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Choice of Law

August 23, 2010

Last week I read that English law is increasingly being selected for international contracts, at the expense of US law. This is apparently because of the perceived risks associated with the US legal system – a greater propensity to litiagate, the more aggressive behavior of US lawyers, the unpredictable (and often headline-grabbing) scale of US court awards.

There have been previous studies that suggest an aversion to exposure to the US legal system – for example, a paper in the Journal of Empirical Legal Studies (Volume 5, Issue 1, 1–20, March 2008) compared the choice of law in arbitration cases and demonstrated an overwhelming preference for English law (though the relatively poor showing of US law might be explained by the aversion of US corporations to the inclusion of arbitration / mediation clauses in their contracts).

As with all data, it is hard to establish the truth. However, the recent IACCM study on the risks of doing business internationally also picked up a sense of fear about the US legal system. While the headline cases are unrepresentative of the norms in litigation, they do create an underlying perception in the rest of the world, because the headlines are all that people see.  This can easily be reinforced by other data – for example, why do US corporations need in-house law groups that are double the size of non-US corporations (findings of Rees Morrison’s international benchmark study)? Isn’t a higher frequency of litiagation inevitable when there are so many more lawyers than in other countries (although the scale of this imbalance is frequently overstated)? Shouldn’t people be scared when the US appears so ready to apply ex-territorial principles and to position itself as having jurisdiction over the world (for example, one-sided extradition rights or the recent Supreme Court case over class actions – see http://business.timesonline.co.uk/tol/business/law/article7079461.ece))?

The number of lawyers in the US has certainly created a lower-cost access to the law – but of course that is part of the problem, at least when looked at from outside, because it increases the propensity to initiate actions, regardless of their merit. And of course, the external party is inevitably placed at a relative disadvantage in terms of cost, understanding, familiarity with the system, language etc.

On the counter-side of these arguments, there are many who would say that US lawyers tend to be far more business-aware than their overseas colleagues. Others would point to the rigor of US regulation, driving the relative growth of in-house legal departments. Many would highlight the extent to which the US legal system has led the world in creating a relatively fairer, more open and less corrupt social and political environment.

In the end, there are no absolutes of right or wrong in making a choice of law or jurisdiction. Decisions will be made according to competitive principles. But there are two  key messages worth considering. One is that the laws of competition are just as applicable to lawyers and legal services as to any other area of commerce – and globalization is removing the protection that traditional national jurisdictions conveyed. Lawyers everywhere need to be aware that they are increasingly in a battle to demonstrate the relative value of their services.

The second message to consider is what exactly that ‘value’ is about. To what extent does the law industry understand the way that shifting social attitudes may be impacting  expectations from the lawyer? Has the apparent increase in more tolerant and collaborative approaches extended to the way that people want their legal advisers to behave? Might the real challenge for US law and lawyers be that they have an image that is increasingly out of step with wider business and social values?

2 Comments
  1. Paul Vince permalink

    The choice of law is most commonly governed by the ability to enforce terms if they should be challenged. While the US tends to be more litigious, often attributed to the absence of the “loser pays legal fees” standard in the UK, we generally try to avoid litigation and have disputes resolevd by ICC arbitration, specifically because ICC arbitration judgments and awards and enforceable by treaty in most popular business jurisdictions. Any choice of law is relatively meaningless without the reasy ability to enforce it.

    • Paul, thanks for your comment. You are of course absolutely right that the law must give equal access to all. And this is one of the key issues we face in today’s globalized economy – that access and recourse have become increasingly unequal. Hence of course the growing interest in new sources of dispute resolution, perhaps outside the traditional legal system, and certainly outside the traditional geographic boundaries of national jurisdictions. The questiosn and concerns that rightly accompany these potential shifts are legitimate; yet so are the forces drving the debate. It is truly a fascinating time as we consider the emergence of new regimes and methods to govern human and social interaction.

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