Globalization and Private Law: The Way Forward

Globalization and Private Law Globalization and Private Law The Way Forward Edited by Michael Faure Professor of Co...

Author: Michael Faure | Andre Van Der Walt

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Globalization and Private Law

Globalization and Private Law The Way Forward

Edited by

Michael Faure Professor of Comparative and International Environmental Law, Maastricht University and Professor of Comparative Private Law and Economics, Erasmus University Rotterdam, The Netherlands

André van der Walt South African Research Chair in Property Law and Professor of Law, Stellenbosch University, South Africa

Edward Elgar Cheltenham, UK • Northampton, MA, USA

© The Editors and Contributors Severally 2010 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2009940743

ISBN 978 1 84844 760 8

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Typeset by Cambrian Typesetters, Camberley, Surrey Printed and bound by MPG Books Group, UK

Contents List of contributors List of abbreviations

xv xvi

Introduction and editorial preface Michael Faure and André van der Walt 1 Problem definition and reasons for this book 1.1 Lawmaking in a globalized world 1.2 Convergence, divergence, accountability and legitimacy 1.3 Who sets the agenda? 2 History and origins of this book 3 Methodology 3.1 Legal multidisciplinarity 3.2 Comparative approach 3.3 Multidisciplinarity 4 Topics 5 Central focus 6 Structure of this book 7 Contributors 8 Acknowledgements References PART I

1 1 2 3 4 4 6 6 7 7 7 10 10 11 11 12

GLOBALIZATION, DEMOCRACY AND ACCOUNTABILITY

1 Democracy and (European) private law: a functional approach Jan Smits 1 Introduction 2 Law without a state: a problem of democracy? 3 Deconstructing democracy 4 The legitimacy of the draft CFR 4.1 Accountability: legitimacy through jurisdictional competition 4.2 Participation: the experience with optional instruments 4.3 Private law: design or organism? 5 Conclusions References v

15 15 17 19 22 23 24 25 27 28

vi

Globalization and private law

2 Public accountability of transnational rule making: a view from the European Union and beyond Deirdre Curtin 1 Introduction 2 Shifts in transnational governance: actors, instruments and levels 2.1 Multi-level governance 2.2 Actors 2.3 Instruments 2.4 Levels 3 Approaches to legitimacy and democracy of transnational governance 3.1 Approaches to understanding legitimacy in the EU 3.2 Understanding and conceptualizing (EU) ‘democracy’ 4 Conceptualizing and applying public accountability 4.1 Accountability relationships 4.2 Accountability as a virtue 4.3 Accountability as a social relationship 5 Concluding remarks References PART II

32 32 33 33 34 39 40 41 41 44 45 45 47 49 50 52

HARMONIZATION VERSUS DECENTRALIZATION

3 Private law in a globalizing world: economic criteria for choosing the optimal regulatory level in a multi-level government system Roger Van den Bergh 1 Introduction 2 Heterogeneity of preferences 3 Decentralized information and innovation 4 Interstate externalities 5 Scale economies, transaction cost savings and the elimination of trade barriers 5.1 The size of the cost savings 5.2 Does harmonization advance market integration? 6 Regulatory competition 6.1 The level playing field argument 6.2 Different types of regulatory competition 6.3 Race to the bottom or race to the top: theoretical work and empirical evidence 7 A public choice perspective

57 57 59 62 63 65 66 68 69 70 72 75 77

Contents

8

Lessons for globalization of private law 8.1 Interstate externalities 8.2 Regulatory competition 8.3 Cost savings 8.4 Benefits of decentralization 9 Conclusions References 4 Globalization and harmonization of international trade law Sieg Eiselen 1 Introduction 2 A brief history of trade law harmonization: the Vienna Convention for the International Sale of Goods, 1980 (CISG) 3 Different methods of achieving harmonization 3.1 Introduction 3.2 Instruments employed to achieve harmonization 3.2.1 Formal instruments – conventions 3.2.2 Soft law instruments – model laws or model codes open for adoption by countries 3.2.3 Soft law instruments – voluntary codes open for adoption by individual commercial parties 3.3 Agents and their methods of harmonization 3.3.1 UNCITRAL 3.3.2 The International Chamber of Commerce (ICC) 3.3.3 Unidroit 3.3.4 World Customs Organization 4 Conclusion References Conventions Legislation Case Law Bibliography List of websites accessed PART III

vii

80 81 84 85 89 91 93 97 97 100 106 106 107 107 111

113 114 114 119 123 125 127 129 129 129 129 131 136

PUBLIC LAW

5 The relation between private law and administrative law in view of globalization Frits Stroink 1 The true nature of administrative law 2 Contracts between the administration and the citizen

139 139 140

viii


3

Administrative law and globalization 3.1 The principle of legality 3.2 Principles of proper administration 3.3 Supervision by a judge 4 Conclusion References 6 Beyond parochialism? Transnational contextualization in constitutional interpretation in South Africa (with particular reference to jurisprudence of the Constitutional Court) Lourens du Plessis 1 Introductory observations and explanations 2 Gateway(s) to the ‘transnational context’ 2.1 Section 39 and the Makwanyane Guidelines 2.1.1 The first guideline 2.1.2 The second guideline (and the ‘framework dictum’) 2.1.3 The third guideline 2.2 ‘Transnational contextualization’ 3 International law 3.1 International law, globalization and South Africa’s ‘new constitution’ 3.2 ‘Binding’ and ‘non-binding’ international law 3.3 Looking critically at the framework dictum in Makwanyane 3.4 The framework dictum compromised? – AZAPO 3.5 Back to the framework: Grootboom 3.6 Some other judgments significant for engagement with international law in constitutional interpretation 3.7 An underused presumption 3.8 Travaux préparatoires in constitutional interpretation – an example of international law ‘making’ domestic constitutional law 3.9 Conclusions pertinent to the role of international law 4 Foreign law and constitutional comparativism 4.1 Constitutional comparativism: believers and disbelievers 4.2 The demonstrable value and advantages of constitutional comparativism 4.3 Conclusions pertinent to constitutional comparativism 5 General conclusions References Cases Bibliography

141 142 142 143 143 144

145 145 147 147 148 149 149 150 151 151 154 155 156 158 160 162

164 165 168 168 173 175 178 179 179 180

Contents

7 Globalization, state commercial activity and the transformation of administrative law Geo Quinot 1 Introduction 2 ‘State commercial activity’ 3 Applicable norms 4 Enforcement of norms 5 Private and public in law and social practice 6 Conclusion References PART IV

ix

183 183 186 187 193 201 203 204

CORPORATE GOVERNANCE

8 Globalization: selected developments in corporate law Bas Steins Bisschop 1 Introduction 2 The VOC: history and present 2.1 Foundation of the VOC 2.2 ‘Act of magic’ 2.3 Shareholders’ rights in relation to the corporate organization 2.4 Conclusion 3 The BRIC countries 3.1 Brazil 3.2 Russia 3.3 India 3.4 China 3.5 Conclusion 4 The corporation and its stakeholders 4.1 The main players in the corporate organization 4.2 Shareholder and stakeholder models 4.3 Convergence between these models? 4.4 The enlightened shareholder model 4.5 Corporate social responsibility 4.6 Corporate interest 4.7 Conclusion 5 Challenges to the global corporate system 5.1 The systematic threat posed by the credit crunch 5.2 The threat posed by hedge funds 5.3 The threat posed by bookkeeping scandals 5.4 Other possible threats 5.5 Reflex responses to the threats, and conclusion

211 211 213 213 214 215 216 217 217 218 219 220 222 222 223 223 224 227 228 229 229 230 230 232 232 233 234

x


6

The limitations of legal remedies in the resolution of crises 6.1 Ex Post and hindsight-biased judgments 6.2 Confusion 6.3 No surprise, really 6.4 Further observations 6.5 Conclusion 7 Supporting legal remedies in the resolution of crises 7.1 Some further comments on the efficiency of regulation 7.2 Transition 7.3 The South African Truth and Reconciliation Commission 7.4 Amnesty 8 Bringing together regulation, supervision, confidence and the TRC 8.1 Intermediate conclusion 8.2 The association with the TRC 8.3 Recommendation References

9 Globalization and corporate law Philip Sutherland 1 Introduction 2 What is globalization? 3 Globalization, corporate law and multinational corporations 4 Corporate law theory 5 What form should corporate regulation take in the globalized world? 5.1 Regulation in national law 5.2 Convergence of national corporate laws 5.3 International rules 6 Alternative systems for constraining the activities of global corporations 6.1 A system of competing rules 6.2 The establishment of constraints outside traditional law 6.2.1 International institutions 6.2.2 Self-regulation by MNCs 6.2.3 Non-governmental organizations 6.2.4 Tightly knit multi-stakeholder networks 6.2.5 Conclusions regarding the restraining of the activities of MNCs outside traditional law 7 Conclusion

236 236 238 240 241 243 243 244 245 247 248 249 249 250 250 251 255 255 255 265 271 283 284 290 298 299 300 302 304 317 321 323 326 328

Contents

References Legislation, Codes and Reports Cases Books Journal articles Websites

xi

330 330 333 333 334 339

PART V PROCEDURAL ISSUES 10 Civil procedure in a globalizing world Remco van Rhee 1 Introduction 2 Law reform at the national level 3 Competition between national systems of civil procedure 4 Harmonization of procedural law on an international and a global scale 4.1 The Storme Report: harmonization on a European scale 4.2 The principles of transnational civil procedure and harmonization on a worldwide scale 5 Final remarks References

343 343 345 348 350 350 357 361 362

PART VI HUMAN RIGHTS AND THE ENVIRONMENT 11 Fundamental rights in private law: anchors or goals in a globalizing legal order? Siewert Lindenbergh 1 Human rights in private law 2 Four illustrations 2.1 The Bürgschaft case 2.2 The case of Wiebke Busch 2.3 The Traveller case: limitation of liability 2.4 The Pye case: deprivation of possession, or not? 3 Bridging the traditional dichotomy between private law and public law 4 The added value of a fundamental rights approach in private law 5 Constitutional and/or supranational courts as driving forces 6 Issues in relation to globalization 7 A different perspective: private law as a tool for protection of fundamental rights 8 Concluding remarks References

367 367 369 369 370 371 372 373 376 377 377 379 380 381

xii


12 Globalization and multi-level governance of environmental harm Michael Faure 1 Introduction 1.1 Starting point 1.2 Challenges 1.3 General background 1.4 Structure 2 Influence of environmental issues on globalization: positive analysis 2.1 Increase of transboundary pollution 2.2 Increased mobility of products and services 2.3 Lowering environmental quality? 3 Influence of environmental issues on globalization: normative analysis 3.1 Multi-level governance 3.2 Shift of governance for local pollution? 3.2.1 Danger of a race to the bottom? 3.2.2 The trade–environment dispute 3.3 Mobility of products, firms and services 4 Influence of globalization on (private) environmental law: positive analysis 4.1 Institutional 4.2 Procedural 4.2.1 Integration of various legal spheres 4.2.2 Effect of international law on private law 4.2.3 Effect on public participation 4.2.4 Tendency toward consensual solutions? 4.3 Contents 5 Influence of globalization on (private) environmental law: normative analysis 5.1 Institutional 5.1.1 Lawmaking beyond the nation state 5.1.2 Victim and environmental protection doubtful 5.1.3 Green treaties or protectionism? 5.1.4 Limited public participation 5.1.5 Shift problematic 5.1.6 Possible remedies 5.2 Procedural 5.2.1 Distinction international–national becomes blurry 5.2.2 Successful bargaining? 5.3 Contents: differentiation of standards

383 383 383 384 385 386 387 387 388 390 392 392 394 395 396 399 400 400 401 401 402 403 404 405 406 406 406 407 409 410 411 411 412 412 413 414

Contents

Contribution of environmental law to the globalization debate 6.1 Environmental issues that shape the globalization debate 6.2 Influence of globalization of environmental private law 6.3 Many unresolved issues … 6.4 … Need multidisciplinary research! References

xiii

6

13 The rule of law and judicial activism: obstacles for shaping the law to meet the demands of a civilized society, particularly in relation to climate change? Jaap Spier 1 The nemesis of climate change 2 A call for legal activism in the field of climate change? 3 Judicial activism: a brief introduction 4 A closer look 5 A few examples 5.1 Dutch cases I 5.2 A slippery slope 5.3 Dutch cases II 5.4 The human rights perspective 5.5 Compelling requirements of equity 5.6 French, Belgian and Italian cases 5.7 Hard cases on the edge of moral 5.8 Non-European cases 5.9 The struggle between judiciary and legislator 5.10 Historical wrongs 5.11 Climate change litigation 6 Legislator and judiciary 7 Interim conclusion 8 Back to climate change and other topics of truly significant importance References PART VII

415 415 415 416 417 417

426 427 427 428 430 437 437 439 440 441 441 442 443 443 444 445 446 446 447 448 451

COMPARATIVE CONCLUSIONS

14 Comparative and concluding remarks Michael Faure and André van der Walt 1 Lawmaking beyond the nation state 2 Reaction to globalization by private actors 3 Regulation and control

457 457 460 461

xiv


4 Private–public law 5 Convergence, divergence, harmonization 6 Reinstalling legitimacy and accountability 7 Procedural issues 8 Remaining issues and challenges References Index

461 463 464 465 466 467 469

Contributors Curtin, Deirdre, University of Amsterdam and University of Utrecht, the Netherlands du Plessis, Lourens, Stellenbosch University, South Africa Eiselen, Sieg, University of South Africa, South Africa Faure, Michael, Maastricht University and Erasmus University Rotterdam, the Netherlands Lindenbergh, Siewert, Erasmus University Rotterdam, the Netherlands Quinot, Geo, Stellenbosch University, South Africa Smits, Jan, Tilburg University, the Netherlands and University of Helsinki, Finland Spier, Jaap, Hoge Raad and Maastricht University, the Netherlands Steins Bisschop, Bas, Maastricht University and Nyenrode Business University, the Netherlands Stroink, Frits, Maastricht University, the Netherlands Sutherland, Philip, Stellenbosch University, South Africa Van den Bergh, Roger, Erasmus University Rotterdam, the Netherlands Van der Walt, André, Stellenbosch University, South Africa Van Rhee, Remco, Maastricht University, the Netherlands

xv

Abbreviations (A) (CC) (E) (N) (SCA) (T) (W) Aarhus Convention AB ADR AIDA AJCL ALI ALL ER ALL SA ALR ANC AZAPO B2B B2C BCLR BEE BLLR BRIC BSE C&F CC CEO CEPEJ CEPR CERES CESR CFR

Appellate Division of the Supreme Court (South Africa) Constitutional Court (South Africa) Eastern Cape High Court (South Africa) Natal High Court (South Africa) Supreme Court of Appeal (South Africa) Transvaal High Court (South Africa) Witwatersrand High Court (South Africa) Convention AB Rechtspraak Bestuursrecht Alternative Dispute Resolution Association International de Droit des Assurances American Journal of Criminal Law American Law Institute All England Law Reports All South Africa Reports American Law Reports African National Congress Azanian People’s Organization business-to-business business-to-consumer Butterworths Constitutional Law Reports (South Africa) Black Economic Empowerment Butterworths Labour Law Reports Brazil, Russia, India and China bovine spongiform encephalopathy cost and freight Crown Cases chief executive officer European Commission for the Efficiency of Justice Centre for European Policy Research Coalition for Environmentally Responsible Economics Committee of European Security Regulators Common Frame of Reference xvi

Abbreviations

CIETAC CIF CII CISG CJTL CLR CO2 CRT CSR DCFR DP EC ECCG ECHR ECJ ECN ECOSOC ECR ECT EEC EESC EICC EITI ELJ EPA ESCR Espoo Convention ETI EU EUI EUROGOV EVRM EXW FAS FASB FLA FOB FSA FSC

xvii

China International Economic and Trade Arbitration Commission cost insurance freight Confederation of Indian Industry Convention on the International Sale of Goods Columbia Journal of Transnational Law Commonwealth Law Reports carbon dioxide Caux Round Table corporate social responsibility Draft Common Frame of Reference Dalloz Périodique European Community European Consumer Consultative Group European Convention on Human Rights European Court of Justice European Competition Network Economic and Social Council of the United Nations European Court Reports Treaty Establishing the European Community European Economic Community European Economic and Social Committee Electronic Industry Code of Conduct Extractive Industries Transparency Initiative European Law Journal Environmental Protection Agency International Network for Economic, Social and Cultural Rights Convention on environmental impact assessment in a transboundary context Ethical Trading Initiative European Union European University Institute European Governance Papers Europees Verdrag van de Rechten van de Mens ex works free alongside ship Financial Accounting Standards Board Fair Labor Association free on board Japan Financial Services Agency Forest Stewardship Council

xviii

GAP GATT GC GDP GMO HCA HCCH HR HRA HRC IAEA IASB IBGC ICC ICESCR ICJ ICMM ICN ICTI IFC IFRS IJGLS ILO ILR ILSA IMF IMO IOSCO ISO ITLOS JEPP JLEO LJ LQR LR LRTAP LSE MDPA METRO


Gents Afrika Platform General Agreement on Tariffs and Trade Global Compact gross domestic product genetically modified organism High Court of Australia Hague Conference on Private International Law Hoge Raad Human Rights Act Human Rights Council International Atomic Energy Agency International Accounting Standards Board Instituto Brasileiro de Governança Corporativa International Chamber of Commerce International Covenant on Economic, Social and Cultural Rights International Court of Justice International Council of Mining and Metals International Competition Network International Council of Toy Industries International Finance Corporation International Financial Reporting Standards Indiana Journal of Global Legal Studies International Labour Organization Iowa Law Review International Law Students Association International Monetary Fund International Maritime Organization International Organization of Securities Commission International Organization for Standardization International Tribunal for the Law of the Sea Journal of European Public Policy Journal of Law Economics and Organization Law Journal Law Quarterly Review Law Review Geneva Convention on Long-Range Transboundary Air Pollution London School of Economics Mines de Potasse d’Alsace Maastricht European Institute for Transnational Legal Research

Abbreviations

MJ MNC NEA NGO NJCM OECD OHADA OJ ORGALIME Public Procurement LR PULP R&D RECIEL Rome I

RSA SA SACR SAJHR SALJ SAR SAYIL SCA SCR SEC SGECC SPS Agreement Stell. LR STIAS TBBR TEU TRC TSAR UCC UCP

xix

Maastricht Journal of European and Comparative Law multinational corporation Nuclear Energy Agency non-governmental organization Nederlands Juristen Comité voor de Mensenrechten Organisation for Economic Co-operation and Development L’Organisation pour l’Harmonisation en Afrique du Droit des Affaires Official Journal European Engineering Industries Association Public Procurement Law Review Pretoria University Law Press Research and Development Review of European Community and International Environmental Law Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations Republic of South Africa South African Law Reports South African Criminal Reports South African Journal on Human Rights South African Law Journal South African Reports South African Yearbook of International Law Supreme Court of Appeal of South Africa Canada Supreme Court Reports US Securities and Exchange Commission Study Group on a European Civil Code WTO Agreement on the Application of Sanitary and Phytosanitary Measures Stellenbosch Law Review Stellenbosch Institute for Advanced Study Tijdschrift Belgisch Burgerlijk Recht Treaty on European Union Truth and Reconciliation Commission Tydskrif vir die Suid-Afrikaanse Reg (Journal for South African Law) Uniform Commercial Code Uniform Customs and Practice for Documentary Credits

xx

UK UKHL ULF ULIS UN UN ESCOR UNCITRAL UNCTAD UNCTC UNECE UNIDROIT UNSW UP US US GAAP USA VOC VPs WCO WRAP WTO ZWeR


United Kingdom United Kingdom House of Lords Decisions Uniform Law on the Formation of Contracts for the International Sale of Goods Uniform Law of International Sales United Nations United Nations Economic and Social Council Regulation United Nations Commission for International Trade Law United Nations Conference on Trade and Development United Nations Convention on Transnational Corporations United Nations Economic Commission for Europe International Institute for the Unification of Private Law University of New South Wales UNIDROIT Principles of International Commercial Contracts United States United States Generally Accepted Accounting Principles United States of America Verenigde Oost-Indische Compagnie Voluntary Principles on Security and Human Rights World Customs Organization Worldwide Responsible Accredited Production World Trade Organization Zeitschrift für Wettbewerbsrecht

Introduction and editorial preface Michael Faure and André van der Walt 1

PROBLEM DEFINITION AND REASONS FOR THIS BOOK

A central focus in the debate on private law in Europe has recently been whether in specific domains (liability, property or company law) one can notice a convergence of legal systems or whether there is still room for divergence. The many harmonization processes in Europe (but also in other jurisdictions) and in federal systems have been described and critically evaluated in the literature. Less attention has so far been given, at least in private law doctrine and theory, to the more public law oriented processes behind lawmaking in private law. Many private lawyers do pay attention to the increasing socalled constitutionalization of private law, for example focusing their attention on the influence of human rights in private legal relationships. Private lawyers have also noticed that, as a result of evolutions at the level of public law (international organizations, EU, WTO), fundamental changes have taken place that affect the area of private law. In continental Europe, for instance, lawmaking has been influenced by regional and international changes and shifts in emphasis for a long time. English law has started feeling the impact of this process more recently, since the adoption of the Human Rights Act 1998 and the concomitant domestic implementation of the European Convention on Human Rights. In South Africa, similar interactions between international human rights principles, a new democratic Constitution (including a Bill of Rights) and private law lawmaking have become visible since the early 1990s. As a result of these shifts, the traditional division of labour between national law makers and the judiciary has also changed. In this respect one can for example refer to the fact that judicial review now often also involves the application of international norms, even in domestic private legal disputes. Private lawyers have noticed the influence of the changing institutional structures. However, so far insufficient attention has been paid to the changing institutional processes and the way in which they affect the agenda of private law in a globalizing world. In particular, private lawyers have not yet come to explore the full implications of globalization on lawmaking in the 1

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sphere of private legal relationships. At most, one can speak of indications that traditional law makers and judicial officers in the sphere of ‘pure’ private law may resist the increasing influence of international and other public law instruments, rules and standards, while on the other hand there are strong indications that the influence of international law and of non-traditional legal sources is de facto increasing. 1.1

Lawmaking in a Globalized World

It is not difficult to point to a variety of developments that have taken place recently as a result of which the scope and contents of private law, and more particularly the sources and responsibilities for lawmaking, have changed. On the one hand, one can point to the importance of institutional globalization, whereby national constitutions, regional and international conventions on human rights and other international treaties, instruments and processes are increasingly influencing the scope and content of private law. However, globalization not only influences private law on the institutional level of decisionmaking (for example, through constitutionalization of private law, influence of human rights and centralization of decision-making); it also influences the material contents of private law. In this respect one just has to point to the fact that the globalization of international financial markets has had a considerable influence on the contents of private legal relations. Increasingly, institutional investors seem to determine decision-making of private actors, irrespective of national borders. This globalization of financial markets has of course highlighted the limits of legal remedies as well, and many have asked to what extent these internationally operating institutional investors comply with standards of accountability and, moreover, whether they can be held accountable for their behaviour, considering their influence on private legal relationships. The growing institutional tendency to shift powers away from the national legislator and towards international organizations and institutions seems to be mirrored by a similar development towards more self-regulation, precisely to control this process of globalization in financial markets. Formal institutional structures are often lacking and are replaced by fiduciary duties or codes of conduct, often under the heading of corporate governance or corporate social responsibility. However, recent scandals whereby private investors seemed to be victimized by failing control and auditing mechanisms have led to serious questions concerning the effectiveness of this type of self-regulation and have led to increased calls for institutional controls, including in this area of globalizing financial markets. However, it is not only economic and financial globalization which is of great importance, but also political globalization, which may have implica-

Introduction and editorial preface

3

tions for domestic legal systems as well. The implications and the importance of financial/economic globalization are clear for private as well as for public law (for example, pointing to developments within international trade law). There are, in addition, increasing signs of political globalization, more particularly a further expansion of the notion of constitutional democracy. Originally, this political model seems to have been the ‘privilege’ of countries in the North. Nowadays, however, this model is exported to quite remote places. This political globalization has important consequences for the legal system as well. Hence, one may wonder whether, in addition to economic globalization, there is also a convergence of virtues, values and interests that results from increasing political globalization. 1.2

Convergence, Divergence, Accountability and Legitimacy

Indeed, questions arise about the appropriate way in which the legal system should react to the pressures of increasing globalization that directly affects private legal relationships. Some argue that increasing harmonization of legal systems is the appropriate answer to globalization in financial markets, whereas others argue that globalization does not do away with local differences and differing preferences, so that room should still be left for divergence. A fundamental question in this respect is who finally takes the decision on lawmaking: within the so-called federalism debate it may be clear that it is no longer only the national legislator who takes decisions, since lawmaking is increasingly influenced by international institutions and organizations. However, the role of these organizations in lawmaking raises serious questions of accountability and legitimacy. Questions also arise about the relationship between the judge in the domestic legal system who has to resolve disputes between private parties and international norms. In some cases, judges in national courts can be called upon to apply international norms directly, or they can test the legitimacy of national legal instruments against international norms (such as human rights). At the international level, globalization thus also has a direct influence on adjudication of private legal relationships. Less clear, however, especially at the normative level, is who should ideally have the power of decision-making in this respect: should it be the legislator, or can sufficient leeway be given to the judiciary? Moreover, the fact that the judiciary is called upon to interpret and apply international legal norms does not answer the fundamental questions with respect to the accountability and legitimacy of international organizations which set the standards that the judges apply within the national legal context. To some extent, institutional solutions within the public law arena are presented as either judicial review or review by constitutional courts or courts of human rights. However, the mechanisms put in place within the different

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settings and jurisdictions vary to a large extent, including as far as their influence on private legal relationships is concerned. 1.3

Who Sets the Agenda?

Increasing political globalization has important consequences and leads to fundamental questions, inter alia with respect to who are the key drivers behind the process of convergence of norms and values. Some hold without further discussion that the US and other industrialized democracies should define the agenda leading to a further convergence towards constitutional democratization at a global level. In this respect one can quote Seita,1 who argued that Perhaps by the year 2001, the representatives of oppressors, victims, victors, losers and adversaries, could assemble on a world stage in a therapeutic ceremony to put the past behind.

That futuristic perspective has not been realized yet and, moreover, the question is whether, as some of the literature indicates, it should indeed be ‘the West’ that determines the agenda leading to convergence of values at the political level. Given the importance of political globalization an important question is how various multicultural perspectives can be taken into account in such a legal-political process of convergence. The traditional view that the West can impose its norms upon the rest of the world is obviously no longer the prevailing paradigm. The cultural clash between the West and, for example, Muslim communities has shown that a convergence perspective should also take multiculturalism into account. In that respect the comparison between Europe and developments in South Africa is highly interesting, given the fact that South Africa has, in its constitution, moved towards a recognition of multiculturalism within one legal system.

2

HISTORY AND ORIGINS OF THIS BOOK

The project which inspired this book was based on cooperation between the Ius Commune Research School and the Law Faculty of Stellenbosch University in South Africa. The chapters in this book are based upon papers that were presented at two conferences held in December 2007 and December 2008 in Stellenbosch (South Africa).

1

Seita (1997).


5

Many of the European contributors to this book worked together in the Ius Commune Research School which is a collaboration between the law faculties of the universities of Amsterdam, Maastricht and Utrecht (the Netherlands) with the Catholic University of Leuven. The focus of the Ius Commune Research School is on the role of law in integration processes. A lot of attention has always been paid in the research of the Ius Commune Research School to questions of harmonization and comparative law in the area of private law, focusing strongly on the questions related to the harmonization debate. In that respect the Ius Commune Research School (which started its activities in 1997)2 has a long-standing collaboration with law faculties representing mixed legal systems, on the basis of the belief that the lessons from mixed legal systems can prove valuable for the harmonization debate in Europe.3 Hence, the Ius Commune Research School has long-standing contacts with the law faculty of the University of Edinburgh4 and with the law faculty of the University of Stellenbosch in South Africa. Earlier joint conferences have been organized and books have been published together with South African colleagues and the Scottish and South African colleagues5 have always attended the annual conferences of the Ius Commune Research School. During a dinner at an annual conference of the Ius Commune Research School organized by the Utrecht Law Faculty in November 2006, a group of South African and European Ius Commune scholars sat together, brainstorming the abovementioned problems concerning the making of private law in the age of globalization. It was the conviction of the participants in that brainstorming session that globalization poses specific problems for the making of private law that have not been sufficiently studied and that merit a thorough comparative analysis. It was decided that a combination of insights from European scholars interested in the harmonization debate and South African experience with mixed legal systems could enrich the common research agenda. As a result of that discussion, a first exploratory research workshop was organized at the Stellenbosch Institute for Advanced Study (STIAS) on 6–8 December 2007, where during three days 12 papers were presented, intense discussions took place and comparative conclusions were drafted. On the basis of this first workshop it was decided that the time was not right yet for a

2 3

http://www.iuscommune.eu. See generally on mixed legal systems the contributions to Smits (2001, p.

126). 4 Which inter alia organized the annual conference of the Ius Commune Research School in 2005. 5 See for example van Maanen and van der Walt (1996, p. 687); Faure and Schwarz (1998, p. 283); Faure and Neethling (2003, p. 230).

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publication, although a valuable contribution to the setting of the research agenda had been made. Hence, following a memo ‘Globalization and private law: the way forward’, it was decided to ask a few contributors to work out their earlier presentations in further detail and to invite some new presentations. On that basis, a second conference was held in December 2008 at the Stellenbosch University Law Faculty, and more particularly at the South African Research Chair in Property Law. Presenters at the December 2007 and December 2008 conferences were subsequently invited to rework their papers in the light of the discussions and comments received. A brief review procedure was followed, resulting in this book.

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METHODOLOGY

The organizers of the seminars consisted of the editors of this book, together with Jan Smits (Tilburg University) and Jacques Du Plessis (Stellenbosch University). The organizers were of the opinion that an attempt to provide a useful contribution to the debate on the influence of globalization on private lawmaking necessitates a combination of various methodological approaches. 3.1

Legal Multidisciplinarity

As will be clear from the table of contents, we have looked for insights from various legal disciplines and authors, who have tried to integrate various legal disciplines into their chapters. Of course, the traditional private law legal approach is followed by many contributors (for example Smits), while others look at the influence of harmonization in the area of international trade law on private law (Sieg Eiselen). Crucial for a better understanding of the lawmaking process in private law is obviously the incorporation of insights from public law scholars. They pay attention to the fact that the traditional boundaries between public and private law become increasingly blurry since state actors increasingly use private law to reach their goals (Geo Quinot and Frits Stroink). Particular case studies looking at the influence of globalization on specific areas of the law also provided valuable insights, for example focusing on the domains of company law (Bas Steins Bisschop and Philip Sutherland), procedural law (C.H. van Rhee) and environmental law (Michael Faure and Jaap Spier). Specific attention was paid in many contributions to the increasing influence of human rights, obviously in constitutional interpretation (Lourens du Plessis), but also in private law (Siewert Lindenbergh).


3.2

7

Comparative Approach

Given the nature of this book, which originated as a cooperation between European and South African scholars, legal comparison received a lot of emphasis. Not only do many chapters discuss interesting topics from the domestic legal system of the author (either European or South African), but many also engage explicitly in comparison with other legal systems (such as that of the US). A lot of attention is paid to specific problems of comparative legal methodology, related inter alia to problems that may arise in the case of so-called borrowing, but also related to the question of how globalization affects fundamental differences between legal cultures and values. 3.3

Multidisciplinarity

Even though this book started from a seemingly straightforward legal question (how globalization affects private lawmaking) it soon became clear that one needs more than ‘hard’ law to be able to answer this question. Hence, the second chapter (by Deirdre Curtin) promptly addresses fundamental notions of democracy and accountability and draws lessons from political science to explain how the notions of legitimacy and accountability could be interpreted in a meaningful way in the debate on private lawmaking. The fundamental question of whether globalization necessarily leads to global lawmaking is one which has also been extensively dealt with in economic literature. Hence, some chapters are especially devoted to the question of whether the economic analysis of law also provides useful insights for the (normative) question as to what types of issues should be regulated on a central rather than a decentred level (Roger Van den Bergh and, regarding environmental problems, Michael Faure).

4

TOPICS

It may be clear from the broadly formulated and ambitious research agenda (see Section 1) that various major issues can be distinguished: • The effect of globalization on private law is central to the whole project. This is largely a factual question whereby the importance of the reallocation of economic power and the importance of changes in financial streams have to be analysed for private legal relationships. • A related question is how private law can react to this process of globalization. Attention can be given in that respect to the factual answers that private parties provide to globalization, but also to institutional

8


structures that can provide the backing for globalization (such as the constitutionalization of private law and the influence of international institutions and structures). Attention can also be given to the nature of the legal reaction to globalization, more particularly as far as the importance of self-regulation for private law is concerned. • A closely related topic is of course whether the distinction between public and private law is still valid today in this globalizing context. Above it was pointed out how public law evolutions affect private law as well. That merits the question of whether the traditional distinction between these systems, at least in civil law, should still be maintained. This unavoidably also reopens the classic distinction between the civil and common law systems, because in the common law the traditional dichotomy between private and public law always had a different meaning from that in civil law jurisdictions. Of course these major issues are still rather broadly formulated. The organizers of this research project formulated ten more specific questions that might play a role in the debate on the influence of globalization on private lawmaking. Without suggesting that all of these topics would be fully dealt with in the chapters in this book we identified at least ten that were to a larger or smaller extent touched upon: 1.

2.

3.

4.

Who is in charge of agenda setting? This relates to the important constitutional question of who is in charge of lawmaking, where the traditional division of labour between legislator and the judiciary seems to be shifting as a result of globalization. This question can be addressed both in a descriptive (positive) manner and in a normative (more policy oriented) way. Related to the previous question is the question of the influence of national and international constitutions and conventions on private legal relationships. Increasingly, one notices that national judges are influenced by provisions in (inter)national constitutions in deciding private legal disputes. This merits an in-depth analysis of the role of traditional judicial review in a multi-governance setting. Another related question is the influence of human rights on private law, also referred to as the debate on the constitutionalization of private law, to which some attention has already been paid in the literature. Within the debate on the role of private law in a globalizing world, the multi-level governance debate also needs to pay attention to the traditional division of labour within federal systems. This concerns not only the abovementioned division between the legislator and the judiciary, but also the division between the different levels of government. One can for


5.

6.

7.

8.

9.

10.

9

instance notice an increasing enthusiasm, at least in Europe, for harmonization of private law. Some even plead for a European Civil Code, whereas others strongly doubt whether this type of far-reaching harmonization is indeed an adequate answer to globalization. In South Africa a debate is also taking place concerning the optimal structure of harmonization. For example, with respect to the core private law topic of the law of sale, the possibilities of harmonization between the OHADA states is currently being debated. The influence of globalization and international institutional structures on specific domains in private law also needs to be addressed. For instance, in the domain of real estate and property law one notices in many legal systems (in South Africa, but also in many European legal systems) that political developments and human rights shape the interpretation and development of the traditional concept of property rights. The same is undoubtedly true for procedural law, where one also notices the decreasing autonomy of national legal systems and (under influence of globalization?) a variety of developments towards alternative dispute resolution (one can in this respect also refer to the increasing importance of arbitration), as well as changes within national legal procedures themselves in an attempt to adapt these procedures to the changing demands of the social partners. An important topic is the increasing importance of arbitration, which raises the question of to what extent this can constitute a serious response to increasing demands for access to justice in a globalizing world. Attention also needs to be paid to the role of self-regulation and selfregulatory norms of conduct in private law. Some argue that self-regulation has, particularly in the area of contract law, to some extent always been prominent in private law. In areas like company law and to some extent in liability law (where rules of professional conduct may shape the standards of care), self-regulation has also always been mixed with government regulation. In a globalizing world questions arise regarding to what extent self-regulation can or should replace or supplement government regulation and how the increasing tendency towards selfregulation can be reconciled with the rule of law requirements related to accountability and legitimacy. Given the central focus on the importance of globalization in the financial and economic sphere for private law, attention will undoubtedly also be paid to a few areas that are crucially related to the financial and economic sector. In this respect one can think of the importance of world trade law and more particularly the way in which this affects the trade–environment dispute, but also on regulations concerning corporate social responsibility (CSR).

10

5


CENTRAL FOCUS

It may be clear that dealing at length with these ten topics would require ten books rather than one. This collection of chapters can hence do no more than touch upon these issues in the hope of contributing to the research agenda in this domain. It was suggested to the contributors that under the broad heading of ‘the influence of globalization on private lawmaking’ a few central issues play a role: 1.

2.

3.

6

It is a financially and economically unavoidable fact that the shape and the scope of private law have changed and are still changing under the pressure of globalization. This influence is combined with institutional changes such as the increasing influence of norms of a higher level (like human rights) that also shape private legal relationships. Private law seeks remedies to both challenges by looking for new institutional structures at different levels (multi-level governance), but to some extent also outside the traditional legal arena (for example, through selfregulation).

