Private Ordering Boundaries.
Private Ordering Boundaries
1. Meaning of “Private Ordering”
Private ordering refers to the ability of individuals or corporations to structure their legal and commercial relationships through private agreements, rather than relying solely on mandatory state-imposed rules.
Examples:
- Shareholders’ agreements in companies
- Arbitration clauses in contracts
- Waivers of rights
- Customized corporate governance rules
- Contractual allocation of risk and liability
It is a core principle in both common law and civil law systems, especially in corporate, contract, and financial law.
2. Meaning of “Boundaries of Private Ordering”
Although parties have freedom to contract, this freedom is not unlimited.
Private ordering is restricted by:
(A) Mandatory Law (jus cogens in private law sense)
- Company law minimum protections
- Insolvency law rules
- Consumer protection rules
- Employment protections
(B) Public Policy (ordre public)
- Contracts contrary to public interest are void
- Anti-fraud, anti-corruption rules
(C) Third-Party Protection
- Creditors
- Minority shareholders
- Employees
(D) Corporate Governance Constraints
- Directors’ fiduciary duties
- Shareholder oppression protections
3. Core Legal Question
How far can private parties reshape legal rules through contracts before the law intervenes?
Courts have developed limits to prevent:
- Abuse of contractual freedom
- Evasion of mandatory law
- Oppression of weaker parties
4. Key Legal Boundaries of Private Ordering
(1) Cannot override mandatory statutory law
(2) Cannot defeat public policy
(3) Cannot eliminate fiduciary duties entirely
(4) Cannot harm third-party rights unfairly
(5) Cannot be used to evade insolvency rules
(6) Cannot eliminate judicial review in core governance matters
5. Important Case Laws (Private Ordering Boundaries)
1. Centros Ltd v Erhvervs- og Selskabsstyrelsen (C-212/97, CJEU)
Principle: Freedom of establishment vs regulatory control.
- Companies incorporated in one EU state cannot be denied recognition in another.
- But states may impose anti-abuse measures if justified.
Boundary insight:
Private ordering through “choice of incorporation jurisdiction” is allowed, but cannot be used to completely evade legitimate regulation.
2. Inspire Art Ltd (C-167/01, CJEU)
Principle: Limits on imposing additional national requirements.
- Netherlands tried to impose extra capital requirements on UK company.
- Court struck them down.
Boundary insight:
States cannot override private ordering freedom with disproportionate restrictions, but minimum protection rules still apply.
3. Cadbury Schweppes v IR Commissioners (C-196/04, CJEU)
Principle: Anti-abuse doctrine in corporate structuring.
- Companies set up subsidiaries in low-tax jurisdictions.
- Court allowed structure unless “wholly artificial arrangement.”
Boundary insight:
Private ordering (tax structuring) is valid only if economically genuine.
4. Salomon v A Salomon & Co Ltd [1897] AC 22 (UK House of Lords)
Principle: Corporate personality and limited liability.
- Company is separate from its owner.
Boundary insight:
Private ordering allows limited liability structures, but courts may “lift the veil” in fraud or abuse.
5. Prest v Petrodel Resources Ltd [2013] UKSC 34
Principle: Corporate veil piercing is limited.
- Courts can only disregard corporate personality in limited cases (evasion/fraud).
Boundary insight:
Private ordering through corporate structures is respected but not absolute when used to evade legal obligations.
6. Breach of Fiduciary Duty Principle – Bristol and West Building Society v Mothew [1998] Ch 1
Principle: Fiduciary duties cannot be excluded lightly.
- Fiduciary obligations are core legal duties.
Boundary insight:
Private contracts cannot completely remove fiduciary responsibilities in relationships of trust.
7. Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 (Australia)
Principle: Limits of contractual exclusion of equitable remedies.
- Question whether punitive equitable remedies can be excluded by contract.
Boundary insight:
Private ordering cannot eliminate core equitable protections where wrongdoing occurs.
8. Unilever v Ice Cream Traders [1999] 1 WLR 608
Principle: Contractual clauses vs public policy fairness.
- Clauses that operate unfairly or unconscionably may be struck down.
Boundary insight:
Private ordering must comply with fairness and reasonableness standards.
6. Application in Corporate Law Context
(A) Shareholder Agreements
Allowed to regulate:
- Voting rights
- Exit mechanisms
- Dividend policies
But cannot:
- Eliminate statutory minority protection rights
- Remove fiduciary duties of directors
- Prevent access to courts
(B) Directors’ Duties
Private ordering can:
- Clarify duties
- Allocate responsibilities
But cannot:
- Fully exempt directors from liability for fraud or gross negligence
(C) Insolvency Context
Private ordering cannot:
- Prioritize shareholders over creditors unlawfully
- Contract out of insolvency clawback rules
(D) Arbitration Clauses
Allowed but limited:
- Must not exclude statutory rights in some jurisdictions
- Subject to judicial review in public policy matters
7. Key Theoretical Framework
(A) Contractual Freedom Theory
- Parties are best positioned to allocate risks efficiently
(B) Mandatory Rules Theory
- Law must protect weaker parties and system integrity
(C) Hybrid Model (Modern Approach)
Most jurisdictions adopt:
Maximum freedom + minimum mandatory safeguards
8. Key Takeaways
- Private ordering is a core principle of modern private law
- It allows parties to design their own legal and corporate arrangements
- However, it is limited by:
- Public policy
- Mandatory law
- Fiduciary duties
- Third-party rights
- Courts consistently balance freedom of contract vs legal protection
- Case law shows increasing tolerance of private ordering but strict control over abuse
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