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Economic value of English law | Oxera

Chapter 1: Introduction

Published: October 5th 2021
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2.1: Introduction 2.2: Economic value is created by ‘gains from trade’—realised through transactions 2.3: The law underpins growth in the volume of transactions (and therefore the generation of economic value) 2.4: Considering the law as infrastructure on which transactions take place
3.1: Introduction 3.2: The economic value created through the UK legal services ecosystem 3.3: The economic value created for the UK as a whole -3.3.1: English law as a global market standard -3.3.2: Agglomeration effects -3.3.3: Reduced transaction costs for UK businesses trading internationally 3.4: The choice of law and legal services for internationally mobile transactions
4.1: Introduction 4.2: English law provides significant value to the UK economy -4.2.1: Maritime sector -4.2.2: Commodity trading -4.2.3: ISDA swaps and derivatives -4.2.4: International insurance contracts -4.2.5: The value of English law to the UK economy is significant 4.3: Risks and opportunities 4.4: Future opportunities for the use of English law represent significant potential value to the UK
5.1: Introduction 5.2: English law suffers from a type of ‘market failure’ 5.3: Solutions to the free-rider problem: coordination across private and public parties 5.4: How to manage the ‘provision’ of English law
A1.1: Maritime sector -A1.1.1: Size of the market -A1.1.2: Overview of governing laws -A1.1.3: Risks and opportunities A1.2: Commodity trading -A1.2.1: Size of the market -A1.2.2: Overview of governing laws -A1.2.3: Risks and opportunities A1.3: ISDA swaps and derivatives -A1.3.1: Size of the market -A1.3.2: Overview of governing laws -A1.3.3: Risks and opportunities A1.4: International insurance contracts -A1.4.1: Size of the market -A1.4.2: Overview of governing laws -A1.4.3: Risks and opportunities
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Chapter 1

Chapter 1: Introduction

Oxera has been commissioned by LegalUK to identify the economic value of English and Welsh law (referred to in the rest of this report as ‘English law’) to the UK. Law in general, and English law specifically, provides significant benefits to society over and above its economic value, such as establishing and maintaining standards, upholding fairness, and facilitating social change. However, in this report, we focus on the economic value that English law—specifically as it relates to business contracts and transactions—brings to the UK.

English law underpins most contracts and transactions made within the UK, as well as many contracts and transactions outside the UK. The use of English law as the global standard in many parts of the global economy is one of the main reasons for the success of the legal services sector in the UK. However, English law’s role as a business platform and market infrastructure is overlooked and highly significant. English law provides a global platform for the trading, financial and commercial contracts on which global business relies. In addition, it provides an infrastructure for the development of new products and services, and this in turn draws internationally mobile transactions to the UK. From this perspective, English law (among many other factors such as language, time zone, and history) plays a key role in making the UK, and London in particular, one of the pre-eminent global business hubs. [1]For some examples of other factors, see TheCityUK (2020), ‘Key Facts about the UK as an international finance centre 2020’, December, p. 10.

Despite its significant role in the UK and international commerce, there has never (so far as we know) been an attempt to outline the economic value of English law to the UK or the opportunities that future developments might provide. This study seeks to address this gap in our understanding.

English law is often one of the first governing laws in the world to deal with complex market issues and is typically able to find solutions relatively quickly. Through the building of precedent as the first-mover advantage, English law has become a global market standard in many industries and sectors. This status of English law in turn strengthens the UK’s position as a leading hub for developments in complex legal issues. This leads to a ‘network effect’[2]A platform experiences network effects when the attractiveness of using the platform depends on the level of participation of other users. Where an additional user of a platform increases the value … Continue reading, whereby English law is used more and more, and the benefit gained by those who use English law (i.e. corporations and financial institutions) grows with the total number of users. Moreover, UK businesses benefit from the concentration of expertise in the law underpinning the economy; this concentration has ‘agglomeration effects’, increasing productivity of legal services. As a result, the widespread international use of English law increases UK businesses’ competitiveness, and results in reduced transaction costs for UK firms trading internationally.

The position of English law as a global standard in many parts of the world economy means that risks can arise from competing jurisdictions and the use of governing laws other than English law. Increasing digitisation and globalisation means that an increasing proportion of transactions and contracts are internationally mobile, where parties are free to choose a particular governing law and legal services that best suit their requirements from anywhere in the world. These trends may have significant impacts on the economic value of English law to the UK in the future.

Opportunities to increase the value of English law lie in its application as the main governing law in new markets that are seeing high growth and will continue to do so in the future. This is where the strengths of English law in providing both flexibility and predictability could play an important role in establishing its position as the global standard in these new areas of the economy. Promoting the use of English law in fintech, for example, fits particularly well with the UK government’s overall strategy to attract more technological innovations into the financial services sector and to ‘cement the UK’s position as the world’s pre-eminent financial centre’[3]UK Chancellor of the Exchequer Rishi Sunak’s announcement of new plans to boost fintech at UK Fintech Week, 20 April 2021.. The flexibility and predictability offered by English law, along with a supportive regulatory environment, can serve as a strong foundation for high growth in the fintech sector. More broadly, there is potential for English law to take the lead in many emerging sectors and industries (for example, in sustainable investing, smart contracts, and artificial intelligence).

This report takes a different approach from previous studies, which have quantified the direct economic contribution of the UK legal services sector[4]For example, see TheCityUK (2020), ‘Legal excellence, internationally renowned: UK legal services 2020’, November; KPMG (2020), ‘Contribution of the UK legal services sector to the UK … Continue reading. Here, we focus on the broader assessment of how English law contributes to the UK economy. For the obvious reason that nobody owns the law and nobody is employed by the law, previous approaches adopted in this area (which often involve counting the number of people employed in a sector, establishing the wages they earn and the profits they generate) would not work. A different approach is required: one that begins by considering how economic value is created and how the law supports that process.

Our approach is to examine the ways in which English law creates economic value for the UK through drawing on relevant economic literature and a number of examples. This enables us to be clear on why law, and English law specifically, creates economic value for the UK (sections 2 and 3); to quantify the value of several examples of internationally mobile transactions underpinned by English law (section 4); and to assess the potential risks and opportunities for the future value of English law to the UK economy (section 4). By structuring our assessment in this way, we can then clearly identify and examine the fundamental economic characteristics of law that create economic value (section 5), and accordingly pose fundamental questions about how that value can be maximised for the UK in the future (section 6).

References

References
↑1For some examples of other factors, see TheCityUK (2020), ‘Key Facts about the UK as an international finance centre 2020’, December, p. 10.
↑2A platform experiences network effects when the attractiveness of using the platform depends on the level of participation of other users. Where an additional user of a platform increases the value of using that platform for other users or groups of users, economists call this a ‘positive network externality’.
↑3UK Chancellor of the Exchequer Rishi Sunak’s announcement of new plans to boost fintech at UK Fintech Week, 20 April 2021.
↑4For example, see TheCityUK (2020), ‘Legal excellence, internationally renowned: UK legal services 2020’, November; KPMG (2020), ‘Contribution of the UK legal services sector to the UK economy’, January.