“The Rule of Law and the Economy: Bankers, Brigands and Bounders”[1]
Introduction
1. There are few votes to be had for politicians who extol the virtues of the legal system. Egged on by the popular press the law is the preserve of fat cat lawyers, bleeding heart judges, legal aid scroungers, undeserving criminals, benefits grasping immigrants and possibility worst of all, fanatical terrorists who invoke human rights. In an era of economic austerity it is often all too convenient and easy to play up to these popular shibboleths.
2. My task in this lecture is not to unpick these stereotypes. I wish instead to focus upon a different matter which is that in this climate of economic austerity and political uncertainty it is also easy, but in fact dangerous, to forget just how fundamentally important the rule of law is to the health of our economy.
3. I would like to start by placing my subject matter into context. The legal system in the United Kingdom is responsible each year for billions of pounds worth of inward payments. It generates very large sums of money for the economy. But, and possibly even more importantly, it provides the essential framework or bedrock for the rest of the economy to operate upon. It is hard to imagine, for example, how the financial power house that is the City of London could exist in the absence of the extraordinarily sophisticated and vast array of expertise that sits on the doorstep of the City in the form of the London legal market. That pool of expertise advises the city on the most recherché of legal problems, it drafts its agreements and helps negotiate its transactions and it handles its disputes.
4. And with regard to disputes these are resolved not only in the courts but also in arbitrations and mediations. In excess of 30,000 disputes are said to be resolved annually within a 2 mile radius of the Royal Courts of Justice on the Strand.
5. I have referred to the London legal market but the strengths of that market also flow centrifugally outwards to the other major cities in the United Kingdom where one finds strong local bars and solicitors who also demonstrate high degrees or acumen.
6. By whatever metric one measures success the United Kingdom legal business market scores exponentially highly. There exists a multiplicity of reasons which explain this but there are two in particular that I wish to dwell upon.
7. The first is choice. Business law is in large measure a transnational commodity. You can buy both into a system of law and out of it. When the parties to international trade agreements address themselves to how they might enforce their agreements they can choose both the substantive law which will govern the contract and the physical location for the resolution of disputes. They do this by choice of law clauses and jurisdictional clauses. They can also reflect the mode of resolution: a court, arbitration or a mediation. The choice of English common law as the benchmark for governing international business contracts is, in this respect, extremely popular. By a large margin English law coupled to English jurisdiction is the most common choice for large scale international contacts. The Commercial Court, which is a division of the Queen’s Bench Division of the High Court, specialises in determining international commercial disputes. Over 50% of its case load involves parties with no connection to the United Kingdom at all and over 80% have at least one party from outside the United Kingdom. Recently, the High Court has devised a so-called “Financial List” comprising a small cadre of judges from the Commercial Court and the Chancery Division who are authorised to hear high value claims arising out of financial markets. The purpose is to prove swift, efficient and highly expert dispute resolution in London to the international market. And it absolutely goes without saying that objectivity and independence of decision making will be assumed.
8. The second key aspect of the success of the legal market is the embedding of the legal system into the constitutional structure of the state. It is trite to say that the independent judiciary is one arm or pillar of the Constitution, along with the Executive and Parliament. It is built into and reflected by the Constitutional Reform Act 2005, though the independence of the judiciary is a free-standing constitutional principle in any event. But the proposition highlights that the independent body of men and women who comprise the judiciary perform a pivotal constitutional role and an important reason for the success of the legal system is that, literally over centuries, the courts have evolved to provide highly specialised independent dispute resolution services for the traders and merchants and financiers whose activities created the nation’s wealth.
9. The state came to appreciate early on the benefits of encouraging high quality, specialised, courts to serve industry. I will develop this theme later on. But without this state sponsored service other legal services would not have developed. Because high quality judges exist to resolve complex business disputes, lawyers in private practice rise to meet the challenge. They, in turn, became attractive to clients because they exhibit a high degree of expertise. If the disputes are technical cadres of experts in a dazzling array of disciplines evolve to provide expert opinions to guide the judges. As the expertise burgeons to meet the needs of court processes and procedures so these same experts and practitioners find alternative ways to resolve their disputes through arbitrations and mediations. And a virtuous circle emerges. Judges enforce arbitration awards as if they were court orders and (albeit relatively exceptionally) correct serious legal errors in arbitral awards; in so doing, the state places its weight behind private non-judicial commercial dispute resolution as well as dispute resolution through the courts. Business then builds into contacts staged dispute resolution: first mediation and if that fails arbitration or court proceedings.
10. The lubrication of the ever faster rotation of this virtuously circling wheel is the sponsoring by the state of high quality, specialised, judicial decision making. In many respects this is a very obvious proposition: in the fast growing economies of China and India or South America a break or curb upon inward investment is the perception that contacts will not be enforced by the courts in an objective, unbiased, fashion. Businesses investing in those states therefore buy out of that judicial system. They insert English law and English jurisdiction (or some alternative) into their contracts because this “foreign” law represents a system they trust. And if the local Government demands that local law governs, the contract may not be entered into at all. If you do not trust the local judicial system to decide your dispute with the local company fairly the ex ante risk attached to the investment increases.
