The Art of Creating the Modern Statutory Business Trust

Sec. 3.1. The Common Law and Contracts

Like any constituent document such as an operating agreement, a partnership agreement and a shareholder agreement, the trust instrument is fundamentally a contract. Although some states have enacted statutes that apply to certain types of contracts, contracts are primarily governed by the common law. As a fundamental legal tradition, the common law is believed to have originated in 1066, when William the Conqueror invaded England and ascended the throne. The foundation of the common law is the principle of stare decisis which means “to stand by things already decided” as set forth in prior judicial decisions. The legal principles which prior judicial decisions expound are precedents which judges must apply in deciding subsequent cases either directly or by analogy. The common law tradition is the basis of the legal systems of nations which were once British colonies or possessions. These nations include the United States (but not Louisiana or Puerto Rico), Canada (not the Province of Quebec), Australia, the Republic of Cyprus and Ireland. By contrast, the civil law tradition is based on the fundamental legal principles which are set forth in statutes. Known as the Code of Napoleon, the civil law tradition is the foundation of the legal systems of those nations which Napoleon occupied or influenced in the early 19th century. These nations include France, Spain, Italy and Greece.

The common law of contracts is species of the common law. The fundamental legal principles which judges have developed over the decades governs every type of contract in a common law nation. The states of the United States have adapted the details of certain common law contract principles to their specific histories, cultures and demographics. But the fundamental principles are the same.