STRUCTURE OF THIS BOOK

In order to provide structure to the contributions the book is divided into parts. Part I deals with general problems concerning globalization, democracy and accountability. It contains a contribution by Jan Smits on a functional approach to democracy and (European) private law (Chapter 1) and a chapter by Deirdre Curtin on public accountability of transnational rule making: a view from the European Union and beyond. Part II deals with the debate between harmonization and differentiation or, in institutional terms, between centralization and decentralization. Chapter 3, written by Roger Van den Bergh, deals with private law in a globalizing world and provides economic criteria for choosing the optimal regulatory level in a multi-level government system. Chapter 4, by Sieg Eiselen, deals with globalization and harmonization of international trade law. Part III contains contributions related to public law issues. Chapter 5, by Frits Stroink, addresses the relation between private law and administrative law in view of globalization. In Chapter 6, Lourens du Plessis analyses the effect of transnational contextualization in the sphere of constitutional interpretation. Chapter 7, by Geo Quinot, deals with globalization, state commercial activity and the transformation of administrative law. Part IV deals with the effects of globalization on corporate governance.


11

Bas Steins Bisschop addresses the role of globalization in the resolution of the credit crisis in Chapter 8. Chapter 9, by Philip Sutherland, addresses globalization and corporate law. Part V focuses on procedural issues and consists of Chapter 10, by C.H. van Rhee, on civil procedure in a globalizing world. Part VI focuses on human rights and environmental issues. Chapter 11, by Siewert Lindenbergh, deals with fundamental rights in private law and asks whether these are anchors or goals in a globalizing legal order. Chapter 12, by Michael Faure, addresses globalization and multi-level governance of environmental standards; while Jaap Spier asks whether there are particular obstacles for shaping the law to meet the demands of a civilized society, particularly in relation to climate change (Chapter 13). Part VII consists of Chapter 14, which contains a set of comparative and concluding remarks by the editors.

7

CONTRIBUTORS

The contributors to this book come, as was made clear, from various universities in Europe and South Africa. Michael Faure, Bas Steins Bisschop, Frits Stroink, C.H. van Rhee, Jan Smits and Jaap Spier are (or at least were, in the case of Jan Smits) connected (full-time or part-time) to Maastricht University. Michael Faure also works at the Erasmus University Rotterdam, as do Siewert Lindenbergh and Roger Van den Bergh. Deirdre Curtin is affiliated to the University of Amsterdam. Lourens du Plessis, Geo Quinot, Philip Sutherland and André van der Walt are all connected to Stellenbosch University in South Africa. Sieg Eiselen is affiliated with the University of South Africa. A complete list of the contributors and their affiliations is provided in the list of contributors in the preliminary pages.

8

ACKNOWLEDGEMENTS

As editors of this book we are grateful to many people who made this project possible. In this respect we refer especially to the two conferences held in December 2007 and December 2008 in Stellenbosch. First of all we would like to thank the Stellenbosch Institute of Advanced Studies (STIAS) for facilitating the December 2007 conference and the University of Stellenbosch Law Faculty and more particularly the Dean, Gerhard Lubbe, for organizing (and financially supporting) the December 2008 conference. As editors we owe special thanks to William Binchy (Trinity College, Dublin), Jacques du Plessis (Stellenbosch) and C.H. van Rhee (Maastricht) for providing excellent

12


summaries and overviews of the presentations and discussion, which provided an excellent basis for our comparative conclusions. We also owe thanks for the administrative support by the Maastricht European Institute for Transnational Legal Research (METRO) and especially to Joke Declercq for editorial assistance in the preparation for the publication of this book. Finally we are truly grateful for the professional cooperation with the people working at Edward Elgar, our publisher, for their assistance in the publication of this book. Texts were finalized in June 2009, and for that reason developments after that date have not been included in this book. Michael Faure André van der Walt

Maastricht/Stellenbosch, June 2009

REFERENCES Faure, M. and J. Neethling (eds) (2003), Aansprakelijkheid, Risico en Onderneming: Europese en Zuid-Afrikaanse Perspectieven, Antwerp: Intersentia. Faure, M. and C.A. Schwarz (eds) (1998), De Strafrechtelijke en Civielrechtelijke Aansprakelijkheid van de Rechtspersoon en Zijn Bestuurders, Antwerp: Intersentia. Seita, A.Y. (1997), ‘Globalization and the Convergence of Values’, Cornell International Law Journal, 30, 429–91. Smits, J.M. (ed.) (2001), The Contribution of Mixed Legal Systems to European Private Law, Antwerp: Intersentia. Van Maanen, G.E. and van der Walt, A. (eds) (1996), Property Law on the Threshold of the 21st Century, Antwerp and Apeldoorn: MAKLU Uitgevers.

PART I

Globalization, democracy and accountability

1. Democracy and (European) private law: a functional approach Jan Smits* 1

INTRODUCTION

The development towards a Common Frame of Reference for European private law1 not only raises questions about what should be the contents of private law rules for the European Union,2 but also challenges our traditional understanding of how rules of private law should come into being. In the European Member States, private law is traditionally ‘made’ in close cooperation between the national legislatures and the courts: it is the result of an intricate decision-making process at the national level (in which legal academia is often also involved3). This is, to varying degrees, true for both civil law and common law jurisdictions. The drafting of the Common Frame of Reference and of other forms of non-State law prompts the question of to what extent these instruments should meet similar requirements as to legitimacy as the national rules in the Member States. The prevailing view seems to be that the rules of the Draft CFR (DCFR) do not meet the requirements of democratic legitimacy necessary in the field of private law. Given that the DCFR was drafted by legal scholars, united in the Study Group on a European Civil Code and in the Research

* Jan Smits is professor of European Private Law and Comparative Law at Tilburg University, The Netherlands (Tilburg Institute of Comparative and Transnational Law) and visiting professor of Comparative Legal Studies at the University of Helsinki, Finland (Center of Excellence on European Law and Polity). This chapter expands on ideas raised in Smits (2008, pp. 49–59). It benefits from discussion at the conference Globalization and Private Law: The Way Forward, Stellenbosch, 18–20 December 2008. Thanks are due to Jennifer Jun for invaluable research assistance. 1 Von Bar et al. (2008). 2 The Draft CFR has already been elaborately discussed from this and other perspectives. See, for example Vaquer (2008); the special issue of the European Review of Contract Law (2008, pp. 223–454) and Cafaggi and Micklitz (2010). 3 Cf. van Caenegem (1987).

15

16


Group on the Existing EC Private Law, the DCFR would, in this respect, be a typical example of Professorenrecht. This is also acknowledged by the drafters, who presented their text as an ‘academic CFR’, a scholarly product that is not politically legitimized and that, at best, could form the basis for a ‘political CFR’ to be drafted by the European Commission. But it is difficult to deny that, in the drafting of the DCFR, many relevant choices were made. In a recent book, Bastiaan van Zelst therefore sketches the following objections against this working method:4 This seems worrying from two different angles. First of all, the scholars that are involved in the drafting of the DCFR lack democratic legitimacy. The group represents neither all of the populations of the Member States, nor their political convictions. Secondly, it is questionable whether professors should be vested with the translation of social-political reality into legislation. In a democratic society, this would seem to principally be the task of the (democratically legitimized) legislature.

Other authors, most of them united in another group, namely the Study Group on Social Justice in European Private Law,5 also hold the view that the Europeanization of private law should take place in a much more democratic way than is the case at present. This would not only be true for the DCFR but for any attempt to create a European private law. These authors are clearly influenced by the Critical Legal Studies view that all law (including private law) is politics.6 In other words, if private law shapes the distribution of wealth in a modern society, creating a future European private law would primarily be a political process. Therefore, the rules of contract law that account for the right balance between the free market and social justice should be determined in a democratic way. Only consulting ‘stakeholders’ and legal practice in drafting new European rules – as the European Commission proposes – is then not enough; instead, the European Parliament and national legislators (including national parliaments) must be involved.7 From a different theoretical perspective, Alain Verbeke recently also argued that the Europeanization process of private law should be ‘re-politicized’.8 This is an important view: if these authors are correct about their ‘democracy thesis’, it means that European private law needs to be ‘made’ in a very different way from how it is now.

4 5

Van Zelst (2008, pp. 244–5). Study Group on Social Justice in European Private Law (2004, pp. 653–74). Also see Hesselink (2004, pp. 675–97); Hesselink (2006, pp. 39–70) and Mattei (2003a, pp. 107–28). 6 Cf. Kennedy (1976, pp. 1685–1778) and Kennedy (2002, pp. 7–28). 7 Cf. Study Group on Social Justice in European Private Law, o.c., p. 669. 8 Verbeke (2008, pp. 395–413) at no. 15.

Democracy and (European) private law

17

In this chapter, I argue that this view (the ‘democracy thesis’) is mistaken. The present Europeanization and globalization processes should radically change our view of how rules (either existing or new ones) in the area of private law are legitimized. My aim is not to reiterate the entire debate about the legitimacy of new modes of governance,9 but to focus directly on rules that seek to regulate the conduct of private parties. It is thus the core of private law, and specifically the law of contract, with which I am concerned. In this area, I argue that there are different (and better) ways of legitimizing private law outside national parliaments. This chapter is structured as follows. Section 2 begins with a more general overview of new types of rule making that, although they evade the democratic decision-making process, are important in regulating the behaviour of individuals and States. This raises the question of to what extent the emergence of these new types of rules poses a problem for the legitimacy of private law. I argue that the problem arises only if we perceive legitimacy in a very restrictive way, limiting it to democratic decision making by national parliaments. Section 3 therefore proposes an alternative approach, a functional one, in which the concept of democracy is deconstructed into various building blocks. This more general theoretical framework should then allow us to assess the Draft CFR in more detail in Section 4. Section 5 sums up the main argument.

2

LAW WITHOUT A STATE: A PROBLEM OF DEMOCRACY?

The drafting of legal rules by academics for the future application of these rules by private parties or States – as in the case of the Draft CFR – is only one example of so-called ‘private global norm-production’.10 Over the last decades, an increasing number of rules and policies were developed beyond the nation-state.11 Apart from the European Union, which has its own procedures for legitimizing the rules it produces, important policy decisions are made by organizations such as the WTO, IMF and World Bank. In the area of private law, the age-old example of the lex mercatoria12 is now supposedly

9

Cf. for example Curtin and Wessel (2005) and Eberlein and Kerver (2004, pp. 121–42) at p. 121. 10 See for this term Teubner (1997, pp. 149–69) at p. 157. 11 For an elaboration of the idea of private law beyond the nation state, see Michaels and Jansen (2006, pp. 843–90); Jansen and Michaels (2007, pp. 345–97) and the special issue of the American Journal of Comparative Law (2008, pp. 527–844). 12 Cf. recently Piergiovanni (2005).

18


supplemented by the lex laboris internationalis13 and the lex sportiva internationalis.14 In addition to this, types of voluntary law,15 such as norms adopted by corporate networks (the most important example being codes of conduct for corporate social or environmental responsibility), rules of standardization organizations for technical standards (such as the codex alimentarius) and other types of self-regulation16 are also supposed to influence the conduct of private parties. Most of these authoritative rules, norms and policies from ‘sites of governance beyond the nation-state’17 would not count as binding law in a traditional conception of legal rules: they do not meet the formal criterion of being enacted by the relevant authorities. But they often do set the norms for specific groups of people and are important in predicting their behaviour. One can argue that, as the legitimacy of law was found in the laws of nature in the seventeenth and eighteenth centuries and in democratic political legislation in the nineteenth and twentieth centuries, it is now again time to find a new source of legitimacy for legal rules.18 It is clear that such a new source of legitimacy cannot be found in the authority of the State. Not only is the authority of the norms that were just described not dependent on the State, their authority is also no longer exercised within clearly defined territorial entities; instead, the relevant rules are often chosen and applied across existing borders.19 Issues that were previously within the domain of democratic decision making at the national level have thus shifted to the international level. If we accept that this type of lawmaking beyond the national State is becoming more and more important, what does this mean for the democratic legitimacy of the rules created in this process? In a recent article, Grainne de Burca distinguishes several approaches in understanding the relationship between democracy and transnational law.20 If legitimacy is a legal concept that cannot be replaced by efficiency or expertise (meaning: public power exercised outside the authority of the State should not escape the expectation of democratic legitimation21), the best approach is one that tries to find alternatives for democracy. The democratic ideal should then be pursued in forms other than through the national parliament. With the multiplication of legal

13 14 15 16 17 18 19 20 21

Cf. the contributions in Craig and Lynk (2006). See F. Latty (2007) and Foster (2003, pp. 1–18). See for this term Slaughter (1995, pp. 503–38) at p. 518. See Cafaggi (2006) and Schiek (2007, pp. 443–66). De Burca (2008, pp. 101–58) at p. 104. Cf. Teubner, o.c., (1997) at p. 157. Delbrück (2003, pp. 29–43) at p. 29. De Burca, o.c., (2008) at p. 117. Id., at p. 113.


19

sources, the need for such a rethinking of democracy is very clear.22 The opposing view – now that there is no transnational demos and electorate, democracy at another level than the national one is impossible23 – cannot be accepted. The important insight to be derived from this is that (private) law does not necessarily have to find its legitimacy in the decisions of national parliaments.24 Such a view would regard legitimacy in a very restrictive way. It is true that, since the eighteenth century, democracy has been closely associated with the State, but this need not be the case. The idea of democracy was present long before the nation-state was developed,25 and now that we accept law that transcends the boundaries of a territory and a people, we need to again dissociate democracy from the State. The question therefore is how to change our conception of law, very much based on the nation-state experience, so as to meet the different conditions of global governance.26 The importance of such a venture is paramount because, as one author puts it: ‘Democracy will be possible beyond the nation-state – or democracy will cease to be possible at all.’27

3

DECONSTRUCTING DEMOCRACY

The approach followed in this section is one in which the concept of democracy is deconstructed into various building blocks. If we are able to define the functions of democracy, it is possible to establish whether these functions can also be fulfilled in another way in the area of European (or even global) lawmaking. It is clear that finding such substitutes for the democratic legitimacy of law is only possible when we stop thinking in terms of national States or parliaments. Instead, the legitimacy of law should be found in other factors. It is also important to realize that our concern is not with all aspects of democracy or of tasks of national parliaments: as indicated above, this chapter only deals with the lawmaking process, in particular in the area of private law. Having said that, this section first suggests that it is not democracy that is at 22 Also see Weiler, quoted by de Burca, o.c., (2008) at p. 105: ‘What is required is … a rethinking of the very building blocks of democracy to see how these may or may not be employed in an international system which is neither State nor Nation.’ Reference is sometimes made to the need for a ‘cosmopolitan democratic theory’. 23 See Dahl (1999, pp. 19–36) and Dahl (1998). 24 See for this debate also Michaels and Jansen, o.c., (2006) at p. 879, criticized by Rödl (2008, pp. 743–67) at p. 751. 25 Dunn (2005). 26 See Habermas (2001a) at p. 58. 27 Pelinka (2003).

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stake when drafting law, but rather the legitimacy of the rules in question. Second, it is argued that such legitimacy can be found in three different factors. It should first be acknowledged that it is difficult to use the term democracy for something that is not related to representative government. The present connotation of the word refers so much to parliamentary representation that it can be confusing to use it for mechanisms that are equal to democratic decision making at other levels than the State. This is one of the reasons why Rubin suggests that we should abandon the term in political analysis.28 It seems better to use the word legitimacy instead, even though this term does not have a fixed meaning.29 The legitimacy of a rule could refer to the political procedures used to put that rule into place, but also to its moral contents or acceptance. In my view, it is this latter meaning that is most important: the legitimacy of a rule refers to the perception that it is the most desirable or proper rule to be adopted in the given circumstances.30 This makes legitimacy dependent not only on the acceptability of those being affected by the rule but also on the acceptance by society in general or by the academic forum.31 It still leaves open the question of which criteria are decisive for this legitimacy to exist. Political science tells us that democracy fulfils three different functions: participation, accountability and transparency.32 Participation at the national level traditionally consists of the parliamentary representation of everyone in everything. However, when the polity is no longer defined along territorial lines or on the basis of a people – as is the case with the type of rules discussed here – such participation can no longer be based on State institutions. With the transnationalization of law, the more effective forms of participation are likely to be based on groups, creating new political communities along functional lines.33 Accountability can be defined as the principle that one is responsible for one’s conduct vis-à-vis another person or organization. Such responsibility

28 29 30

Rubin (2001, pp. 711–92). Cf. Delbrück (2003, pp. 29–43). Cf. Scott (2001): ‘a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.’ Also see Black (2008). 31 In the definition of Scott (2001), it is only the perception of the governed that is important. 32 Cf. Kingsbury et al. (2005, pp. 15–61). 33 Cf. Delbrück, o.c., (2003) at p. 38: ‘functional authorities of varying geographical scope run by individuals selected by lot from among those with a material interest in the issue in question’. Also see de Burca, o.c., (2008) at p. 123 and Hirst (1994) at p. 19: affairs of society should as much as possible be managed by voluntary and democratically self-governing associations as these have more information than central bureaucracies.


21

usually includes the obligation to inform that person or organization about one’s past or future actions, to justify them and to be held responsible in case of misconduct.34 Accountability is thus primarily an ‘ex post governance mechanism’. Traditionally, accountability at the national level is an electoral one: officeholders have to account to those who are entitled to vote for their election. If their performance is insufficient, they will not be re-elected. But this is not a very precise or efficient accountability mechanism: voters do not provide reasons for their votes and can be motivated by many other factors than the standards one wants the office-holders to meet. There are many other types of accountability one can think of,35 including fiscal accountability (through audit regimes), legal accountability (the account-holder is held liable for a violation of a standard), hierarchical accountability (of employees vis-àvis their superiors) and accountability through the market (the satisfaction of those affected by a policy decides its success). Transparency, finally, refers to decision making that is open to the gaze of others (does not take place behind closed doors) and that is based on freely available information. As a political norm, however, transparency is rather vague:36 it does not make clear who these others are and which information exactly is to be shared with them. Surely, there can be no complete access to government information for everyone and for everything. This makes it important to ask why we actually need transparency. In any democratic theory, the need for openness of government follows from the fact that people can only on the basis of such a theory make a well-informed, rational choice of the government by which to be governed. It also facilitates the public debate crucial in a democratic society and a prerequisite for holding government officials accountable.37 Again, this presumes that the transparency requirement is directed towards the public at large. Another approach is to apply the transparency requirement to the group of people most affected by the rules in question. If an important condition for a democracy to be successful is the quality of the deliberation,38 it may well be that informed deliberation among specialists leads to greater legitimacy than a general debate among non-specialists.

34 35

Cf. Schedler (1999a, pp. 13–28). See, for example, the overview, with many references, by Garn (2001, pp. 571–99) at p. 578. 36 This is the point made by Fenster (2006, pp. 885–949) at p. 889. 37 See for all these aspects Fenster, o.c., (2006, pp. 895 ff.), with reference to James Madison’s statement that ‘[a] popular Government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or, perhaps both.’ 38 Deliberative democracy emphasizes the importance of a free, rational, debate among citizens, however difficult this may be in practice. The obvious references are to Rawls (1993) and to Habermas (1992).

22


If we accept these factors as the building blocks of democracy, we have a tool to deal with legitimacy at the transnational level. One important advantage of this approach is to recognize that these criteria can be met to a greater or to a lesser extent. Often, we do not need the full participation of everyone when dealing with certain issues. Likewise, accountability and transparency are also gradual concepts.39 The exact levels of participation, accountability and transparency to meet the legitimacy requirement can thus be made dependent on several factors.40 One factor concerns the type of rules: rules of a more technical nature require less ‘democratic’ legitimacy than rules about issues that are already highly politicized.41 Thus, legitimacy can lie in the merits of the decision-makers (such as their ability to give independent expertise42). Another factor concerns the level of harmonization: minimum harmonization may need less legitimacy than full harmonization. It should be emphasized that this approach also works in the other direction: rules that did pass through the national democratic decision-making process may not meet the requirements of legitimacy as just defined.43 The mere fact that a democratic process took place is then not enough to conclude that a rule is sufficiently legitimate.44

4

THE LEGITIMACY OF THE DRAFT CFR

With the framework provided in the previous section, we are now able to turn back to the Draft Common Frame of Reference for European private law. Are Van Zelst and others right in claiming that private law should come about in a democratic process with the involvement of national parliaments (the ‘democracy thesis’) or is there another way to legitimate the rules of the DCFR? In this section, I provide three arguments as to why (European) private law may not need a democratic basis in the traditional sense because it can secure the three building blocks of democracy in another way. After a discussion about accountability (A) and participation (B), the section on transparency (C) reveals that the nature of private law partly stands in the way of considering it as an area subordinate to policy making. 39 De Burca, o.c., (2008) at p. 107 claims that we need to have ‘the fullest possible participation and representation of those affected.’ 40 See Héritier (1999, pp. 269–82) at p. 270. 41 See, for example, Fischer (1990). 42 De Burca, o.c., (2008) at p. 122. 43 There is no need to refer to the extensive literature on public choice. Instead of all, see Farber and Frickey (1991). 44 Democratically made deficient legislation can lead to people questioning the usefulness of democracy as a whole. See Goldring (1996).


4.1

23

Accountability: Legitimacy through Jurisdictional Competition

In the brief characterization of accountability provided above, it became clear that the core of the concept consists of a relationship between the relevant actors and a forum and that such a relationship can be established in different ways. If the rule-maker cannot be held responsible in the traditional way (by being voted away), what could be an alternative? Without claiming this is the only possible way of enhancing the legitimacy of transnational rules,45 I believe that market accountability can be much more important in legitimating law than is usually assumed. This is in particular true in those areas of law that contain many non-mandatory rules, such as the law of contract. If market accountability in, for example, schools means that good schools attract students whereas bad schools are held accountable by students that leave, a similar mechanism can operate in the fields of facilitative law. This view is, of course, not new. The theory of jurisdictional competition, as developed by Charles Tiebout,46 emphasizes that when parties have the freedom of choice as to the applicable legal regime (as is the case in large parts of contract law) they will choose the regime they like best. Such jurisdictional competition is an alternative to allocating local public goods in a political decision process: the preferences of citizens can be established by allowing the citizens to choose a particular legal regime, even without these citizens moving physically. There are limits to establishing preferences by jurisdictional competition.47 The most important limit arises when law is regarded as mandatory by the State. It is difficult to imagine that such mandatory national law would be set by an authority beside the national lawmaker because this concerns the fundamental social contract between the governed and the government.48 But when designing the structure of relationships between economic entities, primarily driven by market efficiency, it is not clear why it is the State that should guarantee a democratic process.49 But even if this restriction is accepted, jurisdictional competition remains an important alternative to centralist lawmaking in the area of contract law (the backbone of the DCFR). This does mean, however, that we have to abandon the idea that there is only one legitimate group responsible for lawmaking. Too

45 One other way of enhancing accountability is to label and rate types of selfregulation or even of contracts: see Ben-Shahar (2008). 46 Tiebout (1956, pp. 416–24). Also see Ogus (1999, pp. 405–18). 47 See in more detail, also on the question of ‘voice’ and ‘exit’, Smits (2008, pp. 49 ff.). 48 Thus Hadfield and Talley (2006, pp. 414–41) at p. 415. 49 Cf. Hadfield and Talley, o.c., (2006) at p. 415.

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often, only nation-states are seen as legitimate democratic lawmakers. But in an increasingly globalizing and interconnected world, there is no necessary relationship between the nation-state and the legitimacy of law. The number of legal regimes need not be the same as the number of nation-states.50 Consequently, multiple, overlapping authorities may come to coexist, with individuals primarily choosing their own authority.51 Particularly in the context of the Common Frame of Reference, we should be aware that choice is essential for its proper functioning. The DCFR provides definitions of legal terms, fundamental principles and model rules and can be used as a ‘toolbox’52 by the European legislator, as a source of inspiration for the ECJ and national courts, and as an optional code for contracting parties that want to make the CFR the law applicable to their contract. All these functions imply that the DCFR is only applicable if the relevant actors prefer it over national law. If the DCFR is not made applicable by the contracting parties or is not used as a source of inspiration by legislators or courts, the drafters are held accountable for the lack of success of this particular legal regime. 4.2

Participation: The Experience with Optional Instruments

It was seen above53 that the legitimacy of rules does not necessarily have to be based on the participation of everyone in everything. The adherents of the ‘democracy thesis’ set out in Section 1 seem to suggest the opposite: since all law is politics, changing the law requires a political decision by a parliament that should be involved in both the drafting and the adoption of the rules. This is a rather traditional view of democratic input and one that is clearly contradicted by our experience with the drafting of civil codes. First, even mandatory national civil codes were often drafted without much input from parliaments. It is true that the final decision about the enactment of a code is taken by national parliaments (and when it would come to the introduction of a binding European Civil Code, this should also be the case), but in drafting the code the relevant decisions are usually made by the drafters themselves.54 This makes sense because of the often highly detailed and technical questions involved in the drafting process. Only when it comes to politically

50 51 52

Cf. Fischer-Lescano and Teubner (2003–04, pp. 999–1046). Cf. Tarrow (1998) and Héritier, o.c. (1999) at p. 276. European Commission, Communication on European Contract Law and the revision of the Acquis: the Way Forward, COM (2004) 651 final, O.J. 2005 C14/6, p. 14. 53 Section 3. 54 Also see van den Berg (2007).


25

sensitive issues (such as the establishment of the proper level of consumer protection), parliaments should be involved. An important exception to this working method was the procedure followed in the establishment of the new Dutch Civil Code. Immediately after the start of the drafting process in 1947, a list of questions about key issues was presented to the Dutch parliament.55 However, insofar as these questions involved matters of the Code’s structure and other typically scholarly issues, I do not see how any parliamentary input can be helpful. For instance, the question of whether a general action for unjust enrichment should be part of the Code56 is not a question to be decided by parliament. Second, it should be re-emphasized that present efforts to Europeanize private law – and in particular the work on the DCFR – will not lead to rules that are binding in the same way as we are familiar with at the national level. If the DCFR is primarily a source of inspiration for the European legislator and the courts (or if it is at most an optional contract code), its legitimacy need not be found in the traditional democratic decision-making process. This is confirmed by the success of various optional instruments that came into place without any input of parliaments in the drafting stage. Instead, the input consisted of a parliamentary decision to adopt an already existing instrument drafted by legal experts. The two most important examples of such instruments are the American Uniform Commercial Code (UCC) and the United Nations Convention on the International Sale of Goods (CISG). In these two cases, the only ‘democratic’ input consisted of individual American state parliaments (in the case of the UCC) and of national parliaments (in the case of the CISG) adopting an already existing instrument. These experiences indicate that parliaments may not necessarily be involved in the drafting of a successful code. 4.3

Private Law: Design or Organism?

The third building block of democracy relates to the requirement of transparency. If it is applied to rule making in the field of private law, it is my view that, in particular, the quality of the deliberation is important: we have seen before that informed deliberation among specialists may lead to greater legitimacy than a general debate among non-specialists. When it is applied to private law, what comes closest to the transparency requirement is that new statutes and case law are assessed on the basis of the already existing coherent

55 56

See in more detail Hesselink (2006, pp. 39 ff). This was a question that had in fact to be answered by the Dutch parliament.

26


system, which provides us with the criteria to assess to what extent the new rules fit into the existing normative order.57 At the same time, however, we should be cautious in applying the requirement of transparency to the field of private law as if this is just another policy field. The reason for this relates to a more general understanding of private law. It would only be necessary to render private law completely subordinate to democratic decision making if it is a means to a (political) end.58 The question is whether this view of private law as a matter of conscious design by some legislator is in line with the nature of the field. Most of the time, private law is seen as independent from State institutions, having a rationality of its own.59 The private law system has developed over the ages in a long process of trial and error.60 The spontaneous development towards the standards that a community prefers provides this area of law with a rationality of its own which is independent from most public aims.61 If we thus understand private law more as an organism than as a product of explicit design, it becomes clear why democratic input in this area of law can only have a limited impact. The Machbarkeit (‘makeability’) of the law of contracts, tort and property is limited, and the view that private law is an instrument with which to change the existing distribution of power and riches62 should be regarded with suspicion. This would mean that private law serves distributive justice, a view defended before by Anthony Kronman.63 The most important objection against this position is that distributive justice requires a political decision to choose, out of all possible distributions of wealth, one that best establishes the desired collective social, economic or political goal. If private law is thus made part of establishing distributive justice, it is made subordinate to this goal; if this goal is not reached, private law fails. In my view, however, it is not the State that is to decide ex ante what a just private law requires. At best, the result can be corrected ex post.64 Moreover, the redistribution of welfare through (in particular) contract law is

57 This can be argued for from different theoretical perspectives. See, for example, Weinrib (1995) and Dworkin (1985). 58 Cf. Tamanaha (2006). 59 See, for example, Weinrib (1995); cf. for a general framework, see Jansen (forthcoming, 2009). 60 This is not to deny there are differences between civil law and common law, though not as profound as suggested by, for example, Glaeser and Shleifer (2001, pp. 1193–1229). 61 Cf. Hayek (1973–79). 62 Cf. Study Group on Social Justice in European Private Law, o.c., (2004, pp. 653 ff). 63 Kronman (1980, pp. 472–511). 64 Cf. Weinrib, o.c., (1995), pp. 211 ff.


27

doomed to fail because future contracting parties are not likely to contract with ‘weaker’ parties if they would run the risk of avoidance of their contract. This is also the message of Charles Fried:65 Redistribution is not a burden to be borne in a random, ad hoc way by those who happen to cross paths with persons poorer than themselves. Such a conception, heart-warmingly spontaneous though it may be, would in the end undermine our ability to plan and to live our lives as we choose.

The above does not imply that democratic input is never useful; it does imply, however, that the degree of legitimacy is dependent on the type of law being put into place. Facilitative law needs less legitimacy than mandatory law. Put otherwise: (national) democratic input is useful in the case of interventionist law (such as consumer protection and employment law) because preferences as to the level of intervention differ between countries. In facilitative law, preferences are better revealed by jurisdictional competition.66

5

CONCLUSIONS

The main argument of this chapter is that ‘democratic’ legitimacy does not have to come about through territorial entities such as national parliaments. There are other methods of legitimating law; which method is best depends on a range of factors such as the type of rules and the level of harmonization. In the case of the Draft CFR, it is important to realize that it is at most a source of inspiration for (European and national) legislators and courts and an optional code to be chosen by contracting parties if they believe it serves their interests better than national law. This optional character of the DCFR must mean something for its legitimacy. It is primarily the participation of the mentioned actors that decides on the actual legitimacy of the non-binding DCFR. This does not exclude that parliaments can still play a role – for example, by ex post accepting ‘public acts characterized by expertise and rationality’67 – but it is different from the role they have to play in setting mandatory rules. The approach set out in this chapter opens the possibility to investigate whether the new types of law described in Section 2 meet the necessary requirements of legitimacy. The mere fact that these types of law are often set at the European or global level and do not pass through national parliaments

65 66 67

Fried (1981) at p. 106. Garoupa and Ogus (2006, pp. 339–63) at pp. 341–42. See Delbrück, o.c., (2003) at p. 40.

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is, as such, not relevant in assessing their merits. What is relevant is to what extent they meet the requirements of participation, accountability and transparency. This differentiated approach, in which each new type of rules is assessed on the basis of these factors, was applied here to the case of the DCFR. It shows that the ‘democracy thesis’ cannot be accepted: new forms of private law require new forms of legitimacy.

REFERENCES American Journal of Comparative Law (2008), 56, pp. 257–844. Ben-Shahar, O. (2008), ‘The Myth of the “Opportunity to Read” in Contract Law’, University of Chicago Law & Economics Olin Working Paper, 415. Black, J. (2008), ‘Constructing and Contesting Legitimacy and Accountability in Polycentric Regulatory Regimes’, LSE Legal Studies Working Paper, 2. Cafaggi, F. (2006), Reframing Self-Regulation in European Private Law, The Hague: Kluwer Law International. Cafaggi, F. and H. Micklitz (2010), European Private Law after the Common Frame of Reference, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Craig, J.D.R. and S.M. Lynk (eds) (2006), Globalization and the Future of Labour Law, Cambridge: Cambridge University Press. Curtin, D. and R.A. Wessel (2005), Good Governance and the European Union, Antwerp: Intersentia. Dahl, R. (1998), On Democracy, New Haven and London: Yale University Press. Dahl, R. (1999), ‘Can International Organizations be Democratic? A Skeptic’s View’, in I. Shapiro and C. Hacker-Cordon (eds), Democracy’s Edges, Cambridge: Cambridge University Press, pp. 19–36. De Burca, G. (2008), ‘Developing Democracy beyond the State’, Columbia Journal of Transnational Law, pp. 101–58. Delbrück, J. (2003), ‘Exercising Public Authority beyond the State: Transnational Democracy and/or Alternative Legitimation Strategies?’, Indiana Journal of Global Legal Studies, 10, pp. 29–43. Dunn, J. (2005), Democracy: A History, New York: Atlantic Press. Dworkin, R. (1985), Law’s Empire, Cambridge: Harvard University Press. Eberlein, B. and D. Kerver (2004), ‘New Governance in the European Union’, Journal of Common Market Studies, 42, pp. 121–42. European Commission (2005), Communication on European Contract Law and the Revision of the Acquis: The Way Forward, COM (2004) 651 final, Official Journal, C 14/6, p. 14. European Review of Contract Law (2008), 4 (3), pp. 223–454. Farber, D.A. and P.P. Frickey (1991), Law and Public Choice: A Critical Introduction, Chicago: University of Chicago Press. Faure, M. and F. Stephen (eds) (2008), Essays in the Law and Economics of Regulation in Honour of Anthony Ogus, Oxford: Intersentia. Fenster, M. (2006), ‘The Opacity of Transparency’, Iowa Law Review, 91, pp. 885–949. Fischer, F. (1990), Technocracy and the Politics of Expertise, London: Sage. Fischer-Lescano, A. and G. Teubner (2003–04), ‘Regime-Collisions: The Vain Search


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for Legal Unity in the Fragmentation of Global Law’, Michigan Journal of International Law, 25, pp. 999–1046. Foster, K. (2003), ‘Is There a Global Sports Law?’, Entertainment and Sports Law Journal, 2, pp. 1–18. Fried, C. (1981), Contract as Promise: A Theory of Contractual Obligation, Cambridge: Harvard University Press. Garn, G. (2001), ‘Moving from Bureaucratic to Market Accountability: The Problem of Imperfect Information’, Educational Administration Quarterly, 37, pp. 571–99. Garoupa, N. and A. Ogus (2006), ‘A Strategic Interpretation of Legal Transplants’, Journal of Legal Studies, 35, pp. 339–63. Glaeser, E.L. and A. Schleifer (2001), ‘Legal Origins’, Quarterly Journal of Economics, 117, pp. 1193–229. Goldring, J. (1996), ‘Consumer Protection, the Nation-State, Law, Globalization, and Democracy’, Journal of Computer-Mediated Communication, 2 (2). Habermas, J. (1992), Faktizität und Geltung, Frankfurt am Main: Suhrkamp. Habermas, J. (2001a), ‘The Postnational Constellation and the Future of Democracy’, in J. Habermas, The Postnational Constellation: Political Essays, Cambridge: Polity Press, pp. 58–112. Habermas, J. (2001b), The Postnational Constellation: Political Essays, Cambridge: Polity Press. Hadfield, G. and E. Talley (2006), ‘On Public versus Private Provision of Corporate Law’, Journal of Law, Economics and Organization, 22, pp. 414–41. Hayek, F.A. (1973–79), Law, Legislation and Liberty, London: Routledge. Héritier, A. (1999), ‘Elements of Democratic Legitimation in Europe: An Alternative Perspective’, Journal of European Public Policy, 6, pp. 269–82. Hesselink, M.W. (2004), ‘The Politics of a European Civil Code’, European Law Journal, 10, pp. 675–97. Hesselink, M.W. (2006), ‘The Ideal of Codification and the Dynamics of Europeanization: The Dutch Experience’, in S. Vogenauer and S. Weatherill (eds), The Harmonization of European Contract Law, Oxford: Oxford University Press, pp. 39–70. Hirst, P. (1994), Associative Democracy: New Forms of Economic and Social Governance, Amherst: University of Massachusetts Press. Jansen, N. (forthcoming, 2010), ‘The Authority of the DCFR’, in W. Micklitz and F. Cafaggi (eds), European Private Law after the Common Frame of Reference, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Jansen, N. and R. Michaels (2007), ‘Private Law and the State’, Rabels Zeitschrift, 71, pp. 345–97. Kennedy, D. (1976), ‘Form and Substance in Private Law Adjudication’, Harvard Law Review, 89, pp. 1685–778. Kennedy, D. (2002), ‘The Political Stakes in “Merely Technical” Issues of Contract Law’, European Review of Private Law, 10, pp. 7–28. Kingsbury, B. et al. (2005), ‘The Emergence of Global Administrative Law’, Law and Contemporary Problems, 68, pp. 15–61. Kronman, A. (1980), ‘Contract Law and Distributive Justice’, Yale Law Journal, 89, pp. 472–511. Latty, F. (2007), La ‘Lex Sportiva’: Recherche sur le Droit Transnational, Leiden: Martinus Nijhoff. Mattei, U. (2003a), ‘Hard Code Now! A Critique and a Plea for Responsibility in the

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European Debate over Codification’, in U. Mattei (ed.), The European Codification Process: Cut and Paste, The Hague: Kluwer Law International, pp. 107–28. Mattei, U. (ed.) (2003b), The European Codification Process: Cut and Paste, The Hague: Kluwer Law International. Michaels, R. and N. Jansen (2006), ‘Private Law beyond the State? Europeanization, Globalization, Privatization’, American Journal of Comparative Law, 54, pp. 843–90. Micklitz, W. and F. Cafaggi (eds) (forthcoming, 2010), European Private Law after the Common Frame of Reference, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Ogus, A. (1999), ‘Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law’, International and Comparative Law Quarterly, 48, pp. 405–18. Pelinka, A. (2003), ‘Democracy beyond the State: On the (Im-)Possibilities of Transnational Democracy’, Trans: Internet-Zeitschrift für Kulturwissenschaften, 15. Piergiovanni, V. (ed.) (2005), From Lex Mercatoria to Commercial Law, Berlin: Duncker & Humblot. Rawls, J. (1993), Political Liberalism, New York: Columbia University Press. Rödl, F. (2008), ‘Private Law beyond the Democratic Order? On the Legitimatory Problem of Private Law “Beyond the State”’, American Journal of Comparative Law, 56, pp. 743–67. Rubin, E.L. (2001), ‘Getting Past Democracy’, University of Pennsylvania Law Review, 149, pp. 711–92. Schedler, A. (1999a), ‘Conceptualizing Accountability’, in A. Schedler et al. (eds), The Self-Restraining State: Power and Accountability in New Democracies, London: Lynne Rienner Publishers, pp. 13–28. Schedler, A. et al. (eds) (1999b), The Self-Restraining State: Power and Accountability in New Democracies, London: Lynne Rienner Publishers. Schiek, D. (2007), ‘Private Rule-Making and European Governance – Issues of Legitimacy’, European Law Review, 32, pp. 443–66. Scott, W.R. (ed.) (2001), Institutions and Organizations, Thousand Oaks: Sage, 2nd edition. Shapiro, I. and C. Hacker-Cordon (eds) (1999), Democracy’s Edges, Cambridge: Cambridge University Press. Slaughter, A.-M. (1995), ‘International Law in a World of Liberal States’, European Journal of International Law, 6, pp. 503–38. Smits, J.M. (2008), ‘European Private Law and Democracy: A Misunderstood Relationship’, in M. Faure and F. Stephen (eds), Essays in the Law and Economics of Regulation in Honour of Anthony Ogus, Oxford: Intersentia, pp. 49–59. Study Group on Social Justice in European Private Law (2004), ‘Social Justice in European Contract Law: A Manifesto’, European Law Journal, 10, pp. 653–74. Tamanaha, B.Z. (2006), Law as a Means to an End, Cambridge: Cambridge University Press. Tarrow, S. (1998), ‘Building a Composite Polity: Popular Contention in the European Union’, Institute for European Studies Working Paper, 98 (3). Teubner, G. (1997), ‘Breaking Frames: The Global Interplay of Legal and Social Systems’, American Journal of Comparative Law, 45, pp.149–69. Tiebout, C. (1956), ‘A Pure Theory of Local Expenditures’, Journal of Political Economy, 64, pp. 416–24.


