Exorbitant privilege: American and English law and lawyers have a stranglehold on cross-border business. That may not last

Exorbitant privilege: American and English law and lawyers have a stranglehold on cross-border business. That may not last

May 10th 2014 | From the print edition

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.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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