Law and Economics in Civil Law Countries

Bruno Deffains, Thierry Kirat

• Publisher: Taylor & Francis
• Year: 2003
• eBook ISBN: 9781135697075
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The aim of the book is to highlight the law and economics issues confronting civil law countries.

PART I

THE RELEVANCE OF LAW AND ECONOMICS FOR RESEARCH INTO CODIFIED LAW SYSTEMS

COMPETITION BETWEEN LEGAL SYSTEMS: A COMPARATIVE LAW AND ECONOMICS PERSPECTIVE

Bruno Deffains

INTRODUCTION

Relations between law and competition are complex. In European countries, the principal problem concerns the free movement of products, instituted in 1958 by the Traité de Rome, which could be limited given the differences between national legal systems. The main question is then to appreciate the need of a central authority which could impose on states a legal harmonisation. This interrogation concerns public law and, more recently, it appears in the field of private law with the project of a “European Code of Private Law”.

However, this way to start on relations between law and competition is partial because it neglects the fact that law can be presented itself as a product (Romano, 1985; Ogus, 1998). For instance, in contracts law, contracting parties can often choose the applicable rules as they choose the subject of the contract or the other party. As noted by Mattei and Cafaggi (1997), the probability that the law will spread outside of its place of origin can be determined frequently by choice of law mechanisms. In this case, the creators and the users of law have a major concern in the free movement of legal rules. So, the problem becomes to analyse the nature (static or dynamic) and the result of legal competition: can the free movement of legal rules lead to a lus Commune (i.e. a form of decentralised harmonisation)? Some authors already ask for a “new” European freedom which should guarantee free movement of legal rules (Van den Bergh, 1998).

Theoretically, the idea of competition between legal systems is in opposition to the idea of a unitary and hierarchical law. For example in the theory of law, the positivism inherited from Kelsen, even if he accepts the idea of conflict between legal norms, appears to be incompatible with an approach of legal norms or legal systems in terms of competition. Indeed, this type of approach implies “horizontal” relationships between the different sources and legal norms whereas the hierarchical approach (Kelsen's pyramid) gives pride of place to “vertical” relationships.

My aim here is not to criticise the internal coherence of legal positivism but rather to show to what extent the competitive view seems better able to capture the present reality of implementing legal rules both on a domestic¹ and an international level. For example, how can we deny that there is a certain competition between the legal systems originating in Common Law and in the Romano-Germanic tradition at a time when we worry about the Americanisation of European laws especially in the areas of finance law and business law? Accepting that this competition exists does not, however, say anything about the outcome of the competitive process.

The existence of legal competition is all the easier to detect when it appears within one and the same geographical or economic area. Any “legal tourist” observing the legal dispositions of European countries will soon notice that plurality of legal orders is more often the rule rather than the exception. Of course, this pluralism does not necessarily imply competition but can be said to encourage it as States come to realise that certain mechanisms are more effective than others when attracting “forum shoppers” in the shape of companies or owners of capital.

Mireille Delmas Marty in her book entitled Trois défis pour un droit mondial (1998) takes up the argument that “there is a market for law which comes in answer to the law of the market”. This shows itself especially in the way that the legal systems of dominant countries is exported toward those countries under domination (this strategy could enable the form of cultures and economies to be determined without the need to invest in those countries concerned). Moreover, one of the aims of this exporting of law would be to facilitate adapting rules of law to the requirements of international business at the risk of seeing law become a “market service”. This interpretation suggests that actors on the market are becoming “law merchants”. This could particularly be the case in the financial sector. The author fiercely criticises this privatisation of the legal norm which may lead to sovereignty in legal matters being abandoned and private interests taking on more importance than the general interest.

Greater freedom of exchange could thus be said to be responsible for a certain legal havoc. But freedom is not the only culprit. “Codes of conduct” which are developed into an “auto-referential” order contributes to this situation. In the same way, the avoiding action of judges via Alternative Disputes Resolution attempts to lighten the load of the already overworked court system. Arbitration is first in the line of fire as it has a tendency to increasingly take the place of legal proceedings in international business.

This argument has met with considerable success but has also given rise to important problems about legal competition as outcome of the free movement of legal rules. I want to look at two of them which deal with the nature of legal competition and its consequences. We will reveal how economic analysis can help to make the debate clearer with respect to these two questions.

WHAT IS THE NATURE OF LEGAL COMPETITION?

When speaking of competition between legal orders, we need first to stipulate the type of competition in question. Quite apart from knowing with which fields this competition deals (rules, sources of law, procedures, jurisdictions …), economists usually draw a distinction between two types of competition (see for example McNulty, 1968). The first is static competition seen as a state at a given moment and secondly dynamic competition seen as a process. In the first case, only the result matters, the reference being perfect competition. The second case is more a question of analysing the conditions of competition between actors (in this case the “creators of law”).

When applied to the field of law this distinction will lead to “legal competition” being approached from the static side (indeed this is the more frequent approach in the literature). In this case, we study the way in which economic agents are influenced and guided by the performances of rules of law (in terms of expected gain). To be precise, whether it be a question of civil law, commercial law or penal law, the effects of the differences between legal systems upon the behaviour of economic agents is the first element to come under scrutiny. We are particularly interested in the efficiency of the rules of Common Law compared to those emanating from the Romano-Germanic tradition.