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Van Caenegem, R.C. (1987), Judges, Legislators and Professors: Chapters in European Legal History, Cambridge: Cambridge University Press. Van den Berg, P.A.J. (2007), The Politics of European Codification, Groningen: Europa Law Publishing. Van Zelst, B. (2008), The Politics of European Sales Law, The Hague: Kluwer Law International, pp. 244–5. Vaquer, A. (ed.) (2008), European Private Law beyond the Common Frame of Reference, Groningen: Europa Law Publishing. Verbeke, A. (2008), ‘Negotiating (in the Shadow of a) European Private Law’, Maastricht Journal of European and Comparative Law, 15, pp. 395–413. Vogenauer, S. and S. Weatherill (eds) (2006), The Harmonization of European Contract Law, Oxford: Oxford University Press. Von Bar, C. et al. (eds) (2008), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference, Interim Outline Edition, Munich: Sellier. Weinrib, E.J. (1995), The Idea of Private Law, Cambridge: Harvard University Press.

2. Public accountability of transnational rule making: a view from the European Union and beyond Deirdre Curtin* 1

INTRODUCTION

Governance beyond the state, in whatever institutional or informal forum it takes place, largely lies beyond the control of national democracies and constitutional structures. The core problem is that outside the confines of the territorial nation states, executives are only to a very limited extent held to account for their actions and inactions. National parliaments in particular have not kept up with what their national executives are doing and not doing. While national parliaments have stayed put within their own neatly nationally fenced off compartments, the executive has developed into a strongly interwoven, complex administrative network, beyond the horizons of many, maybe all national parliaments. The national executive power operates outside of its own national political and constitutional level. It is active and engaged in decision making at the European level and at the international or global level. It has as a matter of practice surmounted thinking in terms of hierarchical levels and may even be considered as engaged in a more fluid and composite governance process.1 This is even more the case for other, private, actors performing public functions at the transnational or European level. It is moreover relevant in this context not only that general rule-making processes may fall outside domestic processes of political accountability but also that there are no countervailing forces, no or little checks and balances at the regional and global levels of governance. This chapter takes as its broad backdrop the growth of governance beyond the state. In particular it highlights the shift of governance that has taken place * Professor of European Law, University of Amsterdam and Professor of European and International Governance, University of Utrecht. This is a revised and expanded version of the paper I presented at the University of Stellenbosch, 12 December 2008. 1 Besselink (2007).

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Public accountability of transnational rule making

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across legal and political systems and the fact that a wide variety of groups, organizations and networks are making authoritative rules and policies outside the democratic and constitutional confines of the state.2 Governance – as opposed to government – covers, among other things, policy coordination between public and private actors, often across multiple levels of government and through formal and informal networks of actors. Whereas ‘government’ is traditionally understood as involving a distinction between who is governing (the government as executive power) and who is being governed (the citizen), ‘governance’ at the very least blurs that distinction. There is a significant erosion of the boundaries separating what lies inside a government and its administration and what lies outside them.3 This contribution was originally written at the request of the organizers of the final conference in Stellenbosch in December 2008 with a view to initiating a broader debate among private lawyers on the relevance of themes of public law, in particular those relating to democracy and accountability, to the manner in which private law or rule making is increasingly taking place in our globalizing world. The purpose of this chapter is threefold. Firstly, to consider the nature of the phenomenon of a shift in governance and in particular its possible relevance to (European) private lawyers. Secondly, to examine how this relates to our existing understandings of democracy in the nation state. Finally, to consider how we might apply more limited conceptualizations of accountability to relatively new shifts in governance beyond the nation state. Can we develop democracy beyond the nation state or should we instead rely on more limited and confined understandings? This chapter offers what might be termed a European Union perspective on these broad themes, drawing many of its examples from the often highly institutionalized context of the European Union. At the same time the argument is made that the debate – and some of the solutions – are of relevance in a much wider global and also informal transnational context.

2

SHIFTS IN TRANSNATIONAL GOVERNANCE: ACTORS, INSTRUMENTS AND LEVELS

2.1

Multi-Level Governance

The use of the term ‘governance’ even by private lawyers is becoming increasingly widespread and accepted.4 It is used to indicate broader phenomena than

2 3 4

See in general Van Kersbergen and Van Waarden (2001). See, too, Shapiro (2001, pp. 369–77). See, for example, Cafaggi and Muir-Watt (2008).

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what traditionally are accepted parts of a legal system as such. It indicates a wider focus than that of the content of substantive rules as such, embracing a link with institutions and institutional design both in a formal sense and more informally. It implies a dynamic process in the sense that new forms of governance are emerging compared with the more traditional governing mechanisms. It also implies a mixing or blurring of boundaries, public and private as well as local, regional, national, transnational and global levels of governance within the respective spheres. Multi-level governance is the term used by some for the different layers and interactions involved in decision making beyond that of the territorial State.5 The point is that the decision-making layers may be multi-level but paradoxically the political and administrative actors are often the same. In other words, national ministers and national civil servants will appear on various political stages – international, European and national – even though they may be playing different roles in each. This also holds true for the non-state actors. At the same time, the multi-level approach may in its focus on separate ‘levels’ be too exclusive and limiting and imply a degree of hierarchy and of verticality that may not be reflected in governance practices. The so-called displacement/diffusion of national, state-based ‘politics’ is one of the crucial contemporary ‘shifts in governance’.6 The adoption of authoritative rules, norms and policies by actors and forms of governance beyond the nation state is an increasingly widespread phenomenon. The ‘who, what and where’ questions are the highly salient issues of who makes the rules in the contemporary world; how, in the sense of what sort of binding or other instruments; and where, at what governance level? 2.2

Actors

The actors basically consist of an extended notion of executive power, political, administrative and beyond to private and non-state actors. In my book on the executive power of the European Union7 I take a broad-brush approach to executive power: it is residual; everything that is not specifically legislative or judicial is ipso facto executive, at least in constitutional terms. Moreover, I also take an inclusive approach: it embraces the political, the administrative and what I term the ‘satellite’ actors, the agencies and the networks of actors. Inherent in notions and practices of governance is law or rule making by actors other than politicians (and judges), namely technocrats (either civil servants or scientific experts of one kind or another) and/or private actors. It covers 5 6 7

See, for example, Hooghe and Marks (2003, pp. 233–43). Kohler-Koch (2003). Curtin (2009).


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legally structured arrangements as well as less formal arrangements and the norms emerging within them. What are the links of private actors with more public actors? Do they operate in ‘the shadow of’ the political level or ‘government’ and what forms does or may that take? The transfer of governmental decision-making authority to outside actors occurs along a continuum. Thus, at one end of the spectrum it covers very loose coordination processes involving stakeholders and other non-governmental actors. But at the other end it covers actors that are associated much more closely with the core political actors, either at the national level or at the international or supranational level. Two kinds of non-state actors are particularly relevant in this context: experts and networks of actors. Experts are largely private actors who deliver knowledge and information in rule- and lawmaking processes. Their participation is often justified in terms of what is called ‘output legitimacy’ (see below). An institution or process enjoys output legitimacy if the results it delivers meet popular demand and expectations and if its performance is perceived as satisfactory. Experts function as an additional source of legitimacy for policy making, based upon the assumption that scientific knowledge can help to distinguish between what is right and what is wrong.8 Experts often participate in one form or another in various committees at the level of EU governance. One example of committee governance in the area of European private lawmaking is the different advisory bodies and committees that played a role in the process of drafting the Consumer Sales Directive of 25 May 1999.9 After the Commission published the ‘Green Paper on Guarantees for Consumer Goods and After-sales Services’10 a number of advisory bodies and committees came into play to help the drafting and negotiation of this directive. This included advisory opinions by the European Economic and Social Committee (EESC)11 and by the Consumers Committee (currently the European Consumer Consultative Group (ECCG).12 In addition to these two institutionalized advisory bodies in the area of consumer policy, business

8 9

See, further, Benz and Papadopoulos (2006). Directive 99/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees, OJ L171, 1999, pp. 0012–0016. 10 See Green Paper on Guarantees for Consumer Goods and After-sales Services of 15 November 1993, COM (93) 509, OJ C338, 1993; also see Bianca and Grundmann (2002) at p. 23. 11 European Economic and Social Committee, Opinion on the Commission Proposal for a Parliament and Council Directive on the Sale of Consumer Goods and associated Guarantees of 27 November 1996, OJ C66/5, 1997. 12 Commission Decision (2003/709/EC) of 9 October 2003 replaced the Consumer Committee with the European Consumer Consultative Group (ECCG).

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interest groups such as the Union of Industrial and Employers’ Confederations of Europe,13 EuroCommerce and the European Engineering Industries Association (ORGALIME)14 were involved. In later stages of the adoption of the Consumer Sales Directive, the actors on the other side of the continuum, much more closely associated with the core European – and Member State – political actors, are the working committees of the Council of Ministers and the European Parliament. The narrative of the adoption of the Consumer Sales Directive shows the interwoven, networked governance, in the area of private lawmaking in Europe, of private interest groups, non-state actors, and institutionalized advisory bodies that are active both on community and state level.15 The more formal ‘political’ actors may in turn function as a magnet for broader networks. Political scientists argue that no centre of decision making can be located in a network; power is dispersed among more or less autonomous actors, decision making is a negotiating process and ‘government does not have enough power to exert its will on other actors’.16 Lawyers have difficulty in coming to grips with their fluidity and lack of procedures and ‘hard’ (enforceable) results. Yet the expectation is often that network forms of governance will lead to decisions with strong ‘output legitimacy’ because their content is more technically adequate or because they are better accepted by target groups. However, the consequences of network governance for democracy and accountability have long been neglected. The main problems lie in their weak visibility and in the fact that networks tend to be ‘uncoupled’ from the normal democratic circuit.17 Networks may consist of state actors joining together in order to discuss and draw up rules outside any formalized institutional forum. There are for example networks of national regulators with law- or rule-making tasks at the European level. These may be quite institutionalized, such as the role of the Committee of European Securities Regulators (CESR). This is a body composed of national regulators who, thereby, perform a European function, but who are also members of international committees and organizations operative in the field of financial services. The greatly increased role and powers of this Committee operate with significant input from ‘market participants’ 13 This organization in 2007 changed its name to BusinessEurope, The Confederation of European Business. The organization represents Member States’ business federations and dates back to the European Community for Coal and Steel. 14 Orgalime represents the mechanical, electrical, electronic and metalworking industries in 18 European countries. 15 See generally Jansen and Michaels (2008, pp. 527–39); also see Joerges (2004) and Schmid (2002). 16 See further Kickert (1993, p. 275). See also Harlow and Rawlings (2007, pp 542–62). 17 See further Papadopoulos (2007, pp. 469–86).


37

(the Market Participants Consultative Panel) and ‘expert groups’.18 Recently it was proposed to empower CESR with the task of licensing Credit Rating Agencies in the EU and to monitor their performance.19 The International Competition Network (the ICN) is an example of a much more informal type of network with an impact difficult to assess. Its much more institutionalized and legalized EU counterpart is the European Competition Network (the ECN). Other examples may also come from looser coordination processes undertaken within the context of the so-called ‘open method of coordination’.20 In the field of private lawmaking the mixed role of public and private actors is salient. In the field of European private law one finds examples right across the spectrum of law or rule making. Thus we have the adoption of formal EU laws (harmonization directives in one form or another)21 adopted largely by the formal non-state supranational political actors (the Commission, the Council of Ministers and the European Parliament). These will be ‘interpreted’ by the Court of Justice in Luxembourg.22 Private law rules may of course in the EU institutional context be implemented in more detail by so-called ‘comitology’ committees composed largely of national civil servants and scientific experts but acting under the auspices of the European Commission. At the same time, there may be a much more ‘private’ expert input into lawmaking. An example is the work that has been done in drafting a Common Frame of Reference on European Contract Law by a highly specialized ‘expert group’ (consisting largely of law professors from various jurisdictions). In the opinion of some this constitutes an exercise of private lawmaking (behind closed doors) that was intended to be merely ‘rubber-stamped’ by the Commission as supranational public actor. The actors involved in composing

18 19 20 21

http://www.cesr-eu.org/. See De Larosiere et al. (2009), para. 67. See further Sabel and Zeitlin (2008, pp. 271–327). See here for instance the directives that together form the ‘consumer acquis’: Council Directive 85/577/EEC to protect consumers in respect of contracts negotiated away from business premises; Council Directive 90/314/EEC on package travel, package holidays and package tours; Council Directive 93/13/EEC on unfair terms in consumer contracts; Directive 94/47/EC on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis; Directive 97/7/EC on the protection of consumers in respect of distance contracts; Directive 98/67EC on consumer protection in the indication of the prices of products offered to consumers; Directive 98/27/EC on injunctions for the protection of consumers’ interests; Directive 99/44/EC on the sale of consumer goods and associated guarantees. 22 See Smits (2006, pp. 57–104).

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the Draft Common Frame of Reference (hereafter Draft CFR)23 are all legal scholars, combined in two main groups: the Study Group on a European Civil Code (SGECC) and the Research Group on EC Private Law (Acquis Group). The current draft is the result of the work of hundreds of legal scholars from all Member States. The European Commission, however, has primarily funded the project since 2005 as a ‘Network of Excellence’ within the Sixth Framework Programme.24 Interestingly and perhaps quite specific to the character of private law as historically one of the most ‘scientific’ areas of legal scholarship,25 even the internal evaluation of the Draft CFR is carried out by academic fora, notably the Association Henri Capitant des amis de la culture juridique française and the Société de législation comparée, which have already published ‘Principes contractuels communs’ and ‘Terminologie contractuelle commune’.26 Furthermore, the European Parliament, indicating the possible ‘political’ nature of private lawmaking and in particular the current Draft CFR itself, has contracted out the evaluation of the underlying social values of the articles of the DCFR to be assessed by an academic research group.27 This research group was highly involved in the drafting of the DCFR via their participation in the Study Group on a European Civil Code, but at the same time was part of a more critical group of academics that expressed their political concerns about the role of social justice in the process of the activities of the Commission in the area of private law.28 This identity association of experts reveals the enormous influence academic scholars may have in the area of private lawmaking. They may in fact be considered by some to be taking essentially ‘political’ decisions, evaluating and assessing the social values of the rules they themselves have drafted. The ideological divides are debated by academics and the outcome of these debates is then presented to the European Commission or the Parliament.

23 24 25 26 27

Von Bar et al. (2008). Id. See inter alia, Merriman (1969); also see Zweigert and Kotz (1998). See Von Bar et al., supra note 23. See Specific contract no. IP/C/JURI/FWC/2006-211/LOT3/C1/SC2 implementing the framework service contract no. IP/C/JURI/FWC/2006-211/LOT3/C1, on the values underlying the draft common frame of reference: what role for fairness and ‘social justice’? See the study by The Centre for the Study of European Contract Law, University of Amsterdam: Hesselink (2008); PE 408 312 – IP/A/IMCO/ST/2008-11; IP/C/JURI/FWC/2006-211/Lot3/C1/SC2. 28 See the Study Group on Social Justice in European Private Law (2004, pp. 653–74).


2.3

39

Instruments

The second issue relates to the nature of the instruments or measures agreed to or adopted: what is their normativity and what are the implications of the fact that they may be ‘soft’ in legal terms? The term ‘hard law’ is often used to refer to legally binding obligations that are precise (or can be made precise through adjudication or the issuing of implementing regulations) and that delegate authority for interpreting and implementing the law. This would include, for example, at the level of the EU legal order, in any event, formal treaty-based provisions as well as what can be termed ‘secondary legislation’ and delegated and implementing legislation as we have mentioned above. This is not to deny that non-binding rules can be legally significant and form part of the legal order in question. Indeed, private lawyers seem to rather easily accept this proposition. We see that clearly with the emphasis that is placed on codes of conduct, self-regulation, co-regulation, benchmarking and other non-binding measures. The temptation to depart from formal methods of lawmaking has already existed for quite some time and has led to the production of open-ended standards, flexible guidelines and other forms of ‘soft law’ as opposed to formal rules and ‘hard law’. For example, in the discussion of ‘new governance’ in the EU, the concept of ‘soft law’ is often used to describe governance arrangements that operate in place of, or along with, the ‘hard law’ that arises from binding legal instruments for European integration. The main features of this governance mode consist of setting framework goals (1) and indicators (2) to measure achievements of more or less autonomous actors (3) that in return for their autonomy have an obligation to report and whose decisions are open to peer review (4). New governance methods lack features such as obligation, uniformity, justiciability and sanctions and are contrasted, sometimes positively, sometimes negatively, with hard law as an instrument for European integration. The Draft CFR is for example meant to be a tool for making European contract law more coherent.29 It was to serve as a ‘toolbox’ for the revision of the Aqcuis Communautaire, but also should ‘provide for clear definitions and on best solutions found in Member States Legal orders’.30 At one point it was indeed envisaged as the basis for an optional European Code for European contract law. However, the idea of an optional European Civil Code, either only in the area of contract law or more generally, has moved, it seems,

29 See the Commission’s ‘A more Coherent European Contract Law, an Action Plan’, of 12 February 2003, COM (2003) 68. 30 See European Contract Law and the revision of the acquis: the way forward (2004, 651 final) at p. 3.

40


perhaps temporarily, into the background.31 The European Commission has indicated that it aims for a less ambitious revision of eight important directives in the field.32 This would mean that the public and political actors would assume their normal role in this regard and could give rise to fewer legitimacy concerns (see further below). The Draft CFR contains definitions, rules on the consequences of private legal acts, general rules on formation, contractual obligations, specific contracts, general rules on tort liability, unjust enrichment, and so on. And the academic work in this area goes on. The Draft will in the future be the basis for an actual common frame of reference, and is already being used as a toolbox for the revision of the European Consumer acquis.33 Despite the Commission’s reprioritization, then, clearly the European Commission is still investing in this project, especially when taking into account that the Commission has launched an internal selection process with the aim of identifying which parts of the Draft CFR will be integrated into a forthcoming document, such as a Commission White Paper on a Common Frame of Reference. Moreover, the European Parliament has requested to be involved in the selection and identification of articles from the Draft CFR by the Commission, because it feels this will be a ‘highly political exercise’.34 2.4

Levels

The third issue is the question of the level of governance: from beyond the territorial states to either the regional level of governance or the more global level of governance. The shifts in governance and public authority in recent decades away from the territorial state towards different forms and levels of governance, within and beyond the parameters of the traditional nation state, have not been matched by a shift in accountability relationships beyond those applicable within the confines of the territorial state. This results in gaps in the accountability of (public) actors for the exercise of public authority. Though

31 See the Second Progress Report on The Common Frame of Reference, of July 2007 (2007, p. 447). 32 See European Contract Law and the Revision of the Acquis: The Way Forward, of October 11 2004, (2004, p. 651); also see the Green Paper on the Review of the Consumer Acquis, February 2007 (2007, p. 744). 33 See Programme of the Czech Presidency in the Council of the European Union in the Area of Justice and Home Affairs, Council of the European Union (Brussels, 5 February 2009, 6155/09); also see Proposal for a directive of the European Parliament and of the Council on consumer rights, COM(2008) 614 final, 2008/0196 (COD). 34 European Parliament resolution of 3 September 2008 on the common frame of reference for European contract law (P6_TA-PROV(2008)0397).


41

accountability gaps may well have always existed even where public powers were predominantly exercised within the confines of the state, the shift of powers away from the state have made the gaps much more politically salient and acute. It is in response to the shifts in governance and the slow attempts to close gaps in the control over the exercise of public power that scholars have engaged in a much more fundamental and wide-ranging discussion of the potential and limits of the concept of accountability as a (political) mechanism for controlling public power, wherever exercised and in whatever form. Initially, these discussions took place mainly within the disciplines of international relations as well as public administration; in recent years, however, this theoretical debate has started to trickle into the manner in which some international law scholars study the concept of accountability and its application in practice in the international legal order. The next part of this chapter will explore, in a preliminary manner, the relationships between the ‘meta’ themes of any political system, legitimacy and democracy, before explicitly focusing on the more ‘second-order’ theme of accountability and its possible operationalization in practice.

3

APPROACHES TO LEGITIMACY AND DEMOCRACY OF TRANSNATIONAL GOVERNANCE

3.1

Approaches to Understanding Legitimacy in the EU

Within contemporary debates, legitimacy is more often invoked than described and it is more often described than defined. Legitimacy can, in very general terms, be said to represent an umbrella evaluation that, to some extent, transcends specific adverse acts or occurrences; thus legitimacy is resilient to particular events, yet it is dependent on a history of events.35 Over the years, social scientists have offered a number of definitions of legitimacy, with varying degrees of specificity. First, legitimacy may be understood in purely formal (legal) terms in the sense of the manner in which a particular structure of authority was constituted and acts according to accepted legal rules and procedures. Although many political scientists and lawyers focus traditionally on formal legitimacy, some stress the primordial importance of what is termed social (empirical) legitimacy. Social legitimacy refers to the affective loyalty of those who are bound by it, on the basis of a deep common interest and/or a

35

Suchman (1995, pp. 571–610) at p. 574.

42


strong sense of shared identity.36 Social legitimacy will usually have to be created over time simply by the practice, and habit, of doing things together, and there is only so much that can be done to accelerate this process by symbol-building campaigns and communications strategies. It is precisely with regard to social legitimacy that the EU has a long-standing problem – and this is widely recognized, not only by scholars37 but also in the studies done in the context of EU treaty referendum defeats. However democratically legitimate the Member States may be in their own jurisdictions, a sense of social legitimacy will not be created simply by the attribution of rule-making competences to common institutions – although the welfare gains through integration, which should be made possible by the creation of those institutions, can be expected to facilitate it. There are, however, many reasons to expect social legitimacy in particular to be an acute problem for the EU, and to remain so for the foreseeable future. The EU is, in the words of Lord: A new and unfamiliar political system; it has substantial powers to go into the nooks and crannies of member societies; its rules over-ride those made by national institutions; it takes decisions that affect ordinary lives; it demands sacrifices, sometimes with uncertain long-term reward; it takes from some in order to give to others; it affects deeply held values, including basic feelings of identity; and it is a large political system that often seems physically distant to its citizens.38

Should we then really be surprised in this intrusive and uncertain context that citizens feel a sense of alienation of feeling and of understanding from the EU as a whole? With regard to the executive power they can only feel that they do not elect it for the functions it carries out, either at the national level or at the European level, and the deficit of affective loyalty cannot in these circumstances be considered surprising. But they also often do not see it and do not recognize it for what it is (with elements of national executive power interwoven with the EU level). A second way of looking at the legitimacy challenge is through the lens of input legitimacy versus output legitimacy. Output legitimacy means that people agree that a particular structure should exist, and even participate in rule making, because of the benefits it brings. Social acceptance is thus instrumental and conditional, as well as independent of an affective relation. Input legitimacy, on the other hand, means that social acceptance of the structure in question derives from a belief that citizens have a fair chance (however under-

36 37 38

See further Habermas (1979). Weiler (1991, pp. 2525–36). Lord (2000), http://www.one-europe.ac.uk/pdf/P3Lord.PDF.


43

stood) to influence decision making and scrutinize the results. The ability to influence and hold accountable can be realized either through forms of representation which are held to be legitimate or through direct participation which is held to be meaningful, or through some combination of the two. On the whole, the legitimacy of the EU and its decisions has tended to be focused on the output side of the equation39 rather than on the input side. In terms of Lincoln’s famous description of the main elements of democracy, input-oriented legitimacy refers to government by the people, whereas output-oriented legitimacy refers to government for the people. The basis of legitimacy of these different kinds or rather different aspects of democracy is different.40 From the perspective of input-oriented legitimacy, political choices are legitimate if and because they reflect the ‘will of the people’ – that is, if they can be derived from the authentic preferences of the members of a community. The input perspective derives its democratic legitimacy very largely from a pre-existing collective identity. In so far as a collective identity does not exist at the level of the Union, input-oriented legitimacy is out of reach for the EU for the foreseeable future. This can be considered true at the level of democratic representation via a compound system of representative democracy (see below) or via the methods of direct democracy (in particular the use of referendums at crucial decision-making moments). From the perspective of the more modest form of legitimacy – outputoriented legitimacy – political choices are legitimate if and because they effectively promote the common welfare of the constituency in question.41 Government for the people derives its legitimacy from its capacity to tackle problems requiring collective solutions. Identifying collective solutions still presupposes the existence of an identifiable constituency, but what is required is no more than the perception of a range of common interests that is sufficiently broad and stable to justify institutional arrangements for collective action.42 Output-oriented legitimacy is thus interest-based rather than identitybased.43 It is often assumed that input legitimacy is not possible in the context of the EU political system for the major structural reasons (no demos, no collective identity, no European public sphere, and so on). Yet empirically it is noteworthy that there has been movement both in the political (and even treaty reform) debate as well as in practice to introduce elements of a more participatory approach to executive rule making, more grounded in theories of deliberative

39 40 41 42 43

See, in particular, Scharpf (1999) and Majone (1996). See further Thomassen and Schmidt (2004). Scharpf (1999, p. 6). See too Thomassen and Schmidt (2004). Scharpf (1999, pp. 11–12).

44


democracy and input legitimacy than might at first sight be assumed.44 Deliberative democracy is in fact an ideal of political legitimacy. It claims that political decisions are ideally legitimate when they are made through a deliberative procedure, which implies publicly exchanging arguments ‘offered by and to participants who are committed to the values of rationality and impartiality’, and in which all those affected by the decision can take part directly or though their representatives.45 For some years now the perception among some scholars and practitioners has been that the model of deliberative democracy can have a role to play in increasing democratic legitimacy in the EU. In particular, the perspective is that the ‘civil society sphere’ has a potentially significant role to play in widening and expanding the scope of the public debate at the EU level. Kohler-Koch opines, for example, in recent writings that ‘civil society actors can contribute to democratic accountability if their intervention empowers citizens to evaluate executive behaviour, to pass a judgement and to impose consequences’.46 Democratic accountability is used here specifically in the sense of ‘we, the people’ being able ‘to reject one set of office-holders and public policies in favour of another, and to do so in a way that is genuinely effective’.47 3.2

Understanding and Conceptualizing (EU) ‘Democracy’

One possible analysis of the shift in governance is certainly in terms of a democratic challenge at different levels. If we take EU lawmaking as our example, the challenge is to democratize first at the level of the EU political system itself; secondly, at the level of the national political system; and thirdly, at the level of the often intricate interactions between the two. This description already indicates that there is unlikely to be a single solution for Europe’s democratic challenge at any level, since national democracies are not only different but have been affected in critically different ways by ongoing processes of European integration. At the same time, a word of caution is in order. It is dreadfully difficult even in the more specific EU context to agree on a common definition of ‘democracy’ that would cut across strong national democratic traditions both institutionally and in terms of underlying values.48 Indeed there are those who argue that democratic theory itself requires a major revamping if anything approaching transnational democracy (and EU democracy) is to be envisaged in the 44 45 46 47 48

See further, in detail, Mendes (2010). Elster (1998, p. 8). Kohler-Koch (2010, forthcoming). Gustavsson (2009, pp. 35–47) at p. 36. See further the dedicated website http://www.connex-network.org/.


45

contemporary world.49 This latter approach would deny that it is possible to ‘upload’ a conception of national democracy to the EU and/or transnational level. A number of broad strands can be discerned in the existing democratization literature. De Búrca summarizes them well.50 Firstly, there is the denial approach: the claim that there is no democratic deficit with regard to transnational (or even EU) governance; this is ‘myth’, and democracy is adequately provided by the national level.51 Secondly, there is the wishful-thinking approach: that transnational governance can be readily democratized, mainly by using national models of democracy and applying them beyond the state. There is quite a bit of evidence of this approach in institutional reform debates of the EU in particular. Thirdly, what seems to be the dominant approach with regard to wider transnational processes is the argument that democracy can simply not be transposed from the national to the transnational arena and that other ‘compensatory mechanisms’ need to be found instead of democracy. Finally, De Búrca herself proposed the democratic-striving approach that acknowledges the difficulty and complexity of democratizing transnational governance yet insists it is necessary, and identifies the act of continuous striving as the source of legitimacy and accountability. In the spirit of her analysis I would locate my own approach as fitting within her fourth alternative approach, the broader ‘democratic-striving’ approach.52 Yet in the light of the fact that the concept of democracy is so difficult to conceptualize and apply in a context that concerns lawmaking and other activities by actors beyond that of the territorial state, I would initially focus instead on a precise and limited conceptualization of accountability. Accountability can in fact be construed as an important organizing principle of democracy resting upon specific standardized procedures.53

4

CONCEPTUALIZING AND APPLYING PUBLIC ACCOUNTABILITY

4.1

Accountability Relationships

What can be designated the original or ‘core’ sense of accountability is that 49 50 51 52

See, for example, Bohmann (2007). See De Búrca (2008, pp. 221–78). For example Moravcsik (2004, pp. 336–63). See too for elements of this approach Hesselink (2009, pp. 919–71) at pp. 964–6. See, too, Verbeke (2008, pp. 395–413) at p. 412. 53 See, in general, Curtin and Wille (2008).

46


associated with the process of being called ‘to account’ to some authority for one’s actions. Such accountability has a number of features: it is external, it involves social interaction and exchange, and it implies rights of authority in that those calling for an account are asserting rights of superior authority over those who are accountable, including the rights to demand answers and to draw consequences, possibly including the imposition of sanctions. This sense of accountability is in line with the broad sense that Grant and Keohane (2005) describe: ‘accountability’ as involving the justification of an actor’s performance vis-à-vis others, the assessment or judgment of that performance against certain standards, and the possible imposition of consequences if the actor fails to live up to applicable standards. In the context of a democratic state, the key accountability relationships in this core sense are those between citizens and the holders of public office, and within the ranks of office holders those between elected politicians and bureaucrats. Such accountability relationships are obviously familiar terrain for lawyers at the national level, much less so at the international level. Indeed, at the international level where the principle of democracy has made only a limited entry at the level of the international legal order itself as well as with regard to the institutionalization of international organizations, a broad concept of ‘accountability’ is less familiar. International lawyers have traditionally focused on well-established legal principles such as state responsibility, and the operationalization of a broader concept of accountability in the sense of an actor being held to account in an iterative and interactive process is still nascent. In recent years it has in particular been in the context of the European Union that a rather explicit discussion has taken place on core accountability issues such as how voters can make their elected representatives answer for policies, how legislators (at both the national and the European levels) can scrutinize the actions of (European and national) public servants and make them answerable for mistakes, and so on. In fact, that discussion even goes so far as to enable Walter van Gerven, a prominent European legal scholar, actually both a public lawyer and a private lawyer, to rather provocatively ask, ‘Which form of accountable government for the European Union?’54 One can hardly envisage asking an equivalent question for any other international organization. Much less effort has gone into studying other manifestations of the internationalization of politics at other levels than that of the EU. The ‘backstage’ politics of international and informal policy preparation (committee processes, bureaucratic politics and horizontal networks) and implementation remain

54

See Van Gerven (2005, pp. 227–58).


47

under-explored relative to their importance in shaping the process and content of such public policy making.55 In many national systems, specific accountability regimes have evolved over decades/centuries to accommodate the various modes of political choice and action. But how do these regimes adapt when at least part of the political action has moved to the international level? I understand from reading some of the debates on private law, particularly on the making of European private law, that one concern is the lack of democratic input and democratic control, in particular by representatives from national parliaments.56 It is, however, relevant in this context not only that general rule-making processes may fall outside domestic processes of political accountability, but also that there are no countervailing forces, no or few checks and balances at the regional and global levels of governance. In line with existing work with political science colleagues, this contribution will highlight a dual conceptual foundation for more detailed empirical research into the meaning and practice of accountability across a range of policy areas – and one that is much less mono-focused on the possible role of representative democracy at the national level. My approach highlights two different approaches to the conceptualization of accountability that can be discerned in the literature. The first conception of accountability is as a normative concept as a set of standards for the evaluation of the behaviour of (public) actors. The second use of accountability is more narrow and descriptive and implies a focus on the institutional arrangements in which an actor can be held accountable to a forum. Both conceptions of accountability have been further defined in a way to make them operational and to make empirical study possible as to the existence or otherwise of various mechanisms of accountability. 4.2

Accountability as a Virtue

Accountability is often used as a normative concept, as a set of standards for the behaviour of public actors, or as a desirable state of affairs. Often, in this type of discourse, the adjective ‘accountable’ is used, as in: ‘We want public officials to be accountable’, or ‘accountable governance’. In these usages of the concept, accountability or, more precisely, ‘being accountable’ is seen as a virtue, as a positive feature of organizations or officials. Accountability in this very broad sense is used to positively qualify a state of affairs or the performance of an actor. It comes close to ‘responsiveness’ and ‘a sense of responsibility’, a willingness to act in a transparent, fair, and equitable way. It is not 55 See for example Van Schendelen (1998); Richardson (2000); Christiansen and Kirchner (2000); Rhinard (2002, pp. 185–210); Kassim (2003, pp. 132–60); Page (2003, pp. 162–76); Gerardin et al. (2005) and Egeberg (2007). 56 See for example Hesselink (2004) and Smits (2008).

