees of the suppliers are actually the group of people who are intended to be the benefciaries of the sustainability provisions in the contracts. Regarding the enforcement down the chain, it is important to note that whilst the buyer can procure a remedy in situations where the supplier is in breach of a contractual CSR term, the primary remedy in English law (and generally in common law) for a breach of a contractual obligations is to demand damages.51 This situation differs from civil law jurisdiction where the usual remedy is to force the defaulting party to perform the contract.52 In English law, the remedy of specifc performance is only rarely awarded.53 Irrespective of the issue of the remedies that are available, the key limitation of enforcement down the chain by buyer companies (i.e. the transnational corporations at the top of the chain) is that contract law primarily concerns the parties of the contract. According to the privity of contract doctrine, it is a general rule that third parties cannot be subjected to a burden by a contract to which they are not a party.54 Therefore, the subsuppliers that are not party of the contract between the transnational corporation and their direct contractual partners are not bound by sustainability provisions that are included in that contract (i.e. which could be, as mentioned above, the Supplier Code of Conduct of the transnational corporation).55 Subsuppliers are

50 In this context, it is important to consider that enforcement is only possible if the Terms and Conditions of Purchase that contain the CSR provisions are indeed part of the contract. The approach to this issue is different in different legal systems. In English law, the rules on unfair commercial contract terms cannot make invalid CSR policies included in the contracts between buyers and their suppliers, as these rules primarily focus on businessto-consumer relationships. See the statutory framework, The Unfair Contract Terms Act 1977, The Unfair Terms in Consumer Contracts Regulation 1999, The Sale of Goods Act 1979, The Supply of Goods and Services Act 1982 and The Consumer Credit Act 1974. The validity of such clauses is, however, discussed in other legal systems, such as in German law; see B Spießhofer and F Graf von Westfalen, ‘AGB-Recht, CSR-Klausel, Corporate Social Responsibility, Inhaltskontrolle’ (2015) Betriebs-Berater 75. 51 JM Smits, Contract Law: A Comparative Introduction (Edward Elgar 2014) 194. Where the seller has breached a condition, then the buyer can procure the right to repudiate the contract, i.e. terminate it; see J Poole, Textbook on Contract Law (11th edn, OUP 2012) 57–59. 52 JM Smits, Contract Law: A Comparative Introduction (Edward Elgar 2014) 194. 53 R Stone, The Modern Law of Contract (9th edn, Routledge 2011) para 15.9. 54 N Andrews, Contract Law (2nd edn, CUP 2015) 175. 55 A Rühmkorf, Corporate Social Responsibility, Private Law and Global Supply Chains (Edward Elgar 2015) 98–101.

130 Andreas Rühmkorf therefore beyond the contractual reach of the transnational corporation, as these companies cannot directly impose obligations onto them. Whilst some transnational corporations try to address these challenges in ways such as binding their direct suppliers to ensure that subsuppliers comply with these sustainability provisions, the key challenge remains that long and complex supply chains do not match well with rules of contract law. The second scenario concerns the question of whether third parties can enforce contractual clauses from the supply contracts. Given that the employees of the suppliers are the intended benefciaries of the sustainability provisions, the question arises about whether they are able to enforce these clauses.56 If they were able to do so, then that would provide an avenue for the improvement of human rights standards in global supply chains. The parties of the contract (i.e. buyer and supplier) would have to comply with the clauses that are in their contract and which are intended to improve working conditions for other parties (i.e. the employees of the suppliers). However, such an idea does not sit easily with the privity of contract doctrine which denies third parties the opportunity to enforce a contract that they are not party of, even if that contract has been expressly entered into for their beneft.57 In this context, it is important to consider the question of whether the Contracts (Rights of Third Parties) Act 1999 has changed this situation. That Act provides third parties with the opportunity to derive a right of enforcement under certain conditions. There are two routes as to how third parties can procure a right of enforcement under the Contracts (Rights of Third Parties) Act 1999 for a contract that they are not party of. The frst one is that the contract expressly provides that the third party may enforce a term in its own right.58 The Terms and Conditions of Purchase of FTSE100 companies do not appear to include such an express right, however. The second route for a third party is that it may enforce a contractual term if the term purports to confer a beneft on the third party.59 In this situation, the third party must be expressly identifed in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.60 The High Court interpreted the meaning of this phrase in Prudential Assurance Co Ltd v Ayres in the following way: ‘on a true construction of the term in question its sense has the effect of conferring a beneft on the third party in question’.61 It can be argued that the Terms and Conditions of Purchase of transnational corporations usually can be construed to confer a beneft on third parties, namely,

56 57 58 59 60 61

Ibid, 102–107. See Dunlop Pneumatic Tyre Co. Ltd v Selfridge & Co Ltd [1915] AX 847. Contracts (Rights of Third Parties) Act 1999, s1 (1) (a). Contracts (Rights of Third Parties) Act 1999, s1 (1) (b). Contracts (Rights of Third Parties) Act 1999, s3. Prudential Assurance Co Ltd v Ayres [2007] EWHC 775 (Ch); [2007] 3 All ER 946.

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the employees of the supplier companies. For example, a standard phrase is that the supplier warrants that ‘it does not use forced labour in any form’ and that it ‘complies with the laws on working hours . . . in the countries in which it operates’. Such a clause expressly refers to forced labour and working hours and therefore clearly applies to the employees of the supplier. They can therefore be identifed as the intended benefciary of this clause. Still, the parties can exclude the enforcement of a contractual clause by a third party under this route. The Act stipulates that this provision does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.62 Small-scale studies that have assessed Terms and Conditions of Purchase of FTSE100 companies have found such an exclusion of the right for third parties to enforce a contractual clause that purports to confer a beneft onto them to be standard practice. This situation is illustrated by the following example from GlaxoSmithKline: Except for any rights granted to GSK Affliates, which the parties hereby designate as intended third party benefciaries to the Agreement, no person who is not a party to the Agreement shall have any rights under the Contracts (Rights of Third Parties) Act 1999 to enforce any term.63 This clause excludes the third parties who are the intended benefciaries of the sustainability clauses in the contract from deriving a right to enforce a term that purports to beneft them such as a contractual term related to working hours. The practical effect of this is that the opportunities that are offered by the Contracts (Rights of Third Parties) Act 1999 are excluded. The consequence of this situation is that contract law provides only very limited scope to address the human rights violations that occur in global supply chains. In this context, it is also important to mention that transnational companies often voluntarily sign up to certifcation standards aimed at improving working conditions, such as SA8000.64 Such standards could be seen as an instrument that does not just incentivise, but actually also pushes transnational corporations towards taking greater responsibility for their supply chain vis-à-vis their supplier and suppliers. The impact of such standards could therefore be that transnational corporations make greater use of their contractual power. However, the reality seems to be somewhat different. In fact, a factory in Pakistan (Ali Enterprises) was certifed with this particular

62 Contracts (Rights of Third Parties) Act 1999, s2. See also: N Andrews, ‘Strangers to Justice No Longer: The Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999 and Its Implications for Commercial Contracts’ (2000) LMCLQ 540, 545. 63 GlaxoSmithKline, GlaxoSmithKline Terms and Conditions of Purchase, section 25 (‘General’). 64 See .

132 Andreas Rühmkorf standard – SA8000 – a few weeks before it burned down. The factory fre led to the German KIK case, referred to above.65 Generally speaking, there are signifcant doubts in the literature about the effectiveness of any such voluntary certifcation standards and audits.66

Supply chain governance regulation by home states of transnational corporations Underlying the discussion about the limits of both tort and contract law to address human rights violations at both overseas subsidiary and supplier factories is the so-called governance gap of global supply chains. This term refers to the fact that transnational corporations at the top of such chains can outsource not only production but also legal liability.67 Corporate impunity for human rights violations is due to the complexity and length of supply chains which do not sit easily with traditional legal concepts such as limited liability and the territoriality of laws. Ultimately, the very reason for the lack of legal accountability is that the human rights violations usually occur in developing countries where not only production is cheap but often legal standards and/or law enforcement mechanisms are weaker than in the global North and West.68 Even where, as is often the case, the letter of the law prohibits the human rights violations that are occurring at the bottom of supply chains (e.g. the use of child labour or forced labour), the issue is that victims to not have access to justice due to reasons such as weak public enforcement bodies, no access to courts and corruption.69 This situation in the so-called host states of the supply chains of transnational corporations contrasts strongly with the legal framework in home states of these corporations. Given the lack of any binding international law that addresses the global conduct of transnational corporations, the issue is to what extent the home states of transnational corporations can, through legal regulation, govern sustainability in global supply chains. The movement towards regulating global supply chains by home states in the global North and West is a recent phenomenon. It has been fuelled by the ongoing reports about human rights violations in the supply chains of different companies and industries, such as fshing, electronics, mining

65 For an overview of the case, see accessed 30 May 2020. 66 G LeBaron, J Lister and P Dauvergne, ‘Governing Global Supply Chain Sustainability through the Ethical Audit Regime’ (2017) 14 Globalizations 958. 67 Luc Fransen and Brian Burgoon, ‘A Market for Worker Rights: Explaining Business Support for International Private Labour Regulation’ (2012) 19 Review of International Political Economy 236. 68 S. Barrientos, ‘Contract labor: The “Achilles’ Heel” of Corporate Codes in Commercial Value Chains’ (2008) 39 (6) Development and Change 977–990. 69 Ibid.

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or textiles, just to name a few. The media regularly reports new scandals about children being forced to work, factories collapsing or burning down or villages being destroyed to make place for sourcing of raw materials.70 The focus on the home states and their national laws has increased due to the absence of a binding international human rights framework governing transnational corporations.71 In fact, still today, the largest businesses worldwide are being concentrated in a few countries. In 2016, 83% of the Fortune Global 500 companies had their headquarters in just ten countries, including the United States (134), China (103), Japan (52), France (29), Germany (28) and the United Kingdom (25).72 Although this situation is likely to change due to globalisation, it nevertheless demonstrates that a few countries can have an effect on global supply chains through legal regulation. For over two decades, many transnational corporations have run private governance schemes which we have addressed above in the section on contract law. These companies usually have a Supplier Code of Conduct which they impose onto their direct suppliers. However, the development, incorporation and monitoring and enforcement of the Supplier Code of Conduct is all voluntary and dependent on the transnational corporation at the top of the supply chain. As we have seen, contract law is the tool that lies behind this network governance, but it is limited in its ability to provide means of enforcement, particularly for the victims of human rights abuses at the bottom of global supply chains. Against this background, the various forms of home state laws that have been enacted in recent years are a possible way of governing human rights in global supply chains. In terms of governance, the concept that lies behind the effect of home state laws is that these laws are a form of public governance (state regulation). They interact and affect the private governance arrangements of transnational corporations for their global supply chains which are based on contracts.73 Home state laws rest on the assumption that they are complementary to private governance in the sense that they have the ability to infuence and improve the corporate use of private governance.

70 Examples from recent years include slavery in the Thai fshing industry; factory fres in Pakistan; the Rana Plaza Building collapse in Bangladesh; the use of forced labour in the cocoa industry. 71 P Muchlinski, ‘Implementing the New UN Corporate Human Rights Framework: Implications for Corporate Law, Governance, and Regulation’ (2012) 22(1) Business Ethics Quarterly 145, 148. 72 C Dempsey, ‘Geography of Global 500 Companies in 2016’ (22 February 2017), accessed 27 September 2020. 73 D Vogel, ‘The Private Regulation of Global Corporate Conduct: Achievements and Limitations’ (2010) 49 Business and Society 68–87; K W Abbott and D Snidal, ‘International Regulation Without International Government: Improving IO Performance Through Orchestration’ (2010) 5 The Review of International Organizations 315–344.

134 Andreas Rühmkorf The home state laws that are intended to improve sustainability issues such as human rights, labour standards and environmental protection in supply chains are different in terms of their mode of regulation and their stringency. They can be categorised within a continuum. The continuum ranges from ‘soft disclosure’ laws such as the ‘transparency in supply chains’ clause in the United Kingdom at the soft end of the spectrum,74 with stricter reporting regimes such as the US ‘confict minerals’ legislation in the middle ground75 and fnally more stringent laws such as the corporate criminal liability in the UK Bribery Act76 and duty-based approaches such as the French devoir de vigilance Act77 at the other end of the continuum. In this section, we will briefy compare the underlying features of the different regulatory techniques that have been used so far. The frst type of home state laws that impacted sustainability in the supply chain were primarily reporting laws. There is much literature on the benefts of this regulatory technique, which is based on communication. One strength that is often mentioned is that it ‘regulates behaviour by enriching the information available to the target audience’.78 The audience, such as consumers, can then decide whether or not to purchase goods from a company. The underlying idea is that market pressure can reward or punish companies for their behaviour. The typical example that is usually cited in this context is the transparency in supply chains clause in section 54 of the UK Modern Slavery Act 2015. Another relevant reporting law is the national implementation of the EU’s nonfnancial information reporting Directive. The characteristic feature of transparency legislation/reporting laws is that they usually give companies much discretion as to how they report and, more fundamentally, what they do in relation to their supply chains. The present reporting laws do not require a verifcation of the reports, and they lack sanctions for non-compliance. For example, the Modern Slavery Act’s slavery and human traffcking statement is a statement of the steps the organisation has taken during the fnancial year to ensure that slavery and human traffcking is not taking place in any of its supply chains, and in any part of its own business, or a statement that the organisation has taken no such steps.79

74 UK Modern Slavery Act 2015, section 54(1). 75 US Dodd-Frank of 2010, section 1502. This section requires companies that use confict minerals to fle a report with the U.S. Securities and Exchange Commission (SEC). This duty applies to listed US companies as well as foreign companies that are listed at a US stock exchange. 76 UK Bribery Act 2010, section 7(1). 77 Loi n° 2017–399 du 27 mars 2017 relative au devoir de vigilance des société mères et des entreprises donneueses d’ordre, JORF n°0074 du 28 mars 2017. 78 B Morgan and K Yeung (eds), An Introduction to Law and Regulation: Text and Materials (CUP 2007) 96. 79 UK Modern Slavery Act 2015, section 54 (4).

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The subsection that follows the quoted section contains a list of factors that a company ‘may report about’, but companies are not required to include information about them. One such factor in the list is mechanisms for due diligence. The transparency clause is a very soft form of regulation, as companies can already comply with it by effectively saying that they have not done anything to combat modern slavery. There are no key performance indicators or verifcation requirements for companies. In fact, although this is a form of public governance that requires reporting about the private governance of companies, it effectively does not require any actions from companies at all. Companies do not have to do more in order to comply with the law than they had to do prior to the Modern Slavery Act. It is therefore unlikely that this Act will have much of an impact on corporate behaviour. The other main example of a nonfnancial information reporting regime for large UK companies is the UK’s implementation of the EU Directive on nonfnancial information disclosure, which is otherwise known as the ‘CSR Directive’.80 Following its implementation into the UK Companies Act, large companies that are subject to this regime have to issue an annual nonfnancial information statement. However, the wording of this reporting duty does not expressly refer to supply chains. Recital 6 of the underlying Directive says that companies should refer to their supply and subcontracting chains ‘where relevant and proportionate’.81 Like in the case of the transparency in supply chains clause, no more specifc requirement is placed on companies as to what their reporting ought to contain, and no verifcation of the reported information is required. At the other side of the spectrum there are both the UK Bribery Act 2010 and the French Duty of Vigilance Law of 2017. The Bribery Act contains a corporate criminal liability for a company’s failure to prevent bribery by an ‘associated person’.82 If a company that has failed to prevent such a case of bribery by an associated person has so-called ‘adequate procedures’ in place, it has a defence against the offence. One such way of demonstrating ‘adequate procedures’ is to conduct due diligence.83 The French devoir de

80 For an analysis, see A Scheuch, ‘Soft Law Requirements with Hard Law Effects? The Infuence of CSR on Corporate Law from a German Perspective’ in J du Plessis, U Varottil and J Veldman (eds), Globalisation of Corporate Social Responsibility and its Impact on Corporate Governance (Springer 2018) 203. 81 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards Disclosure of Non-Financial and Diversity Information by Certain Large Undertakings and Groups [2014] OJ L 330, 15.11.2014, 1, Recital 6. 82 UK Bribery Act, section 8(1) defnes an ‘associated person’ as a person who performs services for or on behalf of the company. 83 UK Ministry of Justice, The Bribery Act 2010: Guidance about Procedures which Relevant Commercial Organisations Can Put in Place to Prevent Persons Associated with Them from Bribing (2011), accessed 30 May 2020.

136 Andreas Rühmkorf vigilance (which is mostly translated as duty of vigilance applies to French companies that employ (including their subsidiaries) at least 5,000 people in France or 10,000 worldwide.84 The duty of vigilance requires companies to establish a ‘plan of vigilance’, to implement it and to publish it. The plan must include measures of reasonable vigilance which are intended to identify the risks and prevent severe breaches of human rights, health and safety and the environment that might arise from the business activities.85 The reach of the vigilance law is beyond subsidiaries and controlled companies within the corporate group. It also encompasses suppliers and subcontractors that are in an ‘established commercial relation’.86 It will be for French courts to decide whether or not the entire supply chain or only frst tier subcontractors are encompassed by the reach of this law.87 Compared to the analysis of tort law and contract law above and the Bribery Act, the vigilance law has the potential to capture more of the supply chain, as companies beyond direct suppliers are likely to be also included by it. Compared to the reporting laws, the vigilance law is a stronger form of a home state law, as companies that do not comply with the requirements of this duty can be forced by a court to comply and be ordered to make penalty payments as enforcement. Moreover, the law also creates additional civil (tort) liability for violations of the interests that the law is intended to protect. The nature of the liability is a civil, non-contractual responsibility for personal fault instead of liability for a third person.88 The duty is owed to determinable third persons, as the Law’s objective is to offer victims a right to remediation from parent or instructing companies based in France.89 Liability requires fault, damage and causality between the two. The fault is specifed by the duty of vigilance and a risk of (specifc) damages is suffcient for the second condition. However, the victim has to prove

84 Loi n° 2017–399 du 27 mars 2017 relative au devoir de vigilance des société mères et des entreprises donneueses d’ordre, JORF n°0074 du 28 mars 2017. 85 For the implications of this, see S Cossart and T Beau de Loménie, ‘Stakeholders and the Duty of Vigilance’ (December 14, 2017) Revue Internationale de la Compliance et de l’Éthique des Affaires – Suplément à la semaine Juridique Entreprise et Affaires N° 50. 86 French commercial law defnes this as a stable, regular commercial relationship which takes place with or without a contract, with a certain volume of business and under a reasonable expectation that the relationship will last. See French Commercial Code, Art. L. 442–6-I-5; Cour de Cassation, Chambre Commerciale, December 18, 2007. 87 A Danis-Fâtome and G Viney, ‘La responsabilité civile dans la loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre’ (2017) Recueil Dalloz 1610. 88 Conseil constitutionnel, 23 March 2017, n° 2017–750 DC, préc., consid. 27; A DanisFâtome and G Viney, ‘La responsabilité civile dans la loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre’ (2017) Recueil Dalloz 1610. 89 S Brabant and E Savourey, ‘France’s Corporate Duty of Vigilance Law, A Closer Look at the Penalties Faced by Companies’ (December 14, 2017) Revue Internationale de la Compliance et de l’Éthique des Affaires – Suplément à la semaine Juridique Entreprise et Affaires N° 50, 3.

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the causal link90 which is considered to constitute a signifcant barrier for cases to be successful, as this is diffcult to prove.91 The fact that the burden of proof has not been reversed is likely to reduce the number of successful cases that will be brought under this law. Nevertheless, the law exhibits the features of ‘command and control’-type legislation.92 The different steps that are required by the French law are similar to how the UN Guiding Principles on Business and Human Rights93 have laid out the concept of supply chain due diligence.94 It has been argued that the Guiding Principles will be used to interpret the requirements of the vigilance law.95

Mandatory human rights due diligence for global supply chains: a new regulatory tool to govern supply chain networks? We have just noted the overlap between the concept of human rights due diligence in the UN Guiding Principles and the French vigilance law. In fact, mandatory human rights due diligence is regularly requested by NGOs as an instrument to make transnational corporations take more responsibility for their global supply chains. At the time of writing, it seems possible that the German government might draft a bill which will implement mandatory human rights due diligence in a so-called ‘Supply chain law’ (Lieferkettengesetz). There are now also indications that the European Union might regulate supply chains, too. A recent study that was conducted for the European Commission analysed regulatory options for mandatory human rights obligations.96 At the moment, it is unclear whether or not it will come to European regulation in the end, but given the various pieces of legislations in different member states concerning supply chains, a European regulation could be based on the single market competence (Art.114 AEUV). On the basis of the

90 Conseil constitutionnel, 23 March 2017, n° 2017–750 DC, préc. consid. 27. 91 A Danis-Fâtome and G Viney, ‘La responsabilité civile dans la loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre’ (2017) Recueil Dalloz 1610; J Heinich, ‘Devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre: une loi fnalement adoptée, mais amputee’ (Mai 2017) Droit des sociétés 5, comm. 78. 92 R Baldwin and M Cave, Understanding Regulation: Theory, Strategy and Practice (OUP 1999) 35. 93 UN Guiding Principles on Business and Human Rights, UN Doc A/HRC/17/31 (21 March 2011) annex (UNGPs). 94 A Triponel and J Sherman, ‘Legislating Human Rights Due Diligence: Opportunities and Potential Pitfalls to the French Duty of Vigilance Law’ (17 May 2017), accessed 30 May 2020. The understanding of human rights due diligence can be found in Principles 17–21 of the Guiding Principles. 95 Ibid. 96 Lise Smit et al., ‘Study for the European Commission, Study on Due Diligence Requirements through the Supply Chain’ (January 2020), accessed 30 May 2020.

138 Andreas Rühmkorf discussion above about existing home state laws and their relative strengths and weaknesses for supply chain governance, the key question is to what extent any law that requires mandatory human rights due diligence could achieve more corporate sustainability along global supply chains. Although the link to the UN Guiding Principles on Business and Human Rights has already been mentioned, the concept of due diligence that forms the basis of human rights due diligence refers to an investigation, usually of a business or to the performance of an activity to a required standard of care.97 In Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd98 the court noted: ‘An obligation to exercise due diligence is to my mind indistinguishable from an obligation to exercise reasonable care’. The online legal database Lexis defnes due diligence in the context of crime in the following way: Due diligence means that all reasonable precautions were taken and all due diligence was exercised to avoid the commission of the offence. This requires the defendant to produce evidence of the system and procedures it has devised in an effort to avoid unfair practices.99 In legislation, the concept can be traced to the American Securities Act of 1933, which requires companies to be properly vetted prior to their entry to the market for public securities.100 These days, due diligence exercises can be found in a range of different areas such as Mergers & Acquisitions (M&A), Real Estate, Intellectual Property, Data Protection, Litigation, Health and Safety.101 It is most often used in relation to M&A, where it is a very detailed process.102 In the context of M&A, due diligence primarily refers to the review of an acquisition candidate by an acquirer.103 In short, due diligence seems to generally be an investigation which has to be of a certain standard. It is a process aimed at assessing risks and preventing those risks from causing any damage.

97 Jowitt’s Dictionary of English Law (4th edn, Sweet & Maxwell 2015). 98 Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd [1960] 1 All ER 193 at 219, CA, per Willmer LJ. 99 Lexis Library, Glossary (online database). 100 C Geisst, Encyclopaedia of American Business History (An imprint of Infobase Publishing 2006) 379. 101 R Anderson, ‘The Due Diligence Process for UK Companies’ accessed 30 May 2020. 102 N Geary and J Richards, ‘Canada: Legal Due Diligence Trends in the Private Equity Industry’ (26 April 2017), accessed 27 September 2020. 103 For an explanation of due diligence in the context of M&A, see I Saenger, Gesellschaftsrecht (2nd edn, Verlag Franz Vahlen 2013) 589. See also K Unmuß, Corporate Compliance Checklisten: Rechtliche Risiken im Unternehmen erkennen und vermeiden (Verlag C.H. Beck München 2012) 291, 297.

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The UN Guiding Principles use due diligence, as it is a term that the business community is familiar with in the context of managing risk.104 Businesses particularly know the term from Mergers and Acquisitions.105 However, Human Rights Due Diligence has a wider scope than just being a process of identifying risk. It is also intended to prevent and to mitigate risks which, at least implicitly, also include the cessation of the risk.106 Guiding Principle 16 of the UN Guiding Principles defnes Human Rights Due Diligence in the following way: In order to identify, prevent, mitigate and account for how they address their adverse human rights impacts, business enterprises should carry out human rights due diligence. The process should include assessing actual and potential human rights impacts, integrating and acting upon the fndings, tracking responses, and communicating how impacts are addressed. The subsequent Guiding Principles 17 to 21 further outline the requirements of identifying, preventing, mitigating and accounting for human rights impacts. Home state laws such as the French vigilance law or the currently discussed German proposal on a supply chain law can use the steps of human rights due diligence, as outlined in the UN Guiding Principles and combine them with regulatory techniques as they like. Whilst the basic steps of Human Rights Due Diligence, i.e. to identify, to prevent, to mitigate and to account for adverse human rights impacts, involve a process, it is nevertheless possible for legislators to impose sanctions for non-compliance (e.g. the penalty payments in France) or combine sanctions with liability, such as civil liability in France. The concept of human rights due diligence is therefore fexible. The arguments in favour of the introduction of such a law are, frst and foremost, based on the realisation that the purely voluntary approach of transnational corporations to sustainability in supply chains that has evolved during the last two decades has failed, but that these companies

104 P Thielbörger and T Ackermann, ‘A Treaty on Enforcing Human Rights Against Business  – Closing the Loophole or Getting Stuck in a Loop?’ (2017) Indiana Journal of Global Legal Studies 24, 43, 51. 105 K Buhmann, ‘Navigating from “Trainwreck” to Being “Welcomed”: Negotiation Strategies and Argumentative Patterns in the Development of the UN Framework’ in D Bilchitz and S Deva (eds), Human Rights Obligations of Business: Beyond the Obligation to Respect? (CUP 2013) 29, 35. 106 C Van Dam and F Gregor ‘Corporate Responsibility to Respect Human Rights vis-à-vis Legal Duty of Care’ in J Álvarez Rubio and K Yiannibas (eds), Human Rights in Business (Routledge 2017) 119, 133.

140 Andreas Rühmkorf can do more.107 The focus on large corporations in their home states can be based on a number of arguments, such as the fnancial capacity of those organisations or to their moral obligation to ensure that human rights are not violated in the production of the goods that they sell. A practical argument is that supply chain management in business studies focuses on how the ‘lead frm’ at the top of the chain can organise its chain and make it more effcient. This approach presupposes that the lead frm, i.e. the transnational corporation, has the economic power vis-à-vis its suppliers and its subsuppliers. If large companies can use this economic power for operational purposes, then it can be argued that they also have the power to combat human rights abuses within their supply chain. The second main argument is that the existing legal regulation of supply chains by home states of transnational corporations in recent years has equally not led to much of an improvement. The primarily reporting-based laws are seen as having left too much discretion to companies who often have carried on with their previous voluntary approaches to sustainability issues such as labour standards in their supply chains.108 In particular, the absence of binding requirements and sanctions seems to have led to much of a ‘business as usual’ approach.109 It is therefore argued that a mandatory human rights due diligence law is needed, with binding requirements and liability, in order to improve the status quo. The case for such a law is based particularly on aspects such as the bargaining and economic power that transnational corporations have vis-à-vis their supply chain, the control that they hold (as exercised in their supply chain management) and the knowledge that they have. The third main argument for the need for due diligence laws is that they can cut across the loose organisational arrangements that underpin sourcing strategies based on overseas subsidiaries and suppliers. These chains can be long and complex. The ownership of subsidiary companies and the contractual relationships with direct suppliers create a form of organisation which is replicated throughout the chain by sub-subsidiaries and subsuppliers. These organisational arrangements are loose and, importantly, they create signifcant obstacles for law to attach liability to the transnational corporation at the top of the chain. This situation is due to legal concepts such as separate legal entity, limited liability and piercing of the corporate veil, as well as the fact that a breach of a duty of care in the tort of negligence requires proximity and foreseeability.

107 See the German supply chain law initiative at accessed 30 May 2020. 108 See G LeBaron and A Rühmkorf, ‘Steering CSR Through Home State Regulation: A Comparison of the Impact of the UK Bribery Act and Modern Slavery Act on Global Supply Chain Governance’ (2017) 8 (S3) Global Policy 15–28. 109 Ibid.

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The promise of a mandatory human rights due diligence law is that it can require companies to take responsibility for the entire chain, irrespective of ownership or contracts and the question of whether human rights violations occur at a factory of a direct supplier or wholly owned subsidiary or much deeper in the chain. Such laws can require companies to effectively ‘clean their chain’, which means that they can directly counter the argument that companies do not know and cannot reach deep into the chain. By doing that, such a law could tie in with the reality of most global supply chains, which is the economic power of lead frms. This power could be used not only for business purposes but also for legal purposes if we only had the courage to radically rethink how we address the decentralised nature of supply chains and the loose relationships between companies within them. Considering the limitations of the home state laws that we have discussed above, the key question relating to a mandatory human rights due diligence law is whether it can achieve a reconceptualisation of network governance that will lead to more sustainable global supply chains. Such a human rights due diligence law can be designed in different ways, and it is beyond the scope of this chapter to discuss all aspects of such a possible law in detail here. The following points are therefore only indications as to what the contours of such a law could look like. First, the basic feature of the law would be a duty based on the steps of the human rights due diligence, as outlined in the UN Guiding Principles, i.e. risk assessment, establishment of a plan to address the risks, implementation of the plan and monitoring of the functioning of it. The Guiding Principles provide a developed model which is clear and known in the business community. Second, for such a law to overcome the decentralised organisational structure of global supply chains, it must extend the due diligence duty throughout the entire chain. Whilst it could be argued that such a requirement could lack legal certainty in the case of long supply chains, this objection could be addressed by focusing on ‘appropriate actions’. The interpretation of what constitutes ‘appropriate actions’ can then be left to judicial interpretation on a case-by-case basis. Third, the relative lack of compliance of UK companies with the requirement to publish an annual modern slavery and human traffcking statement shows the need for an effective administrative enforcement. It is important that companies pay an administrative fne if they do not exercise due diligence for their supply chain.110 Fourth, contrary to the duty of care in the tort of negligence, human rights due diligence can reach deep into the supply chain beyond frst-tier suppliers, as it does not require any close connection (proximity) between the transnational corporation and the suppliers. Such a duty could even have

110 See the French devoir de vigilance law.

142 Andreas Rühmkorf two signifcant connections with the tort law. First, if transnational corporations at the top of chains have to conduct human rights due diligence for their entire supply chain and, in doing so, have to assess the risks that these rights can be violated, they will fnd it harder to argue that they do not know what occurs in their supply chain (foreseeability) and that they are not suffciently close to the employees of their subsuppliers (proximity). Second, the French law has shown that tort liability can be created in addition to the tort of negligence on the ground that the mandatory human rights due diligence has not been conducted properly and that a violation of an interest protected by the law (e.g. human rights) has occurred. This latter scenario actually creates a new avenue for a tortious claim which can result in a liability-framework that accompanies the duty. Fifth, companies will have to develop processes to implement the human rights due diligence duty. It can be expected that a duty that comes with an administrative fne and liability will be taken more seriously than one that only has a soft enforcement mechanism such as the Modern Slavery Act’s transparency in supply chains clause. Such a duty would then become part of the compliance process of companies. The analysis of documents shows that FTSE100 companies have developed structures such as third-party risk assessments and that these frms usually include contractual clauses that clearly prohibit the use of bribes by agents.111 The use of contractual clauses shows the likely interaction of such a mandatory human rights due diligence duty with contract law. Companies that are affected by the duty can be expected to internalise the duty and to pass it on to its external partners. An indirect effect of a due diligence law also is therefore that it will overcome the barriers that are constituted through the restrictive approach in company law towards piercing the corporate veil in the context of corporate groups with subsidiary companies. Moreover, the fact that such a law can encompass supply chains as an organisational form rather than only focusing on parent companies and subsidiary companies means that it is suited towards governing contractual networks which underlie global supply chains. With its focus on the process of risk assessment, plan establishment and monitoring, a mandatory human rights due diligence law can provide a framework for sanctioning companies even where there is no close relationship between the companies themselves. Overcoming the need to show a direct relationship between two parties such as the transnational corporation and its frst-tier suppliers is essential for any law that is intended to bring legal regulation into global supply chain networks. A mandatory human rights due diligence law can therefore contribute to a reconceptualisation of the role of law in global supply chains and contribute

111 LeBaron G and Rühmkorf A, ‘Steering CSR Through Home State Regulation: A Comparison of the Impact of the UK Bribery Act and Modern Slavery Act on Global Supply Chain Governance’ (2017) 8 (S3) Global Policy 15.

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to a novel framework that consists of a ‘multifaceted approach’.112 Such a multifaceted approach would consist of an interaction of different forms of regulation. The focus here has been on the interaction of public governance regulation in the form of supply chain laws, e.g. reporting duties and a mandatory human rights due diligence duty with private governance of companies, e.g. the incorporation of Supplier Codes of Conduct into supply contracts. As this is a new area of regulation, it is unlikely that one piece of legislation alone will achieve sustainable supply chains, but it will be an important contributing factor. Work in other areas such as consumer laws and directors’ duties continues to be important, but it goes beyond the scope of this chapter. Finally, the Covid-19 pandemic developed during the writing of this chapter. It remains to be seen what the concrete consequences of the pandemic for global supply chains and the protection of workers in them will be. The following list of points is just an indication of the possible impacts of the pandemic on global supply chains: First, if anything, companies have realised the vulnerability of global supply chains due to disruptions in transport and travel.113 It might be that some companies are moving some of their supply chain to countries that are geographically closer. For example, German companies might move more of their production chains to Central and Eastern Europe. But chains are complex, the availability of natural resources and the cost of labour differs, so this is just speculation at the moment. Second, discussions about the responsibilities of transnational corporations for working conditions in their supply chain are likely to become even more important. Covid-19 has shown the need for and, in many cases, the lack of secure working conditions for workers who often have no choice but to work in order to earn money. A mandatory human rights due diligence would emphasise the responsibility of companies from the global North and West to use their power to improve working conditions. Third, the responsibility of transnational corporations also includes their fnancial responsibility in times of a crisis like this when production and demand come to a pause. Suppliers are independent companies that rely on orders from the transnational corporations at the top of the chain. Where these orders stop or are cancelled (such as often happens in this pandemic) then the suppliers’ ability to continue paying their employees suffers.114 The suppliers are often not based in countries that pay for furloughing staff.

112 R M Locke, The Promise and Limits of Private Power: Promoting Labor Standards in a Global Economy (CUP 2013) 177. 113 Financial Times, ‘Covid-19 Crisis Highlights Supply Chain Vulnerability’ (28 May 2020) accessed 31 May 2020. 114 ECCHR, ILAW and WRC, ‘Farce Majeure: How Global Apparel Brands Are Using the COVID-19 Pandemic to Stiff Suppliers and Abandon Workers’ (Policy Paper, 2020), accessed 28 September 2020.

144 Andreas Rühmkorf Responsible business conduct in a situation like this includes fnancial support for the employees of suppliers in the chain.115

Conclusion Global production through the use of both subsidiary companies in corporate groups and supplier and subsupplier companies in global supply chains constitutes signifcant challenges for traditional legal principles to apply liability to the transnational corporation at the top of the production process, for example, in company law, tort law and contract law. Transnational corporations have developed long and complex decentralised business structures for their sourcing processes which shield them from legal liability for human rights violations that occur at the level of subsidiaries or suppliers. Tort law struggles to make the transnational corporations liable for human rights violations that occur at either at subsidiary or supplier level. In the former situation, there is no secondary liability in English law due to the restrictive approach of the courts towards piercing the corporate veil. Additionally, the scope for direct primary liability of a parent company to employees of a subsidiary company is narrowly circumscribed and, in any event, needs to meet the conditions of foreseeability and proximity. Whereas contracts form the basis of networks of suppliers in supply chains, they do not provide much scope for third parties, such as employees of suppliers, to enforce sustainability clauses that are intended to beneft them. This is due to the privity of contract doctrine. Although the Contracts (Rights of Third Parties) Act 1999 would have potential to create such an avenue, the relevant provision can be (and is regularly) excluded by the parties of the contract. English company law focuses on the corporation as a single legal entity, and it neither has specifc rules for corporate groups nor captures networks of businesses in supply chains that are based on contractual relationships. The chapter has also shown the limited effect that the developing legal framework on sustainability in global supply chains in home states of transnational corporations has. The existing laws are primarily reporting duties. Although they constitute a form of public governance that is intended to steer the private governance of large companies, these laws (e.g. the transparency in supply chains clause in the UK’s Modern Slavery Act 2015) are soft, lack sanctions and are therefore unlikely to signifcantly affect corporate behaviour. Whilst it still remains to be seen what the effects of these different pieces of legislation are, just the fact that according to latest statistics only about half of the companies who are under a duty to issue an annual

115 See Human Rights Watch, ‘Coronavirus gefährdet Millionen Beschäftigte in globalen Lieferketten’ (6 April 2020), accessed 31 May 2020.

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human traffcking and slavery statement publish one shows that one cannot expect much. Whilst this does not mean that reporting laws are not capable of steering companies towards assuming more responsibility for issues such as working conditions or health and safety in their production chain, legislative changes are needed that would make such laws more stringent (e.g. requiring monitoring, providing verifed assurance statements and including sanctions). The question is therefore whether the introduction of a mandatory human rights due diligence duty could overcome the weaknesses and limitations of the status quo. Whereas, so far, reporting laws sometimes refer to due diligence processes, such a law would require it from companies. Ultimately, even the introduction of a mandatory human rights due diligence duty would only be part of a ‘multifaceted approach’ towards improving sustainability in global supply chains. The legal steering governance of large and complex international networks through national laws in the home states of transnational corporations is not an easy endeavour, as the discussion in this chapter has shown. Although mandatory human rights due diligence can reach deep into the chain, and although it can be linked with civil (tort) liability, it still needs to interact with other regulatory tools in order to govern the networks underlying global supply chains. In particular, it needs to impact on how transnational corporations are using contract law as a tool to govern. Although the limits of contract law have been shown, and whilst the fact that transnational corporations usually wield strong economic bargaining power vis-à-vis their suppliers and are often able to organise the entire chain (known as supply chain management) and can dictate quality, quantity and prices, it can be argued that, if they only wanted to (i.e. were forced to through laws), they could do the same in relation to sustainability issues such as working conditions and environmental protection. The developing legal framework in this area has the potential to contribute to closing the governance gap that we witness at the moment, but the closing of it is a combined effect of different pieces of legislation and their interaction with each other. Mandatory human rights due diligence laws have the potential to play an important part in the puzzle that is the reconceptualisation of corporations within supply chain networks.

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McCall-Smith K and Rühmkorf A, ‘From International Law to National Law: The Opportunities and Limits of Contractual CSR Supply Chain Governance’ in Ulfbeck V, Andhov A and Mitkidis K (eds), Law an Responsible Supply Chain Management: Contract and Tort Interplay and Overlap (Routledge 2019) 15. Monczka Robert M et al, Purchasing and Supply Chain Management (SouthWestern, 4th ed, 2009) 6. Morgan B and Yeung K (eds), An Introduction to Law and Regulation: Text and Materials (CUP, 2007). Mosley L, Labor Rights and Multinational Production (CUP 2011). Muchlinski P, ‘Holding Multinationals to Account: Recent Developments in English Litigation and the Company Law Review’ (2002) Company Lawyer 168. Muchlinski P, ‘Implementing the New UN Corporate Human Rights Framework: Implications for Corporate Law, Governance, and Regulation’ (2012) 22(1) Business Ethics Quarterly 145. Muchlinski P, ‘Limited Liability and Multinational Enterprise: A Case for Reform?’ (2010) 34 Cambridge Journal of Economics 915. Muchlinski P, Multinational Enterprises & The Law (2nd edn, OUP 2007) 317. Peterkova Mitkidis K, Sustainability Clauses in International Business Contracts (Eleven International Publishing 2015) Poole J, Textbook on Contract Law (11th edn, OUP 2012). Rott P and Ulfbeck V, ‘Supply Chain Liability of Multinational Corporations?’ (2015) 23 European Review of Private Law 415. Rühmkorf A, Corporate Social Responsibility, Private Law and Global Supply Chains (Edward Elgar 2015). Saenger I, Gesellschaftsrecht (2nd edn, Verlag Franz Vahlen 2013) 589. Scheuch A, ‘Soft Law Requirements with Hard Law Effects? The Infuence of CSR on Corporate Law from a German Perspective’ in du Plessis J, Varottil U and Veldman J (eds), Globalisation of Corporate Social Responsibility and its Impact on Corporate Governance (Springer, 2018) 203. Schmitthoff C, ‘The Wholly Owned and the Controlled Subsidiary’ [1978] JBL 218. Smits JM, Contract Law: A Comparative Introduction (Edward Elgar 2014). Spießhofer B and Graf von Westfalen F, ‘AGB-Recht, CSR-Klausel, Corporate Social Responsibility, Inhaltskontrolle’ (2015) Betriebs-Berater 75. Stone R, The Modern Law of Contract (9th edn, Routledge 2011). Strand R, Freeman R E and Hockerts K, ‘Corporate Social Responsibility and Sustainability in Scandinavia: An Overview’ (2015) 127 Journal of Business Ethics 1. Thielbörger P and Ackermann T, ‘A Treaty on Enforcing Human Rights Against Business – Closing the Loophole or Getting Stuck in a Loop?’ (2017) IJGLS 24. Unmuß K, Corporate Compliance Checklisten: Rechtliche Risiken im Unternehmen erkennen und vermeiden (Verlag C.H.Beck München 2012). Van Dam C and Gregor F ‘Corporate responsibility to Respect Human Rights vis-àvis Legal Duty of Care’ in J Álvarez Rubio and K Yiannibas (eds) Human Rights in Business (Routledge 2017) 119. Villiers C, ‘Corporate law, Corporate Power and Corporate Social Responsibility’ in Boeger N, Murray R and Villiers C (eds), Perspectives on Corporate Social Responsibility (Edward Elgar 2008) 95.

148 Andreas Rühmkorf Vogel D, ‘The Private Regulation of Global Corporate Conduct: Achievements and Limitations’ (2010) 49 Business and Society 68–87. Vytopil L, Contractual Control in the Supply Chain: On Corporate Social Responsibility, Codes of Conduct, Contracts and (Avoiding) Liability (Eleven International Publishing) 2015. Witting C, Liability of Corporate Groups and Networks (CUP 2018).

6

Public–private partnerships and the role of the law of organisations and governance Roger M Barker and Iris H-Y Chiu

Public–private partnerships as hybrid non-hierarchical arrangements This chapter examines public–private partnerships (PPPs) as a unique type of non-hierarchical networked arrangement between public-sector agencies and private-sector frms.1 PPPs are structures introduced usually to commercialise and marketise certain public goods and which historically have been undertaken under the aegises of public sector departments in the hope that they may be more effciently and innovatively delivered in partnership with the private sector2 and are capable of being sustained by the application of market logics and forces.3 The rationales commonly adduced in favour of PPPs include allowing the government to apply market-based disciplines where relevant, and reform itself from within, in accordance with New Public Management thinking.4 PPPs also allow the government to leverage

1 Kalpana Gopalan, ‘Public Private Partnerships: A Study in Organisational Design’ (2014) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2382648; Ali Turhani, ‘Governance of Public-Private Partnerships: Lessons Learned from an Albanian Case’ (2013) 3 JEEMS 371. 2 Ezekiel Chinyio and Rod Gameson, ‘Private Finance Initiative in Use’ in Akintola Akintoye and Matthias Beck (eds), Policy, Finance & Management for Public-Private Partnerships (Chichester: Wiley Blackwell 2009) at ch1; Jeffrey Delmon, Public–Private Partnership Projects in Infrastructure (New York: Cambridge University Press 2017). 3 Such as commercialisable outputs in defence manufacturing; see Andrew D James, Deborah Cox and John Rigby, ‘Testing the Boundaries of Public Private Partnership: The Privatisation of the UK Defence Evaluation and Research Agency’ (2005) 32 Science and Public Policy 155 and marketised air traffc rights, Mike Goodlife, ‘The New UK Model for Air Traffc Services – A Public Private Partnership Under Economic Regulation’ (2002) 8 Journal of Air Transport Management 13. 4 John Hood, Andrew Mills and William Stein, ‘Developments in UK Public Sector Risk Management: Implications for PPP/PFI Projects’ in Akintola Akintoye, Matthias Beck and Cliff Hardcastle (eds), Public Private Partnerships: Managing Risk and Opportunities (Oxford: Blackwell Science 2003), ch9; Geert Dewulf, Anneloes Blanken and Mirjam Bult-Spiering, Strategic Issues in Public Private Partnerships (Chichester: Wiley- Blackwell 2012) at ch1.1– 1.2. See generally chs 7–11, Jan Erik Lane, New Public Management (London and New York: Routledge 2002); Carsten Greve and Graeme Hodge, ‘Public Private Partnerships and

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upon the private sector’s expertise, effciencies and innovative capabilities to deliver certain public services and goods more effectively.5 However, this is usually balanced against the consideration that governments may be able to fnance such public goods and services more cheaply by public borrowing versus more expensive fnance that the private sector would have to raise in order to entirely take over the provision of such public goods and services.6 PPPs have been extensively used in many countries, in infrastructure construction and/or operations in both emerging and developed countries,7 such as projects for roads, highways, bridges, utility facilities, etc., and also in the provision of certain public services in developed countries, such as recreational, educational and health facilities.8 PPPs are generally highly complex and relational contractual arrangements with mixed success in the many countries that have introduced them. Although their contractual structures have been developed and studied over the decades, recent problems such as the collapse of numerous projects associated with prominent government contractor Carillion plc in the UK – and the emergence of similar issues at other equivalent enterprises – show that addressing the problems emanating from PPPs remains a work in progress.9 This chapter focuses specifcally on enhancing the organisational and governance perspectives of PPPs in order to address in part the issues and problems that have arisen in them. First we turn briefy to the structures usually adopted in PPPs and see that they can be highly incentive-driven on all sides of the PPP arrangement. Such a focus can give rise to governance gaps resulting in or amplifying problems when they arise. We then discuss the governance lacunae at three broad levels: (1) at the level of the government in initiating and commissioning the PPP, (2) at the level of the government-and-private-sector consortium in relation to contractual governance, and (3) at the level of the privatesector consortium in its interrelations and relations with third parties. These governance issues are derived from a desk-based literature review of the UK’s PPP sector and discussions around the world where relevant. Finally,

5 6

7

8 9

Public Governance Challenges’ in Stephen P Osborne (ed), The New Public Governance: Emerging Perspectives on the Theory and Practice of Public Governance (Oxford: Routledge 2010), 149ff. Delmon (2017), ch1. Jean Shaoul, ‘Using the Private Sector to Finance Capital Expenditure: The Financial Realities’ in Akintoye and Beck (2009), ch2; Matti Siemiatycki and Naeem Farooqi, ‘Value for Money and Risk in Public–Private Partnerships’ (2012) 78 Journal of the American Planning Association 286. Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy, ‘An Overview of Public Private Partnerships’ in Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy (eds), Public Private Partnerships: A Global Review (Oxford: Routledge 2016), ch1. Akintola Akintoye, ‘PPPs for Physical Infrastructure in Developing Countries’ in Akintoye and Beck (2009), ch7. Opined in ‘City Continues to Back PFI Deals Despite Carillion’s Collapse’ (Financial Times, 24 January 2018).

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this chapter discusses if governance reform may be considered, especially in light of the UK’s experience with the collapse of Carillion plc in 2018, in two ways: (1) by introducing governance frameworks as soft law supplementing contractual frameworks, and/or (2) introducing a reframing of the PPP organisational form and purpose. Literature review of the structures for PPPs The structures of PPPs comprise the following aspects: (1) The functions10 that the government seeks to contract out, such as construction, or ‘construction and operation’ or ‘construction, operation and fnancing’, over certain defned periods of time; (2) Financial structuring, which includes raising fnance and relations with fnanciers, such as lenders, and the distribution of expenses, potential costs and benefts amongst these parties;11 and (3) Governance structuring, which includes how contractual and other interactive relations are established, maintained and implemented, including confict and dispute management. Although the multipartite relations in a PPP are essentially contractual in nature, it is unlikely for contracts to be complete,12 especially over normal PPP terms of 15–30 years.13 Parties’ relations would still have to be managed, even where there is no contractual contemplation of the issues that arise; third party issues may arise, too.14 A PPP is defned as an agreement between the government and one or more private partners (which may include the operators and the fnancers) according to which the private partners deliver the service in such a manner that the service delivery objectives of the government are aligned with the proft objectives of the private partners and where the effectiveness of the alignment depends on a suffcient transfer of risk to the private partners.15

10 See Table 1. 11 These include fnancing arrangements, see discussion below. 12 Joaquim Miranda Sarmento and Luc Renneboog, ‘Anatomy of Public-Private Partnerships: Their Creation, Financing and Renegotiations’ (2016) 9 International Journal of Managing Projects in Business 94. 13 Chinyio and Gameson in Akintoye and Beck (2009), ch1. 14 Steven De Schepper, Michaël Dooms and Elvira Haezendonck, ‘Stakeholder Dynamics and Responsibilities in Public–Private Partnerships: A Mixed Experience’ (2014) 32 International Journal of Project Management 1210. 15 Defned in OECD, Dedicated Public–Private Partnership Units: A Survey of Institutional and Governance Structures (2010).

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Roger M Barker and Iris H-Y Chiu Table 6.1 List of acronyms and corresponding functions for the PPP BBO BDO BLOT BOO BOOT BOT BROT BTL BTO DBFO DCMF LDO

Buy-build-operate Build-develop-operate Build-lease-operate-transfer Build-own-operate Build-own-operate-transfer Build-operate-transfer Build-rent-own-transfer Build-transfer-lease Build-transfer-operate Design-build-fnance-operate Design-construct-manage-fnance Lease-develop-operate

PPPs are essentially structures for public and private coordination of functions, roles and interests in the ultimate delivery of certain public goods and services. First, PPP structures are function-focused in relation to what aspects are taken over by the private sector. In some cases, a PPP may be a government concession to a private company, subject to concession conditions. In most cases, a special-purpose vehicle (‘SPV’) is incorporated in order to undertake the functions required. This special-purpose vehicle can be a joint venture between the government and private-sector partners or can be wholly owned by private-sector partners.16 As there may not be one private-sector frm that can carry out all of the functions, the SPV may be a consortium of a number of key frms, such as a construction company, a facilities management company and one or more fnancial institutions.17 The most common combinations of functions undertaken by SPVs are as shown in Table 6.1.18 Commentators document that the most popular structures adopted around the world are the DBFO, BOO, BOOT and BOT.19 The DBFO would require the private-sector consortium in the SPV to design and construct the facility, by largely seeking private-sector fnancing options, and subsequently to operate and maintain the facility for usually 30 years or less. The BOT model would require the private-sector consortium in the SPV to construct and operate the facility thereafter and to transfer it to the public sector after a defned period, such as at the end of 15–30 years. In this model, securing

16 17 18 19

Chinyio and Gameson in Akintoye and Beck (2009), ch1. Discussed in Shaoul in Akintoye and Beck (2009), ch2. List of Acronyms in OECD (2010). Chinyio and Gameson in Akintoye and Beck (2009) at ch1; Delmon (2017), ch2.

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fnance is not entirely left to the private-sector partners, and public fnancing can be involved if the SPV is a joint venture between the government and private-sector partners who each contribute an extent of equity.20 In the US, the SPV is incorporated as a public beneft corporation that can issue tax-free bonds, therefore securing private fnancing to an extent with public subsidy.21 These different functional ‘bundles’ are fexible and modular depending on the needs to be met.22 Further, the bundling of PPP functions is for the purpose of capturing economies of scale and positive incentives on the part of the private-sector partners. If governments were to seek separate private partners for distinct functions such as build and operate, it may not be different from public procurement and having to coordinate different aspects of the project, resulting in a predominantly public form of project management. A bundled arrangement also introduces positive incentives for the private-sector partner to take a holistic approach to the ultimate delivery of public goods and services. If the same private-sector entity were to construct and operate the facility, there are incentives to secure construction outcomes that would be aligned with the needs of operations in due course.23 The combinations of bundling would not, however, be based on effciency considerations alone, as there are considerations in terms of public and stakeholders’ interests in the ultimate delivery of public goods and services.24 In the UK, however, the dominant structure for PPP is DBFO, which is referred to as the ‘Private Finance Initiative’ (PFI).25 This shows the UK government’s preference for a signifcant extent of marketisation in its PPP initiatives. Next, the fnancing structure of a PPP can become more complex if the sources of fnance used are more privatised and marketised. The DBFO structure, which requires the SPV to seek private sources of funding, can lead to highly complex fnancial deals with senior and subordinated lenders with different rights, such as over collateral, cash fows, governance, etc.26

20 Government equity can be as high as 20% or more, depending on the needs and interests of various parties to the PPP; see, for example, Fredy Kurniawan, Stephen Ogunlana and Ibrahim Motawa, ‘Stakeholders’ Expectations in Utilising Financial Models for Public-Private Partnership Projects’ (2014) 4 Built Environment Project and Asset Management 4. 21 Arthur L Smith, ‘PPP Financing in the USA’ in Akintoye and Beck (2009) at ch11; Ahmed M Abdel Aziz and Giovanni C Migliaccio, ‘Public Private Partnerships in the US Transportation Sector’ in Akintoye, Beck and Kumaraswamy (2016), ch22. 22 Delmon (2017), ch2. 23 Efraim Sadka, ‘Public-Private Partnerships: A Public Economics Perspective’ (2006) at https://ssrn.com/abstract=901868. 24 Discussed further below. 25 Darinka Asenova and Matthias Beck, ‘Perspectives on the Future of the Public Private Partnership in the UK’ in Akintoye, Beck and Kumaraswamy (2016), ch21. 26 Delmon (2017) at ch5; Cliff Hardcastle and Kate Boothroyd, ‘Risk Overview in Public Private Partnership’ in Akintoye, Beck and Hardcastle (2003), ch6.

