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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: the US and Britain.
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.
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. Common law 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.
The immediate threat to the American and British law duopoly
comes not from other countries but 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 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.
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.
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.