48


easy to operationalize accountability as a virtue empirically ‘because it depends on the type of organization and on its institutional context; because many of the defining elements, such as transparency, responsibility, and responsiveness, are each ideographs and umbrella concepts themselves, which need extensive operationalization; and because the various elements often cannot be measured along the same scale.’57 One of the more successful attempts to operationalize accountability as a virtue is the Global Accountability Framework. It was developed by One World Trust, a charity that conducts research on practical ways to make global organizations more responsive to the people they affect. It uses a broad, active notion of accountability and applies it to large transnational organizations. It typically formulates a number of standards for the behaviour of transnational actors. They should connect with stakeholders, be responsive to their needs and views and provide explanations; they should be open, engage in dialogue, and be willing to learn from it. These are norms of good corporate governance in the global arena.58 The advantage of this approach is that this understanding of accountability can be operationalized with regard to certain actors or organizations. These have not been applied very extensively yet in practice, but there is no reason why the four core dimensions that make an organization more accountable to its stakeholders – transparency, participation, evaluation, and complaint and response mechanisms – cannot be applied in a wide variety of contexts. To be accountable, an organization or actor must integrate these four dimensions into its policies, procedures and practice, at all levels and stages of decision making and implementation, in relation to both internal and external stakeholders. These four dimensions or ‘standards’ do not require a sophisticated institutional and formal structure. Rather, they can be applied across the board to informal processes, including in the arena of more private governance by largely private actors, as well as to public governance and public organizations. Yet there are problems. Transparency for example lacks a sanction and is not as such to be equated with accountability. Participation by stakeholders may provide some input legitimacy but questions will need to be asked about their representativity. In addition, evaluation and complaint mechanisms are not the same as oversight by the politically representative bodies such as parliaments and the two different decisional circuits may be effectively ‘uncoupled’.

57 58

See further Bovens (2010). See further Blagescu et al. (2006) and Lloyd et al. (2007).


4.3

49

Accountability as a Social Relationship

A different approach to conceptualizing accountability is to view it in relational terms as: a social relationship between an actor and a forum, in which the actor explains his conduct and gives information to the forum, in which the forum can reach a judgment or render an assessment of that conduct, and on which it may be possible for some form of sanction (formal or informal) to be imposed on the actor.59

This definition is analytically precise, consists of several distinct and discrete stages that can be rendered operational, and has the great merit of being able to link actors, any actors at any level, whether institutionalized formally or not, with accountability forums. The latter did not have to be in a principal–agent relationship with the actors and were inclusive and open in terms of mechanism or type of accountability forums. They could be legal, political, financial, administrative, and so on, irrespective of the grand constitutional design. Moreover emergent practices might be linked to systems of democratic accountability but were not limited in any way to these. Nor was there any claim being made that accountability as thus defined would solve the legitimacy problems or would give rise to an appropriate and uncontested notion of supranational or transnational democracy at the level of the EU or anywhere else. On the contrary, the relationship between the rather precise notion of accountability as thus defined and much broader themes and even meta-norms of any political system were temporarily left to one side in the interest of being able to focus on establishing more neutrally to what extent one could speak of existing and evolving ‘practices’ of accountability at various different levels and with regard to various different types of actors and institutions. By applying the Bovens definition in its various stages to various different kinds of actors we could attempt to open the ‘black box’ of the accountability process. That accountability process can be situated at different governance levels: at the supranational level, at the transnational level or at the national level. One example of empirical work that is still ongoing focuses on the manner in which national ‘agents’ sitting in comitology committees of the EU are in practice embedded in hierarchical chains of accountability in the national context. It appears that committee members may often be fully autonomous in organizing their own work. In such cases bureaucratic principals are usually informed of their agents’ behaviour but tend not to engage in

59 Bovens (2006), http://www.connex-network.org/eurogov/pfd/egp-connex-C06-01.pdf, and Bovens (2007, pp. 104–20).

50


debating their agents’ points of view that lie at the heart of their input in Brussels.60 Another ongoing study involves taking a step back from ex post accountability practices to focus on the degree of autonomy from EU political institutions that EU-level non-majoritarian agencies enjoy as a matter of fact as opposed to law. It emerges from a rather extensive series of interviews with high-level practitioners that such agencies are often controlled on an ongoing basis by their EU political principal, either the Commission or the Council of Ministers. Before evaluating agency accountability and identifying deficits, it has to be ascertained a priori whether agencies and perhaps other actors really benefit from all the discretion and independence they are formally said to possess.61 There is a need for more empirical work taking specific actors and networks at the European and global levels as the focus of study and exploring the nature of accountability practices with regard to various accountability forums (for instance, the evolving roles in practice of the European Parliament, European Court of Justice, Court of Auditors, European Ombudsman and so on). For example, actors such as the European-level network of financial regulators, with European tasks, known by the acronym CESR, may be studied. There is also a need for more conceptual (and empirical) work on the linkages between a concept of accountability as relatively precisely defined and other general ‘themes’ of any political system. This can include both meta-norms such as ‘democracy’, ‘representation’ and ‘legitimacy’ and more secondary norms of the type ‘organizing principles’ such as ‘transparency’, ‘administration’ and ‘civil society’. At the same time there is a need to take the empirical work one step further by building on the insights from the empirical research. What do we learn from the empirical work? How can we contribute to/refine the existing theory? These are issues that need much further thought and reflection and can be addressed not only in the context of European private lawmaking but also more generally in that of transnational governance.

5

CONCLUDING REMARKS

One possible analysis of shifts in governance to the transnational and European arenas is certainly in terms of a democratic challenge at different levels. If we take EU lawmaking as our example, the challenge is to democra-

60 61

See in particular Brandsma (2010, forthcoming). See Busuioc (2010, forthcoming).


51

tize first at the level of the EU political system itself; secondly, at the level of the national political system; and thirdly, at the level of the often intricate interactions between the two. This description already indicates that there is unlikely to be a single solution for Europe’s democratic challenge at any level, since national democracies are not only different but have been affected in critically different ways by ongoing processes of European integration. Accountability can in fact be construed as an important organizing principle of democracy resting upon specific standardized procedures.62 Democratic accountability is addressed as an element in accountability as a virtue, in terms of stakeholder involvement, and as a mechanism, in the form of political accountability. No wider claim is made that these practices of accountability, in both senses, will solve legitimacy problems or give rise to appropriate transnational democracy. There is in addition to what has been discussed in this chapter a further potential of international law norms to make a (limited) contribution to holding international actors to account.63 At the transnational level the emerging (administrative) principles in the Global Administrative Law literature64 may be a helpful perspective on an emerging culture of administrative law within global regulatory governance, despite some of the caveats that have been expressed in the literature.65 Some principles (such as transparency, participation) have been identified as part of a growing body of global administrative law based on patterns of commonality in its function as a mechanism of constraint and control. If the EU did not exist then many of the issues currently dealt with by the EU would not simply revert to the national (democratic) level, but would be dealt with through other instruments of international cooperation (bilateral or multilateral treaties, policy networks, and so on) with an aggravation of the same phenomenon: overweening executive power and little if any countervailing power.66 At the level of the EU political system we find the same phenomena that we find at the more global level: policy based networks, involvement by private actors and the scientific community, soft instruments of governance and a lack of clarity as to lines of responsibility and accountability. Moreover it is precisely in this context that several innovative arrangements are emerging/taking shape that could function as inspiration in other contexts.

62 63 64 65 66

See further Curtin and Wille (2008). Wilde (2005). See MacDonald (2008). See further Kingsbury et al. (2005); Marks (2004); and Cassese et al. (2008). See too Craig (1999). See more recently on the transnational level De Búrca (2008, pp. 221–78).

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REFERENCES Benz, A. and I. Papadopoulos (eds) (2006), Governance and Democracy: Comparing National, European and International Experiences, London: Routledge. Besselink, L. (2007), A Composite European Constitution, Groningen: Europa Law Publishers. Bianca, C. M. and S. Grundmann (eds) (2002), EU Sales Directive: Commentary, Antwerp and Oxford: Intersentia. Blagescu, M., L. de Las Casas and R. Lloyd (eds) (2006), Pathways to Accountability: The Global Accountability Framework, London: One World Trust. Bohmann, J. (ed.) (2007), Democracy across Borders: From Demos to Demoi, Cambridge: MIT Press. Bovens, M. (2006), ‘Analysing and Assessing Public Accountability: A Conceptual Framework’, European Governance Papers (EUROGOV), No. C-06-01, http://www.connex-network.org/eurogov/pfd/egp-connex-C-06-01.pdf. Bovens, M. (2007), ‘New Forms of Accountability and EU-Governance’, Comparative European Politics, 5 (1), pp. 104–20. Bovens, M. (2010), ‘Two Concepts of Accountability’, Western European Politics. Brandsma, G.J. (ed.) (2010, forthcoming), Backstage Europe: Comitology, Accountability and Democracy in the European Union, Utrecht: University of Utrecht. Busuioc, M. (ed.) (2010, forthcoming), Accountability of EU Agencies, Delft: Eburon. Cafaggi, F. and H. Muir-Watt (eds) (2008), Making European Private Law: Governance Design, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Cassese, S., B. Carotti, L. Casini, M. Macchia, E. MacDonald and M. Savino (eds) (2008), Global Administrative Law: Cases, Materials, Issues, second edition, available at http://www.iilj.org/gal/Bibliography/GALBib-IGeneral.asp. Christiansen, T. and E. Kirchner (eds) (2000), Committee Governance in the European Union, Manchester: Manchester University Press. Craig, P. (1999), ‘The Nature of the Community: Integration, Democracy, and Legitimacy’, in P. Craig and G. de Búrca, The Evolution of EU Law, Oxford: Oxford University Press. Curtin, D. (ed.) (2009) Executive Power of the European Union: Law, Practices and the Living Constitution, Oxford: Oxford University Press. Curtin, D. and A. Meijer (2006), ‘Does Transparency Strengthen Legitimacy? A Critical Analysis of European Union Policy Documents’, Information Polity, 11 (2), pp. 109–22. Curtin, D. and A. Wille (2008), ‘Meaning and Practice of Accountability in the EU Multi-Level Context’, in D. Curtin and A. Wille (eds), Meaning and Practice of Accountability in the EU Multi-Level Context, Mannheim: Connex Report Series No. 7. De Búrca, G. (2008), ‘Developing Democracy beyond the State’, Columbia Journal of Transnational Law, 46 (2), pp. 221–78. De Larosiere, J. et al. (2009), The High-Level Group on Financial Supervision in the EU, Report, Brussels, 25 February, available at http://ec.europa.eu/ commission_barroso/president/pdf/statement_20090225_en.pdf. Egeberg, M. (ed.) (2007), Institutional Dynamics and the Transformation of Executive Politics in Europe, Mannheim: Connex Report Series No. 103. Elster, J. (ed.) (1998), Deliberative Democracy, Cambridge: Cambridge University Press. Gerardin, D. et al. (eds) (2005), Regulation through Agencies in the EU: A New


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Perspective of European Governance, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Grant, R.W. and R.O. Keohane (2005), ‘Accountability and Abuses of Power in World Politics’, American Political Science Review, 99(1), pp. 29–43. Gustavsson, S. (2009), ‘Putting Limits on Accountability Avoidance’, in S. Gustavsson, C. Karlsson, and T. Persson (eds), The Illusion of Accountability in the European Union, London: Routledge, pp. 35–47. Habermas, J. (1976), ‘Legitimationsprobleme im modernen Staat’, in Zur Rekonstruktion des Historischen Materialismus, Frankfurt: Suhrkamp. Harlow, C. and R. Rawlings (2007), ‘Promoting Accountability in Multi-level Governance: A Network Approach’, European Law Journal, 13 (4), pp. 542–62. Hesselink, M. (2004), ‘The Politics of a European Civil Code’, in M. Hesselink (ed.), The Politics of a European Civil Code, The Hague: Kluwer Law International, pp. 143–70. Hesselink, M.W. (2008), ‘The Values Underlying the Draft Common Frame of Reference: What Roles for Fairness and “Social Justice”?’, Centre for the Study of European Contract Law Working Paper Series, 8. Hesselink, M. (2009), ‘The Common Frame of Reference as a Source of European Private Law’, Tulane Law Review, 83, pp. 919–71. Hooghe, L. and G. Marks (2003), ‘Unraveling the Central State, but How? Types of MultiLevel Governance’, American Political Science Review, pp. 233–43. Jansen, N. and R. Michaels (2008), ‘Beyond the State? Rethinking Private Law: Introduction to the Issue’, American Journal of Comparative Law, 56, pp. 527–39. Joerges, C. (2004), ‘The Challenges of Europeanization in the Realm of Private Law: A Plea for a New Legal Discipline’, EUI Working Paper LAW, 12. Kassim, H. (2003), ‘The European Administration: Between Europeanization and Domestication’, in J. Hayward and A. Menon (eds), Governing Europe, Oxford: Oxford University Press, pp. 132–60. Kickert, W. (1993), ‘Complexity, Governance and Dynamics: Conceptual Explorations of Network Management’, in J. Kooiman (ed.), Modern Governance: New Government–Society Interactions, London: Sage. Kingsbury, B., N. Krisch and R.B. Stewart (2005), ‘The Emergence of Global Administrative Law’, Law and Contemporary Problems, 68 (3–4), pp. 15–61. Kohler-Koch, B. (ed.) (2003), Linking EU and National Governance, Oxford: Oxford University Press. Kohler-Koch, B. (2010, forthcoming), ‘Civil Society and Accountability: The International and the EU Discourse Compared’, Western European Politics, 32. Lloyd, R., J. Oatham and M. Hammer (eds) (2007), Global Accountability Report, London: One World Trust. Lord, C. (2000), ‘Legitimacy, Democracy and the EU: When Abstract Questions Become Practical Policy Problems’, http://www.one-europe.ac.uk/pdf/P3Lord.PDF. MacDonald, E. (2008), ‘The “Emergence” of Global Administrative Law’, paper at the 4th Global Administrative Law Seminar, Global Administrative Law from Fragmentation to Unity?, Viterbo, 13–14 June. Majone, G. (ed.) (1996), Regulating Europe, London: Routledge. Marks, S. (2004), ‘Naming Global Administrative Law’, New York University Journal of International Law and Politics, 37 (4), pp. 995–1001. Mendes, J. (2010), ‘Rights of Participation in European Administrative Law: A RightsBased Approach to Participation in Rule Making’, PhD thesis defended at the EUI on 16 March, publication forthcoming. Merriman, J. (ed.) (1969), The Civil Law Tradition: An Introduction to the Legal Systems of Western Europe and Latin America, Stanford: Stanford University Press.

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Moravcsik, A. (2004), ‘Is There a “Democratic Deficit” in World Politics? A Framework for Analysis’, Government and Opposition, 39 (2), pp. 336–63. Page, E.C. (2003), ‘Europeanization and the Persistence of Administrative Systems’, in J. Hayward and A. Menon (eds), Governing Europe, Oxford: Oxford University Press, pp. 162–76. Papadopoulos, I. (2007), ‘Problems of Democratic Accountability in Network and Multi-level Governance’, European Law Journal, 13 (4), pp. 469–86. Rhinard, M. (2002), ‘The Democratic Legitimacy of the EU Committee System’, Governance, 15 (2), pp. 185–210. Richardson, J. (ed.) (2000), European Union: Power and Policy Making, London: Routledge. Sabel, C.F. and J. Zeitlin (2008), ‘Learning from Difference: The New Architecture of Experimentalist Governance in the EU’, European Law Journal, 14 (3), pp. 271–327. Scharpf, F. (1999), Governing Europe: Effective and Democratic?, Oxford: Oxford University Press. Schmid, Ch. (2002), ‘Patterns of Legislative and Adjudicative Integration of Private Law in Europe’, Columbia Journal of European Law, 8, pp. 415–86. Shapiro, M. (2001), ‘Administrative Law Unbounded: Reflections on Government and Governance’, Indiana Journal of Global Legal Studies, 8, pp. 369–77. Smits, J. (2006), ‘Europese Integratie in het Vermogensrecht: Een Pleidooi voor Keuzevrijheid’, preadvies NJV, in Handelingen Nederlands Juristen-Vereniging, 136e jaargang, 1, pp. 57–104. Smits, J. (2008), ‘European Private Law and Democracy: A Misunderstood Relationship’, in M. Faure and F. Stephen (eds), Essays in the Law and Economics of Regulation. In Honour of Anthony Ogus, Antwerp: Intersentia. Study Group on Social Justice in European Private Law (2004), ‘Social Justice in European Contract Law: A Manifesto’, European Law Journal, 16, pp. 653–74. Suchman, M. (1995), ‘Managing Legitimacy: Strategic and Institutional Approaches’, Academy of Management Review, 20 (3), pp. 571–610. Thomassen, J. and H. Schmidt (2004), ‘Legitimacy and Democracy in the EU’, http://www.mzes.uni-mannheim.de/publications/papers/Schmitt_26_1_04.pdf. Van Gerven, W. (2005), ‘Which Form of Accountable Government for the EU?’, Netherlands Yearbook of International Law, 36, pp. 227–58. Van Kersbergen, K. and F. van Waarden (eds) (2001), Shifts in Governance: Problems of Legitimacy and Accountability, The Hague: Netherlands Organization for Scientific Research. Van Schendelen, M.P.C.M. (ed.) (1998), EU Committees as Influential Policymakers, Aldershot: Ashgate. Verbeke, A. (2008), ‘Negotiating [in the Shadow of a] European Private Law’, MJ, 15 (3), pp. 395–413. Von Bar et al. (eds) (2008), Principles, Definitions and Model Rules of European Private Law; Draft Common Frame of Reference (DCFR), Interim Outline Edition, Munich: Sellier. Weiler, J. (1991), ‘The Transformation of Europe’, Yale LJ, 100 (8), pp. 2525–36. Wilde, R. (2005), ‘Enhancing Accountability at the International Level: The Tension between International Organizations and Member State Responsibility and the Underlying Issues at Stake’, ILSA Journal of International & Comparative Law, 12 (2), pp. 395–415. Zweigert, K. and H. Kötz (1998), Introduction to Comparative Law (transl. T. Weir), Oxford: Oxford University Press.

PART II

Harmonization versus decentralization

3. Private law in a globalizing world: economic criteria for choosing the optimal regulatory level in a multilevel government system Roger Van den Bergh 1

INTRODUCTION

In multi-level systems of territorial jurisdictions, regulations may be enacted at either a higher (centralized) or a lower (decentralized) level of government. A prime example is the European Union (EU): a particular competence may be allocated to one of four different levels: the European Union, the Member States, the regions within the Member States and provinces or municipalities. The World Trade Organization (WTO) adds an additional layer of governance to this already complex vertical division of regulatory powers by creating scope for decision making at the world-wide level. This state of things poses difficult questions as to the optimal level of government. Should competences to enact regulations be exercised at the central level (European Union, World Trade Organization) or should such competences be decentralized and exercised by nation states or by regulatory agencies at lower levels of government within those states? Even though law was originally the exclusive domain of nation states, the ambitious internal market programme of the European Community (EC) has led to a substantial reshuffling of regulatory competences. Since the achievement of the internal market is often considered an exclusive competence of the EC, Member States have lost large parts of their regulatory autonomy in areas of law affecting the four fundamental economic freedoms. Even though the World Trade Organization does not enjoy similar regulatory powers – since there is no direct equivalent to the four economic freedoms and institutions enforcing those freedoms comparable to the European Court of Justice (ECJ) are lacking – the regulatory autonomy of states may be restricted by way of multilateral agreements to ensure free trade, protect health and safety and the environment, avoid competitive distortions through taxes and subsidies, protect intellectual property, and so on. 57

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As a consequence of the foregoing, nation states may lose their regulatory autonomy also in the field of private law in as far as the national rules (either in legislation or in case law) are not in conformity with rules decided at the central level to guarantee free trade. For example, in the EC initiatives to harmonize large parts of private law have been taken under the consumer protection flag. Recently, total harmonization is aimed at by the EC Directive on unfair business-to-consumer practices1 and the proposed EC Directive on consumer contractual rights.2 This far-reaching centralization of regulatory powers is defended by the claims that differences in legal rules hinder firms from extending their operations beyond national borders and that consumers may refrain from cross-border shopping if they do not enjoy the same legal protection abroad. In sum, unification and harmonization would be needed to enhance free trade and create an integrated market. Within the framework of the WTO, there is no comparable delegation of regulatory powers but states may enter into multilateral agreements that limit their freedom to enact legal rules that limit free trade. Compared with the duties imposed on EU Member States, the impact of the obligations of WTO countries on the content of their national rules of private law so far seems to be minor. In an era of ever expanding centralized rule making, which increasingly limits the scope for regulatory action by nation states, it is necessary to ask fundamental questions about the role central institutions are playing and about their capacity to exercise the powers they enjoy in a way that enhances economic welfare. Economic analysis of law advances a number of criteria to assess whether the vertical division of regulatory competences between the central and local levels of government is optimal in an economic sense. This chapter provides an overview of these economic criteria and thus seeks to contribute to the discussion about regulatory autonomy in multi-level jurisdictions. Some economic criteria point in favour of decision making at lower levels of government: heterogeneity of preferences, decentralized knowledge and innovation. Other economic criteria indicate a preference for decision making at the central level: interstate externalities, scale economies, transaction cost savings and the elimination of trade barriers.3 On top of these criteria, it is important to analyse the likely outcome of the different types of regulatory competition that may emerge in decentralized regulatory systems.

1

Directive 2005/29/EC, OJ L149, 11/06/2005, p. 22. Proposal for a Directive on consumer contractual rights, 04/09/2008, SEC(2008). 3 It must be added that there are also non-economic criteria that may favour centralization. If governments want to achieve distributional goals centralization will often be warranted. The discussion in this chapter is limited to the economic goals of policy-making. 2

Choosing the optimal regulatory level

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Will regulatory competition initiate a ‘race to the bottom’ or will it lead to a ‘race to the top’? By discussing the above criteria and analysing the likely outcomes of regulatory competition, better informed policy choices between decentralization and centralization may become possible. The structure of this chapter is as follows. The economic criteria allowing an informed choice of the most appropriate regulatory level will be discussed successively. The second section introduces heterogeneity of preferences as a major justification for decentralized decision making. This insight is an important extension of Tiebout’s theory on optimal provision of public goods. The third section discusses a second group of arguments which strengthen the case in favour of decentralization: better information at lower levels of government and a higher degree of flexibility and innovativeness. The fourth section addresses interstate externalities, which may provide a major justification for centralization and harmonization of laws. The fifth section focuses on the free trade argument, which in the policy debate is the major justification for centralization. A link is made between the market integration reasoning and the economics of federalism. According to the latter approach, scale economies and transaction cost savings may justify centralization; in as far as such cost savings enhance free trade the market integration argument may be accepted as another criterion in favour of centralization. The sixth section discusses the potential benefits and costs of regulatory competition. Here, the popular argument that such competition may reduce the quality of law and cause a ‘race to the bottom’ is discussed. To the above arguments it must be added that uniform rules may benefit interest groups, rather than the general public. The risk of political distortions is briefly discussed in the seventh section of the chapter. In the eighth section of the chapter, the main lessons from economic analysis for globalization of private law are presented. The ninth section concludes.

2

HETEROGENEITY OF PREFERENCES

A useful starting point for an economic analysis of decentralization is Tiebout’s seminal article on the optimal provision of local public goods.4 Congestible public goods, which are consumed and financed in common, do not allow people with a variety of tastes to live side by side without difficulty. People can be better off if they cluster together in communities with others who have similar tastes. For example, people who like to play sports may move to communities offering publicly financed sports facilities, such as

4

Tiebout (1956, p. 416).

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swimming pools and tennis courts. Other people who prefer to read books may move to communities with well-equipped libraries. If people can freely move, they can ‘vote with their feet’ and move to the community offering their preferred bundle of public goods. Legal rules also have characteristics of public goods: they are both nonrivalrous and non-excludable. The possibility to claim damages for a particular victim of a tortfeasor does not hinder other victims from equally obtaining compensation (absence of rivalry); people who do not pay taxes also profit from rules on traffic safety (no possibility to exclude free-riders). Hence, Tiebout’s theory may be extended to competition between legal rules. Competing jurisdictions will offer an optimal package of public goods if people can vote with their feet. Theory tells us that if competition between sellers of products may lead to allocative efficiency, the same beneficial results may be reached when legislators compete as suppliers of legal rules. Decentralization enables legislators to choose those rules which best serve the goals preferred by the local population. Firms and individuals may vote with their feet and choose the jurisdiction which in their view offers the best set of laws. Such ‘exit’ decisions, together with the power to vote (‘voice’), may ensure that firms and citizens are offered their preferred set of legal rules. It must be emphasized that voting with their feet does not require that people move physically. A free choice of law rule, which enables firms and individuals to choose which law will apply to their transactions, will create the largest possible scope for regulatory competition. The best-known example is the freedom for companies to choose the corporate law governing their business,5 but free choice of law may equally apply to business contracts and consumer sales. As is the case with all economic models, Tiebout’s theory is valid only if a number of restrictive assumptions are satisfied: • There must be a sufficiently large number of legislators. In the European context, 27 legislators may offer a wide range of legal options and European rules may be added as a 28th choice. At the world-wide level, the number of potentially competing legislators and, accordingly, the potential to satisfy diverging preferences is much larger. • There must be no information deficiencies. People must be able to understand the different legal rules, so that they can make wellinformed choices. This is a strong assumption with respect to individuals who may face great difficulties in assessing the contents of divergent rules. In contrast, the requirement of perfect information may be more

5

See Heine and Kerber (2002, p. 43).


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realistic for firms, which can hire experienced lawyers to assist them in shopping for the best legal regime. • There must be no interstate externalities, no scale economies or opportunistic behaviour of legislators. These requirements will be discussed in more detail below (Sections 4 to 6), and it will then become clear that these are the main arguments in favour of centralized decision making and some form of harmonization of laws. Even though the conditions of the model are not easily satisfied in practice, Tiebout’s theory remains important since it illuminates the economic reasons which may justify decentralization. At the normative level, the Tiebout model leads to the important insight that diverging legal rules or competition between legal orders enables satisfaction of more preferences. This benefit is particularly important in fields of law where preferences are not homogeneous. Environmental law is an obvious example. In a first-best world environmental standards are decentralized: they are adapted to varying preferences and take regional diversity into account. Some jurisdictions may wish to relax their environmental standards in order to provide attractive jobs for their residents. Costs and benefits do also differ across geographic regions and this regional diversity should be taken into account in an optimally specified environmental law.6 Building upon Tiebout’s classic article, a case can be made also for divergent company laws and varying rules of competition law. Corporate law is largely shaped by the wish to protect investors from managerial shirking. However, the desire to protect not only shareholders but also other stakeholders (in particular employees) may inspire diverging management structures, as a comparison of UK and German corporate law may show.7 In the discussion about the goals of competition law, allocative efficiency is not generally accepted as the sole objective.8 In contrast with the United States of America, pluralist views predominate in the European Union. Rather than emphasizing efficiency goals, the competition law of the EC Member States may reflect different concerns, such as the protection of freedom of competition as such. There is no economic reason why competition laws should not reflect different views in different countries as long as both costs and benefits remain in the jurisdiction that enacted the rules. The recent transplantation of many EC competition rules into the national legal orders of some Member States restricts the choice between competition laws. 6 7

For a more elaborate discussion, see Faure (2001, p. 263). For a broad comparative overview of diverging corporate laws from an economic perspective, see Kraakman et al. (2004). 8 Van den Bergh (2007a, p. 27).

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3


DECENTRALIZED INFORMATION AND INNOVATION

Decentralization becomes the more important the more necessary information for rule making is available only at lower levels of government. Hence, a preference for decentralization follows from the need to cope with informational asymmetries between regulators and regulated firms. Decentralization is the more efficient the more valuable local information is for appropriate rule making and enforcement. The asymmetry of information between regulatory authorities and regulated firms may be analysed as a principal–agent problem. Regulatory authorities (both national and supranational or international) have an information disadvantage vis-à-vis the firms they have to control; the former may be seen as the principals and the latter as the agents. Out of selfinterest the agents may be unwilling to reveal all the information needed by the principals. A related danger is the communication of false information. It may be argued that it is more difficult for firms to hide or misrepresent information to decentralized agencies than to a more remote agency. Decentralization may thus be advocated because it reduces the agency problem.9 Again, examples are appropriate to illustrate the importance of the information argument with respect to both substantive law and rules regarding enforcement. Environmental law nicely illustrates the need of decentralization to cope with information asymmetries. Not only do preferences concerning the desired degree of environmental protection differ across regions, but also knowledge of pollution problems (age of plants, atmospheric conditions) may be decentralized. In the field of enforcement, competition law may be used as an example. If the anticompetitive effects of agreements or a merger manifest themselves mainly within the territory of a single EC Member State, the antitrust authorities of this country will have an information advantage over the central antitrust authority to control these transactions. National competition authorities are generally better placed to assess matters that are concentrated in their particular state. On the other hand, the risk of regulatory capture at lower levels of government may be higher. National authorities may be inclined to favour national interests. Officials of a central competition authority are more remote from the firms they have to control and may thus act in a more independent way, making them less vulnerable to regulatory capture. As a conse9 There are, naturally, also intermediate solutions between full decentralization and full centralization. Decentralized information gathering can help to remove much of the information asymmetry faced by central regulatory agencies. An obvious alternative to the choice between centralization and decentralization is the co-existence of national and supranational procedures.


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quence, an optimal mix of centralized and decentralized enforcement measures will be required to reach efficient outcomes.10 Besides its ability to cure informational asymmetries, decentralization carries an important and related advantage. Competition between legal orders generates all benefits of a learning process.11 Differences in rules allow different experiences and may improve an understanding of the effects of alternative legal solutions to similar problems. From this perspective, the European Union can be seen as a huge laboratory that allows experiments to find out which legal rules are optimal, given specific societal goals. Again, this advantage relates both to the formulation of the substantive rules and their enforcement. The importance of this second argument in favour of competition between legal orders also varies across different fields of law. Sometimes learning will be very important: examples include safety and health standards12 or defining market power in the field of competition law.13 In other areas of law there may be less uncertainty and the importance of trial-and-error processes will consequently diminish.

4

INTERSTATE EXTERNALITIES

Externalities between jurisdictions are a powerful argument in favour of centralized rule making. If nation states enact legal rules that are likely to cause negative externalities for other states, centralization may be needed to guarantee that the externalities are ‘internalized’. The externality problem arises in many fields: air pollution is an obvious example. Another example is the negative effects of a merger on prices in different countries; to internalize these negative consequences control by a central antitrust agency may be required. If allocative efficiency is to be reached in a federal state, preferences for inefficient national rules in any field of law may be satisfied only to the extent that costs are borne by the population preferring such rules. Conversely, centralization may be required to internalize the negative effects thrown upon other jurisdictions. In diverging policy fields, national laws may cause adverse externalities for other states. However, before jumping to the conclusion that centralization is warranted, it should be investigated whether bilateral (or multilateral) agreements between the states concerned are not superior solutions. In the Law and 10 11

Van den Bergh and Camesasca (2006, p. 402). This important insight goes back to the seminal work of Nobel Prize Laureate Friedrich von Hayek. See von Hayek (1978, p. 66). 12 See Ogus (1994, p. 152). 13 On these problems, see Camesasca and Van den Bergh (2002, p. 146).

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Economics literature this alternative is known as Coasian bargaining.14 The Coase theorem tells us that if there are well-specified property rights, full information and low transaction costs, the efficient solution will result through bargaining between the states without any need for further intervention. An important limitation to Coasian solutions is that states may behave opportunistically, so that either no agreement is reached or states do not comply with their obligations. Guzman mentions three factors that have an impact on the costs of such violations and thus promote compliance. The first factor is the loss of reputation: a state that does not comply with its obligations may find it more difficult to make credible international commitments in the future. The second factor is reciprocal non-compliance: other states may equally terminate their own compliance. The third factor is retaliation: other states may punish the non-complying state even if it is costly to do so.15 Cooperative outcomes may be enhanced by increasing the costs of the three Rs: reputation loss, reciprocal non-compliance and retaliation. For example, in the case of the WTO an offended state can suspend its own concessions in response to an ongoing violation by another state. Generally, the threat of reciprocal non-compliance will be more credible the smaller the number of states that are bound by multilateral agreements.16 In the European Community, the attribution of legislative powers to European institutions (European Commission, Council of the European Union, European Parliament) allows the enactment of regulatory measures, including unification and harmonization at the central level, which cope with the externalities problem. However, central rule making may be unnecessary if cooperative outcomes can be reached through negotiations between states. Depending on the availability of information at different regulatory levels and the size of the negotiation and enforcement costs, an important task for the European Community may be to provide an institutional framework in which Coasian bargaining is possible. An example of relatively successful multilateral agreements between EC Member States and a third country, which aimed at solving the problem of interstate externalities, is the reduction of the pollution of the Rhine.17 However, if the number of EC Member States affected by the externalities is too large or reaching agreements is

14 Named after Nobel Prize Winner Prof. R.H. Coase, who is generally considered a founding father of New Law and Economics, in which economic insights are used outside the field of antitrust, such as private law. The Coase theorem was developed in Coase (1960, p. 1). 15 Guzman (2008). 16 Guzman, op.cit., p. 175. 17 See Van den Bergh (2000, p. 80).


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impeded by opportunistic behaviour,18 unification or harmonization of laws may be needed. If Coasian solutions are not possible, legislative measures taken at the central level may be an adequate solution for internalizing negative interstate externalities. The potential for curing the externalities problem remains limited in the context of traditional multilateral negotiations, such as those of the WTO, which are based on the principle of consensus.19 Conversely, European institutions enjoy far-reaching powers to impose rules on Member States without their prior consent and may effectively sanction violations. In this way, the problem of interstate externalities can be overcome when loss of reputation, reciprocal non-compliance and retaliation are insufficient to stimulate co-operative outcomes. Even when the externalities argument may justify centralization, it should be limited to its right proportions. The economic theory of federalism teaches that rules should be enacted at the lowest level of government capable of internalizing the relevant externalities.20 For example, in the case of transboundary pollution the rules should apply to all affected states and only to those states. Hence, the case for globalization remains limited. In cases of pollution of rivers, for instance, the central rules should apply only in states where the rivers are flowing. Universal rules that apply world-wide are needed only when all states in the world are affected by the externalities, for example in the case of global warming.21

5

SCALE ECONOMIES, TRANSACTION COST SAVINGS AND THE ELIMINATION OF TRADE BARRIERS

From an efficiency viewpoint, centralization may also be defended because of scale economies or transaction cost savings. Scale economies are achieved when production costs decrease as size of production increases. An extreme case is a natural monopoly where a single producer can supply the market at a lower per unit cost than can two or more firms.22 Transaction costs are costs associated with finding trading partners, reaching agreements and putting

18 Member States may not agree to a cooperative outcome, in order to signal that they are ‘tough negotiators’, and thus want to protect their bargaining power in future negotiations. 19 On the decision-making processes in the WTO, see Wouters and De Meester (2007, p. 127). 20 Oates (1972) and Inman and Rubinfeld (1997, pp. 43–64). 21 Guzman, op.cit., p. 170. 22 Depoorter (2000, p. 498).

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contractual obligations into force. They comprise information costs, costs of writing contracts and costs of enforcement. If transaction costs are too high, welfare enhancing transactions will not take place. In discussions on international trade, it is often argued that trans-national trade will increase if uniform rules are enacted by a single legislator or trade barriers resulting from differences in legal rules are mitigated through harmonization measures. In the European context, the goal of market integration is often advanced as the major argument to justify rule making at the central level. This line of reasoning gets support from the economics of federalism only if a causal link between cost savings achieved by harmonization of legal rules and increased cross-border trade can be shown. Hence, the burden of proof for those who favour centralization remains heavy. First, they must show that harmonization generates scale economies or transaction cost savings. Second, it must be proven that these cost savings increase trade and contribute to an integrated economic market and that the benefits of increased trade are not outweighed by the disadvantages of centralization. 5.1

The Size of the Cost Savings

Scale economies may be important in the production of the information needed to formulate and/or enforce legal rules. For example, some information relevant to the entire European Union can be most efficiently provided by EU institutions. However, the achievement of these cost savings does not in itself justify centralization. If preferences are heterogeneous, efficiency may require that rules are formulated at lower levels of government even though information gathering is centralized. Moreover, it should be noted that the importance of this argument will vary across different fields of law. Scale economies may be important for the design of efficient rules of public law such as safety regulation, but irrelevant in other fields of law, such as private law. In international trade, transaction costs caused by uncertainty may impede agreements that are mutually beneficial for both contracting parties. Legal rules enacted by a central regulator reduce transaction costs in as far as future contract parties will no longer incur costs to inform themselves about diverging rules that may apply to their transactions. These savings may be substantial in the case of legal uniformity. Uniform rules will reduce information costs, since knowledge of two (or more) legal systems is no longer required. Harmonization measures may equally reduce transaction costs by reducing existing differences between legal systems. Lawyers often refer to the need for legal certainty as a crucial quality feature of law. In economic terms, this argument refers to transaction cost savings generated by legal uniformity and harmonization of laws. If rules differ, information costs increase and the outcome of cases is less predictable. Even though this argument seems plausi-


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ble at first sight, a more detailed analysis will show that the transaction cost savings resulting from legal certainty are less obvious than is regularly assumed. It is doubtful that uniform laws automatically reduce uncertainty. To start with, within the European Union problems already emerge when the ‘uniform’ rules have to be translated into the different languages of the EU Member States. Language differences resulting from translations can lead to different interpretations of the same provision. Even if interpretation problems can be avoided through adequate translations, legal certainty will not automatically be achieved. Common uniform rules only increase legal certainty when a uniform interpretation of the law in each EU Member State is secured. Unlike goods, legal rules cannot easily be transported from one state to another. It does not suffice that the legal systems of the EU Member States use the same wording. This wording must also be understood as having the same content in the different legal systems. Legrand emphasizes that there could only occur a meaningful legal transplant when both the propositional statement as such and its invested meaning – which jointly constitute the rule – are transposed from one state to another. ‘Legal transplants’ sensu stricto may be simply impossible.23 The sharp criticisms by Legrand make clear that the achievement of legal certainty requires not only uniformity of legal rules but equally harmonization of case law. The European Court of Justice may be asked to provide a uniform interpretation of legal concepts that are included in Regulations and Directives. At the international level, there is not another court that has the power to guarantee uniform interpretation of legal concepts. Given the differences in interpretation that cannot be overcome, legal certainty at the global level will thus remain a myth.24 It must be added that the implementation of harmonization measures creates costs of its own, which may (partially) outweigh the savings in terms of legal certainty. The costs of modifying national rules may be very high if the new rules apply also to purely domestic transactions. In the latter case, harmonization causes disharmonies within national legal systems by creating islands of unitary laws that disrupt the internal consistency of national legal systems.