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Prior to the introduction of the UK ‘Private Finance Initiative 2’ (PF2),27 the UK pioneered a PFI model that relied on the private-sector consortium to seek funding. This usually resulted in a thin level of equity capitalisation by consortium partners such as 5–10%, with the rest funded by debt.28 Hence much of the governance aspects of the PPP, in all three levels discussed in the next section, revolved around debt governance and discipline. Such governance can result in an overly fnancially focused form of governance, which has been criticised.29 The UK’s PF2 reform now makes it mandatory for the government to retain a minority equity stake in PFI projects, hopefully bringing about a governance dimension geared towards the public interest to moderate fnancially focused governance.30 Finally, the PPP is held together by contractual and relational governance amongst the parties. The public-sector partner and the private-sector consortium would enter into a contractual agreement in relation to specifcation of works, outcomes, allocation of risks, monitoring of performance, payment schedules, mechanism for penalties, renegotiations and terms for such, coordination, accountability and confict management arrangements and dispute resolution.31 In particular, the allocation of risks32 is a highly debated issue and shapes the fnancial and governance aspects of the PPP. Further, governance arrangements in relation to decision making and sharing of benefts would be entered into via shareholders’ agreements in relation to the SPV between the public-sector partner and private-sector consortium.33 Contractual arrangements also exist between the SPV and lenders, and with subcontractors for supplies, works, services, etc.34 Although the PPP is a complex web of contracts, incomplete contracting amongst all parties is the norm, as unforeseen circumstances or materialisation of risk could emerge in these typically long-term contracts.35 Hence many commentators are of the view that a relational contracting approach should apply to contractual

27 Asenova and Beck in Akintoye, Beck and Kumaraswamy (2016), ch21. 28 Chinyio and Gameson in Akintoye and Beck (2009), ch1. 29 Darinka Asenova and Matthias Beck, ‘Obstacles to Accountability in PFI Projects’ in Akintoye and Beck (2009) at ch3; para 1.32, National Audit Offce, PFI and PF2 (2018) at www.nao.org.uk/wp-content/uploads/2018/01/PFI-and-PF2.pdf. 30 Ibid. 31 Delmon (2017), chs 7, 8. 32 More to be discussed in Section below, see generally, Hardcastle and Boothroyd in Akintoye, Beck and Hardcastle (2003), ch2. 33 Delmon (2017), ch8. 34 Delmon (2017), ch7, Annex: OECD Principles for Private Sector Participation in Infrastructure, OECD (2010); Andrew Walsh, ‘A Legal Perspective in Risk Management in Public Private Partnership’ in Akintoye, Beck and Hardcastle (2003), ch7. 35 Sarmento and Renneboog (2016); Jurong Zheng, Jens K Roehrich and Michael A Lewis, ‘The Dynamics of Contractual and Relational Governance: Evidence from Long-Term Public-Private Procurement Arrangements’ (2008) 14 Journal of Supply and Purchasing Management 43, Dewulf et al. (2012) at ch5.1.

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arrangements for the PPP so that fexible mutual adjustments can be made.36 There are usually clauses specifying conditions for renegotiations with the government, in relation to fnancial distribution, but they are only one type of post-contract adjustment.37 Further, there are often non-contractual relations that need to be taken care of, such as stakeholders’ interests and relational management of stakeholder and public interest.38 The construction of roads or public facilities would affect communities, and local stakeholders are a prominent group to reckon with.39 Ultimate users of the facility are also an important stakeholder group. Although the PPP is held together by a web of contracts that construct a complex relational structure amongst various public and private-sector parties, these structures are largely incentive-driven and refect the atomistic interests of individual parties to the arrangements.40 We argue that in view of the problems and failures that have occurred in relation to PPPs, examples of which are discussed below, there is scope for considering whether introducing an ‘organisational’ perspective to the PPP could address some of the problems. As discussed in Chapter 1, an organisational perspective allows us to look at the PPP and its various components as embedded in social context, enmeshed in institutions and power relations and driven by micro-factors of action other than incentives, some of them normative and communitarian in nature.41 This richer account of the relational nature of the PPP drawn from economic sociology is able to provide us with a framing of problems and challenges for PPPs that points the way to certain options and solutions. These are arguably found in governance frameworks and norms that supply the underweighted ‘organisational’ perspective of the PPP and are able to complement contractual developments. Problems highlighting governance lacunae Problems that could occur in a PPP are often manifested in renegotiations, penalties and failures. Renegotiations take place when the fnancial estimates or other conditions that have earlier been agreed upon deviate signifcantly from reality, and the public sector party and the private-sector consortium need to engage in renegotiation of key terms.42 Renegotiation clauses are often provided for, but the conditions for triggering them can be

36 Zheng et al. (2008); Turhani (2013). 37 Sarmento and Renneboog (2016). 38 Turhani (2013); Zheng et al. (2008); John Kelly, ‘The Application of a Whole-Life Value Methodology to PPP/PFI Projects’ in Akintoye and Beck (2009), ch18. 39 Ibid. 40 Kurniawan et al. (2014). 41 Chapter 1 of this book. 42 S Ping Ho, ‘Government Policy on PPP Financial Issues: Bid Compensation and Financial Renegotiation’ in Akintoye and Beck (2009), ch15.

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rather specifc, in order to prevent moral hazard on the part of the privatesector consortium in controlling cost and expenses. However, there can be unforeseen risks for the private-sector consortium, such as unforeseen disruptions in supply and procurement costs that become drastically different from those anticipated.43 The public sector can also initiate a renegotiation due to changes in political conditions, for example.44 Failures occur when the PPP is unable to deliver, resulting in an unanticipated early takeover of the project by the public sector in order to keep essential public services running. This can occur due to the bankruptcy of certain parties in the private consortium, such as in the case of the failure of Carillion in early 2018, its bankruptcy resulting in the government takeover of school and hospital services that Carillion was operating.45 The onset of the Covid-19 crisis in early 2020 is another unique context where failures could occur. During the crisis, the UK imposed a lockdown on nonessential services and social distancing measures from 24 March 2020. This had severe impact on PPPs in several ways. Severe contraction of demand in some areas could result in threats to the viability of the PPP model, even for months after the peak of the pandemic may be over. Lockdowns and social distancing could mean suspension of provision of services or the forced reduction in the capacity to provide services.46 Penalties are often contractually stipulated for if the private-sector consortium underperforms according to criteria earlier agreed upon. The public-sector partner is often required to pay unitary charges47 under the contractual arrangement, i.e. fxed annual sum payments, but penalties can be deducted for suboptimal performance in terms of delay, suboptimal quality or non-delivery. Under an incentive-based framework, the private-sector consortium could be incentivised to ask for a high unitary charge, especially if it is exposed to a signifcant proportion of risks. The public-sector partner would also be incentivised to design high and deterring penalties in order to secure performance and prevent moral hazard. An incentive-based approach for both sides is likely to result in overestimation and hence suboptimality

43 Some of these fnancial estimate deviations can, however, be due to poor allocation and mispricing of risks on both sides, sometimes driven by the government behaving in an aggressive and calculative manner; see paras 72–75, pp25–26, Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018). 44 Sarmento and Renneboog (2016). 45 ‘Carillion’s Private Failure is a Public Problem’ (Financial Times, 16 January 2018). 46 Norton Rose Fullbright, ‘COVID-19 and the Impact on Public-Private Partnerships in the UK’ (March 2020) at www.nortonrosefulbright.com/en/knowledge/publications/c13580f6/ covid-19-and-the-impact-on-public-private-partnerships-in-the-uk; David Baxter, ‘How Will Coronavirus Affect Public-Private Partnerships?’ (World Bank Blog, 10 March 2020) at https://blogs.worldbank.org/ppps/how-will-coronavirus-affect-public-private-partnerships. 47 Jon Scott and Herbert Robinson, ‘The Payment Mechanism in Operational PFI Projects’ in Akintoye and Beck (2009), ch22.

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in pricing. It is queried if parties in a more relational governance framework would allocate risks more optimally and hence reduce the need for such overestimations on both sides.48 Renegotiations, penalties and failures can manifest as fnancial problems that ultimately affect the viability of the PPP. However, such a perspective is often atomistic, as the mode of fnancial failure is more likely a culmination of relational problems, such as the lack of coordination, due monitoring, governance norms, etc., rather than merely fnancial mismanagement or misfortune on the part of distinct constituents in the PPP. We turn to a couple of examples to illustrate the nature of relational problems giving rise to renegotiations or failure, to refect the salience of the lack of governance norms in these cases. Sarmento and Renneboog49 studied a PPP in Portugal where renegotiations were triggered resulting in signifcant fnancial compensation made by the government to the private-sector consortium. In that case, a privatesector consortium was commissioned to build a bridge in the Lisbon area south of the Tagus. There was an existing bridge serving commuters, but it had become crowded, and a second bridge could ease traffc conditions. The private-sector consortium agreed to a DBFO structure and to transfer the bridge to government ownership upon the satisfaction of one of these conditions: either 2.25 billion vehicles had crossed both sides of the river (which was expected to occur between 2019 and 2022) or on March of 2028, whichever came frst. Further, the private-sector consortium agreed to take over operations of the existing bridge, so that toll revenues from both bridges would be the returns reaped by the private-sector consortium. The contract provided for certain revenue safeguards for the private-sector consortium in relation to government toll policy, and the right of the consortium to operate any new bridges the government subsequently decides to construct in the same area. However, the government did not follow through with one of the revenue safeguard conditions to end exemptions on the existing bridge so that toll levels on both bridges would be evened out. This is because of public protests in response to the government’s announced policy to end exemptions. As a result, the private-sector consortium stood to make losses, and a renegotiation was triggered. As this matter can be regarded as a contractual breach, it resulted in the need for the government to pay fnancial compensation to the private-sector consortium. At a relational level, however, it is queried whether earlier failures in coordination and governance are better explanations for the above renegotiation

48 Istemi Demirag, Iqbal Khadaroo, Pamela Stapleton and Caral Stevenson, ‘The Diffusion of Risks in Public Private Partnership Contracts’ (2012) 25 Accounting, Auditing and Accountability Journal 1317. 49 Sarmento and Renneboog (2016).

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episode. It was pointed out50 that the government agency that had dealt with the private consortium was abolished midway through the project and replaced with joint coordination between two ministries. There is scope for considering if such relational changes without due management could have resulted in a lack of communication and coordination between the PPP parties in relation to the government’s need to change toll policy. Further, it was also pointed out that the risk allocation between parties in the initial contract was suboptimal. The risk in relation to demand and therefore revenues was transferred to the private sector,51 but the government’s policies would undoubtedly affect such risk, which is suboptimally borne by the private sector in full. Hence if parties designed a more balanced sharing of risk and coordinative mechanisms for their future outworking, this could have alleviated the costly renegotiation. Finally, the PPP did not account for political and social risk, which is a blind spot, as embeddedness and context are often important for relational contracts. Next, fnancial penalties are the key mechanism for the public-sector agency in ensuring that the public services outcomes contracted for are met. These penalties can relate to availability, i.e. that the required facilities are not available, completed or equipped for use, or relate to the occurrence of certain defned adverse outcomes. For example, in PPP contracts for prison construction and management, adverse outcomes can relate to cell overcrowding or adverse incidents such as escape.52 The infiction of fnancial penalties is an incentive-driven mechanism for shaping the private-sector provider’s conduct and performance, but diffculties and problems may have deeper relational roots. In the National Audit Offce’s (NAO) report53 on the UK government’s PPP arrangements for prisons, it was noted that safety and security were worse in PPP-run prisons than prisons managed by the public sector54 and that there were fewer staff per prisoner in the former.55 It is queried to what extent reduction of cost is a key driver for management and staffng decisions in PPP-run prisons. Further, the NAO noted that prison performance was often judged by the public-sector agency using a variety of quantitative over qualitative factors,56 reinforcing the emphasis on incentive-driven management. The report highlighted a few areas for improvement, all of which can be framed in terms of better relational governance between the public-sector agency and private-sector consortium.

50 Ibid p114. 51 Ibid, p111–113. 52 Referred to in National Audit Offce, The Operational Performance of Prisons in PFI (2002–2003). 53 Ibid, p24. 54 Ibid. 55 Ibid, para 2.22, p26. 56 Ibid, para 2.25, p29.

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One area relates to higher levels of contractual fexibility57 in order to accommodate operational and legal changes that were unanticipated, such as in relation to changes in sentencing laws or policy. The other relates to greater levels of coordination, sharing and communication between public sector-run and PPP-run prisons in order to share best practices.58 The latter implicitly brings in an organisational perspective of the prison network as a holistic organisational fabric so that relational governance can permeate across the fabric. This would substitute for an atomistic perspective that takes each PPP arrangement as a distinct and atomistic arrangement driven by incentives. Although the NAO report was commissioned in 2003, there remain problems in PPP-run prisons, and in August 2018, Birmingham prison reverted to public management from a private concession due to the unacceptable levels of drug abuse, self-harm and violence in the prison.59 Finally, a spectacular example of PPP failure occurred in the UK as an important government contractor, Carillion plc, which was involved in many concessions relating to school and hospital management, went insolvent after unsuccessfully requesting a government bailout.60 Two parliamentary committees were established to investigate the reasons for Carillion’s failure61 and implications for the future of PPPs in the UK.62 Carillion plc was found to have been subject to managerial decisions that were highly questionable, in relation to its relentless and expensive acquisitions in order to build up market share,63 as well as its fnancial management when diffculties were experienced.64 As with any PPP arrangement, problems can be experienced in long-term relational arrangements, such as with Carillion’s contracts in Qatar.65 The Parliamentary Committee found that due to Carillion’s eagerness to win public-sector contracts in order to boost revenues to prop up earlier fnancial holes, it was quoting too low and struggling with margins. However, this was also because the government practice focused only on cost and ‘squeezing’ contractors.66 As a consequence, Carillion resorted to aggressive accounting management in order

57 Ibid, paras 3.15–18, p33. 58 Ibid, Box 20, p32. 59 ‘Failings at Birmingham Prison Refect Broader Crisis, MOJ is Warned’ (The Guardian, 20 August 2018) at www.theguardian.com/society/2018/aug/20/failings-of-hmp-birminghamrefect-broader-prison-crisis-moj-warned. 60 ‘Unravelling a Web of Failures at UK Outsourcer Carillion’ (Financial Times, 16 May 2018). 61 BEIS and Work and Pensions Parliamentary Committee, Carillion (2018). 62 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018). 63 BEIS and Work and Pensions Parliamentary Committee, Carillion (2018), p13. 64 Ibid, p14, 16–24. 65 Ibid, para 15, p17. 66 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), paras 65–71, pp24–25.

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to look fnancially healthy to investors, recognising revenue in an imprudent manner67 and keeping up dividend payments in order to assure investors68 while avoiding the honour of its obligations to pension savers and suppliers. Suppliers were put on 120-day payment terms with an option to factor their invoices for a discount, effectively lending to Carillion,69 while pension defcits were not addressed despite wrangling with the Pensions Regulator.70 The Parliamentary Committee was of the view that Carillion’s demise was inevitable.71 However, the government failed to keep an eye on the fnancial viability of its private-sector partners, relying on atomistic incentive-driven contractual arrangements and even awarded Carillion a £2bn concession after Carillion made a proft warning in 2017.72 Carillion requested a government bailout on the eve of its insolvency, believing that it was too important to fail in view of its extensive services to the government. The government ultimately refused to bail it out, and in the wake of Carillion’s insolvency, the government had to take over essential school and hospital services. Although Carillion was considered an egregious case, a number of PPP contractors have also come under scrutiny as to whether their fnancial conditions are hazardous and whether any problems can be more preemptively addressed.73 Carillion’s episode highlights a few important lessons in relation to the lack of governance norms and perspectives in PPPs. First, incentive-driven arrangements can result in perverse fnancial management on both sides, i.e. the public-sector as well as the private-sector partner, and some of these management errors can be prevented by a richer relational paradigm for the PPP. As the next section discusses, the arrangements between the public-sector agency and private-sector partners are highly calculative and quantitative, and this emphasis may create blind spots for the need for relational management, coordination, fexibility and adjustment over the long term. Second, a governance framework is important for the public-sector agency so that it does not succumb to a mistaken belief that marketisation is superior or will solve the problems in relation to public-sector provision of services. The Parliamentary Committee found in its investigations into Carillion that general tendencies on the part of the government in PPP arrangements were disturbing in relation to an over-transfer of risks to the private sector (to

67 BEIS and Work and Pensions Parliamentary Committee, Carillion (2018), paras 82–96, p39–44. 68 Ibid, paras 15–17, pp16–18. 69 Ibid, paras 38–40, pp24–25. 70 Ibid, paras 133–143, pp58–60. 71 Ibid, para 14, p16. 72 ‘Carillion’s Private Failure is a Public Problem’ (Financial Times, 16 January 2018). 73 ‘UK Contractors have “Bankrupt” Business Models, Says Vetting Group’ (Financial Times, 2 December 2018).

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be discussed below).74 This is not necessarily optimal burden-sharing. An embedded contextual view is likely to yield better insights into how risks and burdens should be shared and even jointly managed for a more sustainable long-term relationship. Such ‘wholesale delegation’ is also likely to engender perceptions on the part of the private sector that they may be ‘too important to fail’, generating perverse incentives in their private management. Finally, the UK government’s preference for PFI, which is the DBFO version of PPP, could create a concentrated landscape for service providers, weakening market discipline in PPP arrangements.75 This could be an indication for the need for higher levels of relational coordination and management between the public- and private-sector partners in order to ensure the success of the project. It is, however, observed that during the Covid-19 crisis in the UK, the government took pre-emptive steps76 in order to mitigate adverse impact upon private-sector partners as well as the provision and quality of public services. The orchestration of governance in a crisis leads us to question the need for more articulation of shared or joint governance needs not only in a crisis but also as a matter of good governance and risk management in normal times. Moreover, the government’s measures focused on their contractual relationship with the private-sector supplier and left questions open as to subcontractors and a more multilateral or organisational framework for dealing with the shared impact of the crisis. We now turn to discussing the three levels of governance that are essential to PPPs.

Three levels of governance requirements in PPPs PPPs are highly complex and multipartite contracts77 and their long-termist and relational nature have often entailed challenges in ongoing coordination. For a long time in the UK, there has been an underweighted if not missing perspective in relation to the PPP as a hybrid organisational-contractual arrangement that should not merely be analysed in contractual terms. More consideration should be given to the governance needs and norms of PPP arrangements.78 The governance perspective is not necessarily a silver bullet that would pre-empt or address all challenges faced by PPPs, but the analysis above shows that relational and governance paradigms could play a part in preventing or ameliorating certain aspects of challenges – for example, in relation to whether to commission a particular private-sector partner at

74 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), paras 54–65, pp21–24. 75 Ibid., paras 86–95, pp30–32. 76 To be discussed shortly. 77 Delmon (2017), chs 3–8. 78 Turhani (2013).

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all, in relation to allocations of risk and adjustment, etc. Although reform has been introduced in the UK, we critically explore the new governance frameworks through a three-level governance lens. We argue that in PPPs, the governance framework should be seen as three levels complementing and affecting each other. First, the governance framework at the public-sector level in relation to its decision to provide public goods or services via PPPs is important and underpins how the public-sector agency interacts with its private-sector partners. Crucially, the second level is the governance architecture for the relationship between the public-sector agency and private-sector consortia. A number of governance issues arise for the long-term, relational and contextually based paradigm of the concession. Finally, we argue that at the level of the private consortia, there is also a governance paradigm in contractual relationships spanning fnance to supply, and a predominantly incentive-driven paradigm may create or exacerbate problems. The three levels should be regarded as interrelated in constituting an overall governance architecture for PPPs. The three-level analysis is also arguably supported by a survey of literature on ‘critical success factors’ for PPPs. We note, however, that in such literature, success seems to be based on the initial successful delivery or commencement of the intended public goods or services rather than ongoing or periodic assessments. It is also queried to what extent these studies defne success holistically, including stakeholders’ or communities’ perceptions. Although there may be limitations to such studies, their fndings for even a limited notion of success can be instructive. Broadly, the critical success factors for PPPs drawn from across a number of studies can be categorised as: (1) factors over which the public sector has control, (2) factors in relation to the public- and private-sector partner relationships, and (3) factors in relation to the private-sector consortia. In relation to (1), success factors include political commitment to the project; the institutional environment such as legal frameworks, judicial and dispute resolution systems; clear and transparent selection and procurement by government; clear policies for government in using PPP; stable economic and policy environment and genuine public interest, all of which need to be met.79 Many of these factors can be infuenced and shaped by public-sector policy. Hence the governance at the public-sector level in making decisions to commission PPPs is a salient cog in the wheel. In relation to (2), success factors include the optimality of risk allocation between the public- and

79 Carter B Casady, Kent Eriksson, Raymond E Levitt and W Richard Scott, ‘Examining the State of Public-Private Partnership (PPP) Institutionalization in the United States’ (2018) 8 The Engineering Project Organization Journal at https://ssrn.com/abstract=3317770; Andreas Wibowo and Hans Wilhelm Alfen, ‘Government-led Critical Success Factors in PPP Infrastructure Development’ (2015) 5 Built Environment Project and Asset Management 121–134; Afeez Olalekan Sanni, ‘Factors Determining the Success of Public Private Partnership Projects in Nigeria’ (2016) 16 Construction Economics and Building 42.

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private-sector partners; clear contractual stipulations on roles, responsibilities, dispute resolution and confict management; and a good governance and relational framework in terms of communications, information sharing, accountability, coordination and problem solving.80 This relates to the crucial level of relational outworking between the public-sector agency and private-sector consortia and should not merely be designed to delegate or pass risks and responsibilities in an incentive-driven manner. In relation to (3), success factors include the strength, viability and reputation of consortium partners; favourable investment conditions that promote fnanciers’ innovation and confdence; good team management and coordination; legal frameworks for contractual provisions and enforcement; and risk allocation and sharing amongst the private consortium partners.81 The interrelationships within the private-sector consortium are also salient to project success and performance. Insight derived from the empirical literature above signpost for us the importance of the governance aspects that can be enhanced in PPPs. First, we turn to the level of governance at the public-sector level in decision making as regards PPPs. The governance requirements at the level of the public-sector agency and government The rationale for involving private delivery of public services often revolves around the private sector’s capacity to deliver goods and services in an effcient and innovative manner. Hence decision making for commissioning PPPs is based on a cost-beneft analytical framework known as ‘value for money’ or ‘VFM’. The UK government pioneered the VFM decision-making matrix as an objectively driven governance framework for decisions to deploy PPPs, and this framework has been adopted in many other countries.82 In theory, the VFM matrix obliges public-sector agencies to identify the cost savings that would arise from private-sector involvement, whether the private sector can optimally bear those risks that are transferred to them and whether the private sector has an interest in undertaking those risks

80 Ibrahim A Mohammed and Omer S Shaoush, ‘Critical Success Factors for the PublicPrivate Partnership in Electric Infrastructure Projects in Hadhramout-Yemen’ (2018) 9 International Journal of Civil Engineering and Technology 1971; Esther Cheung, Albert PC Chan and Stephen Kajewski, ‘Factors Contributing to Successful Public Private Partnership Projects: Comparing Hong Kong with Australia and the United Kingdom’ (2012) 10 Journal of Facilities Management 45; Robert Osei-Kyei and Albert PC Chan, ‘Review of Studies on the Critical Success Factors for Public–Private Partnership (PPP) Projects from 1990 to 2013’ (2015) 33 International Journal of Project Management 1335. 81 Ibid. 82 Siemiatycki and Farooqi (2012).

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in view of returns.83 Initially in the UK, a public-sector comparator has to be applied to the VFM results to see which is more cost-effective. The public-sector comparator refers to what it would cost the government if the works were to be procured by the government and managed directly.84 This comparator is still applied in many countries, although the UK has moved on to a more complex assessment in both quantitative and qualitative terms in order to address the earlier fawed application of the publicsector comparator. Governance by VFM has not proved to be particularly successful, especially in the UK. Sadka85 argues that the application of the VFM is not an exact science, as effciency savings and projected returns over the long term can be highly estimated, and the inherent uncertainty in the VFM methodology can result in fawed application. Further, it is commented that VFM decisions and documents are generally not available for public scrutiny, as they often contain commercially sensitive information.86 The lack of public scrutiny can be capitalised upon for VFM decisions that may not be well supported or justifed.87 Reeves’s research fnds that where governments have a preference for using PPP, VFM numbers could be used strategically to justify such decisions, for example, by underestimating the cost of the PPP, such as in relation to transaction costs in establishing a PPP.88 Khadaroo’s empirical research89 also fnds that UK local authorities support a preference for PPPs so that the local budget would not be heavily burdened with capital expenditure, such as for estates development in schools. Hence VFM calculations often feature an underestimation of risk transferred to the private-sector partner in operating schools, or excluding and not quantifying low risks altogether, in order to infate the benefts of the project. Often, the government also relies on private-sector advisers to justify the use of PPPs. However, empirical research fnds that the adviser market is highly concentrated,90 and advisers often suffer from conficts of interest in promoting the interests of their corporate clients, too.91 More

83 Steven Toms, Darinka Asenova and Matthias Beck, ‘Refnancing and the Proftability of UK PFI Projects’ in Akintoye and Beck (2009), ch4. 84 Ibid. 85 Sadka (2006). 86 Matti Siemiatycki, ‘Public–Private Partnerships in Canada: Refections on Twenty Years of Practice’ (2015) 58 Canadian Public Administration 343. 87 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), paras 4–6, p43–44. 88 Eoin Reeves, ‘Public–Private Partnerships in Ireland: A Review of the Experience 1999– 2012’ (2013) at https://ssrn.com/abstract=2215795. 89 Iqbal Khadaroo, ‘The Valuation of Risk Transfer in UK School Public Private Partnership Contracts’ (2014) 46 The British Accounting Review 154. 90 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), ch5. 91 Matti Siemiatycki, ‘Public-Private Partnership Networks: Exploring Business-Government Relationships in United Kingdom Transportation Projects’ (2011) 87 Economic Geography 309.

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often than not, advisers have converged on the superiority of PPPs, reinforcing the government’s preference. The entanglement of political preferences with an apparently objective decision-making matrix has caused the Parliamentary Committee, in scrutinising government outsourcing policies in the wake of Carillion’s collapse, to criticise the government for not objectively adhering to its own VFM procedures and policies.92 The fawed governance at the level of the UK government in relation to VFM calculations is also refected in the governance architecture for PPPs overall. The government agency responsible for considering PPPs is now the Infrastructure and Projects Authority (IPA), established in 2016.93 The Authority is a separate governmental body accountable to the Treasury and Cabinet Offce in relation to commissioning projects and retaining an ongoing involvement in terms of management and facilitating independent assurance regarding project development.94 Prior to the Authority’s establishment, PPPs were commissioned by Infrastructure UK, which was part of the Treasury. The establishment of Infrastructure UK in 2010 was preceded by the dissolution of the former agency for PPPs, Partnerships UK. Partnerships UK was criticised for being the agency commissioning and overseeing PPPs, as it was a PPP itself, comprising a 56% stake by private-sector constituents, who were PPP contractors and fnanciers, and a 44% stake by the Treasury. Its advisory council was populated overwhelmingly by privatesector interests and skewed the governance of PPPs at the government level towards favouring PPPs.95 This was a highly unusual arrangement, as the OECD survey96 of PPP governance at the government level in many countries showed public-sector control over VFM policies and in the decisionmaking and commissioning stages. A number of provinces in Canada, such as Ontario, have established a Crown corporation to commission and oversee PPPs, and a number of other countries have established distinct government agencies, offces within Treasuries or dedicated inter-ministerial or project-specifc committees at governmental levels. The OECD noted that there are benefts as well as drawbacks to whether a PPP agency should be more or less independent of the government (for example, being situated in the Treasury). A PPP agency independent of the government may be able to institute and carry out its policies and assessments in a more objective manner, free from any fear of interference, but being within the Treasury could avail a PPP agency of budgetary expertise. The UK has now moved its PPP agency from within the Treasury to be

92 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), paras 28–36, pp13–15. 93 www.gov.uk/government/organisations/infrastructure-and-projects-authority. 94 IPA Charter, ibid. 95 Jean Shaoul, ‘Using the Private Sector to Finance Capital Expenditure: The Financial Realities’ in Akintoye and Beck (2009), ch2. 96 OECD (2010).

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housed in a separate statutory body, possibly to mitigate the critique that the PPP agency was dominated by the government’s preference for privatising and marketising public services.97 Although the Infrastructure and Projects Authority is not making a move towards publishing its VFM determinations, they now commit to new governance frameworks and a public accountability agenda of publishing data regarding the performance and assessment of major projects.98 The governance architecture for PPPs could be enshrined in legislation, as the OECD survey revealed.99 Such legislation could provide specifc processes and input legitimacy for the commissioning of PPPs designed to combat corruption.100 Legislative governance can also provide for processes of assurance and accountability in project stages and delivery. Such governance is not pursued in the UK, but after a long history of experimentation and critique, the UK has introduced governance architecture for the public sector in the form of publicly published soft law, as a Standard for Projects.101 Further, the Infrastructure and Projects Authority has now published clear allocations of responsibility and accountability for certain functions such as the ‘Senior Responsible Owner’102 of the project in order to promote good governance and mitigate problems. It is noted that the VFM methodology has been dropped from the Standard. Instead, the commissioning authority has to make a continuing business case, a wider term whose import is uncertain but could retain some VFM elements alongside more holistic considerations. The Infrastructure and Projects Authority also has the responsibility to arrange independent assurance of project performance. The Infrastructure and Projects Authority now has responsibility for commissioning and overseeing PPPs. At this level, the IPA needs to balance the safeguarding of public interest while maximising the benefts of marketising certain aspects of public services. Dewulf et al. argue that it is diffcult to defne ‘public interest’ per se, as public interest is not always the superiority of users’ interests over commercial interests. Hence safeguarding ‘public interest’ is likely a balancing act which should be steered by appropriate procedural governance that features input legitimacy103 such as upwards

97 National Audit Offce, Projects leaving the Government Major Projects Portfolio (19 October 2018) indicates improvement that has been delivered by the IPA in relation to project monitoring and performance, at www.nao.org.uk/press-release/projects-leavingthe-government-major-projects-portfolio/. 98 IPA Charter. 99 OECD (2010). 100 See OECD Principles in Private Sector Participation, Annex A, ibid, Principles 5 and 6. 101 Government Functional Standard GovS 002: Project Delivery (1 August 2018) at www. gov.uk/government/publications/project-delivery-functional-standard. 102 The Role of the Senior Responsible Owner (18 July 2019) at www.gov.uk/government/ publications/the-role-of-the-senior-responsible-owner. 103 Dewulf et al. (2012), ch7.

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accountability to Parliament (which the IPA is subject to) and downwards accountability in relation to stakeholder engagement (which is provided for in the IPA’s Project Delivery Standard, more of which is discussed below), such as public reporting and accountability (mentioned above). Input legitimacy also includes horizontal accountability and coordination, which is discussed in the next section. The UK benefts from pioneering leadership in committing to objective and clear policies for project selection and seems to be determined to reform the governance of PPPs. The UK’s institutional environment and legal frameworks remain trusted and favourable, but uncertain macroeconomic and political conditions due to Brexit and the Covid-19 crisis may affect the strength of governance at the public-sector level. The beneft of legislative governance for PPPs is that institutional commitment to govern PPPs in a certain manner would be achieved even if changes in government political ideology occur. The IPA in its management of the Covid-19 crisis in 2020 took early and pre-emptive measures104 to address welfare concerns in the PPP arrangement, but these measures were nevertheless limited to the contractual layer, the government and the private consortium. These measures are voluntary between the private sector consortium and its sub-contractors. The IPA’s published soft law in terms of a Standard for Projects establishes a framework for governance at the public-sector level as well as for public scrutiny. The IPA’s role and agility in issuing guidance and soft law may place it in a position to deal better with issues in the PPP network. New strengths can also be discerned in some incremental provision of governance at the second and third levels discussed below. We suggest that the IPA can consider enhancing its governance in relation to stakeholder engagement, i.e. to ascertain the perspectives of its stakeholders in relation to its governance and performance. These can be discovered by regular surveys of user/stakeholder experience, and ascertaining the level of trust in the IPA by private-sector partners and stakeholders, etc.105 Such engagement may not always lead to the imposition of a wish list by partners and stakeholders and can provide useful feedback for public-sector learning. Governance needs at the level of the public- and private-sector partner relationships A PPP is essentially a contractual arrangement between the public-sector agency and the special-purpose corporate vehicle formed by the private consortium to carry out and deliver the project. Hence the contract defnes the public–private-sector relationship. However, as contracts are generally for a

104 Discussed below. 105 Ibid.

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long term, from 15 to 30 years, incomplete contracting106 is bound to occur due to the inability of parties to foresee changes in circumstances, within or beyond one’s control, and also due to bounded rationality. Problem solving or confict management down the road could very much depend on the soft relational fabric between the public-sector agency and private-sector partners. In this manner, having a governance framework or governance norms could facilitate good relational outworking.107 Existing literature paints a picture of a largely quantitative and calculative framework for the public-sector agency’s relationship with its private-sector partners. The OECD defnes the PPP as based on an agreement, whereby the service delivery by the private sector aligns the private sector’s proft objectives with the government’s public services objectives and where the effectiveness of the alignment depends on optimal risk transfer from the public to private sector.108 This defnition underlies the dominant governance approach between the public and private sector, which is incentive-driven. The objective is to arrive at optimality in risk transfer based on quantitative estimates. Ideally, the government should seek to transfer risks to the private sector where such risks can be managed more effciently by the private sector, such as marketbased risks relating to supply, work management, etc., and to retain risks that are better managed by itself, such as political and institutional risk.109 The risk allocation matrix determines the government’s ‘VFM’ calculations and the private sector’s quote for its unitary charge,110 an annual fxed payment representing the private sector’s estimated costs and/or performance-based payments, if certain performance benchmarks are exceeded. The risk allocation matrix is also the foundation for determining performance penalties for the private sector for failure in or defective performance.111 In a number of jurisdictions including the UK, governments have been found to engage in excessively high levels of risk transfer.112 In the UK, the Parliamentary Committee took the view that ‘[t]he Government has deliberately promoted an aggressive approach to risk transfer to the private sector – often even attempting to transfer risks that the government itself has completely failed to analyse or to understand’.113 This tendency could

106 107 108 109 110

Sarmento and Renneboog (2016), Zheng et al. (2008). Kalpanath (2014). OECD (2010), p18. Kalpanath (2014), Delmon (2017), ch7. Jon Scott and Herbert Robinson, ‘The Payment Mechanism in Operational PFI Projects’ in Akintoye and Beck (2009), ch22. 111 Ibid., Principle 14, OECD Principles in Private Sector Participation, Annex A, OECD (2010). 112 Reeves (2013); Darinka Asenova and Matthias Beck, ‘Perspectives on the Future of the Public Private Partnership in the UK’ in Akintoye, Beck and Kumaraswamy (2016), ch21 on the UK. 113 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), p3.

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be attributed to perverse incentives on the part of the government (especially in borrower countries) to take projects off its accounting books,114 although such incentives have been moderated by changes in accounting rules.115 Further, there may be a tendency on the part of the government to see marketisation as an opportunity to minimise responsibility rather than as an opportunity to reconfgure its responsibility.116 Correspondingly, excessive transfer of risk from the public to private sector could also result in future policy constraints and lack of fexibility in responding to public interest needs.117 In return, the private sector often quotes high unitary charges to refect the signifcant amounts of uncertain risks they take on, making the VFM case weaker for the government.118 Nevertheless, the taking on of such high levels of risk may also not be properly costed by the private sector, eager to obtain such government commissions, such as in the case of Carillion and other struggling government contractors.119 This could lead to perverse incentives for managing risk within the private-sector consortium120 and result in adverse impact on project development, interrelational outworking and the quality of public services. At worst, a suboptimal allocation of risk can result in the need for the government to step in if risk materialisation cannot be borne by the private sector without affecting public services, such as in the case of Carillion’s insolvency. Post-Carillion, there is appetite for a better governance framework for risk allocation between the public and private sectors. We are of the view that a governance architecture and framework can bring in a longer-term perspective of relational outworking to moderate incentive-driven tendencies in ex ante contracting. Such a governance framework should also provide for risk allocations to be made within a ‘sharing’ instead of ‘passing’ ethos and for adjustments121 to be made in the future that could be short of triggering renegotiations. The UK’s reforms to PPP are continuing but incremental in nature.

114 Ron Hodges and Howard Mellett, ‘The U.K. Private Finance Initiative: An Accounting Retrospective’ (2012) 44 The British Accounting Review 235. 115 Ibid. 116 Mohan M Kumaraswamy, Florence YY Ling and Aaron M Anvuur, ‘Team Building for PPPs’ in Akintoye and Beck (2009) at ch8 warning against such ‘wholesale delegation’, and also see Siemiatycki (2015). 117 Darinka Asenova and Matthias Beck, ‘Obstacles to Accountability in PFI Projects’ in Akintoye and Beck (2009), ch3. 118 Jean Shaoul, ‘Using the Private Sector to Finance Capital Expenditure: The Financial Realities’ in Akintoye and Beck (2009), ch2. 119 ‘UK Contractors have “Bankrupt” Business Models, Says Vetting Group’ (Financial Times, 2 December 2018). 120 Discussed below. 121 Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy, ‘An Overview of Public Private Partnerships’ in Akintoye, Beck and Kumaraswamy (2016), ch1; Siemiatycki and Farooqi (2012); Saeed et al. (2018).

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The introduction of a Standard for Projects by the Infrastructure and Projects Authority seems encouraging, as the Standard addresses the publicsector and private-sector partners in one document, bringing a holistic and relational view to the PPP. There seems to be a move away from ex ante risk allocation or transfer. The Standard now requires decision making by the public-sector agency (such as in approval or commissioning projects) to consider risk transfer decisions in a holistic and contextual manner. In particular, the public-sector agency must consider the outworking of the decision over time and to take into account stakeholders.122 These decisionmaking standards also apply to all levels of decision making in the project, such as in relation to the private-sector partner’s appointment of subcontractors. The decision-making standards are consistent, applying the same holistic and contextual demands across project partners, from the public-sector agency to the members of the private-sector consortium and its subcontractors. This is akin to a governance framework that supports a continuing relationship amongst parties, taking into account change, negotiation and adjustment, and it indicates a move away from the ‘passing’ or wholesale delegation tendencies observed in the past. Second, the Standard encourages all parties to ensure that risks are managed within their individual risk appetites and are also managed across the portfolio as a whole,123 taking into account the need to manage change. This is a more explicit reference to risk management and indicates a move away from atomistic and calculative perceptions of risk allocation. The standard could, however, go further in being explicit about joint risk sharing where optimal and the possibilities or needs for mutual adjustment. It can be argued that the onset of the Covid-19 crisis in early 2020 put to the test the more holistic framework for risk management between public authorities and their project partners. As the crisis led to government policies for lockdowns and social distancing, including the closing of schools and ‘non-essential’ retail and commerce, project partners could be adversely affected in relation to sudden collapses in demand and revenues. Social distancing rules as well as the possibility of workers being ill could also result in impairment to the provision of public services which needed to remain open. The government provided procurement guidance to the IPA which instructed all contracting public authorities to pay their suppliers and maintain business continuity. Indeed, suppliers could ask for support for wages of contingent workers in order to prevent early layoffs124 and to seek

122 Loke-Min Foo, Darinka Asenova, Stephen Bailey and John Hood, ‘Stakeholder Engagement and Compliance Culture’ (2011) 13 Public Management Review 707; Zheng et al. (2008). 123 Government Functional Standard GovS 002: Project Delivery (1 August 2018) at www. gov.uk/government/publications/project-delivery-functional-standard, para 5.1, p12. 124 Cabinet Offce, ‘Guidance Notes on Payments to Suppliers for Contingent Workers Impacted by COVID-19’ (March 2020) at https://assets.publishing.service.gov.

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to provide for earlier payment of their invoices.125 The IPA also urged all contracting authorities not to regard the onset of the crisis as triggering force majeure to result in termination of the PPP but to work with their contracting project partners to modify contractual clauses temporarily126 and to engage in dialogue in how best to manage the risks and impact to all sides during the crisis.127 Relational outworking also involves confict management at unhappier times such as where the private-sector partner’s performance or delivery is suboptimal. The traditional governance approach is incentive-driven and quantitative, i.e. via a payment mechanism approach whereby schedules of payment are tied to delivery and availability targets, while penalties may be applied for defective delivery and performance.128 This can create a calculative matrix129 and adversarial environment, adversely impacting stakeholders and the delivery of public services.130 Although it remains important to incentivise optimal private-sector cooperation to deliver the needed public goods and services, contextualisation, problem solving and confict management are relational aspects that need to be developed. The reforms introduced by the Infrastructure and Projects Authority now include a governance framework that promotes relational outworking, in the following ways: (1) the appointment of specifed roles of individual responsibility to oversee holistic relational outworking, such as the roles of the senior responsible owner,131 the portfolio manager,132 the project director,133 etc., (2) the defnition of key stages of work so as to provide broad checklists for decision making and implementation, such as the stages of initialling,

125

126

127

128 129 130 131 132 133

uk/government/uploads/system/uploads/attachment_data/file/877221/PPN02_20Contingent-Workers-Impacted-by-Covid-19-2.pdf. Cabinet Offce, ‘Procurement Policy Note – Supplier Relief Due to COVID-19’ (March 2020) at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/fle/874178/PPN_02_20_Supplier_Relief_due_to_Covid19.pdf. Cabinet Offce, ‘Guidance Notes on Model Interim Payment Terms – Procurement Policy Note 02/20’ (March 2020) at https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/877260/PPN02_20_Model_Interim_ Payment_Terms_v1.pdf. IPA, ‘Supporting Vital Service Provision in PFI /PF2 (and Related) Contracts during the COVID-19 Emergency’ (2 April 2020) at https://assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment_data/file/878059/2020_04_02_PFI_ and_COVID19_fnal.docx.pdf. Jon Scott and Herbert Robinson, ‘The Payment Mechanism in Operational PFI Projects’ in Akintoye and Beck (2009), ch22. Saeed et al. (2018). Zheng et al. (2008). Government Functional Standard GovS 002: Project Delivery (1 August 2018) at www. gov.uk/government/publications/project-delivery-functional-standard, ch6.4 and p36. Ibid., ch4.4.3, ch5 and Annex C at p35. Ibid., ch4.4.5, ch6 and p36.

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planning, managing, delivery and closing,134 in order to provide for consistency in project management and implementation, (3) explicit references made to the context for the project, such as stakeholder management135 and to the need to manage change and adjustment136 in a dynamic relationship, (4) the continuing need for internal assurance, and the independent assurance carried out by the Infrastructure and Projects Authority in relation to performance evaluation, making the process more qualitative, transparent and credible,137 and (5) the requirement for the IPA to report annually to the public,138 therefore inviting public scrutiny and maintaining the need for the public-sector agency to be continuously accountable for the project. In particular, the role of the senior responsible owner is envisaged to be the ‘personal glue’ for the organisational fabric of the project. The senior responsible owner is a person appointed at senior position, usually at the organisation that would ultimately be delivering the public services or goods.139 In a typical DBFO arrangement, such a person would be drawn from the senior ranks of the private-sector contractor that is operating the public services facility. The senior responsible owner takes ultimate responsibility for the delivery of the project and is accountable directly to Parliament in the case of a major project.140 S/he must maintain oversight of the business case, key appointments such as project director who reports to him/her, budget and fnancial management, project management and governance, stakeholder management, risk and change management and the assurance process.141 The Infrastructure and Project Authority’s initiatives are akin to establishing soft governance frameworks catering for the need of relational outworking in the project. The framework takes into account continuing interrelationships, dynamic management and contextual environments, such as stakeholders, and looks to the taking of personal ownership by key individuals. The Authority’s public accountability also incentivises it to maintain due oversight and to play important roles such as leadership in problem solving, confict management and bringing the overall public interest to bear.142 In this manner, the Standard provides a governance framework for sharing of responsibility as well as having a collective perspective

134 135 136 137 138 139

Ibid., Ch6 generally. Ibid., Ch2, 4.2, 4.3, 5.3 and 5.3. Ibid., ch7.1.2. Ibid., ch4.2. IPA Charter. The Role of the Senior Responsible Owner (18 July 2019) at www.gov.uk/government/ publications/the-role-of-the-senior-responsible-owner, p10. 140 Ibid. 141 Ibid. 142 Sanni (2016) highlights the importance of public-led leadership in the ‘collective’ perspective that is a critical success factor for PPPs.

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between the public and private sectors in coordination, management and problem solving. However, it may be argued that there is still too much emphasis on private-sector responsibility, as the senior responsible owners for DBFO projects are likely to be from the private sector, and one should consider whether there is a need for more ongoing public-sector involvement, such as through a public–private committee structure, as implemented in Singapore.143 An empirical study from South Korea also highlights the importance of a high-level committee structure, as the public-sector agency can work more effectively at peer level with the private-sector partners in a co-learning environment.144 Further, in the Covid-19 crisis episode, although the IPA took pre-emptive action to share impact with and support the project partners of public contracting authorities, there was less provision in relation to total relational outworking throughout the PPP network, including subcontractors. Although the IPA’s guidance directed their project partners to treat themselves as being in the shoes of public authorities providing public services,145 this was not clear as to whether project partners should treat their suppliers and subcontractors in the same manner and in the same framework that has been applied to them. This lacuna could result in contractual uncertainty or risk aversion behaviour down the supply chain. A collective and holistic governance framework is also important for benefts distribution and stakeholder management. The UK’s PFI has often been criticised as having infexible arrangements whereby governments end up paying high unitary charges for excessive risk transfer and are unable to share in excess benefts generated by the project, all profts going to the private-sector shareholders in the consortium.146 The Infrastructure and Projects Authority’s new Standard now calls for benefts to be better tracked and monitored,147 but it is uncertain if this includes adjustment for sharing. Perhaps this is not likely a thorny issue, as the UK government is a minority shareholder in projects. However, it is noted that the Scottish PPP model has adopted a structure of government-only equity in order to maximise the capture of benefts by the public sector, and the private sector would only have

143 Mohan M Kumaraswamy, Florence YY Ling and Aaron M Anvuur, ‘Team Building for PPPs’ in Akintoye and Beck (2009), ch8. 144 Sounman Hong and Taek Kyu Kim, ‘Public-Private Partnership Meets Corporate Social Responsibility: The Case of H-JUMP’ (2017) Public Money and Management, at https:// papers.ssrn.com/sol3/papers.cfm?abstract_id=2984496. 145 IPA, ‘Supporting Vital Service Provision in PFI /PF2 (and Related) Contracts during the COVID-19 Emergency’ (2 April 2020) at https://assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment_data/file/878059/2020_04_02_PFI_ and_COVID19_fnal.docx.pdf. 146 Chinyio and Gameson, ‘Private Finance Initiative in Use’ in Akintoye and Beck (2009), ch1. 147 Government Functional Standard GovS 002: Project Delivery (1 August 2018) at www. gov.uk/government/publications/project-delivery-functional-standard, ch7.1.1.

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debt claims against the special-purpose vehicle.148 Although commentators are uncertain that this is a superior framework for allocating benefts,149 the Parliamentary Committee has encouraged studying the model.150 Finally, stakeholder management is an aspect that can affect the success or failure of projects,151 but which could be ignored under more incentivedriven and atomistic arrangements.152 Under an incentive-based approach, the public-sector agency could transfer excessive risks to the private sector and leave the private sector to manage stakeholders. However, private-sector bodies are often not as well placed to manage stakeholders, as they may not be familiar with the public-interest expectations or demands raised by stakeholders and may not be able to communicate with or involve stakeholders effectively.153 Stakeholder management is important for project success, as stakeholder or public buy-in can affect the future demand for the public goods and services and ameliorate legal and reputational risks.154 Commentators opine that stakeholder management should be a shared responsibility between PPP partners.155 The Infrastructure and Project Authority’s Standard provides that stakeholders are expected to be engaged with in relation to changes, benefts, expectations and feedback for learning experience. They are also expected to be involved in the processes relating to assurance and closure of the project.156 Although there is clarity as to when stakeholders should be involved, there seems to be a lack of responsibility sharing as the private sector is made more explicitly responsible. The senior responsible owner has overall responsibility for engaging with key stakeholders157 and designing the stakeholder engagement framework, such as identifying stakeholders and communicating with them. Key appointments such as

148 Darinka Asenova and Matthias Beck, ‘Perspectives on the Future of the Public Private Partnership in the UK’ in Akintoye, Beck and Kumaraswamy (2016), ch21. 149 Mark Hellowell and Allyson M Pollock, ‘Non-Proft Distribution: The Scottish Approach to Private Finance in Public Services’ (2009) 8 Social Policy and Society 405. 150 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), para 43, p17. 151 De Schepper et al. (2014). 152 Turhani (2013). 153 De Schepper et al. (2014). 154 Siemiatycki and Farooqi (2012); Delmon (2017), ch3; Principles 9 and 23, OECD Principles for Private Sector Participation, Annex A, OECD (2010); Thillai A Rajan, Sheetal Sharad and Sidharth Sinha, ‘PPP in Greenfeld Airport Development: A Case Study of Cochin International Airport Limited’ in Akintoye and Beck (2009) at ch6. 155 Ibid, Ahmed M Abdel Aziz and Giovanni C Migliaccio, ‘Public Private Partnerships in the US Transportation Sector’ in Akintoye, Beck and Kumaraswamy (2016), ch22; Marie H Martin and Arie Halachmi, ‘Public-Private Partnerships in Global Health: Addressing Issues of Public Accountability, Risk Management and Governance’ (2012) 36 Public Administration Quarterly 190. 156 See n126. 157 The Role of the Senior Responsible Owner (18 July 2019) at www.gov.uk/government/ publications/the-role-of-the-senior-responsible-owner, para 3.1, p6.

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the portfolio manager also has responsibility for rolling out stakeholder engagement plans.158 There is no mention of public-sector involvement in co-managing stakeholders where this may be optimal or relevant. We are of the view that private-sector entities could beneft from public-sector involvement on this front as the public-sector agency may have more experience or background information in relation to public-interest expectations and demands. In sum, although the Authority’s Standard now clarifes a governance framework for the continuing outworking of project relationships and locations of personal responsibilities, there is still a strong tendency of transfer to the private sector, instead of considering where the optimal sharing may lie. Governance needs at the level of the private consortium One of the key relationships at the level of the private consortium would be the fnancier/s’ relationships with the special-purpose vehicle formed by the private consortium. The interests of fnanciers dominate governance arrangements, as it is important to safeguard fnancial returns. In turn, the publicsector agency may have less room to manoeuvre in governance arrangements in order to take policy decisions regarding the delivery of public goods and services. In the UK, where the DBFO structure is predominantly used, private fnance is sought to fund the PPP project, and this is often non-recourse fnancing for the special-purpose vehicle (or project fnance). Debt can be provided by a bank or a number of banks, and such debt may be collateralised against future revenues the project would generate such as highway tolls, or against lease revenues where the government agrees to a lease-back of the facility.159 However, Dewulf et al. note that in the wake of the credit crunch which started in 2007, and the global fnancial crisis thereafter, bank lending has become rarer and more expensive.160 In the alternative, a public issue or private placement of bonds may take place, and they can be attractive to long-term institutional investors such as pension funds.161 However, these also attract certain standardised debt servicing and governance obligations in order to meet the requirements of certain credit ratings.162 The debt levels incurred by the special-purpose vehicle are usually high, as equity contributions by the private-sector consortium can be as low as 5%.163 The

158 Government Functional Standard GovS 002: Project Delivery (1 August 2018) at www. gov.uk/government/publications/project-delivery-functional-standard, Ch5.2. 159 Arthur L Smith, ‘PPP Financing in the USA’ in Akintoye and Beck (2009), ch11. 160 Dewulf et al. (2012), ch6. 161 Ibid. 162 Freshfelds Bruckhaus Deringer, Financing PPPs by Project Bonds in Germany (2013) at https://www.infrapppworld.com/report/fnancing-ppps-with-project-bonds-in-germanyfreshfelds-bruckhaus-deringer 163 Chinyio and Gameson, ‘Private Finance Initiative in Use’ in Akintoye and Beck (2009), ch1.

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government would also be a minority shareholder. In the UK, the government used to not take any equity stake at all in the special-purpose vehicle, raising questions regarding the limitations that the government would face in making policy decisions regarding the ultimate delivery and standards of public goods and services to be provided by the PPP.164 The position has now changed, but to what extent the size of the government’s stake would incentivise the nature of the government’s governance conduct is questioned. It is envisaged that fnanciers’ discipline would extensively shape the governance of the project. Debt covenants could shape the fnancial management of the project, and there may be needs for project partners to obtain relevant insurances to hedge risks and even for public-sector guarantees in certain aspects such as guaranteeing certain levels of demand for the ultimate public goods or services.165 There is always a risk that fnancial management would become a pressing concern to the extent that decision making would be geared to meet those needs without holistic consideration.166 Further, contractual provisions can be infexible, and these can adversely affect the delivery of public goods and services as well as users’ and stakeholders’ interests if conditions change.167 As a matter of good governance according to the Standard of decision making discussed earlier, the public-sector partner of the PPP should consider the optimal stake for the government in relation to maintaining fexibility for addressing the needs of public interest in the project. Further, as the example of Carillion shows above, fnancial management is not merely at the level of the special-purpose vehicle. The fnancial mismanagement of Carillion ultimately affected the fnancial management of its projects and its relationships with its subcontractors. Hence it is important for the government to be better informed about the nature of consortia participants, in relation to their strength and viability as well as their experience and reliability.168 The Standard discussed above does not really address this issue, as its broad principle relates to suitable appointments to the project and the senior responsible owner must ultimately ensure such decision making is sound and justifed.169 Where the senior responsible owner is a private-sector appointment, they are infuenced by incentives such as cost

164 Discussed earlier. 165 Delmon (2017), ch7; Sadka (2008). 166 NAO (2002) in auditing the National Air Traffc Control Services PPP opined that debt servicing pressures could affect the performance of public services. This was experienced by the air traffc control services immediately after the September 11 attacks in New York in 2001. 167 Dewulf et al. (2012), ch6. 168 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018), paras 127–137, pp40–42. 169 Government Functional Standard GovS 002: Project Delivery (1 August 2018) at www. gov.uk/government/publications/project-delivery-functional-standard, ch4.3.