11. The role of the law and the legal system is unlike any other public service, howsoever important. It is more subtle and less easily quantifiable in terms of measuring outputs. However, the continued robust good health of the rule of law is essential to the well being of both our democracy and our economy.
Rule of law hot spots
12. Commentators regularly link economic prosperity to the rule of law but few have a clear conception of what the rule of law actually means. Routinely, they equate the rule of law with three things: an absence of corruption, sanctity of contract, and respect for property rights. Occasionally they added the stability of executive institutions. This is of course understandable since these represent the most fertile ground for risk reduced investments. But they do not represent the rule of law; they are merely some of the benefits of it. If you cast your eye at almost any point in time over the business and financial press you will pick up a large number of articles which, whether the journalist appreciates it or not, reflect upon the rule of law.
Beware of Greeks bearing bonds
13. In April 2014, a year before the “existential” (as commentators liked to call it) Greek crisis, the Financial Times led with an article “Greece comes out of Eurozone bond exile”. It reported that on 9th April 2014 the State of Greece had returned to the global capital market with a $11billion issue of 5 years bonds. This was just 4 years after the scale of Greek debts first triggered the international banking crisis and was that point time viewed as an augury of better things to come (little did they know). The offering was open to foreign investors only. To the surprise of many there was significant demand for the bonds. One reason for this was that the bonds were expressly made subject to English Law and this sufficed to satisfy potential investors that there could be no repetition of the previous, court sanctioned, restructuring of state debt by the Greek Government. In 2012 the Greek Government had run out of money and could not afford to pay its bond holding creditors. To reduce its debt the Government introduced legislation which enabled them to write down the debts; and since this was embodied in Greek legislation the domestic courts were bound to accept the outcome. Investors were compelled against their wills to accept a “haircut”, i.e. a savage reduction in debt repayment sanctioned by the courts. Not surprisingly this undermined the confidence of investors in Greek debt – beware of Greeks bearing bonds! The expedient of choosing English Law however for the new issue was sufficient to help re-engender a sense of confidence on the part of investors to subscribe for the bonds. It eliminated the possibility that the Greek State could use domestic law and domestic courts to renege upon debt obligations. What this indicated was that the international financial community had confidence in English law and, it follows, our particular brand of the rule of law.
A MOU for Greece?
14. The long running Greek bailout saga provides another illustration. In August 2015 the European Union and Greece announced a Memorandum of Understanding or “MOU” under which Greece would undertake wide ranging and deep structural changes to its economy as the quid pro quo for Greeks creditors (mainly other EU states) agreeing to release funds to Greece. One component of the deal was an obligation on Greece to introduce changes to the civil justice system which included the adoption of an entirely new civil procedure code, a review of court fees, measures to reduce the backlog of cases in particular in the administrative courts (i.e. cases against the state), measures to enhance judicial efficiency, measures to increase transparency and to increase non-judicial mediation and alternative dispute resolution and measures to improve the computerisation of court systems. Greece also had to introduce legislation insulating financial crime and corruption investigations from political intervention in individual cases.
15. The remainder of the MOU set out a challenging programme of economic reform stretching from wide ranging privatisations of nationalised industries through to banking and pension law reform. All of these could and almost inevitably would engender a slew of disputes and litigation, many involving disputes between the State and companies and individuals affected by the reforms. In the absence of a justice system supervised by an efficient and independent judiciary, the reforms risk being bogged down in delays and political infighting. An effective judicial system however created an external safeguard. The Courts can compel Government to stick to its bargain. Although it is not expressly so described the MOU reflects the rule of law in operation and its integral role in ensuring economic reform. It was highly significant that in an agreement which concerned economic reform it was necessary to introduce far reaching judicial and civil law reform.
Where do billionaires come from?
16. In the spring of 2014 two researchers from the University of Stockholm published a report[2], sponsored by the Centre for Policy Studies, which sought to identify the factors which bred “super entrepreneurs”. Their report is informative in beginning to explain why English law has a powerful, intrinsic, economic value. They identified 1000 dollar billionaires from Forbes starting in 1996 and ending in 2010 then researched where these individuals had their closest business connections with. The starting point was the proposition that having the spark of creativity was not sufficient, in and of itself, to bring about a successful business. To succeed a person otherwise imbued with entrepreneurial flair needed to be established in an environment which allowed that flair to thrive. The study therefore focused upon the conditions which needed to exist to enable business acumen to be translated into hard profits. There were some vary obvious stimulants to wealth –a low personal and corporate tax base was (not surprisingly) very attractive. But the study also argued convincingly that one very important ingredient for success was the legal origin of the society in which the “super” entrepreneur was situated. The analysis showed that the legal origin found to be most conducive to entrepreneurship was the English common law legal system. Former British colonies with top rated economies such as the US, Canada and Australia all had legal systems whose origins were English common law.
17. The principal legal rivals to English common law were the French, German and Scandinavian legal systems. The authors conducted an analysis which compared the percentages of what they described as “high-impact entrepreneurs” in these different nations and their analysis demonstrated that within nations with English legal origins the rate of super-entrepreneurship was over twice as high relative to those with German legal origins. And in relation to those with Scandinavian origins nations with English legal origins were three times as likely to generate super entrepreneurs. The lowest share was found among nations with French legal origins.