23 Legrand (1997, p. 111). Some commentators believe that codification produces certainty, while others think that systems of precedent bring greater predictability. See on this issue Collins (2002, p. 269). Legal systems trying to understand the expectations and understandings of parties and implement them will score better in terms of predictability than legal systems which poorly reflect citizens’ expectations. 24 Rühl (2008).

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In sum, the overall impact of harmonization on legal certainty is ambiguous and there is no compelling transaction cost argument in favour of harmonization of laws. 5.2

Does Harmonization Advance Market Integration?

In the international trade literature, the market integration argument (removal of trade barriers) is widely used to justify, eventually far-reaching, centralization and harmonization of laws. This line of reasoning gets support from the economics of federalism only if two conditions can be shown and an additional caveat is taken seriously. First, uniformity or harmonization of laws must enable the achievement of scale economies or transaction cost savings. Second, these cost reductions must increase cross-border trade and further market integration. Even if a causal link between harmonization measures and increased cross-border trade can be shown, the ensuing benefits should not be outweighed by potential costs of the centralization plan. In reality, there are three major problems with the market integration argument. First, there is a risk that the benefits of market integration are too easily taken for granted. Diversity in legal rules may constitute a trade barrier that prohibits firms from using the same production and marketing techniques in larger areas. However, an open question remains as to the impact of increased legal certainty on the volume of international trade. There is evidence that state borders have a dampening effect on the volume of commercial transactions but the causes of this phenomenon and the ensuing transaction cost dilemma (implying that transactions do not take place even if they are welfare increasing) remain largely unknown. So far, there is no hard empirical proof that corroborates the hypothesis that diversity in rules limits cross-border trade. The European Commission is usually relying only on data from surveys conducted among firms and consumers. The answers given to hypothetical questions such as ‘Would you sell/buy more abroad if legal rules were uniform?’ may not reveal how people act in real-life circumstances. Another reason to be cautious is that surveys that were not commissioned by the European Commission do not confirm the hypothesis that firms are deterred from engaging in cross-border transactions by diverging legal rules. 25 Convincing empirical evidence requires a comparison of existing trade flows between countries where laws are widely uniform and countries where legal rules diverge substantially. By way of a regression analysis, the impact of diverging rules must be isolated from other factors, such as travel costs, language differences and cultural barriers. An econometric analysis of real-life

25

Ott and Schäfer (2002, p. 203).


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data, rather than figures about reactions to hypothetical questions, is needed to prove the European Commission’s market integration reasoning. As long as convincing empirical evidence is lacking, the barriers to trade argument cannot on its own justify centralized rule making. Second, firms may find different ways to overcome legal barriers in international trade. Public ordering mechanisms, such as harmonization measures, may be inferior solutions compared with private ordering mechanisms that better solve the problem of legal uncertainty.26 Private firms may establish their own rules for international transactions; in the context of commercial law these standardized contracts are known as lex mercatoria. Besides developing an autonomous law of international trade, firms may develop and maintain cooperative strategies that overcome problems resulting from diverging legal rules in countries where their transactions take place. Game theory teaches that parties will act cooperatively (and thus honour their promises) if they are repeat players (who meet each other an indefinite number of times) and are able to assess whether their contract party behaves cooperatively or not. The Law and Economics literature has tested this hypothesis and provides convincing examples of international trade relying on reputation mechanisms from the middle ages until today.27 In sum the cost–benefit ratio of decentralized private ordering mechanisms may be superior to uniformity and harmonization brought about by a central public rule-maker. Third, the market integration argument (as it is presented in the policy documents of the European Commission) is based solely on foreign trade concerns and neglects the broader insights from the economic theories of federalism and regulatory competition.28 Even if cross-border trade increases, the losses due to centralization and harmonization may outweigh the benefits. Gains resulting from increased trade must be balanced against losses resulting from reduced possibilities to satisfy diverging preferences regarding the contents of legal rules and losses from missed learning opportunities and other benefits of decentralization. As will be explained below, regulatory competition is not necessarily a bad thing and may lead to a ‘race to the top’ rather than a ‘race to the bottom’.

6

REGULATORY COMPETITION

The choice between centralization and decentralization has an impact on the degree of legal uniformity and the scope for competition between legal rules. 26 27 28

Schmidtchen and Schmidt-Trenz (1990, p. 3). Milgrom and Weingast (1994, p. 745) and Bernstein (1992, p. 115). Kerber (2007, p. 15).

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Centralization may imply uniformity and little scope for diverging legal rules. By contrast, decentralization may enable competition between legislators and different solutions for legal problems. Diverging rules are often criticized because they would cause distortions of competition in cross-border trade. When the European Commission proposes harmonization of laws, it usually refers to the need to prevent inequality of competitive conditions across the EC Member States. It is regularly argued that differences in regulation cause distortions of competition, and that harmonization measures are needed to create a ‘level playing field’ for industries that are active in cross-border trade. If legal rules differ, so it is argued, firms operating in Member States that have chosen in favour of regulatory laxness would have a competitive advantage over firms in other Member States that have adopted stricter rules. Competitive distortions of this kind would be incompatible with the goal of market integration. Also at the global level, uniformity may be seen as an instrument to equalize competitive conditions in world markets so that firms from different countries may compete on an equal footing. In sum, the need to create a ‘level playing field’ is often advanced as an argument against regulatory competition. There are several problems with the above line of argumentation. First, the level playing field argument is based on a reasoning that goes against the very essence of international trade itself. Second, the argument may be easily abused by policy makers who favour far-reaching centralization. In the European context, this may cause a ‘race to Brussels’. Such strong centralist tendencies endanger both the existence of a multi-level regulatory system and its beneficial competitive elements. These criticisms do not imply that regulatory competition is always to be judged positively. An assessment of regulatory competition requires two steps: (i) an analysis of the particular type of regulatory competition that may develop given the degree of (de)centralization and the applicable conflict-of-law rules within a multi-level regulatory system, and (ii) an analysis of the welfare effects of this competition. The last part of this assessment may show a risk of a ‘race to the bottom’. Only if this risk materialized would regulatory competition lead to ‘bad’ law, and centralization, in particular measures of (minimum) harmonization, would be needed to protect the quality of the law. Below, these arguments are further elaborated upon. First, the ‘level playing field’ argument is criticized. Second, a distinction is introduced between different types of regulatory competition. Third, the risk of a ‘race to the bottom’ is critically assessed. 6.1

The Level Playing Field Argument

A very popular argument in discussions on international trade, both at the EC level and at the global level (WTO), is that differences between legal rules on


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market behaviour create distortions of competition and may harm industries that are active in the more heavily regulated countries. Removing those differences would create a ‘level playing field’ for industry and promote market integration and global trade. When it is critically assessed as an argument justifying harmonization measures, the level playing field argument does not withstand close scrutiny. International trade is based on comparative advantages, so that it is not necessarily illegitimate to exploit differences in legal rules. Such differences may have an impact on the competitive advantages of states.29 Refusing to exploit differences in government policies seems to be in contradiction with the essence of international trade itself. If conditions of competition were indeed totally equal, as the argument assumes, there would be no trade. The argument in favour of a level playing field thus appears to be distributional rather than efficiency oriented.30 If legal rules confer a competitive advantage on firms in a particular state, the consequence will be that prices for consumer goods in the international market will be reduced, with welfare gains flowing to consumers who previously had to pay higher prices. Some losses will be incurred by industries previously complying with inefficient laws, but gains will flow to other industries offering cheaper products. The aggregate welfare consequences for the global market are likely to be beneficial. In sum, an ‘uneven’ level playing field may create scope for regulatory competition that results in substantial welfare gains at the global level. It must be added that harmonization of a particular field of law is not necessarily an appropriate remedy to create a ‘level playing field’ for industry. The problem with a partial centralization plan is that it does not equalize all costs. The costs of complying with a particular set of regulations are only one component of the total costs of production. Harmonizing one type of regulation (such as environmental law) will leave ‘competitive distortions’ intact in other fields of regulation (such as consumer law). Furthermore, the goal of creating a ‘level playing field’ will not be reached, since industries in some countries will keep an advantage in terms of infrastructure, wages, labour productivity, and so on. Countries that perform well on the non-harmonized components of costs will thus keep competitive benefits. The ultimate answer is to eliminate the possibility of competition over any of the costs mentioned, including both costs of complying with regulations and other production costs. Such a comprehensive intervention at the world-wide level is simply impossible.

29 30

Porter (1990). Ogus (1999, p. 417).

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6.2

Different Types of Regulatory Competition

The discussion on the harmful or beneficial effects of regulatory competition is often obscured by a lack of precise analysis of the type of regulatory competition that may develop in a multi-level regulatory system. Before the effects of regulatory competition on economic welfare can be assessed, answers are needed to the preliminary questions of whether there is scope for regulatory competition in the first place and which forms such regulatory competition may take. The answers to these questions are dependent on (i) the institutional framework of the existing multi-level system of government and the degree of unification or harmonization that has been achieved already (minimum harmonization or total harmonization), and (ii) the applicable conflict-of-law rule in such a multi-level legal system. This will be further explained below by distinguishing different potential scenarios: centralization combined with harmonization, decentralization and free choice of law, decentralization protected by the country of destination principle, and decentralization combined with the country of origin principle or mutual recognition. There are different types of regulatory competition that each depend on the degree of (de)centralization in multi-level legal systems and the conflict-oflaw rule that applies in case of shared regulatory competences.31 The more regulatory competences are centralized, the smaller is the scope for diverging rules at lower levels of government. An extreme scenario is total harmonization: all legislative and regulatory decisions are taken at the central level; hence there is complete uniformity and no scope for regulatory competition. Another scenario is centralization combined with minimum harmonization. In this setting, competition between legal rules remains possible but only above a floor of rights that is guaranteed by the minimum standards that have been imposed at the central level. The opposite of centralization combined with harmonization is decentralization combined with divergent legal rules. If different rules may apply to a single transaction, conflict-of-law rules are needed to determine which legal rules govern business deals with transnational components. The most intensive type of regulatory competition can emerge under a regime of free choice of law. Under this scheme, sellers and buyers can choose between diverging national regulations and select the rules that are best adapted to their preferences. A Tiebout-like scenario of ‘voting with their feet’ may develop without the need for sellers and buyers to move their physical location. In spite of the potential positive welfare effects of regulatory competition, decentralized systems may opt for different conflict-of-law rules that reduce the scope for

31

Heine and Kerber (2002) op.cit.; Kerber and Budzinski (2003, p. 411).


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competition between legal rules. Hereinafter, we contrast two conflict-of-law rules that are commonly used in international trade: the country of destination principle and the country of origin principle, which is also referred to as mutual recognition. The country of destination principle severely limits the scope for competition between regulations governing the production or the sale of goods. Sellers and buyers cannot freely choose which rules will apply to cross-border transactions. If they prefer that their transactions are governed by legal rules of a foreign country, firms have to relocate to that state and consumers must conclude their business deals there. Since even a relocation of firms does not change the requirement of compliance with the domestic regulations of the import countries, there will be no direct regulatory competition. The only form of competition that may emerge is ‘yardstick competition’. Countries may compare the costs and benefits of their own legal rules with the cost–benefit ratio of comparable rules in other states. This process of yardstick competition allows parallel experimentation with different regulations and mutual learning about better regulations. By contrast, full harmonization would eliminate even this reduced form of regulatory competition.32 The country of origin principle generates a very peculiar kind of regulatory competition. According to this principle, foreign firms are allowed to offer goods that are produced in conformity with the regulations of their country of origin and sell them in accordance with those regulations. In the European Community, the principle is also referred at as ‘mutual recognition’. The rationale underlying the rule of mutual recognition is that host Member States can no longer enforce their own rules if rules of home Member States have equivalent objectives or effects but are obliged to accept the equivalent foreign rules. Since the famous Cassis de Dijon judgment of the European Court of Justice,33 this rule has allowed European consumers to choose between different goods produced in conformity with diverging national regulations. Meanwhile, the principle of mutual recognition has expanded from the area of free movement of goods into the areas of right of establishment and freedom to provide services, and even beyond its traditional boundaries. Aside from the fundamental economic freedoms, mutual recognition is now also advanced as a leading principle in other parts of European Union law, in particular safety and security.34

32 For policy innovation and learning from parallel experimentation, yardstick competition, and laboratory federalism, see Salmon (1987, p. 24); Vanberg and Kerber (1994, p. 193). 33 Case 120/78, Rewe-Zentrale AG v Bundesmonopolverwaltung für Branntwein [1979] ECR 649. 34 Joint cases 187/01 and 385 /01, Gözütok and Brügge [2003] ECR I-1345.

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The expansion of the principle of mutual recognition has not yet reached its limits, since it may be seen also as an appropriate institutional device to break down non-tariff barriers to trade in the international context and promote a world-wide integration of markets. In this context, it should be noted that the EU principle of mutual recognition may itself conflict with the non-discrimination rules of the WTO since it applies only to products imported from other EU Member States and not to products manufactured according to the regulations of a third country. Redesigning mutual recognition as an open system applying at the world-wide level would overcome this problem. According to Weiler, ‘it will not be long before a WTO Panel and/or the Appellate Body will pronounce a WTO version of the Doctrine of Parallel Functionalism (or mutual recognition)’.35 Several authors have welcomed the principle of mutual recognition as an instrument for enabling regulatory competition (allowing states to pursue their own economic and social policy) and impeding the centralization of regulatory powers.36 In recent papers, Kerber and Van den Bergh argue that mutual recognition is neither an appropriate rule for enabling a sustainable process of regulatory competition nor an effective device for preventing centralization and harmonization.37 In their view, the principle of mutual recognition suffers from several inconsistencies and therefore does not ensure a stable allocation of regulatory powers in a multi-level system of rule making. First, the principle of mutual recognition rule established by the ECJ is a conditional rule: it applies only if the objectives or effects of diverging national regulations are equivalent. This conditional rule reduces the scope for a meaningful form of regulatory competition. In practice, EC Member States must submit all envisaged new technical rules to a special committee. This may have the effect that the rules are adapted before they become part of national legislation, so that the final outcome closely resembles harmonization. Also, the Cassis de Dijon ruling allows that market integration concerns may be given less weight than the protection of the general good in the host state.38 This possibility to justify national rules on the basis of ‘mandatory requirements’ of general interest does not create a stable solution and will initiate a dynamic process of re-allocating regulatory powers. Second, the scope for regulatory competition that may emerge under a regime of mutual recognition is very limited, since only buyers of the import 35 36

Weiler (2005, p. 25) at p. 58. Sun and Pelkmans (1995, p. 67); Weiler (2005) op.cit. and Pelkmans (2007,

p. 699). 37

Kerber and Van den Bergh (2008a, p. 447); Kerber and Van den Bergh

(2008b). 38

Weatherill (2005, p. 60).


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state and not sellers may choose between different regulations. For example, German consumers may prefer goods produced in conformity with Italian rules but German firms are not free to adapt their production according to Italian law. Mutual recognition does not help to preserve decentralized regulatory powers, because the states lose the regulatory autonomy over their domestic markets and retain regulatory power only over domestic firms. In this way, existing regulations for domestic markets are transformed into hardly defensible regulations for domestic producers. Complaints about ‘reverse discrimination’ may lead to problematic industrial policy efforts for improving the international competitiveness of domestic firms. Third, the deficiencies described above cannot be overcome by making mutual recognition an unconditional rule that would also offer a stable solution. The reason is that such rule may cause a race to the bottom. If this risk materializes, mutual recognition tends to be an inferior rule compared with (minimum) harmonization or the country of destination principle. In the opposite case, a free choice of law rule, which creates a free market for regulations and the highest possible degree of regulatory competition, will be superior to mutual recognition. In sum, the rule of mutual recognition does not seem to be a stable conflictof-law rule in a two-level system of regulations. Its inconsistencies and problems suggest that it will initiate a process leading to (de facto) harmonization, back to the country of destination principle, or to a free choice of law rule. 6.3

Race to the Bottom or Race to the Top: Theoretical Work and Empirical Evidence

If there is a sufficient degree of decentralization and conflict-of-law rules leave scope for regulatory competition, the question arises as to whether such competition will lead to ‘bad’ law (race to the bottom) or ‘good’ law (race to the top). As a preliminary remark it should be stated that in policy discussions it is often unclear what should be regarded as the ‘bottom’ and what should be seen as the ‘top’, provided there is scope for a race among legislators in either of these directions. For example, the EC Treaty states that the European Community strives for a ‘high’ level of consumer protection. This could be seen as the top to be reached. However, if this approach justifies far-reaching paternalistic interventions in markets, the resulting consumer protection rules may cause severe inefficiencies that in terms of legal quality resemble the bottom, rather than the top. Hence, to enable a meaningful discussion, criteria for judging the quality of law should be clearly defined. In this chapter, allocative efficiency is used as the relevant benchmark. Consequently, competitive processes should lead to an ‘optimal’ level of regulation and from this normative perspective neither the bottom nor the top is desirable.

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The risk of race to the bottom may be rephrased in economic terms as the danger of prisoners’ dilemmas.39 If states inform each other on the content of their regulatory policies, they may try to find solutions that maximize their joint welfare. For example, they may jointly decide on taking steps to protect air quality and share the costs of the necessary regulatory measures. However, if states do not communicate with each other and are trapped in a prisoners’ dilemma game, regulatory laxness may occur when rules have to be enacted and implemented. A state may wish to attract polluting business knowing that it will gain a competitive advantage, provided that other states do not act in the same way. However, if all other states anticipate such action and act similarly, only the businesses will gain. The result of this prisoners’ dilemma is a ‘race to the bottom’. Game theory suggests that prisoners’ dilemmas may be overcome through communication. By taking decisions jointly at the central level, states may be able to prevent regulatory laxness and make sure that welfare enhancing measures are taken and implemented. There is a very large theoretical economic literature that examines whether competition between regulators may cause a ‘race to the bottom’. The outcomes of these theoretical studies are highly dependent on the assumptions used in the underlying theoretical models. Under certain assumptions a ‘race to the top’ may ensue. Taking environmental law as an example, there is no unambiguous support in the theoretical literature for the claim that there will be a ‘race to the bottom’ over environmental standards. Game theoretic analyses show that interstate competition may produce either suboptimal lax or suboptimal stringent environmental regulations.40 Given that economic theory is not conclusive, scepticism about ‘race to the bottom’ claims is further warranted as long as there is no (or very little) empirical evidence supporting such claims. The ‘race to the bottom’ story is based upon the belief that states may wish to attract industry by lowering their environmental standards. However, it seems unlikely that firms will relocate existing plant and incur the costs of acquiring a new site, building a new facility and recruiting and training new workers to save pollution control costs that amount to only a small percentage of the total value of sales. Results from US studies indicate that there is little direct evidence of a relationship between the stringency of environmental regulations and plant location decisions.41 Also, research by Holzinger and Sommerer covering 19 European Member States (as well as the USA, Mexico and Japan) has not found a single case to support the risk of a ‘race to the bottom’ in environmental law. On the contrary, a general tendency towards upgrading the envi39 40 41

Rose-Ackermann (1992, p. 167). For a critical overview, see Revesz (1997, p. 535). Jaffe et al. (1995, p. 132).


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ronmental standards has been observed.42 Holzinger and Sommerer show that, theoretically, a ‘race to the bottom’ may develop in the case of free trade and unconditional mutual recognition of product standards and product processes. Conversely, a ‘race to the top’ may develop if symmetric firms (who have the same cost conditions and the same market share) are hindered by trade restrictions. Since neither of these scenarios is sufficiently realistic in the European Union (mutual recognition does not apply unconditionally and firms are seldom symmetric), in practice there may be no race at all and an upgrading of environmental standards may be better explained by harmonization measures decided at the central level. The conclusion seems to be that the scope for regulatory competition in environmental law is limited and that its outcomes are uncertain. Observed processes to upgrade environmental standards are not necessarily an outcome of regulatory competition but may be simply the consequence of harmonization measures favoured by politically powerful groups. This leads us to the important insight that an analysis of (de)centralization has to take account of potential political distortions, which will be briefly discussed in the next section.

7

A PUBLIC CHOICE PERSPECTIVE

The economic analysis above has made clear that arguments may be advanced in favour of both decentralization and centralization. So far, the discussion has proceeded on the assumption that regulatory powers are allocated in such a way as to maximize economic welfare. However, private politics rather than welfare considerations may be the driving force behind (de)centralization. It is well known that private interests may have an important impact on the contents of legal rules. The same is true with respect to decisions about whether to regulate at higher or lower levels of government. Interest groups will have a preference for rules being formulated at the level at which their strength is greatest relative to that of other groups with divergent interests in the same area.43 Hence, the question arises as to which interest groups may succeed in rent-seeking at the expense of the public at large. The role of pressure groups and bureaucracies will be analysed in turn. Interest groups may be strong enough to pervert the legislator and regulatory agencies. When not all interests are equally well represented, regulatory capture becomes possible. A general lesson from Public Choice is that industry groups

42 43

Holzinger and Sommerer (2007, p. 183). Noam (1982, p. 278).

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will be more powerful lobbies than consumer groups. To be a powerful lobby, the interests represented must be homogeneous and benefits from lobbying should not flow to outsiders, who do not pay for the benefits generated (freeriders). Consumer groups are large and have heterogeneous interests; excluding free-riding is equally very difficult or impossible. By contrast, some industry interests are represented by well-organized pressure groups that are able to cope with the free-riding problem easily through compulsory membership. This explains why the liberal professions (medical doctors, attorneys) have been successful in generating rents for existing practitioners.44 Large firms will also be powerful lobbyists: they may gather information about the substantive and procedural issues concerned at low cost (as a by-product of their other activities); they may also have more at stake and may therefore be better able to spread the fixed costs of information acquisition. The possibilities of regulatory capture have their limitations in the design of regulatory institutions. Although appropriate institutional design will not prevent regulatory capture altogether, it may nevertheless limit its scope. Three axioms are crucial to prevent regulatory capture: accountability, independence, and transparency. Regulators should be responsible for the consequences of their decisions; they should be independent from the interest groups they are supposed to control; and decision processes should be transparent to outside observers.45 These lessons from Public Choice are also relevant when allocation of competences in (quasi-)federal structures must be assessed. The case for centralization may be strengthened if it is a way of minimizing the impact of pressure groups and favouring efficient legal rule making. For example, pressure groups from the small and medium-sized retailing trade may be able to lobby national governments to enact fair trade rules that reduce competition but may fail in obtaining the same results at the European level. Indeed, the European Court of Justice has struck down many ‘fair trade’ rules that were inconsistent with the free movement of goods within the European Union.46 Conversely, if rent-seeking is pervasive at the central level, decentralized decision making will be preferable from an economic welfare perspective. For example, pressure groups from industries that comply with strict environmental standards may lobby in Brussels to have these standards imposed in other countries, so that they may gain a competitive advantage in international trade.47 44 See OECD, Competitive Restrictions in Legal Professions, Paris, 2007 (DAF/COMP/WP2(2007)3). 45 These criteria are taken from Neven et al. (1993, p. 175). 46 For an overview, see Barnard (2004). 47 See Faure and Lefevere (1995, p. 321).


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Attention must also be drawn to the bureaucrats’ self-interest in power and prestige. According to classic Public Choice analysis, the behaviour of bureaucrats may be explained by assuming that they pursue their self-interest, which includes salary, reputation and power. Unlike managers of private firms in competitive markets, they do not have to assess the marginal costs and benefits of their actions. As a consequence, the budget of the bureau will be maximized regardless of the quality of the bureaucrats’ performance and productive inefficiency will ensue.48 However, the extent of the welfare losses may be reduced by competition between different bureaux which have to compete for budget allocation49 (as is the case with the different Directorate Generals within the European Commission). In addition, high status and agreeable work tasks, rather than budget maximization, may secure the bureaucrats’ self-interest in power and prestige better.50 In the discussion on the allocation of competences, European bureaucrats may tend to favour centralization and harmonization of laws since these are ways to maximize their power and prestige. In this respect the argument that harmonization is needed to create a ‘level playing field’ for industry in Europe must be critically assessed (see Section 6.1 of this chapter). Linking the above insights to the topic of this chapter, it could be argued that centralization (including measures of harmonization) of private law is needed since nation states are not always able or may not be willing to enact ‘good’ laws that promote overall economic welfare. Such a claim is difficult to support with respect to facilitative law (for example, rules on formation and interpretation of contracts), since the parties involved may draft their own sets of rules. The argument would mainly apply to regulatory law: national states would not always be inclined or able to enact welfare enhancing rules protecting victims of torts or weak contract parties, in particular consumers. As to the latter, it may be argued that in many states consumer law is not yet well developed. However, a low degree of regulatory intervention may indicate that citizens are not willing to pay the price for mandatory consumer protection. Conversely, it should be acknowledged that there might be a minimum level of protection on which all consumers would agree, even if it results in higher consumer prices. Political failure to enact consumer laws in some states may deprive consumers of this protection. There remain two problems with the Public Choice justification in the field of private law. First, it is assumed that central rules are more efficient than decentralized rules. This is a far-reaching claim. Even if rules may be imposed

48 49 50

Niskanen (1971). Ogus (1994, p. 96). Dunleavy (1991).

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against the will of an individual state, there is no reason to assume that the central law-maker will enact efficient rules. A critical look at EC Directives immediately shows that several rules of consumer protection may cause inefficiencies rather than curing them. EC Directives often exhibit a lack of understanding of the basic economic insights and thus fall a long way short of providing an effective and efficient response to market failures in consumer markets.51 Second, the Public Choice reasoning applies only if there are lawmaking powers at the central level that supersede (the absence of) national legislation, such as in the case of the European Community. By contrast, the argument is not relevant at the global level if states have to consent to any obligation that is imposed upon their citizens and firms.

8

LESSONS FOR GLOBALIZATION OF PRIVATE LAW

As shown above, economic analysis of law provides useful insights for the policy debate about the desirability of competition between legal rules or the need to harmonize laws. If national rules cause substantial negative interstate externalities, if there is a risk of a ‘race to the bottom’ or if significant scale economies and/or transaction cost savings can be achieved by increased legal uniformity, a case for central rule making, including measures of harmonization, can be made. Conversely, if preferences concerning the contents of legal rules diverge strongly, relevant knowledge is not centrally available (or only at high costs), a ‘race to the top’ is possible or learning processes are very important, decentralized decision making and competition between legal rules may be preferable from an economic welfare perspective. The assessment of the costs and benefits of (de)centralization and harmonization varies across different fields of law, and even within a single legal discipline a refined analysis will be necessary to be able to conclude whether a particular legal rule should be centrally decided and harmonized or not. Within the confines of this chapter, it is not possible to provide final answers to the question as to which rules of private law should be harmonized. Only a number of general remarks will be made; some examples taken from the areas of tort law and contract law will illustrate the general line of reasoning. Aside from the problems concerning the desirability of centralization (including harmonization measures in the area) of private law, it is pertinent to recall that a world-wide private law may simply be impossible. Within the European Union, states have delegated authority to European institutions (the European Commission, the Council of the European Union and the European

51

Examples are discussed in Van den Bergh (2007b, pp. 196–7).


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Parliament) and the consent of all EU Member States is not required to centrally establish legal rules. Moreover, the principle of mutual recognition developed by the European Court of Justice may imply that the application of national rules is considered contrary to the four economic freedoms. In this way, an impetus towards harmonization may be given by judicial rule making. By contrast, within the WTO there is no comparable institutional framework for harmonizing laws in order to reach market integration goals. Agreements still have to be negotiated by individual states. Since these states have retained their sovereignty they may request that imported goods and services fully comply with national rules. In addition, in the absence of an international court enjoying powers comparable to those of the ECJ, there is no general rule based on case law that allows putting aside national rules that infringe economic freedoms. As a consequence, the scope for enacting harmonized rules of private law is still very limited at the global level. Hereinafter, the economic arguments that have been introduced in the previous part of this chapter will be assessed anew, in order to find out to what extent they support either centralization combined with harmonization or decentralization and competition between rules in the field of private law. 8.1

Interstate Externalities

A major economic argument in favour of centralist decision making, in particular harmonization of laws, is the need to internalize negative interstate externalities. From an economic point of view states should be able to choose the rules which best satisfy the preferences of their citizens as long as they also bear the full costs of their legal decisions.52 Where trans-boundary effects occur central rule making may be required to avoid costs being thrown upon other jurisdictions. However, compared with other fields of law, such as environmental law,53 the relevance of the externalities argument in the field of private law is limited. To justify central or global private law two things must be shown. First, rules of private law must affect transactions with interstate repercussions. Second, it must be impossible to fully internalize negative externalities arising from interstate transactions by applying national rules of private law. Both conditions will not be easily satisfied. Even if this is the case, the central rule must provide an adequate answer to the externalities problem and this goal may not be reached due to Public Choice problems (rent-seeking by pressure groups active at the central level). 52 The economic theory underlying this important insight is the Tiebout model on optimal provision of public goods (Tiebout op.cit.). See also the literature on economic federalism, Oates (1999, p. 1120). 53 See Faure (2000, pp. 467–508).

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In the search for trans-boundary torts, product liability can be regarded as a major area of private law to be governed by central rules. Sellers of defective products should not escape liability when harm occurs outside the territory of the exporting state. Manufacturers of defective products are generally liable in damages for harm suffered in export markets. If the law of the export state does not allow recovery for certain types of damage or even totally exempts the product from the scope of the product liability law, compensation will be available according to the law of the import state if the law of the latter country does not contain similar exclusions.54 Hence, if a defective product is exported, negative externalities do arise but they do not automatically constitute a sufficient cause for legislative action at the central or global level. A global private law would accomplish a useful task only in very specific circumstances, where the rules of the import country do not allow a full internalization. This task would be to fill the gaps of national tort laws when, for some reason, national legislators cannot easily cure these deficiencies. An example could be a state law which does not easily allow recovery since the requirement of causation is too stringent or immaterial losses cannot be compensated. Due to such limitations, a full internalization of the externalities caused by tortious behaviour may not be possible. This line of reasoning points to inefficiencies in national state laws and thus parallels the Public Choice argument in favour of central rule making (see Section 7 of this chapter). However, efficiency requires that the goal of full internalization can be more easily reached by central rules than by rules enacted at lower levels. If the opposite scenario holds, Public Choice arguments favour decentralization. Interestingly, product liability was the first topic covered by the harmonization process in the European Union.55 Even though product liability is a good candidate for harmonization, the EC Directive does a poor job in addressing the relevant economic issues.56 From an economic perspective, it is remarkable that the EC Directive does not harmonize different legal approaches to problems of causation or compensation of immaterial losses.57 Deficiencies of national laws may prevent a full internalization of the Community-wide externalities and EC law may be justified for filling these gaps. Similar problems arise with respect to the proof of causation in product liability cases but this issue too is not covered by the harmonization process. In addition, the EC Directive increases the risk of cross-border externalities by giving Member States the option of imposing a ceiling (of not less than €70 54 The danger that all Member States laws provide for lax rules, which would cause a ‘race to the bottom’, is discussed below. 55 Directive 85/374, OJ, 1985, L210/29. 56 Faure (2000, p. 467). 57 Van den Bergh (1998, pp. 140–45).


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million) on damages resulting from death or personal injury caused by identical items with the same defect. Rather than inefficiencies being cured, the externalities problem is thus aggravated. This example shows that the interstate externalities argument does not play an important role in the discussions on harmonization of tort law. It also warns against the view that central rules are easily able to correct inefficiencies of rules enacted at lower levels of government. At first sight, the externalities argument does not seem convincing in the field of contract law. Generally, contracts do not cause effects for third parties because the rights and obligations agreed upon only concern the contracting partners. This does not imply, however, that the externalities problem is entirely irrelevant. It is indeed possible that a network of contracts generates externalities. Decisions as to quality and price taken by a trader may have both positive and negative effects on downstream or upstream salespersons of the same distribution chain. For example, a decision to lower quality to achieve higher profits may bring short-term benefits to a single retailer, but will harm the distribution network at large. Upstream liability of producers and wholesale sellers is necessary to make sure that proper incentives to ensure quality are given to parties with actual control over the likelihood of product defects. Again, it must be added that a showing of externalities is in itself no sufficient reason to justify harmonization of laws. It must be impossible to internalize the externalities by applying national rules of contract law; for example, because contract remedies are made unavailable by technical reasons of national law. The task of rules enacted at the central level would then be to fill the gaps when performance or compensation claims and, therefore, full internalization of cross-border externalities are impossible. Also here an example is appropriate to show that the externalities problem is not a major concern in the case of centralization and that there is no guarantee that efficient central rules will be designed. The European legislator does a poor job in curing interstate externalities in international distribution networks. In the EC Directive on consumer sales contracts and guarantees, the important matter of upstream liability is curiously left out of the harmonization project.58 There is no rule to avoid the fact that claims in cases of nonconformity with the contract terms stop at the border. A consumer can sue a retailer, who could exercise his right of redress against a wholesaler or the importer, but the availability of a right of redress against the producer in an export country is left to the national law of that country.

58

See consideration 9 of Directive 1999/44 (OJ, 1999, L171/12).

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8.2

Regulatory Competition

In line with the above analysis (see Section 6) two questions should be asked: (i) May regulatory competition develop in fields of private law? (ii) Is there a risk that such competition may cause a race to the bottom? Theoretically, private law could be fully decentralized and free choice of law could allow competition amongst a large set of diverging rules. In practice, there is a growing tendency to decide contents of rules of private law at a central level and competition is limited by harmonization measures and excluding free choice of law. The European Union has started a very ambitious programme of full harmonization of rules protecting consumers that limit the possibility of Member States to freely decide the contents of contract law.59 Freedom of choice for consumers is excluded by Article 5 of the Rome Convention, which stipulates the binding rule that cross-border transactions are governed by the law of the country where the consumer resides.60 There is no comparably ambitious centralization plan in the area of tort law, so that the scope for regulatory competition is larger and a risk of a race to the bottom cannot totally be excluded. As the existing harmonization measures still leave scope for regulatory competition, the risk of a race to the bottom scenario on the markets for private law in Europe does not seem high. Theoretically, the risk of a race to the bottom in consumer law has been shown by Sinn, who argues that the market failures addressed by consumer law will re-emerge if competition between consumer protection rules is made possible.61 This reasoning requires information asymmetries on markets for legislation that may be less severe than information asymmetries in ordinary markets.62 Moreover, in the real world consumers are protected by the rules of their home state. To attract industry by means of ‘bad’ consumer law would thus imply that a national legislator decides to make its own consumers worse off. The presence of politically powerful consumer groups may make this choice unlikely. It seems equally implausible that firms will relocate plants to profit from lenient rules of consumer contract law. Other factors, such as the tax rate, the availability of public services and the unionization of labour forces, may be far more important decision criteria in location decisions of businesses. Finally, if rules of contract law are efficiency motivated they will increase and not decrease the competitiveness of firms. States may thus also have incentives to engage in a ‘race to the top’.63 59 60 61 62 63

See the references in footnotes 1 and 2. For a discussion and examples, see Wagner (2002, pp. 1005–1006). Sinn (1997, p. 247). Kerber and Van den Bergh op.cit. (2008b). Van den Bergh, op.cit. (1998, pp. 137–9).