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and familiarity170 in making appointments, and there does not seem to be provision for ex ante and ongoing public-sector scrutiny of relevant contractual data regarding the web of contracts for the project, including subcontractor data. This is a lacuna that has been mentioned by the Parliamentary Committee.171 The Infrastructure and Projects Authority should maintain ongoing diligence and knowledge of fnancial risks that may emanate from the web of contractual relationships at the level of the private-sector consortium.172 It is arguable that as the Authority has the responsibility for annual public reporting on project data and performance, it would be incentivised to gather suffcient information and knowledge about its private-sector partners. It is crucial to ensure that the government enhances the levels of commercial understanding and capacity on the part of its staff173 so that they monitor not only project-level information but also partner-level information that may have implications for the project. Another issue that could arise with the overemphasis of fnanciers’ discipline over the project would be how fnanciers would manage an exogenous crisis or shock like the Covid-19 onset in early 2020. It has been pointed out by commentators that projects can be threatened if fnanciers took a strict view with regard to strict repayments, and in view of economic contraction during the crisis, forbearance and delays may be important.174 However, the scale of forbearance or risk absorption demanded of the fnancial sector could also affect its resilience. In view of these challenges, a more holistic programme of managing fnancial discipline, risk and success of the project is needed, with the IPA more intimately involved in the total network engagement amongst PPP constituents and not just the immediate project partners. Another issue at the level of interrelationships in the private consortia is that of risk allocation amongst the consortia members. Demirag et al.175 fnd that where the public-sector agency aggressively and excessively transfers risk to the private sector, this adversely affects risk allocation in the interrelationships at the consortia level, as contractors would also try to excessively allocate risks to subcontractors. For example, subcontractors may be asked to quote fxed prices and absorb overruns. This diffusion of risk through the network creates a general culture of incentive-driven and self-centred behaviour. As commentators have pointed out, in relation to critical success factors for PPPs, effective sharing and allocation of risk is

170 171 172 173 174

Siemiatycki (2011). See n157. Ibid. Ibid., paras 115–126, pp37–40. Norton Rose Fullbright, ‘COVID-19 and the Impact on Public-Private Partnerships in the UK’ (March 2020) at www.nortonrosefulbright.com/en/knowledge/publications/ c13580f6/covid-19-and-the-impact-on-public-private-partnerships-in-the-uk. 175 Demirag et al. (2012).

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crucial,176 and this often means that risks are allocated and retained appropriately, and risks can be jointly shared where appropriate. There is a need for a governance framework for effective risk allocation, and although the Standard refers to collective risk management in the project,177 risk management in the Standard is still predominantly a siloed affair. This is because risk management is considered from the point of view of individual consortium partners’ risk appetites, and there is little guidance on what collective risk management looks like. The Standard envisages that risks should be identifed and assigned an ‘owner’ for primary leadership in addressing the risk.178 Further risks should be set within each organisation’s own risk appetite and enterprise risk management processes.179 Although the Standard’s insistence on individual responsibility achieves the focusing of attention by responsible individuals so that they are not shielded behind organisational liability, there can be further provision for frameworks of collaboration without losing the incentives for ‘personal ownership’ of responsibility. In sum, we argue that at all three levels of governance relevant to PPPs, there is scope for more relational support to moderate the highly incentivedriven frameworks that are already in place. We recognise that the Project Delivery Standard is the beginning of a more relational governance framework, and we propose that further aspects can be strengthened. We turn next to two options in the reframing of PPPs in a more relational and governance-based architecture. The frst is the enhancement of the existing contractual framework, adding to the work achieved under the Project Delivery Standard, and the second is more radical, considering an organisational overhaul of the special-purpose vehicle.

Organisational and governance options for PPPs In this section we consider how an enhanced ‘organisational’ and ‘governance’ framing of PPPs can be achieved. First, a natural and incremental place to start is to acknowledge that the Infrastructure and Projects Authority’s Project Delivery Standard already goes some way towards constructing an overall framework for the web of contractual arrangements in the PPP. The Standard covers all parties to the PPP, from the public-sector agency to private-sector consortia partners, and is worded in general terms in order to cover all types of contractual relationships. The broad principles cover how decision making should be carried out, who should be appointed to positions

176 See n76. 177 Government Functional Standard GovS 002: Project Delivery (1 August 2018) at www. gov.uk/government/publications/project-delivery-functional-standard, ch7.2.4. 178 Ibid. 179 Ibid. and ch2.2, 5.1.

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of responsibility and their roles and tasks, how key roles should relate with each other, how stakeholders should be engaged with and key stages of projects and key tasks that need to be fulflled. The Standard has the status skin to a meta contract that is a governance framework for all PPPs. Its status at the moment is arguably soft law, as it sets out government expectations for broad aspects of project management and delivery and cannot be as specifc as contractual stipulations for projects. However, the Standard contains a variety of ‘mandatory’ and ‘encouraged’ provisions,180 therefore accommodating different extents of ‘hardness’ in its soft law. The enforceability of the terms of the Standard may depend on its incorporation into project contracts with SPVs and to what extent its terms align with specifc contractual stipulations. Further, it remains uncertain to what extent it would be incorporated into contractual arrangements amongst private-sector parties at the consortia level. However, the Standard should frst reshape the government’s conduct and its governance at the frst level discussed in the previous section, so that the government can build up experience and capacity in evaluating private-sector consortia partners in accordance with their compatibility with the Standard. Government leadership in internalising the Standard and holding to its consistent application would be crucial for the Standard to become effective soft law throughout the PPP arrangement. Nevertheless, as argued above, we are of the view that certain areas in the Standards can still be improved, such as the consideration of optimal risk allocation and sharing, more ongoing collaborative frameworks for problem solving without undermining the sense of individual responsibility vested in appointed key persons and explicit frameworks for considering how public interest is to be met and how benefts may be allocated. More radically, it can be considered whether the SPV can be organisationally overhauled into a public-service corporation. Such organisational reform provides the architecture for governance norms for all constituents of the public-service corporation, making them binding and providing for the enforcement of such norms inter se. In instituting such a device for structuring PPPs, the suboptimalities of a contractual-only structure can be addressed, i.e. the lack of multilateral duties or standards or the lack of express provision that binds all parties to a common and ultimate purpose, i.e. the effcient and effective delivery of public services. Public-service corporations for PPPs? In the US, the Wisconsin Public Service Company is an example of a private company (owned by a fnancial institution) incorporated to provide public goods, i.e. gaslight from the early 1820s right up to today’s utilities services

180 Ibid., p2.

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and energy needs.181 One may say that this is in the tradition of the oldfashioned chartered corporation, where a corporate person is established by legislation for certain purposes that would serve the public interest, and is therefore bound by legislative provisions that relate to its objectives, governance, accountability, etc. The chartered company was also an old icon of monopolistic interests sanctioned by the government, such as in the case of the English East India Company or the South Sea Company.182 Indeed the South Sea Company was referred to as equivalent to a modernday PPP.183 It issued debt in order to fund the government and explored trade in South America. However, the monopolistic nature of these corporations attracted many gullible investors who were unaware of nefarious activities that these corporations carried out in colonies, such as slave trading. When the War of the Spanish Succession broke out and disrupted the South Sea Company’s trade, the company plunged into fnancial disaster and its stock price collapsed. Eventual insolvency caused fnancial ruin for many investors. In 1825, an Act of Parliament repealed the charter that protected monopolistic companies like the South Sea Company.184 Many chartered companies that remain today have been historically established for specifc purposes, such as the Bank of England or the Royal Academy and many universities. Given the history of chartered corporations with commercial incentives and operations, it may not be entirely wise to refashion the PPP backwards into history. However, it is queried if a new corporate category of the ‘public-service corporation’ can be created that distinctly mandates the corporate person to serve certain public-interest purposes.185 This would be different from the chartered corporation whose commercial purposes could be undefned and whose charter was mainly to protect its monopoly. In particular, we suggest that the SPV should be incorporated as a public-service corporation. It may be queried whether we need a new legal form of a public service corporation, as existing legal forms such as the UK’s Community Interest Company (CIC), discussed in Chapter 8, provides a legal framework for a corporate person to be incorporated but tied to the service of community interest as approved by the regulator. Although the CIC can be a model to consider, the legal framework for the CIC does not arguably meet the needs of a public-service corporation. The CIC envisages funding by members’ equity that is subject to restrictions in return in order to protect the fulflment of the objectives of the CIC and capped interest rate payments

181 See https://accel.wisconsinpublicservice.com/company/history.aspx. 182 Adrian Wooldridge and John Micklethwait, The Company: A Short History of a Revolutionary Idea (London: Weidenfeld & Nicholson 2005), chs 1–3. 183 See Wikipedia entry, at https://en.wikipedia.org/wiki/South_Sea_Company. 184 Act of Parliament of 1825 that repealed the Bubble Act of 1720. 185 This was proposed in the Institute of Director’s response to the Joint Parliamentary Committees’ inquiry into the collapse of Carillion.

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on debt issued. However, the public-service corporation may be fnancially structured differently, as signifcant debt is usually involved. What is needed may be express provisions on minimum levels of equity funding, especially for the government agency partner. It is envisaged that the public-service corporation should be a new legal form with a specifc defnition of public service and governance and fnancial provisions tailored to meet the needs of the PPP. ‘Public service’ can be defned in the vein of the economic understanding of public goods and services and having a signifcant stakeholder footprint. In this manner, the public-service corporation has specifc objectives that relate to serving public interest or providing public goods and services, distinguishing it from today’s commercial corporations whose ‘objects are presumed to be unlimited’186 unless specifcally stated to the contrary in the company’s constitution. Such objectives provide an overriding check upon the incentives of the various partners in the SPV. They also constrain the bilateral framing of contractual relations, such as in relation to risk allocation and transfer, in order to protect public interest. Two company law doctrines are of special relevance to the public-service corporation in order to safeguard its public-interest objectives. One is that the doctrine of ultra vires applies in order to protect the company from transactions that do not accord with its public-interest objectives.187 Historically, the doctrine of ultra vires has also been used, for example, by companies themselves to get out of transactions that they had remorse for afterward, and such practice could be exploitative of third parties.188 In the US, doctrines were developed to mitigate the harshness of ultra vires application against third parties,189 while the EU introduced a legislative provision to protect third parties.190 The UK Companies Act 2006 ultimately relegated the ultra vires doctrine to a position of little importance by abolishing the need for objects clauses for for-proft companies.191 In the US, even early opinion critical of the abuses of the ultra vires doctrine took the view that such a doctrine would be more strictly upheld in the case of public-service corporations, as public interest was at stake.192 We see the ultra vires doctrine as being useful for the PPP, as it holds the SPV to

186 S31, Companies Act 2006. 187 Ashbury Ry Carriage and Iron Co v Riche (1879) LR 7 HL 653. 188 A.G. v G.E. Ry (HL) (1879) 5 App Cas 473; Rolled Steel Products v British Steel Corp. (CA) [1985] 2 WLR 908. 189 Herbert Hovenkamp, ‘The Classical Corporation in American Legal Thought’ (1988) 76 Georgetown Law Journal 1593, at 1664–1666; Robt L McWilliams, ‘Ultra Vires Corporate Acts Under the California Decisions’ (1917–1918) 6 California Law Review 319. 190 First EC Company Law Directive (68/151/EEC), Art.9. 191 S31, Companies Act 2006. 192 J B Whitfeld, ‘Rights and Duties of Public Service Corporations’ (1912–1913) 22 Yale Law Journal 39.

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public-interest objects and allows the government as a minority shareholder to challenge actions that may be contrary to this doctrine. The possibility of ultra vires challenges also provides incentives for the private-sector consortium to internalise the importance of public-interest objectives. This serves to discipline incentive-driven behaviour that may confict with attainment of such objectives. In other words, the ultra vires doctrine operating in the context of a public-service corporation may provide governance effects. However, we are also mindful of the abuses of the ultra vires doctrine which can be narrowly interpreted to allow the company to get out of an unfavourable contract. Judicial exposition193 in the purpose of transactions and not just the literal iteration of what is constitutionally included serves to discipline against opportunistic and literal use of the doctrine, but not all potential abuses can be prevented ex ante. Next, it is a director’s duty to adhere to the constitution and to act according to ‘proper purpose’.194 Directors, therefore, could be open to personal liability for ultra vires transactions. A number of cases have also interpreted proper purpose as relating to governance actions, such as between the Board and shareholders, that should facilitate the proper outworking of the company’s organs.195 In this manner, the existing provision on a director’s duty may provide discipline to ensure that directorial powers secure and do not subvert the government’s role in upholding public interest relating to the PPP. It may be argued that the existing director’s duty to promote the success of the company for the beneft of its members as a whole already requires balanced decision making to take into account the government shareholder’s public interest stake as well as to have due regard to a range of stakeholder interests.196 Further, this provision is supported by the need for directors to report yearly on how they have discharged the above duty.197 Would this not be suffcient to ensure that directors of the SPV behave properly and that there is no need to rely on the ultra vires doctrine? However, as the failure of Carillion indicates, sub-optimal directorial conduct198 at the level of the parent company could affect the discharge of such functions by parent company representatives in SPVs. Such conduct can often be framed as navigating a course amongst dilemmas and conficts between different interests, making the veracity of directorial decisions diffcult to judge ex ante. The availability of the ultra vires challenge can bring public-interest

193 Re Introductions Ltd [1970] Ch 199; Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246. 194 S171, Companies Act 2006. 195 Howard Smith v Ampol Petroleum [1974] AC 821; JKX Oil v Eclairs and Glengary [2015] UKSC 71, obiter only. 196 S172, Companies Act 2006. 197 S414CZA, Companies Act 2006, amended in 2018. 198 Pointed out by the BEIS and Work and Pensions Parliamentary Committee, Carillion (2018) at p4, para 21, p19.

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objectives to the forefront and empower the government to challenge both the transaction and responsible directors. At the government’s end, capacity for ongoing engagement, knowledge and monitoring of PPPs is essential for such power to be meaningfully used. Further, particular governance rules can be provided for public-service corporations in order to refect its overriding objective, such as in relation to Board composition as well as governance and power structures. A possibility mooted by the Institute of Directors in responding to the Joint Parliamentary Inquiry into the collapse of Carillion included stakeholder representation as an organ of corporate governance in public-service corporations. This could ensure that stakeholder interests are represented at decision making. Further, the stakeholder organ could also share power with shareholders such as in relation to decisions such as appointment or removal of directors.199 It may be argued that a public-service corporation is not an optimal option, as the private sector would not be incentivised to take up PPP concessions if they are constrained in being able to carry out their commercial decisions with certainty and make the project proftable for them. Financiers may not be attracted to fund with such constraints, making PPPs impossible. In this manner, the Scottish model represented what was feasible between meeting public- and private- sector interests. Its ‘Non Proft Distribution’ model reserves all benefts to the public sector as shareholder, while the private-sector fnanciers can only be bondholders. This model preserves the maximum discretion for the public sector to ensure that policymaking is not constrained. However, it is uncertain that this model is less expensive than that found in England, as bondholders are compensated at a premium for not being able to enjoy excess benefts.200 Nevertheless, there is room to consider if private-sector fnanciers may be attracted to fund PPPs that are public-service corporations, as such fnance can be characterised to be ‘responsible’, ‘sustainable’ or ‘green’, such as in relation to constructing and operating green energy facilities. In the EU, for example, there is a policy push201 towards stimulating the market for sustainable fnance. Policy initiatives include encouraging the corporate sector to invest in and engage in sustainable practices as well as encouraging conventional fund managers to invest in sustainable fnance that achieves defned public-interest outcomes.202 EU legislation such as

199 Iris H.-Y. Chiu, ‘Operationalising A Stakeholder Conception in Company Law’ (2017) 10 Law and Financial Markets Review 173. 200 Hellowell and Pollock (2009). 201 EU High Level Expert Group on Sustainable Finance (HLEG), Financing a Sustainable European Economy (2018) (HLEG, 2018). 202 Art 2, Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the fnancial services sector.

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the  Non-fnancial Reporting Directive 2014203 is a step towards making existing companies engage with and disclose various matters in the realm of ‘environmental, social and governance’ issues. Chiu has also discussed a slew of post-global fnancial crisis regulatory initiatives aimed at making corporate behaviour more socially responsible.204 In the EU and the UK,205 investors are also called upon to more actively engage with their investments in order to promote companies’ attention to and performance in ‘environmental, social and governance’ issues. There is scope for new businesses to develop focused sustainable and responsible initiatives, such as by adopting one or more of the UN’s Sustainable Development Goals.206 EU policymakers have also taken steps to explicitly defne the expected outcomes of a number of these sustainable goals in order to facilitate investment into environmental-focused initiatives.207 Fund managers are provided with a legal framework where they must integrate ‘environmental, social and governance issues’ into everyday investment management,208 and they may do so by investing in investment opportunities that meet the defned goals stated above. Investments in such opportunities can be marketed across the EU under sustainable fnance labels related to those goals to be achieved.209 The ‘taxonomy’ of sustainable fnance is a starting point to pin down what outcomes and performance in sustainable fnance means and could in time extend to other forms of social and governance goals. Investors are not only being nudged210 to invest in sustainable and responsible fnance but have an appetite to do so.211 We see public-service corporations as being a possibly attractive product in the sustainable fnance market, and their objectives can be aligned with the defned sustainable goals set out by the EU in order to attract funding by mainstream institutional funds, whether by equity participation or as purchasers of bonds.212 Indeed, institutional funds have become increasingly attracted

203 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-fnancial and diversity information by certain large undertakings and groups. 204 Iris H.-Y. Chiu, ‘An Institutional Theory of Corporate Regulation’ (2018) 71 Current Legal Problems 279. 205 Arts 3g(1)(a), 3i(1), Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement. 206 www.un.org/sustainabledevelopment/sustainable-development-goals/. 207 See n201. 208 See n202. 209 Ibid. 210 See below. 211 George Sullivan, ‘ESG Integration on the Rise: And How to Implement it in Your Portfolio’ (23 April 2018) at www.aima.org/journal/aima-journal-edition-114/article/esgintegration-on-the-rise-and-how-to-implement-it-in-your-portfolio.html. 212 Gopalan (2014).

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to asset classes such as infrastructure213 as institutions look to diversifcation from traditional corporate equities and corporate and sovereign bonds in order to obtain yield.214 The foray by institutional funds into sustainable fnance, facilitated by the EU’s public policy initiatives, provides a ripe context for rethinking how PPPs, which are meant to service public interest, can be redesigned.

Conclusion This chapter looked at public–private partnerships as hybrid contractualorganisational constructs and proposed to offer a perspective from organisations and governance in order to address well-reviewed areas of governance shortcomings. These shortcomings are commonly a refection of incentivedriven positions taken by various parties albeit in a long-term relational arrangement. The chapter argued that there are three levels of governance frameworks that can be established for PPPs in order to support their longterm and relational nature so as to promote their success and meeting of public-interest objectives. These can be instituted as meta-level soft law incorporated into contracts to different extents, but we proposed that it is worthwhile considering a more radical option. The special-purpose vehicle for the PPP can be incorporated as a public-service corporation so that it is internally disciplined to balance private-sector incentives and the ultimate delivery of public goods and services. Further, the public-service corporation can plug into new policy initiatives and investment appetites for sustainable fnance, meeting public-interest needs in sustainability as well as the contemporary needs and appetites of investors in capital markets for sustainable and responsible products.

Bibliography Akintoye, Akintola and Beck, Matthias (eds), Policy, Finance & Management for Public-Private Partnerships (Chichester: Wiley Blackwell 2009) Akintoye, Akintola, Beck, Matthias and Hardcastle, Cliff, Public Private Partnerships: Managing Risk and Opportunities (Oxford: Blackwell Science 2003) Akintoye, Akintola, Beck, Matthias and Kumaraswamy, Mohan (eds), Public Private Partnerships: A Global Review (Oxford: Routledge 2016) BEIS and Work and Pensions Parliamentary Committee, Carillion (2018) Casady, Carter B, Eriksson, Kent, Levitt, Raymond E and Scott, Richard W, ‘Examining the State of Public-Private Partnership (PPP) Institutionalization in the United

213 E.g. Ingo Walter et al., The Infrastructure Finance Challenge (Cambridge: Open Book Publishers 2016). 214 ‘Hunt for yield pushes more investors into riskier assets’ (Financial Times, 29 November 2016).

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States’ (2018) 8 The Engineering Project Organization Journal at https://ssrn.com/ abstract=3317770 Cheung, Esther, Chan, Albert PC and Kajewski, Stephen, ‘Factors Contributing to Successful Public Private Partnership Projects: Comparing Hong Kong with Australia and the United Kingdom’ (2012) 10 Journal of Facilities Management 45 Chiu, Iris H-Y, ‘Operationalising A Stakeholder Conception in Company Law’ (2017) 10 Law and Financial Markets Review 173 Delmon, Jeffrey, Public–Private Partnership Projects in Infrastructure (New York: Cambridge University Press 2017) Demirag, Istemi, Khadaroo, Iqbal, Stapleton, Pamela and Stevenson, Caral, ‘The Diffusion of Risks in Public Private Partnership Contracts’ (2012) 25 Accounting, Auditing and Accountability Journal 1317 De Schepper, Steven, Dooms, Michaël and Haezendonck, Elvira, ‘Stakeholder Dynamics and Responsibilities in Public – Private Partnerships: A Mixed Experience’ (2014) 32 International Journal of Project Management 1210 Dewulf, Geert, Blanken, Anneloes and Bult-Spiering, Mirjam, Strategic Issues in Public Private Partnerships (Chichester: Wiley-Blackwell 2012) EU High Level Expert Group on Sustainable Finance (HLEG), Financing a Sustainable European Economy (2018) Foo, Loke-Min, Asenova, Darinka, Bailey, Stephen and Hood, John, ‘Stakeholder Engagement and Compliance Culture’ (2011) 13 Public Management Review 707 Freshfelds Bruckhaus Deringer, ‘Financing PPPs by Project Bonds in Germany’ (2013) at www.eib.org/attachments/epec/epec_fnancing_ppps_project_bonds_ in_germany_en.pdf Goodlife, Mike, ‘The New UK Model for Air Traffc Services – A Public Private Partnership Under Economic Regulation’ (2002) 8 Journal of Air Transport Management 13 Gopalan, Kalpana, ‘Public Private Partnerships: A Study in Organisational Design’ (2014) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2382648 Greve, Carsten and Hodge, Graeme, ‘Public Private Partnerships and Public Governance Challenges’ in Stephen P Osborne (ed), The New Public Governance: Emerging Perspectives on the Theory and Practice of Public Governance (Oxford: Routledge 2010) at 149ff Hellowell, Mark and Pollock, Allyson M, ‘Non-Proft Distribution: The Scottish Approach to Private Finance in Public Services’ (2009) 8 Social Policy and Society 405 Hodges, Ron and Mellett, Howard, ‘The U.K. Private Finance Initiative: An Accounting Retrospective’ (2012) 44 The British Accounting Review 235 Hong, Sounman and Kim, Taek Kyu, ‘Public-Private Partnership Meets Corporate Social Responsibility: The Case of H-JUMP’ (2017) Public Money and Management, at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2984496 Hovenkamp, Herbert, ‘The Classical Corporation in American Legal Thought’ (1988) 76 Georgetown Law Journal 1593 James, Andrew D, Cox, Deborah and Rigby, John, ‘Testing the Boundaries of Public Private Partnership: The Privatisation of the UK Defence Evaluation and Research Agency’ (2005) 32 Science and Public Policy 155 Khadaroo, Iqbal, ‘The Valuation of Risk Transfer in UK School Public Private Partnership Contracts’ (2014) 46 The British Accounting Review 154

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Kurniawan, Fredy, Ogunlana, Stephen and Motawa, Ibrahim, ‘Stakeholders’ Expectations in Utilising Financial Models for Public-Private Partnership Projects’ (2014) 4 Built Environment Project and Asset Management 4 Lane, Jan Erik, New Public Management (London and New York: Routledge 2002) Martin, Marie H and Halachmi, Arie, ‘Public-Private Partnerships in Global Health: Addressing Issues of Public Accountability, Risk Management and Governance’ (2012) 36 Public Administration Quarterly 190 McWilliams, Robt L, ‘Ultra Vires Corporate Acts Under the California Decisions’ (1917–1918) 6 California Law Review 319 Mohammed, Ibrahim A and Shaoush, Omer S, ‘Critical Success Factors for the Public-Private Partnership in Electric Infrastructure Projects in HadhramoutYemen’ (2018) 9 International Journal of Civil Engineering and Technology 1971 National Audit Offce, The Operational Performance of Prisons in PFI (2002–2003) National Audit Offce, ‘PFI and PF2’ (2018) at www.nao.org.uk/wp-content/ uploads/2018/01/PFI-and-PF2.pdf National Audit Offce, ‘Projects Leaving the Government Major Projects Portfolio’ (19 October 2018) at www.nao.org.uk/press-release/projects-leaving-thegovernment-major-projects-portfolio/ OECD, Dedicated Public-Private Partnership Units: A Survey of Institutional and Governance Structures (2010) Osei-Kyei, Robert and Chan, Albert PC, ‘Review of Studies on the Critical Success Factors for Public – Private Partnership (PPP) Projects from 1990 to 2013’ (2015) 33 International Journal of Project Management 1335 Public Administration and Constitutional Affairs Committee of the Parliament, After Carillion: Public Sector Outsourcing and Contracting (July 2018) Reeves, Eoin, ‘Public-Private Partnerships in Ireland: A Review of the Experience 1999–2012’ (2013) at https://ssrn.com/abstract=2215795 Sadka, Efraim, ‘Public-Private Partnerships: A Public Economics Perspective’ (2006) at https://ssrn.com/abstract=901868 Sanni, Afeez Olalekan, ‘Factors Determining the Success of Public Private Partnership Projects in Nigeria’ (2016) 16 Construction Economics and Building 42 Sarmento, Joaquim Miranda and Renneboog, Luc, ‘Anatomy of Public-Private Partnerships: Their Creation, Financing and Renegotiations’ (2016) 9 International Journal of Managing Projects in Business 94 Siemiatycki, Matti, ‘Public-Private Partnership Networks: Exploring BusinessGovernment Relationships in United Kingdom Transportation Projects’ (2011) 87 Economic Geography 309 Siemiatycki, Matti, ‘Public-Private Partnerships in Canada: Refections on Twenty Years of Practice’ (2015) 58 Canadian Public Administration 343 Siemiatycki, Matti and Farooqi, Naeem, ‘Value for Money and Risk in Public  – Private Partnerships’ (2012) 78 Journal of the American Planning Association 286 Turhani, Ali, ‘Governance of Public-Private Partnerships: Lessons Learned from an Albanian case’ (2013) 3 JEEMS 371 Walter, Ingo et al, The Infrastructure Finance Challenge (Cambridge: Open Book Publishers 2016). Whitfeld, J B, ‘Rights and Duties of Public Service Corporations’ (1912–1913) 22 Yale LJ 39

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Wibowo, Andreas, and Wilhelm Alfen, Hans, ‘Government-led Critical Success Factors in PPP Infrastructure Development’ (2015) 5 Built Environment Project and Asset Management 121–134 Zheng, Jurong, Roehrich, Jens K and Lewis, Michael A, ‘The Dynamics of Contractual and Relational Governance: Evidence from Long-Term Public–Private Procurement Arrangements’ (2008) 14 Journal of Supply and Purchasing Management 43

7

The platform economy and the law of organisations and governance Iris H-Y Chiu

Introduction This chapter and chapter 9 turn to discuss business models that foster and leverage upon mass participation, usually by ordinary retail-level citizens. These business models present new organisational features that are often diffcult to ft into the existing categories of market or hierarchy1 and raise questions for reconfgurations in regulations2 and law.3 They are not totally decentralised in terms of organisational structure or governance but are often dispersed in terms of geographical presence4 or even borderless in nature.5 We locate the discussion of the platform economy6 and the blockchain or distributed ledger technology-based (DLT-based) business model7 as thematically linked. The platform economy and DLT-based business model both leverage upon technological transformations. The platform economy can be

1 Rashmi Dyal-Chand, ‘Regulating Sharing: The Sharing Economy as an Alternative Capitalist System’ (2015) 90 Tulane Law Review 241; Bronwen Morgan and Declan Kuch, ‘Radical Transactionalism: Legal Consciousness, Diverse Economies, and the Sharing Economy’ (2015) 42 Journal of Law and Society 556. 2 Ruth Berins Collier, V.B. Dubal and Christopher L. Carter, ‘Disrupting Regulation, Regulating Disruption: The Politics of Uber in the United States’ (2018) 16 Perspectives on Politics 919; Benjamin Edelman and Damian Geradin, ‘Effciencies and Regulatory Shortcuts: How Should We Regulate Companies Like Airbnb and Uber?’ (2016) 19 Stanford Technical Law Review 293; Wulf Kaal and Erik P.M. Vermeulen, ‘How to Regulate Disruptive Innovation from Facts to Data’ (2017) 57 Jurimetrics 169; Derek McKee, ‘The Platform Economy: Natural, Neutral, Consensual and Effcient?’ (2017) 8 Transnational Legal Theory 455. 3 Morgan and Kuch (2015), Michele Finck and Sofa Ranchordas, ‘Sharing and the City’ (2016) 49 Vanderbilt Journal of Transnational Law 1299. 4 Jonas Andersson Schwarcz, ‘Platform Logic: An Interdisciplinary Approach to the PlatformBased Economy’ (2017) 9 Policy and Internet 374. 5 Pablo Muñoz and Boyd Cohen, ‘Mapping out the Sharing Economy: A Confgurational Approach to Sharing Business Modeling’ (2017) 125 Technological Forecasting and Social Change 21; Andrea Geissinger, Christofer Laurell and Christian Sandström, ‘Digital Disruption beyond Uber and Airbnb – Tracking the Long Tail off the Sharing Economy’ (2019) Technological Forecasting and Social Change, forthcoming. 6 Next section. 7 Later in this chapter.

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regarded as a precursor to the DLT-based business model in terms of novel production, value creation, fostering new exchange and socio-economic relationships, communities and even ethos.8 The distinguishing feature of DLTbased business models is the use of ‘tokens’ which are standardised pieces of code fulflling ‘smart contracting’ purposes of auto-executing transactions on the DLT platform.9 Tokens potentially revolutionise transaction standardisation and effciency of exchange, potentially bringing about a new form of democratic capitalism.10 This chapter focuses on the platform economy. We argue that the economic sociology of many platform business models is ill-served by traditional organisational framing in law such as in corporate law. As a consequence, corporate law and governance norms are applied in limited ways and for the purposes of allocating economic benefts in a disproportionate manner. Further, the default to contractual or self-governance is often defective due to a lack of ‘organisational’ framing in aspects of socio-economic relations on the platform economy. We argue for reconfgurations in organisational framing and governance norms for platforms and believe that such a reconfguration is a necessary complement to the larger picture of the regulatory/ governance defcit for platform economies.11

The platform economy The platform economy has been called by other names. One of the most popular is ‘the sharing economy’, based on the idea of marketising access to assets instead of promoting traditional consumption to attain ownership of whole assets.12 This idea is possible, as certain large assets like a home or car

8 Muñoz et al. (2017); Johanna Mair and Georg Reischauer, ‘Capturing the Dynamics of the Sharing Economy: Institutional Research on the Plural Forms and Practices of Sharing Economy Organizations’ (2017) 125 Technological Forecasting and Social Change 11; Aurélien Acquier, Thibault Daudigeos and Jonatan Pinkse, ‘Promises and Paradoxes of the Sharing Economy: An Organizing Framework’ (2017) 125 Technological Forecasting and Social Change 1; Martin Kenney and John Zysman, ‘The Rise of the Platform Economy’ (2016) Issues in Science and Technology 61. 9 Nick Szabo,‘Smart Contracts: Building Blocks for Digital Markets’, University of Amsterdam (1996), at www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/ LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html; Bastien Buchwalter, ‘Decrypting Cryptoassets: A Classifcation and Its Implications’ (2019) at https://ssrn.com/ abstract=3271641. 10 Arun Sundarajan, ‘The Economic Impact of Crowd-sourced Capitalism’ in The Sharing Economy (Cambridge, MA: MIT Press 2016) at ch5; Alex Pazaitisa, Primavera De Filippi and Vasilis Kostakis, ‘Blockchain and Value Systems in the Sharing Economy: The Illustrative Case of Backfeed’ (2017) 125 Technological Forecasting and Social Change 105. 11 Above cites in n2. 12 Sundarajan (2016), ch1; Rachel Botsman and Roo Rogers, What’s Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live (New York: Collins 2011).

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may be underutilised at times,13 such as a spare room or spare capacity in a privately owned car. Marketising access to such assets, such as in the homesharing or ride-sharing business models of AirBnB, Couchsurfng, Uber, Lyft and BlaBlaCar, can meet a variety of urban consumption needs.14 The ‘sharing’ or ‘collaborative’15 manner of consumption is the business model underlying many large and successful platform economies such as AirBnB, Uber, Lyft and other businesses involving food and fashion.16 Critics have raised concerns about the ‘sharing’ framing, as such business models are commoditised spheres of domestic life, personal time or space, presenting ‘on-demand’ access and choice for consumers. They are an extension of consumption-led capitalism, not an alternative form of socially led capitalism that promotes community ethos or sustainable consumption.17 Nevertheless, the business model of commoditising on-demand access to ‘underutilised assets or spare capacity’ is only one of the business models made possible on the platform economy. The term ‘platform’ economy, which focuses on the enabling technology instead of the business model, is more neutral,18 and such technology allows the ‘fattening’ of hierarchies for economic agency and brings changes to the traditional nature of economic activity. There is no longer a necessary hierarchical divide between business and retail, as platforms allow retail-level participants to assume economic agency like business but on a more casual basis. This can be quite empowering, as some people can supplement their main income,19 such as holiday lets on AirBnB or occasional jobs on TaskRabbit, or even carry out their main economic agency.20 Platforms facilitate a ‘peer-to-peer’ economy that gal-

13 14 15 16

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Sundarajan (2016). Finck and Ranchordas (2016). Botsman and Rogers (2011). Andrea Geissinger, Christofer Laurell and Christian Sandström, ‘Digital Disruption Beyond Uber and Airbnb – Tracking the Long Tail off the Sharing Economy’ (2019) Technological Forecasting and Social Change, forthcoming. David Murillo, Heloise Buckland and Esther Val, ‘When the Sharing Economy Becomes Neoliberalism on Steroids: Unravelling the Controversies’ (2017) 125 Technological Forecasting and Social Change 66; Christofer Laurell and Christian Sandström, ‘The Sharing Economy in Social Media: Analyzing Tensions Between Market and Non-Market Logics’ (2017) 125 Technological Forecasting and Social Change 58. Kenney and Zysman (2016). Diana Farrell, Fiona Greig and Amar Hamoudi, ‘The Evolution of the Online Platform Economy: Evidence from Five Years of Banking Data’ (2019) 109 AEA Papers and Proceedings 362–366; Deborah Meilhan, ‘Customer Value Co-Creation Behavior in the Online Platform Economy’ (2019) 7 Journal of Self-Governance and Management Economics 19. Willem Pieter De Groen, Zachary Kilhoffer, Karolien Lenaerts and Nicolas Salez, ‘The Impact of the Platform Economy on Job Creation’ (2017) 6 Intereconomics 345 show that just over 10% of workers in the EU are carrying out full-time economic activity on platforms. Vili Lehdonvirta, Otto Kässi, Isis Hjorth, Helen Barnard and Mark Graham, ‘The Global Platform Economy: A New Offshoring Institution Enabling Emerging-Economy Microproviders’ (2019) 45 Journal of Management 567.

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vanises economic opportunities21 for many that would have been deterred by the need to institute a formal business form or to dedicate ‘specialised’ commitment to conduct economic activity. In the sector of crowdfnance, for example, the business models of peer-to-peer lending or equity/reward crowdfunding by start-up businesses give both entrepreneurs and investors access to opportunities that would hitherto have been limited to fnancial institutions such as banks and private equity funds.22 Commentators have raised concerns about the nature of such ‘peer-topeer’ or ‘gig’ economies where established institutions such as consumer protection23 or employment rights may be undermined due to the indeterminate nature of new economic arrangements.24 Further, the possibly casual nature of transactions cause diffculties with categorising economic activity as business that ought to be subject to traditional licensing and regulatory regimes. This is the case with work in the ‘gig economy’,25 the occasional holiday let versus the established hospitality industry,26 as well as the driver carrying out ride-sharing in his/her privately owned car. The latter issue has been raised in litigation in the EU involving Uber,27 and Uber’s attempt to categorise itself as an information-service provider that matches available

21 Bridgette Wessels, ‘Virtual Exchange-Based Mobilities: Platform Economy, Exchange and Culture’ (2018) 3 Applied Mobilities 51–65. 22 Anders Broström, Ali Mohammadi and Ed Saiedi, ‘Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending’ (2018) at https://ssrn.com/abstract=3124301 arguing that p2p lending provides a substitution for traditional fnancing avenues; Lucia Gibilaro and Gianluca Mattarocci, ‘Peer-to-peer Lending and Real Estate Mortgages: Evidence from United Kingdom’ (2018) 11 Journal of European Real Estate Research 319– 334 argues that p2p fnance are able to serve market segments for the underserved by traditional institutions. 23 Diana Cao, ‘Regulation through Deregulation: Sharing Economy Companies Gaining Legitimacy by Circumventing Traditional Frameworks’ (2017) 68 Hastings Law Journal 1085; John Armour and Luca Enriques, ‘The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts’ (ECGI Working Paper 2017) in relation to the need for consumer protection across crowdfnance models. 24 Brishen Rogers, ‘Employment Rights in the Platform Economy: Getting Back to Basics’ (2016) 10 Harvard Law and Policy Review 480; Alberto Di Minin, Lenny Mendonca, Erkki Ormala and Peter Evans, ‘Assessing the Platform Economy’ (2016) 32 Issues in Science and Technology 13. 25 Sundarajan (2016) at ch6; Derek McKee, ‘Peer Platform Markets and Licensing Regimes’ in Law and the Sharing Economy (Ottawa, ON: University of Ottawa Press 2018), ch1; Berins Collier et al. (2018); Natalie Videbæk Munkholm and Christian Højer Schjøler, ‘Platform Work and the Danish Model  – Legal Perspectives’ (2018) NJCL 118 on how Dutch trade unions have defed the gig economy by compelling collective bargaining with platforms for participants. 26 Mara Ferreri and Romola Sanyal, ‘Platform Economies and Urban Planning: Airbnb and Regulated Deregulation in London’ (2018) 55 Urban Studies 3353. 27 Asociación Profesional Elite Taxi v Uber Systems Spain SL Case C-434/15 (December 2017); Request for a Preliminary Ruling under Art 267 TFEU from the tribunal de grande instance de Lille against Uber, Case C-320/16 (April 2018).

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drivers with customers was rejected. Although the preliminary rulings before the Court clarifed Uber as providing a multifaceted service including information and transport, it still does not clarify to what extent platform economies should be regarded as arbitrageurs of regulatory regimes28 or should be treated with novel thinking in regulation and law.29 The platform economy is still far from clear in terms of legal and regulatory classifcations that are based on old assumptions in production, work and exchange. Further, as Gansky points out, even commercialised platform economies are like a ‘mesh’,30 where marketising or commoditising underutilised assets is interwoven with social elements such as being galvanised by social media or by new forms of social trust. There are new socio-economic elements in production, such as where AirBnB hosts are not only in the hospitality trade but also ‘local insiders with restaurant tips’ and ‘hospitality advisers’,31 and Lyft provides a paid ride as well as a conversation with a co-dweller in an urban city.32 There are also new socio-economic elements in terms of exchange, as the peer-to-peer lending market shows that the social connections33 and identity of the borrower matter greatly for loan success or even the subsequent lack of default.34 At the end of the spectrum where economic activity is more communitarian in nature, such as where ‘collaborative production’ exists to co-create commons, such as open source software and Wikipedia,35 or where value creation is not monetised, even more rethinking of traditional laws that underlie economic value creation and exchange is needed.36 For example, Prabhat discusses such a type of platform

28 Ryan Calo and Alex Rosenblat, ‘The Taking Economy: Uber, Information, and Power’ (2017) 117 Columbia Law Review 1623. 29 Michèle Finck, ‘Distinguishing Internet Platforms from Transport Services: Elite Taxi v. Uber Spain’ (2018) 55 Common Market Law Review 1619; Christoph Busch, ‘The Sharing Economy at the CJEU: Does Airbnb Pass the “Uber Test”? Some Observations on the Pending Case C-390/18 – Airbnb Ireland’ (2018) 4 Journal of European Consumer and Market Law 4. 30 Lisa Gansky, The Mesh: Why the Future of Business Is Sharing (Portfolio Penguin 2012). 31 Moloud Abdar and Neil Y. Yen, ‘Analysis of User Preference and Expectation on Shared Economy Platform: An Examination of Correlation Between Points of Interest on Airbnb’ (2019) Computers in Human Behaviour, forthcoming. 32 Sundarajan (2016) at ch2. 33 Emőke-Ágnes Horvát, Jayaram Uparna and Brian Uzzi, ‘Network vs Market Relations: The Effect of Friends in Crowdfunding’ paper presented at IEEE/ACM International Conference on Advances in Social Networks Analysis and Mining (2015) at 226; Jascha Alexander Koch, ‘A Framework for the Notion of “Utility” in the Landscape of Crowdfunding’ (2017) at https://ssrn.com/abstract=2991000. 34 Joseph Feller, Rob Gleasure and Stephen Treacy, ‘Information Sharing and User Behavior in Internet-Enabled Peer-To-Peer Lending Systems: An Empirical Study’ (2017) 32 Journal of Information Technology 127. 35 Yochai Benkler, ‘Peer Production and Sharing’ in The Wealth of Networks (New Haven: Yale University Press 2006), ch3. 36 Bronwen Morgan, ‘The Sharing Economy’ (2018) 14 Annual Review of Law and Social Science 351; Morgan and Kuch (2015).

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economy in Borrowmydoggy.com where the platform brings together a community for dogsitting services, where the purpose is to meet emotional or social needs and exchange is usually in kind.37 Platform economies present novel economic features in production, value creation and exchange, and their defance of simple classifcation within legal or regulatory regimes is underlined by a more fundamental issue of their ambivalent nature between markets and hierarchies. Platform economies are not just about technologically driven effciencies that exploit legal and regulatory arbitrage.38 We argue that by grappling with the novel hybrid characteristics of platform economies as both markets and hierarchies, an organisational and governance framing can provide the basis for a new agenda for legal and regulatory treatment.39 It is easy to assume that platform economies resemble marketplaces, an early iconic example being eBay. Hence the legal governance of platform economy relationships may be assumed to be contractual by default.40 However platform economy characteristics raise certain questions in relation to the nature of production, value creation and exchange that call into question whether the ‘market’ framing is indisputably appropriate.41 There is a spectrum of business models in the platform economy,42 and we argue that new confgurations of production, value creation and exchange give rise to three features that pose challenges for classifying the platform economy as market or hierarchy. These are: (1) New confgurations in terms of how ‘property’ relations are structured in the platform economy, meaning that neither the ‘private property’ concept of a frm’s deployment of assets or resources, nor discrete property rights for transactional exchange in a market situation applies;

37 Devyani Prabhat, ‘“BorrowMyDoggy.Com”: Rethinking Peer-to-peer Exchange for Genuine Sharing’ (2018) 45 Journal of Law and Society 84. 38 Sundarajan (2016), Stephen R. Miller, ‘First Principles for Regulating the Sharing Economy’ (2016) 53 Harvard Journal on Legislation 147. 39 Llewellyn D.W. Thomas, Erkko Autio and David M. Gann, ‘Architectural Leverage: Putting Platforms in Context’ (2014) 28 Academy of Management Perspectives 198; Cristiano Codagnone, Athina Karatzogianni and Jacob Matthews, ‘Ideological Production in Digital Intermediation Platforms’ in Cristiano Codagnone, Athina Karatzogianni and Jacob Matthews (eds), Platform Economics: Rhetoric and Reality in the ‘Sharing Economy’ (Bingley: Emerald 2018) at ch4; Mark Fenwick and Erik P. M. Vermeulen, ‘A Sustainable Platform Economy & the Future of Corporate Governance’ (ECGI Working Paper 2019) at http:// ssrn.com/abstract_id=3331508. 40 Lee A. Bygrave, ‘The Predilection for Contract’ in Internet Governance by Contract (Oxford: OUP 2015) at ch3. 41 Julia A. Fehrer, Sabine Benoit, Lerzan Aksoy, Thomas L. Baker, Simon J. Bell, Roderick J. Brodie and Malliga Marimuthu, ‘Future Scenarios of the Collaborative Economy: Centrally Orchestrated, Social Bubbles or Decentralised Autonomous?’ (2018) 29 Journal of Service Management 859, Codagnone et al. (2018), chs 2 and 4. 42 Mũnoz et al. (2017); Mair et al. (2017); Acquier et al. (2017).

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(2) New confgurations of economic agency and relationships, meaning that platform economies are neither centralised like the private hierarchy of the frm nor are they fully decentralised or autonomous like in a free market; (3) New movements of social or bottom-up institutions of self-governance that refect both market and hierarchy characteristics in platform economies. We discuss these in turn with specifc examples of platform business models in order to illustrate how they defy the classifcations of market or hierarchy. New confgurations in property relations The Coasean frm43 envisages that resources are brought by economic agents who contract with each other in repeat transactions, and such resources can be most effciently organised, managed and exploited for proft if a hierarchical organisational structure is adopted for repeat transactions. The law supports such effcient organisation by establishing the separate legal personality of the frm,44 delineating its personhood as a boundary vis-à-vis external economic actors or third parties. Such a boundary underpins the property rights of the frm over its assets,45 the ownership of profts made from exploiting assets and resources46 and the internal relations of economic agents that make the frm’s collective economic agency possible.47 Governance follows the framing of property rights, and this paradigm is arguably challenged by the novelties of the platform business model. The platform business model is unlike the Coasean frm, as it often (but not always) comprises a two-layered structure where: the platform is itself an asset created and maintained by a frm/hierarchy but economic relations carried out over the platform are ‘external’ to the frm.48 This structure is typical of for-proft platforms such as Uber and AirBnB, although alternative

43 Discussed in Chapter 2. 44 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 as a founding principle of corporate law. 45 Macaura v Northern Assurance Co Ltd [1925] AC 619. See also arguing that rights apportioned in company law are proprietary in nature to an extent, as they are exclusively appropriated to those constituents. John Armour and Michael C. Whincop, ‘The Proprietary Foundations of Corporate Law’ (2007) 27 Oxford Journal of Legal Studies 429. 46 S829, Companies Act 2006, for example, sets out the boundaries of when members may be distributed corporate assets. 47 Broadly the law of corporate governance, dealt with in the Companies Act 2006; see, for example David Kershaw, Company Law in Context (Oxford: OUP 2012) at Part II, Marc T. Moore and Martin Petrin, The Law of Corporate Governance (London: Macmillan 2017). 48 Katarina Stanoevska-Slabeva, Vera Lenz-Kesekamp and Viktor Suter, ‘Platforms and the Sharing Economy: An Analysis’ (Report from the EU H2020 Research Project Ps2Share, 2018), https://ssrn.com/abstract=3102184.

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structures are adopted by platforms of a different ethos.49 The platform would only become successful and proftable if it is able to attract mass participation, so its core business model is to exploit the network effects of mass participation, whether to harvest data (Facebook, Instagram) or to facilitate many micro-trades upon which the platform earns commission (such as eBay, or AirBnB and Uber). The platform does not assert ownership over the assets transacted, such as the second-hand goods sold on eBay or the cars or homes made available for ‘sharing’ on AirBnB and Uber. It also does not internalise the economic relations created on the platform, as those are bilateral between users of the platform.50 Its role can be perceived as facilitative or intermediating in nature, and it does not directly exploit assets or labour, yet it captures signifcant economic rent from exploiting network effects, which arguably cannot be the subject of ‘property’.51 Indeed, DyalChand52 describes the platform business model as unlike the traditional corporate entrepreneur that exploits private assets and information and instead as an agent that exploits the data, information and assets of others. On the one hand, one can regard the platform owner as merely mining in the public domain and creating private value by applying proprietary commodifying techniques that make network effects valuable. This is a narrow perspective of what is corporate ‘property’ and justifes the corporate platform owner’s relations with users as merely contractual. However, the platform is not merely a public marketplace that houses bilateral transactions, as many platforms proactively make transactions work in order to protect its economic rent extracted from the network effects. This means that platforms institute governance or rules that bind users to the platform and inter se, even if such rules primarily serve the instrumental motivations of the platform owner. As Leoni and Parker put it, [T]he value creation and the fnancial performance of the organisation depend upon how the users’ activities perform on the platform. These activities are not controlled directly by the platform owner, who in turn seeks ways to encourage users’ performance via digital coordination.53 The ubiquitous nature of ‘digital coordination’ encapsulates the ambiguous nature of contractual governance underpinned by an artifcially limited

49 See Chapter 8. 50 See Section 2, www.ebay.co.uk/help/policies/member-behaviour-policies/user-agreement?id= 4259#1.%20Introduction; Clause 1.1, www.airbnb.co.uk/terms. 51 The legal character of property is the ability to exclude others from enjoyment or access, and network traffc, data or information is too open or porous to be property, Yochai Benkler, ‘Law, Innovation, and Collaboration in Networked Economy and Society’ (2017) 13 Annual Review of Law and Social Science 231; Benkler (2006) at ch2, Julie E. Cohen, ‘Law for the Platform Economy’ (2017) 51 UC Davis Law Review 133. 52 Dyal-Chand (2015). 53 Giulia Leoni and Lee D. Parker, ‘Governance and Control of Sharing Economy Platforms: Hosting on Airbnb’ (2019) 51 British Accounting Review 100814.

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notion of property relations on the platform. However, we query if the ‘property’ exploited on the platform can be regarded as co-created and coowned by the many participants together with the platform owner. Can we view the collective information and data as being a co-production of value for the platform? If so, this perception of ‘collective’ and not private property will give rise to different implications for how the platform should be conceptualised and governed. Private property law focuses on delineation of boundaries of ownership and the exclusion of others from ownership rights. Collective property law has been developed largely in the context of forproft businesses so that power over property is distributed and exercised in accordance with governance norms, such as directors’ duties in company law and the powers of shareholders in general meeting. A reconceptualisation of property relations in platforms as co-producing collective property has profound implications for the norms of governance and power distribution on platforms. An iconic example to discuss is Facebook, which raises questions as to what ‘corporate assets’ it is exploiting for its success and hence what light the ambiguous nature of ‘asset’ sheds on the nature of Facebook as a hierarchy or market. Facebook is a social media platform of over 2 billion users worldwide that facilitates a form of self-expression, communication, instantaneous sharing and possibly even micro-payments54 between individual users. However, users are subject to conditions whereby they agree to Facebook’s advertising policies,55 which allow Facebook to send personalised advertising campaigns aimed at users based on Facebook’s harvesting of users’ social data.56 A number of commentators argue that users’ data cannot be regarded as Facebook’s ‘property’ as such57 and that arguably Facebook’s ‘asset’ is really a ‘social derivative’, described by Arvidsson as based on the idea of the fnancial derivative.58 The fnancial derivative is an instrument derived from underlying fnancial assets, whether securities, currency or commodities, and is usually designed for the purposes of future risk management.59 Its value is based on underlying assets, and those who trade in fnancial derivatives normally do not need to own any of the underlying assets. Similarly,

54 Facebook’s introduction of its own currency Libra, which is subject to pending considerations by regulators. 55 Discussed in Bygrave (2015) at ‘Lex Facebook’, ch6. 56 Discussed in Calo and Rosenblat (2017); Kenneth C Werbin, ‘The Social Media Contract: On the Paradoxes of Digital Property in This Digital Land’ (2012) 46 Journal of Canadian Studies 245. 57 Calo and Rosenblat (2017). 58 Adam Arvidsson, ‘Facebook and Finance: On the Social Logic of the Derivative’ (2016) 33 Theory, Culture and Finance 3. 59 Benjamin Lee and Edward LiPuma, Financial Derivatives and the Globalization of Risk (Durham, NC: Duke University Press 2004) at chs 2, 4–6; Dick Bryan and Michael Rafferty, Capitalism With Derivatives: A Political Economy of Financial Derivatives, Capitalism and Class (London: Palgrave Macmillan 2006) at chs 2, 3, 8 and 9.

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Arvidsson posits that Facebook’s business model is based on introducing a form of quantifcation and commodifcation of social life in order to proft, in an arguably parasitic manner, from a commodifed framing of social life.60 The derivative nature of what Facebook appropriates shows the ambiguity of what may be considered ‘corporate assets’. The process of creating the social derivative is likely proprietary to Facebook, but there seems a signifcant disproportion in terms of the private proft Facebook appropriates from the social derivative.61 Value is created in the platform by users but exclusively captured by the corporate form that owns the platform and the proprietary techniques behind the social derivative.62 However, it can be argued that raw data has no value and that Facebook’s proprietary techniques behind the social derivative is what creates value.63 The truth is probably in between, that users bring an extent of value and co-contribute to Facebook’s economic agency. In this manner, there is arguably a disjunct between how Facebook treats its users, as merely bound together by contractual terms of use,64 and not as co-contributors to network wealth. This disjunct allows Facebook to externalise users from its corporate governance, where in fact, questions should be asked as to how economic agency that brings value to the frm/hierarchy should be protected by relational and distributive norms within the hierarchy.65 Indeed the reality as Schwarcz argues is that Facebook is able to continue maintaining that disjunct by exercising relational powers over users and yet maintaining arm’s-length market-like relations under contract.66 The analysis above raises questions as to the extent to which legal and regulatory classifcation (and therefore treatment) may be defcient due to a lack of new framing appropriate for the organisational and governance needs of platform business models. The defaultisation to a market framing and contractual governance is insuffcient. Other businesses that allow the platform owner/operator to capture most of the value created by network effects as private value would be susceptible to a critique similar to the above.

60 Arvidsson (2016). 61 Calo and Rosenblat (2017); Jonathan M. Barnett, ‘The Costs of Free: Commodifcation, Bundling and Concentration’ (2017) at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2916859. 62 ‘Active appropriation’ as described in Julie E. Cohen, ‘Law for the Platform Economy’ (2017) 51 UC Davis Law Review 133. 63 Werbin (2012). 64 Bygrave (2015) at ch6. 65 See broadly cites in n48. 66 Ori Schwarcz, ‘Facebook Rules: Structures of Governance in Digital Capitalism and the Control of Generalized Social Capital’ (2019) 36 Theory, Culture and Society 117 arguing that Facebook is like an internal empire of relational ordering and adjudication over users’ social capital that are tied to the platform.