In this light, writers have taken an interest in the comparison of the liability rules in risk prevention, of the regimes of patent law regarding the incentives to innovate. The effects of the differences between inquisitorial and accusatory procedures in civil proceedings have also been analysed by seeking to single out the most efficient from the point of view of the information acquired by the judges responsible for settling disputes. Other authors have studied the impact of damages on the incentives to risk prevention in the field of civil liability. In the same way, the effects of the quota litis pact on the behaviour of lawyers have been analysed. More recently the question of predictability has been approached in order to discover whether stare decisis which states that a rule of precedent in Common Law must be respected, does indeed lead to improved legal forecasting compared to a legal order based upon a codified law. Our present article does not aim to give detailed results of this research work with which the specialists of Law and Economics are well familiar.

In my view, this static approach highlights the “demand” side: the comparative advantages of rules or legal systems are examined according to the interest of those concerned. One risk must be brought to light here. Better performances may well be attributed to given rules whereas in fact these performances are the result of different procedures (one example is the type of dispute settlement or procedures).

Tenants of legal realism gave pride of place to this approach a good while ago, as the following statement by the famous judge Holmes illustrates: “if we look at things from the point of view of the litigant, we observe that he could not care less about great theories. What he wants to know is what the courts of Massachussets or of England will decide regarding his case”.²

It thus seems logical that this current way of thinking was to give rise to the movement of Law and Economics in the sixties, directed at the economic evaluation of rules of law. The general idea is to provide the jurist with a method enabling him to supply a description of reality (via the evaluation of the consequences of the application of the rules) and to suggest changes in the legislation in cases where the rules do not meet its intended objectives. Conceived of in this way, the movement of Law and Economics is the ultimate development of legal realism.

LEGAL COMPETITION AS A DYNAMIC PROCESS

The static approach does however have its limits in the sense that it does not account for the “strategic” behaviour of the creators of law (judges or legislators …). Only dynamic competition allows us to approach this question as it deals above all with the changes in the rules. To this end, it would be appropriate to examine the way in which these “creators” react to the decisions of their “competitors”. Hence, at an international level, if one State implements a rule which appears more favourable to the economic actors (as regards labour law, tax law or the fight against economic crime), it is interesting to bring out the “function of legal reaction” of neighbouring countries. Indeed, as opposed to the widely studied subject of fiscal competition, legal competition brings to light the phenomenon of “voting with one's feet”, i.e. companies choose to set up where the rules are the most suitable to their activities.

This analysis, it is true, complements the previous one which was based on the recognition of performance differences of legal systems but includes an extra dimension as it leads us to look at the outcome of this dynamic: will the creators of law in a situation of competition decide to cooperate (a tendency toward harmonisation) or will they be decidedly uncooperative (legal competition)?

This is a difficult question as we have seen that the same point of departure (accepting the heterogeneity of rules of law) may lead to quite opposite conclusions. Regarding the unitary and hierarchical approach, heterogeneity leads to cooperation. The non-unitary approach leads to competition. We must immediately clarify that, for the tenants of the non-unitary approach, legal order can be just as coherent as for those preferring the unitary approach. For example, Hayek attempts to show that the rules emerging from legal order after the evolutionary process are precisely those which will win the competition.

This remark is also valid both for a given legal system and between different systems. In a given legal system, a rule of law may be conceived as being the product of the action of several producers in competition (doctrine, jurisprudence, law). Ugo Mattei then demonstrates how this competition helps to spread the knowledge regarding the legal solutions to a particular problem. It is precisely this which ensures legal order. Competition, then, is not responsible for disorder but for order quite independently of the positivist paradigm: “consequently, outside of a state centered paradigm of the law, competition between components of the legal rule, rather than cooperation among sources of the law, is the appropriate tool to use”.

This is the first important result to come out of an economic analysis of legal competition: the proposition “cooperation implies order whereas competition implies disorder” is largely unfounded.

The same observation is valid at an international level at which competition becomes apparent via the transposition of concepts or legal rules from one system to another. Ugo Mattei has given a very good description of the massive importing of the German doctrine to interpret the Italian Civil Code of 1865, largely based on the French model.

The major observation we can make today is that over the last twenty years a certain number of legal instruments, norms and contractual techniques often invented within the context of Anglo-Saxon law have been imposed in countries of civil law and these appear to be spreading to all industrialised countries in the wake of globalisation. The introduction and the competition of these new laws then alter the national legal environment. But by receiving these new rules the States have become “law takers” (even though the rules are not usually accepted as they stand). It would appear that by receiving these new laws, the national institutions and laws are adapting to the demands of the global economy. The argument depicting states as “law givers” or even “law merchants” is obviously in contrast to this observation.

And, as Ugo Mattei notes, barriers between legal systems are today challenged more then ever by the extent of human market transactions. Legal rules from different legal systems are often in conflict with one another when ruling on the same course of action. It is unrealistic to imagine a set of coherent and ranked legal orders issued to the people by one all powerful “law giver”.

In fact, the idea of competition between legal systems is widely accepted but this competition is rarely due to “law merchants” in the sense that the creative power of the States would be highly limited. Widely speaking, competition could theoretically lead to a coherent legal order (here economists would speak of equilibrium à la Stigler).

Be that as it may, competition is, in practice, imperfect and the contradictions in ...

Table of contents

• Cover
• Half Title
• THE ECONOMICS OF LEGAL RELATIONSHIPS
• Full Title
• Copyright
• Contents
• LIST OF CONTRIBUTORS
• STATEMENT OF SCOPE
• CALL FOR AUTHORS/VOLUME EDITORS/TOPICS
• INTRODUCTION
• PART I – THE RELEVANCE OF LAW AND ECONOMICS FOR RESEARCH INTO CODIFIED LAW SYSTEMS
• PART II – LEGAL-ECONOMIC ANALYSIS OF LEGAL ISSUES IN A EUROPEAN CONTEXT