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In the field of tort law, the limited reach of the harmonization measures leaves more scope for regulatory competition. For example, the EC Product Liability Directive leaves freedom to the Member States to decide whether product manufacturers may limit their liability by profiting from a development risk defence. It has been argued that the optional nature of the development risk defence may distort business decisions as to where to locate and that businesses may have a preference to ‘test’ products in states that maintain the defence.64 This example shows that the Directive is not an effective instrument to curtail a ‘race to the bottom’ if such scenario materializes. However, the fear of a risk of a race to the bottom may be misplaced. Not only is there no hard empirical evidence that supports the decision to (re)locate. Even more importantly, testing products in host states may increase global welfare by overcoming the negative impact of the exclusion of the development risk defence in home states. In spite of its potential disadvantages, legal diversity with respect to the admissibility of the development risk defence may protect incentives to innovate and thus preserve important learning processes in the market.65 The above analysis assumed that the possibility of a race to the bottom is low since states can only acquire benefits in the case of physical migration of firms. In the area of contract law and tort law, this is a realistic assumption in as far as states cannot charge foreign firms for using their legal system. The discussion on regulatory competition in the field of corporate law shows that regulatory competition becomes intense if states are able to charge fees for making use of their company law. Romano reports that 16 per cent of the total tax revenue of Delaware is derived from incorporation fees.66 However, it seems less feasible to charge fees for using contract or tort doctrines developed in a single jurisdiction. In sum, the risk of a race to the bottom is no convincing argument to justify centralization and harmonization of laws. 8.3

Cost Savings

In the previous sections it was shown that neither the interstate externalities argument nor the risk of a race to the bottom justifies far-reaching centralization of private law. This leads to the question of whether cost savings may justify the enactment of rules of private law at central levels of government. Besides the level playing field argument, unification and harmonization are usually defended because of the cost savings they may generate and the increase in international trade that may ensue as a beneficial consequence of 64 65 66

Weatherill, op.cit. (p. 145). Geistfeld (2000, pp. 362–4). Romano (1993, p. 89).

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these cost reductions. Before investigating the merits of the cost savings argument for unification or harmonization of private law, it is pertinent to recall that an exclusive focus on potential benefits in international trade neglects the possible disadvantages of centralization plans. Below, the relevance of the cost savings argument and its linkage to benefits of increased international trade is further analysed. The potential costs of centralization are discussed in Section 8.4. It may be recalled from the analysis in Section 5 that cost savings may take two forms: scale economies and transaction cost savings. Scale economies may be important if information must be collected about costs and benefits of alternative rules: for example, to enact efficient safety standards. However, such scale economies seem to be of less importance in the field of private law. They are absent when facilitative rules (enabling formation and execution of contracts) must be formulated. In the case of regulatory rules (such as consumer protection regulation) centralization may generate economies in information production. However, these cost savings may be outweighed by the loss of information about the effects of alternative rules generated by regulatory competition. Transaction cost savings result from greater legal certainty in the case of uniform or harmonized rules of private law. As discussed above, in international trade legal certainty may remain an illusion as long as there is no uniformity in the way legal rules are interpreted. Whereas the European Court of Justice may contribute to the achievement of transaction cost savings through its preliminary rulings, there is no comparable court which could provide legal certainty at the global level. Private ordering mechanisms may fill this gap. In international trade, standardized contracts (lex mercatoria) and reputation building may be more powerful tools to cope with uncertainty on legal rules than harmonization measures decided by a central public regulator. Finally, even if public ordering mechanisms succeed in creating more legal certainty it remains doubtful that cross-border trade will increase after harmonization of laws. As discussed above, hard evidence on increased trade as a result of harmonization of laws is lacking and the real impact of diverging legal rules on trade flows across countries remains largely unknown. Given the large ambiguities that characterize the cost savings argument, it will be clear that centralization of private law at the global level cannot easily be justified by increases in international trade that are the consequence of greater legal uniformity. Hence, there is a risk that the cost savings argument is abused in the policy discussions to justify centralization. This risk may be contained by making use of distinctions that properly account for the differences relating to both the size of the transaction cost savings and their impact on trade flows across countries. In its present form, the market integration


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argument is far too general; it lacks distinctive power67 and owes its strength more to the fact that it is constantly repeated than to convincing analysis. The quality of the policy discussion will be improved by distinguishing areas where transactions may be impeded by differences in legal rules and areas where such problems can be overcome easily. Both the qualifications of the trading partners and the size of the risk factor in international trade transactions may be helpful criteria to downsize the cost savings argument to its right proportions. The ‘barriers to trade’ argument seems less powerful in business-to-business (B2B) relations than in business-to-consumer (B2C) relations. The reasons are threefold. First, firms can hire experienced lawyers and may more easily inform themselves about differences in legal rules than individual consumers are able to do. Second, firms may resort to private ordering mechanisms that circumvent the problems resulting from diverging legal rules. Even under legal uncertainty firms may develop joint welfare maximization strategies if they are involved in repeated transactions, recognize opportunistic behaviour and can impose sanctions on non-cooperative behaviour. By building long-term relationships (relational contracts) and resorting to trade intermediaries, firms will become repeat players. Firms may also be able to assess whether a contract party behaves cooperatively by limiting the transactions to narrowly defined groups. The membership of such groups may then signal that a trading party kept his promises in the past and is likely to behave also cooperatively in the future to avoid tough sanctions, such as exclusion. Cooperative behaviour may be stimulated further by specific investments68 or securities, such as a bank warranties.69 Third, firms may establish autonomous private rules and achieve cost savings through standardization of their contracts. In sum, firms active in international trade have different possibilities to overcome problems caused by legal diversity and, therefore, the negative impact of legal uncertainty on the volume of international trade may be limited. The picture is different in business-to-consumer contracts. First, consumers face greater difficulties when they want to inform themselves about differences in legal rules. Second, reputation mechanisms do not work in the same way as in B2B contracts. Third, there is no equivalent of a lex mercatoria for international transactions between businesses and consumers. It should be added that reputation building may develop on the internet (for example, through online reputation channels, such as www.tripadvisor.com) and that

67 68 69

See also Faure and Hartlief (2003, p. 173). Schmidtchen (1994, pp. 57, 76; 1995, p. 56). Rühl, op.cit. (p. 19).

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internet firms (such as Amazon) may equally develop standardized consumer contracts. However, one may doubt whether market failures in consumer markets could be sufficiently cured by these mechanisms.70 In addition to the distinction between B2B and B2C contracts, the size of the risk in international trade may be a second factor in assessing the relative importance of the cost savings argument. Deliveries of goods are likely to pose fewer problems than contracts relating to services. For simple goods that require no post-sales service, such as books, compact discs, tobacco products and alcoholic drinks, an international market has developed in the absence of uniform contract law.71 By contrast, contracts for complex services that are entered into for a long time period and entail substantial risks may not develop smoothly at the international level without a supporting legal framework. Whereas private ordering mechanisms may work relatively well in the former case (as it can again be shown by the Amazon example), it is doubtful that these devices can be a substitute for central regulation in the latter case. The recent financial crisis has shown that the reputation mechanism does not suffice to prevent huge risks and that central rule making at the global level is needed to enable the continuation of international transactions.72 A look at existing EC Directives on consumer law shows that the European legislator is not concentrating its efforts on areas where the barriers to trade argument appears to be the most convincing. The EC Directive on doorstep selling73 lacks the cross-border component;74 the EC Directive on timesharing75 does not address the long-term problems of poor maintenance services; and the EC Directives on financial services76 limit themselves to information remedies and pay insufficient attention to the need for substantive rules to guarantee contract quality and performance. In conclusion, the international trade argument referring to cost savings in order to justify centralization is much stronger in the case of B2C relations than in the context of B2B contracts and probably strongest in the case of B2C consumer contracts for delivery of complex services.

70 71 72 73 74 75 76

Rühl, op.cit. Wagner, op.cit. (pp. 1016–17). Schaefer (2008). Directive 85/577, OJ 1985 L372/31. See also the criticisms by Weatherill, op.cit. Directive 94/47, OJ 1994 L280/83. Directive 87/102, OJ 1987 L42/48; Directive 2002/65 OJ 2002 L271/16. For a discussion, see Weatherill, op.cit. (p. 86).


8.4

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Benefits of Decentralization

An economic analysis of harmonization of private law leads to the conclusion that arguments in favour of unification and harmonization are weak. Conversely, economic arguments in favour of decentralization and competition between legal rules are strong. Heterogeneity of preferences, the importance of learning processes and decentralized availability of information all plead in favour of enacting rules at the lowest possible level of government. First, different rules of private law may satisfy a greater number of diverging preferences. The discussions in the legal literature on the goals of tort law and contract law illustrate that preferences of citizens may differ substantially. If a country regards tort law mainly as a compensation mechanism, it may enact rules that are absent in tort laws of other countries that focus more on deterrence and aim at guaranteeing compensation by relying on insurance markets.77 The different views on the desirability of punitive damages78 and the compensation of non-pecuniary losses79 nicely illustrate this heterogeneity. Also in the field of contract law preferences differ, as can be learnt from the debate on the desirable amount of consumer protection. Rich countries may prefer a high level of consumer protection irrespective of the price increases such a rule may cause, whereas poor countries may prefer cheaper products that can be financially afforded by a large group of consumers. One may object that, from a policy perspective, it may be desirable to guarantee a minimum level of consumer protection to all citizens. Politicians may feel that low standards infringe widely held perceptions of equity and justice, or even violate human rights.80 In the European context, the consequence would then be that the preferences of the citizens can be overruled by the political desire to provide a basic quality of life for all European consumers. However, to guarantee a basic quality of life to European citizens, it would be much more important to assure the provision of a minimum level of public health and social security. The latter areas are very sensitive fields of policy making and EU Member States have been insisting on keeping their sovereignty in deciding on those issues. In the current state of affairs, it thus seems rather odd to enact European rules to provide a minimum quality of consumer goods, if a minimum protection for more basic needs cannot be guaranteed.81 Second, different rules of private law allow important learning processes and may improve the quality of law through innovation. Comparative lawyers 77 78 79 80 81

Van den Bergh, op.cit. (1998). See Koziol and Wilcox (2009). See Rogers (2001). Ogus, op.cit. Faure (2003, pp. 67–8).

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will generally agree that competition for the best legal solution has been occurring in Europe. Rules of contract law have been converging towards the most efficient solution, thanks to ‘yardstick competition’ initiated by the writings of legal scholars who were impressed by the blessings of a foreign legal rule.82 Also, the evolution of the consumer laws of EC Member States offers different examples illustrating the potential scope of the learning processes. Examples include the sanction for sending unsolicited products to consumers, the regulation of cooling-off periods and the way to judge deception in advertising cases.83 The counterargument that experimentation will lead to an unmanageable amount of diverging rules and an intolerable level of legal uncertainty can be easily rebutted. Mutual learning processes may alleviate the convergence of legal rules and amount to an ex post or market-based harmonization of laws. Hence, competition between legislators in the EC does not necessarily imply that rules will greatly differ. Whereas unification and harmonization by means of central rules (Regulations and Directives) implies forced coordination of legislative provisions in the Member States, dynamic competitive processes may produce voluntary harmonization. The result of the process of innovation and subsequent amendment may be a substantial uniformity across the EC Member States. Third, information advantages at lower levels of government plead in favour of decentralization. Problems of information asymmetries in consumer markets require solutions that are optimally adapted to local market conditions. For example, consumers living in countries with less developed market economies (which previously had a state planned economy) may be more vulnerable to certain types of unfair trade practices, such as pyramid promotional schemes. The different degrees of evolution of the market economy should be reflected in different levels of mandatory information duties and concomitant sanctions. Also, the regulator who is closest to the consumers in question is best placed to enact the necessary information regulation. A central regulator would face an almost impossible task in identifying the information that must be conveyed and the way in which it must be communicated in order to allow consumers to make an informed choice, thereby fully taking account of their divergent expectations as to the variety and quality of products offered. Fourth, decentralization enables regulatory competition and a ‘race to the top’. The most intense form of regulatory competition occurs under a regime of free choice of law. Under this option, a market for consumer protection rules emerges in which states offer national regulations as certifications to all firms that are active in the market. The firms can choose freely between them

82 83

Wagner, op.cit. (p. 1012); Ogus op.cit. (pp. 412–13). Van den Bergh, op.cit. (2007b).


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and export their products and services if they are in conformity with one of the national regulations. The decisive question is whether the consumers are capable of assessing the quality of the consumer protection rules. In this respect, it should be taken into account that both the reputation mechanism and information intermediaries, who have special knowledge and are able to monitor the quality of these regulations, can help the consumers in their assessment of diverging national regulations. If the information problem is solved, the most important disadvantage of the free choice of law solution is eliminated. Other disadvantages, such as higher costs through the parallel existence of several regulations, are relatively small in comparison with the potentially great advantages.

9

CONCLUSIONS

In a globalized world, difficult questions arise as to the optimal level of lawmaking in multi-level territorial jurisdictions. The sovereignty of traditional nation states is challenged since it is by no means evident that the balancing of costs and benefits at lower levels of decision making corresponds with goals of welfare maximization at higher levels of government. In the European Union, the goal of market integration is advanced by measures of unification and harmonization of laws. It is regularly argued that differences in legal rules make it difficult for firms to expand their operations beyond national borders and that this divergence creates distortions of competition, which are at odds with the need for a ‘level playing field’ for industry. Moreover, consumers will be deterred from cross-border shopping since they do not enjoy the same legal protection across the different EU Member States. Under the consumer protection flag, a broad set of rules has meanwhile been enacted that affect legal doctrines of national contract law and form the basis of the new discipline of ‘European contract law’. Since, at the global level, there are no institutions that enjoy similar regulatory and judicial powers the impact of world trade law on the private law of nation states has remained minor. However, there is a risk that the European model may inspire future developments within the World Trade Organization and that limited or indirect forms of harmonization of private law (for example, through a variant of the principle of mutual recognition) may be considered necessary to achieve an integrated global economic market. Hence, the time seems ripe for a critical assessment of the free trade argument as a basis for justification of uniform or harmonized rules of private law. At first blush, the market integration argument seems plausible: legal uncertainty and transaction costs increase with an expanding number of diverging legal rules. However, a closer analysis shows that the argument,

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even if it could be empirically substantiated, provides only a very partial view and neglects the important insights from the economics of federalism. A fullfledged economic analysis provides both arguments in favour of decentralization (and competition between legal rules) and factors that may justify centralization (and unification or harmonization of laws). Arguments in favour of decentralization include: heterogeneity of preferences, better access to information at lower levels of government, and innovation. Diverging rules may satisfy a greater number of preferences. The benefits of decentralization further increase the more important are information benefits at lower levels of government. Finally, a laboratory of diverging rules enables learning processes that increase innovation. Conversely, the need to internalize interstate externalities and the achievement of cost savings may justify centralization. Decentralized lawmaking is efficient only if the benefits and costs remain within the territorial jurisdiction that enacted the rules. If costs are thrown upon other jurisdictions, harmonization measures may be needed to ensure that the negative externalities are internalized. Moreover, centralization may be defended by showing that legal uniformity and harmonization measures decrease transaction costs and, in this way, promote international trade. To the above argumentation, one needs to add an analysis of the likely effects of regulatory competition and a Public Choice assessment of (de)centralization. If there is a serious risk of a ‘race to the bottom’, centralization and (minimum) harmonization may be needed to achieve efficiency. By contrast, the chances of a ‘race to the top’ justify decentralization and competition between legal rules. Finally, the relative power of pressure groups at different vertical levels of decision making may support the choice in favour of or against centralization. It follows from the above that, in the European policy debate, the market integration argument is often abused. The problem is not only that the negative impact of different legal rules on cross-border trade is not proven; in particular, legal diversity is not isolated from other factors that have a bearing on trade flows, such as language and cultural differences, and travel costs. But even if the claim could be empirically substantiated, the benefits of an integrated market would still need to be balanced against the costs of centralization. The potential disadvantages include the impossibility of satisfying different preferences, the loss of information benefits at lower levels of government, less innovation, no scope for a regulatory race to the top, and an increased impact of powerful pressure groups at the central level. For the European policy maker this message seems to come (too) late, since an overambitious programme to fully harmonize consumer contract law has already been proposed. At the global level, the warnings of this chapter should be taken even more seriously. Indeed, the arguments in favour of decentral-


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ization become the more powerful the larger is the number of nations involved: more diverging preferences, more information benefits at decentralized decision levels, more scope for innovation, and an increased risk of regulatory capture at the central level. As long as the WTO does not enjoy similar regulatory powers a ‘world consumer law’ still seems very far away. However, it may take less time for the WTO to adopt some form of mutual recognition principle and this may become the Trojan horse in a diversified global legal order. The European experience shows that mutual recognition, far from allowing regulatory competition and protecting against far-reaching centralization, has become an alternative pathway to achieve harmonization.

REFERENCES Barnard, C. (ed.) (2004), The Substantive Law of the EU: The Four Freedoms, Oxford: Oxford University Press. Bernstein, L. (1992), ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’, Journal of Legal Studies, 21(1), p. 115. Camesasca, P. and R. Van den Bergh (2002), ‘Achilles Uncovered – Revisiting the European Commission’s 1997 Market Definition Notice’, Antitrust Bulletin, 47(1), p. 146. Coase, R. (1960), ‘The Problem of Social Cost’, Journal of Law and Economics, 3, p. 1. Collins, H. (2002), ‘Transaction Costs and Subsidiarity in European Contract Law’, in S. Grundmann and J. Stuyck, An Academic Green Paper on European Contract Law, The Hague: Kluwer Law International, p. 269. Depoorter, B. (2000), ‘Regulation of Natural Monopoly’, in B. Bouckaert and G. De Geest, Encyclopedia of Law and Economics, No. 5400, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, p. 498. Dunleavy, P. (ed.) (1991), Bureaucracy and Public Choice: Economic Explanations in Political Science, Hemel Hempstead: Harvester Wheatsheaf. Faure, M. (2000), ‘Product Liability and Product Safety in Europe: Harmonization or Differentiation?’, Kyklos, 53 (4), pp. 467–508. Faure, M. (2001), ‘Regulatory Competition versus Harmonization in EU Environmental Law’, in D. Esty and D. Geradin (eds), Regulatory Competition and Economic Integration – Comparative Perspectives, Oxford: Oxford University Press, p. 263. Faure, M. (2003), ‘How Law and Economics may Contribute to the Harmonisation of Tort Law in Europe’, in R. Zimmermann (ed.), Grundstrukturen des Europäischen Deliktsrechts, Baden-Baden: Nomos, pp. 31–82. Faure, M. and T. Hartlief (2003), ‘Naar een Harmonisatie van Aansprakelijkheidsrecht in Europa? Een Kritisch Rechtseconomisch Perspectief’, Nederlands Juristenblad, p. 170. Faure, M. and J. Lefevere (1995), ‘Protecting Drinking Water Quality against Contamination by Pesticides: An Alternative Regulatory Framework’, Review of European Community and International Environmental Law (RECIEL), p. 321. Geistfeld, M. (2000), ‘Products Liability’, in B. Bouckaert and G. De Geest,

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Encyclopedia of Law and Economics, No. 5140, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 347–95. Guzman, A. (ed.) (2008), How International Law Works: A Rational Choice Theory, New York: Oxford University Press. Heine, K. and W. Kerber (2002), ‘European Corporate Laws, Regulatory Competition and Path Dependence’, European Journal of Law and Economics, 13(1), p. 43. Holzinger, K. and T. Sommerer (2007), ‘Race to the Bottom oder Race to Brussels? Regulierungswettbewerb im Umweltschutz’, in K. Heine and W. Kerber (eds), Zentralität und Dezentralität von Regulierung in Europa, Stuttgart: Lucius & Lucius, p. 183. Inman, R. and D. Rubinfeld (1997), ‘Rethinking Federalism’, Journal of Economic Perspectives, 11(4), pp. 43–64. Jaffe, A., S. Peterson, P. Portney and R. Stavins (1995), ‘Environmental Regulation and the Competitiveness of US Manufacturing: What Does the Evidence Tell Us?’, Journal of Economic Literature, 33(1), p. 132. Kerber, W. (2007), ‘Regulierung in föderalen Mehr-Ebenen-Systemen’, in K. Heine und W. Kerber (eds), Zentralität und Dezentralität von Regulierung in Europa, Stuttgart: Lucius & Lucius, p. 15. Kerber, W. and O. Budzinski (2003), ‘Towards a Differentiated Analysis of Competition of Competition Laws’, ZWeR – Journal of Competition Law, 1(4), p. 411. Kerber, W. and R. Van den Bergh (2008a), ‘Mutual Recognition Revisited: Misunderstandings, Inconsistencies, and a Suggested Reinterpretation’, Kyklos, 61(3), pp. 447–65. Kerber, W. and R. Van den Bergh (2008b), ‘Wechselseitige Anerkennung von Regulierungen: Ist die EU ein Vorbild für das globale Handelsregime?’, in R. Ohr (ed.), Internationalisierung der Wirtschaftspolitik, Berlin: Duncker & Humblot, pp. 147–68. Koziol, H. and V. Wilcox (eds) (2009), Punitive Damages: Common Law and Civil Law Perspectives, Vienna: Springer. Kraakman, R., P. Davies, H. Hansmann, G. Hertig, K, Hopt, K. Kanda and E. Rock (eds) (2004), The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford: Oxford University Press. Legrand, P. (1997), ‘The Impossibility of Legal Transplants’, Maastricht Journal of European and Comparative Law, 4(2), p. 111. Milgrom, P. and B. Weingast (1994), ‘Coordination, Commitment, and Enforcement: The Case of the Merchant Guild’, Journal of Political Economy, 102(4), p. 745. Neven, D., R. Nuttall and P. Seabright (1993), Merger in Daylight: The Economics and Politics of European Merger Control, London: CEPR. Niskanen, W. (ed.) (1971), Bureaucracy and Representative Government, Chicago: Aldine-Atherton. Noam, E. (1982), ‘The Choice of Governmental Level in Regulation’, Kyklos, 35(2), pp. 278–91. Oates, W. (ed.) (1972), Fiscal Federalism, New York: Harcourt Brace Jovanovich. Oates, W. (1999), ‘An Essay on Fiscal Federalism’, Journal of Economic Literature, 37(3), p. 1120. Ogus, A. (ed.) (1994), Regulation: Legal Form and Economic Theory, Oxford: Clarendon Press. Ogus, A. (1999), ‘Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law’, The International and Comparative Law Quarterly, 48, pp. 405–18.


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Ott, C. and H.-B. Schäfer (2002), ‘Die Vereinheitlichung des europäischen Vertragsrechts – ökonomische Notwendigkeit oder akademisches Interesse?’, in C. Ott and H.-B. Schäfer (eds), Vereinheitlichung und Diversität des europäischen Zivilrechts in transnationalen Wirtschaftsräumen, Tübingen: Mohr Siebeck, p. 203. Pelkmans, J. (2007), ‘Mutual Recognition in Goods. On Promises and Disillusions’, Journal of European Public Policy, 14(5), p. 699. Porter, M. (ed.) (1990), The Competitive Advantage of Nations, New York: Palgrave Macmillan. Revesz, R. (1997), ‘The “Race to the Bottom” and Federal Environmental Regulation: A Response to Critics’, Minnesota Law Review, 82(2), p. 535. Rogers, H. (ed.) (2001), Damages for Non-Pecuniary Loss in a Comparative Perspective, Wien: Springer. Romano, R. (1993), The Genius of Corporate Law, Washington, DC: AEI Press. Rose-Ackermann, S. (ed.) (1992), Rethinking the Progressive Agenda: The Reform of the American Regulatory State, New York: Free Press. Rühl, G. (2008), ‘Effizienzprobleme bei grenzüberschreitenden Rechtsstreitigkeiten’, German Working Papers in Law and Economics, Article 17. Salmon, P. (1987), ‘Decentralization as an Incentive Scheme’, Oxford Review of Economic Policy, 3(2), p. 24. Schaefer, H.-B. (2008), ‘Kommentar zu Giesela Rühl: Effizienzprobleme bei grenzüberschreitenden Rechtsstreitigkeiten’, German Working Papers in Law and Economics, Article 18. Schmidtchen, D. (1994), ‘Neue Institutionenökonomik internationaler Transaktionen’, Jahrbuch Neue Politische Ökonomie, p. 57. Schmidtchen, D. (1995), ‘Territorialität des Rechts, Internationales Privatrecht und die privatautonome Regelung internationaler Sachverhalte’, RabelsZeitschrift, p. 56. Schmidtchen, D. and H.-J. Schmidt-Trenz (1990), ‘New Institutional Economics of International Transactions: Constitutional Uncertainty and the Creation of Institutions as Exemplified by the Multinational Firm’, Jahrbuch für neue politische Ökonomie, 9, p. 3. Sinn, H.-W. (1997), ‘The Selection Principle and Market Failure in Systems Competition’, Journal of Public Economics, 66, p. 247. Sun, J.M. and J. Pelkmans (1995), ‘Regulatory Competition in the Single Market’, Journal of Common Market Studies, 33, p. 67. Tiebout, C. (1956), ‘A Pure Theory of Local Expenditure’, Journal of Political Economy, 64, p. 416. Van den Bergh, R. (1998), ‘Subsidiarity as an Economic Demarcation Principle and the Emergence of European Private Law’, Maastricht Journal of European and Comparative Law, 5, pp. 129–52. Van den Bergh, R. (2000), ‘Economic Criteria for Applying the Subsidiarity Principle in European Environmental Law’, in R. Revesz, P. Sands and R. Stewart (eds), Environmental Law, the Economy, and Sustainable Development, Cambridge: Cambridge University Press, p. 80. Van den Bergh, R. (2007a), ‘The More Economic Approach and the Pluralist Tradition of European Competition Law’, in D. Schmidtchen, M. Albert and S. Voigt (eds), The More Economic Approach to European Competition Law, Tübingen: Mohr Siebeck, pp. 27–36. Van den Bergh, R. (2007b), ‘The Uneasy Case for Harmonising Consumer Law’, in K. Heine and W. Kerber (eds), Zentralität und Dezentralität von Regulierung in Europa, Stuttgart: Lucius & Lucius, pp. 183–206.

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Van den Bergh, R. and P. Camesasca (eds) (2006), European Competition Law and Economics: A Comparative Perspective, London: Sweet & Maxwell. Vanberg, V. and W. Kerber (1994), ‘Institutional Competition among Jurisdictions: An Evolutionary Approach’, Constitutional Political Economy, 5(2), p. 193. Von Hayek, F. (1978), ‘Competition as a Discovery Procedure’, in F. von Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas, Chicago: University of Chicago Press, p. 66. Wagner, G. (2002), ‘The Economics of Harmonization: The Case of Contract Law’, Common Market Law Review, 39, pp. 995–1023. Weatherill, S. (2005), EU Consumer Law and Policy, Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Weiler, J. H. (2005), ‘Mutual Recognition, Functional Equivalence and Harmonization in the Evolution of the European Common Market and the WTO’, in F. Kostoris Padoa Schioppa (ed.), The Principle of Mutual Recognition in the European Integration Process, New York: Palgrave, pp. 25–84. Wouters, J. and B. De Meester (eds) (2007), The World Trade Organization. A Legal and Institutional Analysis, Antwerp: Intersentia.

4. Globalization and harmonization of international trade law Sieg Eiselen 1

INTRODUCTION

The phenomenon of globalization is speeding up in the current century. Although there is as yet no clear and generally accepted definition of what exactly globalization means and includes, there are a number of core characteristics which can be used to describe the phenomenon in international trade.1 Globalization is characterized by the increasing way in which international borders are becoming irrelevant, especially in respect of international trade, due to the modern forms of transport, modern forms of communication (specifically the internet) and the use of English as the common trade language. It is a process driven mostly by economic and technological forces, irrespective of any legal barriers that may exist.2 The way in which international markets have become integrated and mutually dependent in the last century and a half was dramatically demonstrated first by the worldwide recession, caused by the protectionist trade measures of the United States and the ensuing tariff war, during the early part of the twentieth century,3 and more recently by the Asian financial crisis in 1997, which caused not only severe economic turbulence in South-East Asia but a worldwide economic slowdown,4 and the worldwide tremors sent through international markets originating in the ongoing American sub-prime crisis and recession of 2008. The tardiness of the law to respond to the challenges posed by globalization, by the needs of international trade and by the impact of information technology and the internet is mentioned quite often as one of the major stumbling blocks in the path of greater globalization and international trade.5 The process

1 2 3 4 5

Backer (2007, p. xiii); Kenna (2008, p. 397) and Keenan (2008, pp. 342–3). Dalhuisen (2000). August (2004, pp. 353–4). Karunatilleka (1999). See for instance the General Assembly Resolution 35/51 at its 35th Plenary 97

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of changing the law is notoriously slow in many respects, causing international traders to simply accept the legal risks and uncertainties involved, rather than lag behind in developing their international markets. Unlike international trade, which barely knows any national borders these days, law is still very much localized – there is as yet no over-arching international trade law or lex mercatoria6 that will generally apply to international transactions.7 Every international trade transaction is still rooted in the domestic law of a specific country to be appointed by the rules of private international law.8 Domestic laws differ quite significantly, even on something as basic as sales law. For instance, most civil law systems require a buyer to inform the seller of any non-conformity of the goods within a fairly brief period of time, after which the buyer may lose the remedies available for such non-conformity. In systems based on the common law the duty to notify the seller of deficient goods is much less clearly defined and usually it does not lead to a loss of remedies, but the failure to give a timely notification merely reflects on the probity of the buyer’s allegations of non-conformity.9 Such differences may impact quite significantly on the conduct of the various parties to a sales contract, depending on their understanding of the law. Although parties in international trade transactions have the power to determine the contents of their contract, their rights and obligations largely autonomously, they often fail to do so, concentrating only on the basic aspects of their transaction such as price, quantity, quality and time and place of delivery. They very often fail to determine key issues such as the applicable legal system and the courts that will have jurisdiction in the case of disputes between them.10 This could render the contract and the respective rights and Meeting on 4 December 1980 available at http://www.UNCITRAL.org/ UNCITRAL/en/UNCITRAL_texts/sale_goods/1980CISG.html, accessed 5 June 2009; Backer (2007, pp. xiii–xiv and 10–12). 6 Michaels (2007, pp. 447–8); Mazzacano (2006); Rodriguez (2002, p. 46) and De Ly (2006, pp. 28–38). 7 Forsyth (2003, pp. 20–23); North and Fawcett (1992, pp. 3–5) and Michaels (2007, p. 458). 8 For a brief comparative overview see Schwenzer (2005) Art 39 § 4, pp. 461–2; Eiselen and Kritzer (2008) § 89:64, pp. 89–136 and 89–137; Gruber (2008) CISG Art 39 § 34, pp. 2292–3. 9 Schwenzer (2005) Art 39 § 4, pp. 461–2; Eiselen and Kritzer (2008) § 89:64, pp. 89–136 and 89–137; Gruber (2008) CISG Art 39 § 34, pp. 2292–3. 10 See Forsyth (2003, pp. 303–4 and 307). South African case law such as Improvair (Cape) (Pty) Ltd v Establissements Neu 1983 2 SA (C); Laconian Maritime Enterprises Ltd v Agromar Lineas Ltd 1986 3 SA 509 (D) bears testimony to the fact that international commercial contracts often fail to address the issue of the applicable law. These examples can be multiplied many times over when international cases are taken into consideration. See for instance the cases quoted in North and Fawcett (1992, pp. 457–9 and 487–93).

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obligations of the parties subject to a great deal of legal uncertainty due to divergences in different legal systems. These differences are not only found in the substantive legal rules, but also in the national rules of jurisdiction that will determine which courts could potentially exercise jurisdiction in the case of a dispute11 and the rules of private international law that must determine which legal system will determine the applicable substantive rules.12 Although there are quite a few voices that are sceptical about the need for and value of the harmonization of international trade law,13 there is a very strong movement in favour of developing harmonized laws in key areas.14 This belief that there is a need for harmonized law is nothing new. Towards the end of the nineteenth century there was a strong yearning to hark back to the good old days of the lex mercatoria that allegedly applied throughout the market places in medieval Europe15 and a belief that a common law of mankind needed to be developed.16 The need for a common harmonized law that will apply irrespective of jurisdiction and free of domestic law is based on the premise that the territorial nature of law, the divergent rules of private international law and the vagaries of jurisdiction present obstacles and additional cost factors in international trade law which, if eliminated, will contribute to greater legal certainty and cost effectiveness.17 The aim of this chapter is not to argue the case for legal harmonization generally, as the advantages and disadvantages of that topic have been discussed in detail elsewhere,18 but, on the assumption that the continued harmonization of international trade law is necessary and will be beneficial for international trade, to take stock of the existing harmonization efforts and agencies with the object of determining critical factors for successful harmonization. In this discussion it will become clear that state law and conventions

11 12 13 14

Forsyth (2003, pp. 158–9); Cameron (2001, pp. 1–17). Forsyth (2003, pp. 2–3); North and Fawcett (1992, pp. 3–5). Kötz (1986, p. 1); Rosett (1984, p. 265); Stephan (1999). See for instance the General Assembly Resolution 35/51 at its 35th Plenary Meeting on 4 December 1980, available at http://daccessdds.un.org/doc/ RESOLUTION/GEN/NR0/390/70/IMG/NR039070.pdf?OpenElement, accessed 5 June 2009; Backer (2007, pp. xiii–xiv and 10–12). 15 Michaels (2007, p. 447). 16 Zweigert and Kötz (1998, pp. 2–3). 17 See for instance General Assembly Resolution 35/51 at its 35th Plenary Meeting on 4 December 1980, available at http://daccessdds.un.org/doc/ RESOLUTION/GEN/NR0/390/70/IMG/NR039070.pdf?OpenElement, accessed 5 June 2009. It is also a sentiment that is regularly repeated in the Preambles to UNCITRAL instruments. 18 Kötz (1986, p. 1); Stephan (1999); Grossmann-Doerth (1930, p. 65); Goode (1993, p. 1); Hobhouse (1990, p. 531); Evans (1994, p. 146); Wool (1997, p. 46); Rosett (1992, pp. 683–4).

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like the Vienna Convention for the International Sale of Goods, 1980 (CISG), are not the only available instruments of trade law harmonization, but that there are also soft law options such as the Incoterms of the International Chamber of Commerce (ICC) or the Unidroit Principles of International Commercial Contracts of Unidroit that can play a significant role in this process. The various agents of harmonization such as the United Nations Commission for International Trade Law (UNCITRAL), Unidroit, the International Chamber of Commerce (ICC) and the World Customs Organization will also be considered. In the evaluation of the different agents of harmonization and their instruments, attention will further be given to the extent that these instruments may be regarded as reflecting democratic values in their drafting processes and application.

2

A BRIEF HISTORY OF TRADE LAW HARMONIZATION: THE VIENNA CONVENTION FOR THE INTERNATIONAL SALE OF GOODS, 1980 (CISG)

The rise of the modern sovereign state in Europe and its increased importance since the sixteenth century19 led to the realization that modern law was territorial in its nature, rooted in the sovereignty of a specific state.20 There were no universally applicable legal systems, but rather laws or statutes were found in individual sovereign states. Even at this early stage, improved forms of transportation and communications and the advent of the industrial age were the catalysts for increased international trade and early globalization. This raised the question: which legal system should apply to an international transaction where the parties had their places of business in different states and where different aspects of the contract were performed in different places?21 Different legal systems answered this question in different ways, leading to legal uncertainty where these rules were not similar or where the applicable substantive legal rules were not similar.22 One of the solutions proposed during the nineteenth century was the harmonization or unification of law, along the lines of the earlier Roman Ius

19 20

Forsyth (2003, p. 38); North and Fawcett (1992, pp. 20–21). For the first time jurists dealing with conflicts of laws problems were faced with the question why a court of one sovereign state should apply the law of another sovereign state. See the discussion of the comity theory in Forsyth (2003, pp. 38–41). 21 Forsyth (2003, pp. 37–41); North and Fawcett (1992, pp. 457–9). 22 Martiny (1996) § 2–25; North and Fawcett (1992, pp. 457–9); Forsyth (2003, pp. 294–5).


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Commune in Europe or the lex mercatoria of the Middle Ages.23 The early attempts at harmonization or unification of international private law towards the end of the nineteenth century (referring back to the lex mercatoria) were far too ambitious in their scope.24 As a result these attempts had no immediate impact or success other than to raise awareness of the problems caused for international trade by the rise of the modern state and its exclusive territorial domestic laws. Even in states within close proximity to each other and with a common legal heritage founded on classical Roman law like the European states, a great deal of legal diversity developed quite quickly, with some states basing their civil codes on the French model while others chose the German example.25 Similarly, the contract codes and trade laws existing in the various American states diversified over time, finally necessitating the drafting of the Uniform Commercial Code (UCC), which has now been adopted in most states, as a harmonizing instrument of trade law.26 On the international level, the first serious attempt at harmonizing aspects of international trade law started with the founding of Unidroit as an auxiliary organ by the League of Nations in 1926.27 Their first project started in 1929 under the leadership of Cecil Hurst and Ernst Rabel and consisted of the drafting of an international sales code.28 A draft was finally presented by the drafting committee in 1935, but the fate of that document was initially sealed by the growing tensions in Europe and finally World War II.29 This draft was only revived again in 1951 at an international conference in The Hague in the Netherlands. A new commission was appointed to rework the original Rabel draft and a draft text was presented to the Hague Conference in 1958.30 Further work led to two draft instruments, namely the Uniform Law of International Sales (ULIS) and the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULF) under the auspices of the

23 For a discussion on the ancient and modern lex mercatoria see Michaels (2007, pp. 447 ff.); Mendes (1988, pp. 109–44); Blasé (1999, p. 3); Mazzacano (2006). 24 Kötz (1986, pp. 1–2); Michaels (2007, p. 447); Oly (1982, pp. 29–33). 25 Zweigert and Kötz (1998, pp. 51 and 54–5). 26 For a history and justification of the UCC see Corbin (1950, pp. 821–36); Braucher (1958, pp. 798–812); Kamp (1949, pp. 359–476). 27 For a brief history of Unidroit see http://www.unidroit.org/dynasite. cfm?dsmid=84219, accessed 5 June 2009. Unidroit is still in existence today as an organization founded by a multilateral convention, the Unidroit Statute of 1940. 28 Bianca and Bonell (1987, p. 3); Magnus (2005) Einl. zum CISG § 20; Schlechtriem (2005, p. 1). 29 Bianca and Bonell (1987, pp. 3–4); Magnus (2005) Einl. zum CISG § 20. 30 Bianca and Bonell (1987, p. 4); Magnus (2005) Einl. zum CISG § 21; Schlechtriem (2005, p. 1).