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At the other end of the spectrum, some platform economies are structured in such a way as to explicitly create a commons so that private proprietisation is resisted and also inappropriate. However, in the absence of private property law, there is also a lacuna in relation to collective property ‘law’ and the development of governance norms in a not-for-proft or hybrid context.67 Benkler raises the examples of open source software and Wikipedia as not-for-proft projects that bring together participation from diverse individuals who contribute information, expertise, know-how and time to build up and maintain a collective good, akin to a public good.68 The aim is that such privately and collaboratively produced goods can bring about collective beneft to society without making any particular entrepreneur especially well-off in capturing the private gains of innovation.69 In this manner, production is both organised in terms of commitment to a community ethos and project aim and sourced broadly from inclusive and diverse participation. Value creation is not monetised, and the ultimate end-goals are to promote free and public access to a valuable collective good and to enhance private and social welfare as a whole without the need for bilateral exchange. Many such platforms produce self-governance protocols and norms that mimic not-for-proft enterprises.70 These self-governing norms can provide insight as to how new notions of property relations on for-proft and other platform economies should be reconceptualised.71 New confgurations of economic agency and relationships Platform economies are neither clearly markets nor hierarchies, as the nature of economic relations on many of them refect a hybrid nature. Many platforms posit to be web and information-based services facilitating the matching of needs on the supply and demand sides, and they insist that the transactional contract of exchange is between users inter se and does not involve the platform as an intermediary.72 For example, AirBnB says in its terms, The Airbnb Platform is an online marketplace that enables registered users (“Members”) and certain third parties who offer services (Members

67 Chapter 8. 68 Benkler (2006), chs 1–3. 69 Benkler (2009), ch9; Primavera de Filippi and Miguel Said Vieira, ‘Information Commons Between Peer Production and Commodifcation: The Case of Cloud Computing’ (2013) at http://ssrn.com/abstract=2772098; Acquier et al. (2017). 70 Cristiano Codagnone, Athina Karatzogianni and Jacob Matthews, ‘Ideological Production in Digital Intermediation Platforms’ Codagnone et al. (2018), ch4. 71 Morgan (2018). 72 Critically questioned in Irina Domurath, ‘Platforms as Contract Partners: Uber and Beyond’ (2018) 25 Maastricht Journal of European and Comparative Law 565.

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and As the provider of the Airbnb Platform, Airbnb does not own, create, sell, resell, provide, control, manage, offer, deliver, or supply any Listings or Host Services, nor is Airbnb an organiser or retailer of travel packages. . . . Hosts alone are responsible for their Listings and Host Services. When Members make or accept a booking, they are entering into a contract directly with each other. Airbnb is not and does not become a party to or other participant in any contractual relationship between Members, nor is Airbnb a real estate broker or insurer. Airbnb is not acting as an agent in any capacity for any Member, except as specifed in the Payments Terms.74 Another example is TaskRabbit, a platform that connects people who need certain tasks completed to ‘Taskers’ who are willing to undertake the chore for a fee. TaskRabbit excludes professional services that require a licence, such as gas safety inspection. TaskRabbit’s terms say, The TaskRabbit Platform is a web-based communications platform which enables connections between Clients and Taskers. “Clients” are individuals and/or businesses seeking to obtain task services (“Tasks”) from Taskers, and are therefore clients of Taskers, and “Taskers” are individuals and/or businesses seeking to perform Tasks for Clients. Clients and Taskers together are hereinafter referred to as “Users.” If you agree on the terms of a Task with another User, you and such other User form a Service Agreement directly between the two of you. . . . Taskers are independent contractors and not employees, partners, agents, joint ventures, or franchisees of Company. Company does not perform Tasks and does not employ individuals to perform Tasks. Users hereby acknowledge that Company does not supervise, direct, control or monitor a Tasker’s work. TaskRabbit is not responsible for the work and therefore has no responsibility or liability for the work performed on the Tasks in any manner, including but not limited to a warranty or condition or good and workmanlike services, warranty of ftness for a particular purpose, or compliance with any law, regulation, or code.

73 Clause 1.1 www.airbnb.co.uk/terms, accessed 15 December 2019. 74 Clause 1.2, above.

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The TaskRabbit Platform only enables connections between Users for the fulfllment of Tasks. TaskRabbit is not responsible for the performance or communications of Users, nor does it have control over the quality, timing, legality, failure to provide, or any other aspect whatsoever of Tasks, Taskers, Clients, nor of the integrity, responsibility, qualifcations, or any of the actions or omissions whatsoever of any Users, or of any ratings provided by Users with respect to each other. Company makes no warranties or representations about the suitability, reliability, timeliness, or accuracy of the Tasks requested or services provided by, or the communications of or between, Users identifed through the TaskRabbit Platform, whether in public, private, or offine interactions or otherwise howsoever’.75 The reality, however, is that AirBnB and TaskRabbit are more than mere marketplaces, as they exercise forms of centralised governance and are not mere intermediaries such as listing directories. Leoni and Parker’s study76 of AirBnB’s platform governance rules shows that there are aspects of centralised governance or control exercised by AirBnB that shape and affect users’ ultimate transactions inter se, and there are also aspects of laissez-faire for AirBnB hosts and users that are closer to a free market model. Centralised governance relates to admission of hosts’ properties, streamlining of content presentation in terms of property description, price, availability, etc., streamlining of house rules, handling of payment and the institution of a standardised feedback system. Indeed, commentators posit that AirBnB’s centralised governance is highly sophisticated, bringing hosts under a standardised and metricised system of evaluation and control.77 The laissez-faire aspects relate to property availability, whether hosts are letting properties in whole or part and the setting of price. The centralised aspects of governance and control on AirBnB’s part relate largely to instrumental motivations,78 such as the need to maintain certain levels of commonality and trust in order to be attractive for the user experience. Standardisation creates positive externalities for all hosts that beneft from a collective trustworthy environment.79 The purposes of such centralised governance can arguably be ‘organisational’ in nature towards attaining collective aims and objectives, although individualism on the part of hosts and users is also promoted. Cohen also argues that such centralised

75 Clause 1, www.taskrabbit.co.uk/terms, accessed 15 December 2019. 76 Leoni and Parker (2019). 77 Martin Kornberger, Dane Pfueger and Jan Mouritsen, ‘Evaluative Infrastructures: Accounting for Platform Organization’ (2017) 60 Accounting, Organisations and Society 79. 78 Leoni and Parker (2019). 79 Above. See also OECD, ‘Trust in Peer Platform Markets’ (OECD Paper 263/2017), which discusses factors engendering trust in platforms such as secure payment systems, standardised user interfaces such as ratings and reviews, even if users do not critically evaluate terms of protection and their rights.

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governance is often for the purposes of manipulating network dynamics and to prevent defection, serving the platform owner’s private interests of maximising the network effects created on the platform.80 Similar forms of centralised governance can be found on eBay which has over the years instituted highly controlling house rules for the conduct of sale and purchase and takes upon itself to adjudicate81 sales disputes in relation to lost or defective goods.82 Indeed, in recent litigation in the EU,83 Uber’s claim to merely be an information intermediary matching drivers in their own cars with potential sharers who need a ride has been decisively rejected. These decisions are premised on an evaluation of Uber’s extent of centralised governance of the platform business model. Uber maintains decisive infuence over the conditions of the ride, such as ‘booking’ the car and the price. Indeed Uber’s extensive controls over transactions, such as in relation to incentives introduced to encourage less casual provision of service and the determination of price, have been regarded as being ‘organisational’ in nature in relation to work and value creation, and not merely providing a marketplace.84 In one of the preliminary rulings before the Court of Justice of the EU, the court has taken the view that ‘[Uber’s] intermediation service must thus be regarded as forming an integral part of an overall service whose main component is a transport service and, accordingly, must be classifed not as “an information society service”’.85 The implication that follows is that legal and regulatory characterisation in different EU member states may follow from such decisions, such as whether traditional institutions of business regulation applying to corporates86 would also extend to Uber and that platforms may come under more scrutiny87 as to whether their marketplace claim88 is tenable or otherwise. This development may

80 Julie E. Cohen (2017). 81 Platform adjudication of disputes not only happens on eBay; see https://resolutioncentre. ebay.co.uk/ but also on Facebook, which provides a process for comment take-downs or account issues to be raised and disputed. However, platform adjudication is self-governed, and it will be discussed shortly, including the observed defcits of accountability and transparency; see Schwarcz (2019). 82 https://resolutioncentre.ebay.co.uk/. Indeed, it may be regarded as unbalanced that an adjudication process is in place for buyer protection, but sellers do not have such recourse for a bad buyer such as non-payment or other bad behaviour, as only ‘reports’ can be made and negative feedback cannot be left. 83 Case citations in n27. 84 Abbey Stemler, ‘The Myth of the Sharing Economy’ (2017) 67 Emory Law Journal 197. 85 Para 40 of the judgment in Asociación Profesional Elite Taxi v Uber Systems Spain SL Case C-434/15 (December 2017). 86 See, for example, discussion of the growth of business regulation worldwide in Peter Drahos and John Braithwaite, Global Business Regulation (Cambridge: CUP 2008) showcasing the growth in business regulation imposed on corporations over the years. 87 E.g., see Busch (2018), raising the Uber test to AirBnB. 88 See critical discussion by McKee (2017) on the hyped up ‘market’ claim made by platform economies in order to be left to self-regulation.

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attract corresponding legal and regulatory regimes, such as taxi licensing regulations and other regulatory regimes.89 Nevertheless, the platform economy features a diversity of governance intensity in terms of centralised features.90 Some platforms have developed less centralised governance systems, possibly because the legal risks of setting norms of conduct or carrying out adjudication of disputes are high and too costly. TaskRabbit, for example, relies heavily on disclaimers in order to dissociate from taskers’ or hirers’ conduct or disputes. However, in order to advance the instrumental motivation of securing and sustaining network effects, even less-centralised platforms offer certain centralised institutions to promote trust, a key institution being user feedback,91 seen as a credible self-governance system by many.92 Further, with the onset of the Covid19 crisis in early 2020, platforms have been challenged as to their role in protecting and providing for their participants’ welfare, and an atomistic, purely contractual or arm’s-length view of their interrelationships would likely be regarded as socially unacceptable. Although instituting a feedback system alone may not mean that a platform exercises suffcient centralised governance so that its intermediary role becomes integrated with the ultimate transaction provided, the Uber test goes some way to show where the line is to be drawn and what precise implications follow.93 It may also be argued that the Covid-19 crisis in early 2020 has challenged platforms as to whether centralised governance would be needed to deal with disruptions and welfare implications for participants from whom platforms derive revenue. Would platforms show solidarity or distance, and what would these tell us about the ubiquitous nature of platforms? Uber decided to follow in the footsteps of government guidance in the UK to employers regarding staff who needed to self-isolate. Uber offered fnancial assistance to drivers in such certifed self-isolation, but it remained uncertain what would be offered beyond those 14 days94 if the driver became ill or if work volumes fell drastically due to the lockdowns and social distancing measures put in place by the government. AirBnB also offered to compensate hosts who suffered booking cancellations that were at least 25% of their expected proceeds, with the best welfare treatment reserved for superhosts

89 Derek McKee, ‘Peer Platform Markets and Licensing Regimes’ in Makela et al. (2018), ch1. 90 Will Sutherland and Mohammad Hossein Jarrahi, ‘The Sharing Economy and Digital Platforms: A Review and Research Agenda’ (2018) 43 International Journal of Information Management 328 for a taxonomy. 91 Cantero Gamito, Marta, ‘Regulation.com. Self-Regulation and Contract Governance in the Platform Economy: A Research Agenda’ (2017) 9 European Journal of Legal Studies 53. 92 OECD (2017); Molly Cohen and Arun Sundararajan, ‘Self-Regulation and Innovation in the Peer-to-Peer Sharing Economy’ (2015–6) 82 University of Chicago Law Review Dialogue 116. 93 Busch (2018); Finck (2018). 94 www.uber.com/gb/en-gb/coronavirus/.

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who could apply to their Relief Fund for up to $5,000 in relief upon meeting eligibility criteria.95 Such solidarity also goes some way to show the more communitarian stance taken by platforms in response to the extraordinary circumstances of the crisis. However, such solidarity, if any, was also voluntary and self-regulatory, and it remained in platforms’ discretion how they should be implemented and applied. What is clear is that platform business models are not merely marketplaces that allow laissez-faire between the supply and demand sides, and the spectrum of centralised governance adopted shows that hybrid characteristics are present. In this manner, it should be questioned whether economic relations on platforms should primarily be governed by platforms’ own rules and self-governance, i.e. the default contractual mode of governance, and whether appropriate organisational framing can pave the way for organisational and governance norms that more appropriately cater for the economic sociology of platform relations. New institutionalisation of social legitimacy mechanisms that sustain a market-society At a broader level, platforms have also ushered in a new movement of legitimacy creation that is bottom-up in nature and are introducing alternative institutions for interaction and exchange without necessarily relying on conventional legal or regulatory institutions. Indeed platform economies bring about not only new marketplaces but also new institutions of trust, legitimacy and coherence that foster a type of ‘society’, making the platform economy a market-society and not just a market. In the conventional economy, customers’ trust in a transport provider may be rooted in its licensed or regulated status, such as the black cab in London being described as trustworthy over unregulated alternatives such as the unlicensed minicab.96 Similarly, one would choose a licensed hotel or restaurant to go to when visiting in a foreign country. Although being licensed or subject to a system of regulation does not mean that the hotel is attractive nor its service excellent, the minimum framework of trust is provided by a top-down system of regulatory approval and oversight. The social contract between the hospitality or transport provider industry and the customer is at least in part framed by regulatory approval and oversight.97 This is

95 AirBnB, ‘$250M to Support Hosts Impacted by Cancellations’ at www.airbnb.co.uk/ resources/hosting-homes/a/250m-to-support-hosts-impacted-by-cancellations-165; ‘Answers to Your Questions About the Superhost Relief Fund’ at www.airbnb.co.uk/resources/ hosting-homes/a/answers-to-your-questions-about-the-superhost-relief-fund-170. 96 ‘TFL Launches HomeSafeSelfe Campaign Urging Women to Travel in Unbooked Minicabs’ (The Independent, 26 September 2014). 97 See, for example, Neil Gunningham, ‘The New Collaborative Environmental Governance: The Localisation of Regulation’ (2009) 36 Journal of Law and Society 145, in which is

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then fanked by market-based information goods such as Michelin and AA ratings that provide extra information about quality to customers. Marketbased information goods is a bottom-up development that provides a complementary ‘social licence to operate’.98 The platform economy has arguably revolutionised the nature of the social contract, as many platform business models aim to provide self-governance and bottom-up institutions that ‘replace’99 conventional legal and regulatory systems, such as offcial licences and legal dispute resolution. Indeed, platform business models may argue that their self-regulatory systems work just as well and are less costly and more effcient. However, legitimising these self-governing systems entails some disturbing effects, chiefy the resistance of platforms against the institutional fabric of conventional law and regulations.100 The non-application of conventional regulations and law is usually justifed on the basis of the different nature of economic activity on platforms as framed by its self-governance. This has resulted in two effects. One is that public state-based regulation is marginalised, while platforms exploit the freedoms allowed in private law. The other is that the self-governance of platforms should be treated as a form of public/administrative law in an order unto itself but is allowed to be characterised as private contractual law. In other words, there is an absence of a ‘public’ framing in platforms which does not refect the nature of communities and societies that platforms have become. The common observation on for-proft platforms is that users are takers and not negotiators of platform rules. In this manner, the notion of social contract can be severely undermined. The political notion of the social contract, which bases the government’s right to govern upon the consensus of society in relation to the protection of their rights and freedoms,101 should be applied by analogy to interrogate platforms’ self-governance systems. To what extent do platforms’ self-governance systems protect users’ freedoms and rights such that this order is suffcient to replace the socially and politically negotiated order represented in conventional institutions such as regulation?102 The regulation of industries such as

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argued that governance is often a heterarchical architecture of regulatory frameworks and bottom-up forces shaping dialogue, negotiation and behaviour. Kieren Moffat, Justine Lacey, Airong Zhang and Sina Leipold, ‘The Social Licence to Operate- A Critical Review’ (2016) 89 Forestry 477 for example on the role of bottom-up forces in constraining corporate behaviour; Karin Buhmann, ‘Public Regulators and CSR: The “Social Licence to Operate” in Recent United Nations Instruments on Business and Human Rights and the Juridifcation of CSR’ (2016) 136 Journal of Business Ethics 699 on how the ‘social licence’ co-evolves and is co-shaped by legal normifcation. Julie E. Cohen (2017). Above. John Locke’s Two Treatises of Government, see brief discussion in ‘Consent, Political Obligation and the Ends of Government’ at https://plato.stanford.edu/entries/locke-political/. Regarding regulation as located within the theoretical space of ‘regulationist theory’, i.e. that regulation is inherent to the capitalist system or framework and not merely ‘external’

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hotels allows a licence to operate within the social expectations of protective rules such as building and fre safety, health and hygiene, environmental compliance and other matters relating to preventing harm and externalities. Many platform economies have been skeletal where protective norms are concerned103 and have often instituted them on an ex post basis after problems have occurred. For example, the full suite of consumer protection regulation such as distance-selling rights cannot be applied against the ‘retail’ seller on eBay as opposed to business sellers, and eBay has only developed buyer protection in an incremental manner over the years. To what extent should conventional regulatory protection be mitigated in peer-to-peer transactions and what is the platform’s responsibility for instituting an adequate balance? The continued upholding of platform economies as markets and the ignoring of their collective social reality is likely to result in governance defcits. We argue that it is untenable to continue to accept platform business models’ preferred market-framing of their nature and the defaultisation to contractual self-governance.104 It is important to consider if organisational and collective framing is to an extent apt so that relational dimensions and their protection can be better addressed. We set out below options for organisational framing for the for-proft platform economy.

Organisation and governance for the platform economy In this section we argue that new organisational framing for the platform economy towards the notion of a collective group, or ‘community’ is not inappropriate.105 An organisational framing also provides the basis for governance norms, which we argue are necessary given the defcits of selfgovernance dominated by for-proft platform owners. Conceptualisation of organisational framing The corporatisation of the platform owner is the norm for for-proft platform business models,106 but other organisational forms may be selected for platform models that are not-for-proft or hybrid in nature, such as the

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in nature to combat externalities arising from a free market sphere. This is a more socially embedded view of economic activity; see Bob Jessop, ‘Polanyian, Regulationist and Autopoieticist Refections on States and Markets and Their Implications for the Knowledgebased Economy’ in Alexander Ebner and Nikolaus Beck (eds), The Institutions of the Market: Organisations, Social Systems and Governance (Oxford: OUP 2008) at ch14.3. See discussion below on ‘Need for Governance Norms’. Lee A. Bygrave, ‘Utility and Legitimacy Issues’ in Bygrave (2015), at ch7 acknowledges problems relating to contractual governance. See Vergard Kolbjørnsud, ‘Collaborative Organisational Forms: On Communities, Crowds and New Hybrids’ (2018) 7 Journal of Organisational Design 11. Stanoevska-Slabeva et al. (2018).

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social enterprise or cooperative forms discussed in Chapter 8. The for-proft platform owner, such as eBay, AirBnB, Uber, Facebook, etc., are corporations that own and develop the platform as their asset. The corporate entity that owns and manages the platform then maintains relations with users, whether on the supply or demand side, by contract. In contrast, not-for-proft or hybrid platforms take a more progressive approach of recognising platforms as communities with greater relational intensities amongst members inter se. For example, Freegle is a platform for coordinating the supply and demand side for unwanted used goods and operates a gift economy where goods are given away instead of sold. Freegle is formed as a cooperative in the UK but is run as a not-for-proft charitable organisation.107 Its users are treated as its members, and an integrated and inclusive governance structure prevails instead of the arm’s-length structures maintained by corporatist platform owners vis-à-vis users. Freegle is strongly supported by a community ethos of sustainable living and gifting the community instead of commoditising. A number of platform cooperative examples can be raised to illustrate the hybrid platform model where commoditisation occurs, such as with artwork like photographs and with music. These platforms are designed to promote fair distributive values, ethical exchange and/or community and sustainability values. They adopt governance structures that are more egalitarian in nature. For example, Fairmondo, a German platform cooperative that runs an online marketplace for ethical goods and services,108 and Resonate.is,109 a Berlin-based ethical music streaming company that aims to strike a fair distributive balance for the supply and demand sides of downloadable music. Another platform cooperative that aims to promote the distribution of highquality usable images but ensure distributive fairness between the supply and demand sides is Stocksy United, based in Canada.110 The key difference between the for-proft ‘neoliberal’ platform111 is the two-layered structure mentioned earlier that allows the corporatised entity to maintain arm’s-length relations with its users and stakeholders while extracting maximum proft out of the platform’s asset value, consistent with the shareholder value maximisation ideology.112 The not-for-proft or hybrid platform generally has a fat one-layer structure where the platform is constituted as a community for user/members, and all user/members have equal

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www.ilovefreegle.org/about. www.fairmondo.de/global. https://resonate.is/. www.stocksy.com/. Murillo et al. (2017); Cristiano Codagnone, Athina Karatzogianni, Jacob Matthews, “Introduction” in Codagnone (2018) at ch1. 112 Calo and Rosenblat (2017), Julier B. Schor, ‘Does the Sharing Economy Increase Inequality Within the Eighty Percent? Findings From a Qualitative Study of Platform Providers’ (2017) 10 Cambridge Journal of Regions, Economy and Society 26.

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governance rights.113 Such platforms may also be supported by more dedicated teams that maintain and moderate the platform, such as the Freegle volunteers, or the executive teams behind Resonate.is. Democratic governance is the norm in such platforms. One queries whether the lack of recognition for the for-proft platform as a ‘community’ instead of merely a web of bilateral transactions is a matter that ought to be addressed. Corporate law leaves it open as to what property companies may exploit for their proft-seeking purposes, and there is a long and unsatisfactory history of corporations exploiting what may be collective or public goods for private ends, as long as a private property framing can be made. For example, the exploitation of natural resources such as water or energy resources by private companies has largely led to deregulation,114 regulatory catch-up with externalities and exploitation of households and ordinary citizenry.115 Benkler argues that a case can be made for the information economy to be regarded as producing public goods, based on collective data sharing.116 In this manner, should the network effects created on large platform economies be regarded as collective or public goods? Should we continue to allow for-proft corporations to appropriate collective network effects as private property for their own proft maximisation? One approach would be to introduce distinct regulation of platforms as such. This could mean specifc regulatory intervention into the setting up of a platform or governance rules for platforms. The Digital Platforms Act proposed by Feld117 is to date the most comprehensive proposal for

113 The platforms raised as examples in n96–99 are generally run on a membership and one vote per member basis for decision making; see also de Filippi and Said Viera (2013). 114 See, for example, Marjorie G. Cohen, ‘From Public Good to Private Exploitation: GATS and the Restructuring of Canadian Electrical Utilities’ (2001) 48 Canadian-American Public Policy 1. In the UK, the privatisation of utilities has led to the creation of regulatory agencies to oversee these new powerful privatised corporations, but regulatory development has been in the form of catch-up to problems surfaced, e.g. the Directors’ Remuneration Report Regulations 2000 that were enacted after scandals involving massive pay packages for utilities companies chief executives were revealed and investigated in the Greenbury Report; i.e. Richard Greenbury, Report of Study Group on Directors’ Remuneration (1995) at www.icaew.com/technical/corporate-governance/codes-and-reports/ greenbury-report. 115 For example, see Ofgem, ‘Asymmetrical Price Response in Energy Supply: A Review of Ofgem’s Analysis’ (2011); and even in 2016, media reports that energy consumers are still being overcharged, see ‘Asymmetrical Price Response in Energy Supply: A Review of Ofgem’s Analysis’ (The Independent, 18 August 2016). On water resources exploitation, see Hope Johnson, Nigel South and Reece Walters, ‘The Commodifcation and Exploitation of Fresh Water: Property, Human Rights and Green Criminology’ (2016) 44 International Journal of Law, Crime and Justice 146. 116 Benkler (2006), chs 1–3. 117 Harold Feld, ‘The Case for the Digital Platform Act: Market Structure and Regulation of Digital Platforms’ (2019) at https://www.publicknowledge.org/assets/uploads/documents/ Case_for_the_Digital_Platform_Act_Harold_Feld_2019.pdf.

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identifying a platform and subjecting platforms to a comprehensive suite of rules involving regulation of concentration/anticompetitive behaviour, consumer protection, data protection, moderation of speech rights and platform responsibilities. The EU’s approach is more patchwork in nature, as there is no regulation for platforms as such, but regulation is targeted at specifc matters and platforms are included where relevant. For example, the General Data Protection Regulation118 deals with how personal data is used and stored by platforms; the Regulation on fairness and transparency in online platform trading119 deals with regulating certain aspects of business conduct by platforms, hence introducing some moderation to the largely selfregulatory landscape of contractual governance. Video-sharing platforms are responsible for preventing degradation of minors or hate speech.120 One can also consider whether intervention should be made into conventional corporate law for for-proft companies. This approach is slightly different from the regulatory approaches discussed above. The above approaches attempt to introduce moderations and corrections of imbalances due to contractual governance. Regulatory modifcations supplant unacceptable contractual terms, perhaps on a gradual and catch-up basis. However, one can consider whether to intervene into corporate law121 so that ex ante restraints122 can be introduced where corporations are engaged with public or collective goods. Such ex ante restraints can relate to conduct, rights and responsibilities and distribution where commons, public or collective goods are exploited so that corporate exploitation or involvement is framed by inherent constraints that respect community and reciprocal values. This approach may be superior to sectoral regulation. It is not inconceivable to develop general norms of corporate restraint in relation to exploitation of commons, public goods or collective goods

118 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). 119 Regulation (EU) 2019/1150 of the European Parliament and of the Council of 20 June 2019 on promoting fairness and transparency for business users of online intermediation services. 120 Directive (EU) 2018/1808 of the European Parliament and of the Council of 14 November 2018 amending Directive 2010/13/EU on the coordination of certain provisions laid down by law, regulation or administrative action in member states concerning the provision of audiovisual media services (Audiovisual Media Services Directive) in view of changing market realities. 121 Using corporate law as a regulatory tool to moderate corporate behaviour is an observed recent trend; see Iris H.-Y. Chiu, ‘An Institutional Theory of Corporate Regulation’ (2018) 71 Current Legal Problems 279; chs3–5, Barnali Choudhury and Martin Petrin, Corporate Duties to the Public (Cambridge: CUP 2019). 122 Norms of conduct within corporate law would moderate corporate behaviour on an ex ante basis instead of having behaviour modifed on an ex post basis after incurring liability.

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in order to moderate governance and distributive concerns. A defnition of ‘public’ or ‘collective good’ would be needed123 and could be dependent on scale, number of users/regular users, geographical reach, etc.124 It would also not be inconceivable that specifc governance stipulations such as stakeholder or community participation in governance (such as a Board committee of elected stakeholder representatives) should be instituted to monitor corporate engagement with commons, public or collective goods.125 An even more radical approach would be to regard a platform which exploits property that falls within the defnition of commons, public or collective goods as incapable of proprietising such property at all, and to maintain that a new constitutional and governance structure should be prescribed for such platforms. In other words, platforms could be given separate legal status as a ‘platform community’ that attracts specifc constitutional and governance frameworks. In this manner, the corporate platform developer would be one constituent of the platform and would be subject to constitutional and governance frameworks for the platform that apply to all platform constituents. The law would need to defne the scope of platform constituents and can provide default or broad frameworks of constitutional and governance norms for all constituents. In this manner, new organisations and governance law would delineate the corporation’s power vis-à-vis users and provide for norms relating to power, conduct, rights and responsibilities, as well as distributive norms.126 This chapter does not intend to develop each reform agenda in full, but we suggest that there is room to consider how an ‘organisational’ framing of platforms can address the current governance defcits and regulatory arbitrage indulged by some powerful platforms. Such new framing may better refect the interdependencies

123 Usually meaning that a good is both non-excludable and non-rivalrous in that individuals cannot be excluded from use or could be enjoyed without paying for it, and where use by one individual does not reduce availability to others or the goods can be effectively consumed simultaneously by more than one person. Also see Inge Kaul, Isabelle Grunberg and Mark Stern (eds), Global Public Goods: International Cooperation in the 21st Century (Oxford: OUP 1999). 124 Brian Fabo, Jovana Karanovic and Katerina Dukova, ‘In Search of an Adequate European Policy Response to the Platform Economy’ (2017) 23 Transfer: European Review of Labour and Research 163 on special issues posed by large global platform economies; Michèle Finck, ‘Digital Regulation: Designing a Supranational Legal Framework for the Platform Economy’ (2017) at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2990043 also argues that the reach of regulation should be scaled up according to the scale of a platform economy. 125 For a stakeholder-oriented reconfguration of corporate law, see Iris H.-Y. Chiu, ‘Operationalising a Stakeholder Conception in Company Law’ (2017) 10 Law and Financial Markets Review 173. 126 This is argued in detail for DLT-based business models in Iris H.-Y. Chiu, Regulating the Crypto-economy: Business Transformations and Financialisation (Oxford: Hart 2022) forthcoming.

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and nature of ties developed in the platform economy.127 At the moment, platform owners’ and users’ mutual need for network effects does not arguably warrant the imposition of one-sided, instrumental standard contractual terms carefully crafted to mostly beneft the platform owner128 or the imbalance between the distributive gains profted by platforms129 and the benefts gained by users. Regulatory interventions based on an ‘organisational framing’ of the platform community can be effective for internalisation of the need to reconfgure the structures of economic relations towards greater fairness, mutual responsibility and ethicality.130 However, it may be argued that intervention into ‘organisational framing’ is inappropriate. Empirical research has found that instrumental motivations are key to users on for-proft platforms, such as drivers on Uber,131 and hosts and users of AirBnB.132 Hence it can be argued that the relational depiction of platform economies as ‘communities’ bound by interdependent relations and ties is too idealistic, and the reality of the relational intensity on platforms can be quite minimal.133 Due to the different business models that use a platform structure, one cannot presume that they all constitute ‘communities’, and those that are ‘relationally intense’ would likely have chosen a different organisational form and governance structure. Whether we adopt a new organisational framing for platforms or treat them as a new species for organisational regulation, we argue that platform governance should be developed, preferably by regulatory law. Regulatory law should provide a framework and key terms in three aspects: civic

127 Advocated by Morgan and Kuch (2015); Di Minin et al. (2016). 128 Calo and Rosenblat (2017). 129 Facebook, YouTube and AirBnB are extremely proftable; so is eBay and Alibaba.com, but Uber has been making losses in 2017 and 2018; see ‘Why Uber is losing money and what it will take to become proftable’ (2019) at www.google.com/url?sa=t&rct=j&q=&esrc= s&source=web&cd=3&cad=rja&uact=8&ved=2ahUKEwjH98LUwK_jAhWsQkEAHee ODVkQFjACegQIDBAH&url=https%3A%2F%2Fwww.cnbc.com%2Fvideo%2F2019 %2F05%2F08%2Fuber-is-losing-money-will-it-ever-be-proftable.html&usg=AOvVaw0 g1Kd8mOyUBoiEenJA4aCn. 130 Good platform governance often refects community ethos and communitarian values; see Chris J. Martin, Paul Upham and Rita Klapper, ‘Democratising Platform Governance in the Sharing Economy: An Analytical Framework and Initial Empirical Insights’ (2017) 166 Journal of Cleaner Production 1395. 131 Mark-Philipp Wilhelms, Sven Henkel and Tomas Falk, ‘To Earn Is Not Enough: A MeansEnd Analysis to Uncover Peer-Providers’ Participation Motives in Peer-To-Peer Carsharing’ (2017) 125 Technological Forecasting and Social Change 38; Zach W.Y. Lee, Tommy K.H. Chan, M.S. Balaji and Alain Yee-Loong Chong, ‘Why People Participate in the Sharing Economy: An Empirical Investigation of Uber’ (2018) 28 Internet Research 829. 132 Kevin Kam Fung So, Haemoon Oh and Somang Min, ‘Motivations and Constraints of Airbnb Consumers: Findings From a Mixed-Methods Approach’ (2018) 67 Tourism Management 224. 133 Maartje Roelofsena and Claudio Minca, ‘The Superhost. Biopolitics, Home and Community in the Airbnb Dream-world of Global Hospitality’ (2018) 91 Geoforum 170.

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conduct, protection of the less powerful or weak and distributive governance. Feld’s proposed Digital Platforms Act and the EU Regulation on fairness and transparency in online platforms deal with certain aspects of our proposed umbrella framework, but we argue that more can be done. Need for governance norms and regulatory reforms so far It may be argued that as long as the corporate owner of the for-proft platform institutes satisfactory rules and governance for the platform, the distributive consequences of the two-layered structure discussed above should not lead us to conclude that reform is needed. This argument is fundamentally neoliberal in nature and ignores the market-cum-hierarchy characteristics of platforms. Accepting the need for an organisational framing of platforms, to an extent, is the basis from which governance fows and is fundamental to addressing governance defcits observed on for-proft platforms especially. Organisational structuring has a direct impact on issues of ethos such as regulatory avoidance or arbitrage. The organisational-based approach is more proactive in nature than waiting for market failures to justify perhaps minimalist regulation. However, such a proactive approach requires policy shifts and ideological acceptance (1) of the platform as a community and more than a market, (2) of production on the platform as being collaborative in nature, even if it just contributes to network effects, and 3) of the collective good sustained by the platform as a common or public good, whether it is aggregated information or network effects. In the absence of addressing organisational structuring, regulatory intervention into platform governance is likely to be more piecemeal in nature,134 responding to market failures, regulatory arbitrage or clear dissonance with institutions. We turn to discuss the state of limited regulatory intervention so far. We argue that such regulatory intervention has been patchy and hesitant. Although some progress in addressing market failures or bringing regulatory arbitrage under control is acknowledged, a more fundamental and coherent framework for platform governance is needed. Market failures The self-governance of platforms has been recognised by commentators as being defcient, as it is weighted towards being in favour of platform owners.135 For-proft platforms do not generally institute processes for stakeholder participation in governance even though their business models are heavily reliant upon the network effects and social goodwill created by users and

134 Fabo et al. (2017), especially in relation to changes to labour law in view of ‘work’ developed in the platform economy. 135 Leoni and Parker (2019) on AirBnB, for example.

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stakeholders.136 For example, Engelmann et al.137 show that even though Facebook has come under some pressure to allow their users and stakeholders more participation and voice in decision making over Facebook policies, the self-governing framework that underlies such ‘constitutional-like’ bargains still produces results that disadvantage users. Facebook trialled a participatory process which was cumbersome to use and then withdrawn for lack of popularity.138 Facebook’s experience shows that although there is a need for stakeholder participation in the governance of platforms, a completely open and democratic process is diffcult to institute and may also fail to garner the majority required to change things, as each voice is drowned out in the crowd. However, leaving it to platforms to design stakeholder engagement or involvement processes may result in feeble or no attempts, as platforms are not incentivised to increase their transaction costs for governance when they are already in a powerful position to dictate their rules. The failure to make stakeholders count continues to be a matter delegated to platforms to manage. Further, some clusters of users can become more powerful than others in platform economies, for example, if they act as moderators.139 Social media platforms beneft especially from such voluntary roles, but they allow proletarian justice to be dispensed by moderators and do not maintain robust oversight of them.140 The self-governance systems on platforms perpetuates issues of power imbalances and unfairness that are not often addressed satisfactorily by for-proft platforms focused on their instrumental motivations. Policymakers have only selectively intervened into the regulation of platform relations where market failures also refect issues of public interest. One such area is the protection of personal data and the prevention of misuse of data under the General Data Protection Regulation 2017. This Regulation applies to all automated processing of personal data in the course of business and therefore includes platforms. It would be platforms that have to implement and monitor the protection of personal data and any breach of such protection, even if the breach may be carried out by another user on the platform.141 Another example of regulatory intervention is the EU is the Directive on audiovisual media services,142 which applies to all broadcasters

136 Acquier et al. (2017); Laura Stein, ‘Policy and Participation on Social Media: The Cases of YouTube, Facebook, and Wikipedia’ (2013) 6 Communication, Culture & Critique 353. 137 Severin Engelmann, Jens Grossklags and Orestis Papakyriakopoulos, ‘A Democracy Called Facebook? Participation as a Privacy Strategy on Social Media’ in M. Medina et al. (eds), APF 2018, Privacy Technologies and Policy (Springer 2018) pp. 91–108, 2018 at https://doi.org/10.1007/978-3-030-02547-2_6. 138 Above. 139 Joseph Seering, Tony Wang, Jina Yoon and Geoff Kaufmann, ‘Moderator Engagement and Community Development in the Age of Algorithms’ (2019) New Media and Society 1. 140 Schwarcz (2019). 141 Arts 33–34, GDPR 2017. 142 Audiovisual Media Services Directive 2018.

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and providers of on-demand programmes, as well as to video-sharing platforms.143 In particular, platform providers are under duties to protect the public from hate speech and video content that breaches Union law, as well as to protect minors from content that adversely affects their physical, mental and moral development.144 These platforms have duties to vet content and to institute user reporting and complaint mechanisms so as to enrol co-policing by its user base.145 Next, limited regulatory intervention has taken place in relation to regulatory arbitrage, in this manner limiting the freedom of self-governance on platforms. These interventions are, however, patchy and experimental in nature, as the example from regulating crowdfnance in the UK shows. Moreover, such regulatory intervention is inconsistent among jurisdictions, and this may yet promote regulatory arbitrage. Regulatory arbitrage Policy makers respond to market developments in a mixed manner around the world, depending on the political dynamics in the jurisdictions concerned. For example, AirBnB has attracted more severe regulatory attention in some cities over others, such as in Kyoto, Barcelona and Denver, compared to lighter regulatory regimes in cities such as London and New York.146 Uber is also subject to more severe regulatory requirements in some cities than others, as it is not operating in Belgium or Germany but welcome in many parts of the US and the UK.147 These discrepancies are a result of political contests rather than ideological consistency on the economic regulation of platforms. Further, during the onset of the Covid-19 crisis, it was clear that the corporate economy was subject to the government’s emergency measures such as furloughing workers, but this would be voluntary for platforms. Platform

143 Theresa Bauer, ‘The Responsibilities of Social Networking Companies: Applying Political CSR Theory to Google, Facebook and Twitter’ in Communicating Corporate Social Responsibility: Perspectives and Practice (Bingley: Emerald Insight 2014) argues that there is a market failure in platforms regulating speech or content, and this is due to their failure to grapple with their ‘citizenship’ within the institutional fabric. 144 Art 28a, Audio-visual Services Directive. 145 Above. 146 Shirley Nieuwland and Rianne van Melik, ‘Regulating Airbnb: How Cities Deal With Perceived Negative Externalities of Short-Term Rentals’ (2018) Current Issues in Tourism at https://doi.org/10.1080/13683500.2018.1504899, documenting the different approaches taken in different cities, some limiting AirBnB lets to restricted numbers of days per year or requiring compliance equivalence with the hotel industry, while others allowing such lets to take place in a more lenient and lightly regulated manner. 147 Chihiro Watanabe, Kashif Naveed, Pekka Neittaanmaki and Brenda Fox, ‘Consolidated Challenge to Social Demand for Resilient Platforms – Lessons from Uber’s Global Expansion’ (2017) 48 Technology in Society 33.

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participants are not regarded as employees, a point criticised heavily by commentators who seek equivalent treatment of labour in the gig economy.148 Commentators discuss how platforms that have become technological giants or ‘unicorns’ lobby excessively for ‘mitigated’ regulation of their business models149 and galvanise their users to put social pressure on governments for lobbying success.150 Further, pro-market regulators and policymakers are wary of introducing overly restrictive regulation that could stife innovation. Innovators are often able to persuade fervently with regard to the potential economic benefts of their models, such as how crowdfunding meets the needs of small and medium-sized enterprises after the credit squeezes post the global fnancial crisis 2007–2009151 as well as the underserved.152 We turn to look at an example of regulation of the crowdfnance platform economy to see how regulation has developed in a piecemeal and highly restrained manner. This example highlights the limited forays that regulatory intervention has made into the platform economy so far, even in the face of regulatory arbitrage. Financial regulation is perhaps one of the most developed and comprehensive regulatory regimes post the global fnancial crisis 2007–2009,153 but it has only caught up with crowdfnance after a number of successful platforms have been in operation for some time. The mechanics of crowdfnance, the platform operators’ roles and the nature of investments concerned are all aspects that defy conventional regulatory classifcations such as in securities and collective investing regulation. After crowdfunding platforms such as Zopa (founded in 2005) and Seedrs (founded in 2012) gained popularity, the Financial Conduct Authority (FCA) then considered if a bespoke regime of regulation was appropriate.154

148 Videbæk Munkholm and Højer Schjøler (2018); Cristiano Codagnone, Athina Karatzogianni and Jacob Matthews, ‘Rhetoric, Reality, Impacts and Regulation in Labour Intermediation Platforms’ in Cadagnone et al. (2018) at ch2; Fabo et al. (2017); Gramano (2019); Schor (2017); Rogers (2016). 149 Berins Collier et al. (2018); Nieuwland and van Melik (2018). 150 Berins Collier et al. (2018); Sofa Ranchordás, ‘Digital Agoras: Democratic Legitimacy, Online Participation and the Case of Uber-petitions’ (2017) 5 Theory and Practice of Legislation 31; Ferreri and Sanyal (2018); Ebru Tekin Bilbil, ‘New Governance and Digital Platform Companies: The Case of Uber’ (2019) 6 International Journal of Public Administration in the Digital Age, at doi:10.4018/IJPADA.2019040104. 151 Alma Pekmezovic and Gordon Walker, ‘The Global Signifcance of Crowdfunding: Solving the SME Funding Problem and Democratizing Access to Capital’ (2016) 7 William and Mary Business Law Review 347; Ulrich Atz and David Bholat, ‘Peer-to-peer Lending and Financial Innovation in the United Kingdom’ (Bank of England Staff Working Paper 598/2016). 152 Broström et al. (2018); Gibilaro and Mattarocci (2018); Paul Langley, ‘Crowdfunding in the United Kingdom: A Cultural Economy’ (2016) 92 Economic Geography 301–321. 153 See Mads Andenas and Iris H.-Y. Chiu, The Foundations and Anatomy of Financial Regulation (Oxford: Routledge 2014). 154 Consultation was carried out in 2013 and regulation came into force in April 2014.

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The initial phase of regulation of peer-to-peer fnancial platforms, such as lending and equity crowdfunding in the UK, has resulted in minimalist regulation which is discrepant between p2p lending and equity crowdfunding.155 This initial phase has also been recognised to be insuffcient a few years on by the FCA and has been reformed.156 From 1 April 2014, the FCA introduced bespoke regulation for loan and equity-based crowdfunding platforms in order to provide a regime of investor protection as well as oversight of platforms. To leave these platforms totally unregulated would present anomalies in the face of existing investor protection duties in securities and collective investment regulation as well as stringent prudential and risk management regulation for the activity of lending.157 Loan-based crowdfunding platforms were imposed with a bespoke prudential regulation regime to ensure that risk-taking, i.e. loan underwriting, would be supported by suffcient capitalisation on the part of platform operators, even if investors bore the capital risk. Loan-based platforms were also imposed with requirements to make certain mandatory disclosures about the borrowers admitted to the platforms for the beneft of lenders.158 Equity crowdfunding platforms were treated differently, as prudential regulation and mandatory disclosure were not imposed but left to self-governance, and the main regulatory tool for investor protection was an investment cap for retail investors of not more than 10% of investible assets to be invested over the platform.159 The initial minimalist regulatory framework was justifed as being balanced and proportionate with the acknowledgement that many matters continued to be left to selfgovernance, such as platform operators’ due diligence standards160 so as not to be overly prescriptive. In the US, the JOBS Act also provided a bespoke regime for crowdfunding platforms carved out from the application of securities regulation.161 However, commentators on both sides of the Atlantic have written about the blind spots of such minimalist regulatory regimes. Market failures are arguably rife on crowdfunding platforms which attract dominantly

155 See below. 156 FCA, Loan-based (‘Peer-to-peer’) and Investment-based Crowdfunding Platforms: Feedback to CP18/20 and Final Rules (June 2019) at www.fca.org.uk/publication/policy/ps1914.pdf. 157 For an overview of the prudential and protective regulatory regimes in fnancial regulation post-2008, see Andenas and Chiu (2014) generally. 158 FCA, The FCA’s Regulatory Approach to Crowdfunding Over the Internet, and the Promotion of Non-readily Realisable Securities by Other MediaFeedback to CP13/13 and Final Rules (March 2014) at www.fca.org.uk/publication/policy/ps14-04.pdf. 159 Above. 160 Above at para 2.19. 161 Pekmezovic et al. (2016).

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retail participation.162 Commentators opine that information signalling on p2p lending platforms is left to self-governance and is generally not satisfactory,163 and investors rely on behavioural biases such as herding to follow positive signals left by other investors.164 Price formation is regarded as relatively poor on equity crowdfunding platforms, as no equivalent securities book-building process is carried out,165 and investors do not have the beneft of liquidity.166 Further, there also seems no facilitative mechanism to help investors exercise their corporate governance rights actively in order to compensate for the lack of liquidity.167 Some commentators even go as far as to suggest that retail investors are likely doomed in equity crowdfunding as there is grave information and expertise asymmetry between them and the start-up company, and retail investors would almost certainly suffer loss.168 The FCA has decided to introduce reforms with effect from 9 December 2019 to enhance the regulation of online p2p lending platforms. In particular, the reforms require a minimum standard of credit risk assessment carried out by platforms supported by appropriate processes and senior management oversight. Platforms are also to institute appropriate organisational structures of governance and internal control.169 Protection for investors is also improved, with clearer and more disclosure of investment prospects, default rates, platform compensation arrangements and winding down arrangements.170 There is also a mandatory duty on platforms’ part to assess that entering into p2p lending arrangements is appropriate171 for investors, meaning that the platform is obliged to gather relevant information about the investors’ knowledge and understanding of risks involved in order to

162 This landscape is changing, as more institutions are participating on crowdfnance platforms; see ‘Professional Investors Join the Crowdfunding Party’ (Financial Times, 15 March 2017) at www.ft.com/content/235b5198-08ce-11e7-ac5a-903b21361b43. 163 Gmeleen Faye B. Tomboc, ‘The Lemons Problem in Crowdfunding’ (2013) 30 The John Marshall Journal of Information Technology and Privacy Law 253; Armour and Enriques (2017); Adair Morse, ‘Peer-to-Peer Crowdfunding: Information and the Potential for Disruption in Consumer Lending’ (2015) 7 Annual Review of Financial Economics 463. 164 Armour and Enriques (2017); Yang Jiang, Yi-Chun (Chad) Ho, Xiangbin Yan and Yong Tan, ‘Investor Platform Choice: Herding, Platform Attributes, and Regulations’ (2018) 35 Journal of Management Information Systems 86–116; Sebastian C. Moenninghoff and Axel Wieandt, ‘The Future of Peer-to-Peer Finance’ (2013) 65 ZFBF 466. 165 Armour and Enriques (2017). 166 Above. 167 J.W. Verret, ‘Uber-ized Corporate Law: Toward a 21st Century Corporate Governance for Crowdfunding and App-Based Investor Communications’ (2016) 41 Journal of Corporation Law 927. 168 Michael B. Dorff, ‘The Siren Call of Equity Crowdfunding’ (2014) 39 Journal of Corporation Law 493. See also Seth C. Oranburg, ‘Bridgefunding: Crowdfunding and the Market for Entrepreneurial Finance’ (2015) 25 Cornell Journal of Law and Public Policy 397. 169 FCA (2019). 170 Above. 171 Above.

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determine that the investor enters into transactions with such knowledge and understanding.172 Investment caps that apply for equity crowdfunding would also apply to retail investors on online p2p lending platforms.173 The second phase of the FCA’s regulation of crowdfnance shows that regulatory response is gradual and nuanced, and much is still left to platform self-governance in terms of the quality of credit risk assessment, the management of defaults and compensation arrangements for investors. Indeed the FCA’s relatively light regulation for online p2p lending platforms would not have prevented the collapse of Lendy in mid-2019. It was revealed that Lendy had engaged in lending investors’ money largely to former property magnate Stewart Day’s property developments, which had left projects unfnished and entered insolvency.174 However, the FCA had not extended the full suite of prudential regulatory controls, such as the limitation of large exposures applicable to banks to online p2p lending platforms. Even in the reforms proposed for December 2019, such bank-like regulation would not be applied to regulate credit risk management on online p2p platforms. Regulatory harmonisation in the EU, which would see some enhanced protective requirements for investors, including a standardised disclosure document, has not been formalised at the time of writing.175 In sum, regulatory developments are piecemeal and catch-up in nature. Next, we consider the limitations of regulatory responses in the face of ‘institutional dissonance’, i.e. observed differences that platforms bring that may cause discomfort as being contrary to accepted social, cultural or community institutions. Institutional dissonance As far as the platform business model has provided new opportunities to conceptualise production, value creation and exchange, it has also introduced new meanings and ambiguity to terms such as ‘work’, i.e. what the status of work in the gig economy should be and what rights in employment should be attracted or otherwise.176 The platform business model has also introduced new meanings and ambiguity to the nature of commercial licenses for business and how such licensing regimes can cope with semi-casual for-proft operations in the

172 Defned in FCA Handbook COBS 10.1. 173 FCA (2019). 174 ‘The Links Between a Former Football Chair and Failed p2p Lender’ (Financial Times, 23 July 2019); ‘Investors Lose Millions in Lendy Collapse’ (The Times, 17 July 2019). 175 Eugenia Macchiavello, ‘“What to Expect When You Are Expecting” a European Crowdfunding Regulation: The Current ‘Bermuda Triangle’ and Future Scenarios for Marketplace Lending and Investing in Europe’ (2019) at https://papers.ssrn.com/sol3/papers. cfm?abstract_id=3493688. 176 Videbæk Munkholm and Højer Schjøler (2018); Cristiano Codagnone, Athina Karatzogianni and Jacob Matthews, ‘Rhetoric, Reality, Impacts and Regulation in Labour Intermediation Platforms’ in Cadagnone et al. (2018) at ch2; Fabo et al. (2017); Gramano (2019); Schor (2017); Rogers (2016).

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hospitality or transport industry.177 It has also introduced new schemes of legitimacy for commercialisation or commoditisation, from top-down licensing regimes or government audits or inspections (such as for restaurants) to legitimacy schemes based on user feedback and ratings, a bottom-up approach generating a ‘social licence’ to operate.178 In this landscape, existing institutions are being questioned in relation to their appropriateness, but in turn, platforms’ avoidance of institutional conformity is also being questioned. For example, one question that arises is whether platforms should uphold institutions of anti-discrimination and civil rights or should market forces be allowed to determine choices even if infuenced by notions that are socially distasteful? This is the question raised by Bauer179 in relation to many for-proft platforms’ lack of a sense of institutional embedment and citizenship, ‘picking and choosing’ the institutional aspects that are favourable, such as private law, and skirting those that are regarded as constraints, such as regulatory and social compacts. On p2p lending platforms, the social data of borrowers are used for risk assessment purposes, and this is regarded as an innovative measure contributing to accuracy in credit risk assessment. However, platforms may not deal with the potential for investors to discriminate on the basis of ethnicity, gender, age and marital status, etc.180 Should platforms have a role to play to support conformity with institutional norms against discrimination or should laissez-faire prevail? Discrimination issues have also been fagged on the platform economy,181 such as on AirBnB,182 and it is queried if such issues can be left to platforms’ self-governance to deal with. Leong and Belzer argue that fundamental norms of civil rights underlie the passage of public accommodations laws in New York, and the potential lack of application to AirBnB undermines important social institutions such as civil rights.183 The platform

177 McKee (2017); Stemler (2017); Dyal-Chand (2015); Miller (2016). 178 Bruno Abrahaoa, Paolo Parigi, Alok Gupta and Karen S. Cook, ‘Reputation Offsets Trust Judgments Based on Social Biases among Airbnb Users’ (2017) 114 Social Sciences 9848; Fenwick and Vermeulen (2019); Karolina Mikołajewska-Zając, ‘Terms of Reference: The Moral Economy of Reputation in a Sharing Economy Platform’ (2018) 21 European Journal of Social Theory 148; OECD (2017). 179 Bauer (2014). 180 Nataliya Barasinka and Dorothea Schäfer, ‘Is Crowdfunding Different? Evidence on the Relation between Gender and Funding Success from a German Peer-to-Peer Lending Platform’ (2014) 15 German Economic Review 436 on discrimination against female borrowers, Eugenia Macchiavello, ‘Peer-to-Peer Lending and the Democratization of Credit Markets: Another Financial Innovation Puzzling Regulators’ (2015) 21 Columbia Journal of European Law 521 on discrimination against obese or Hispanic borrowers; and Feller et al. (2017). 181 E.g. age discrimination discussed in Eva Berde, ‘Older People in the Platform Economy’ (2019) 4 Frontiers in Sociology at https://doi.org/10.3389/fsoc.2019.00008. 182 Mingming Cheng and Carmel Foley, ‘The Sharing Economy and Digital Discrimination: The Case of Airbnb’ (2018) 70 International Journal of Hospitality Management 95; Edelman and Geradin (2016); Kornberger et al. (2017). 183 Nancy Leong and Aaron Belzer, ‘The New Public Accommodations: Race Discrimination in the Platform Economy’ (2017) 105 Georgetown Law Journal 1271.

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may regard itself as a private player and is not necessarily incentivised to uphold norms of the social compact. Next, platforms can become large and powerful due to their network effects, but it is uncertain if conventional institutions in competition law are poised to deal with them, especially if they acquire different digital assets that are not in the same sector but are able to gain new and unprecedented cross-sectoral economies of scale and power.184 Competition lawyers may still be one step behind185 in dealing with the institutional dissonance created by new forms of business agglomeration.186 This is a key issue that Feld’s proposed Digital Platforms Act deals with, and he proposes that there should be regulatory oversight to cap technological giants’ market share as well as to limit vertical integration or to effect breakups of large technological organisations that become too large and powerful in relation to network effects.187 He also moots the possibility of product unbundling or structural separation of different lines of businesses within technological giants to moderate their dominance. Further, the ‘butterfy’ effects of platform business models are also only unravelling, such as how AirBnB affects buy-to-let markets, urban housing availability and town planning.188 This can give rise to an opportunity to consider how institutional challenges can be met. Should we, as Gurran et al. suggest, reframe property rights so that new ways of sharing of risks, liabilities and benefts can be institutionalised in the sharing economy?189 Should we require platforms to respect and uphold certain social institutions as part of their citizenship in the socio-economic fabric and not regard themselves as a universe unto themselves?190 As rightly questioned by Werbin,191 what should a social contract between platforms and society look like?

