5.4: How to manage the ‘provision’ of English law

So far, in this section, we have drawn upon economic theory to discuss the market failure in the ‘provision’ of English law. By ‘provision’, we mean growing the international user base with innovative offerings in new sectors (e.g. fintech and ESG as discussed in section 4.4), increasing market share in existing sectors, and promoting the use of English law for internationally mobile transactions more generally. This can range from raising awareness of the advantages of using English law to investing in and maintaining the already high quality of UK dispute resolution, judges and the judicial system in general, and support for UK-seated arbitration. Indeed, it is important to note that a cornerstone of the provision of English law is the function of an independent judiciary who apply, interpret and create the law. Managing the ‘provision’ of the law therefore means ensuring that the UK best takes advantage of the opportunities associated with this national asset.

There are two key considerations relating to the management of the ‘provision’ of English law.

First, promoting the use of English law is particularly important because English law exhibits a notable network effect—i.e. the benefit gained by English law users grows with the total number of users.

As more internationally mobile transactions in a specific sector are written under English law, English law then becomes a standard for contracts in that sector. Thus, there is greater incentive for users of that contract to use English law instead of deviating to a different governing law. A standardised contract can increase predictability and confidence between the parties involved and help lower transaction costs.^[1]The benefits of ‘standard setting’ have been discussed thoroughly in the context of the role of regulation within the economic literature. An example of this is the mandatory EU technical … Continue reading This in turn leads to an increase in the number of transactions, compared to the counterfactual without a standardised contract where parties have to choose a suitable governing law, draft and review each contract for every transaction they make.^[2]This is called the ‘market-creating’ and ‘market-growing’ benefits from standard setting. Ibid.

As a consequence of this dynamic, many sectors with internationally mobile transactions have a tendency to ‘tip’ in the sense that one governing law takes it all or dominates these transactions, due to the benefit from standard setting. As a result, this means that there is a significant incentive for competing governing laws to position themselves as an alternative to English law and to win the market (as we discuss in section 4.3, there is already some competitive pressure to win certain sectors and markets from English law).

Box 5.3 Another perspective on network effects: digital platforms

Given the value at risk and the competitive pressure against English law, it is important that sufficient investment is made in maintaining and growing the user base for English law.

Second, due to the free-rider problem and for the obvious reason that nobody ‘owns’ English law, coordinated efforts across industries, as well as the government, are required to achieve the biggest impacts in promoting the use of English law.

Indeed, efforts have been made by industry bodies in the legal services sector—the Bar Council and the Law Society—to promote the use of English law on various international platforms.^[3]For example, see: https://www.lawsociety.org.uk/en/topics/international/english-law-day-ukraine-2021, or … Continue reading There has been some success where various jurisdictions from different parts of the world started to adopt some areas of English law in developing their own laws.^[4]Stakeholders in the legal services sector have mentioned the role of English law in newly developed insolvency laws in jurisdictions such as Mexico and Saudi Arabia, as well as advising on the legal … Continue reading Another example is the UK Jurisdiction Taskforce’s Legal statement on Cryptoassets and Smart Contracts on the status of cryptoassets, distributed ledger technology and smart contracts under English private law and the publication of digital dispute resolution rules that we discuss in section 4.4.

However, considering the importance of English law to the UK economy, and the risks and opportunities involved, it is not sufficient to rely solely on these efforts. The free-rider/positive externality problem is a large hurdle to overcome, especially if a significant upfront investment is needed. Such investment is likely to deliver value for money through the value that comes with an increase in transactions under English law (as illustrated in section 4), as well as the associated increase in employment and tax revenue.

With English law serving as an important element of infrastructure and providing significant value for the UK economy as a whole, the optimal level of investment made by individual private parties alone is likely to be lower than the socially optimal level without further coordination. For instance, new legal technology may be useful to employ in order to address the free-rider problem while still growing and maintaining the user base of English law. However, there may not be sufficient incentive for a single party to fund, develop and maintain such a solution on its own.

Indeed, solving this market failure will require a significant level of coordination among various private parties and the public sector. In addition, multiple factors, such as favourable regulation and the high-skilled labour market, along with a strong legal system, need to be aligned to successfully position the UK as a leader in new sectors and markets.

While funding for these activities to promote and manage English law may come from the industry, support from the government could be in the form of a government mandate but delivered by the private sector, or other forms of support, such as public information campaigns, cultural expectations, and the assistance of a central coordinating body.