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newly formed Unidroit, being presented to the Hague Conference of 1964, where both were adopted.31 Although these conventions were generally regarded as a failure because of the lack of international acceptance, they did form an important stepping-stone for the eventual development of the CISG in 1980.32 The Hague Conventions were only adopted by 11 countries, of which 9 were European.33 The main reason for the low level of acceptance of these instruments was the fact that they were perceived to be too Eurocentric due to a lack of participation in the drafting process by socialist and developing countries.34 These countries were of the opinion that the conventions failed to address their interests adequately and tended to favour the seller rather than the buyer.35 However, valuable experience was gained in the application and operation of these conventions in the countries where they did apply.36 It is therefore not surprising that they formed the point of departure for the drafting of what would eventually become the CISG.37 In 1966 the United Nations General Assembly recognized that disparities in national laws governing international trade created obstacles to the flow of trade.38 It established the UN Commission on International Trade Law (UNCITRAL)39 with the mandate to further the progressive harmonization and unification of the law of international trade. UNCITRAL consists of 60 members appointed by the General Assembly so as to be representative of the world’s various geographic regions and its principal economic and legal systems. A survey amongst members showed that most members were interested in the harmonization of international sales laws.40 UNCITRAL appointed a drafting team consisting of 15 members who were representative of all regions and economic interest groups of the world. Using the two Hague Conventions (ULIS and ULF) as the basis, the drafting team presented two texts which 31 32

Bianca and Bonell (1987, p. 4); Magnus (2005) Einl. zum CISG § 22. Bianca and Bonell (1987, pp. 4–5); Magnus (2005) Einl. zum CISG § 23; Schlechtriem (2005, p. 1). 33 Honnold (1999, p. 4); Bianca and Bonell (1987, pp. 4–5). Ironically the United Kingdom was one of the countries that acceded to the conventions, but it was done in such a manner that they never became operative in that country. To date the United Kingdom has also not acceded to the CISG, despite its participation in the drafting process in UNCITRAL. 34 Honnold (1999, p. 9); Magnus (2005) Einl. zum CISG § 24. 35 Magnus (2005) Einl. zum CISG § 24. 36 Schlechtriem (2005, pp. 1–2). 37 Schlechtriem (2005, p. 2); Magnus (2005) Einl. zum CISG § 24. 38 Resolution 2205(XXI) of 17 December 1966. 39 Resolution 2205(XXI) of 17 December 1966. On UNCITRAL see generally http://www.UNCITRAL.org, accessed 5 June 2009. 40 Magnus (2005) Einl. zum CISG § 24.


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were eventually adopted by UNCITRAL in 1978 as a single draft convention.41 The UNCITRAL text was discussed at a diplomatic conference in Vienna in 1980 where 62 countries were represented. After more than a month of discussion and redrafting, a final text was adopted as the Vienna Convention for the International Sale of Goods on 11 April 1980 (CISG).42 However, the CISG did not enter into force until 1 January 1988 after 11 states adopted the convention, the final two states quite fittingly being the United States and the People’s Republic of China.43 After an initial spate of adoptions following on the accession of the United States and China, there has been a steady trickle of adoptions, with the tally now standing at 74 member countries.44 Despite a number of notable exceptions like the United Kingdom, India, Portugal, Brazil45 and South Africa, the Member States today represent about 80 per cent of world trade, making the CISG one of the most important harmonizing international trade instruments today. The CISG is generally regarded as a great success story in the harmonization of international trade, despite initial fears that it would be generally excluded by traders and that its impact would be minimal.46 Although there was an initial trend for businesses to exclude the application of the CISG in their standard terms and conditions,47 the practice certainly has never been universal and it is also changing as a newer generation of lawyers who are acquainted with the CISG enter into practice.48

41 42 43 44

Honnold (1999, pp. 8–10); Bianca and Bonell (1987, pp. 5–6). Bianca and Bonell (1987, pp. 5–6); Magnus (2005) Einl. zum CISG § 26. Magnus (2005) Einl. zum CISG § 27. An up-to-date statement of the status of the CISG can be found at http://www.UNCITRAL.org/UNCITRAL/en/UNCITRAL_texts/sale_goods/ 1980CISG.html, accessed 5 June 2009. 45 There are indications that Brazil will soon adopt the CISG, following on the recent accession by Japan. 46 Schlechtriem (2005, p. 1); Eiselen and Kritzer (2008, pp. 80–85) § 80:1; Lookofsky (1993, p. 18); New Zealand Law Commission (1992, p. 10). 47 Holdsworth (2001); Eiselen and Kritzer (2008) § 84–49. 48 This is a trend that is apparent from for example an analysis of Chinese arbitration cases where parties have been expressly opting into the CISG. See for instance China 10 August 1999 CIETAC Arbitration proceeding (Raincoat case) http://cisgw3.law.pace.edu/cases/990810c1.html, accessed 5 June 2009; China 26 June 2003 CIETAC Arbitration proceeding (Alumina case) http://cisgw3.law.pace.edu/ cases/030626c1.html, accessed 5 June 2009; China 18 December 2003 CIETAC Arbitration proceeding (AOE and PECVD machines case) http://cisgw3.law.pace.edu/ cases/031218c1.html, accessed 5 June 2009; China 14 December 2004 Xiamen Intermediate People’s Court [District Court] of Fujian Province (Xiamen Xiang Yu Group Corporation v Mechel Trading AG) http://cisgw3.law.pace.edu/cases/

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The success of the CISG can be attributed to a number of factors, some pertaining to the drafting process and some due to subsequent developments. During the drafting process of the CISG the concerns of socialist and developing countries were taken into account adequately as there was sufficient participation by these countries. The drafters of the CISG consciously avoided using terminology that could bring with it unintended baggage originating from a specific legal system or culture and instead used terminology that would bridge the gap between the civil and common law traditions. Whereas domestic sales laws developed with domestic sales as their matrix, the drafters of the CISG aimed at taking the requirements and conditions of international sales into consideration. They also aimed at creating an equitable balance between the interests of the seller and those of the buyer, unlike in many domestic sales laws where the interests of either the seller or the buyer are more dominant. There are six official versions of the CISG and many other unofficial translations, but English has become the dominant language for the discussion and interpretation of the CISG. At the outset there were predictions that the harmonization would be more apparent than real because of the fact that the CISG would not be applied in a uniform manner after integration into the various Member States.49 Rosett voiced the fear that one of the biggest stumbling blocks on the path of harmonization would be deviating interpretations and applications of the CISG or a so-called homeward trend by courts in different jurisdictions.50 It is, of course, of little value to have a uniform or harmonized instrument if there is significant divergence in the way it is interpreted or applied, or if courts interpret and augment it under the influence of their own legal system.51 UNCITRAL and several commentators took this danger to heart and from an early stage have collected, collated, and published cases from all over the world.52 The UNILEX Database compiled by Bonell was one of the first comprehensive collections and is still being kept current.53 To date it contains 041214c1.html, accessed 5 June 2009; China 23 September 2005 New Pudong District People’s Court [District Court] of Shanghai (Xi’an Yun Chang Trade Ltd. v An Tai International (USA)) http://cisgw3.law.pace.edu/cases/050923c1.html, accessed 5 June 2009. See also the recommendation by Magnus (2005) Art 5 §§ 73–74. 49 Rosett (1984, p. 265); Rosett (1988, p. 587). Also see Kötz (1986, pp. 9–10); Ferrari (1994, pp. 183 ff.); Kramer (1996, pp. 137 ff.). 50 Rosett (1984, p. 269). See also Van Alstine (1998, pp. 687–793); Andersen (1998, pp. 403–10); Ferrari (1994, pp. 183–228); Ferrari (1999, pp. 245–61). 51 Ferrari (2001, pp. 225–39); Bazinas (2006, pp. 18–27). 52 Will (1995); Bonell (1995). 53 It was originally published as a hard copy loose-leaf publication but is currently published on Unidroit’s website at http://www.unilex.info/dynasite. cfm?dssid=2375&dsmid=14276, accessed 5 June 2009.


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almost 800 cases. The UNCITRAL website also contains a current list of cases that is updated regularly. To date it contains more than 600 cases. In addition, it contains a Case Digest that provides guidance through the large body of case law.54 The most comprehensive and ambitious collection of case law is to be found on the award-winning website of the Pace Law School’s Institute of International Commercial Law.55 This website contains the full text of more than 2000 cases and arbitral awards from all parts of the world. It is easy to use and accessible, with each case classified according to the CISG article to which it relates. Most cases are also available in English, either as the original language or in translation.56 This is the premier site for any researcher on the CISG, because it also contains a comprehensive bibliography of literature on the CISG, including more than 1200 texts available in full.57 In addition to these websites, there are several authoritative commentaries available on the CISG. The one by Schlechtriem and Schwenzer58 is one of the most comprehensive and best available in English, while the introduction by Lookofsky59 provides an excellent introductory text for anyone new to this field. The result has been that there is a wealth of accessible material, case law as well as scholarly commentary, available on the interpretation and application of the convention. Most of it is easily accessible on the Internet, and one would expect practitioners and courts to rely on this material when dealing with the CISG. The fear that there would be widely disparate interpretations and application of the CISG has therefore not proved to be a widespread problem.60 Although there were quite a few cases initially where the so-called homeward trend in the interpretation of the CISG was apparent,61 this is also changing, with courts worldwide using international case law and academic commentary rather than relying on domestic solutions.62 By and large the uniform interpretation and application of the CISG have been kept intact.

54 55

Lookofsky (2004, pp. 181–95). See Pace Law School ‘CISG Database’, accessible online at http://www.cisg.law.pace.edu, accessed 5 June 2009. 56 See http://www.cisg.law.pace.edu/cisg/text/queenmary.html, accessed 5 June 2009, for details of the translation programme of the Queen Mary University, London. 57 Available at http://www.cisg.law.pace.edu, accessed 5 June 2009. 58 Schlechtriem and Schwenzer (2005). See also Honnold (1999); Eiselen and Kritzer (2008). 59 Lookofsky (2008). See also Huber and Mullis (2007); Schwenzer and Fountoulakis (2007). 60 Magnus (2009, p. 38). 61 For examples see Ferrari (2009, pp. 185 ff.). 62 Magnus (2009, p. 38). The decisions in Italy 25 February 2004 Tribunale

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Where the CISG has been adopted by a country, it becomes applicable to all international sales and displaces the domestic sales law, unless the parties have chosen another legal system where the CISG does not apply or have expressly excluded the application of the CISG.63 Practically speaking, the CISG therefore exists as a parallel sales law to domestic sales law in all member countries. An international sale is defined as any sale where the parties have their places of business in different states.64 The CISG applies autonomously where both parties have their places of business in contracting states, or alternatively where the rules of private international law determine that the law of a contracting state is the governing law.65 As is evident from the number of reported cases,66 the CISG is applicable to a great number of international sales transactions and is becoming even more entrenched as the newer generation of lawyers use it as a useful instrument in international trade, rather than fearing it as an unknown body of law that needs to be excluded. There is a wealth of case law and academic commentary available today, contributing to the growing importance of the CISG as a harmonizing instrument.67 The experience with the CISG has shown that legal harmonization can be a long and cumbersome process, even in areas where there is a big need for such harmonization, but that it can be successfully implemented if the area of law targeted is well chosen and limited and not over-ambitious. However, more recent projects of UNCITRAL, as discussed below, show that the drafting and implementation process can be sped up considerably.

3 3.1

DIFFERENT METHODS OF ACHIEVING HARMONIZATION Introduction

The different methods currently employed to achieve legal harmonization of international trade law are closely linked to the agents or organizations [District Court] Padova http://cisgw3.law.pace.edu/cases/040225i3.html, accessed 5 June 2009 and Italy 11 December 2008 Tribunale di Forli [District Court] (Mitias v Solidea S.r.l.) http://cisgw3.law.pace.edu/cases/081211i3.html accessed 5 June 2009 provide a excellent examples. 63 Schlechtriem (2005) Art 6 §§ 2–3; Magnus (2005) Art 6 §§ 8–9. 64 Art 1. 65 Art 1. 66 On the Pace Institute for International Commercial Law website there are more than 2,000 reported cases and the number grows almost daily. 67 Magnus (2009, pp. 38–9).


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promoting harmonization. The CISG provides an excellent example of formal legal harmonization, that is, UNCITRAL using an internationally binding convention as the method for achieving unification or harmonization. The use of conventions is the most obvious instrument or method for achieving such harmonization, but it is by no means the only method available, nor necessarily the most effective method.68 There are a variety of alternative methods that have been employed by various agents of harmonization and have been equally effective and successful. These methods rely on soft law instruments which may be adopted on a voluntary basis by countries worldwide or by the participants in international trade themselves, rather than formal binding conventions. The UNCITRAL Model Laws on electronic trade provide such examples, drafted by a United Nations Agency in which there is formal state participation. The Incoterms and the Uniform Customs and Procedures for International Documentary Payments of the International Chamber of Commerce, which can be adopted by the parties themselves, rather than by countries, provide further examples of soft law instruments, but in this case drafted by a private international organization. These and other similar instruments will be assessed in more detail below, along with the organizations which have been responsible for these instruments, in order to establish how these norms are created, how democratic they are, how they function in practice, how successful they have been in harmonizing the law and how their enforceability or effectiveness is assured. 3.2

Instruments Employed to Achieve Harmonization

3.2.1 Formal instruments – conventions69 The first and most obvious method for legal harmonization in any field consists of formal legally binding instruments such as international conventions. Conventions are created in terms of binding public international norms.70 They are entered into voluntarily by the governments of the various states that decide to become members of such conventions.

68 Goode (1993, pp. 6–9); Rosett (1992, pp. 683–97); Bonell (1994, pp. 1–6); Bonell (1996, p. 29); David (1971, Ch. 5); Kötz (1986, pp. 1 ff.); Hobhouse (1990, p. 531); Mertens (1957, p. 657). 69 In public international law the term treaty or convention is used in the alternative to refer to ‘a written agreement between states or states and international organizations operating in the field of public international law’ – see Dugard (2000, p. 26). The convention forming the modern basis for the law of treaties is curiously named the Vienna Convention on the Law of Treaties, 1969. 70 Vienna Convention on the Law of Treaties 1969 Art 2; Dugard (2000, pp. 26–7).

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Depending on the constitutional dispensation of individual countries, such conventions become part of the domestic law of a member country, either through executive action, that is, where the government signs a convention, or through legislative action, that is, where the convention is ratified by the legislative power of a state.71 The rules that determine the capacity of states and organizations to enter into conventions, the procedures to enter into conventions, the interpretation of conventions and the termination of conventions are found largely in the 1969 Vienna Convention on the Law of Treaties. In the field of international trade law harmonization, multilateral treaties, that is, treaties that have more than two members and are open to ratification by any other state in accordance with the provisions of that treaty, play the most significant role. Such multilateral treaties are open-ended and can be adopted at any time by new members. Today, a multilateral convention will usually come into existence in one of two ways: it is either drafted by an international convention of states and then adopted at the final meeting of that diplomatic conference, or it is drafted by a representative agency of the United Nations, such as UNCITRAL, and then adopted by the General Assembly of the United Nations. In either case, such multilateral conventions will not enter into force until such time as a sufficient number of states as determined in the convention itself have signed and ratified the convention. The biggest advantage of harmonization by convention is the fact that such a convention will become binding law in all the states that have ratified that convention. In this manner the CISG has become the binding international sales law in 74 states, displacing the rules of the domestic sales laws applicable to international sales in those countries. By using conventions a high degree of uniformity or harmonization can formally be established, although achieving uniformity practically in the interpretation and application of the convention may be more difficult. Furthermore, the more countries that accede to such a convention, the larger the potential degree of harmonization may be, as all such countries will have the same text as a point of departure. As discussed above, opponents of legal harmonization efforts claim that the apparent harmonization achieved by the convention may soon disappear due to the different interpretations given to the convention and the manner in which it is applied by national courts. The CISG probably provides the best empirical evidence on the accuracy of this claim and the reality of this fear. The so-called ‘homeward trend’ in the interpretation and application of a convention constitutes a real danger that may shatter the apparent

71 Vienna Convention on the Law of Treaties 1969 Art 11; Dugard (2000, pp. 47–50; 54–8).


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harmony.72 This danger is somewhat countered by the fact that in the interpretation of a convention courts and tribunals are entitled to take note of the legislative history of the convention and its provisions.73 The CISG, as is the case with most subsequent UNCITRAL conventions, contains an article on interpretation which is aimed at countering the homeward trend. Article 7 states: (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.

Experience with the CISG has shown that there has been a homeward trend in some decisions74 and a divergence in the results of the application of some of the provisions. On the whole, however, the integrity and harmonization effect of the CISG have been preserved.75 There is also a growing trend in courts worldwide to refer not only to domestic decisions and writings but also to international decisions and literature.76 The leading commentaries on the

72 73

Ferrari (2009, pp. 171–7). Magnus (2009, pp. 49–50). Despite the differences in interpretational methodology between civil and common law, common law courts have successfully employed a more international approach to the interpretation of conventions as is evident from for instance the decision in England James Buchanan & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048 at 1052. See also England Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696; Eiselen (2009, pp. 77–9). 74 See for instance the decisions in United States Delchi Carrier SpA v Rotorex Corp., 71 F.3d 1024, 1028 (2d Cir. 1995); United States MCC-Marble Ceramic Center, Inc., v Ceramica Nuova d’Agostino, S.p.A., 144 F.3d 1384, 1388–9 (11th Cir. 1998); Germany 9 January 2002 Bundesgerichtshof [Federal Supreme Court] (Powdered milk case) http://cisgw3.law.pace.edu/cases/020109g1.html, accessed 5 June 2009. 75 Magnus (2009, p. 38); Eiselen and Kritzer (2008) § 85:9. 76 See for instance United States Medical Marketing International, Inc., v Internazionale Medico Scientifica, S.R.L., 99-0380, 1999 U.S. Dist. LEXIS 7380, at (E.D. La. May 17, 1999), available at http://cisgw3.law.pace.edu/cases/990517u1.html, accessed 5 June 2009; Italy 12 July 2000 Tribunale [District Court] Vigevano (Rheinland Versicherungen v Atlarex) http://cisgw3.law.pace.edu/cases/000712i3. html, accessed 5 June 2009. For other examples see also Italy 25 February 2004 Tribunale [District Court] Padova http://cisgw3.law.pace.edu/cases/ 040225i3.html, accessed 5 June 2009; Italy 11 December 2008 Tribunale di Forli [District Court] (Mitias v Solidea S.r.l.) http://cisgw3.law.pace.edu/cases/ 081211i3.html, accessed 5 June 2009; Germany 8 January 2004 Landgericht [District Court] Trier http://cisgw3. law.pace.edu/cases/040108g1.html, accessed 5 June 2009; Austria 13 April 2000 Oberster Gerichtshof [Supreme Court] http://cisgw3.law.pace.edu/cases/000413a3. html, accessed 5 June 2009; Australia 24 October 2008 Federal Court [South Australia District] (Hannaford v Australian Farmlink Pty Ltd) http://cisgw3.law.pace.edu/cases/ 081024a2.html, accessed 5 June 2009. See also DiMatteo et al. (2004) at n. 590; Magnus (2009, p. 38).

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CISG all refer to a variety of cases from different jurisdictions as well as scholarly materials from all over the world. Opponents of harmonization also refer to the danger that conventions, especially successful ones with many members, can become a static monument which may become out of touch with the needs of a fast-changing world.77 The best example of a convention that has fallen victim to this danger is the 1929 Warsaw Convention,78 dealing with the rules on carriage by air. The convention was drafted at a time when carriage by air was still in its infancy and therefore many of its provisions have become outdated and problematic. However, despite serious attempts to modify the convention, it has proved almost impossible to do so as it requires the consent of all members of the convention. Whether this poses a substantial problem or not also depends on the type of convention.79 With a convention like the CISG the danger of the convention becoming outdated is small and it is further countered by the underlying principle of party autonomy, which allows individual parties to change or modify any of the provisions of the convention to suit their particular needs. There is for instance general consensus amongst commentators that the provisions of the CISG can adequately deal with the challenges presented by electronic commerce, despite the fact that this phenomenon did not exist at the time the convention was drafted.80 The question of how democratic a particular convention is must be answered at two levels. At the international level it will depend on the participation of states and the transparency and inclusiveness of the drafting process. Where a convention lacks proper participation or inclusiveness it is likely to fail, as was the case with the two 1964 Hague Sales Conventions. Where there is proper participation and transparency, it has a much better chance to succeed, as is the case with the CISG and the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In any event, no state can be forced into entering into a convention.

77 For a full discussion of the various points of criticism on legal harmonization see Rosett (1984, p. 269); Rosett (1992, pp. 683–97); Stephan (1999); Garro (1989, p. 450); Eörsi (1983, pp. 345–52); Zwart (1988, pp. 109 ff.); Lehmann (2006, pp. 317–28); Eiselen (1999, pp. 323–70); Eiselen (2007, pp. 14–24). 78 Convention for the Unification of Certain Rules Relating to International Carriage by Air, Signed at Warsaw on 12 October 1929. It has 150 members. See also Stephan (1999). 79 Although 4 amendments have been made to the convention, the most important amendment, contained in the Montreal Protocol of 1975, has not yet entered into force due to a lack of ratifications. See August (2004, pp. 641–3). 80 See Ramberg (2003); Schlechtriem (2005) 13 § 2a; Schwenzer and Mohs (2006, p. 239); Ferrari (2002, pp. 289–304); Eiselen (2002, pp. 305–18).


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On the domestic level the question of whether the instrument passes the test of being democratic is more complicated. It depends firstly on the democratic nature of the particular state itself. If it is a non-democratic state, ratification of a convention can hardly be described as democratic. If a democratic state is involved, the accession to the convention either by the executive or the legislature can only be regarded as an indirect democratic process because the convention is presented as a complete package, to be accepted or rejected as a whole. 3.2.2

Soft law instruments – model laws or model codes open for adoption by countries A second type of instrument that has become more popular in the effort to harmonize international commercial law is the model law or model code. The object of such a model law or code is to indirectly harmonize the law in a particular area by providing a standard text which can be adopted or modified by individual countries as part of their domestic law. For instance, in the Preamble to the 1985 UNCITRAL Model Law on International Commercial Arbitration, the General Assembly states: Convinced that the Model Law, together with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Arbitration Rules of the United Nations Commission on International Trade Law recommended by the General Assembly in its resolution 31/98 of 15 December 1976, significantly contributes to the establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations, …

The Commentary by the Secretariat to the Model Law states: 2. The Model Law constitutes a sound basis for the desired harmonization and improvement of national laws. It covers all stages of the arbitral process from the arbitration agreement to the recognition and enforcement of the arbitral award and reflects a worldwide consensus on the principles and important issues of international arbitration practice. It is acceptable to States of all regions and the different legal or economic systems of the world. Since its adoption by UNCITRAL, the Model Law has come to represent the accepted international legislative standard for a modern arbitration law and a significant number of jurisdictions have enacted arbitration legislation based on the Model Law.81

81 This assessment is substantiated by the fact that the Model Law has been used by the following countries in enacting their arbitration laws: Armenia (2006), Australia (1991), Austria (2005), Azerbaijan (1999), Bahrain (1994), Bangladesh (2001), Belarus (1999), Bulgaria (2002), Cambodia (2006), Canada (1986), Chile (2004), in China: Hong Kong Special Administrative Region (1996), Macau Special Administrative Region (1998); Croatia (2001), Cyprus, Denmark (2005), Dominican Republic (2008),

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The advantage of a model law as a means of harmonization is that it provides a more flexible approach to the process of harmonization because states can adopt the model law as the basis for their own legislation, but they are not bound to the specific provisions. It can be adapted to make provision for the needs, requirements and quirks of the particular domestic legal system. This advantage also presents the greatest danger to the harmonization process because there is no guarantee that countries adopting or using the model law will draft a final instrument that incorporates all of the underlying principles of that model law. The experience with, for instance, the 1996 Model Law on Electronic Commerce shows, however, that the eventual enactments in the various countries using the model law are remarkably similar, although they may contain some differences to provide for domestic requirements.82 There are some jurisdictions, though, where the Model Law can only be said to have influenced the domestic legislation, without being followed closely.83 In these instances the level of harmonization can only be described as low. The implementation of model laws takes place at the state level, that is, the legislature of a particular state will use the model law in the drafting of its own legislation. Whether the model law can be regarded as democratic or not will depend on the level of participation in the initial drafting stages, but ultimately on the democratic nature of the state where it is being implemented itself. Unlike conventions, the model laws are not presented on a take-it-or-leave-it basis, but simply as a suggested text that may be freely amended by legislatures. The question of their democratic nature is therefore not likely to arise very readily. Egypt (1996), Estonia (2006), Germany (1998), Greece (1999), Guatemala (1995), Hungary (1994), India (1996), Iran (Islamic Republic of) (1997), Ireland (1998), Japan (2003), Jordan (2001), Kenya (1995), Lithuania (1996), the former Yugoslav Republic of Macedonia (2006), Madagascar (1998), Malta (1995), Mexico (1993), New Zealand (1996), Nicaragua (2005), Nigeria (1990), Norway (2004), Oman (1997), Paraguay (2002), Peru (1996), the Philippines (2004), Poland (2005), Republic of Korea (1999), Russian Federation (1993), Serbia (2006), Singapore (2001), Spain (2003), Sri Lanka (1995), Thailand (2002), Tunisia (1993), Turkey (2001), Ukraine (1994), within the United Kingdom of Great Britain and Northern Ireland: Scotland (1990); in Bermuda, overseas territory of the United Kingdom of Great Britain and Northern Ireland; within the United States of America: California (1996), Connecticut (2000), Illinois (1998), Louisiana, Oregon and Texas; Uganda (2000), Venezuela (1998), Zambia (2000) and Zimbabwe (1996). 82 The South African Electronic Communications and Transactions Act Chapter III and the Australian Electronic Transactions Act 162 of 1999 follow the Model Law fairly closely. Nevertheless the Model Law has been followed quite closely in the legislation based on it in 27 countries. 83 The legislation adopted in Canada and the United States differs quite markedly from the Model Law and can only be said to have been influenced by it.


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Soft law instruments – voluntary codes open for adoption by individual commercial parties Voluntary codes that have been developed by industry organizations like the ICC constitute a third important type of instrument used for purposes of legal harmonization. The individual commercial parties can adopt these codes, usually by referring to them or incorporating them into their agreements. The rules of the code are then regarded and applied as part of the individual agreement between the parties. Where such a code is well known or widely adopted in trade relationships or a particular industry, parties will in time develop confidence in the certainty that such codes provide. Because these codes are not binding, they will only be adopted in practice if they are regarded as sound and persuasive.84 The ICC’s Incoterms and Uniform Customs and Procedures for Documentary Credits, which are discussed in more detail below, are two excellent examples of such codes. Unidroit’s Principles of International Commercial Contracts, which are also discussed below, are a further important example. These codes are usually relatively easy to update and change to provide for new developments, as they are not subject to the same constraints that apply to conventions. This is evident from the ease and regularity with which the ICC’s Incoterms and Uniform Customs and Procedures for Documentary Credits have been amended, the former seven times since 1936 and the latter five times since 1933.85 Even Unidroit’s Principles of International Commercial Contracts have been modified once since their recent inception in 1994.86 The question of how democratic these instruments are is less important than is the case with conventions, because these codes are open to voluntary acceptance by private parties. No party can be forced by the originators of the codes to adopt or use them, although market pressures may leave participants in particular markets with little choice other than to adopt them. In the case of documentary credits very few banks worldwide will accept such payment instruments unless they are subject to the UCP 600 rules.87 It would, however, seem that such instruments are created largely by bodies which have a very wide representation of stakeholders and after thorough consultative processes, rendering the eventual instruments democratic.

84 85 86 87

Bonell (2006, p. xv). August (2004, pp. 593–4; 676). Bonell (2006, p. xi). August (2004, p. 676); D’Arcy et al. (2000, pp. 167–8).

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3.3

Agents and their Methods of Harmonization

In the discussion of the historical development of international trade law harmonization above, the nature and work of UNCITRAL in developing the CISG was discussed in detail. UNCITRAL, however, is not the only body which has been active in this field. Other intergovernmental bodies that are active in this field include the World Customs Organization, Unidroit and the World Trade Organization (WTO). There are also private organizations such as the ICC which have been very active in this field. The following provides a brief description of these important agents of international trade harmonization and the instruments they have used to achieve their aims. The role and instruments of the World Trade Organization will not be discussed as that body is primarily concerned with the facilitation of international trade by means of regulating intergovernmental relations and conduct.88 That subject falls outside the scope of this discussion which is focused on the harmonization of commercial law and related matters.89 3.3.1 UNCITRAL UNCITRAL was established in 1966 by the General Assembly of the United Nations with the express object of promoting international trade harmonization.90 Resolution 2205 (XXI) of 17 December 1966, establishing UNCITRAL, states in its Preamble: The General Assembly … Reaffirming its conviction that divergencies arising from the laws of different States in matters relating to international trade constitute one of the obstacles to the development of world trade; Having noted with appreciation the efforts made by intergovernmental organizations and non-governmental organizations towards the progressive harmonization and unification of the law of international trade by the adoption of international conventions, uniform laws, standard contract provisions, general conditions of sale, standard trade terms and other measures,

88 August (2004, pp. 358–60). See also the website of the WTO at http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm, accessed 5 June 2009. 89 The work of the World Customs Organization is included here because customs valuation and duties form an integral part of the individual trade negotiations and agreements. In that sense it is a commercially related matter, although strictly speaking it falls within the scope of public law. 90 http://www.UNCITRAL.org/UNCITRAL/en/about/origin.html, accessed 5 June 2009.


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Noting at the same time that progress in this area has not been commensurate with the importance and urgency of the problem, owing to a number of factors, in particular insufficient co-ordination and co-operation between the organizations concerned, their limited membership or authority and the small degree of participation in this field on the part of many developing countries, Considering it desirable that the process of harmonization and unification of the law of international trade should be substantially co-ordinated, systematized, and accelerated and that a broader participation should be secured in furthering progress in this area, … Decides to establish a United Nations Commission on international trade law (hereinafter referred to as the Commission), which shall have for its object the promotion of the progressive harmonization and unification of the law of international trade in accordance with the provisions set forth in section II below.

UNCITRAL is composed of 60 Member States, structured so as to be representative of the world’s various geographic regions and its principal economic and legal systems.91 Members of the Commission are elected for terms of six years. The Commission carries out its work at annual sessions, which are held in alternate years at the United Nations Headquarters in New York and at the International Centre in Vienna. Each working group of the Commission typically holds one or two sessions a year, depending on the subject-matter to be covered; these sessions also alternate between New York and Vienna. In addition to Member States, all States that are not members of the Commission, as well as interested international organizations, are invited to attend sessions of the Commission and of its working groups as observers.92 Observers are permitted to participate in discussions at sessions of the Commission and its working groups to the same extent as members, but have no voting rights. The ICC, for instance, has been a long-standing observer participating in UNCITRAL’s work.93 UNCITRAL currently has six working groups that perform the substantive preparatory work on topics within the Commission’s programme of work. Each of the working groups is composed of representatives of all Member States of the Commission. These groups currently deal with the following topics: international procurement, international arbitration and conciliation, transport law, electronic commerce, insolvency law and security interests.94

91 http://www.UNCITRAL.org/UNCITRAL/en/about/origin.html, accessed 5 June 2009. 92 http://www.UNCITRAL.org/UNCITRAL/en/about/methods.html, accessed 5 June 2009. 93 http://www.iccwbo.org/id93/index.html, accessed 5 June 2009. 94 http://www.UNCITRAL.org/UNCITRAL/en/about/methods.html, accessed 5 June 2009.

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These subjects are regarded by UNCITRAL as the most important current topics in need of harmonization. UNCITRAL has made use of mainly two types of harmonization methods in carrying out its tasks, namely drafting international conventions and drafting model laws. In addition, it has also drafted a set of arbitration rules that can be incorporated voluntarily by contract parties or agreed to when a dispute arises. The following are a selection of texts apart from the CISG that have been drafted by it and accepted in international conventions or by the General Assembly: • 1976 UNCITRAL Arbitration Rules, which may be used by private parties when resolving disputes by arbitration. The Rules have proved to be successful in a highly competitive market where they must compete with the arbitration rules of other established commercial arbitration bodies.95 Schmitthoff describes them as almost indispensable in ad hoc arbitration.96 • 1980 UNCITRAL Conciliation Rules, which may be used by private parties when resolving disputes by conciliation. • 1978 United Nations Convention on the Carriage of Goods by Sea – the ‘Hamburg Rules’.97 The Hamburg Rules were designed to replace the Hague-Visby Rules,98 but have been only moderately successful with 34 parties, whereas the Hague-Visby Rules still enjoy more support worldwide. • 1985 UNCITRAL Model Law on International Commercial Arbitration, with amendments as adopted in 2006.99 • 1988 United Nations Convention on International Bills of Exchange and International Promissory Notes.100 • 1994 UNCITRAL Model Law on Procurement of Goods, Construction and Services, with Guide to Enactment.101

95 See Rubino-Samartano (2001, p. 139) and August (2004, p. 143) for a list of some of these institutions. 96 D’Arcy et al. (2000, pp. 490–91). 97 34 parties. 98 The 1968 Hague-Visby Rules (Protocol of 23 February 1968) are a variant of the original 1924 Hague Rules (International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading). They currently have more than 80 Member States. See August (2004, pp. 617–18); Gillies and Möens (1998, p. 176). 99 More than 30 countries have used the Model Law in drafting their arbitration laws. See Wolf (2004, pp. 243–4). 100 Not yet in force, 10 actions required. 101 Legislative texts based on or largely inspired by the UNCITRAL Model Law


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• 1995 United Nations Convention on Independent Guarantees and Stand-by Letters of Credit.102 • 1996 UNCITRAL Model Law on Electronic Commerce with Guide to Enactment.103 • 1997 UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment.104 • 2001 United Nations Convention on the Assignment of Receivables in International Trade.105 • 2001 UNCITRAL Model Law on Electronic Signatures with Guide to Enactment.106 • 2005 United Nations Convention on the Use of Electronic Communications in International Contracts.107 The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards – the ‘New York Convention’108 – was adopted by the United Nations before UNCITRAL came into existence. UNCITRAL, however, has been instrumental in the continued promotion of this convention, leading to more than two-thirds of accessions since the establishment of UNCITRAL.109 This convention is generally regarded as one of the most successful international trade law harmonization instruments, as international arbitration plays a vital role in international trade.110 The Convention was initiated by a request of the ICC to the Economic and Social Council of the United Nations (ECOSOC) in 1955 to consider the adoption of the draft convention developed by the ICC.111 on Procurement of Goods, Construction and Services have been adopted in various countries including Afghanistan, Albania, Azerbaijan, Bangladesh, Croatia, Estonia, The Gambia, Guyana, Kazakhstan, Kenya, Kyrgyzstan, Madagascar, Malawi, Mauritius, Moldova, Mongolia, Nepal, Nigeria, Poland, Romania, Rwanda, Slovakia, Tanzania, Uganda, Uzbekistan and Zambia. 102 8 parties. 103 The Model Law has been used in 60 countries worldwide. 104 Legislation based on the UNCITRAL Model Law on Cross-Border Insolvency has been adopted in: Australia, the British Virgin Islands, Colombia, Eritrea, Great Britain, Japan, Mexico, Montenegro, New Zealand, Poland, the Republic of Korea, Romania, Serbia, Slovenia, South Africa, and the United States of America. 105 Not yet in force (5 actions required). 106 Legislation based on the UNCITRAL Model Law on Electronic Signatures has been adopted in Cape Verde (2003), China (2004), Guatemala (2008), Mexico (2003), Thailand (2001), United Arab Emirates (2006) and Vietnam (2005). 107 Not yet in force, 3 actions required. 108 144 members. 109 http://www.UNCITRAL.org/UNCITRAL/en/UNCITRAL_texts/arbitration/NYConvention.html, accessed 5 June 2009. 110 Briner (1998). 111 See Report of the Committee on the Enforcement of International Arbitral

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The text was adopted by a diplomatic conference attended by 45 countries and was initially signed by 10 countries, but now has 144 members representing 98 per cent of world trade.112 Very often, arbitration awards need to be enforced in countries other than the place where the arbitration took place and such an award becomes meaningless if it cannot be effectively enforced.113 This convention has contributed in a large measure to ensure that arbitral awards will be recognized and enforced efficiently in a large number of countries.114 It has also indirectly contributed to the growth of international commercial arbitration since the second half of the twentieth century.115 Like the CISG, the New York Convention is an example of a formal legally binding convention that has been utilized to achieve a high level of international harmonization. UNCITRAL has also employed soft law instruments where it regarded the use of conventions as inappropriate. Amongst others, it has adopted two model laws aimed at facilitating the drafting of national legislation on electronic commerce law and one on international commercial arbitration. The aim of the model laws is to achieve harmonization by influencing domestic legislatures to adopt electronic commerce laws which, if not identical, are at least similar in their approach. The 1985 Model Law on International Commercial Arbitration has met with considerable success. More than thirty countries have based their domestic legislation on it.116 The 1996 Model Law on Electronic Commerce has been quite successful, with more than fifty countries employing it as the basis on which they drafted their national legislation.117 The 2001 Model Law on Electronic Signatures has been less successful, with only a handful of countries having used it.118

Awards 2/2704 of 28 March 1955 available at http://www.UNCITRAL.org/pdf/ english/travaux/arbitration/NY-conv/e-ac/eac424r1-N5508097.pdf, accessed 5 June 2009. 112 See United Nations documents E/CONF.26/8/Rev.1 available at http://www.UNCITRAL.org/pdf/english/travaux/arbitration/NY-conv/e-conf-26/8r1N5829382.pdf, accessed 5 June 2009 and E/CONF.26/SR.25 of 12 September 1958 available at http://www.UNCITRAL.org/pdf/english/travaux/arbitration/NY-conv/ e-conf-26-sr/25-N5815727.pdf, accessed 5 June 2009. 113 D’Arcy et al. (2000, p. 497). 114 Rubino-Samartano (2001, pp. 937 ff.). 115 Nariman (1998). 116 http://www.UNCITRAL.org/UNCITRAL/en/UNCITRAL_texts/arbitration/ 1985Model_arbitration.html, accessed 5 June 2009. 117 http://www.UNCITRAL.org/UNCITRAL/en/UNCITRAL_texts/electronic_ commerce/1996Model.html, accessed 5 June 2009. 118 http://www.UNCITRAL.org/UNCITRAL/en/UNCITRAL_texts/electronic_ commerce /2001 Model_ signatures .html, accessed 5 June 2009.