184 Brian Williamson and Mark Bunting, ‘Reconciling Private Market Governance and Law: A Policy Primer for Digital Platforms’ (2018) at https://ssrn.com/abstract=3188937; Dariusz Adamski, ‘Lost on the Digital Platform: Europe’s Legal Travails with the Digital Single Market’ (2018) 55 Common Market Law Review 719. 185 See Ioannis Lianos, ‘Polycentric Competition Law’ (2018) Current Legal Problems at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3257296; Anna Tzanaki, ‘The Common Ownership Boom - Or: How I Learned to Start Worrying and Love Antitrust’ (2019) Competition Policy International at https://papers.ssrn.com/abstract_id=3401209. 186 See, however, opposing view in Pinar Akman, ‘Antitrust Populism: Tech Giants under Scrutiny’, keynote address, Centre for Business Law and Practice, University of Leeds (18 September 2018). 187 Feld (2018), 88–116. 188 Ferreri and Sanyal (2018). 189 Nicole Gurran, Glen Searle and Peter Phibbs, ‘Urban Planning in the Age of Airbnb: Coase, Property Rights, and Spatial Regulation’ (2018) 36 Urban Policy and Research 399. 190 Bauer (2014). 191 Werbin (2012).

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Regulatory intervention into platform governance should not just be about extending the regulatory perimeter192 or piecemeal additions to correct market failures. We argue that platform governance should be developed more comprehensively in order to address platform relationships as well as the social contract between platforms and society. Platform governance In this section, we argue that platform governance comprises three aspects, i.e. civic conduct, protective needs and distribution. These should be provided in a skeletal regulatory framework that can be feshed out further for platforms’ different needs. These three areas should be developed in regulatory experimentation and learning193 through multi-stakeholder participation194 and regulatory co-evolution and adjustment. This is because top-down regulation may be inappropriate for the different types of socio-economic relations fostered in the platform economy.195 Civic conduct At scale, platform economies are like mini societies and platform governance can be thought of in terms of the social constitution upon which platforms maintain order, coherence and community amongst ‘peers’. As the society of ‘peers’ is the basis upon which platforms distinguish themselves from the need to apply conventional legal and regulatory institutions, we argue that platform governance should cater for the needs of such an economic-society. Peers should have mutual respect for each other, and this forms the basis for civic conduct in terms of mutual expectations as well as orderly and fair behaviour according to the reasonable expectations of the community. Civic conduct norms should provide for aspects of mutuality, not only for instrumental purposes but also for social and reciprocal purposes. First, we propose that platforms should consolidate a charter of community values to encapsulate the principles of behaviour that are encouraged and discouraged. For-proft platforms seldom put out a ‘community values’ charter, unlike socially oriented or not-for-proft platforms, as they are more anxious to be characterised legally as an intermediary and not become involved in the bilateral transactions between users.196 For-proft platforms’ policies and statements are generally characterised by ‘terms of use’, creating

192 Cantero Gamito (2017); Abbey Stemler, ‘Regulation 2.0: The Marriage of New Governance and Lex Informatica’ (2016) 19 Vanderbilt Journal of Entertainment and Technology Law 87; Williamson and Bunting (2018). 193 Discussed below. 194 Discussed below. 195 Stemler (2016). 196 See, for example, AirBnB’s and TaskRabbit’s terms discussed above.

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discrete and bilateral relations with each user rather than fostering relational and collective constructs that are multilateral in nature.197 Along the spectrum, although Etsy is a for-proft company, it strives to maintain an ethos of ethicality and social trust, and it adopts community values, policies and house rules in order to promote mutually civic and ethical behaviour and to promote sustainable consumption.198 Resonate.is is, however, proud to be organised as a cooperative and calls itself a community. It has a community manifesto subscribing to a collective ethos to promote fairness, transparency and cooperation in the production and purchase of music, supporting sustainable artist careers while building up an ethical marketplace and a culture of mutual support and fair distribution of rights and benefts.199 We argue that all platforms should adopt a community values charter which should be multilateral in character and based on bottom-up support. One may say that such a requirement is counter-productive, as it can legitimate platform communities with perverse objectives with such majority support. In view of that possibility, we advocate that regulatory governance for platforms should provide that platform Charters should at the very least accord with public interest, not to be in breach of national laws, and should not promote discrimination, hate, mental or moral degradation. These parameters are drawn from the EU Directive for regulating audio-visual sharing platforms and provide guidance for minimum substantive standards of community values. Such a charter can be the basis upon which users can challenge antisocial behaviour and for platform discipline. It has been commented that platform discipline, such as the termination or suspension of accounts, is often totally in the hands of platform owners who can exercise unchallenged discretion.200 Although the EU Regulation on fairness and transparency on online platforms aims to curb platforms’ arbitrary powers by compelling due processes to be instituted, such regulation introduces only procedural fairness for users. An agreed charter can provide a check and balance mechanism for platforms’ exercise of power. Next, we argue that platforms should be compelled to develop civic conduct norms that balance the interests of the different sides of the market. We observe that self-governance in for-proft platforms does not always

197 E.g. see Uber’s UK terms, www.uber.com/en-GB/legal/terms/gb/; AirBnB and TaskRabbit’s terms discussed earlier, Facebook’s terms, discussed in Bygrave ‘Lex Facebook’ in Bygrave (2015) at ch6; Spotify terms at www.spotify.com/uk/legal/end-user-agreement/; eBay’s terms at www.ebay.com/help/policies/member-behaviour-policies/user-agreement?id=4259. 198 See www.etsy.com/uk/legal?ref=ftr and ‘Our Guiding Principles’ at https://www.etsy.com/ uk/mission. It is unlikely that ‘Guiding Principles’ may become contractually enforceable but House Rules arguably could be, creating a set of multilateral and collective expectations, showcasing the relational nature of the Etsy community. Etsy also facilitates community activity and relations. 199 https://resonate.is/manifesto/. 200 Bygrave (2015) at ch6.

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provide a balanced slate of rules for users on different sides of the market. For example, AirBnB provides for hosts to lay down ground rules, but does it provide for hosts to be aware of and meet guests’ special needs, such as disability needs?201 Platform governance should be built upon mutual and reciprocal community expectations and not only rules of conduct where they are instrumental.202 It has been observed that users of platforms could delete their account if they receive negative feedback and create new accounts to start over, usually without much scrutiny from platforms.203 Would users like to deal with other users whose history is deliberately obscured? Should platforms have a greater sense of community oversight and ensure that antisocial or uncivic behaviour is policed and managed? Although the norms appropriate for each platform may be different,204 we argue that a regulatory framework can sensibly require platforms to institute balance, reciprocity and fairness in their governance and rules for promoting mutually civic behaviour. Platforms should also take responsibility for monitoring and discouraging deviant behaviour. For example on Etsy, although buyers have the power to affect sellers’ social licences to operate by leaving feedback in detail, house rules are explicit in that discriminatory conduct or conduct that threatens to undermine the integrity of the system is not permitted.205 The EU Regulation on the fairness and transparency of online platforms encourages platforms to have informal and out-of-court dispute settlement mechanisms such as mediation,206 although this seems not to be a mandatory requirement. Hence the regulation nudges platforms towards greater responsibility for moderating behaviour. Platforms such as eBay, Etsy and AirBnB do provide for in-house dispute resolution, but the practice is inconsistent. We propose that platforms should be regulated in relation to how they conduct case review and dispute resolution processes, and perhaps independent audits of platform dispute resolution systems should be required in order to ensure that they are fair, transparent and according to objective criteria such as platform Charter values or legal principles of justice or fairness. Where platforms institute power structures such as volunteer moderators to adjudicate between users, it is also important to ensure that power is exercised responsibly and that effective adjudication is carried out. The mere dispensation of ‘proletarian justice’ should be avoided.207 Platforms should vet the suitability of moderators and subject them to a code of conduct and discipline for breaches. Platforms should have the

201 202 203 204

Cheng and Foley (2018); Leoni and Parker (2019). Leoni and Parker (2019). Mikołajewska-Zajac (2018). Such as disclosure norms for online marketplaces, crowdfnance or ID or qualifcations vetting where services may be provided. 205 www.etsy.com/uk/legal/section/buyers. 206 Arts 12–13. 207 Schwarcz (2019).

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responsibility to ensure that their governance and power structures accord with their Charter, and that holders of power are subject to appropriate safeguards and accountability. Further, platform governance should also relate to mutual and civic conduct between platform operators and users.208 In this respect, platforms should be regulated in order to moderate the potential adverse effects they can infict upon users due to their power over users. For example, the EU Regulation on the fairness and transparency of online platforms209 explicitly provides for certain important aspects, such as the right of business users to information and complaint if their accounts are suspended or terminated. Such regulation introduces an important constraint upon the possible arbitrary exercise of powers by the platform operator. We argue that civic behaviour required on the part of platform operators should extend to platform transparency about its exercise of powers, for example, to publish statistics on quarterly numbers of accounts suspended or terminated and for what reasons, quarterly statistics on complaints and outcomes and challenges and reviews of platform decisions and outcomes. We also think that an independent audit and reporting requirement can be imposed on platforms, so that the platform’s complaint-handling and dispute resolution processes can be subject to independent scrutiny. Finally, we also advocate platform governance in relation to civic participation by users, such as allowing users to have a say or to be consulted where changes in policies or terms or decisions about other important issues that affect the community as a whole are considered. We consider this aspect of platform governance in greater detail under ‘Distributive Norms’ shortly. Protective regulation Next, we argue that platforms should be regulated to administer a basic set of protective norms that are consistent with social expectations amongst peers, such as in relation to anti-fraud and non-exploitation. More specifc norms for different platforms should also be developed so as to combat imbalances in information and power and to protect vulnerable participants such as minors. Highly developed regimes of product liability,210 consumer protection,211 etc. have over the years been instituted in Western consumer capitalist societies. Such protective laws and regulations represent institutions that address

208 E.g. see Schwarcz (2019). 209 Art 4. 210 Private law on product liability such as in tort has been refned by legislation, see D. Fairgrieve and R.S. Goldberg, Product Liability (Oxford: OUP 2018) pts II, III; Consumer Protection Act 1987; Trade Descriptions Act 1968; Consumer Rights Act 2015. 211 J. Wood, ‘Consumer Protection: A Case of Successful Regulation’ in P. Drahos (ed), Regulatory Theory (Canberra: ANU Press 2017), ch36.

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asymmetries in relation to information or power that may not be corrected by market forces. On platforms, although many transactions in theory take place between peers, there is information asymmetry between seller and buyer of a used good, and there may be power asymmetries between sophisticated or repeat users compared to the one-off or ad hoc user. Conventional laws and regulations may not apply to platform economies due to the ‘peer’ nature of transactions, i.e. not carried out in the course of business for attracting the application of protective regulation or by virtue of crossborder diffculties such as the lack of extra-territoriality for the relevant protective laws or regulations. The self-governance of eBay, for example, shows incremental development over the years in providing a system of sellers’ and buyers’ rights outside of domestic sales and consumer laws. However, not all used goods platforms provide a similar standard of service.212 We do not engage here with the extent to which conventional sales, consumer, regulatory and other laws in different jurisdictions should form part of platform governance but rather seek to suggest that there are certain fundamental protective norms that can be made consistent across all platform economies. These form a basic layer of protective norms upon which further development can be made, including the extension of conventional laws and regulations to the functionally equivalent subject in the platform economy. First, anti-fraud should be a protective norm upheld by platforms, as fraud is fundamentally damaging to trust in the platform economy. Platforms should have a duty to monitor, within their best endeavours, for potentially misleading or deceptive descriptions by users. Users should also have the right to fag up or report suspect fraudulent behaviour. For example, the FCA’s regulation of online p2p lending platforms requires platforms to conduct independent credit risk assessment on online p2p lending platforms.213 This refects an expectation on the part of platforms to ‘verify’, as users may not overcome information asymmetries based on their own endeavours. It may be argued that a regulatory duty for platforms to monitor deceptive and misleading behaviour is too onerous and that platforms should not be made jointly liable with the primary defendant that has made misleading or deceptive representations. However, as platforms do maintain some extent of centralised governance and are often in a position to do so, disclaiming responsibility for users’ content altogether seems disingenuous.214 The scoping of platforms’ responsibilities215 can be made more nuanced in view of platforms’ objectives and resources, and well-resourced platforms can be

212 For example, Depop, which is a popular app-based used goods platform, does not provide for extensive in-house rules for sellers’ and buyers’ rights. Users would need to rely on protections offered by PayPal or their credit card provider. 213 Discussed above. 214 Audio-visual Media Directive, Art 28a. 215 See discussion below.

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in a position to invest in monitoring technology such as algorithmic-driven monitoring. Platforms should put in place explicit policies to discourage deception and misleading descriptions, and infringing acts by users should result in discipline. Platforms should also not engage in misleading practices themselves in order to attract network traffc, such as the criticised practice of ‘phantom cars’216 adopted by Uber in order to attract bookings. Next, non-exploitation should also be regarded as a fundamental protective norm, which is consistent with civic conduct amongst peers as discussed above. In this respect, platforms should not exploit users and should also monitor exploitative behaviour. ‘Exploitative’ behaviour means ‘unfairly or cynically using another person or group for proft or advantage’.217 In this respect, we suggest that a regulatory defnition can be adopted in a non-exhaustive manner, such as exploitative conduct in relation to users’ information, users’ vulnerabilities (such as minors), users’ trust, etc. We suggest that platforms should have a duty to monitor, discourage and enforce against such behaviour amongst users and to refrain from engaging in such behaviour itself. Regulation such as the General Data Protection Regulation (GDPR),218 and safeguards that are required on the part of payment services providers under the Payment Services Directive 2015,219 protect key user information such as personal data and payment details. However, we argue that non-exploitation can go further. At the moment, many platforms such as Facebook, Google and Amazon use customers’ data for marketing and commodifcation purposes on the basis that platforms have secured pre-agreed consents by users in lengthy terms and conditions that users do not read. Should more meaningful and informed consent be required, and mechanisms for user opt-out be made much more readily available, going beyond the protections for personal and sensitive data in the GDPR? Calo and Rosenblat220 argue that a more radical legal development would be to treat platforms as fduciaries of information, therefore severely constraining their ability to exploit users’ information. Another example of exploitation that needs to be addressed relates to platforms’ discriminatory treatment between users, such as the ‘surge pricing’221

216 Calo and Rosenblat (2017). 217 According to the Merriam-Webster dictionary at www.merriam-webster.com/dictionary/ exploitative. 218 See https://gdpr-info.eu; ch5, Paul Voight and Axel von dem Bussche, The EU General Data Protection Regulation (GDPR) (Heidelberg: Springer 2017). 219 Protection for personal security features in Art 66–70, Payment Services Directive 2015, also payment service providers’ obligation to ensure that strong customer authentication controls are put in place to prevent hacking and fraud, see Arts 72, 74, 90, 95–98, Payment Services Directive 2015. 220 Calo and Rosenblat (2017). 221 ‘Surge Pricing: How It Works and How to Avoid It’ (BBC News, 18 January 2018).

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practice that Uber carries out when users try to book a car. Users may also engage in similar exploitative practice by offering preferential prices to different users without a clear basis for doing so (where platforms do not determine price). Platforms should be required to refrain from discriminatory practices and to monitor and enforce against such practices amongst users inter se. Further, platforms need to consider if practices on the platform can be exploitative in character due to grey legal or regulatory treatment or the potential for regulatory arbitrage. For example, Uber’s treatment of drivers as independent contractors has been criticised as exploitative when many, in fact, drive ‘full-time’ for Uber under Uber’s control without enjoying the institutions of protection at work.222 It is also queried whether a buy-to-let owner of a dozen listings or so on AirBnB should still be regarded as a peer ‘host’ not subject to the full suite of hospitality regulations.223 It may be argued that it is diffcult for platforms to monitor exploitative conduct on the part of users, as such conduct is wide-ranging and can be subtle. However, regulatory design for platform responsibilities can be balanced, and it is not inconceivable that platforms can be subject to a monitoring duty ‘to the best of their endeavours’. It is conceivable that platforms may be able to monitor certain proxy factors for suspect behaviour; such monitoring would also develop over time as a response to learning patterns of user behaviour. For example, platforms can monitor the numbers of users who close accounts and restart their existence, users who have multiple accounts or listings under similar personal information, suspicious behaviour such as repeated cancelled transactions, etc. We think that consistent with the EU Directive on audiovisual media that imposes responsibility on media providers and video-sharing platforms to protect the vulnerable, platforms can generally be required to do more for the vulnerable. For example, platforms can do better with information collected from users. Instead of merely profling users for marketing or commodifcation purposes, platforms can collect the preferences of users, identify possible vulnerabilities such as being underage, elderly, impecunious, disabled or in a minority group and can then extend protective mechanisms. Such protective mechanisms can include asking users if content or marketing ought to be blocked in appropriate cases, or treating any complaints raised by such groups as requiring particularly sensitive handling. We also suggest that users should have a right to raise complaints about platforms’ or other users’ exploitative behaviour and these should be handled in accordance with fair and open dispute resolution as envisaged under the EU Regulation on fairness and transparency on online platforms.

222 Rogers (2016); Di Minin (2016). 223 Stemler (2017).

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Finally, we argue that there may be room to consider imposing a duty on platform owners to protect within their best endeavours the collective good of the platform in users’ collective interests. This duty is arguably proportionate to platform owners’ powers on the platform. This duty may arguably be derived from the corporate director’s duties of loyalty and care to the company.224 We have argued earlier that policymakers should consider treating the platform as a distinct entity from its owners, just like the company is a distinct legal entity from its shareholders. In this manner, the collective ‘property’ to which all constituents contribute can be objectively governed and protected. If such an organisational reform is adopted, we argue that it is apt to ensure that platform owners’ powers over the platform will be exercised responsibly and accountably, and that the semi-public good nature of the collective property on the platform, especially at scale, will be recognised and handled with appropriate care. In this manner we are not demanding the same directors’ fduciary standard for platform owners in their management of platforms. But inspiration from organisational law such as company law is relevant, as platforms exhibit characteristics of both markets and hierarchies. For example, platform owners could ensure that platform continuity is provided for, that access to the platform is not arbitrarily disrupted or terminated and that there are governance and protective systems that guard against third-party interference and attack. Such collective management responsibilities should not be left to self-governance, as users can be highly prejudiced without the management of these ‘collective’ responsibilities. Such provisions would also go further than the EU Regulation’s provisions, which deal largely with the right to ex post complaints and dispute resolution. Distributive norms As earlier argued, many for-proft platforms exploit a form of collective ‘property’ over which they assert private rights. Not-for-proft or hybrid platforms take the opposite approach of resisting private property defnitions and maintain a commons with self-generated governance frameworks. It is apt to consider requiring platforms to institute appropriate distributive norms supported by multi-stakeholder governance. This approach will go some way towards bringing distributive issues to the forefront of the platform economy so that these are properly considered as part of the social contract between platforms and society. Further such an approach hopefully mitigates the severe imbalances and inequalities that result from for-proft platforms’ proprietary assertion.225

224 S170, Companies Act 2006, and see Andrew Keay, The Corporate Objective (Cheltenham: Edward Elgar 2011) on maximising the welfare of the company as a legal entity in itself. 225 Gurran et al. (2018).

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In relation to Facebook, Google and other social media sites where data and information are of great commodity value, Barnett opines: Digital content markets exhibit two recurrent characteristics: abundant free content and extreme concentration among content aggregation intermediaries. These two characteristics are linked. Zero-price content environments promote concentration by shifting rent-extraction opportunities from content production markets to content aggregation markets characterized by scale economies, network effects, weak inventory constraints, ecosystem effects and learning effects that promote winner-take-all outcomes.226 We argue that it is because the legal framework allows the corporatised platform owner to deal with platform users at arm’s length that such ‘winnertake-all-outcomes’ persist in successful for-proft platform economies. Zuckerberg’s personal wealth derived from Facebook’s success stands as a stark contrast of inequality with many of Facebook’s users. Does the for-proft platform economy promote even greater distributive inequality than has persisted in the post-Fordist age?227 The platform economy presents an appearance of fat and decentralised structures and open access. This often gives rise to the wrong impression that egalitarianism and equality can be somehow fostered. However we have shown in our discussion that this impression is mistaken, as platform governance, when left to self-governance by for-proft platforms, can be highly unequal and extractive. At the opposite end of the spectrum, the platforms that are not-for-proft or promote fair trading refect the move towards adoption of new governance and distributive norms that aim to promote greater equality in rights of participation and fairer distribution of benefts. Such qualities should not only be confned to platform cooperatives. As platform economies are neither clearly markets nor hierarchies, it is apt to consider regulating platform governance across the board in relation to distributive issues that arise. Otherwise, platform owners would be able to choose extant organisational forms to delineate distributive parameters, such extant organisational forms having been introduced without the foresight of the rise of the platform economy. As we argue that platforms create collective ‘property’ such as agglomeration of information (as discussed by Barnett) or network effects, there should be regulatory recognition given to the co-contribution towards such property by all stakeholders so that governance rights may be distributed to them. We are of the view that platforms should introduce systems for stakeholder participation and governance. Platforms may adopt different processes of

226 Barnett (2017). 227 G. Mulgan, ‘The Essence of Capitalism’ in The Locust and the Bee (Princeton, NJ: Princeton University Press 2013), ch3; T. Piketty, Capital in the Twenty-frst Century (Cambridge, MA: Harvard University Press 2014) discussing the modern state of distributive inequalities.

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participation and feedback228 but we argue that this should be enshrined in a constitution between the platform and members, and members inter se.229 It is not possible at this stage to be prescriptive as to what these arrangements should look like for each platform, but platforms should co-produce this with their users. The constitutional framework should include these key aspects: (1) How rights of participation are to be defned, for example, by consultation and feedback,230 by individual231 or collective voting232 or by other means of enabling two-way dialogue between platform owners and stakeholders; (2) How rights of participation are apportioned, i.e. one member/one vote,233 rights apportioned according to commitment or regularity of use or other forms of ‘key stakeholding’, voice or participation rights in individual or collective contexts such as individual rights to circulate statements234 or participate in panels;235 and (3) How the processes of participation are to be carried out, such as by processes akin to corporate ‘general meetings’,236 grouped panels or engagement;237 and (4) Supporting mechanics to make the processes of participation work, such as notice requirements for meetings or panels,238 quorum requirements,239 how voting is carried out and how votes are counted.240 The above framework draws from organisational laws such as company law which have the tradition of catering for ‘collective property’ notions in

228 Stein (2013) argues that platforms provide a ladder of different intensities of participation, some more cosmetic than others. Although we agree that platforms will adopt different approaches, such approaches should be collectively determined and appropriate for the platform. 229 Much like the corporate constitution under s33, Companies Act 2006. 230 Such as advisory councils for employees under Provisions 5, 6 of the UK Corporate Governance Code. Employees would not have decision-making rights such as reserved to shareholders and directors under company law but would have a clear channel of input. 231 Such as one member one vote systems in companies, social enterprises or cooperatives. 232 Where voting rights may not be one member one vote, where there are different classes of voting rights, such as according to type of capital contribution. Company law provides for class voting, see s334–5, Companies Act 2006. 233 Which can be adopted in companies, social enterprises and cooperatives. 234 Differentiated voting rights can exist in companies such as class rights according to type of share held, and in France, the Florange Law, for example, accords higher weighted voting rights to ‘long-term’ shareholders who hold the company’s shares over two years. 235 Such as constituents guaranteed formal processes of consultation by decision makers, e.g. the employees’ advisory or work councils in companies. 236 General meetings are provided for most extensively in the company law framework; see Part 13, UK Companies Act 2006. 237 Such as class meetings for voting members with differentiated rights. 238 For example, s307–313, Companies Act 2006. 239 S318, Companies Act and may be determined in a company’s constitution. 240 S320–332, Companies Act, for example.

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the form of governance rights distribution. In this manner, a framework can be provided for platforms to fesh out their constitutions, which should be enforceable by platform stakeholders. This may mitigate the possibility that powerful platforms would introduce cosmetic systems for stakeholder participation. For example, Facebook’s voting process for policy change discussed earlier did not galvanise suffcient participation. However, critics have raised issues regarding the cumbersome mechanics of accessing the voting policy.241 Finally, we argue that platforms’ constitutions should contain distributive frameworks regarding wealth generated over the platform and the distribution of benefts. Not-for-proft and hybrid platforms have already shown the way in egalitarian best practice, such as the royalty-free arrangements and at least 50% revenue-sharing between platform owners and contributor artists on Stocksy, a platform cooperative that sells curated images and videos produced by individual artists who are also given a share in the cooperative.242 Although we do not think we can be prescriptive about how platforms share collective wealth creation with their stakeholders, we argue that there should be a framework for such wealth distribution. For example, we would prefer to see Facebook’s Libra project243 as one that distributes rewards to users based on wealth created on the network. It should not be an extension of the ‘winner-take-all-outcomes’ mentioned above in allowing Facebook to extract even more from users by acting as a private and unregulated bank. We also wonder if Uber’s and Lyft’s distribution of shares to their most committed drivers244 refects their recognition of the coproduction of value by user participation, therefore mitigating some of the worst effects of distributive inequality.245 During the onset of the Covid-19 crisis, platform giants such as Uber and AirBnB did put in place measures to mitigate the loss of welfare for their participants, as mentioned earlier. These are to an extent distributive in nature, but are ad hoc and subject to platforms’ discretion, such as the eligibility to apply for AirBnB Superhost relief to ameliorate income loss. Although emergency welfare measures cannot be overly prescribed, perhaps there should be a framework for governance and participation by stakeholders in relation to the formulation of distributive policies. Further, in order to promote scrutiny for platforms’ distributive policies, we argue that there should be mandatory regulation to compel platforms to disclose corporate platform owners’ profts and distribution of benefts to corporate

241 Bygrave (2015) at ch6; Engelmann et al. (2018). 242 www.stocksy.com/service/about/. 243 Facebook plans to launch a private currency, Libra, that is fully backed by sovereign currencies and can be used for international remittance, https://libra.org/en-US/. 244 ‘Uber, Lyft to Offer Some Drivers Shares in Stock Market Listing’ (Reuters, 28 February 2019) at www.reuters.com/article/us-uber-ipo/uber-lyft-to-offer-drivers-shares-in-stockmarket-listing-wsj-idUSKCN1QH1S6. 245 However, as Uber is still making a loss, it can be argued that giving shares may be a form of risk-shifting onto stakeholders.

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managers and shareholders. Platforms should also consider a framework for distribution of benefts to users who take on extra roles in a productive manner, such as being effective moderators. It may be argued that in advancing the framework above, we support norms of platform governance not unlike those advanced under stakeholder theory in relation to company law.246 We argue that the case for this in platform governance is more compelling and that the lack of progression in company law reform in adopting stakeholder theory247 is less persuasive in the case of platform business models. Conventional corporate law theory gives a prized place to the private capital contributed by shareholders that provides the stability needed for companies to contract for and exploit opportunities and resources.248 As argued above, the private property underpinning of corporate law does not apply squarely to the platform business model which brings private capital together with the agglomeration of collective input from mass participation (social capital), making both aspects equally indispensable for the creation of wealth. The social domain is both a key input in platform wealth creation as well as its broader ‘embedding’ context,249 providing a pool of information or network commons from which the platform draws. At the very least, if one takes a ‘team production’ view250 of platform wealth creation, one must recognise users’ place in this process. Further, in the development of UK company law, reforms have been needed to explicitly improve stakeholders’ positions, as voluntary business practice has not brought about governance changes.251 For example, employee voice on the Board is only recently facilitated by the Corporate Governance Code that applies to publicly listed companies, so that employees can be ‘represented’ at Board level by a dedicated nonexecutive director, or a representative employee appointed to the Board or

246 R. Edward Freeman, ‘A Stakeholder Theory of the Modern Corporation’ reproduced in Max B.E. Clarkson (ed), The Corporation and Its Stakeholders (Toronto: University of Toronto Press 1998), 125, see also discussion and citations in Chiu (2017). 247 UK company law is shareholder-centred; see John Armour, Simon Deakin and Suzanne J. Konzelmann, ‘Shareholder Primacy and the Trajectory of UK Corporate Governance’ (2003) at www.cbr.cam.ac.uk/fleadmin/user_upload/centre-for-business-research/downloads/ working-papers/wp266.pdf; Andrew Keay, ‘Shareholder Primacy in Corporate Law: Can It Survive? Should It Survive?’ (2009) at http://ssrn.com/abstract=1498065; in the US see Leo Strine Jnr, ‘Our Continuing Struggle with the Idea that For-Proft Corporations Seek Proft’ (2012) 47 Wake Forest Law Review 135. 248 Armen A. Alchian and Harold Demsetz, ‘Production, Information Costs and Economic Organisation’ (1972) 62 The American Economic Review 777. 249 Mark Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’ (1985) 91 American Journal of Sociology 481. 250 Margaret M. Blair and Lynn A. Stout, ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia Law Review 247. 251 Chiu (2018).

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via an advisory council to the Board.252 Hence we argue that for platform users that contribute to the social capital which is appropriated for the private wealth creation of platforms, explicit reforms are necessary in order to include them in the governance and distribution frameworks.

Platform governance as new governance and co-regulation So far we have argued for a regulatory approach to platform governance that encompasses organisational and governance reform and the reconceptualisation of property laws. However, as platforms are socio-economic communities, whether tending towards more instrumental objectives or ethos-based objectives, a governance argument for platforms cannot be fully top-down in nature. Black argues that ‘de-centred’ regulation253 is appropriate where fve conditions prevail, namely, complexity, fragmentation, interdependencies, ungovernability and the rejection of a clear private-public distinction. ‘Complexity’ refers to the nature of problems that may need to be dealt with. ‘Fragmentation’ refers to the fragmentation of knowledge, resources and capacity for control in the regulatory space. ‘Interdependencies’ refers to the dynamics between the participants in the regulatory space, co-producing and co-enforcing norms of governance. ‘Ungovernability’ refers to the autonomy and unpredictability of actor behaviour in the regulatory space, which will pose challenges to assumptions made by regulatory authorities. In a decentred landscape, there is, some argue, no public–private distinction, as all participants contribute to and infuence governance. Although some platforms are more instrumentally focused than others, the model of network effects on platforms means that socio-economic relations are likely to be characterised as complex, interdependent, fragmented in relation to power and needs and therefore requiring a balance of governance that has features of centralisation and decentralisation. Centralised governance can be necessary for the creation of institutions and norms that sustain the community, while decentralisation is important for preserving autonomy and distributing power.254 Finck255 argues for platform governance to be based on co-regulation. Co-regulation involves pluralistic processes for norm generation so that the public, private sector and stakeholders are all enrolled into dialogue, learning and co-development processes to design features of governance. She argues that there is uncertainty in terms of what specifc norms should be generated for platform governance as it may be cumbersome or futile to add duplicative layers of norms onto existing regulatory norms such as health

252 Provisions 5 and 6, UK Corporate Governance Code 2018 at https://www.frc.org.uk/get attachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-GovernanceCode-FINAL.pdf. 253 Julia Black, ‘Critical Refections on Regulation’ (2002) 27 Australian Journal of Legal Philosophy 1. 254 Fenwick and Vermeulen (2019). 255 Finck (2017).

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and safety, consumer protection, etc., but leaving to self-governance is not optimal either. Co-regulation would be characterised by: (1) Participation and power sharing amongst all relevant governance actors mentioned above; (2) Multilevel integration as innovative regulatory or governance solutions are shared and ‘tried out’ for experimentation; (3) Diversity and decentralisation where uniform solutions are not practicable or normatively justifed across platform governance; (4) Deliberation among multiple stakeholders as a continuing process in terms of dialogic discussions and reviewing of governance norms and solutions; (5) Flexibility and revisability of governance norms and solutions as they are generated; (6) Experimentation and knowledge creation amongst all stakeholders in the governance processes. Finck’s approach very much refects the ethos in ‘new governance’. ‘New governance’ methodologies are based on multi-stakeholder governance to bring about desired commercial or social behaviour.256 Hence regulatory design based on new governance tends to incorporate more procedural fexibility and to include a variety of ‘governance’ actors, including regulators, markets and stakeholders, in securing optimal outcomes,257 potentially overcoming the shortcomings of traditional command-and-control regulation. Although ‘new governance’ has been accepted in regulatory design, such as in international fnancial regulation,258 its implementation has not been as pluralistic as envisaged259 nor as effective as presumed.260 This is largely due to regulators implementing a form of effective devolution to their regulatees, resulting in a form of poorly supervised self-governance.261 Lessons have been learnt from failures in new governance since the global fnancial crisis 2007–2009, and its ethos and techniques remain relevant for its rejuvenation.262 Commentators argue that the governance of innovation

256 Christine Parker, The Open Corporation (Cambridge: CUP 2002). 257 Gunningham (2009). 258 The Basel II Capital Accord of 2006; R. Weber, ‘New Governance, Financial Regulation, and Challenges to Legitimacy: The Example of the Internal Models Approach to Capital Adequacy Regulation’ (2010) 62 Administrative Law Review 783. 259 Chiu (2018). 260 See below citations. 261 Cristie Ford, ‘New Governance, Compliance, and Principles-Based Securities Regulation’ (2008) 45 American Business Law Journal 1; Julia Black, ‘Paradoxes and Failures: “New Governance” Techniques and the Financial Crisis’ (2012) 75 Modern Law Review 1037. 262 Cristie Ford, Innovation and the State (Cambridge: CUP 2013) on the rejuvenated potential of new governance to govern the rise of innovations.

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requires a process-based approach, as ultimately, learning about the risks and benefts of innovation is an ongoing process, and the involvement of multiple actors from policymakers to the private sector and stakeholders is essential for the shaping of discourse surrounding knowledge discovery.263 Different actors bring to bear different facets of the discourse, from public policy goals and community values to issues of effective standardisation.264 Kaal and Vermeulen, for example, argue that it is important for policymakers to talk to venture capitalists in order to understand emerging trends in innovation and their implications.265 To an extent, we already see co-regulation being adopted in EU legislation, as the Directive on audiovisual media services explicitly envisages that regulatory stipulations should be complemented by codes of conduct developed by the private sector, such as by associations of media providers, in relation to marketing or advertising of controversial consumer products such as foods that may cause obesity.266 However, the EU legislation does not arguably go far enough to make co-regulation a really pluralistic framework, as other stakeholders such as non-governmental think tank bodies are not mentioned. More needs to be done.

Conclusion We argued that self-governance on platforms has allowed platforms the freedom to sideline their ‘collective’ aspects and for-proft platforms to focus on contractually delineating their relations and responsibilities vis-à-vis users in order to maximise platform owners’ private profts. Although not-for-proft and hybrid platforms adopt a different approach, recognising the hierarchical aspects of their governance and introducing new governance and distributive norms to refect the collective property of the platform, we consider the regulation of platform governance to be timely and to bring about a more level playing feld. There is scope to consider regulating platforms as distinct legal entities, and this new organisational framing paves the way for reconceptualisation of platform property, governance and distribution. Such regulation would provide for platforms to engage in co-regulation processes, ensuring pluralism and inclusivity in governance design, and to be governed according to key basic notions. These are: (1) Constitutional framing of platform relations with users that specifes community values, governance and distributive norms;

263 Stemler (2016) and see below. 264 David E. Winickoff and Sebastian M. Pfotenhauer, ‘Technology Governance and the Innovation Process’ (2018) OECD Science, Technology and Innovation Outlook 221. 265 Kaal and Vermeulen (2017). 266 Arts 4a, 6a, 9 and 28b.

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(2) Platform responsibilities and powers in relation to monitoring and enforcing civic conduct, anti-fraud, anti-exploitative norms amongst users inter se; (3) Platform obligations to refrain from engaging in anti-civic or antiprotective norms; and (4) Platform owners’ special responsibilities in view of management powers to promote the collective good of the platform as a whole. These notions are drawn from fundamental tenets in organisations law that refect the ‘organisational’ characteristics of platforms often sidelined in favour of the ‘market-framing’ aspects. To an extent, EU regulation has also picked up on the need to combat the market failures of platforms, such as the obligations imposed on platforms in the Regulation of transparency and fairness on online platforms and the Directive on audiovisual media services. However the regulatory approach so far is piecemeal and patchy, and only slowly responding to long-standing issues. Consistent with the general message of the book, it is timely to consider appropriate organisational framing and governance reforms for decentralised business models, in order to address the defcits of contractual governance that these business models have so far defaulted to.

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Verret, J.W., ‘Uber-ized Corporate Law: Toward a 21st Century Corporate Governance for Crowdfunding and App-Based Investor Communications’ (2016) 41 Journal of Corporation Law 927 Videbæk Munkholm, Natalie and Højer Schjøler, Christian, ‘Platform Work and the Danish Model – Legal Perspectives’ (2018) NJCL 118 Voight, Paul and von dem Bussche, Axel, The EU General Data Protection Regulation (GDPR) (Heidelberg: Springer 2017). Watanabe, Chihiro, Naveed, Kashif, Neittaanmaki and Pekka Fox, Brenda, ‘Consolidated Challenge to Social Demand for Resilient Platforms – Lessons from Uber’s Global Expansion’ (2017) 48 Technology in Society 33 Werbin, Kenneth C., ‘The Social Media Contract: On the Paradoxes of Digital Property in This Digital Land’ (2012) 46 Journal of Canadian Studies 245 Wessels, Bridgette, ‘Virtual Exchange-Based Mobilities: Platform Economy, Exchange and Culture’ (2018) 3 Applied Mobilities 51–65 Wilhelms, Mark-Philipp, Henkel, Sven and Falk, Tomas, ‘To Earn Is Not Enough: A Means-End Analysis to Uncover Peer-Providers’ Participation Motives in Peer-ToPeer Carsharing’ (2017) 125 Technological Forecasting and Social Change 38 Williamson, Brian and Bunting, Mark, ‘Reconciling Private Market Governance and Law: A Policy Primer for Digital Platforms’ (2018) at https://ssrn.com/ abstract=3188937 Winickoff, David E. and Pfotenhauer, Sebastian M., ‘Technology Governance and the Innovation Process’ (2018) OECD Science, Technology and Innovation Outlook 221

8

Social enterprise law in the platform economy Nina Boeger

Introduction During the coronavirus pandemic, much of our world shifted online. While offces, schools and shops stood empty, remote working became essential. Online trade rose signifcantly.1 So did the income and shares of large online platforms, even while other equity slumped in the global economic chaos.2 Many smaller and local businesses connected online with their customers to cope in the crisis. Even public services, including the delivery of certain medical services, have increased online elements of their provision. There are predictions that at least some of these changes are here to stay even when the pandemic subsides. Some will welcome this, but others point to economic and social risks, including the possibility that big corporate platforms that run online provision will be able to consolidate their existing economic and political power, making it increasingly diffcult to hold them to account for their global operations. This chapter builds on the detailed characterisation of online platforms in previous chapters of this book3 to refect on the specifc question of how their legal ownership structure can be adjusted to steer their behaviour and socio-economic impact. The tool to do this sort of steering is here loosely termed “social enterprise law”. It describes, in shorthand, that branch of business organisations law which enables ‘blended’ ownership that is both socially committed and economically sustainable. This includes general

1 ‘Impact of the Coronavirus (COVID-19) on Online Shopping in the United Kingdom (UK) in May’ (Statista, June 2020) accessed 14 June 2020. 2 Rupert Neat, ‘Zoom Booms as Demand for Video-conferencing Tech Grows’ The Guardian (London, 31 March 2020) accessed 14 June 2020; Dominic Rushe and Michael Sainato, ‘Amazon Posts $75bn First-quarter Revenues But Expects to Spend $4bn in Covid-19 Costs’ The Guardian (London, 30 April 2020) accessed 14 June 2020. 3 See Chapter 7 in this volume.

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company law (covering limited companies) to the extent that it allows for fexibility to make changes to a company’s purpose, membership or governance to make it operate as socially responsible economic actor. In addition, it comprises tailored legal formats for blended ownership which, in the UK, are regulated in several specifc legal instruments overseen by different regulatory bodies. They include the law on community interest companies and on incorporated societies. We ask how platforms set themselves up in blended ownership and how to do so impacts their behaviour as economic actors. What lessons can we learn for organising a platform economy post-Covid? To focus on platform ownership – and the use of social enterprise law as (private) transactional law  – is complementary to alternative approaches that ask how (public) regulatory intervention can police the behaviour of incumbent corporate platforms whose dominance and its socio-economic effects have become a concern.4 Social enterprise law also regulates these socio-economic effects, but it proceeds “from the inside out” by imposing internal rules on purpose, membership and governance that are incorporated into the platform’s legal format. In doing so, it potentially reduces the need for external regulatory intervention and resulting transaction costs. Social enterprise law is a system of choice. Organisations that own and run platforms may or may not select to incorporate as a (here broadly understood) “social enterprise”. The vast majority prefer the traditional form of a for-proft limited company, for commercial reasons. And those that do set up as social enterprises are, as Chiu observes, widely ‘regarded as ‘alternative’ or ‘in the minority’’5 compared to corporate platforms. In this chapter, however, we encourage a shift in perspective whereby to recognise them as a minority and acknowledge the optional (private law) nature of social enterprise law as a system of choice does not mean to assign them a marginal role in attempts to reform and regulate important socio-economic aspects of the platform economy that are perceived currently to be problematic. On the contrary, social enterprise law, by enabling blended ownership committed to different socio-economic priorities from the traditional company form, provides an essential ingredient in this reform process. The chapter proceeds as follows. The next section sets out, as a conceptual frame for understanding its approach to steering, corporate as distinct from community ownership in platforms as two ideal types. It introduces at the same time the idea of blended ownership: in reality, a spectrum of blends and variations of platform ownership exist that, in terms of their purpose, governance and membership, are clearly distinct from typical corporate ownership yet also distinct from one another. Social enterprise law provides the legal tools for incorporating these different ownership blends.

4 Ibid. 5 Ibid.

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Subsequent sections explore systematically three elements of UK social enterprise law to document how this blending works in practice. The next section considers the legal mechanisms available to incorporate social purpose into a platform company, including the implementation of an assetlock or mission-lock, the tailored legal format of the community interest company, as well as the loser (but for some, more commercially attractive), B Corp accreditation. The section after that examines formats that go further than to embed social purpose, moving to community membership where the right to make key decisions in the organisation, and in some cases to share in its proceeds, is shared among the platform’s stakeholders as members. The discussion incorporates two case studies of UK-based multistakeholder “platform co-ops” that follow democratic membership despite being incorporated under different legal forms. The next section explores inclusive governance processes that suit platform organisations in blended ownership, including heterarchical methods that operate outside traditional boardroom structures. The fnal section concludes by briefy drawing some initial lessons and challenges from the discussion in the chapter.

Platform ownership: the role of social enterprise law The role of platforms in today’s online economy, as others in this book have highlighted, is hard to label. Existing labels, such as the ‘sharing’ economy, have been found ambiguous, too narrow or otherwise problematic, for good reasons.6 We may then go with the more generic denomination of a “platform economy” instead and focus not on labels but on key features that tend to characterise the reality of these organisations. Platforms are online matchmakers7 building on networks and network effects: the more users the platform accumulates, the better its business model works.8 They generate value by matching up people or businesses and, by collecting data as they go along, they usually become better at it (and often make additional proft). Large platforms now exist to enable trading, swapping, streaming or sharing (Amazon, Airbnb, Spotify, TaskRabbit), but others exist to simply connect people, socially or for work (Facebook, Instagram, Zoom). Quite separate is the question of how commercialised individual platforms are as organisations. Facebook, for example, enables social relationships but runs a highly commercial corporate enterprise. Contrast this to a local platform like UK-based Ecoswap which enables, amongst other things, local and

6 Bronwen Morgan, ‘The Sharing Economy’ (2018) 14 Annual Review of Law and Social Science 351–366; Juliet Schor, ‘Debating the Sharing Economy’ 2016 4(3) Journal of SelfGovernance and Management Economics 7. 7 David S. Evans and Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms (Harvard Business Review Press 2016). 8 EU Commission, ‘Online Platforms’ accessed 14 June 2020.

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Table 8.1 Capital and community platform ownership (ideal types)   Purpose

Corporate ownership

Proft and shareholder value Governance Hierarchical, with directors accountable to shareholders Membership By capital investment Platform economic model Financialised capitalism

Community ownership Community value Inclusive of stakeholders (direct or through fduciaries) By contributing to value Social economy

sustainable commercial trade but is run as a community interest business and incorporated as such.9 These two platforms are distinct not only for the obvious differences in the sheer scale of their operations but also structurally for their respective roles in the economy and, fundamentally, in the underlying understanding of what the platform economy is for, what it should do and, accordingly, who should run it. Table 8.1 summarises the key distinctions between the platform ownership types. Corporate ownership In the case of Facebook – or any other big corporate platform – the focus is on the interest of capital. Regardless of what their business model might look like, behind it are the trimmings of a capitalist organisation controlled by and run, ultimately, for the purpose of investors. The legal format that suits this model is the company limited by shares (or equivalent) either privately held or, in the case of larger platforms, publicly listed. This ownership form is designed for business organisations that focus on proft and return on investment, usually measured by quarterly increase in share price. Rules on membership and governance traditionally refect this. Membership rests with fnancial investors, even if they are distant from the company (exceptions are equity-incentivised directors or key employees). In corporate governance, the members (shareholders) as the providers of the company’s capital are prioritised and treated, if not as full owners, then at least as holders of residual property rights in the company, including the right to receive a share of proft, to vote and hold company directors to account (including to appoint and dismiss them). Company directors are accountable to shareholders above others and incentivised (including by their remuneration policies) to deliver shareholder value.

9 Ecoswapstore webpage accessed 14 June 2020.

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This ownership form corresponds with an understanding of the platform economy as a new arena for the evolution of fnancialised capitalism, offering additional opportunities for investment and economic growth.10 The platform economy and the for-proft corporate format are, from this perspective, wellpaired economic structures to the extent that the focus on proft and return on investment inherent in the corporation drive the platform business and set it up to pursue growth. Investors, including venture capitalists, tend to see the beneft of platforms as an ‘asset- and employee-light’ business model relatively ‘low on liability and high on upside’11 not least because, being moveable, it is relatively easy to minimise exposure to regulation, such as tax and labour laws. Access to networks and data are often seen as promising opportunities to expand into secondary markets or diversify the platform’s services. The downsides of this legal and economic model, on the other hand, include evidence of a lack in balanced and sustainable growth in the platform economy12 with high levels of market concentration, reinforced by network effects, that have allowed incumbent corporate platforms to accumulate levels of independent power that render them state-like.13 Operating internationally, these powerful companies escape much regulatory control, with high levels of regulatory failure and arbitrage. States have spent millions on infrastructure to ensure large corporate platforms comply with regulations to protect the public interest, from tax to labour laws, yet have often still failed to effectively rein in rent-seeking behaviour.14 In the absence of effective regulation, however, the corporate format has the disadvantage that it incorporates few self-policing mechanisms against socially irresponsible and unsustainable pursuit of proft. By affording shareholders legal privileges, corporate ownership enables further rent-seeking from investors extracting proft for private gain. Without internal legal safeguards against this, the format reinforces socio-economic inequalities between capital-holding investors and other stakeholders in the platform economy in ways that,

10 Evans and Schmalensee, supra n. 7; see also Nic Srnicek, Platform Capitalism (Polity Press 2016), p. 9. 11 John Herrman, ‘Platform Companies Are Becoming More Powerful  – But What Exactly Do They Want?’ New York Times (21 March 2017) accessed 14 June 2020. 12 Michael Cusumano, ‘The Sharing Economy Meets Reality’ (2018) 61(1) Communications of the ACM 26, 28 accessed 14 June 2020. 13 Shoshana Zuboff, The Age of Surveillance Capitalism (Public Affairs 2019). E.g. Amazon is now employing ‘several times more full-time economists than the largest [US] academic economics department’, according to Susan They and Michael Luco, ‘Economists (and Economics) in Tech Companies (2019) 33(1) Journal of Economic Perspectives 209, 211. 14 On tax evasion of large corporate platforms: ‘The Silicon Six and Their $100 Billion Global Tax Gap’ (Fair Tax Mark, December 2019) accessed 14 June 2020.

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ultimately, undermine its ability to bring wider economic prosperity. The effects of corporate irresponsibility can extend from labour and environmental exploitation to the problematic use of data surveillance and political power; these effects can be far-reaching, as has been highlighted in previous chapters of this book.15 Community ownership The Ecoswap platform  – as an example of a form that is a locally run community platform – operates for an entirely different purpose than the corporate form discussed in the preceding section (and legally, as a UK community interest company, further discussed below). Financial objectives are important insofar as they help to ensure the economic sustainability of the organisation. But they are strictly instrumental, and subordinate, to the social purpose of the organisation, which is to serve the platform’s local user community. Value is measured, therefore, not from the point of view of extraction but based on the platform’s contribution to the community.16 This difference in direction and purpose is refected in its governance by providing that company directors will be bound to engage with community stakeholders in leading the organisation. Other similar platforms go further and incorporate this inclusivity also into their membership structure by adopting a format of community membership that refects and rewards the contributions different members, who are not distant investors but involved in the platform (as users, workers, supporters, etc.), make to the platform’s value creation. While for some (like Ecoswap), these connections are mostly locally rooted, community in others goes further. Wikipedia, for example, a well-known community platform and non-proft online encyclopaedia, involves thousands of volunteers contributing globally.17 Community platforms are unconnected to the structure of fnancialised capitalism. Their version of the platform economy is unconcerned about new opportunities for extraction but instead extends patterns of the social economy, combining collective values and solidarity-based organising with the operation of commercially viable ventures, into the online world.18 Typically, however, their main challenge is fnancing these ventures to enable growth and development enough to catch up on the market share of at least some corporate incumbents. Venture capital, which is available to corporate start-ups, usually ‘requires investor control and the potential for large future

15 See Chapter 7 in this volume. 16 Mariana Mazzucato, The Value of Everything: Making and Taking in the Global Economy (Penguin 2019). 17 Wikipedia Foundation webpage accessed 14 June 2020. 18 European Commission, ‘Social Economy in the EU’ accessed 14 June 2020.

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returns’ which community formats typically cannot to offer.19 We will return to this and other challenges in our discussion below. A key advantage of community owned platforms, on the other hand, is their ability through ownership, or elements of ownership, to steer the organisation to behave in the community interest. These elements, in other words, build into the organisation a form of ‘regulation from within’. The ability to internally steer in this way is typically absent in corporate ownership: corporate platforms expect to operate for proft within the ‘rules of the game’ set by externally imposed regulatory standards, from matters of taxation and environmental laws to labour standards. The corporate ownership company’s internal rules of corporate governance, on the other hand, remain largely unconcerned with these matters except where they adversely affect investors’ interests, increasing investment risks. The tug of war between regulatory intervention and corporate push-back against it, however, can be costly as well as ineffective, as we have seen. Corporate resistance against regulation, and the resulting regulatory arbitrage and failures, happen because for-proft companies are wired, legally as well as economically, to push back against interference with their proft-maximising objective. Platforms in community ownership, on the other hand, are wired to respond differently, in accordance with their commitments in purpose, governance and membership. Blended ownership and social enterprise law Corporate and community ownership of platforms are ideal types: they bring a ‘neat’ categorisation to the reality of platforms when in fact that reality is messier and full of more ownership blends than these categories suggest. Granted, corporate ownership is tangible, in virtually unadulterated form, in the widespread global practice of well-known commercial platforms run by corporate multinationals. Its counterpart, the community platform, on the other hand, is closer to an ideal type in the true sense: the simplifed description of an ‘extreme’ ownership type that sits at one end of an organisational spectrum. In reality, that spectrum includes different blends and variations of platform organisations that, in terms of their purpose, governance and membership, are clearly distinct from typical corporate ownership yet also distinct from one another. Some of these do not fall neatly within the conception of a social economy: mission-led platforms that are accredited B Corps, for example (see the next section) are too commercially oriented for this. But B Corps are, online as offine, part of an emerging impact economy that looks at social mission and impact as well as proft. In short, on the spectrum between the archetypically corporate and community organisation, a long and colourful stretch of blended ownership exists.

19 Simon Borkin, ‘Platform Cooperatives  – Solving the Capital Conundrum’ (NESTA and Coops UK, February 2019), p. 25 accessed 14 June 2020.

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The legal tools for incorporating different ownership blends are provided by what we loosely call ‘social enterprise law’. It describes, in shorthand, that branch of organisations law which ‘enables businesses to specify the nature, intensity, and duration of their commitments to objectives other than proft maximisation’ and reaches, thus understood, ‘from the borderlines of charitable venture to the heartland of corporate law’.20 This includes, for our purposes in this chapter, mainstream UK company law (the formats of companies limited by shares or guarantee) which platform organisations may fexibly adjust to implement their own blend between communal and corporate ownership. But it also incorporates more tailored legal forms, including the UK legislation on community interest companies and societies law. Social enterprise law, whilst not by character regulatory, is still the enabler of internal steering – of regulation from the inside out – that platforms in community or blended ownership are capable of. Its ability to do this  – to make a relevant set of legal tools available to create internal rules that steer membership, governance and purpose – is essential for creating platform organisations that behave differently from big corporates in the frst place. The remainder of this chapter, therefore, is dedicated to exploring how different aspects of UK social enterprise law can enable the blending of community platform ownership in practice. We focus on each legal element separately – considering varieties of (1) social purpose, (2) community membership, and (3) inclusive governance structures.

Social purpose During the coronavirus pandemic, the social impact of organisations with a communal purpose has been magnifed. From food banks to community self-help groups, in these organisations a human response to the catastrophic impact of the virus, based on solidarity and empathy, became clearly visible. How organisations, and especially businesses, embed a commitment to communal purpose into their venture, however, differs widely. For a UK for-proft limited company, it usually involves incorporating a purpose statement into its articles of association, specifying what community or wider social interests it intends to serve. By committing itself in this manner, the company places on its directors a duty to consider these interests in the pursuit of the company’s business. UK company law is suffciently fexible to allow for these changes,21 which in the case of a company limited by shares can only be reversed if at least 75% of shareholders vote to do so. The question is how those companies (or any blended ownership format) address the

20 Benjamin Means and Joseph W. Yockey, ‘Introduction’ in idem (eds), Cambridge Handbook of Social Enterprise Law (Cambridge University Press 2018), p. 2. 21 Beate Sjåfjell, ‘Dismantling the Legal Myth of Shareholder Primacy: The Corporation as Sustainable Market Actor’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018).

