2014-05-13 09:47:18
American and English law and lawyers have a stranglehold on cross-border
business. That may not last
May 10th 2014
IN 2012 ICBC, a state-controlled Chinese company that is the world s most
valuable bank, bought four-fifths of the Argentine subsidiary of Standard Bank,
a South African firm. The deal was hailed as a leap forward for South-South
co-operation direct economic ties between emerging markets. But one group of
rich-world middlemen got a slice of the action: lawyers. ICBC was represented
by Linklaters, an English firm, and Standard Bank by Jones Day, an American
one. The deal was made under English law, with any differences to be settled in
an English arbitration centre.
Though emerging markets now account for over half the world s GDP at
purchasing-power parity, and trade between them is booming, just two developed
countries retain a stranglehold on cross-border finance, investment, mergers
and acquisitions. Just as America benefits from issuing the world s reserve
currency, America and its former colonial master, Britain, enjoy the exorbitant
privilege of issuing the world s reserve law . A global survey by Queen Mary
University in London in 2010 of general counsels and legal-department heads
found that 40% most frequently did business using English law and another 22%
American, generally the law of New York state. No other country s law got a
significant share.
America and Britain reap large rewards from their legal dominance. Of the world
s 100 highest-grossing law firms, 91 have their headquarters in one of the
two. America s legal sector is bigger than the GDP of Peru; though much of that
is because of Americans litigiousness, a good chunk comes from foreign work.
The New York offices of American firms earn around $1.8 billion annually from
international-dispute resolution. Almost two-thirds of litigants in English
commercial courts are foreign. At 1.5%, the legal sector s share of British GDP
is nearly double that in other big European countries.
Other bits of both countries economies feel the ripples, too. Foreigners
visiting for legal hearings stay in hotels and eat in restaurants. Aspiring
lawyers from around the world pay to attend their universities and spread
goodwill when they go home. Dependence on American and British law firms makes
it harder for dealmakers to move from New York and London to Hong Kong or
Frankfurt. Britain s government describes lawyers as central to the export of
other professional services such as accounting, asset management and banking.
The competition is often weak: much of China s commercial law was written by
Communist Party officials and is riddled with errors; and though India adopted
much of English common law, its courts are notoriously slow. But the incumbents
biggest advantage is that they have common-law systems with centuries of
binding precedent. That means they offer as much certainty as any jurisdiction
can. In civil-law countries such as France, Portugal and Spain, and their
ex-colonies, judges have wide latitude to interpret statutes, increasing the
risk of nasty legal surprises. Common law also permits almost any terms in a
contract. Civil systems place more restrictions on acceptable clauses, and
often consider the interests of third parties, such as workers or consumers.
Many other countries would like to break this duopoly. But even those with good
laws on paper would take decades to train enough lawyers and judges to make
them stick. The immediate threat to American and British law comes from a trend
that dispenses with courts altogether.
Parties to a cross-border deal must decide not only which country s law governs
it but how disputes should be resolved. Firms are increasingly opting for
private arbitration, which promises confidentiality, speed and lower costs than
going to court and here London and New York are less dominant. The Paris-based
International Chamber of Commerce is among the world s biggest centres, and
Stockholm was a popular venue during the cold war.
More recently, new entrants have made inroads. Among the most successful is
Singapore, whose dedicated arbitration venue, SIAC, opened in 1991. Singapore s
government exempts arbitrators from income tax and expedites entry for
participants in hearings. SIAC s caseload has quadrupled in the past decade,
with Indian firms particularly keen. Last year they were parties to a third of
its 259 new cases.
With 260 new cases last year, Hong Kong matches SIAC for size. Arbitration is
essential for cross-border deals involving China, since its judges rarely
enforce foreign court decisions but are bound to uphold arbitration awards by
the New York Arbitration Convention, which it signed in 1987. In the past,
Chinese firms reluctantly accepted distant arbitration venues. But they are
increasingly insisting on disputes being heard locally.
Exorbitant no more?
English law remains prevalent in Asian arbitration, accounting for 32% of cases
at SIAC (most of the rest are under Singaporean law and involve at least one
local party). But a recent trend in South America shows how quickly this could
change. Of the big emerging economies, the one that has most effectively
promoted its own law is Brazil. Its firms still use third-party law, usually
New York s, to raise money and make acquisitions abroad. But foreign firms
active in Brazil often acquiesce to local law, relying on local arbitration as
an alternative to courts that are politicised and glacially slow.
Brazil s government created a legal framework for arbitration in 1996, which
became widely used after being approved by the supreme court in 2001. Nothing
prevents firms from using foreign arbitration but losers may delay the
application of foreign rulings for years (though not for ever) by filing
objections in Brazilian courts. In contrast, domestic arbitration awards in
local-law cases are deemed equivalent to legal rulings, and implemented on the
spot. There s nothing to fear about having an arbitration in Brazil, says
Stephen O Sullivan, a former solicitor in England who works for Mattos Filho, a
Brazilian firm.
At first sight, the lawyers of Wall Street and the City of London have the most
to lose from the growing popularity of arbitration. Their governments are not
helping. In Britain authorities often fail to provide timely visas for parties,
experts or witnesses. As for America, businesses often complain about the
burden of pre-trial discovery, and the threat of unsophisticated juries or
elected judges awarding exorbitant damages. In a recent survey, Hogan Lovells,
a law firm whose main offices are in London and Washington, DC, asked general
counsels around the world which jurisdiction they found most challenging. China
finished second after America.
In the long run, developing countries may be bigger losers. Local arbitration
may facilitate deals and bolster short-term growth. But if it reduces the
pressure from multinationals and local firms for simpler laws, better courts
and less political corruption, it may delay attempts to establish legal systems
that work not just for businesses but for everyone else too.