The Merchant of Venice: Shylock’s appeal

Trevor Norwitz
Wachtell, Lipton, Rosen & Katz, New York
TSNorwitz@wlrk.com

Report on the joint session of the Banking Law Committee and the Securities Law Committee at the 37th International Financial Law Conference in Venice

Friday 13 May 2022

Session Co-Chairs

Trevor Norwitz Wachtell, Lipton, Rosen & Katz, New York

Halide Gül Çetinkaya Yilmaz CCAO, Istanbul

Speakers

Giuseppe De Simone Gianni & Origoni, Rome

Marieke Driessen Stibbe, Amsterdam

Monique Mavignier Müssnich, Barbosa Müssnich & Aragão, São Paulo

Francisco ‘Chico’ Müssnich Müssnich, Barbosa Müssnich & Aragão, Rio de Janeiro

At the 2022 International Financial Law Conference in Venice, delegates crowded the Appellate Chamber of the Venetian Republic to bear witness to a legal occasion hundreds of years in the making: Shylock’s appeal.

At the outset, the stage was set by the presiding judge (yours truly) who explained that the Venice Trial Court (Portia J) had found unenforceable the bond held by a lender (one Shylock) over a borrower (one Antonio) in respect of a defaulted loan of 3,000 gold ducats. The Trial Court had held that, because the specified security (a pound of the debtor’s flesh) could not be conveyed without the spillage of blood, which was not explicitly mentioned in the security agreement, the security was null and void, and further, that the underlying loan was deemed forgiven. The lender appealed this verdict.

The court first called on counsel for the lender and appellant, Francisco ‘Chico’ Müssnich, to state the case for Shylock. Joining by video link from Rio de Janeiro (because he had recently tested positive for Covid-19), Müssnich gave an impassioned argument in support of the lender’s case. He noted that the contract was unambiguous and voluntarily entered into, with no lack of capacity, and free of duress or fraudulent inducement. He said the court a quo had overstepped its power in reading into the agreement a term not agreed to by the parties (namely that there must be no spillage of blood). Even if the contract was found to be ambiguous, he argued, the court should then have looked to parol evidence, which would clearly have shown that the borrower knew exactly what he was agreeing to. The only argument the borrower could make, Müssnich said, is that the arrangement was ‘void for reasons of public policy’. However, he noted that new technologies presented a palatable solution: a doctor in Padua has designed a method of extracting excess flesh through a thin tube without harming the patient (called lipo suctio) and the court should have sought a remedy that upholds the agreement rather than simply deeming it void. Moreover, he argued, to the extent the borrower knew that the court would not uphold his bond, he was not a forthright negotiator and should not benefit from his lack of good faith, and alternatively that, given his subsequent behaviour, the borrower Antonio should be estopped from asserting that the loan and collateral were invalid. The Appeal Court should reverse, he demanded, and award judgment to the lender Shylock.

The court first called on counsel for the borrower and respondent, Halide Çetinkaya, to state the case for upholding the Trial Court’s judgment.

Çetinkaya argued that the court a quo reached the right answer at trial. The contract was ambiguous as it did not specify how the collateral was to be transferred. As such, the court could impose a term to fill in the gap left by the parties’ omission. The term imposed by the court – that there be no spillage of blood – was a reasonable one, and the lender should have realised that such a term would be imposed. As such, it was the lender not the borrower who was not a forthright negotiator. Moreover, she said, the lender did not satisfy the perfection requirements for the collateral but allowed the borrower to carry the collateral around with him, so the bond was invalid. In the alternative, she argued, the contract was an unconscionable agreement of adhesion, presented on a take-it-or-leave-it basis, between parties of such disparate bargaining power that the borrower should not be held to his bond. And finally, she said, the bond was contrary to public policy and in such a case, the correct remedy is not simply to ‘correct’ the contract to bring it within the bounds of acceptability but to declare it null and void so as to discourage future violations of public policy. The Appeal Court should, Çetinkaya averred, affirm and uphold the wise judgment of Portia J.

Having heard both arguments, a panel of esteemed legal scholars analysed the issues from a multijurisdictional perspective. In addition to counsel and the judge, the panellists were Giuseppe De Simone, Marieke Driessen and Monique Mavignier.

Among the many issues considered by the panel of experts were: When is a contract considered ambiguous? What rules of construction apply? When can the courts look to parol evidence (outside the contract), only in case of ambiguity or more broadly to ascertain intent? Is there an implied covenant of good faith and fair dealing in any contract? When is a contract considered unenforceable for reasons of public policy? What public policy grounds might upend a contract, especially a loan? Is usury illegal and with what consequence? Does the court have the power to amend or ‘correct’ a contract? How might a ‘partial invalidity’ clause change the outcome? When will a party be held bound by subsequent behaviour (or in common law, the doctrine of promissory estoppel)? What are the ‘perfection requirements’ for a security interest, and how might a lender’s ‘pre-contractual information obligations’ be implicated? What is the forthright negotiator principle and when will it be applied? With a nod to current events, the panellists also discussed the impact of illegality or international sanctions on financing arrangements.

At the end of the discussion, to the disappointment of the thronging masses clamouring for a verdict, the Appeal Court decided to take the arguments under advisement.