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inevitable complexity in blended ownership of running a for-proft organisation, especially a platform business, for a social purpose while securing its economic sustainability. As the venture grows, so typically does the pressure to satisfy fnancial objectives. These, however, can become so overwhelming that, unless it is frmly locked into the organisation, purpose may become secondary. In the case of platform organisations, and in the platform economy, where business models rely on network effects that depend on accelerated growth and investment, these risks can be magnifed. Asset lock and community interest company One way of addressing these issues is to incorporate an asset lock into the company (or other legal format): a constitutional device that prevents the distribution of residual assets to members. The purpose of an asset lock is ‘to ensure that the public beneft or community beneft of any retained surplus or residual value cannot be appropriated for private beneft of members’.22 A second possibility, often seen as distinct from the asset lock, in the case of a company limited by shares, is a restriction on dividends. Both stipulations ensure that the company’s proft-making mission is tempered signifcantly by mandating effectively that assets are kept in common ownership and profts at least partly reinvested into the business and its purpose. UK social enterprise law offers a tailored legal format of community interest company (CIC) with mandated dividend cap and asset lock (though these can also be incorporated into the standard company form).23 This regulated legal form for blended ownership is tailored for businesses wishing to incorporate as for-proft companies but also make a frm and irreversible legal commitment to pursue social purpose over proft. Many that select this format incorporate as company limited by guarantee (without shareholders) but some, especially those with ambitions to grow, choose to become a CIC as company limited by shares. The government has made available model constitutions for both CIC options.24 The format follows the usual company incorporation rules but imposes additional requirements (including a community interest statement and annual CIC report) overseen by a dedicated

22 ‘Asset Lock Provisions’ (Community Shares, 2017) accessed 14 June 2020. 23 Offce of the Regulator of Community Interest Companies, ‘Information and Guidance Notes Ch. 6: The Asset Lock’ accessed 14 June 2020. 24 Offce of the Regulator of Community Interest Companies, ‘Model Constitutions’ accessed 14 June 2020.

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Regulator of Community Interest Companies.25 As asset-locked organisations, CICs do have access to certain forms of social and community fnance, donors or grant funding from public and private organisations that expect an irreversible commitment to a designated social purpose (though some of those will be limited to charities) and currently, certain charitable forms and CICs can trigger UK social investment tax relief for funders.26 But the restrictions on CICs clearly affect their ability to access other commercial fnance and equity investment. There are currently over 15,000 registered CICs in the UK.27 Exactly how many of those are hosting online platforms is diffcult to track, but a preliminary search reveals that only a small proportion currently seem to focus their operation on the platform economy. That said, where it does exist in the platform economy, CIC ownership demonstrates the benefts of a clear and enforceable social mission coupled with the company format. It typically is chosen by social enterprises that operate to enable smaller businesses to extend their market reach via online distribution but without giving up on local ethos or sustainability (see also the discussion of Open Food Network UK in the following section).28 CICs have played a relatively strong role in the provision of communal service delivery, especially in the areas of health and social care, and it will be interesting to see if more enter the platform economy as more public service may be moved online in the context of Covid-19 and its aftermath. Mission lock and B Corp A further option involves a constitutional mission lock that incorporates a commitment to purpose and may include a limit on proft distribution, but no full asset lock. Compared to asset-locked formats this choice enhances commercial fexibility while also giving social impact investors trust that their funding will be dedicated to a social purpose.29 In the platform economy,

25 Offce of the Regulator of Community Interest Companies accessed 14 June 2020; Nina Boeger, Sara Burgess and Julie Ellison, ‘Lessons from the Community Interest Company’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018). 26 Jay Wiggan, ‘Policy Boostering the Social Impact Investment Market in the UK’ (2018) 47(4) Journal of Social Policy 721–738. 27 Offce of the Regulator of Community Interest Companies, ‘Annual Report for 2018 to 2019’ accessed 14 June 2020. 28 Brishen Rogers, ‘The Social Cost of Uber’ (2017) 82(1) University of Chicago Law Review Online (Article 6) 85–102, 86 accessed 14 June 2020. 29 Dana Brakman Reiser and Steven A. Dean, Social Enterprise Law: Trust, Public Beneft and Capital Markets (OUP 2017), ch 1.

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this direction effectively bakes a commitment to pursue ‘responsible tech’30 into the ownership of the platform business. To address the risk of ‘mission drift’,31 companies can go further and entrench – genuinely lock – mission into the organisation by making it diffcult to reverse the existing social purpose clause (this would usually require a 75% shareholder majority to reverse). This can be done via a constitutional ‘supermajority’ clause requiring shareholder unanimity (or at least 90%) for a reversal to be approved; or it could involve a golden share arrangement that requires the consent of a non-proft organisation (a charity, trust or foundation with a golden share in the company). Golden share arrangements are more complex but can be fexible and time limited.32 They are similar to company structures widespread in Northern Europe with a non-proft foundation as dominant shareholder.33 Another possibility for platform companies is to become a certifed ‘B Corp’ by going through an accreditation process attesting the company’s legal commitment to pursue purpose beyond proft and to consider the impact of its business on its wider stakeholders.34 The process is run by B Lab, an internationally operating non-proft organisation, and it is now available to all UK-incorporated companies. Key requirements for accreditation include a mandated constitutional objects clause ‘to have a material positive impact on (a) society and (b) the environment, taken as a whole’, and for company directors in the pursuit of this object to balance fairly a range of stakeholder interests (wording based on the general UK company law on directors’ duties but strengthened). As B Lab points out, the modifcation ‘does not aim to be overly prescriptive, so that it has wide applicability and can be used by all prospective B Corps’.35 A further condition is for the company to successfully complete a B Impact assessment (renewable every three years) certifying its impact in the areas of governance, community, workers, environment and customers. B Corp accreditation has not been without criticism for not going far enough in its social ambition. It hardly offers assurance that social impact can be guaranteed over time (given that accreditation lapses unless

30 Borkin, above n. 19, p. 10. 31 Miriam Wolf and Johanna Mair, ‘Purpose, Commitment and Coordination Around Small Wins: A Proactive Approach to Governance in Integrated Hybrid Organizations’ (2019) 30 Voluntas 535–548. 32 Ben Smith et al., ‘Spotlight Paper’ (UnLtd., April 2017) accessed 14 June 2020. 33 Peer Hull Kristensen and Glenn Morgan, ‘Danish Foundations and Cooperatives as Forms of Corporate Governance: Origins and Impacts on Firm Strategies and Societies’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018). 34 B Lab webpage accessed 14 June 2020. 35 B Lab, ‘Certifed B Corp: Legal Requirements’ accessed 14 June 2020.

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renewed).36 There are further concerns about ‘purpose-washing’ and the worry that we might be seeing not a paradigm shift so much as a repeat of previous CSR trends that were eventually eclipsed by shareholder value and reduced to management strategies to further the corporate business case.37 But it appears to be popular among socially committed and commercially oriented companies in the platform economy with investment needs that a more commercially restrictive format would not meet. Neighbourly, for example, one of the founding UK B Corps (accredited 2015), is a company limited by shares running a CSR platform that connects businesses, including large multinational companies, that wish to donate to the community with ‘thousands of local good causes’.38 In 2015 it secured a £1m start-up investment from angel investors.39 Similarly, Peerby is a B Corp-accredited product-sharing platform based in the Netherlands.40 In 2016, it raised over $2m from its users in a successful crowdfunding campaign from investors, most of whom were platform users.41

Community membership Community membership in platform organisations follows a radical but simple idea: ‘imagine if the platforms we used every day were owned by the workers and the users themselves’.42 Here, the ambition goes further than embedding purpose (though usually, community membership also incorporates a commitment to social purpose). In a clear departure from corporate ownership, which is extractive, moving to community membership means that the right to make key decisions in the business organisation, and to share in its proceeds (if applicable), must be shared among the platform’s community of stakeholders as members who are active participants in the business and not external investor-shareholders.

36 Brakman Reiser and Dean, above n. 29. 37 Nina Boeger and David Hunter, ‘Mission-led Business: CSR Reboot or Paradigm Shift?’ (2018) 1 Bristol Law Research Paper Series 1–26 accessed 14 June 2020. 38 Neighbourly webpage accessed 14 June 2020. 39 Ryan Fowler, ‘Neighbourly.com Secures £1m Investment’ (UKTN, 22 July 2015) accessed 14 June 2020. 40 www.peerby.com/. 41 ‘Dutch Lending Website PEERBY Raises $2.2m in Crowdfunding Campaign’ DutchNews. nl (31 March 2016) accessed 14 June 2020. 42 Ed Mayo, Secretary-General of Co-operatives UK, quoted in Stir to Action, ‘New Pilot Accelerator Launched for UK Platform Co-operatives’ (P2P Foundation, 8 March 2018) accessed 14 June 2020.

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This can be achieved by offering shares in a limited company to the platform’s community of stakeholders, including its users, workers or supporters (e.g. via crowdfunding as with peerby.com above). To do so alters the corporate structure to ensure members, who continue to vote and share profts in accordance with their fnancial shareholding, are also linked as stakeholders to the platform (and its purpose). But more far-reaching ideas of community membership are linked to cooperative ownership and to an emergent movement to support the development of ‘platform co-ops’ as democratically organised alternatives to corporate platform ownership, where membership is based on one person/one vote and proft is shared equitably. The platform co-op movement started in earnest about fve years ago with some academic support, publicity and funding. Globally, the number of existing platforms that organise democratically as co-ops is still relatively limited, but it has grown with support of the movement.43 Existing platform co-ops are diverse. A relatively common model involves multi-stakeholder community membership where ‘users and the producers of the products/services facilitated by the platform, and the platform developers themselves, all come together as member-owners’ (like resonate.is, introduced above).44 Others, however, are organised by a single group of stakeholders, for example, producers (e.g. stocksy.us), workers or service providers (e.g. taxiapp.uk.com) or as consortia of worker-owned businesses (e.g. upandgo.coop). As with the incorporation of social purpose (discussed above), the stipulations that implement community membership will be enshrined in the organisation’s governing documents and in its legal form, making it important for law to provide suffciently fexible instruments. UK social enterprise law contains several legal formats to implement community membership, each allowing for adaptation to accommodate variations in the law on companies, societies and partnerships. To illustrate these variations, rather than setting them out theoretically, we look at two examples of organisations that practice community membership in the UK by operating as democratically owned platform cooperatives with different legal models. Both operate as multi-stakeholder models of cooperative membership: departing from a more traditional understanding of the cooperative as an employee-owned business form, they provide for membership of the platform organisation to be shared among different member-groups (including platform users, providers and supporters), all of whom are identifed as contributing value to its operation.

43 Trebor Scholz and Nathan Schneider (eds), Ours to Hack and to Own: The Rise of Platform Cooperativism, a New Vision for the Future of Work and a Fairer Internet (OR Books 2017); Duncan McCann and Edanur Yazici, ‘Disrupting Together: The Challenges (and Opportunities) for Platform Co-operatives’ (New Economics Foundation, June 2018) accessed 14 June 2020. 44 Borkin, above n. 19, p. 18.

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Open Food Network UK CIC The Open Food Network (OFN) is described as ‘a global network of people and organisations who work together on the development of open and shared resources, knowledge and infrastructure to support the emergence and development of food enterprises and short supply chains all over the world’.45 The network is committed to building a sustainable and resilient food system by reconnecting producers and consumers, by empowering people and giving them tools and knowledge to develop the food hubs they need for their community. OFN platforms host open source software that anyone can use. They can build their own project on it to support sustainable and resilient food systems and create development products such as marketing tools, research, incubation and training programmes, case studies, consulting and so on. These online products can then be released publicly under a creative commons license and can be used by anyone for commercial or noncommercial use provided that the OFN is credited and the items are released under the same licence.46 These products, which are central to the network, are described as the OFN Commons. Membership falls into three types. ‘Affliate’ members include OFN regional representative organisations that deploy and maintain a branded OFN platform and provide the OFN Commons for the communities, food producers and food enterprises within their defned region. ‘Associates’ and ‘Service Providers’, on the other hand, describe members who contribute to the OFN Commons in other ways such as acting as a web agency, developer or consultant, etc. Membership revolves around a ‘community pledge’ that OFN asks all members to sign, as a formal mutual engagement, that provides ‘a format for accountability and transparency where people are using the Commons but want to clearly be part of strengthening and spreading it’.47 The pledge involves a commitment to (1) share the OFN values that underpin everything the network does,48 (2) be transparent and communicate with the community about projects and opportunities that can impact the community, (3) actively contribute to the improvement and strengthening of the OFN Commons, (4) respect the licencing conditions, and (5) update pledge commitments if members surpass or cannot keep them. Affliate members commit to additional responsibilities, including local development and building up service capacity to respond to local needs and to represent the OFN brand.

45 Open Food Network Community Forum, ‘Community Pledge v2’ (January 2020) accessed 14 June 2020. 46 Ibid. 47 Ibid. 48 Open Food Network, ‘Our Values’ accessed 14 June 2020.

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The Affliate member with regional responsibility for the UK is Open Food Network U.K. Community Interest Company (OFNUK), a CIC incorporated as a company limited by guarantee (without shares). OFNUK’s articles of association are adapted for the organisation to operate as a cooperative (co-op) with democratic membership, where each member holds one vote (an entrenched provision that can only be changed by unanimous approval of all members).49 Its community interest statement specifes that by hosting of the OFN website and keeping the software open source, OFNUK offers an alternative to sites funded by venture capital that are otherwise available to local food hubs, enabling them to retain their own proft within their communities.50 Subscriptions to the site are means-tested, making its use free for hubs initially and subject to a small fee for larger organisations.51 All users have access to an online community forum which is used for the development of the OFN system.52 OFNUK describes itself as a ‘platform cooperative’ in which platform users are members and can contribute to the growth and direction of the company, and some users are non-executive company directors.53 Flexibility in UK company law, including within the CIC format, to allow for constitutional variations, enables OFNUK to adapt its articles of association to operate as a cooperative. In OFNUK’s case, the articles do not only feature an objects clause committing the cooperative to carry on activities that beneft the community and, especially, to provide services that facilitate the development of sustainability food distribution networks. Supplementing these objects, the articles also include an asset lock, based on the mandatory wording for CICs but supplemented to refect cooperative principles.54 A further clause (entrenched and requiring unanimity to change) commits OFNUK to the purpose of carrying out its functions as a cooperative and of abiding by internationally recognised cooperative values and cooperative principles as defned by the International Cooperative Alliance (ICA).55 Membership in OFNUK operates democratically (one member/one vote) and it is open and voluntary, aligning with ICA principles. It may include platform users, employees and supporters – the latter are defned as persons

49 Clause 47 of the Open Food Network UK Ltd. Articles of Association (fled 22 September 2017) (hereafter “OFNUK Articles”) accessed 14 June 2020. 50 Open Food Network UK Ltd. Community Interest Statement (fled 4 March 2015) accessed 14 June 2020. 51 Open Food Network UK Ltd.,‘Pricing: How Does It Work’ accessed 14 June 2020. 52 Open Food Network UK Ltd. Community webpage accessed 14 June 2020. 53 Open Food Network UK Ltd., Community Interest Company Report (fled 27 December 2019) . 54 OFNUK Articles, above n. 49, Clauses 101 and 102. 55 Ibid., Clause 5.

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or organisations operating in an associated feld of activity to OFNUK or with an interest in supporting OFNUK’s business. Applications for membership are approved by company directors.56 Directors also determine what proportion of proft is reinvested in the business or applied for the community beneft (no profts are distributed to private shareholders).57 Equal Care Co-op Ltd Equal Care Co-op Ltd (ECC) is a locally operating multi-stakeholder cooperative that uses platform technology to provide personalised care services in the UK. It has four member categories: service recipients who use the platform (supported members), the caregivers (worker members), relatives or friends of care recipients who cannot be members (advocate members) and those who support and have made a fnancial investment in ECC (investor members). However, to ensure that the co-op is controlled by key stakeholders, investor members have no more than 10% of voting strength in the organisation.58 The cooperative is committed to ‘delivering a fair, relationship-centred, co-owned care and support service that matches, supports and develops the users and the givers’ of care.59 Its business model is dedicated to empowering both users of care services and care givers: the former, by enabling them to select their own care workers and have control over their own care planning, coordination and data; the latter, by ensuring they are paid fairly and have fexibility in choosing the employment model and timetable that suit them. ECC deploys its platform technology to manage the service effciently and free up resources to focus on the quality of care and work instead. Unlike OFNUK, it does not rely on the company (or CIC) format. Instead, ECC is incorporated as a UK cooperative society, registered under the Cooperative and Community Beneft Societies Act 2014 and regulated by the Financial Conduct Authority (FCA). The FCA controls the society’s rules (its governing documents) and statement of operation to ensure it adheres to the ICA Statement of Co-operative Identity as well as the statutory principles and requirements in the 2014 Act. The society format is arguably less well known than the private company or CIC, and it offers slightly less fexibility for adaptation, but it is designed especially for cooperatives. Unlike a company, a society is always formed to run for the mutual beneft of its members, based on their common economic, social and cultural needs and

56 Ibid., Clauses 10–14. 57 Ibid., Clause 100. 58 Equal Care Co-op Ltd., Rules, Clause 63(b) accessed 14 June 2020. 59 Ibid., Clause 5.

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aspirations. Decisions are taken in accordance with the principle ‘one member/one vote’ (unlike for a company, this cannot be changed). An advantage of the cooperative society form is the ability within the co-op structure to attract capital from investor members. It can pay interest on share capital and distribute a share of its surplus, although return on capital is limited, and while profts may be distributed to members, this must follow an equitable formula. Interest payable on shares is limited to what is necessary to obtain and retain enough capital to run the business.60 ECC, for example, has successfully taken advantage of the fnancial fexibility within this regulatory system to attract equity capital (in addition to grant funding). After an initial crowdfunding campaign, raising over £20,000 with nearly 200 supporters to provide important start-up funding, the co-op has recently completed a successful community share offer, raising over £400,000 to fund technology and ongoing costs.61 Despite their legal and structural differences, there are similarities between ECC and OFNUK worth highlighting. Both are platform organisations in blended ownership, incorporating the pursuit of social mission and democratic membership while operating as a business to be fnancially sustainable. They rely on UK social enterprise law as enabler of this operational mode, having chosen legal formats that suit their venture individually. By placing values of fairness, community and sustainability at the heart of their venture, both fulfl social functions which the coronavirus pandemic has accentuated. OFNUK, for example, has played a key role globally in the pandemic, including in the UK, in helping communities, including producers and consumers, build and plan their online food systems and home delivery.62 Similarly, ECC’s personalised approach to care has proven advantageous for reducing infection risks because care recipients see their single chosen caregiver continuously, not a stream of different workers. Both organisations, in community ownership, have reacted responsibly, inclusively and fairly to a global crisis, steered by their constitutional obligations. Both have found means of dealing with economic challenges that most platforms face, such as building networks or ensuring fnancial sustainability. In ECC’s case, this involved especially the successful crowdfunding and community share campaigns. In the case of OFNUK, the interaction between the UK organisation and the global OFN network acts as a mutual

60 Financial Conduct Authority, ‘Guidance on the FCA’s Registration Function under the CoOperative and Community Beneft Societies 2014’ (November 2015) accessed 14 June 2020. 61 Power to Change, ‘Equal Care Co-op: A Platform Co-operative that Brings Community Together in Social Care’ (September 2019) accessed 14 June 2020. 62 Open Food Network UK Ltd., ‘Helping with Covid-19: All the Links for Resources and Funding Opportunities’ accessed 14 June 2020.

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enabling mechanism: by plugging into the global network, OFNUK sustains its business model, while the network, on the other hand, relies on its UK regional partner to sustain the global OFN system and brand. Both ECC and OFNUK are also examples of organisations that have an identity as a platform co-op and a member of a social movement challenging corporate platform ownership.63 They have concretely profted from the movement as a support structure, for example, by receiving targeted support from a UK accelerator programme for the platform co-ops.64 How the coronavirus pandemic will affect this movement and platform organisations in community membership, like ECC and OFNUK, is still uncertain. As with other areas of the economy, Covid-19 has brought us a watershed moment that, on the one hand, might see existing socio-economic systems and embedded inequalities further exaggerated. Or it might go the other way and allow genuinely radical alternatives to fourish in a (post-)pandemic world. For the platform co-op movement, the stakes are high. There clearly is potential for platform co-ops to play a key part in the recovery of local economies from the pandemic’s devastating economic impact by generating genuinely inclusive and shared local platforms for business, workers and users to beneft from. Their success in the medium term, on the other hand, will depend heavily on whether governments and their economic policies, but also platform users and their consumer habits, can be weaned off habitual reliance on the convenience of large corporate platforms whose dominance may instead become further entrenched and centralised in this new world. Key members of the movement are mobilising to address these challenges by democratising ‘digital-business-as-usual’.65

Inclusive governance Membership in a business organisation determines who can take key decisions and share proceeds, if applicable. Governance, on the other hand, concerns the rules and processes within the organisation that ensure the overall direction of its leadership and that hold leaders accountable. Governance may involve members directly, but it will usually be delegated to a group of fduciaries, typically a board of directors who manage the venture on behalf of members. We have seen that archetypically corporate ownership, by prioritising shareholders and the pursuit of shareholder value as the (sole) measure of good corporate governance, tends to operate as unidimensional

63 Nina Boeger, ‘The New Corporate Movement’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018). 64 ‘Unfound’ Platform Coop Accelerator webpage accessed 14 June 2020. 65 Platform Cooperativism Consortium, ‘A Cooperative Digital Economy NOW!’ accessed 14 June 2020.

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and structurally speaking, therefore, relatively simple model (see the section “Corporate ownership”). In contrast, governing organisations in blended ownership is very much a multidimensional exercise that involves balancing diverse stakeholder interests as well as ensuring that the organisation is economically successful. Platform organisations that have legally committed to refect community interests in their purpose and potentially in their membership will typically aim to operate an inclusive governance model to align with their commitment. The complexities that come with such a move have long been recognised.66 Being inclusive involves discretionary judgments by directors or others involved in the balancing act that can be complex and time-consuming.67 UK law does not currently offer much direction on these issues. General company law, as we have seen, is fexible enough for company directors to take account of stakeholders in discharging their duties towards the company (i.e. the shareholders), but without imposing a strict legal obligation on them to do so unless companies choose to stipulate this in their articles.68 The accompanying corporate governance codes, which set out soft-law principles applicable to public and large private limited companies, impose some procedural accountability on companies for accounting to stakeholders.69 But these obligations are relatively limited, applicable on a ‘comply or explain’ basis. Neither general company law, nor the codes, offer any detailed guidance on how directors might go about the exercise of balancing various stakeholder interests in practice. Specialised UK social enterprise law (including the CIC regime and societies) includes few express or detailed stipulations on corporate governance, with some exceptions. The ICA cooperative principles, for example, are incorporated into the cooperative society under the FCA’s direction. And the CIC legislation provides that CICs are legally required in their annual community interest report to specify, at least briefy, how they have tackled aspects of their governance, including details on their directors’ remuneration, dividends paid on any shares and details of how they involve stakeholders. The CIC regulator does have powers to investigate individual CICs and take appropriate action where necessary, including by changing directors or

66 Dana Brakman Reiser, ‘Governing and Financing Blended Enterprise’ (2010) 85 ChicagoKent Law Review 619. 67 A point classically raised to reject managerial or stakeholder theories of corporate governance, e.g. Henry Hansmann and Reinier Kraakman, ‘The End of History for Corporate Law’ (2001) 89 Georgetown Law Review 439. 68 Georgina Tsagas, ‘Section 172 of the Companies Act 2006: Desperate Times Call for Soft Law Measures’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018). 69 UK Companies (Miscellaneous Reporting) Regulations 2018 and UK Corporate Governance Code 2018 (principle 1.5) accessed 14 June 2020.

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even to wind up a CIC. But these are exercised with a light touch, in accordance with a soft-law guidance set out by the regulator.70 None of these legal regulations are particularly detailed on matters of inclusive corporate governance. Mostly, therefore, it is currently up to platform organisations themselves to come up with an appropriate governance framework that works for their venture as well as complying with the applicable legal framework. The complexity of having to balance diverse stakeholder interests and economic constraints while governing inclusively raises two specifc structural questions. The frst is whose interests as stakeholders are being included. Inclusive governance may, for example, incorporate a specifc and relatively homogenous stakeholder group, allow for multi-stakeholder input (e.g. in organisations like OFNUK or ECC) or aim to be more radically inclusive and accept input from open groups, interested parties, contributors or supporters, etc. of the organisation (e.g. Wikipedia incorporates aspects of this). The second and related question is whether stakeholder voices will feed into governance directly via a process of participation or whether they are channelled mainly through fduciaries (usually, the board of directors) with decision-making powers. Commonly, even inclusive structures tend to favour board-centric and hierarchical methods of governance that rely on directors duty-bound to consider and evaluate stakeholder input, though it is possible to place stakeholder representatives on the board (e.g. OFNUK, where some members are also non-executive directors). Some, however, favour more radical models organised around a ‘decentralisation of power and authority’,71 that enable stakeholder groups to play an active role as decision makers in the governance of the platform, in ways that are not centrally mediated through the boardroom. The difference between the two approaches hinges on the very character they assign to the stakeholder: in a board-centric structure, unless stakeholders are directly involved in the boardroom, they often remain a relatively passive voice  – an interest to be consulted and considered. In a community-led model, they are assigned an active role as decision makers that determine the overall direction of the organisation. It is not uncommon for platforms in blended ownership to make use of the availability of technology and networks built into their business model to pursue a more fexible and decentralised form of governance that also helps with inclusivity and transparency. As a member-owned organisation, ECC, for example, has built its decision-making structure on a model of

70 Offce of the Regulator of Community Interest Companies,‘Guidance Chapters,Ch.9: Corporate Governance’ accessed 14 June 2020. 71 Richard B. Wells, ‘Heterarchical Organization and Management’ (2015), p. 9 accessed 14 June 2020.

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‘sociocracy’,72 relying on ‘circle’ governance that is different from a boardcentric model. ECC describes its model as self-governance using a hierarchical structure of semi-autonomous, interlinking Circles which are responsible for policy decisions within their areas of responsibility. Each Circle is guided by input from the more general circle it is linked to and co-operative members through the Circle thread in the main Equal Care Co-op Forum on [the open source software] Loomio.73 Every circle must set out its aim (description of purpose), domain (work areas and tools), term (how long it will run for), membership (participants and how to join) and work roles it creates to fll its aim. Circles are linked to one another in a hierarchical structure (with broader circles overseeing the aim and domain of more focused ones), though they can have overlapping members, and all circle meeting records are made public to ECC’s members (except for discussions of confdential or sensitive information).74 This method of organising closely resembles a heterarchy.75 It does not discard the idea of hierarchy altogether but softens it by introducing changing, and overlapping, hierarchical patterns. In ECC, for example, clearly some circles still decide things over others but, given the fexibility of the circle structure itself, there is no fxed hierarchy of who comes out ‘top’ and ‘bottom’ in the long term.

Conclusion: lessons and challenges In attempts to control the socio-economic impact of platforms, political and regulatory intervention has to date received the lion’s share of attention. Much less has been said about the corporate legal structure of the platform and its ownership. This chapter introduced an alternative response to the corporate platform economy that relies on blends and variations of its ownership to steer its socio-economic effects. We asked what fexibility there is within (UK) social enterprise law to incorporate constitutional commitment to social purpose, community membership and inclusive governance within business organisations that run platforms. When these organisations are in corporate ownership, they operate from a perspective of satisfying the

72 Sociocracy for All, ‘Sociocracy’ accessed 14 June 2020. 73 Equal Care Co-op Ltd, ‘Circles  – Who Decides’ accessed 14 June 2020. 74 Ibid. 75 Gerard Fairtlough, The Three Ways of Getting Things Done (Triarchy Press 2012); Karen Stephenson, ‘Neither Hierarchy Nor Network: An Argument for Heterarchy’ (2009) 32(1) Perspectives 4–13.

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demands for regular proft income in order to stay ahead of the competition for growth and, ultimately, to improve shareholder value. In this hierarchy, other stakeholders, even if they are closely involved in the platform (users, producers, community supporters, etc.), have little weight in its governance, nor the opportunity to be active members or share in the proft of the business to which they contribute. Our response to this format is based on a simple observation: being both exclusive and extractive, this ownership design is a root cause for the socioeconomic problems emerging in the corporate platform economy, to growing political attention. The behaviour of corporate platforms is steered not just by economic and cultural etc. imperatives but also, and fundamentally, by the extractive legal ownership format of the corporations that run them. Social enterprise law, on the other hand, by enabling communal blends of platform ownership, opens the possibility of steering their behaviour ‘from the inside out’, offering legal forms that make platforms operate differently (in terms of their governance, membership and purpose) from the corporate format but without the need for (the same level of) additional, external regulatory intervention. Our discussion of UK social enterprise law in this chapter brings up some initial lessons. While the law can offer much-needed legal framing and fexibility, the commercial challenges facing blended ownership formats are formidable. The success of blended ownership will depend crucially on the ability of such formats to govern their own complexities as organisations, to encourage growth, build networks and access fnance. Despite their legal framing, for some organisations the risk of mission drift cannot be excluded. Managing drift, on the other hand, involves carefully balancing the inevitable impact of some legal mechanisms, like an asset lock, on commercial prospects. Matching models of ownership and available capital fnance is a recurrent and urgent commercial issue for blended formats, from memberowned cooperatives to mission-led B Corps.76 There simply are, currently, not as many of these as there are of corporate platforms, and where they exist, many are smaller organisations and less ‘visible’ in everyday economic and political life. These are challenging conditions, no doubt, despite promising signs that emerging movements and their associations do manage to offer support, gather and disseminate knowledge, provide advice and build networks that help tackle some of the challenges. It will be important to strengthen these further, especially to support the development of new instruments for social impact fnance in which both platforms and potential investors have trust. This support should come from local and central government as well as the sector itself, including some further direction on corporate governance for blended ownership.

76 Borkin, above n. 19, p. 10.

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But the emphasis on blended ownership, which is advocated in this chapter, has another structural challenge to answer. It raises the question whether, despite some of the promise we see, the advocated approach – which relies on social enterprise law as a voluntary regime to enable changes in ownership design – is ever enough to bring about structural reform in the platform economy. Currently, this approach creates blended formats that only ever seem to operate in the interstices of corporate capitalism but do not replace it. Some might go further, therefore, and ask whether this approach carries the risk of diverting resources and focus away from alternative, and potentially more effective, strategies to meet the challenge of controlling the extractive behaviour of incumbent corporate platforms. From that perspective, surely we should be focusing on the reform of corporate law generally to enable sustainable corporate ownership more broadly. Or should we concentrate on devising more effective transnational instruments to gain political control and steer corporate platforms by regulatory means (as advocated by Chiu in this book)? Or advocate at least only one legal form for social enterprises operating in the platform economy rather than supporting multiple blends and movements to avoid confusion and fragmentation? A new sense of urgency has entered these questions as we try to fgure out how (not if) the Covid-19 pandemic will change how the platform economy works. The stakes are high. Corporations are seeing new opportunities while community businesses are showing potential but are anxious about marginalisation. Already implicit in the discussion in this chapter is the argument that the relationship between regulation and redesign of legal ownership is not a zero-sum game but mutually reinforcing. On the one hand, by keeping incumbent corporate platforms in check, regulation (if successful) will create a more level playing feld for new entrants, including community platforms. On the other hand, if regulating corporate platforms is diffcult or fails, then to encourage ownership that steers by imposing restraint internally, if well supported, can, to some extent at least, compensate for it. This suggests we need both regulation and ownership design, as a pincer movement to eventually create a legal environment that manages to enable and support the evolution of blended ownership and, at the same time, to improve the regulation of existing corporate platforms.77 It would seem that for this pincer to be strong, as the post-Covid-19 economy develops we should now embrace diversity and experimentation in blended ownership instead of committing to some formats over others at this point in time. The challenge is to fnd those ideas that generate structural change. Systems thinking tells us that structural or systemic change  – of the kind some of us would like to see in the corporate platform economy – usually

77 For the ‘pincer movement’ terminology see Marjorie Kelly, Owning Our Future: The Emerging Ownership Revolution (Berrett-Koehler 2012).

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requires a paradigm shift: a change in ideas and assumptions about how the world is and how it can be.78 In other words, it involves devising new ideas of how the platform economy could (and should) operate. Regulating corporate platforms alone cannot help us here – after all, regulation is part of the existing system setting ‘the rules of the game’. Recognising that ‘ownership matters’ – that ‘deepening problems . . . are the predictable outcomes of the basic organisation of the extractive economy’ – is another good place to start.79

References B Lab webpage accessed 14 June 2020 B Lab, ‘Certifed B Corp: Legal Requirements’ accessed 14 June 2020 Boeger, Nina, ‘The New Corporate Movement’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018) Boeger, Nina, Sara Burgess and Julie Ellison, ‘Lessons from the Community Interest Company’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018)Boeger, Nina and David Hunter, ‘Mission-led Business: CSR Reboot or Paradigm Shift?’ (2018) 1 Bristol Law Research Paper Series 1–26 accessed 14 June 2020 Borkin, Simon, ‘Platform Cooperatives – Solving the Capital Conundrum’ (NESTA and Coops UK, February 2019), p. 25 accessed 14 June 2020 Brakman Reiser, Dana, ‘Governing and Financing Blended Enterprise’ (2010) 85 Chicago-Kent Law Review 619 Brakman Reiser, Dana and Steven A. Dean, Social Enterprise Law: Trust, Public Beneft and Capital Markets (OUP 2017) Community Shares, ‘Asset Lock Provisions’ (2017) accessed 14 June 2020 Cusumano, Michael, ‘The Sharing Economy Meets Reality’ (2018) 61 (1) Communications of the ACM 26, 28 accessed 14 June 2020 David S. Evans and Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms (Harvard Business Review Press 2016) DutchNews.nl, ‘Dutch Lending Website Peerby Raises $2.2m in Crowdfunding Campaign’ (31 March 2016) accessed 14 June 2020 Ecoswapstore webpage accessed 14 June 2020 Equal Care Coop Ltd, ‘Circles – Who Decides’ accessed 14 June 2020

78 Donella Meadows, Thinking in Systems: A Primer (Chelsea Green Publishing 2008). 79 Marjorie Kelly, ‘The End of the Corporation?’ (Transnational Institute, State of Power 2020) accessed 14 June 2020.

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Equal Care Coop Ltd., ‘Rules’ accessed 14 June 2020 European Commission, ‘Online Platforms’ < https://ec.europa.eu/digital-singlemarket/en/policies/online-platforms> accessed 14 June 2020 European Commission, ‘Social Economy in the EU’ accessed 14 June 2020 Fair Tax Mark, ‘The Silicon Six and Their $100 Billion Global Tax Gap’ (December 2019) accessed 14 June 2020 Fairtlough, Gerard, The Three Ways of Getting Things Done (Triarchy Press 2012) Financial Conduct Authority, ‘Guidance on the FCA’s Registration Function Under the Co-operative and Community Beneft Societies 2014’ (November 2015) accessed 14 June 2020 Fowler, Ryan, ‘Neighbourly.com Secures £1m Investment’ (UKTN, 22 July 2015)

accessed 14 June 2020 Hansmann, Henry and Reinier Kraakman, ‘The End of History for Corporate Law’ (2001) 89 Georgetown Law Review 439 Herrman, John, ‘Platform Companies Are Becoming More Powerful  – But What Exactly Do They Want?’ New York Times (New York, 21 March 2017) accessed 14 June 2020 Hull Kristensen, Peer and Glenn Morgan, ‘Danish Foundations and Cooperatives as Forms of Corporate Governance: Origins and Impacts on Firm Strategies and Societies’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018) Kelly, Marjorie, ‘The End of the Corporation?’ (Transnational Institute, State of power 2020) accessed 14 June 2020 Kelly, Marjorie, Owning Our Future: The Emerging Ownership Revolution (BerrettKoehler 2012) Mazzucato, Mariana, The Value of Everything: Making and Taking in the Global Economy (Penguin 2019) McCann, Duncan and Edanur Yazici, ‘Disrupting Together: The Challenges (and Opportunities) for Platform Co-operatives’ (New Economics Foundation, June 2018) accessed 14 June 2020 Meadows, Donella, Thinking in Systems: A Primer (Chelsea Green Publishing 2008) Means, Benjamin and Joseph W. Yockey, ‘Introduction’ in idem (eds), Cambridge Handbook of Social Enterprise Law (Cambridge University Press 2018) Morgan, Bronwen, ‘The Sharing Economy’ (2018) 14 Annual Review of Law and Social Science 351–366 Neat, Rupert, ‘Zoom Booms as Demand for Video-conferencing Tech Grows’ The Guardian (London, 31 March 2020) accessed 14 June 2020 Neighbourly webpage accessed 14 June 2020

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Offce of the Regulator of Community Interest Companies accessed 14 June 2020 Offce of the Regulator of Community Interest Companies, ‘Annual Report for 2018 to 2019’ accessed 14 June 2020 Offce of the Regulator of Community Interest Companies,‘Information and Guidance Notes Ch. 6: The Asset Lock’ accessed 14 June 2020 Offce of the Regulator of Community Interest Companies, ‘Guidance Chapters, Ch. 9: Corporate Governance’ accessed 14 June 2020 Offce of the Regulator of Community Interest Companies, ‘Model Constitutions’ accessed 14 June 2020 Open Food Network, ‘Our Values’ accessed 14 June 2020 Open Food Network Community Forum, ‘Community Pledge v2’ (January 2020) accessed 14 June 2020 Open Food Network UK CIC, ‘Helping with Covid-19: All the Links for Resources and Funding Opportunities’ accessed 14 June 2020 Open Food Network UK CIC, ‘Pricing: How Does It Work’ accessed 14 June 2020 Open Food Network UK CIC Articles of Association (fled 22 September 2017) accessed 14 June 2020 Open Food Network UK CIC, Community Interest Company Report (fled 27 December 2019) Open Food Network UK CIC Community Interest Statement (fled 4 March 2015) accessed 14 June 2020 Open Food Network UK CIC Community webpage accessed 14 June 2020 Peerby webpage accessed 14 June 2020 Platform Cooperativism Consortium, ‘A Cooperative Digital Economy NOW!’ accessed 14 June 2020 Power to Change, ‘Equal Care Co-op: A Platform Co-operative that Brings Community Together in Social Care’ (September 2019) accessed 14 June 2020 Rogers, Brishen, ‘The Social Cost of Uber’ (2017) 82(1) University of Chicago Law Review Online (Article 6) 85–102, 86 accessed 14 June 2020 Rushe, Dominic and Michael Sainato, ‘Amazon Posts $75bn First-quarter Revenues But Expects to Spend $4bn in Covid-19 Costs’ The Guardian (London, 30 April

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2020) accessed 14 June 2020 Scholz, Trebor and Nathan Schneider (eds), Ours to Hack and to Own: The Rise of Platform Cooperativism, a New Vision for the Future of Work and a Fairer Internet (OR Books 2017) Schor, Juliet, ‘Debating the Sharing Economy’ 2016 4(3) Journal of Self-Governance and Management Economics 7 Sjåfjell, Beate, ‘Dismantling the Legal Myth of Shareholder Primacy: The Corporation as Sustainable Market Actor’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018) Smith, Ben et al., ‘Spotlight Paper’ (UnLtd., April 2017) accessed 14 June 2020 Sociocracy for All, ‘Sociocracy’, accessed 14 June 2020 Srnicek, Nick, Platform Capitalism (Polity Press 2016) Statista, ‘Impact of the Coronavirus (COVID-19) on Online Shopping in the United Kingdom (UK) in May’ (June 2020) accessed 14 June 2020 Stephenson, Karen, ‘Neither Hierarchy Nor Network: An Argument for Heterarchy’ (2009) 32(1) Perspectives 4–13 Stir to Action, ‘New Pilot Accelerator Launched for UK Platform Co-operatives’ (P2P Foundation, 8 March 2018) accessed 14 June 2020 They, Susan and Michael Luco, ‘Economists (and Economics) in Tech Companies’ (2019) 33(1) Journal of Economic Perspectives 209 Tsagas, Georgina, ‘Section 172 of the Companies Act 2006: Desperate Times Call for Soft Law Measures’ in Nina Boeger and Charlotte Villiers (eds), Shaping the Corporate Landscape (Hart 2018) UK Companies (Miscellaneous Reporting) Regulations 2018 UK Corporate Governance Code 2018 accessed 14 June 2020 ‘Unfound’ Platform Coop Accelerator webpage accessed 14 June 2020 Wells, Richard B., ‘Heterarchical Organization and Management’ (2015), p. 9 accessed 14 June 2020 Wiggan, Jay, ‘Policy Boostering the Social Impact Investment Market in the UK’ (2018) 47(4) Journal of Social Policy 721–738 Wikipedia Foundation webpage accessed 14 June 2020 Wolf, Miriam and Johanna Mair, ‘Purpose, Commitment and Coordination Around Small Wins: A Proactive Approach to Governance in Integrated Hybrid Organizations’ (2019) 30 Voluntas 535–548 Zuboff, Shoshana, The Age of Surveillance Capitalism (Public Affairs 2019)

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Blockchain technology-enabled business arrangements Iris H-Y Chiu and Alexandra Schneiders

Introduction to blockchain technology Distributed ledger technologies (DLTs), such as blockchains, have been dubbed the ‘next step in the peer-to-peer economy’.1 Blockchain-based enterprises are a development from the platform economy, as they enable peer-to-peer transactions, cutting out the platform as middleman. Blockchains enable decentralised peer-to-peer transactions by automating such transactions through tokenised code, without the interference of an intermediary.2 For example, the blockchain-based enterprise Swarm City intends to enable peer-to-peer ride provision services without the need for a rent extracting middleman such as the corporate Uber.3 The blockchain architecture has the potential to revolutionise traditional top-down business models and restructure social relations. Blockchains were frst introduced through Bitcoin, a virtual currency created in the wake of the 2008 fnancial crisis and enabling decentralised peer-to-peer payments. With Bitcoin, individuals avoid paying fees typically charged by fnancial intermediaries for the verifcation and authorisation of payment transactions, such as a bank conducting checks to ensure the payee has enough funds for a payment to go ahead.4 Bitcoin is ‘an electronic payment system based on cryptographic proof instead of trust’.5 Anyone running the Bitcoin programme on their Internetconnected device contributes computational power towards the solving of cryptographic puzzles. Through this they contribute to the verifcation and

1 Aaron Wright and Primavera De Filippi, ‘Decentralised Blockchain Technology and the Rise of Lex Cryptographia’ (2015) at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=2580664. 2 Satoshi Nakamoto, ‘Bitcoin: A Peer to Peer Electronic Cash System’ (2008) at https://bitcoin. org/bitcoin.pdf. 3 ‘Launch Swarm City Terminal’ at https://press.swarm.city/launch-swarm-city-terminalf32a8264d98f. 4 Nakamoto (2008). 5 Ibid.

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approval of Bitcoin transactions as well as make sure that the underlying blockchain is not corrupted with inaccurate information or false transactions. Those helping solve the cryptographic puzzles are awarded with newly minted Bitcoins (‘mining’).6 Bitcoin transactions are recorded in a chronological order by being compressed into a chain or ‘ledger’ of blocks, hence the word ‘blockchain’. This record is immutable, i.e. it is almost impossible to alter the information on it.7,8 Transparency is therefore one of the key selling points of blockchain. This cryptography-run consensus mechanism creates trust and eliminates the need for a central party verifying transactions.9 Since the introduction of Bitcoin, thousands of copycat virtual currencies/ cryptocurrencies have been launched so far. These have attracted a considerable amount of negative press, due to their alleged use by criminals for illegal activities10 as well as their wildly fuctuating value.11 Characteristics such as the latter make them an unreliable form of payment, as one of the main qualities of fat money is that it should represent a reliable store of value.12 This has led to virtual currencies being mainly used for speculative means such as for investment, i.e. exchanging virtual currencies for fat currencies in case of a favourable exchange rate.13 Other obstacles to cryptocurrencies becoming mainstream are related to the rising number of devices connecting to their respective networks, causing longer transaction validation time frames as well as increasing the networks’ energy use.14 The computational power currently being input into the Bitcoin network has recently been likened to Switzerland’s power consumption.15 Additionally, entrepreneurs have seen the value of obtaining newly minted Bitcoins en masse by grouping computing devices running the programme into ‘mining farms’, resulting in the currency being in the hands of the few.16

6 Merlinda Andoni et al., ‘Blockchain Technology in the Energy Sector: A Systematic Review of Challenges and Opportunities’ (2019) 100 Renewable and Sustainable Energy Reviews 143. 7 The blockchain can only be altered if a minimum of 51% of blockchain users agree to a change. Reaching this threshold can be diffcult when a network, such as Bitcoin, has thousands of users. See www.investopedia.com/terms/1/51-attack.asp. 8 Nakamoto (2008). 9 Valentina Gatteschi et al., ‘To Blockchain or Not to Blockchain: That Is the Question’ (2018) 20 IT Professional 62. 10 ‘Bitcoin Has Lost Steam. But Criminals Still Love It’ (The New York Times, 28 Jan 2020). 11 ‘Why Bitcoin Has a Volatile Value’ (Investopedia, 15 Jan 2020). 12 ‘Deutsche Bank Says Bitcoin Is “Too Volatile” to Be a “Reliable” Store of Value’ (The Block, 27 Jan 2020). 13 ‘Cryptocurrencies Dismissed as “Speculative Investment Vehicle” by US Congress’ (U. Today, 29 May 2019). 14 Gatteschi (2018). 15 ‘Bitcoin’s Energy Consumption “Equals That of Switzerland”’ (BBC News, 3 July 2019). 16 ‘A New York Power Plant Is Mining $50K Worth of Bitcoin a Day’ (CoinDesk, 5 Mar 2020).

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Bitcoin has also inspired the creation of other types of blockchains. One of the most famous examples thereof is Ethereum, which allows for the conclusion of ‘smart contracts’.17 Smart contracts are an added functionality enabling ‘if, then’ transactions. Participants on the blockchain set their terms (which are coded into the blockchain programme) for the trading of a good or service (e.g. willing to sell/buy X amount for Y price). The terms are in an app on their phone and are recorded on the blockchain. Once the blockchain fnds matching terms (‘if’), a fnancial transaction automatically takes place between parties (‘then’).18 It should be noted that the movement of the good or service is independent from the fnancial transaction facilitated by the smart contract. Permissioned and public blockchains An important distinction to make is the one between permissioned and public blockchains. Public blockchains are open for anyone to join, the most famous example being Bitcoin. They are truly ‘decentralised’ networks in the sense that all the information is ‘distributed and shared among all users’. All users are engaged in the ‘entire functioning of the blockchain’. On the other hand, permissioned blockchains have an added element of centralisation, where an organisation (trusted third party, TTP) plays the role of central authority by deciding who may join the blockchain network and what rules apply to the network. In this model, a limited number of users may be in charge of ‘storing the ledger and updating it with new blocks’.19 This is likely to be the model adopted in most consumer-facing blockchain applications, since it allows for the limiting of risks associated with consumers taking an active role facilitated by the technology. Permissioned blockchains The automation functionalities offered in smart contracts are able to ease coordination ineffciencies in business and commerce, such as in global transportation, corporate supply chains, etc. In these commercial arrangements, many commercial parties are involved in order to undertake intermediate steps or tasks, carry out verifcation and pass data over to the next intermediaries until the accomplishment of the end goal. The use of a permissioned blockchain allows all relevant parties to join a single ledger that is simultaneously distributed and that updates information in order for coordination to proceed. For

17 Vitalik Buterin, ‘A Next Generation Smart Contract and Decentralised Application Platform’ (2014) at http://blockchainlab.com/pdf/Ethereum_white_paper-a_next_generation_ smart_contract_and_decentralised_application_platform-vitalik-buterin.pdf. 18 Gatteschi (2018). 19 Lea Diestelmeier, ‘Changing Power: Shifting the Role of Electricity Consumers with Blockchain Technology – Policy Implications for EU Electricity Law’ (2019) 128 Energy Policy 189.

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example, the IBM-Maersk hyperledger project intended to record and track movement of every step in transportation logistics so that each step needed can be triggered effciently.20 However, in this manner, permissioned blockchains do not rely on decentralised and incentive-based consensus protocols to validate activities and transactions, such as in the Bitcoin blockchain discussed above.21 Since permissioned blockchains are comprised of known and trusted participants, other trust mechanisms and protocols such as verifcation of identity are likely to be used for verifying blockchain activity. Although parties in a permissioned blockchain utilise automated protocols in smart contracts to execute functions and activities, these are likely to be derived from existing contracted-for commercial practices.22 However, automation can give rise to new legal problems. Automation needs to be based on clearly defned conditions, and it remains uncertain how qualitative judgment or discretion-based room can be built into the determination that conditions have been met.23 As such, one may expect smart contract glitches such as refusal or rejection of an activity due to the narrow parameters that have been defned. These may need to be overcome by some form of automated reporting so that human oversight and override can take over.24 Commentators opine that smart contract operations in permissioned blockchains would not pose severe challenges to expected contractual framing and predictable legal consequences, as parties are known to each other in existing business arrangements underpinned likely by existing formal contractual arrangements. However, automation gives rise to potential erroneous consequences that may need to be undone, and the role of vitiating factors in contract law such as mistakes would become much more important if there is no complete and foreseen provision in the allocation of risk and responsibilities under contract. Commentators also opine that the doctrine of mistake should apply to undo smart contract operations that are due to code error, for example.25 This

20 Chris Berg, Sinclair Davidson and Jason Potts, Understanding the Blockchain Economy (Cheltenham: Edward Elgar 2019) at ‘The V-form Organisation and the Future of the Firm’, ch7. 21 See, for e.g., Anna Donovan, ‘(Shadow) Banking on the Blockchain: Permissioned Ledgers, Interoperability and Common Standards’ in Iris H.-Y. Chiu and Iain G. MacNeil (eds), Research Handbook on Shadow Banking (Cheltenham: Edward Elgar 2018) at ch11. 22 Blaise Carron and Valentin Botteron, ‘How Smart Can a Contract Be?’ in Daniel Kraus, Thierry Obrist and Olivier Hari (eds), Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law (Cheltenham: Edward Elgar 2019) at ch5. 23 Eliza Mik, ‘Smart Contracts: Terminology, Technical Limitations and Real World Complexity’ (2017) 9 Law, Innovation and Technology 269. 24 Roger Brownsword, ‘Smart Contracts: Coding the Transaction, Decoding the Legal Debates’ in Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019) at ch17. 25 Blaise Carron and Valentin Botteron, ‘How Smart Can a Contract Be?’ in Daniel Kraus, Thierry Obrist and Olivier Hari (eds), Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law (Cheltenham: Edward Elgar, 2019) at ch5.

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matter was, however, tested in a Singapore case relating to automated transactions, although not in a blockchain context. The reasoning may have ramifcations for application to smart contracts running on blockchains. In that case, automated trading of cryptocurrency pairs was triggered due to a failure in the exchange operator’s algorithmic processes which was automatically exploited and not corrected by one of the counterparties’ trading algorithm. The exchange operator reversed the transactions in favour of the counterparty who has lost out in having sold bitcoins for ether at an obvious undervalue. The other party sued the exchange operator for breach of contract and trust. The court held that there was no breach of contract as the transaction was vitiated by mistake but struggled to apply the doctrine of unilateral mistake which required the party benefting from the mistake to know that such a mistake has occurred. In automated execution environments, such knowledge had to be fabricated in legal reasoning and was ultimately imputed to the benefting party by virtue of the foreknowledge of the software writer (acting as his agent to beneft him) who must have known of the faws of the programme that led to its exploitative behaviour in due course.26 Although this result accords with an instinctive sense of contractual integrity and fairness, its reasoning opens up a host of further questions about whether every use of automation software, which inherently contains faws (as all software does), must be subject to a risk of contract vitiation by mistake. This may render automation software more legally risky. Further, this implication is ironic given that automation deployment is usually to combat the inconsistencies and errors on the part of human beings! This ruling on the ‘mistake-prone’ nature of automation protocols would also affect smart contracts, as they are inherently automation protocols. This case refects the challenges of human agency-centred contract law in the face of increasingly sophisticated forms of automation, although it is acknowledged that in the frst instance the judge was unwilling to articulate a far-reaching statement of law in this novel context. That said, there is also a possibility that the deployment of smart contracts that work in an ex ante manner could reduce incidents and opportunities for ex post breaches of contract, achieving transactional fnality and effciency.27 However, where performance of contractual obligations is offchain, i.e. recorded but not necessarily perfected on the blockchain, there is still room for contractual non-performance such as delay or breaches of terms to occur. In such a case, the blockchain is unable to function as a complete record of validity or immutability, and it should not be misused

26 B2C2 Ltd v Quione Ltd [2019] SGHC(I) 03, commented by Kelvin Low at ‘Unpicking a Fin(e)tech Mess: Can Old Doctrines Cope in the 21st Century?’ (Nov 2019) at www.law.ox.ac.uk/business-law-blog/blog/2019/11/unpicking-finetech-mess-can-olddoctrines-cope-21st-century. 27 Christian Catallini, ‘Blockchain Technology and Cryptocurrencies’ (2018) 19 Georgetown Journal of International Affairs 36.

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or become a hindrance for parties seeking to enforce their ‘real-world’ contractual rights.28 Another hazard that is cautioned by commentators relates to permissioned blockchains becoming large monopsonies of commercial or business networks, therefore posing barriers to entry to challenger businesses.29 A permissioned blockchain can become a defned space for a selective community that trusts but is also vulnerable to one another in terms of the information commons they have achieved and the relational investment made in the blockchain infrastructure. Further, a permissioned blockchain like Calastone’s global funds marketplace30 would likely be open only to institutional participants and not retail participants, making it less likely for investors to be empowered by information and access to investment opportunities around the globe.31 It is queried to what extent blockchain infrastructures would become fortresses that would shut out opportunities for challenger businesses and participants. Permissioned blockchains are promising structural enhancements to current business relationships and networks that can offer scale and recalibrations of relationships in new and unprecedented ways. Further, the contractual uncertainties raised above raise the question of whether permissioned blockchains should themselves be ‘organisationally’ governed, extending from our discussion of business networks in Chapter 4, for example. Our case study on peer-to-peer energy trading will refect on particular governance issues that arise when permissioned blockchains are extended into business-to-consumer and consumer-to-consumer relationships. These raise novel questions in relation to organisational, governance and also regulatory implications. Permissionless blockchains Cryptocurrency blockchains like Bitcoin demonstrate how a permissionless blockchain can work, but are by no means the only purpose for which a permissionless blockchain exists. Permissionless blockchains or distributed ledgers that facilitate the execution of ERC 20-compatible smart contracts (application tokens) are the more radical new frontier for economic activity that heralds the rise of the crypto-economy.

