Law Matters – But Which System Is Best?

It is not only lawyers who argue that the rule of law is fundamental to a flourishing society and economic welfare. Economists also recognize the critical importance of trust in creating sustainable conditions for business and trade – and that trust depends in part on having clearly accepted rules and principles that are capable of fair and objective enforcement.

So while business leaders may not always welcome regulation (for example, greater oversight or tighter restrictions on their actions), they do endorse the need for ‘the rule of law’ as it relates to contract enforcement or the protection of rights (for example, patents or intellectual property).  And they also realize that today’s international variations in regulatory and legal standards is a source of uncertainty and risk.

It is not surprising, therefore, that there is extensive interest in the spread of international standards and the development of more consistent codes and principles. But as with all forms of standardization, this immediately leads to questions such as ‘Which system should we use as the model?’ or ‘Which country does this best?’

 We have witnessed tussles over this in areas such as the adoption of consistent accounting rules and principles of corporate governance. The most visible arguments have been between the US and Europe, but today the ‘battle for supremacy’ is extending to more general debates over who offers the ‘best’ legal system. Of course, as the country with the world’s most lawyers, the United States  inevitiably lays claim to its superiority and has sought to promote its legal model as the global standard (for example, through the spread of US law schools into other countries). It cites its governance model, with clear constitutional separation of powers, as the way to safeguard good government and objective legal decisions.

Many disagree with this. They point to class action lawsuits, the dominance of trial lawyers, the aggressive, win-lose attitudes of attorneys and the ‘corruption’ created by lobbying and political funding.  And the World Bank supports their point of view. Its analysis of governance (see http://info.worldbank.org/governance/wgi/index.asp) and, within that, specific analysis of ‘the rule of law’, shows that the US is among the best – but certainly not the best.   

That honor goes to the Nordic countries, together with Australia and New Zealand.

This is interesting, because work at IACCM has consistently revealed the Nordic countries as a hotbed of thought and research on issues of contracting and trade. Indeed, the Association has extensive links with universities and business schools in Norway, Finland, Denmark and Sweden.

There are many hypotheses about why these countries score well in governance indices. Among these might be that they have been relatively isolated from the extremes of world economics and that their small, but highly educated,  populations have flourished in an environment of trust and high social responsibility. Indeed, these countries have remained free from many of the extremes of capitalism and personal wealth and are regularly used as mediators or moderators in world affairs.

But does this mean that they offer us a good model for governance and the rule of law, or is the model in fact solely due to specific local conditions and not truly replicable in other cultures?

Recent evidence would suggest that it may indeed depend on local conditions, because among this top rank of countries was Iceland – which sadly let itself become infected by the financial governance inadequacies that caused the crumbling economies of the United States and United Kingdom. So if ‘unbridled capitalism’ is unleashed, even these systems prove inadequate to control it.

However, this does not alter the fact that the Scandinavian countries and their Antipodean rivals have in general been able to sustain a model that offers an environment of trust and relative stability. And it seems probable that academic and business interest in the use of contracts and commercial policies in overseeing successful business relationships is in some way linked to this overall leadership in the Global Governance Tables.

So as we search for models as a basis for developing greater international consistency in contracting and terms and conditions, we should maybe focus on the countries that lead the world in governance and the rule of law. Perhaps they have discovered secrets and methods that would assist us all in developing a framework of trust for our trading relationships.

And if we truly wish to build consensus and a common framework, we must also accept that no-one has a monopoly on truth. Good ideas can come from anywhere and everywhere – a global standard must be open to shared influence and an openness to excellence, not subject to domination by those with the loudest voice, the greatest power or the longest traditions.

That is why the unique community that has joined together to establish IACCM has the potential to show leadership in such fundamental issues as the framework for improved trading terms and conditions and the development of global standards for the integrity and oversight of trading relationships.