28 Low and Mik (2020). 29 Chris Berg, Sinclair Davidson and Jason Potts, Understanding the Blockchain Economy (Cheltenham: Edward Elgar 2019) at ‘The V-form Organisation and the Future of the Firm’, ch7. 30 Calastone Launches World-First Blockchain Powered Global Funds Marketplace in May 2019’ (PR Newswire, 3 Dec 2018). 31 Robert J. Shiller, ‘Democratizing and Humanizing Finance’ in Randall S. Kroeszner and Robert J. Shiller (eds), Reforming U.S. Financial Markets: Refections Before and Beyond Dodd-Frank (Cambridge, MA: MIT Press 2011).

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For example, new crypto-goods or services that are provided completely over the internet (on-chain) can be developed, such as the sale of CryptoKitties, virtual representations of digital cat artworks that can be bought and ‘bred’ virtually in CryptoKitty communities.32 The CryptoKitty producers could be individual artists that are able to produce cute digital renditions of cat artwork and consumers could ‘collect’ these unique pieces of artwork and engage in ‘breeding’ them on the online gaming platform. Smart contracts deployed on a distributed ledger network can also facilitate the purchase and sale of peer-to-peer services such as storage space in idle computers on the distributed ledger network. For example, Storj and Golem are blockchain enterprises that are developing peer-to-peer platforms that facilitate access to individual computers’ idle power for a fee33 and bring together networks of computers willing to share their ‘excess capacities’. These provide an alternative to cloud-based computing services that are offered by oligopolistic technology giants such as Apple, Google or Amazon. Permissionless blockchains raise a host of governance issues, many of which remain unresolved. First, in terms of the bilateral contracts for cryptogoods or services that are provided over the blockchain platform, these are usually executed as automated smart contracts. Smart contracts give rise to an array of issues in relation to commercial rights and expectations. To what extent would self-governance terms such as the CryptoKitty licence apply and how would it interact with existing bodies of private and regulatory law? Möslein questions: if mainstream legal norms in contract, property, intellectual property, etc. laws contradict the provisions of selfregulatory templates, licences and conditions,34 how would such contradictions be dealt with? Would the self-regulatory templates be regarded as a ‘choice of law’?35 Second, where and how would disputes that arise be resolved? Would completely self-regulatory blockchain-based adjudication mechanisms then arise?36 If so, on what basis do they have jurisdiction and decision-making authority, and upon what principles do they adjudicate? What procedures and safeguards apply, and would they be consistent with constitutional, due process and human rights? How would enforcement be carried out?

32 www.cryptokitties.co/. 33 See https://golem.network/. 34 Florian Möslein, ‘Conficts of Laws and Codes: Defning the Boundaries of Digital Jurisdictions’ in Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019) at ch15. 35 Ibid. 36 Michael Abramowicsz, ‘Blockchain- Based Insurance’ in Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019) at ch10.

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More generally, Arcari37 questions whether transactions effected by smart contracts could be questioned as refecting the intention of the contracting parties. Contracts can never be completely coded, as it is inherently impossible to be able to code ex ante all possible eventualities in contractual performance in order to foreclose unexpected situations and issues from arising.38 Further, questions would also arise as to which jurisdiction’s contract laws should apply where there are cross-border transactions. In the absence of express stipulation, who bears the risk of errors in code, cyberhacking and force majeures such as internet outages that result in performance not being carried out at a stipulated time? Off-chain support for blockchain peer-to-peer marketplaces are necessary when elements of the transaction cannot simply be performed and completed on-chain, such as where verifcation of information pre-transaction is required, or where ex post delivery of goods or performance of services are required and do not take place on-chain. Oracles are smart contracts that can be used to verify externally available information in order to reduce the chances of fraud on the network. If in a peer-to-peer energy marketplace, a Supplier (S) of harvested solar energy wishes to sell his/her excess capacity, S’s smart energy meter may be connected to the distributed ledger network in order to send information of actual capacity to be verifed by the oracle. Oracles may, however, need to be maintained by regular human intervention in order to ensure that it is gathering information from the latest and correct information sources.39 There is also a need to ensure that data privacy and security concerns are addressed in relation to the oracle’s interaction with smart devices.40 This is pertinent for development of distributed ledger business platforms that serve the Internet-of-Things market.41 Ex post aspects of blockchain-based transactions that are ‘off-chain’, such as regarding delivery and performance, may also go wrong in conventional ways such as delay, defective goods, etc. These are likely to be dealt with under contract and sales laws, although what remains uncertain is whether consumer protection laws apply in peer-to-peer marketplaces.

37 Jared Arcari, ‘Decoding Smart Contracts: Technology, Legitimacy, & Legislative Uniformity’ (2019) 24 Fordham Journal of Corporate and Financial Law 363. 38 Usha R. Rodrigues, ‘Law and the Blockchain’ (2019) 104 Iowa Law Review 680; also see generally Michèle Finck, Blockchain Governance and Regulation in Europe (Cambridge: CUP 2018). 39 Arcari (2019). 40 Patrick Waelbroeck, ‘An Economic Analysis of Blockchains’ (2018) at https://papers.ssrn. com/sol3/papers.cfm?abstract_id=3157485. 41 Bin Yu, Jarod Wright, Surya Nepal, Liming Zhu, Joseph Liu and Rajiv Ranjan, ‘TrustChain: Establishing Trust in the IoT-based Applications Ecosystem Using Blockchain’ (2018) IEEE Computing 12; Alfonso Panarello, Nachiket Tapas, Giovanni Merlino, Francesco Longo and Antonio Puliafto, ‘Blockchain and IoT Integration: A Systematic Survey’ (2018) 18 Sensors 2575.

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Further, questions may arise as to which jurisdiction’s relevant laws apply in a cross-border context. The permissionless blockchain is usually maintained in a decentralised manner by mining protocols so that all users are able to, if they wish, participate in the maintenance and governance of the platform. This apparently democratic and decentralised ‘governance’ structure is not necessarily the case in reality, as mining can involve commitment of signifcant resources especially in terms of energy and computing power and can be concentrated in clusters such as mining farms. The simplicity of the ideas of de-hierarchicalisation,42 distributed participation by any and everyone and automated smart contracts underpinned by a value transfer and recording ledger system do not necessarily bring about a self-performing, self-enforcing and problem-free marketplace or community. The needs for maintenance of the network and for resolving problems in the Bitcoin blockchain and on the Ethereum blockchain have brought about new ungoverned institutions such as oracles which can become points of failure or entry for fraud.43 Such institutions become trusted and yet are self-governing without an accountable basis for doing so.44 Ad hoc governance moments have arisen for crisis management, as discussed below, but there is no systematic recognition of either multilateral norms for the marketplace in a predictable manner45 or the institution of centralised locations of powers, responsibility and governance.46 In contrast, the need to resolve ex post problems is the raison être for the rise of institutions for governance and dispute resolution, law and justice.47 The lack of clear institutions of authority on a permissionless blockchain allows a defaultisation to majority control, and this has allowed rogue

42 Darcy W.E. Allen, Chris Berg and Mikayla Novak,‘Blockchain: An Entangled Political Economy Approach’ (2018) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3158805. 43 Alexander Egberts, ‘The Oracle Problem: An Analysis of How Blockchain Oracles Undermine the Benefts of Decentralised Ledger Systems’ (2019) at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3382343. 44 Ibid. 45 Simon Geiregat, ‘Cryptocurrencies Are (Smart) Contracts’ (2018) 34 Computer Law and Security Review 1144. 46 Angela Walch, ‘Deconstructing “Decentralisation”: Exploring the Core Claim of Crypto Systems’ (2019) at https://ssrn.com/abstract=3326244; Matthias Tarasiewicza and Andrew Newman, ‘Cryptocurrencies as Distributed Community Experiments’ in The Handbook of Digital Currencies (Singapore: Elsevier 2015) at ch10. See also Karen Yeung, ‘Regulation by Blockchain: The Emerging Battle for Supremacy Between the Code of Law and Code as Law’ (2019) 82 The Modern Law Review 207 arguing about whether governance norms or structures should be established. 47 E.g. see Dani Rodrik, ‘Getting Institutions Right’ (2004) at www.ifo.de/DocDL/dicereport 204-forum2.pdf; Dani Rodrik, Arvind Subramanian and Francesco Trebbi, ‘Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development’ (2004) 9 Journal of Economic Growth 131 on the importance of legal institutions such as private property rights and regulatory frameworks.

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behaviour to prevail on a number of cryptocurrency blockchains where a rogue majority attains 51% control of the nodes and is able to effect miscreant behaviour such as hacking and theft.48 In each case, the founder developers of the network would intervene and create a fork in the blockchain so that rogue behaviour is not legitimised in the forked chain.49 This, however, creates governance by forking, i.e. to move clusters of users away into a different ‘community’ existing alongside the previous community, without any further governance over rogue behaviour. Such governance is minimal and primitive50 as it avoids norm development, prevention and sanctioning, and the ecosystem is retarded in developing social character and culture. Further, such crisis management also does not cater for individual redress needs. It may, however, be argued that the development of sociology in distributed ledger ecosystems must be kept to a minimum so as not to create rules of inclusion/exclusion, which are against the ethos of a permissionless system. However, it is queried to what extent economic activity or agency can fourish without the support of institutions such as legal institutions for commercial certainty and to incentivise investment.51 Further, it can be seen that founder developers, core coders and powerful miners on distributed ledgers wield signifcant levels of power to affect the development of the underlying infrastructure.52 It may be argued that founder developers such as Vitalik Buterin and the Ethereum Foundation are reputationally trustworthy in terms of their competence and judgment, but what about problems that happen on separate distributed ledgers based on the Ethereum blockchain

48 ‘Blockchain’s Once-Feared 51% Attack Is Now Becoming Regular’ (8 June 2018) at www. coindesk.com/blockchains-feared-51-attack-now-becoming-regular. 49 ‘How Many Bitcoin Forks Are There?’ at https://forkdrop.io/how-many-bitcoin-forks-arethere; ‘Ethereum Executes Blockchain Hard Fork to Return DAO Funds’ (2016) at www. coindesk.com/ethereum-executes-blockchain-hard-fork-return-dao-investor-funds; and attack on the already forked Ethereum classic in Jan 2019, see ‘Cryptocurrency Hackers Steal $1.5m of Ethereum Classic in Rare Attack’ (8 Jan 2019) at www.independent.co.uk/ life-style/gadgets-and-tech/news/ethereum-classic-attack-cryptocurrency-bitcoin-coinbaseetc-a8716986.html. 50 Markos Zachariadis, Garrick Hileman and Susan V. Scott, ‘Governance and Control in Distributed Ledgers: Understanding the Challenges Facing Blockchain Technology in Financial Services’ (2019) 29 Information and Organisation 105. 51 Consumers and investors generally value trusted centralised institutions in the economic landscape, and commentators fnd that core code developers are informally regarded as such on distributer ledger platforms, see Ying-Ying Hsieh, Jean-Philippe (JP) Vergne and Sha Wang, ‘The Internal and External Governance of Blockchain-Based Organizations Evidence from Cryptocurrencies’ in Malcolm Campbell-Verduyn (ed), Bitcoin and Beyond: Cryptocurrencies, Blockchains, and Global Governance (Oxford: Routledge 2018) at ch3. 52 Angela Walch, ‘In Cod(ers) We Trust’ in Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019) at ch3 suggesting that core code developers should be subject to fduciary duties, but see refute in Raina Haque, ‘Blockchain Development and Fiduciary Duty’ (2019) 2 Stanford Journal of Blockchain Law & Policy 1.

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and not on the Ethereum blockchain itself? Are there institutions such as the Ethereum Foundation that can act as anchors for trust and governance? Further, miners are in particular a powerful group in relation to the creation and distribution of wealth on the distributed ledger. The underlying payment infrastructure of crypto-economy businesses is built upon the Ethereum blockchain if not on the blockchain itself (such as CryptoKitties). Miners continue to be a necessary institution for verifying and recording value transfers and perform the underlying ‘clearing and settlement’ infrastructure for transactions at the application layer. As Ethereum blockchain-based business applications grow, miners can become an incredibly powerful group that accumulates wealth in ether. Such power can have signifcant market effects in relation to infation such as in the crypto-economy. Commentators have proposed more democratic53 as well as less costly forms of consensus protocols54 for mining so that mining power does not get concentrated in the hands of only those who can afford it. However, it remains important to consider the governance and responsibility of miners as maintainers of the crucial underlying business infrastructure for all participants on a distributed ledger. Further commentators have looked at the profle of code developers and key miners and argue that they are not merely atomistic entities unrelated to each other but are socially networked and connected with each other55 in order to coordinate crisis management action when needed.56 Such latent and unaccounted for power may need to be subject to more overt institutions of governance.

53 Such as systems that continuously rotate miners so that mining power does not become concentrated in a few hands, see Pengfei Li, Jingtian Peng, Long Yang, Qian Zheng and Gang Pan, ‘Crux  – A New Fast, Flexible and Decentralised Consensus Algorithm with High Fault Tolerance Rate’ in Meikang Qiu (ed), Smart Blockchains (Heidelberg: Springer 2018) at 66–76; Hong Guo, Hongqiang Zheng, Kai Xu, Xiangrui Kong, Jing Liu, Fang Liu and Keke Gai, ‘An Improved Consensus Mechanism for Blockchain’ in Meikang Qiu (ed), Smart Blockchains (Heidelberg: Springer 2018) at 129–138. 54 Dimitris Karakostas, Aggelos Kiayias, Christos Nasikas and Dionysis Zindros, ‘Cryptocurrency Egalitarianism: A Quantitative Approach’ (2019) at https://arxiv.org/abs/1907.02434 supporting the Proof of Stake approach for miners on the Ethereum blockchain. This entails miners staking their own ether wealth in proposing to verify transactions and is arguably less costly in terms of energy consumption. The commentators also argue that this approach is egalitarian, as wealthy or less wealthy miners only earn in proportion to their wealth. However, see other novel ideas such as proof of burn, where miners offer to burn cryptocurrency in order for the burnt coins to be locked up in a common fund for the common good of the ledger, see Fahad Saleh, ‘Volatility and Welfare in a Crypto Economy’ (2019) at https:// papers.ssrn.com/sol3/papers.cfm?abstract_id=3235467; Jason Potts, Ellie Rennie and Jake Goldenfein, ‘Blockchains and the Crypto City’ (2017) 59 Information Technology 285. 55 Dan Bousfeld, ‘Crypto-coin Hierarchies: Social Contestation in Blockchain Networks’ (2019) 19 Global Networks 291. 56 Francesca Musiani, Alexandre Mallard and Cécile Méadel, ‘Governing What Wasn’t Meant to Be Governed: A Controversy-Based Approach to the Study of Bitcoin Governance’ in Malcolm Campbell-Verduyn (ed), Bitcoin and Beyond: Cryptocurrencies, Blockchains, and Global Governance (Oxford: Routledge 2018) at ch7.

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Truly decentralised business models require coordination and effciency at scale, which is not an easy balance to strike, as coordination is not always smooth and dispute-free. Abadi and Brunnermeier57 discuss the costliness and ineffciencies of payment verifcation on cryptocurrency blockchains such as Bitcoin as being necessary because the cost of trust is not centralised but distributed. At what scale can all the complex needs for institutions that create certainty, predictability and protection be distributed, in terms of both effectiveness and technological feasibility? And what responsibilities and accountability should entail from nodes performing ‘institutional’ roles such as mining?58 Fundamentally, can distributed ledger marketplaces merely rely on market forces to develop appropriate mechanisms that sustain the marketplace, or is the governance of the platform beyond the question of market-based mechanisms and instead a question of governance for the loose community/organisation of the ledger participants?59 Further, it may be argued that relying on market forces to provide selfgenerated governance is not appropriate, as the permissionless blockchain is not merely a world that people opt into as a choice away from systems governed by the rule of law, as suggested by Schrepel.60 During the Covid-19 crisis, for example, empirical researchers61 fnd that fnancial institutions and others piled into crypto-currencies, possibly perceiving this as an uncorrelated haven from battered conventional fnancial markets. This may suggest that the seemingly parallel universe of the permissionless blockchains are social spheres of importance, and this should give rise to implications in terms of considering whether they should be subject to governance consistent with institutional order or considered as outworkings of a new social contract. The decentralised autonomous organisation A number of commentators view the blockchain business platform as in between markets and hierarchy.62 The analogy with markets is close, as blockchain platforms, like platform economies of today such as Ebay, Etsy

57 Ibid. 58 See Philipp Hacker, ‘Corporate Governance for Complex Cryptocurrencies? A Framework for Stability and Decision Making in Blockchain- Based Organizations’ in Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019) at ch7. 59 Mark Fenwick and Erik P.M. Vermeulen, ‘Decentralisation Is Coming! The Future of Blockchain’ (2019) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3450467. 60 Thibault Schrepel, ‘Anarchy, State, and Blockchain Utopia: Rule of Law versus Lex Cryptographia’ in General Principles and Digitalisation (Oxford: Hart Publishing, 2020) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3485436. 61 Hadar Jabotinsky and Roee Sarel, ‘How Crisis Affects Crypto: Coronavirus as a Test Case’ (2020) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3557929. 62 Prateek Goorha, ‘Blockchains as Implementable Mechanisms: Crypto-Ricardian Rent and a Crypto-Coase Theorem’ (2018) 1 JBBA 1; Soichiro Takagi, ‘Organizational Impact of

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or Alibaba.com, foster contractual relationships between participants inter se, and participants have separate contractual relationships with the market operators themselves. However, the analogy is incomplete, as participants’ relationships with the market operator are uncertain in terms of their legal framing and categorisation. The ledger platform may be developed by a development entity (which could be a company), but the ledger, being by its nature permissionless and distributed, is not ‘owned’ as an asset by the development entity. It is uncertain what legal entity the ledger is, and whether it has any legal relationship with participants. Moreover, in many platforms, participants can be users and co-creators on the ledger, contributing also to the ledger and code development.63 Hence the platform can be regarded as a commons,64 and participants’ relationships with each other over the commons may thus not be regarded simply as atomistic market-based and contractual relations but may have certain relational and interdependent aspects to them. In this regard, it is queried as to whether there is a need in law to fashion a legal recognition and new categorisation of the blockchain platform, as well as whether legal standards may provide for such platforms’ governance.65 The distributed ledger infrastructure has indeed been used in an experiment undertaken by blockchain company Slock.it.com in order to build a completely decentralised organisation which anyone can join in order to co-fund and generate decision making.66 The Decentralised Autonomous Organisation (DAO) was a pioneer template67 for smart contract applications to be built upon the Ethereum platform which had the following functions: (1) To enable participants to send funds in ether to an address on the blockchain, and the address mentioned to receive the funds in a pooled form;

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Blockchain through Decentralised Autonomous Organizations’ (2017) 12 International Journal of Economic Policy Studies 22. Primavera De Filippi, ‘Translating Commons-Based Peer Production Values into Metrics: Toward Commons-Based Cryptocurrencies’ in David Lee (ed), The Handbook of Digital Currencies (Singapore: Elsevier 2015) at ch23; Alyse Killeen, ‘The Confuence of Bitcoin and the Global Sharing Economy’ in David Lee (ed), The Handbook of Digital Currencies (Elsevier 2015) at ch24. Davidson et al. (2018); Damodaran Appukuttan Nair, ‘The Bitcoin Innovation, Crypto Currencies and the Leviathan’ (2019) 9 Innovation and Development 85–103; Zachariadis et al. (2019). Above. Quinn DuPont, ‘Experiments in Algorithmic Governance: A History and Ethnography of “The DAO,” A Failed Decentralised Autonomous Organization’ in Malcolm CampbellVerduyn (ed), Bitcoin and Beyond: Cryptocurrencies, Blockchains, and Global Governance (Oxford: Routledge 2018) at ch8. See ‘The History of the DAO and Lessons Learnt’ at https://blog.slock.it/the-history-ofthe-dao-and-lessons-learned-d06740f8cfa5, where the DAO is described as an open source project that is intended to inspire others to develop DAOs.

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(2) To enable participants to vote on where the funds should be deployed, i.e. to indicate by vote the participant’s preference for investment; (3) To enable the recording and tallying of investment votes to meet the majority number trigger; (4) To enable funds to be sent to the investment opportunity destination the majority of votes support. The pioneer template was a deliberately simple governance model, as acknowledged by slock.it.com, the developers. The developers envisaged that the open source code for the DAO could become a template for future DAOs to be developed, perhaps with more complex governance functions.68 Despite the failure of the frst DAO, commentators are of the view that this is a futuristic vision of a distributed organisation that is de-hierarchical, removing itself of the need for centralised management, administrators and the agency problem between fnanciers and management,69 allowing direct governance by democratic participation by all funders. The DAO’s story ended in fames, as an attacker exploited a faw in the open source code and managed to drain the pool of funds of about USD $50 million worth of ether, parking them in a child DAO. However, slock. it.com and key miners on the Ethereum blockchain decided to remedy the damage by implementing a hard fork so that an application (smart contract) was written in order to return ether that had been contributed to the DAO address, and the Ethereum blockchain therefore maintained a ledger clean of the theft.70 Although the implementation of the hard fork was pragmatic in order to resolve the harms caused to the DAO’s funders, it raised the question of not just the DAO’s governance protocols but the meta-level governance protocols above the DAO layer in order to resolve problems. The lack of articulated or clear norms of governance gives rise to ad hoc decision making and problem solving which ironically contradicts the ethos of decentralisation and de-hierarchicalisation that distributed ledger developers wish to maintain.

Organisational and governance norms for permissionless blockchains? Permissionless blockchains raise many boundary-defying issues for organisation and governance of potentially new forms of businesses, not merely extensions of current business models. This chapter provides a snapshot

68 Ibid. 69 Ori Oren, ‘ICO’s, DAO’S, and the SEC: A Partnership Solution’ (2018) 2018 Columbia Business Law Review 617. 70 See ‘The History of the DAO and Lessons Learnt’ at https://blog.slock.it/the-historyof-the-dao-and-lessons-learned-d06740f8cfa5.

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of these visionary possibilities but will turn to focus on the permissioned blockchain in a case study extending from existing real economy business models. This is because such deployment and integration into the conventional economy is more likely scalable in the near term. The permissionless blockchain has organisational characteristics in itself, and even if the developer or founder of the blockchain platform is an organisation, such as a corporation like Tron or a foundation like Ethereum, the platform should itself arguably be treated as a distinct organisational phenomenon. This is because the developer is a distinct participant on the blockchain itself, interacting with other users and volunteers. The developer may in some cases ‘own’ the platform as an asset, especially in a permissioned blockchain, just like AirBnB or Uber, which own their platforms and have rights to extract rents from the value produced on the platforms without necessarily sharing such value with users. However, many developers do not behave in the same way and are more incentivised to raise pre-development funds for developing the blockchain platform and then relinquishing the operations and governance of it to the self-sustaining community of users after the platform goes live. Governance mechanisms are only emerging on permissionless blockchains, centred upon mining protocols such as proof-of-work, where miners need to dedicate resources to verify if the cryptographic hashes in transactions match their public keys, or various versions of proof-of-stake where verifcation is carried out by staking one’s cryptocurrency for the consensus validation of other nodes. The self-regulating default situation in established blockchains has generated haphazard crisis management and governance, as mentioned above, and also promoted powerful clusters in terms of infuential founder/ developers, active code developers and mining groups.71 It can however be argued that as the blockchain development space becomes more competitive, developers may compete to improve blockchain governance in order to attract users. By default, the democratic ethos underpins many bottom-up innovations and is consistent with the peer-to-peer nature of the blockchain platform.72 Governance and voting mechanisms have arisen in a number of blockchain-based enterprises such as stablecoin issuer MakerDAO and decentralised fnancial markets such as Uniswap. However, democratic set-ups, such as on the Dash blockchain,73 do not necessary encourage equally engaged behaviour from all nodes. The Dash chain

71 Bronwyn E. Howell, Petrus H. Potgeiter and Bert M. Sadowski, ‘Open-Source or OpenSlather? Governing Blockchain Applications as Common-Pool Resources’ (2019) at https:// ssrn.com/abstract=3427166. 72 Democracy may be a starting point, such as in the Dash blockchain governance, but over time, inert nodes may not vote and infuential groups may collude and garner most power over decision making; see Lawrence Mosley, Hieu Pham and Yogesh Bansal, ‘Towards a Systematic Understanding of Blockchain Governance in Proposal Voting: A Dash Case Study’ (2019) at https://ssrn.com/abstract=3416564. 73 Mosley et al. (2019).

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features inert voters who are not really engaged and groups that could collude and become infuential. Hence a particular hazard in the generation of collective thinking under conditions of decentralisation is that it remains free for manipulative groups to subvert democratic processes.74 Visionaries in the blockchain development space, such as Vitalik Buterin, also urge blockchain governance to be developed. Buterin, in his blog, has proposed three forms of decentralised governance that may be written on top of the Ethereum blockchain.75 First, futarchy protocols can be written as governance protocols on top of the Ethereum blockchain. This idea is derived from economist Robin Hanson’s vision of a political futarchy76 where citizen’s votes for or against a policy are accompanied by pay-offs, and these predictive markets will be used to choose winning policies. Buterin envisages that governance proposals can be coded more precisely for token holders to vote upon, and token holder apathy is overcome as the holder of tokens is compelled to choose one or the other option, fully engaged in betting for or against an outcome. This may not prevent market manipulation where tokens are simply bought or sold by those who wish to infuence a particular outcome but can form a starting point for coders to consider how a market for governance and policy/decision making can be created, therefore bypassing the need for centralised institutions. Next, holacracy can be coded into blockchain protocols to defne roles that are needed for blockchain governance and the eligibility criteria and responsibilities of those roles, perhaps deriving from the foundational tenets in the Holacracy Constitution.77 Role-takers would then be able to shape norm development in proposal interaction with the community of roletakers. This proposal does not avoid centralisation, as the developers of code that provides role defnitions and eligibility arguably perform a centralising act (i.e. ‘Ratifers’, according to the Holacracy Constitution), and role-takers are clusters of power and infuence within the blockchain ecosystem, although governed by protocols and inter-governing each other (as ‘Partners’, according to the Holacracy Constitution). Finally, liquid democracy78 could also be coded into blockchain protocols. This one more simply defaults to one-token-one-vote, but token holders can delegate their rights to others to vote, or take back the vote, as token holders see ft. Delegated proof-of-stake is implemented on the blockchain-based social media platform Steem, now known as Hive. This fexible participatory

74 Nick Cowen, ‘Markets for Rules: The Promise and Peril of Blockchain Distributed Governance’ (2019) at https://ssrn.com/abstract=3223728. 75 Vitalik Buterin, ‘An Introduction to Futarchy’ (Oct 2014) at https://blog.ethereum. org/2014/08/21/introduction-futarchy/; also discussing other governance innovations. 76 Robin Hanson, ‘Vote Values But Bet Beliefs’ at http://mason.gmu.edu/~rhanson/futarchy. html. 77 www.holacracy.org/constitution. 78 Bryan Ford, ‘Delegative Democracy’ (2002) at https://bford.info/deleg/deleg.pdf.

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system caters for those who choose to engage for issues that matter and can delegate to others when they are less intensely concerned or engaged. Such fexible democratic participatory systems arguably surpass representative democracies where power can be concentrated in the hands of a small group of elites and also overcome the problems of referendum-based democracies which may be too cumbersome and entail apathy in voters who may be fatigued from engaging in every single motion. The permissionless blockchain continues to generate unique organisational and governance needs which are still subject to emerging debate.79 We now turn to how permissioned blockchains may change business models in an existing commercial context and give rise to new organisational and governance needs.

Energy sector application of the permissioned blockchain: peer-to-peer energy trading The use of blockchain technology within the energy sector provides interesting insights into how it has the potential to revolutionise traditionally top-down corporate structures. In recent years, the technology has been experimented with in the sector for uses such as the grouping of energy data into a single database to facilitate energy supplier switching (Electron),80 as well as the selling of energy at the wholesale level (Ponton Enerchain).81 A use case particularly challenging the top-down supplier-consumer relationship is peer-to-peer (P2P) energy trading, which will be further delved into in this section.82 Still at the experimental stage, peer-to-peer energy trading is commonly done using blockchain technology.83 It was frst trialled in Brooklyn (New York) in 2016, with neighbours exchanging electricity using blockchain technology.84 Another example is the CommUNITY project in Brixton (London, United Kingdom), which started in 2018 and involves residents of a social housing building. The building has solar panels on its roof and battery storage in the basement, enabling the storing of energy generated by the solar panels. Each fat owns a share of the solar panels and battery storage.

79 See for e.g. Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019); David Fox and Sarah Green (eds), The Law of Cryptocurrencies (Oxford: OUP 2019); Chris Berg, Sinclair Davidson and Jason Potts, Understanding the Blockchain Economy (Cheltenham: Edward Elgar 2019). 80 www.electron.org.uk/. 81 https://enerchain.ponton.de/. 82 Chenghua Zhang et al., ‘Review of Existing Peer-to-Peer Energy Trading Projects’ (2017) 105 Energy Procedia 2563–2568. 83 Ibid. 84 www.brooklyn.energy/.

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Residents can choose to sell or donate excess energy from their share to neighbours using a blockchain-enabled app on their phones.85 Blockchain is a technology commonly used in P2P energy trading, since it allows for direct fnancial transactions between parties through the use of ‘smart contracts’. As stated above, this only enables the virtual (fnancial) aspect of trading. The physical aspect, namely, the movement of energy between participants, is made possible by the consumer’s smart energy meter. The meter measures incoming and outgoing energy fows in a household and, by being connected to a device running the blockchain programme, ensures that the consumer receives the purchased energy.86 The Brixton project is being rolled out by the energy supplier EDF within the framework of the UK energy regulator’s regulatory sandbox (‘Innovation Link’). The latter enables licenced organisations and partners to experiment with new business models that are currently not foreseen in regulation, such as P2P energy trading, for a set amount of time and with a limited number of consumers. The aim is for the government to use the results of trials to reassess policy/regulation, enabling these models to be rolled out at a wider scale and in the long term.87 Regulatory sandboxes are being launched across the world, allowing for the testing of blockchain applications in the fnancial services and energy sectors. Peer-to-peer energy trading is not foreseen in the regulation of most countries where it is being trialled. This will change at the European level, since the European Union’s revised Renewable Energy Directive, having come into force in December 2018 and to be transposed by EU Member States by 2021, explicitly recognises the right for consumers to carry out peer-topeer energy trading (Articles 2(18), 21(2)(a) REDII). Blockchain technology is not explicitly mentioned, although the defnition of P2P energy trading states that it could take place ‘by means of a contract with pre-determined conditions governing the automated execution and settlement of the transaction’. This could be interpreted as referring to smart contracts. Crucially, the Directive leaves signifcant room for interpretation by leaving out details on the specifc rules that should govern these peer-to-peer networks, as well as which technology should underlie trading.88 There are several reasons why new business models such as peer-to-peer energy trading are gaining in popularity. There has been a recent rise in the number of domestic consumers producing their own energy (‘prosumers’). Renewable energy technologies such as solar panels have become more

85 ‘EDF Energy Empowers Social Housing Residents to Trade Solar Energy’ (EDF Energy, 11 Feb 2019). 86 Exergy,‘Business Whitepaper’ (2017) at https://lo3energy.com/wp-content/uploads/2018/04/ Exergy-BIZWhitepaper-v11.pdf. 87 www.ofgem.gov.uk/about-us/how-we-engage/innovation-link. 88 Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (2018) OJ L 328.

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affordable, and governments are providing fnancial incentives for the installation of such technologies as well as the production of renewable energy. New data-centric technologies such as smart meters, which are being rolled out across all domestic households across Europe,89 allow consumers to sell their self-generated energy on to energy suppliers.90 Thanks to distributed ledger technologies such as blockchains, energy consumers have the opportunity to sell energy directly to other consumers.91 Peer-to-peer energy trading using blockchain provides consumers with a choice over the ‘type of energy used as well as whom they pay for it’ and how much they pay.92 For trading communities, it brings additional benefts such as job creation and enhanced community cohesion.93 At a wider level, it allows for a greater share of renewable energy in the grid and ‘reduces congestions on transmission and distribution lines’.94 Furthermore, energy policymakers and regulators have been considering peer-to-peer energy trading as a potential way to mobilise energy consumers to help meet national and international climate targets.95 The recently revised EU Renewable Energy Directive grants more rights to consumers (individually and as a group) to produce, store and trade their own energy.96 European countries such as the Netherlands are also enabling the roll-out of P2P energy trading pilots using blockchain, in a bid to explore ways to actively involve energy consumers in the transition towards a more sustainable energy system.97 Therefore, pressure from the top (government) and bottom (affordable renewable energy technologies, distributed ledger technologies) are driving the emergence of new business models such as peer-to-peer energy trading. In this application scenario, new commercial relationships are forged and existing business and regulatory relationships face changes. This is because energy trading can now include consumer-to-consumer trading as peers, and

89 European Commission, ‘Smart Grids and Meters’ (2020) at https://ec.europa.eu/energy/ topics/markets-and-consumers/smart-grids-and-meters/overview_en. 90 Thomas Morstyn, Alexander Teytelboym and Malcolm D. McCulloch, ‘Bilateral Contract Networks for Peer-to-Peer Energy Trading’ (2019) 10 IEEE Transactions on Smart Grid 2026. 91 Sinan Küfeoğlu et al., ‘Digitalisation and New Business Models in Energy Sector’ (2019) Cambridge Working Paper in Economics. 92 Dawn Mulvey, Nicole Mcnab and Steve Morley, ‘Future Energy Models- Citizens Advice’ (2019) at https://www.citizensadvice.org.uk/Global/CitizensAdvice/Energy/915%20 Citizens%20Advice%20Future%20Energy%20Models%20Report%20Final%20v2.pdf. 93 Saskia Lavrijssen and Arturo Carrillo,‘Radical Innovation in the Energy Sector and the Impact on Regulation’ (2017) at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2979206. 94 Chenghua Zhang et al., ‘A Bidding System for Peer-to-Peer Energy Trading in a GridConnected Microgrid’ (2016) 103 Energy Procedia 147. 95 Saskia Lavrijssen, ‘The Right to Participation for Consumers in the Energy Transition’ (2016) 25 European Energy and Environmental Law Review 152. 96 Directive (EU) 2018/2001. 97 www.rvo.nl/subsidies-regelingen/experimenten-elektriciteitswet.

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the energy trading context continues to be embedded in an existing regulatory landscape. We now turn to the issues that need to be addressed. Access to participation It could be said that the energy sector is one of the sectors that can most beneft from blockchain technology, as this technology has the potential to make the energy grid more sustainable, through an increase in the production and sharing of renewable energy. It would also bolster community energy groups and help governments meet their climate targets. On the fip side, the energy sector is one of the most vulnerable to the risks of blockchain technology. As opposed to Uber or Airbnb, peer-to-peer transactions would make use of a physical infrastructure of critical national importance, namely the energy grid. All energy consumers pay additional costs in their energy bills for the maintenance of the grid. If peer-to-peer networks were to be completely self-suffcient on the energy they produce and no longer make use of the grid, then it would fall on consumers who aren’t able to join trading networks (e.g. consumers with no space at home for renewable energy installations or with insuffcient internet connectivity) to shoulder the costs of maintaining the grid. This raises issues of fairness.98 Blockchain-specifc risks for participation In addition to questions of fairness, there are blockchain-specifc risks for consumers engaging in P2P energy trading. Key characteristics of the technology would make the enforcing of consumer-facing obligations, such as dispute resolution and data privacy rights, more diffcult. One of blockchain’s main selling points is that it provides an immutable record of transactions, which is almost impossible to amend (i.e. commit fraud on), thereby representing a reliable source of information for all parties involved. It replaces the need for trust between transacting participants, due to fulflling the role traditionally taken by third parties to verify and enable transactions. However, the technology’s immutability clashes with data privacy rights in the GDPR, such as the ‘right to be forgotten’ (i.e. data to be deleted from the database at the consumer’s request), right to ‘data portability’ (i.e. request for data to be moved to another database) and for data to be amended.99 There is also the question of who is responsible on a blockchain for enforcing any data requests. In other words, who is the data ‘controller’ and

98 UCL Energy Institute, ‘Summary: Launch Event of GO-P2P’ (2019) at https://userstcp.org/ wp-content/uploads/2019/10/191004-SummaryGlobalObservatoryLaunchEvent.pdf. 99 Michele Finck, ‘Blockchain and the General Data Protection Regulation- Can Distributed Ledgers Be Squared with European Data Protection Law?’ (2019) at www.europarl.europa. eu/RegData/etudes/STUD/2019/634445/EPRS_STU(2019)634445_EN.pdf.

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‘processor’ (in GDPR language) in the case of a blockchain? A participant running the blockchain on their computer could be labelled a processor but also a controller, since he/she decides what information to place on the blockchain.100 Little legal clarity has been provided on these questions so far, making the use of blockchain for consumer-facing services such as peer-topeer energy trading a risky endeavour. Another one of blockchain’s strengths, as previously discussed, is the ability to use smart contracts for fnancial transactions. This involves individuals programming the terms of selling or buying a good or service in computer code, and once the blockchain fnds matching terms, an automatic fnancial transaction takes place between both parties. Due to the immutable nature of the blockchain, smart contracts are irreversible,101 meaning that those impacted by a badly or non-delivered good/service will need to have recourse to a court or arbitration instance having knowledge of smart contracts and of the computer code used to programme these in order to get their money back.102 Rules will therefore be necessary to regulate the terms of transactions between network participants, and the most likely entity to enforce these will be the entity providing the blockchain infrastructure, namely, the platform provider. These intermediaries providing the blockchain platform will need to ensure that contract terms stipulated by participants are uniform and that a third party providing arbitration or a court is designated to remedy disputes.103 Furthermore, it will be diffcult to code all of the parties’ terms into computer language. The strength of natural language contracts is that they can include clauses covering unforeseen circumstances, such as changes in the law, situations of force majeure or a change in the legal position of parties. Even if it were possible to programme these into a smart contract, it is diffcult to imagine how it would be able to recognise when such an external event takes place.104 Based on the aforementioned, simply relying on smart contracts to govern relationships between network participants (‘code is law’ principle),105

100 Ibid. 101 Juhar Abdella and Khaled Shuaib, ‘Peer to Peer Distributed Energy Trading in Smart Grids: A Survey’ (2018) 11 Energies 1560. 102 Alexandra Schneiders and David Shipworth, ‘Energy Cooperatives: A Missing Piece of the Peer-to-Peer Energy Regulation Puzzle?’ (2018) at https://papers.ssrn.com/sol3/papers. cfm?abstract_id=3252486. 103 Ibid. 104 Mateja Durovic and Andre Janssen, ‘The Formation of Blockchain-Based Smart Contracts in the Light of Contract Law’ (2019) 26 European Review of Private Law 753. 105 Primavera De Filippi and Samer Hassan, ‘Blockchain Technology as a Regulatory Technology- From Code Is Law to Law Is Code’ (2016) First Monday at https://frstmonday. org/ojs/index.php/fm/article/view/7113.

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as is the idea behind a DAO, is not practically feasible when it comes to consumer-facing services such as peer-to-peer energy trading. The legal characterisation of the prosumer and nature of commercial relationships The emergence of the ‘prosumer’ in recent years has prompted the recognition of the concept in legislation. For instance, the European Union recognised the ‘active customer’ in its revised Renewable Energy Directive106 as well as its Internal Energy Market Directive107 and has made clear that they will retain their rights as consumers as long as their activities, including the selling of self-produced energy, do not constitute their primary commercial activities. This clarifcation is welcome, but the question of who will be liable for any shortcomings is left open. This is particularly a problem in the case of prosumers using blockchain technology to sell energy to other consumers. In a blockchain scenario, there are no longer ‘well-defned’ roles. Participants have ‘pooled responsibilities’ by taking an active role in selling goods/services and at the same time consuming those sold by others on the network. Such pooled responsibilities will bring issues of liability to the forefront.108 Decentralisation will lead to an ‘uncertain attribution of liability and accountability for energy services’.109 The issue of ‘prosumers’ selling energy raises questions comparable to those in the sharing economy debate, namely, the extent of their responsibility towards the consumers they are selling energy to. Energy is a basic comfort we rely on, and a faulty trade could have signifcant implications. Energy companies in the UK are granted a license for the distribution, supply and transport of energy on the grid. They are bound by energy codes regulating access to the grid, spanning 10,000 pages. These include obligations for consumer-facing companies, including energy suppliers, such as those around billing and handling complaints.110 It would be logistically very diffcult if not impossible for individual consumers selling energy to be able to implement the thousands of pages of

106 Directive (EU) 2018/2001. 107 Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/ EU (2019) OJ L 158. 108 Lea Diestelmeier, ‘Regulating for Blockchain Technology in the Electricity Sector: Sharing Electricity-and Opening Pandora’s Box?’, 16th Annual Conference in Science, Technology, and Society Studies (2017). 109 Lavrijssen and Carrillo (2017). 110 UK Department for Business, Energy & Industrial Strategy (BEIS), ‘Modernising Consumer Markets: Consumer Green Paper’ (2018) at https://assets.publishing.service.gov. uk/government/uploads/system/uploads/attachment_data/file/699937/modernisingconsumer-markets-green-paper.pdf.

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obligations that license-holding energy companies must uphold. Meeting supplier-facing obligations would place an ‘unjustifable burden on prosumers’ and slow down the rollout of innovative business models supported by blockchain.111 The platform provider, in a permissioned blockchain, will again have responsibility here to enforce any (commonly agreed) rules on the distribution of liability. Furthermore, for reasons of comfort, most energy consumers are likely to have a preference for the trading to be automated and facilitated by a third party.112 In this manner, third parties providing the blockchain platform enabling peer-to-peer trading will play a key role in protecting consumers while they reap the opportunities provided by the technology. The platform’s business model would not be to distribute or sell electricity but to provide the technology facilitating ‘trust and transactions between peers’.113 It will likely take charge of the ‘paperwork’ regulating the interactions between consumers.114 Such a model is closer to the platform economy discussed in this chapter, yet slightly different, as platform providers may not exert as much dominance. In existing P2P trading use cases, the platform is usually not operating independently but is ‘an extension of existing business models’. It is often owned and operated by an ‘existing electricity market actor’ who provides it as an additional service on top of its core activities.115 It remains uncertain, however, to what extent private law characterisations and remedies apply clearly between participants on the platform. Private law – namely consumer law, competition law and contract law – will become crucial when regulating relationships between consumers trading energy. Private law clauses will be necessary as ‘competition fourishes’ and consumers become more empowered.116 However, as online third-party platforms (TPPs) connecting sellers/buyers blockchain technology are a relatively new phenomenon, these legal felds may not be enough to protect energy consumers. There is, for example, a lack of legislation in all countries protecting consumers engaging in online consumer-to-consumer (C2C) transactions.117 For the moment, peer-to-peer energy trading pilots using blockchain are being rolled out and managed by energy suppliers who are fully responsible for any shortcomings of the activities undertaken by consumers.

111 112 113 114

Lavrijssen and Carrillo (2017). Mulvey, Mcnab and Morley (2019). Diestelmeier (2019). ‘After the Clean Energy Package: Towards a Prosumer-Rights Framework’ (National Energy Ombudsmen Network (NEON), 23 Apr 2019). 115 Henri van Soest, ‘Peer-to-Peer Electricity Trading: A Review of the Legal Context’ (2019) 19 Competition and Regulation in Network Industries 180. 116 Lavrijssen and Carrillo (2017). 117 NEON (2019).

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Novel organisation for P2P energy trading? The organisational needs of peer-to-peer energy trading communities raise novel issues in relation to whether existing organisational forms meet their needs or indeed law reform should be considered. In order to further mitigate risk, participants of a peer-to-peer energy trading network (and in a permissioned blockchain setting) may want to group within a legal entity. This has become a requirement in the legislation of several countries, which have made peer-to-peer energy trading and community self-consumption conditional upon the participants becoming part of a legal entity (e.g. France).118 The European Commission has recognised the possibility of there being several organisational forms applicable to communities of active energy consumers, including those sharing energy. As previously mentioned in this chapter, the right to trade energy (while retaining consumer rights) is recognised in new European Union legislation. This is recognised by the EU Internal Electricity Market Directive (IEMD)119 as taking place within the entity of Citizen Energy Community (CEC), while the recently revised Renewable Energy Directive (REDII) recognises trading as an activity of the Renewable Energy Community (REC).120 The aim of these new market actors should be to provide ‘environmental, economic or social community benefts for . . . shareholders or members or for the local areas where [they] operate, rather than fnancial profts’ (Art. 2(16)(c) REDII/Art. 2(11)(b) IEMD).121 They cannot have a commercial purpose, which distinguishes them from traditional market actors.122 Companies are allowed to become members, as well as provide them with services, but are ‘forbidden from exercising control over the community’.123 Due to their narrower geographical scope, RECs are perceived as being a subset of CECs.124 Both forms are recognised by the EU Directives as being ‘legal entities’ (Art. 2(16)(c) REDII/Art. 2(11)(b) IEMD). RECs and CECs have free choice over the type of legal entity they wish to be incorporated into, namely, ‘any form of entity . . . [that] is entitled to exercise rights and be subject to obligations in its own name’ – such as an association, cooperative, non-proft organisation, partnership or an SME (small or medium-sized enterprise) (Recital 44 IEMD). The Directives simply provide a ‘governance framework’

118 Ordonnance N° 2016–1019 du 27 Juillet 2016 Relative à l’autoconsommation d’électricité (2016) JORF n° 0174. 119 Directive (EU) 2019/944. 120 Directive (EU) 2018/2001. 121 Josh Roberts, ‘What Energy Communities Need from Regulation’ (2019) 8 European Energy Journal 13. 122 COMPILE Project, ‘Energy Community Defnitions’ (2019) at www.compile-project.eu/ wp-content/uploads/Explanatory-note-on-energy-community-defnitions.pdf. 123 Roberts (2019). 124 COMPILE Project (2019), Energy Community Defnitions.

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within which these legal entities must operate.125 It is likely that the reason why energy communities have free choice over the type of legal entity they can incorporate into is that their activities can cover ‘various parts of the value chain’, including the production, distribution and supply of energy.126 Energy communities are also increasingly providing services to members via online platforms, e.g. peer-to-peer energy trading.127 Other than being required by European energy legislation, incorporation makes sense from a practical point of view, particularly where blockchain technology is used for energy trading. As stated in the previous section, a framework is needed to govern transactions and ensure the protection of consumers producing and consuming energy (most likely enforced by the service provider). Were individuals to be trading within an incorporated organisation, they would become jointly and individually responsible for all activities taking place between them.128 Within an incorporated entity, participants can share risk and have limited liability.129 Little detail is provided in the EU Directives on the governance of trading activities – or on the technology to be used for these.130 This lack of detail is likely the case in order to give EU member states room to allow for experimentation in light of trials currently being rolled out across Europe. Taking the United Kingdom as an example, which will have the choice of transposing the Directives, not all legal forms would be applicable for energy trading activities. Some of the forms most commonly used by energy communities, such as the Community Beneft Society (Bencom) and Community Interest Company (CIC), would not be applicable due to a key requirement being that these can only exist to beneft the ‘community rather than private shareholders’ (Section 2 (2)(a)(ii) Co-operative and Community Beneft Societies Act 2014 [CCBSA 2014]).131 Suitable legal forms could be the Co-operative Society (Co-op) and Limited Liability Partnership (LLP),132 due to their acceptability of members

125 Jens Lowitzsch, Christina E. Hoicka and Felicia J. van Tulder, ‘Renewable Energy Communities under the 2019 European Clean Energy Package – Governance Model for the Energy Clusters of the Future?’ (2020) 122 Renewable and Sustainable Energy Reviews 109489. 126 ASSET Project, ‘Energy Communities in the European Union’ (2019) at https://asset-ec.eu/ wp-content/uploads/2019/07/ASSET-Energy-Comminities-Revised-fnal-report.pdf. 127 Roberts (2019). 128 Co-operatives UK, ‘Simply Legal – All You Need to Know about Legal Forms and Organisational Types’ (2017) at www.uk.coop/sites/default/fles/uploads/attachments/simplylegal-fnal-september-2017.pdf. 129 The Hive (Co-operatives UK), ‘Incorporated or Unincorporated Co-Operatives’ (2019) at www.uk.coop/the-hive/setting-up-a-co-operative/incorporated-and-unincorporatedco-operatives. 130 Roberts (2019). 131 CIC Business Activities: Forms and Step-by-Step Guidelines (Gov.uk, 2020). 132 Schneiders and Shipworth (2018).

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reaping the benefts of the community’s activities, including economic benefts (although this cannot be the main aim for co-ops). The co-operative is a ‘jointly owned and democratically controlled enterprise’.133 It is run according to the principle of ‘one member, one vote’, giving all members control over the entity.134 A co-op cannot carry out business with the aim of ‘making profts mainly for the payment of interest, dividends or bonuses’ (Section 2(3) CCBSA 2014).135 Legal entities as well as natural persons may become co-op members (Section 32 CCBSA 2014). The latter is also applicable for the LLP, which is a legal entity comprised of ‘two or more persons associated for carrying on a lawful business with a view to proft’ (Section 2 Limited Liability Partnerships Act 2000 [LLPA 2000]).136 In the case of co-ops and LLPs, control over the entity is not centralised and is spread across several participants. This fts the business model of energy trading using decentralising technologies such as blockchain. The ability to shield members from risk through incorporation, while giving them the chance to play an active role within the entity and take advantage of benefts offered by P2P energy trading such as lower electricity bills and a higher share of renewable energy,137 are reasons why LLPs and co-ops are ideal legal forms for P2P energy trading. They also allow for companies to become members, meaning that those providing blockchain services could become part of the communities, as set out in the IEMD and REDII. Another beneft of co-ops and LLPs is the ability to formulate mutually agreed rules governing the community’s activities. Co-ops have governing rules binding their members, for which a failure to comply can be made punishable ‘on summary conviction by a fne not exceeding such reasonable sum as is specifed by the rules’ (Sections 15 and 20 CCBSA 2014).138 The existence of rules binding members is particularly convenient when shielding participants from the risks of blockchain-enabled consumer-to-consumer transactions. For instance, the co-op’s governance rules could stipulate how smart contracts should be coded and how disputes remedied (to protect individuals from the risk posed by smart contracts being irreversible).139 However, incorporation into a legal entity would not help remedy data privacy risks posed by blockchain technology. As stated above, there is currently a lack of legal clarity on whether blockchain use (due to, e.g., the technology’s immutability) can be GDPR-compliant. Crucially, it is unclear who is responsible for enforcing GDPR rights in a blockchain setting (i.e.

133 134 135 136 137 138 139

Cooperative Identity, Values & Principles (International Co-operative Alliance, 2020). Why One Member, One Vote? (Co-operatives First, 2020). Co-operative and Community Beneft Societies Act 2014 (2014) c. 14. Limited Liability Partnerships Act 2000 (2000) c. 12. ASSET Project (2019). Schneiders and Shipworth (2018). Ibid.

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who is the ‘controller’ and the ‘processor’ of data). The governing rules of the legal entity cannot resolve this issue, as this is a problem of lack of legal clarity on GDPR interpretation. This puts individuals that are trading with blockchain technology at considerable risk, e.g. if it was to be ruled by a court that the blockchain contains personal data and individuals running the blockchain programme on their devices to trade energy are data ‘controllers’ (and therefore liable for GDPR infringements).140 Furthermore, the inability of a company (such as that providing services to the community) to have control over the entity, as required by the IEMD and REDII, could be problematic in situations where blockchain technology is used for trading. This is due to the risks presented by the technology as set out in the previous section, particularly to individuals’ consumer rights (which should be ensured according to the Directives). The entity providing the blockchain infrastructure, which will most likely be a company, could be the best positioned to intervene in case of a problem caused by the technology. It could also be argued that it would be best positioned (due to providing platform services to community members) to enforce the mutually agreed rules governing the entity. Such issues, resulting from technology moving at a faster pace than the drafting of regulation, will present an obstacle to the creation of legal entities enabling the trading of energy using blockchain technology. In order to remedy these, it will be important to allow energy communities to experiment with the rules. On the basis of experiment results, the regulator/government could reassess the rules (which would lead to the recognition of new types of organisations). Space for experimentation, through, for instance, a regulatory sandbox, is provided in the European Directives thanks to their non-prescriptive nature when it comes to energy trading.141 However, it should be noted that existing regulatory sandboxes, such as the UK’s, are unable to allow for exemptions from EU legislation in trials.142 The GDPR is EU legislation, meaning that the data privacy issue previously identifed cannot be addressed in a sandbox environment. Ultimately, it will be up to the courts and the European Union to provide further guidance on how and whether blockchain technology can be used in a GDPR-compliant manner. The need for a regulatory solution? As DLT technologies will drive consumers to become increasingly active and take on the roles traditionally played by suppliers, an argument can be made for the need for regulation focusing on the ‘functions and tasks’ of actors,

140 Ibid. 141 ASSET Project (2019). 142 ELEXON,‘P362: Electricity Market Sandbox’ (2018) at www.elexon.co.uk/mod-proposal/ p362/.

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including TPPs and consumers.143 This is due to the decentralised business models of the future being designed around ‘providing a service for or by the consumer rather than around current business structures’.144 In the long run, blockchain will simply be a technology facilitating direct transactions between participants. The technology’s ability to link individuals directly will be used for different aims. This is already visible in the peer-to-peer energy trading space, where communities have different aims ranging from fnancial proft to cross-subsidisation between poorer and richer consumers.145 There is therefore not likely to be one specifc business model which blockchain would be used within. Hence the importance of service-based rather than business model-based regulation. Due to the redistribution of roles caused by decentralisation, a servicebased regulatory model will likely be developed.146 This will help create a ‘level playing feld’ for all the hybrid business models being shaped by decentralisation. Regulatory obligations will then depend on the activities that a frm is authorised to undertake, rather than the ‘type of frm’ in question.147 An idea being foated by the UK government is to provide a licence for each type of service, rather than one licence for a particular business model. Consumers selling energy would then also be provided with such a licence. In light of the criminal sanctions that are part of the licence approach, the activities for which a licence is needed could be reduced to those where no ‘adequate protections are afforded through the application of consumer law’. Another alternative is to ‘authorise’ activities, instead of granting them licences, as long as they comply with a relevant set of rules. If they do not, the energy regulator would ensure compliance by taking enforcement action.148 The rules applicable to platform-based business models would take the form of ‘principles-based regulation’.149 A simplifed set of rules would be drafted by policymakers, enabling regulated parties to decide ‘how to most

143 Diestelmeier (2017). 144 Laura Sandys, Jeff Hardy and Richard Green, ‘Reshaping Regulation- Powering from the Future’ (2017) at www.imperial.ac.uk/media/imperial-college/grantham-institute/ public/publications/collaborative-publications/Reshaping-Regulation-Powering-fromthe-future.pdf. 145 UCL Energy Institute (2019). 146 Laura Sandys et al., ‘Redesigning Regulation- Powering from the Future’ (2018) at www. challenging-ideas.com/wp-content/uploads/2018/12/ReDESIGNING_REGULATIONfnal-report.pdf. 147 Ofgem, ‘Future Supply Market Arrangements – Response to Our Call for Evidence’ (2018) at www.ofgem.gov.uk/system/fles/docs/2018/07/future_supply_market_arrangements_-_ response_to_our_call_for_evidence_0.pdf. 148 Ofgem, ‘Flexible and Responsive Energy Retail Markets- Putting Consumers at the Centre of a Smart, Low Carbon Energy System’ (2019) at https://assets.publishing.service.gov. uk/government/uploads/system/uploads/attachment_data/fle/819624/fexible-responsiveenergy-retail-markets-consultation.pdf. 149 Ofgem (2018).

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appropriately implement them’. They would be ‘outcome-based’ rather than detailed prescriptive rules, providing fexibility in how outcomes are delivered.150 Prescriptive requirements would only be drafted into legislation when necessary, i.e. to provide important protections for consumers.151 There will therefore need to be a shift from ‘regulating process to regulating for risk’.152 This would enable businesses, including those offering blockchain services, to ‘think more carefully about how best to achieve a regulatory goal, and not mechanistically follow rules laid out by the regulator’.153 Alternative regulatory tools such as co- and self-regulation154 in the form of industry standards, regulatory guidance and codes of practice on blockchain use can complement ‘outcome-focused legislation’ and provide further clarity for businesses. These alternatives to regulation are necessary, as the rate of innovation often exceeds the speed at which regulatory systems are able to adapt.155 In this way, regulation would become ‘agile and responsive’ to these new innovative business models.156 Services are also likely to be bundled, as set out in the example above of energy market actors providing the trading platform as an additional service. Bundled services demonstrate the emergence of complex innovative business models ‘straddling different regulatory regimes’. Regulators will therefore need to work more closely together to accommodate this multidisciplinarity.157 The UK government is, for instance, currently considering introducing a ‘cross-sectoral regulatory regime for third-parties intermediaries’, to refect the fact that ‘many intermediaries operate across markets’.158

Conclusion Where the blockchain-facilitated economy is concerned, permissionless blockchains raise unique and novel issues with respect to their commerce and governance, and there is substantial emerging literature discussing these issues. Turning to the permissioned blockchain in relation to how existing

150 BEIS (2018). 151 UK Government, ‘Regulation for the Fourth Industrial Revolution: White Paper’ (2019) at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_ data/fle/807792/regulation-fourth-industrial-strategy-white-paper-web.pdf. 152 Sandys (2018). 153 UK Government (2019). 154 European Commission, ‘Study on Blockchains  – Legal, Governance and Interoperability Aspects (SMART 2018/0038)’ (2020) at https://ec.europa.eu/digital-single-market/en/ news/study-blockchains-legal-governance-and-interoperability-aspects-smart-20180038. 155 UK Government (2019). 156 UK Department for Business, Energy & Industrial Strategy (BEIS), ‘Future Energy Retail Market Review- Creating an Agile Retail Market That Captures System Benefts for Consumers’ (2019) at www.gov.uk/government/publications/future-energy-retail-market-review. 157 UK Government (2019). 158 Ofgem (2019).

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business models, commerce and business as well as regulatory relationships may be changed, we are of the view that the technology has the potential to radically change organisations, and particularly the consumer-supplier relationship. The energy sector, which has been traditionally centralised and top-down, is an interesting example of this, namely, through the use case of peer-to-peer energy trading. Entities providing the blockchain platform will play a key role in protecting consumers taking an active role through trading. They will help shield consumers from risks around blockchain use, such as uncertainty as regards the validity of smart contracts, enforcing of data privacy rights (particularly those set out in the GDPR) and the obligations of consumers selling goods/ services through the blockchain. The emergence of platform models, particularly those that are decentralised through use of blockchain technology, will revolutionise the regulatory framework currently being applied to consumer-facing companies. A sectoral approach will no longer apply. This is due to the use of blockchain across a variety of sectors and case studies, leading to bundled products. Furthermore, blockchain-running platforms will be only one of several services offered by organisations. Consumers will also become service suppliers. There will therefore no longer be defned market actors, with all those involved on the blockchain fulflling a mix of responsibilities. Regulating services instead of a particular business is a solution that would help accommodate the hybrid roles and market roles in decentralised networks. It would also help foster innovation, which is a challenge in the sharing economy space and is likely to happen with blockchain models. A ‘light touch’ legislative approach, in the form of outcome-focused, principles-based regulation and standards, would also help with the rolling out of new business models. Only in situations where consumer safety is at risk will a licence and prescriptive regulation be necessary. It is also likely that private law, such as consumer and competition law, is likely to play a key role in the regulating of these horizontal business models. However, these legal felds need to be further developed due to a lack of protection of consumers engaging in online consumer-to-consumer transactions. Due to the current uncertainties around using blockchain technology, consumers selling goods and services with the technology should become part of a legal entity. This will help shield them from risk by distributing and clarifying liability as well as help enforce the community’s governance rules (through, for instance, the sanctioning of rule infringements). However, incorporation is not a full-fedged guarantee to protect consumers, as the example of lack of legal clarity around the enforcing of data privacy rights on a blockchain shows. The need for experimentation around legal forms and governance of P2P transactions is crucial, to help clarify legal uncertainties and protect consumers wanting to participate in such activities. In sum, we foresee the need for a new regulatory model to guide the development of governance and expectations in prosumer evolutions and

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consumer-to-consumer relationships, as well as platforms’ facilitation duties and their responsibilities. However, a fexible and principles-based regime seems appropriate to address the emerging developments.

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Sandys, Laura, Jeff Hardy and Green Richard, ‘Reshaping Regulation- Powering from the Future’ (2017) at www.imperial.ac.uk/media/imperial-college/granthaminstitute/public/publications/collaborative-publications/Reshaping-RegulationPowering-from-the-future.pdf. Schneiders, Alexandra and David Shipworth, ‘Energy Cooperatives: A Missing Piece of the Peer-to-Peer Energy Regulation Puzzle?’ (2018) at https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=3252486. Shiller, Robert J., ‘Democratizing and Humanizing Finance’ in Randall S. Kroeszner and Robert J. Shiller (eds), Reforming U.S. Financial Markets: Refections Before and Beyond Dodd-Frank (Cambridge, MA: MIT Press 2011). Takagi, Soichiro, ‘Organizational Impact of Blockchain Through Decentralised Autonomous Organizations’ (2017) 12 International Journal of Economic Policy Studies 22. Tarasiewicza, Matthias and Andrew Newman, ‘Cryptocurrencies as Distributed Community Experiments’ in The Handbook of Digital Currencies (Singapore: Elsevier 2015) at ch10. UCL Energy Institute, ‘Summary: Launch Event of GO-P2P’ (2019) at https:// userstcp.org/wp-content/uploads/2019/10/191004-SummaryGlobalObservatoryL aunchEvent.pdf. UK Department for Business, Energy & Industrial Strategy (BEIS), ‘Future Energy Retail Market Review-Creating an Agile Retail Market That Captures System Benefits for Consumers’ (2019) at www.gov.uk/government/publications/ future-energy-retail-market-review. UK Department for Business, Energy & Industrial Strategy (BEIS), ‘Modernising Consumer Markets: Consumer Green Paper’ (2018) at https://assets.publishing. service.gov.uk/government/uploads/system/uploads/attachment_data/fle/699937/ modernising-consumer-markets-green-paper.pdf. UK Government, ‘Regulation for the Fourth Industrial Revolution: White Paper’ (2019) at https://assets.publishing.service.gov.uk/government/uploads/system/ uploads/attachment_data/fle/807792/regulation-fourth-industrial-strategy-whitepaper-web.pdf. Van Soest, Henri, ‘Peer-to-Peer Electricity Trading: A Review of the Legal Context’ (2019) 19 Competition and Regulation in Network Industries 180. Waelbroeck, Patrick, ‘An Economic Analysis of Blockchains’ (2018) at www.CESifogroup.org/wp. Walch, Angela, ‘Deconstructing “Decentralisation”: Exploring the Core Claim of Crypto Systems’ (2019) at https://ssrn.com/abstract=3326244. Walch, Angela, ‘In Cod(ers) We Trust’ in Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019) at ch3. Wright, Aaron and Primavera De Filippi, ‘Decentralised Blockchain Technology and the Rise of Lex Cryptographia’ (2015) at https://papers.ssrn.com/sol3/papers. cfm?abstract_id=2580664. Yeung, Karen, ‘Regulation by Blockchain: The Emerging Battle for Supremacy between the Code of Law and Code as Law’ (2019) The Modern Law Review (forthcoming). Yu, Bin, Jarod Wright, Surya Nepal, Liming Zhu, Joseph Liu and Rajiv Ranjan, ‘TrustChain: Establishing Trust in the IoT-based Applications Ecosystem Using Blockchain’ (2018) IEEE Computing 12.

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Zachariadis, Markos, Garrick Hileman and Susan V. Scott, ‘Governance and Control in Distributed Ledgers: Understanding the Challenges Facing Blockchain Technology in Financial Services’ (2019) 29 Information and Organisation 105. Zhang, Chenghua et al., ‘A Bidding System for Peer-to-Peer Energy Trading in a GridConnected Microgrid’ (2016) 103 Energy Procedia 147. Zhang, Chenghua et al., ‘Review of Existing Peer-to-Peer Energy Trading Projects’ (2017) 105 Energy Procedia 2563–2568.

10 Conclusion Improving the resilience and accountability of decentralised business models Roger M Barker and Iris H-Y Chiu The triumvirate of hierarchies, markets and networks represents the three main ways in which business activity can be organised.1 Although we frequently talk of living in a market economy, it is actually organisational hierarchies – in the form of various kinds of corporate entity – that have exerted the most dominant infuence over economic development during the last 150 years.2 In contrast, the third member of this taxonomy, the collaborative network, is a more recent feature of the modern business environment – although the rise of the digital economy is serving to rapidly accelerate its infuence. Since reaching their apotheosis in the decades after the Second World War, hierarchically organised corporations have more recently attempted to blend aspects of markets and networks into their functioning as a means of securing competitive advantage.3 As a result, they have in many cases attained something of a hybrid structure  – with a traditional hierarchical power structure at their core but with many activities devolved or subcontracted to entities or networks lying outside the legal boundaries of the traditional unitary corporation. This is the Decentralised Business Model (DBM) in its various forms that we have explored in this book. In this concluding chapter, we summarise some of the book’s key themes relating to DBMs and consider how policymakers might address some of their legal and economic limitations. DBMs are of increasing interest from a legal perspective, as many of their key inter-linkages do not fall within the scope of the law and governance of organisations but are defned in terms of contract law, voluntary governance norms or technological processes. As we argue in Chapter 2, DBMs

1 Mark Granovetter, ‘Business Groups and Social Organisation’ in Nicholas Smelser and Richard Swedberg (eds), The Handbook on Economic Sociology (Princeton, NJ: Princeton University Press, 2nd ed, 2005) at ch19. 2 J. Micklethwait and A. Wooldridge, The Company: A Short History of a Revolutionary Idea (Vol. 12) (New York: Random House Digital, Inc, 2005). 3 M. Lubell, G. Robins, and P. Wang, ‘Network Structure and Institutional Complexity in an Ecology of Water Management Games’ (2014) 19 Ecology and Society 23.

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offer a direct challenge to the Coasean theory of the frm, which offers a binary choice between structuring economic activities through a company or through a series of transactional market exchanges. However, hybrid enterprises lying between markets and hierarchies remain under-researched and under-theorised, and they lack clarity in terms of how they function in the face of signifcant economic and societal challenges  – including most recently the Covid-19 health crisis.

The accountability defcit at the heart of decentralised business models As management thinker Henry Mintzberg has observed, business systems exhibit a tendency to swing back and forth between an emphasis on centralisation or decentralisation.4 However, the recent era of hyper-globalisation in both consumer markets and production locations has particularly encouraged a shift away from unitary, hierarchical business corporations towards more complex but fexible, decentralised relationships which coordinate economic actors through shared ventures, contractually based outsourcing arrangements, network collaborations and platform activities. In a globalised business environment, many types of business enterprise beneft from the greater proftability that accrues to the attainment of critical mass and a transnational structure.5 Being big enables economic actors to criss-cross the globe in search of cheaper capital and labour as well as innovative know-how. Large-scale enterprises can win infuence over markets through their signifcant buying power, global brand recognition, network size effects and leverage over national policymakers. And they may shift their head offces, seats of incorporation, listing jurisdictions and production facilities easily across and between regulatory and tax jurisdictions in search of the most ‘business-friendly’ environment.6 But simply expanding capacity within the ‘command and control’ structure of hierarchical corporate entities can also result in diseconomies in terms of reduced fexibility and higher cost. These disadvantages may particularly arise if the frm continues to entirely operate within the demanding regulatory regimes prevalent in many advanced economies, where a strong emphasis is placed on safeguarding the interests of various local stakeholders, particularly employees. A straightforward expansion within the hierarchical entity may also bring greater complexity and bureaucracy, and it may

4 Henry Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973). 5 J. Lee, ‘Does Size Matter in Firm Performance? Evidence From US Public Firms’ (2009) 16 International Journal of the Economics of Business 189–203. 6 K. Cowling and P.R. Tomlinson, ‘Globalisation and Corporate Power’ (2005) 24 Contributions to Political Economy 33–54.

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entail more proximate risk and liability for the entity itself, its directors and its shareholders.7 For these reasons, a unitary, centralised corporate structure has in recent decades become viewed as ineffcient, unwieldy and unsophisticated by business practitioners – both in the private and public sectors.8 In addition, national regulatory systems in overseas jurisdictions have often demanded that global businesses demonstrate a local presence in their legal and operational structure.9 As a result, hierarchical corporate entities in a variety of contexts have sought to decentralise their business models in diverse ways – some of which have been explored in this book. And as we have seen, the changes that have occurred have generated adverse consequences for corporate accountability and societal legitimacy – and for economic stability (see below). For example, the adoption of a group structure, consisting of numerous separate legal entities held together by ownership stakes or crossshareholdings – a common feature of many multinational enterprises – can obfuscate (either by design or as an unintended consequence) the true location of decision making. Directors, executives or shareholders at the holding company level are able to shield themselves from liability for wrongdoing at other entities within the corporate group, e.g. over decisions relating to corporate strategy, health and safety policy or respect for human rights in the group’s supply chains. And yet the authority structure of business groups ensures that in practice these actors can exert profound infuence – either explicitly or implicitly – over such policies and decisions. As discussed in Chapter 5, the unwillingness of courts to pierce the corporate veil between separate legal entities, or treat groups of companies as single economic units, reduces the capacity of regulators and stakeholders to enforce accountability mechanisms which would meaningfully align power with responsibility. This lack of clarity over who is held accountable for key decisions is not only an issue for external regulators and stakeholders. In our experience, it can also be a concern for managers and directors within the organisations themselves, who are often uncertain or unknowing about the extent of companies’ legal risk10 and their personal liability, e.g. when joining the board of directors of a subsidiary entity, a joint venture or a special-purpose vehicle.

7 S. Turnbull, A New Way to Govern: Organisations and Society after Enron (London: New Economics Foundation Pocketbook, 2002), 6. 8 Peter F. Drucker, ‘The Coming of the New Organization’ Harvard Business Review (January/February, 1988). 9 J.J. Li, L. Poppo and K.Z. Zhou, ‘Relational Mechanisms, Formal Contracts, and Local Knowledge Acquisition by International Subsidiaries’ (2010) 31 Strategic Management Journal 349–370. 10 Martin Petrin and Barnali Choudhury, ‘Group Company Liability’ (2018) 19 European Business Organization Law Review 771.

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A related set of problems arises when a corporation seeks to expand its activities through a contractual web of outsourced business relationships. These relationships are often structured on the basis of individually negotiated agreements with diverse external parties, e.g. between the company and its suppliers, agents and increasing proportions of its workforce. The result is often the displacement of in-company stakeholders by a diverse patchwork of ostensibly autonomous suppliers and contractors, many of which may be located in overseas jurisdictions with relatively limited workplace protections. Although the expansion of enterprises through outsourcing rather than in-house capacity may be motivated by a desire to enhance business fexibility, the consequence is often an absence of common purpose or commitment amongst loosely connected business participants.11 As with a subsidiary structure, a web of external contractual relationships increases overall enterprise opaqueness and complexity – particularly for stakeholders positioned outside of the corporation’s inner sanctum. Furthermore, as was observed in Chapter 5, economic enterprises built on multilevel contractual relationships often fail to establish a meaningful chain of accountability up to the highest levels of the enterprise – a reality which explains why many multinational companies have yet to commit themselves to undertaking robust due diligence in respect of human rights conditions across their supply chains.12 Whatever its merits in the coordination of specifc market transactions, contract law is a crude and infexible tool with which to nurture a longterm organisational culture or a team-oriented approach amongst long-term business partners.13 In contrast, although a company structure cannot necessarily claim to create an egalitarian power structure, it at least establishes a socially legitimate framework for stakeholder interaction that is relational and long-termist in nature.14 As company law frameworks have constantly been adjusted by law and policy to changing circumstances, various stakeholders can be motivated and included in the direction of a common business purpose. As argued in Chapter 1, a company is more than a nexus of contracts – it goes beyond simply facilitating arrangements that would have emerged anyway amongst privately coordinating actors. This insight has underpinned the historical development of organisational law as a means of establishing formal roles and coordination mechanisms for parties involved in a long-term business venture.

11 J. Barthelemy, ‘The Seven Deadly Sins of Outsourcing’ (2003) 17 Academy of Management Perspectives 87–98. 12 K. Parella, ‘Outsourcing Corporate Accountability’ (2014) 89 Washington Law Review 747. 13 discussed in relation to business networks in Marc Amstutz and Gunther Teubner (eds), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart Publishing, 2009). 14 William W. Bratton, ‘Welfare, Dialectic, and Mediation in Corporate Law’ (2005) 2 Berkeley Business Law Journal 59.

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The problems arising from attempts to build a more decentralised business organisation on the basis of contract law have been brought into sharp focus in the UK government outsourcing sector. As explored in Chapter 6, Public–Private Partnerships (PPPs) have attempted to contractually regulate long-term relationships between government agencies and private-sectorservice providers on a massive scale. The results have not been encouraging. Instead of motivating a cooperative, team-oriented approach in the shared delivery of public services, PPPs have embedded infexible, adversarial relationships which effectively take the form of a zero-sum game between the public and private sectors. UK governments have aggressively attempted to shift as much risk as possible onto private-sector actors. For their part, outsourcing companies have acquiesced in unsustainable business models due to their myopic focus on growing their businesses in the short term – and based on the risky assumption that unfavourable initial contracts could subsequently be renegotiated. Such an approach backfred spectacularly in January 2018 when the UK government rejected an appeal for a bailout from Carillion Plc, its secondlargest outsourcing partner. The latter had erroneously assumed that it was too big to be allowed to fail and would therefore be rescued by the government when other sources of fnancing dried up. The consequences were felt not only by the two contracting parties but by a host of other stakeholders who were adversely affected by the UK’s largest ever corporate liquidation.

Decentralised business models as drivers of economic fragility So far, we have critiqued DBMs in terms of their legal approach to structuring business relationships and their resulting lack of accountability. The governance structures of DBMs also predominantly focus on instrumentality and do not cater suffciently for relational norms and stakeholders. Although we do not analyse it in detail in this book, a further worrying characteristic of the DBM approach is its inherent economic fragility – a feature that has been particularly exposed by the extreme pressures of the Covid-19 health crisis. Despite the ongoing dialogue amongst business practitioners and regulators around the importance of robust risk management and business continuity planning, the pandemic has exposed the thin margins of error accepted as normal by much of global business. Highly indebted companies, working from lean inventories, supported by just-in-time supply chains and staffed by short-term contractors, have been turned upside down by the sudden onset of the crisis. Many board members and shareholders have only now realised that, by pursuing the mantra of ever greater effciency through outsourcing and decentralisation, they sacrifce robustness, resilience and ultimately corporate survival. Prior to the crisis, those businesses that had built thick buffers against shocks – either in fnancial terms on their balance sheets or in operational

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terms via the structure of their supply chains  – were seen as ‘ineffcient’ or appropriate targets for a radical shake-up by activist investors.15 For example, Japanese corporations sitting on large reserves of ‘unproductive’ cash had long been the subject of much derision in the Anglo-American fnancial community  – especially as this money could have been used to boost the near-term share price by recycling it back to shareholders through share buybacks or dividend payouts.16 However, in the wake of the Covid19 crisis, those companies demonstrating high levels of fnancial solvency, liquidity or diversifcation – arising from an eschewing of short-term shareholder demands, an unfashionably diverse conglomerate structure or simply innate managerial prudence – have somewhat improved their credibility in the business community. A high credit rating is – for the time being at least – seen as a sign of strength rather than ineffciency – as indeed was historically the case before the philosophy of shareholder value maximisation hijacked business norms in the mid-1980s.17 Both the Covid-19 health crisis of 2020 and the fnancial crisis of 2008 have highlighted the need for much greater emphasis to be placed on corporate ‘resilience’ rather than ‘effciency’. Nassim Taleb has argued that the corporate ecosystem should prioritise an ‘antifragile’ approach which can adapt to, and even thrive on, disorder.18 In order to achieve this, there will be a consequent need to rethink the structure, law and incentives of DBMs and their impact on the overall business system – although the tendency of the business system to return to ‘business as usual’ following the 2008 crisis suggests that there are strong incentives within our legal and economic frameworks which will continue to resist this trend. One manifestation of corporate fragility is the current fnancing orientation at DBMs and other kinds of enterprises toward debt rather than equity – a bias that is encouraged by the tax system in many countries.19 However, treating the addiction of many corporate entities to excessive leverage may prove to be a monumental task in the wake of the Covid-19 crisis. The corporate sector went into the pandemic in an already indebted state. For example, the S&P credit rating of the global corporate sector as a whole was BBB at the end of 2019 – only just above ‘junk’ status and a far

15 N.M. Boyson and R.M. Mooradian, ‘Corporate Governance and Hedge Fund Activism’ (2011) 14 Review of Derivatives Research 169–204. 16 K. Kato, M. Li and D.J. Skinner, ‘Is Japan Really a “Buy”? The Corporate Governance, Cash Holdings and Economic Performance of Japanese Companies’ (2017) 44 Journal of Business Finance & Accounting 480–523. 17 ‘Private-equity Backed Companies Dominate Lowest Depths of Junk’ Financial Times (7 May 2020). 18 N.N. Taleb, Antifragile: Things That Gain From Disorder (Vol. 3) (New York: Random House Incorporated, 2012). 19 E.P. Davis, Debt, Financial Fragility, and Systemic Risk (Oxford: Oxford University Press, 1995).

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cry from the ‘A’ rating that it enjoyed in 1980.20 During the crisis itself, companies have taken on vastly more debt, often encouraged by debt-oriented government support packages, as a means of securing short-term survival. A major policy challenge for the post-Covid recovery will be to fnd a way to reduce the crushing burden of debt on the corporate sector through greater use of equity fnancing and debt-for-equity transformation.21 Another issue for DBMs will be the need to rethink the nature of supply chains from ‘just in time’ to more of a long-term partnership approach. The pandemic has underlined the need for companies, suppliers, customers and other stakeholders to collaborate. This may involve questioning the ubiquity of adversarial contractual relationships. It will be up to larger survivors, in particular, to help support the smaller and weaker components of supply chains, rather than pursuing a zero-sum approach which places the entire model on a knife edge, unable to resist signifcant shocks. Such a change will demand a rethinking of the underlying effciency logic that has been utilised in the creation of DBMs. Businesses will also need to regain the trust of the disparately structured groups of people that underpin their success. This will be a challenge when – in the midst of the pandemic – many have decided to lay off or furlough staff just to survive. But this is arguably the most crucial component of a post-crisis strategy. Just as companies relying on the fragile web of the gig or contractor economy may be vulnerable to collapse during the crisis, so those that have maintained a cadre of well-integrated, loyal and adaptable full-time workers are more likely to fourish in its aftermath.

How policymakers should respond to DBMs Many of the challenges facing DBMs have been around for a while but are now being accentuated by the extreme economic circumstances of the Covid19 health crisis. Perhaps we may see a backlash against the DBM, which accentuates fragility in economic relations as well as economic insecurity for stakeholders. If so, there may be a push towards ‘re-centralisation’ into relational frameworks of governance, such as under corporate law. However, there would still be a need to consider how corporate law can accommodate the complexities of participation in economic wealth creation as well as what may be offered by alternative business vehicles discussed in Chapter 8. A frst potential policy response to the challenges posed by DBMs would be a much greater recognition within corporate law of the importance of a diverse group of stakeholders in determining corporate success,

20 ‘Lockdown Is Exposing the Folly of Reckless Financial Strategies’ Financial Times (3 May 2020). 21 ‘A Flood of Bankruptcies Must Not Overwhelm the Recovery’ Financial Times (17 May 2020).

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and therefore their need for more explicit input into decision making and governance.22 In existing shareholder-oriented systems, the imperative of prioritising short-term fnancial returns  – either via increases in the share price, through dividend payments and buybacks or by facilitating an active market for corporate control – is strongly motivated by the wide range of shareholder infuence mechanisms embedded in organisational law and governance, e.g. the ability to appoint the board of directors or approve important transactions. This orientation is further encouraged by the prevailing structure of executive pay policies, which typically deliver much of senior management compensation on the basis of achieving high returns for equity investors over a relatively short-term time horizon.23 Such an incentive structure has been a key driver of the transformation of corporations into decentralised business organisations. In particular, the outsourcing of signifcant aspects of corporate activity – both in domestic and overseas markets  – has been a key means for transnational business entities to reduce their costs, increase proftability and reduce the regulatory burden associated with in-house activities. Such measures have made perfect sense in a world where the primary objective of the corporation is conceived in terms of maximising the interests of shareholders and the rewards of the senior executive team. However, the motivation for a decentralised model becomes less obvious if board members are mandated by corporate law to treat the interests of stakeholders other than shareholders as potentially of equal importance to those of shareholders. In such a world, the benefts of assuming a DBM structure may appear less compelling, and the associated risks – particularly in terms of enterprise fragility and the inherent disregard of such a concern for its impact on global society – may come into clearer focus. There is growing evidence that business norms are transitioning away from the doctrine of shareholder primacy in favour of more of a pro-stakeholder orientation, refecting changes in social attitudes on issues like climate change and responsible business.24 During the Covid-19 health crisis, shareholder primacy receded into the background as national governments played the

22 R.E. Freeman and D.L. Reed, ‘Stockholders and Stakeholders: A New Perspective on Corporate Governance’ (1983) 25 California Management Review 88–106. 23 Andrew Smithers, Productivity and the Bonus Culture (Oxford: Oxford University Press, 2019). 24 For example, in August 2019, the US Business Roundtable embraced stakeholder governance in a statement signed by 181 high-profle CEOs. In November 2019, the British Academy echoed this theme in its ‘Principles for Purposeful Business’, and in December 2019, the World Economic Forum issued its ‘Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution’, stating that: The purpose of a company is to engage all its stakeholders in shared and sustained value creation.

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crucial societal role of sustaining the survival of the corporate sector. Furthermore, during this period, regulators chose to dilute or suspend many shareholder (and creditor) rights, albeit temporarily, as a means of sustaining companies and their employees through a period of existential danger.25 Despite these developments, there remains a strong shareholder orientation embedded in corporate law frameworks.26 Unless the nature of shareholder infuence is examined across the entire spectrum of company-related legislation and regulation, shareholder interests will continue to infuence the behaviour and development of DBMs as they have in the past.27 A second potential policy response to the challenges of DBMs relates to the concept of limited liability. Historically, limited liability has proven to be a hugely benefcial legal innovation for mobilising investment, despite its inherent dangers in terms of moral hazard and reduced investor accountability. However, it is increasingly apparent that in certain circumstances, the costs to society of limited liability start to outweigh its benefts  – for example, where it is utilised within a DBM by a holding company to structure its control of groups of subsidiary entities or joint ventures. Within such a structure, limited liability simply serves to insulate key decision makers sitting at the top of the overall enterprise from the consequences of their decisions, while at the same time doing little to serve its primary purpose of encouraging more investment or business activity across society as a whole. Limited liability is not a divine right of investors or companies. It is an artifcial legal construct that has been pragmatically adopted due to its expected impact on economic development.28 Rather than offering limited liability as a universal option open to almost every kind of business activity, policymakers would be justifed in considering if its exploitation throughout the structure of DBMs is appropriate or desirable. As we have seen, it currently enables the boards and senior executives of large multinational groups to evade ultimate responsibility for many aspects of the practices and behaviour of sub-entities within their overall business enterprise – including those that exercise weak oversight of human rights in the supply chain. This surely cannot serve the interests of public policy and may also create

25 Marvin T. Brown, Corporate Integrity (Cambridge: Cambridge University Press, 2012) at chs 1, 2, 3 and 7; Peter Rea, Alan Kolp, Wendy Ritz and Michelle D. Steward, ‘Corporate Ethics Can’t Be Reduced to Compliance’ Harvard Business Review (29 April 2016). But the recent Covid-19 crisis has forced companies choosing between survival and socially oriented behaviour to jettison the latter; see ‘Can Companies Still Afford to Care About Sustainability?’ Financial Times (7 May 2020). 26 Shareholder primacy underlies much of UK company law; also see Andrew Keay, ‘Shareholder Primacy in Corporate Law: Can It Survive? Should It Survive?’ (2009) at http://ssrn. com/abstract=1498065. 27 Jesse Fried, ‘The Roundtable’s Stakeholderism Rhetoric Is Empty, Thankfully’. 22 November 2019. Harvard Law School Forum on Corporate Governance. https://corpgov.law. harvard.edu/2019/11/22/the-roundtables-stakeholderism-rhetoric-is-empty-thankfully/. 28 As conceptualised in the concession theory.

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confusion and misunderstanding about the allocation of duties and liabilities within organisations themselves.29 According to Charles Goodhart and Rosa Lastra,30 the limited liability of equity holders is by far the biggest source of moral hazard and risk shifting in a capitalist economy, and it should therefore be applied on a more nuanced basis. Their solution is to move to a system with two tiers of equity investor. The frst group would consist of ‘insiders’ such as controlling shareholders and senior management with the authority and proximity to exert direct oversight over business decisions. The second group would be categorised as ‘outsiders’, i.e. equity investors such as pension funds or retail shareholders who are more distanced and would not involve themselves in the company’s decision making. ‘Insiders’ would be subject to multiple liability, both in legal and fnancial terms. ‘Outsiders’ would retain limited liability as at present. Such a demarcation could effectively mean that those equity holders with signifcant direct power over an entity – such as holding companies, controlling shareholders or private equity funds – would effectively no longer beneft from limited liability and would hence no longer be able to hide behind a corporate veil which shielded them from legal and stakeholder accountability for corporate decisions over which they nonetheless exercised signifcant infuence.31 This measure would have signifcant implications for liability in private equity owned companies – of which there are almost 3000 in the UK, more than twice as many as listed companies.32 A third avenue for policymakers relates to the application and scope of corporate regulation in its broadest sense.33 Policymakers must fnd a way to overcome the inability of much existing corporate regulation to hold DBMs accountable as single economic concerns. There is currently a gaping inconsistency between accounting regulation – which seeks to help shareholders in forming an overall fnancial assessment of groups of connected enterprises through the publication of consolidated accounts – and company law, which still largely insists that the corporate veil marks the outer border of the enterprise regardless of ultimate economic reality. The UK Bribery Act 201034 and the French Corporate Duty of Vigilance Law 201735 provide models for how accountability and liability can

29 See discussion in Chapter 5. 30 C.A. Goodhart and R.M. Lastra,‘Equity Finance: Matching Liability to Power’ (No. 13494), CEPR Discussion Papers 2019.  31 John Plender, ‘Shareholders Are Being Dethroned as Rulers of Value’ Financial Times (2 January 2019). 32 British Private Equity & Venture Capital Association (BVCA). www.bvca.co.uk/OurIndustry/Private-Equity-Explained/FAQs-in-Private-Equity, accessed on 19 May 2020. 33 Iris H.-Y. Chiu, ‘An Institutional Theory of Corporate Regulation’ (2018) 71 Current Legal Problems 279. 34 Section 7. 35 See Catherine Malecki, Corporate Social Responsibility: Perspectives for Sustainable Corporate Governance (Cheltenham: Edward Elgar, 2018).

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potentially be established across DBMs and thereby help encourage parent companies, their directors and key offcers to play a meaningful role in monitoring the behaviour of subsidiaries or subcontractors on a global basis. Neither of these pieces of legislation radically alters the law’s defnition of what conduct should be considered unlawful in terms of adverse bribery, human rights or environmental impacts. Rather, they shift the focus of who bears burdens of responsibility and who is held to account – by focusing on the failure to prevent the unlawful behaviours of those who act on behalf of a corporation. Going forward, it is important that regulatory policy for DBMs assigns legal responsibility to those individuals or governance bodies with the ultimate power to ensure appropriate compliance with the spirit of the legislation  – typically those on the board of a parent company or in key executive positions. In case of unlawful corporate behaviour at a local level, the direct personal involvement of responsible persons should not need to be established in order to result in liability. It should rather be a matter of determining if key decision makers had taken the appropriate preventative steps at the organisational level – in terms of due diligence, policies, procedures and corporate culture. It is clear that these kinds of regulatory mechanisms should be employed on a much wider scale than at present to counter the regulatory arbitrage tendencies of DBMs. In this book, we have considered the importance of applying such an enterprise-wide approach in countering modern slavery in supply chains and ensuring respect for human rights. However, there are numerous other aspects of corporate behaviour where the interests of good governance and meaningful accountability would be well served by an enterprise-wide regulatory approach that locates potential liability with those with the decision-making power to actually make a difference. To some extent, the alignment of liability with organisational power is already taking shape in the post-2008 fnancial sector. For example, the recently established Senior Manager and Certifcation Regime (SM&CR) began operating the UK fnancial sector in March 2016.36 It was intended to provide a regulatory device that could pierce through what a Parliamentary Committee described as an accountability frewall that had hitherto made it hard for senior managers at major banks to be held responsible for their failings.37 The framework targets individuals – as opposed to institutions – as a means of ensuring that the consequences of misconduct are borne by the designated individuals tasked with directly managing and overseeing specifc

36 Prudential Regulation Authority Rulebook, at chapters ‘Allocation of Responsibility’ and ‘Code of Conduct’; see www.prarulebook.co.uk/ accessed on 21 Sept 2020. Financial Conduct Authority Handbook at Chapters SYSC, FIT and COCON. See https://www.handbook. fca.org.uk/ accessed on 21 Sept 2020. 37 Parliament, U.K, ‘Parliamentary Commission on Banking Standards Final Report’ (19 June 2013).

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aspects of corporate conduct  – rather than allowing the consequences of misconduct to fall on the head of the entire organisation and thereby create adverse outcomes for less culpable or uninvolved stakeholders such as creditors, employees, customers and taxpayers. The SM&CR framework is a step in the right direction  – we should consider this as a model for enterprise-wide liability so that an individual’s responsibility is not artifcially contained within the boundaries of separate legal personalities. Individual liability is a concept that can be applied to DBMs as a framework capturing the ‘substance’ of responsibility in other economic sectors. At the organisational level, a reassessment is already occurring in terms of the location of responsibility for key business risks. For example, the multinational mining enterprise BHP has signifcantly redesigned its framework of risk governance in the wake of the 2015 Samarco dam collapse in southeastern Brazil – which killed 19 people and displaced 700. This major environmental and human disaster resulted in signifcant reputational damage and legal liability for the joint-venture partners involved in the associated mining project: BHP38 and Vale. Although the project was operated through a legally distinct JV entity, Samarco, this did not protect the two JV shareholders from exposure to signifcant regulatory sanctions and shareholder class actions.39 In the face of signifcant public condemnation, particularly in Brazil, BHP – a UK/Australian-listed corporation – has subsequently sought to ensure that more centrally defned standards of risk management are implemented across all of its business activities, including those that take place in ostensibly separate legal entities.40 It has centralised joint-venture management and limited use of non-operated joint-venture structures; and where they are used, it ensures that a major partner has full operational control.41 From an enterprise risk management perspective, it makes sense for DBMs to clearly articulate roles and decision-making responsibilities across the various components of their enterprises through an explicit group governance or subsidiary governance policy rather than wait for courts to allocate liability after an adverse event has already occurred.42 A fourth avenue for policy innovation relates to the creation of corporate legal forms that would better encompass the economic activities of DBMs. As we have seen, most DBMs are constructed utilising standard corporate templates (e.g. limited or public company forms) for their holding

38 Formerly BHP Billiton. 39 ‘National Courts Have Global Companies in Their Sights’ Financial Times (14 May 2019). 40 ‘BHP Billiton Puts Joint Ventures Under Review After Dam Breach’ Financial Times (16 November 2015). 41 Alison George, ‘Was the Samarco Disaster a Failure of Governance from BHP Billiton?’ (8 September 2016). www.regnan.com/was-the-samarco-disaster-a-failure-of-governancefrom-bhp-billiton, accessed on 19 May 2020. 42 Mak Yuen Teen and Chris Bennett, ‘Governance of Company Groups’ (CPA Australia and ICLIF, 2014).

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companies and other associated corporate entities. Relationships with other economic actors are then bolted onto these atomistic entities through contractual agreements and – to a lesser extent – through bespoke governance arrangements relating to participation in collaborative networks of various kinds (described in Chapters 7 and 9). Thus far, there have been very limited attempts within organisational law to establish more tailored corporate forms43 that might encompass DBMs in their entirety and thereby construct a more legitimate framework of overall accountability. Existing examples which we have discussed in this book include the European Economic Interest Grouping framework for EU-based entities – which currently is restricted in its application to niche areas of non-commercial collaboration  – and Konzernrecht in Germany. There is clearly scope for policymakers at both national and transnational level to develop new frameworks within organisational law that might better refect the economic nature of DBMs. As an example of this kind of innovation, we propose in Chapter 6 the establishment of a new corporate form – the Public Service Corporation – which would be a suitable corporate vehicle for private-sector enterprises engaged in the delivery of public services on behalf of government. Its key feature would be embedding of a genuine stakeholder orientation in its legal framework – specifcally, in the nature of the general legal duties that are defned for company directors. These would still allow boards of directors to pursue shareholder interests but only if they are balanced with fulflling the interests of other key stakeholders, including employees, creditors, suppliers and pension fund benefciaries. In our view, the delivery of outsourced public services by such corporate entities would achieve a better balance between harnessing entrepreneurial energy and fulflling societal needs than is being achieved by existing frameworks of publicsector outsourcing such as Public–Private Partnerships.

The future of DBMs This book has cast a relatively critical eye over DBMs operating between hierarchies and markets. It has identifed a variety of shortcomings in their governance structures, accountability mechanisms, their social legitimacy and in their capacity to exhibit resilience in the face of economic shocks. One response to this critique might be to argue that we should seek to roll back time and push enterprises back within the boundaries of a reformulated corporate hierarchy, albeit one grounded on more progressive principles than at present. However, in our view such an unequivocal response would be a mistake. In a modern networked and digitised economy, there will remain signifcant societal benefts associated with business relationships that take place outside of, or between, hierarchies and markets. In particular, we are

43 See discussion in Chapter 8.

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convinced that companies have much to gain by engaging in innovative and creative partnerships with actors who lie beyond the corporate veil. For example, Chapter 9 has described the considerable potential offered by new technologies such as the blockchain in structuring business relationships and transactions in a highly decentralised manner. And Chapter 4 has described the potential advantages of collaborating with like-minded, autonomous participants in various kinds of networks, alliances and voluntary initiatives. There is nothing inherently wrong with incorporating these kinds of interactions into the overall portfolio of an economic enterprise. However, all of these newly emerging mechanisms of economic organisation need an appropriate governance and regulatory framework to ensure that such novel arrangements contribute to responsible value creation and do not become the new vehicles of exploitation or unsustainable risk taking. In short, DBMs – lying between hierarchies and markets – have a potentially bright future if structured and governed in the right way. The challenge for policymakers and business practitioners alike will be to embrace organisational innovation in a manner which sustains commitment to universal governance principles such as meaningful accountability, effective decision making, business ethics, social legitimacy and stakeholder partnership. These principles can be easily lost in the fog of business activity – but they are well worth striving for.

Bibliography Barthelemy, J., 2003. ‘The Seven Deadly Sins of Outsourcing’. Academy of Management Perspectives, 17(2), pp. 87–98. Boyson, N.M. and Mooradian, R.M., 2011. ‘Corporate Governance and Hedge Fund Activism’. Review of Derivatives Research, 14(2), pp. 169–204. British Academy. ‘Principles for Purposeful Business’. 27 November 2019. www. thebritishacademy.ac.uk/programmes/future-of-the-corporation Cowling, K. and Tomlinson, P.R., 2005. ‘Globalisation and Corporate Power’. Contributions to Political Economy, 24(1), pp. 33–54. Davis, E.P., 1995. Debt, Financial Fragility, and Systemic Risk. Oxford: Oxford University Press. Drucker, P.F., 1988. ‘The Coming of the New Organization’. Harvard Business Review (January/February). Freeman, R.E. and Reed, D.L., 1983. ‘Stockholders and Stakeholders: A New Perspective on Corporate Governance’. California Management Review, 25(3), pp. 88–106. Goodhart, C.A. and Lastra, R.M., 2019. Equity Finance: Matching Liability to Power (No. 13494). CEPR Discussion Papers. Granovetter, M. 2005. ‘Business Groups and Social Organisation’. In Nicholas Smelser and Richard Swedberg (eds), The Handbook on Economic Sociology. Princeton, NJ: Princeton University Press, 2nd ed at ch19. Kato, K., Li, M. and Skinner, D.J., 2017. ‘Is Japan Really a “Buy”? The Corporate Governance, Cash Holdings and Economic Performance of Japanese Companies’. Journal of Business Finance & Accounting, 44(3–4), pp. 480–523.

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Lee, J., 2009. ‘Does Size Matter in Firm Performance? Evidence From US Public Firms’. International Journal of the Economics of Business, 16(2), pp. 189–203. Li, J.J., Poppo, L. and Zhou, K.Z., 2010. ‘Relational Mechanisms, Formal Contracts, and Local Knowledge Acquisition by International Subsidiaries’. Strategic Management Journal, 31(4), pp. 349–370. Mak, Y.T. and Bennett, C., 2014. Governance of Company Groups. CPA Australia and ICLIF. Micklethwait, J. and Wooldridge, A., 2005. The Company: A Short History of a Revolutionary Idea (Vol. 12). New York: Random House Digital, Inc. Mintzberg, H., 1973. The Nature of Managerial Work. New York: Harper & Row. Parella, K., 2014. ‘Outsourcing Corporate Accountability’. Washington Law Review, 89, p. 747. Smithers, A., 2019. Productivity and the Bonus Culture. Oxford: Oxford University Press. Taleb, N.N., 2012. Antifragile: Things That Gain From Disorder (Vol. 3). New York: Random House Incorporated. Turnbull, S., 2002. A New Way to Govern: Organisations and Society After Enron. London: New Economics Foundation Pocketbook, 6. US Business Roundtable. ‘Business Roundtable Redefnes the Purpose of a Corporation to Promote “An Economy That Serves All Americans”’. 19 August 2019. www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-acorporation-to-promote-an-economy-that-serves-all-americans World Economic Forum. ‘Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution’. 2 December 2019. www.weforum.org/ agenda/2019/12/davos-manifesto-2020-the-universal-purpose-of-a-companyin-the-fourth-industrial-revolution

Index

accountability: in networks 112 Adams v Cape Industries 121–122 alliances, business 29–30, 35, 35 arbitrage, regulatory, platform economy and 214–218 Arnold v Britton 65 asset lock 252–253 Audiovisual Media Services Directive 213–214 Bates v Post Offce Ltd 69 B corp 253–255 Beswick v Beswick 71 blockchain(s): Bitcoin 15, 15n81, 271–273; contracts and 76–77; decentralised autonomous organisation and 282–284; distributed ledger technology and 16; in energy sector 287–299; Ethereum 16; governance norms for 284–287; organisational norms for 284–287; overview of 271–272; participation risks 290–292; permissioned 273–276; permissionless 284–287; prosumers and 292–293; public 273; regulation of 297–299; trust and 75; see also distributed ledger technology (DLT) BOT see build-operate transfer (BOT) Bribery Act 2010 34, 134–135, 316–317 build-operate transfer (BOT) 152 Cavendish Square Holding BV v Talal El Makdessi 78 Chandler v Cape plc 125, 127 CICs see community interest companies (CICs) civic conduct, platform economy and 221–224

civil rights 219–220 coherentism 56–58 community interest companies (CICs) 44–45, 180–181, 252–253, 262–263 community ownership, in platform economy 247, 249–250 Companies Act 2006 123 company law 118–120 concession theory 5n27 Consumer Rights Act 2015 79 Contract Act 1998 9 contract law 6, 21, 54n6, 63–66 contracts, smart 16–17, 58, 77–79, 273–279, 291 Contracts (Rights of Third Parties) Act 1999 71, 144 contractual analysis 9 coronavirus see Covid-19 Corporate Governance Code 5n30, 230n230 Covid-19 14–15, 143–144, 167, 170–171, 177, 203–204, 231–232, 244, 266, 282, 312–313 cryptocurrency see blockchain(s); distributed ledger technology (DLT) DAO see Decentralised Autonomous Organisation (DAO) DBFO see design-build-fnance operate (DBFO) DBM see decentralised business model (DBM) DC Merwestone 80 Decentralised Autonomous Organisation (DAO) 283–284 decentralised business model (DBM): accountability of 307–320; defned 1; future of 319–320; governance of 51–84; as neither hierarchies or

324

Index

markets 7–18; policymaker responses to 313–319; resilience of 307–320 de-mutualisation 45n139 design-build-fnance operate (DBFO) 152–154, 173, 175 DHN Food Distributors Ltd v Towler Hamlets BLC 121 Digital Platforms Act 208–209 discrimination 219–220 distributed ledger technology (DLT) 15–17, 27, 41; platform economy and 189–190; platform economy vs. 42; see also blockchain(s) distributive norms 228–233 DLT see distributed ledger technology (DLT) ECC see Equal Care Co-Op Ltd (ECC) economic fragility 311–313 economic sociology 21–26 EEIG see European Economic Interest Grouping (EEIG) embeddedness 22–23 energy sector 287–299 Ethereum blockchain 16, 286 European Economic Interest Grouping (EEIG) 2, 2n5, 30–31, 96–97 Facebook 197–198, 202n81 FCA see Financial Conduct Authority (FCA) Financial Conduct Authority (FCA) 215–218, 225, 259–260 fragility, economic 311–313 Freegle 207 GDPR see General Data Protection Regulation (GDPR) General Data Protection Regulation (GDPR) 209–210, 213, 226 globalisation 32 governance: blockchain 284–287; contractual 67–70; of decentralised business models 51–84; failure types 102; inclusive 261–264; of networks 88–113, 91, 93, 97, 99, 102; platform 233–235; for platform economy 206–233; in public–private partnerships 161–178; regulatory approach in 70–75; regulatoryinstrumentalism and 58–61; self-, of networks 98–99, 99; technocracy and 61–62; technological approach to 75–76

hierarchies: decentralised business models as not 7–18; markets vs. 3–18, 6; networks vs. 91; platform economies as 194–195 holacracy 286 human rights due diligence 137–144 human rights violations 118–120 IEMD see Internal Electricity Market Directive (IEMD) Infrastructure and Projects Authority (IPA) 166–167, 171–172 institutional dissonance 218–221 instrumentalism, regulatory 58–61 Internal Electricity Market Directive (IEMD) 294, 297 Investors Compensation Scheme Ltd v West Bromwich Building Society 64 IPA see Infrastructure and Projects Authority (IPA) LawTech Delivery Panel 58 liability: in group structures 120–126; of parent company to subsidiary employees 124–126; supply chain networks and 120–126; for torts committed by subsidiaries 120–124 liquid democracy 286–287 Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd 64 markets: decentralised business models as not 7–18; hierarchies vs. 3–18, 6; networks vs. 91; platform economies as 194 Marks and Spencer plc v BNP Paribas Services Trust Company (Jersey) Limited 65 mergers and acquisitions 92–93 mission lock 253–255 Modern Slavery Act 2015 33–34, 134, 144 NAO see network administration organisation (NAO) network administration organisation (NAO) 98, 99 networks: accountability in 112; benefts of 90–95, 91, 93; business 29–30, 35, 35; case studies 103–107; collaborative-type 88–89; constitutions for 110; defning 89–90; diversity of landscape of 95–100, 97, 99; examples of 88; governance

Index challenges facing 100–103, 102; as grassroots 92; hierarchies vs. 91; legitimacy of 113; markets vs. 91; in mergers and acquisitions 92–93; nonchartered 95–96; organisational and governance needs of 88–113, 91, 93, 97, 99, 102; participant relationships in 97; research 94; self-governance of 98–99, 99; see also supply chain networks New Public Management 149 Nissan 10n45 norms, distributive 228–233 OFN see Open Food Network (OFN) Open Food Network (OFN) 257–261 open source software 199 organisations and governance law: business-to-business arrangements and 28–36, 35; economic sociology and 21–26; options in 44–46; for peer-to-peer arrangements 36–43, 41; relevance of 20–28 over-socialisation 22 pandemic see Covid-19 Parker v South Eastern Railway Co 63 Partnerships Act 1890 24n18 Patel v Mirza 80–81 peer-to-peer arrangements: blockchain and 16; organisations and governance law for 36–43, 41; in platform economy 13 peer-to-peer energy trading 287–299 peer-to-peer lending 218 PFI see Private Finance Initiative (PFI) platform business models 13–15; distributed ledger vs. 42 platform economy: asset lock and 252–253; blended ownership in 250–251; civic conduct and 221–224; civil rights and 219–220; community membership and 255–261; community ownership in 247, 249–250; corporate ownership in 247, 247–249; Covid-19 and 203–204; discrimination and 219–220; distributed ledger technology and 189–190; distributive norms and 228–233; economic agency and relationship confgurations and 199–204; General Data Protection

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Regulation and 209–210, 213, 226; governance norms in 212; governance of 206–235; as hierarchy 194–195; inclusive governance and 261–264; institutional dissonance and 218–221; market failures and 212–214; as marketplace 194–195; mission lock and 253–255; organisational framing in 206–212; organisation for 206–233; platform ownership and 246–251, 247; property relations and 195–199; protective regulation and 224–228; regulatory arbitrage and 214–218; regulatory reforms and 212; social contract and 205–206; social enterprise law in 244–267, 247; social legitimacy and 204–206; social purpose and 251–255 power dynamics 23 power structures, critical interrogations of 24 PPPs see public–private partnerships (PPPs) Private Finance Initiative (PFI) 154, 161, 173 property relations 195–199 prosumer 292–293 Prudential Assurance Co Ltd v Ayres 130–131 public–private partnerships (PPPs) 11–12; build-operate transfer 152; Community Interest Company and 180–181; complexity of 150; defned 151–155, 152; design-buildfnance operate 152–154, 173, 175; failure of 159–161; governance lacunae in 155–161; governance options for 178–185; government equity in 153n20; as hybrid nonhierarchical arrangements 149–161, 152; organisational options for 178–185; penalties with 156–159; risk allocation in 177–178; special purpose vehicle in 152–153, 179–180; stakeholder management in 174–175; structures of 151–155, 152; success factors in 162–163; value for money and 163–165 Rainy Sky v Kookmin Bank 68 REDII see Renewable Energy Directive (REDII)

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regulation: defned 54 regulatory arbitrage, platform economy and 214–218 regulatory-instrumentalism 58–61 Renewable Energy Directive (REDII) 294, 297 risk allocation: in public–private partnerships 177–178 Riverstone Meat Co Pty Ltd v Lancashire Shipping Co Ltd 138 RTS Flexible Systems Limited v Molkerei Alois Müller Gmbh and Co 68 Salomon v Salomon & Co Ltd 119–120 self-governance 99; of networks 98–99 Seng Pte Limited v International Trade Corporation 65n45 sharing economy 13–14; see also platform economy Sheikh Tahnoon Bin Saeed Bin Shakboot Al Nehayan v Kent 65n45 smart contracts 16–17, 58, 77–79, 273–279, 291 Smith v Hughes 63 social contract 205–206 social enterprise law: blended ownership and 250–251; in platform economy 244–267, 247; platform ownership and 246–251, 247; as system of choice 245 social legitimacy 204–206 sociology, economic 21–26 special purpose vehicle (SPV) 152–153, 179–180 SPV see special purpose vehicle (SPV)

stakeholder management: in publicprivate partnerships 174–175 subsidiaries: liability for torts committed by 120–124; liability of parent company to employees of 124–126 suppliers, liability to employees of 126–128 supply chain networks: as business networks 128–132; company law and 118–120; governance regulation of 132–137; human rights due diligence for 137–144; human rights violations and 118–120; sustainable 116–145; tort liability and 120–126 technocracy 53, 61–62 Thompson v Renwick Group Plc 125 tort liability: in group structures 120–126; to suppliers 126–128 Transfeld Shipping Inc v Mercator Shipping Inc. 68 Tweddle v Atkinson 71 UK Economic Interest Grouping (UKEIG) 31, 96 UK Jurisdiction Taskforce 58 Unfair Contract Terms Act 1977 70–71 value for money (VFM) 163–165 VFM see value for money (VFM) Wood v Capita Insurance Services Ltd 65 Woolfson v Strathclyde 121