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The failure of this model law can probably be ascribed to two factors: firstly, the 1996 Model Law contained provisions on electronic signatures which many countries regarded as sufficient as a basis for their own solutions and, secondly, the 2001 Model Law was regarded as insufficient to solve the problems involved with electronic signatures and legislators therefore preferred to adopt their own solutions in keeping with the requirements and quirks of their domestic laws.119 As is evident from the above list of instruments, UNCITRAL has been playing a key role in the process of international trade law harmonization and is likely to do so in future too. Its successes so far can be ascribed to the inclusive and democratic manner in which it is composed and in which it carries out its work. The drafting of its instruments follows a cumbersome and fairly slow process of consultation, drafting in specialist working groups and further discussion and assessment of such drafts by UNCITRAL itself. UNCITRAL has been reasonably successful in identifying areas of international trade law in need of harmonization and drafting appropriate instruments, even if not all of its instruments have met with the same measure of acceptance. It is sometimes difficult to gauge the level of acceptance and therefore success of an instrument, as there usually is quite a long time lapse between the initial drafting and the entry into force of the convention and its subsequent adoption by further countries. In the case of the very successful CISG, almost eight years elapsed between its adoption in 1980 and its entry into force in 1988, but since then it has gained widespread support with new countries acceding every year since. It may therefore take decades, rather than years, to assess whether a particular instrument has met with success or not. 3.3.2 The International Chamber of Commerce (ICC) The International Chamber of Commerce was founded in 1919 with its principal aim to serve world business by promoting trade and investment, open markets for goods and services, and the free flow of capital.120 The ICC’s initial driving force was Etienne Clémentel, a former French minister of commerce who acted as its first president. The organization’s international secretariat was accordingly established in Paris. Clémentel was also instrumental in the founding of the ICC International Court of Arbitration in 1923.121 Initially, the ICC consisted of a number of European countries and the United States, but it has since grown into a world business organization

119 120 121

Jaglom (2009); Winn and Silveira (2007, p. 239). http://www.iccwbo.org/id93/index.html, accessed 5 June 2009. See http://www.iccwbo.org, accessed 5 June 2009; August (2004, pp. 40–41).

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representing thousands of businesses and business organizations in more than 130 countries. These businesses represent many internationally influential companies and every major industrial and service sector.122 The ICC represents itself as the ‘voice of international business’ and enjoys a high level of recognition and status.123 In 1945 it was granted the highest level consultative status within the United Nations and its specialized agencies such as UNCITRAL, where it has consistently made submissions on subjects of interest to its members.124 The ICC has 16 specialized commissions dealing with various subjects of concern to the international business community. Subjects range from banking techniques to financial services and taxation, from competition law to intellectual property rights, telecommunications and information technology, from air and maritime transport to international investment regimes and trade policy.125 One of the leading principles in all of these committees is that of self-regulation. These committees draft codes on specific topics that may be voluntarily adopted by businesses or business sectors.126 Two ICC instruments have been particularly important for international trade law harmonization, namely Incoterms and the Uniform Customs and Practice for Documentary Credits (UCP). Incoterms consist of a number of standard trade terms and definitions which have been very widely and commonly used in world trade.127 The UCP makes provision for rules regulating the rights and obligations of the parties, including banks, involved in payment by way of a documentary credit or letter of credit.128 Banks almost invariably incorporate the provisions of the UCP in letters of credit that they issue.129 Incoterms were initially published in 1936 in order to standardize the meaning of trade terms such as ex works (EXW), free on board (FOB), cost and freight (C&F) and cost insurance freight (CIF) that were widely used in international trade but did not have a standardized meaning or consequences in different legal systems.130 The use and consequences of these terms were

122 123 124 125 126 127

See http://www.iccwbo.org, accessed 5 June 2009. http://www.iccwbo.org/id93/index.html, accessed 5 June 2009. See http://www.iccwbo.org, accessed 5 June 2009. http://www.iccwbo.org/id96/index.html, accessed 5 June 2009. See http://www.iccwbo.org, accessed 5 June 2009. J. Ramberg (1999, p. 10); August (2004, pp. 593–4); D’Arcy et al. (2000, pp.

7–8). 128 129 130

J. Ramberg (2000, p. 142); August (2004, pp. 674–6). August (2004, p. 676); D’Arcy et al. (2000). ICC INCOTERMS 2000: Report of the Secretary-General (A/CN.9/479) § 1 published in UNCITRAL Yearbook 2000 Vol. XXXI. See also Eiselen and Kritzer (2008) § 88:1; Honnold (1999, p. 206); Huber and Widmer (2005, p. 338); Gabriel (2001, pp. 41–73); J. Ramberg (1999).


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therefore sometimes uncertain or confusing.131 Since their initial publication Incoterms have undergone six revisions, with Incoterms 2000 being the latest.132 The revisions were aimed at keeping pace with the changing nature in the transport of goods in international trade. Incoterms have been drafted in the nature of voluntary rules which can be incorporated into their contract by parties. Courts worldwide have accepted the validity of this type of inclusion by parties and have adhered to the definitions supplied by the ICC, provided that it was clear that the parties intended to refer to the ICC Incoterms.133 These terms are so widely used and accepted in international sales and transport that they have almost achieved the status of trade custom. The value of using Incoterms is recognized in that there are detailed rules which are well known internationally and can be incorporated by, for instance, simply referring to ‘CIF Incoterms 2000’.134 Such a reference will be sufficient to determine the following consequences: the party who is responsible for the arrangement and cost of transport or freight during the various stages of transport; the party who is responsible for arranging and payment of insurance; the incidence and transfer of risk in the case of the goods becoming damaged or destroyed during the period of transport (which is not related to ownership at all); the party who is responsible for export and import licences and clearance and the payment of duties and taxes; and the party who is responsible for the payment of other related or incidental costs.135

131 For instance, the American Uniform Commercial Code contained a number of trade terms such as F.O.B., F.A.S., C.I.F. and C&F – see ss. 2-319 to 2-322 – which carried meanings slightly different from the ICC Incoterms. In the latest revision of the UCC, these trade terms have been specifically abandoned due to the confusion caused with the ICC Incoterms. In a legislative note to s 2-319 it is stated that ‘Sections 2-319 through 2-324 have been eliminated because they are inconsistent with modern commercial practices.’ 132 ICC INCOTERMS 2000: Report of the Secretary-General (A/CN.9/479). 133 D’Arcy et al. (2000, pp. 7–8); August (2004, pp. 593–4); Huber and Widmer (2005, p. 338) Art 30 §§ 3 and 4; Honnold (1999, p. 206). See for instance United States BP Oil Intern., Ltd. v Empresa Estatal Petoleos de Ecuador, 332 F.3d 333, 335, 200 A.L.R. Fed. 771 (5th Cir. 2003); Argentina 2 July 2003 Juzgado Comercial [Commercial Court] Buenos Aires (Arbatax S.A. Reorganization Proceeding) http://cisgw3.law.pace.edu/cases/030702a1.html, accessed 5 June 2009; United States St. Paul Guardian Ins. Co. v Neuromed Medical Systems & Support, GMBH, 53 Fed. Appx. 173 (2d Cir. 2002); Russia 11 April 1997 Arbitration proceeding 220/1996 http://cisgw3.law.pace.edu/cases/970411r1.html, accessed 5 June 2009; Spain 3 October 2002 Audiencia Provincial [Appellate Court] Pontevedra (Frozen stockfish case) http://cisgw3.law.pace.edu/cases/021003s4.html, accessed 5 June 2009. 134 J. Ramberg (1999, p. 10); Honnold (1999, p. 206); Huber and Widmer (2005, p. 338) Art 30 §§ 3 and 4. 135 J. Ramberg (1999, pp. 38–50; 8–17); Gabriel (2001, pp. 41–73).

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The first version of the Uniform Customs and Practice for Documentary Credits (UCP) was published in 1933 as a set of voluntary rules to be adopted mainly by banks when dealing with documentary credits in the payment process.136 Like Incoterms, the UCP has undergone a number of revisions over the years to keep abreast with the changes that have taken place in international banking, insurance and transport practice and have been introduced by newer technologies.137 The latest version is UCP 600, which came into effect on 1 July 2007. In his foreword to UCP 600, the Secretary General of the ICC states that ‘[t]he 39 articles of UCP 600 are a comprehensive and practical working aid to bankers, lawyers, importers, and exporters, transport executives, educators, and everyone involved in letter of credit transactions worldwide.’138 The drafting process of UCP 600 involved extensive consultations and deliberations to ensure its eventual acceptability. The ICC Secretary General describes the process as follows:139 A range of individuals and groups contributed to the current revision, which is entitled UCP 600. These include the UCP Drafting Group, which sifted through more than 5000 individual comments before arriving at this consensus text; the UCP Consulting Group, consisting of members from more than 25 countries, which served as the advisory body reacting to and proposing changes to the various drafts; the more than 400 members of the ICC Commission on Banking Technique and Practice who made pertinent suggestions for changes in the text; and ICC national committees worldwide which took an active role in consolidating comments from their members.

This description provides evidence that the rules have been developed and drafted in a transparent and democratic manner by the ICC by consulting as widely as possible. Although these rules are in the nature of a voluntary code, the vast majority of banks worldwide adhere to them by incorporating them into letters of credit that they issue.140 Incoterms and the UCP provide examples of voluntary rules that have been very successful in harmonizing international trade by providing clear and succinct rules that are well known internationally and are very widely used in international trade. The success of Incoterms has even caused the drafters of the American Uniform Commercial Code to jettison similar trade terms that had existed in the UCC in the latest suggested amendments to the UCC.141 136 August (2004, p. 676); http://www.iccwbo.org/id93/index.html, accessed 5 June 2009. 137 Collyer (2007). 138 Collyer (2007). 139 Collyer (2007). 140 August (2004, p. 676); J. Ramberg (2000, p. 142). 141 A 2003 legislative note to § 2-319 states: ‘Sections 2-319 through 2-324 have


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3.3.3 Unidroit The International Institute for the Unification of Private Law (Unidroit) is an independent intergovernmental organization with its seat in the Villa Aldobrandini in Rome. Its purpose is to study needs and methods for modernizing, harmonizing and co-ordinating private and in particular commercial law as between states and groups of states. It was founded in 1926 as an auxiliary organ of the League of Nations. After the demise of the League it was re-established in 1940 on the basis of a multilateral agreement, the UNIDROIT Statute.142 Unidroit currently consists of 63 Member States from five continents which represent a variety of different legal, economic and political systems as well as different cultural backgrounds. Its independent status as an intergovernmental organization has enabled it to use working methods which have made it a particularly suitable forum to engage in more technical issues.143 Unidroit’s basic statutory objective is to prepare modern and, where appropriate, harmonized uniform rules of private law understood in a broad sense. These uniform rules are mostly aimed at the harmonization of substantive law rules.144 The uniform rules drawn up by Unidroit have traditionally been in the form of international conventions. The low priority that is sometimes given to the implementation of these conventions has forced Unidroit to consider the use of alternative methods of unification and harmonization, especially in those instances where a binding instrument was not necessarily essential.145 Such alternatives have included model laws that states may utilize when drafting domestic legislation or general principles which are addressed directly to judges, arbitrators and contracting parties who can freely decide whether to use them or not.146 Where the Governing Council has identified a subject that it deems in need of harmonization, it will appoint a study group. The study group is usually chaired by a member of the council, and is made up of experts in the particular field identified by the secretariat. The secretariat endeavours to assemble a

been eliminated because they are inconsistent with modern commercial practices.’ And the Official Comment states: ‘Sections 2-319 through 2-324 have been repealed. The effect of a party’s use of shipping terms such as “FOB,” “CIF,” or the like, absent any express agreement to the meaning of the terms, must be interpreted in light of any applicable usage of trade and any course of performance or course of dealing between the parties.’ 142 http://www.unidroit.org/dynasite.cfm?dsmid=84219, accessed 5 June 2009. 143 http://www.unidroit.org/dynasite.cfm?dsmid=84219, accessed 5 June 2009. 144 http://www.unidroit.org/dynasite.cfm?dsmid=84219, accessed 5 June 2009. 145 http://www.unidroit.org/dynasite.cfm?dsmid=84219, accessed 5 June 2009. 146 http://www.unidroit.org/dynasite.cfm?dsmid=84219, accessed 5 June 2009.

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study group that will be as representative as possible, having regard to the world’s different legal and economic systems and geographic regions.147 Unidroit was ultimately responsible for the drafting of the two Hague Sales Conventions of 1964 discussed above, which were adopted only by a handful of mostly European states, but were influential in the drafting of the CISG. Since 1964 Unidroit has been responsible for the drafting of 11 conventions148 of which the 2001 Cape Town Convention on International Interests in Mobile Equipment has been the most successful.149 Unidroit has also developed two model laws, the Model Franchise Disclosure Law (2002) and the UNIDROIT Model Law on Leasing (2008). As yet it is too early to comment on the success of these two instruments. The most interesting work undertaken by Unidroit, however, has been the two sets of Principles that it has adopted, namely the 2004 ALI/UNIDROIT Principles of Transnational Civil Procedure150 and the 2004 UNIDROIT Principles of International Commercial Contracts (an amendment of the original 1994 version of the Principles).151 The black letter text of the principles is augmented with official comments explaining and expanding on the practical application of the principles. The ALI/UNIDROIT Civil Procedure Principles were adopted as a joint project with the American Law Institute with the aim of:152 reconciling differences among various national rules of civil procedure, taking into account the peculiarities of transnational disputes as compared to purely domestic

147 148

http://www.unidroit.org/dynasite.cfm?dsmid=84219, accessed 5 June 2009. For a full list of the conventions and other instruments it has drafted, see http://www.unidroit.org/dynasite.cfm?dsmid=84219, accessed 5 June 2009. 149 The 2001 Cape Town Convention has 32 members. The other conventions are the two 1964 Hague Sales Conventions (denounced by all states who have acceded to the CISG); the 1970 Brussels International Convention on Travel Contracts; 1973 Washington Convention providing a Uniform Law on the Form of an International Will (19 members); 1983 Geneva Convention on Agency in the International Sale of Goods (6 signatories); 1988 Ottowa UNIDROIT Convention on International Financial Leasing (10 members); 1988 Ottowa UNIDROIT Convention on International Factoring (7 members); 1995 Rome UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects (29 members); 2001 Cape Town Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment (29 members); 2007 Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Railway Rolling Stock. 150 Text available at http://www.unidroit.org/english/principles/civilprocedure/ main.htm, accessed 5 June 2009. 151 Text available at http://www.unidroit.org/english/principles/contracts/ main.htm, accessed 5 June 2009. 152 Preamble to the Principles.


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ones. They may not only serve as guidelines for code projects in countries without longer procedural traditions, but may initiate law reforms even in countries with long and high quality procedural traditions; they may also be applied by analogy in international commercial arbitration.

These principles provide an interesting point of departure in the harmonization of an area of the law that has traditionally been perceived as very diverse internationally, for historical and cultural reasons. As yet it is too early to comment on the likely success of these principles in influencing the harmonization of this part of the law. The UNIDROIT Principles of International Commercial Contracts (UP) were drafted to serve as an instrument that may be expressly used or adopted by the parties to an international commercial agreement, or by courts and arbitral tribunals where the parties have failed to choose a governing law or have simply referred to general principles of international law or the lex mercatoria, and, also as an aid to national and international law reform.153 The UP has proved to be a remarkably successful soft law instrument in all three of these areas.154 Although parties seldom refer to the UP expressly, they quite often provide that their contract should be governed by ‘general principles of law’ or the ‘lex mercatoria’. It is especially within arbitral tribunals, which have much more freedom in regard to the law that they will apply, that the UP has been widely used. Surprisingly, the UP has also been used by courts and tribunals to supplement or help interpret domestic law.155 3.3.4 World Customs Organization The World Customs Organization (WCO) describes itself as:156 153 154

Preamble to the Principles. See Bonell (2006, pp. xv–xviii); Gopalan (2008, p. 334); Castellucci (2007, p. 35); Felemegas (2007, p. 33). Cases where the UP has been used include Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366 (Rolled metal sheets case) http://cisgw3.law.pace.edu/cases/940615a3.html § 5.2.2, accessed 5 June 2009; France 23 October 1996 Appellate Court Grenoble (Gaec des Beauches v Teso Ten Elsen) http://cisgw3.law.pace.edu/cases/961023f1.html, accessed 5 June 2009; Russia 6 June 2003 Arbitration proceeding 97/2002 http://cisgw3.law.pace.edu/cases/030606r1.html, accessed 5 June 2009; Netherlands 10 February 2005 Netherlands Arbitration Institute (interim award) http://cisgw3.law.pace.edu/cases/050210n1.html, accessed 5 June 2009; Belarus 20 May 2003 Supreme Economic Court of the Republic of Belarus (Holzimpex Inc. v State Farm-Combine Sozh) http://cisgw3.law.pace.edu/cases/ 030520b5.html, accessed 5 June 2009. 155 Bonell (2006, p. xviii) mentions that in almost half of the 130 cases collected by Unidroit, the UP has been used to interpret or supplement domestic law, an objective not even mentioned in the Preamble of the UP. These included decisions from developed and developing nations. 156 On its website at http://www.wcoomd.org/home_about_us.htm, accessed 5 June 2009.

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the only intergovernmental organisation exclusively focused on Customs matters. With its worldwide membership, the WCO is now recognised as the voice of the global Customs community. It is particularly noted for its work in areas covering the development of global standards, the simplification and harmonisation of Customs procedures, trade supply chain security, the facilitation of international trade, the enhancement of Customs enforcement and compliance activities, anticounterfeiting and piracy initiatives, public-private partnerships, integrity promotion, and sustainable global Customs capacity building programmes. The WCO also maintains the international Harmonized System goods nomenclature, and administers the technical aspects of the WTO Agreements on Customs Valuation and Rules of Origin.157

The WCO started out as a European initiative to found a regional customs cooperation organization in 1947, but was formalized as an international convention in 1952, establishing the Customs Co-operation Council. In 1994 it became known as the World Customs Organization to reflect the fact that it had become a truly international organization.158 It currently has 174 members accounting for 98 per cent of international trade.159 One of the key tasks of the Council was to establish a harmonized system for the classification of goods for tariff purposes.160 It was recognized that the implementation of reciprocal tariff agreements under the 1947 General Agreement on Tariffs and Trade (GATT) would suffer if identical goods were not classified in an identical way for tariff purposes. This eventually led to the 1983 Brussels International Convention on the Harmonized Commodity Description and Coding System (‘Harmonized System’), according to which all products are classified for customs purposes on importation.161 All Member States are obliged to apply their customs laws according to the Harmonized System.162 The Harmonized System has played an important part

157 158

http://www.wcoomd.org/home_about_us.htm, accessed 5 June 2009. On its website at http://www.wcoomd.org/home_about_us_auhistory.htm, accessed 5 June 2009. 159 On its website at http://www.wcoomd.org/home_about_us_our_profile.htm, accessed 5 June 2009. 160 Williams (2002, pp. 231–2) § 526. See also the Preamble to the 1983 Brussels International Convention on the Harmonized Commodity Description and Coding System. 161 South Africa Commissioner for Customs and Excise v Kemtek Imaging Systems Ltd 1999 (4) SA 906 (SCA) § [3]; Williams (2002, p. 231–2) § 526. See also the information provided by the WCO on its website at http://www.wcoomd.org/ files/1.%20Public%20files/PDFandDocuments/Conventions/Hsconve21.pdf, accessed 5 June 2009. 162 See Art 3 of the Convention. For instance, in South Africa the detailed tariff classifications of the Harmonized System are found in Schedule 1 of the Customs and Excise Act 91 of 1964. The Schedule is amended regularly in accordance with the


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in the success of GATT to lower customs duties worldwide through a consistent and fair application of reciprocal customs agreements. The Harmonized System consists of about 5000 commodity groups; each identified by a six-digit code, arranged in a legal and logical structure and supported by well-defined rules to achieve uniform classification. The WCO also publishes Explanatory Notes to the various sections, chapters and individual tariff headings as an official aid to interpretation to ensure a consistent and uniform interpretation of the tariff headings.163 Although there is domestic litigation from time to time due to the fact that certain products are difficult to classify in accordance with the Harmonized System,164 the Harmonized System has created a remarkable level of uniformity in a key area of international trade.

4

CONCLUSION

From the historical accounts of the different areas of international trade law where harmonization has been attempted, it becomes clear that not all instruments have enjoyed equal success or support, although with some instruments it is just too early to tell what their eventual impact will be. One must realize from the outset that the development and drafting process will be cumbersome and slow if it is to adhere to basic democratic values of inclusiveness, representativeness and transparency. However, circumventing this slow process will probably lead to an instrument which will not find much favour. The description of the various methods of harmonization that have been employed by the different agents and promoters of the harmonization of international trade law and of those areas of the law where harmonization has been attempted provides an indication of the critical success factors necessary to achieve effective and real harmonization. These factors include: amendments to the Harmonized System to provide for new classifications and new goods. See Williams (2002, pp. 231–2) § 526. 163 See Art 7 of the Convention. See also South Africa Commissioner for Customs and Excise v Kemtek Imaging Systems Ltd 1999 (4) SA 906 (SCA) § [3]; Williams, (2002, pp. 231–232) § 526. See also the information provided by the WCO on its website at http://www.wcoomd.org/files/1.%20Public%20files/ PDFandDocuments/Conventions/Hsconve21.pdf, accessed 5 June 2009. 164 See for instance the following classic South African customs cases: African Oxygen Ltd v Secretary for Customs and Excise 1969 3 SA 391 (T); Autoware (Pty) Ltd v Secretary for Customs and Excise 1975 (4) SA 318 (W); Secretary for Customs and Excise v Thomas Barlow and Sons Ltd 1970 (2) SA 660 (A); International Business Machines SA (Pty) Ltd v Commissioner for Customs and Excise 1985 (4) SA 852 (A); Commissioner for Customs and Excise v C I Caravans (Pty) Ltd 1993 (1) SA 138 (N); Commissioner for Customs and Excise v Capital Meats CC 1991 (1) SA 570 (SCA).

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• Real or strongly perceived need for harmonization. There must be a real practical need for harmonization or a strong perception that harmonization is necessary or will be beneficial among stakeholders. In the absence of such a need or perception, any attempted harmonization instrument will enjoy little support. • Properly contained target area. It is necessary that the harmonizing body properly and realistically define the area which it perceives as in need of harmonization. Projects that are too ambitious or wide in scope will probably not come to fruition. • Representative and authoritative body/promoter/agent. It is necessary that the harmonization agent be sufficiently representative of all the stakeholders in the field that is being harmonized and that it has sufficient authority to successfully promote its harmonization instrument. The absence of these basic democratic principles will probably lead to the failure of the particular instrument. • Choice of the proper instrument – hard or soft law. There are a variety of different instruments available to harmonization agents, and all of them have been successfully employed in recent years. Proper thought must be given to which instrument will be the most appropriate for the particular purpose. • Proper promotion of the eventual instrument. The harmonization agent must keep on promoting the instrument amongst interested parties to ensure its successful implementation. Often national governments do not give sufficiently high priority to the introduction or acceptance of these harmonization instruments. • Availability of texts and other information. The experience with the CISG has shown that the success of an instrument, especially the harmonized application of the instrument, is dependent on a proper dissemination of the information in respect to the instrument. Making sources such as commentaries, academic writings and case law generally available will contribute significantly in time to ensuring the successful harmonization of the particular field. As is evident from the current work undertaken by organizations like UNCITRAL, Unidroit and the ICC, there are still many areas of international trade law which could potentially benefit from further harmonization, although it is difficult to predict which instruments will eventually be successful. This should not discourage these and other bodies from continuing with this work. Although these forms of lawmaking beyond national borders may sometimes be questioned on the basis of their democratic nature, the above analysis shows that in the harmonization of international trade law most successful instruments have been built on basic democratic principles. In this


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particular field undemocratic instruments are likely to be simply ignored into oblivion.

REFERENCES Conventions 1924 1929 1968 1969 1970 1973 1983 1983 1988 1988 1995 2001 2007

Hague Rules (International Convention for the Unification of Certain Rules of Law Relating to Bills of Lading) Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air Hague-Visby Rules (Protocol of 23 February 1968) Vienna Convention on the Law of Treaties Brussels International Convention on Travel Contracts Washington Convention providing a Uniform Law on the Form of an International Will Brussels International Convention on the Harmonized Commodity Description and Coding System Geneva Convention on Agency in the International Sale of Goods Ottowa UNIDROIT Convention on International Factoring Ottowa UNIDROIT Convention on International Financial Leasing Rome UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects Cape Town Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment Luxembourg Protocol to the Convention on International Interests in Mobile Equipment on Matters specific to Railway Rolling Stock

Legislation American Uniform Commercial Code Australia Electronic Transactions Act 162 of 1999 South Africa Customs and Excise Act 91 of 1964 South Africa Electronic Communications and Transactions Act Chapter III

Case Law Argentina 2 July 2003 Juzgado Comercial [Commercial Court] Buenos Aires (Arbatax S.A. Reorganization Proceeding) http://cisgw3.law.pace.edu/cases/030702a1.html accessed 5 June 2009 Australia 24 October 2008 Federal Court [South Australia District] (Hannaford v Australian Farmlink Pty Ltd) http://cisgw3.law.pace.edu/cases/081024a2.html accessed 5 June 2009 Austria 13 April 2000 Oberster Gerichtshof [Supreme Court] http://cisgw3.law. pace.edu/cases/000413a3.html accessed 5 June 2009 Austria 15 June 1994 Vienna Arbitration proceeding SCH-4366 (Rolled metal sheets case) http://cisgw3.law.pace.edu/cases/940615a3.html accessed 5 June 2009

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Belarus 20 May 2003 Supreme Economic Court of the Republic of Belarus (Holzimpex Inc. v State Farm-Combine Sozh) http://cisgw3.law.pace.edu/cases/030520b5.html accessed 5 June 2009 China 10 August 1999 CIETAC Arbitration proceeding (Raincoat case) http://cisgw3.law.pace.edu/cases/990810c1.html accessed 5 June 2009 China 26 June 2003 CIETAC Arbitration proceeding (Alumina case) http://cisgw3.law.pace.edu/cases/030626c1.html accessed 5 June 2009 China 18 December 2003 CIETAC Arbitration proceeding (AOE and PECVD machines case) http://cisgw3.law.pace.edu/cases/031218c1.html accessed 5 June 2009 China 14 December 2004 Xiamen Intermediate People’s Court [District Court] of Fujian Province (Xiamen Xiang Yu Group Corporation v Mechel Trading AG) http://cisgw3.law.pace.edu/cases/041214c1.html accessed 5 June 2009 China 23 September 2005 New Pudong District People’s Court [District Court] of Shanghai (Xi’an Yun Chang Trade Ltd. v An Tai International (USA)) http://cisgw3.law.pace.edu/cases/050923c1.html accessed 5 June 2009 England Fothergill v Monarch Airlines Ltd [1980] 2 All ER 696 England James Buchanan & Co Ltd v Babco Forwarding and Shipping (UK) Ltd [1977] 3 All ER 1048 at 1052. France 23 October 1996 Appellate Court Grenoble (Gaec des Beauches v Teso Ten Elsen) http://cisgw3.law.pace.edu/cases/961023f1.html accessed 5 June 2009 Germany 9 January 2002 Bundesgerichtshof [Federal Supreme Court] (Powdered milk case) http://cisgw3.law.pace.edu/cases/020109g1.html accessed 5 June 2009 Germany 8 January 2004 Landgericht [District Court] Trier http://cisgw3.law.pace.edu/ cases/040108g1.html accessed 5 June 2009 Italy 12 July 2000 Tribunale [District Court] Vigevano (Rheinland Versicherungen v Atlarex) http://cisgw3.law.pace.edu/cases/000712i3.html accessed 5 June 2009 Italy 25 February 2004 Tribunale [District Court] Padova http://cisgw3.law.pace.edu/ cases/040225i3.html accessed 5 June 2009 Italy 11 December 2008 Tribunale di Forli [District Court] (Mitias v Solidea S.r.l.) http://cisgw3.law.pace.edu/cases/081211i3.html accessed 5 June 2009 Netherlands 10 February 2005 Netherlands Arbitration Institute (interim award) http://cisgw3.law.pace.edu/cases/050210n1.html accessed 5 June 2009 Russia 11 April 1997 Arbitration proceeding 220/1996 http://cisgw3.law.pace.edu/ cases/970411r1.html accessed 5 June 2009 Russia 6 June 2003 Arbitration proceeding 97/2002 http://cisgw3.law.pace.edu/ cases/030606r1.html accessed 5 June 2009 South Africa African Oxygen Ltd v Secretary for Customs and Excise 1969 3 SA 391 (T) South Africa Autoware (Pty) Ltd v Secretary for Customs and Excise 1975 (4) SA 318 (W) South Africa Commissioner for Customs and Excise v C I Caravans (Pty) Ltd 1993 (1) SA 138 (N) South Africa Commissioner for Customs and Excise v Capital Meats CC 1991 (1) SA 570 (SCA) South Africa Commissioner for Customs and Excise v Kemtek Imaging Systems Ltd 1999 (4) SA 906 (SCA) South Africa Improvair (Cape) (Pty) Ltd v Establissements Neu 1983 2 SA (C) South Africa International Business Machines SA (Pty) Ltd v Commissioner for Customs and Excise 1985 (4) SA 852 (A)


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South Africa Laconian Maritime Enterprises Ltd v Agromar Lineas Ltd 1986 3 SA 509 (D) South Africa Secretary for Customs and Excise v Thomas Barlow and Sons Ltd 1970 (2) SA 660 (A) Spain 3 October 2002 Audiencia Provincial [Appellate Court] Pontevedra (Frozen stockfish case) http://cisgw3.law.pace.edu/cases/021003s4.html accessed 5 June 2009 United States BP Oil Intern., Ltd. v Empresa Estatal Petoleos de Ecuador, 332 F.3d 333, 335, 200 A.L.R. Fed. 771 (5th Cir. 2003) United States Delchi Carrier SpA v Rotorex Corp., 71 F.3d 1024, 1028 (2d Cir. 1995) United States MCC-Marble Ceramic Center, Inc., v Ceramica Nuova d’Agostino, S.p.A., 144 F.3d 1384, 1388–9 (11th Cir. 1998) United States Medical Marketing International, Inc., v Internazionale Medico Scientifica, S.R.L., 99-0380, 1999 U.S. Dist. LEXIS 7380, at (E.D. La. May 17, 1999) http://cisgw3.law.pace.edu/cases/990517u1.html accessed 5 June 2009 United States St. Paul Guardian Ins. Co. v Neuromed Medical Systems & Support, GMBH, 53 Fed. Appx. 173 (2d Cir. 2002)

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Felemegas, J. (ed.) (2007), An International Approach to the Interpretation of the United Nations Convention on Contracts for the International Sale of Goods (1980) as Uniform Sales Law, Cambridge: Cambridge University Press. Ferrari, F. (1994), ‘Uniform Interpretation of the 1980 Uniform Sales Law’, Georgia Journal of International and Comparative Law, 24, pp. 183–228, available at http://www.cisg.law.pace.edu/cisg/biblio/franco.html, accessed 5 June 2009. Ferrari, F. (1999), ‘CISG Case Law: A New Challenge for Interpreters’, Journal of Law and Commerce, 17, pp. 245–61, available at http://www.cisg.law.pace.edu/cisg/ biblio/ferrari3.html, accessed 5 June 2009. Ferrari, F. (2001), ‘Tribunale di Vigevano: Specific Aspects of the CISG Uniformly Dealt With’, Journal of Law and Commerce, 20, pp. 225–39, accessible online at http://www.cisg.law.pace.edu/cisg/biblio/ferrari6.html, accessed 5 June 2009. Ferrari, F. (2002), ‘Brief Remarks on Electronic Contracting and the United Nations Convention on Contracts for the International Sale of Goods (CISG)’, Vindobona Journal of International Commercial Law and Arbitration, 6, pp. 289–304. Ferrari, F. (2009), ‘Homeward Trend: What, Why and Why Not’, in A. Janssen and O. Meyer (eds), CISG Methodology, Berlin: Sellier, pp. 171–206. Forsyth, Ch. F. (ed.) (2003), Private International Law, 4th edn, Cape Town: Juta. Gabriel, H. (2001), ‘International Chamber of Commerce Incoterms 2000: A Guide to Their Terms and Usage’, Vindobona Journal of International Commercial Law and Arbitration, 5, pp. 41–73. Garro, A.M. (1989), ‘Reconciliation of Legal Traditions in the UN Convention on Contracts for the International Sale of Goods’, International Lawyer, 223, p. 450. Gillies, P. and G. Möens (eds) (1998), International Trade and Business, Sydney: Cavendish. Goode, R. (1993), ‘Reflections on the Harmonization of Commercial Law’, in R. Cranston and R. Goode (eds), Commercial and Consumer Law – National and International Dimensions, Oxford: Clarendon Press, pp. 3–27. Gopalan, S. (2008), ‘A Demandeur-Centric Approach to Regime Design in Transnational Commercial Law’, Georgetown Journal of International Law, Winter, 39, p. 334. Grossmann-Doerth, H. (ed.) (1930), Das Recht der Überseekauf, p. 65. Gruber, U.P. (2008), ‘Schuldrecht: Besonderer Teil 1’, in W. Krüger and H.P. Westermann (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch, Band 3, 5th edn, Munich: Beck. Hobhouse S. (1990), ‘International Conventions and Commercial Law: The Pursuit of Uniformity’, Law Quarterly Review, 106, p. 531. Holdsworth, J.L. (2001), ‘Practical Applications of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”)’, available at http://www.cisg.law.pace.edu/cisg/biblio/holdsworth.html, accessed 5 June 2009. Honnold, J.O. (ed.) (1999), Uniform Law for International Sales Under the 1980 United Nations Convention, 3rd edn, The Hague: Kluwer. Huber, P. and A. Mullis (2007), The CISG: A New Textbook for Students and Practitioners, Munich: Sellier. Huber, U. and C. Widmer (2005), Commentary on Articles 30–34, in P. Schlechtriem and I.H. Schwenzer (eds), Commentary on the UN Convention on the International Sale of Goods (CISG), 2nd (English) edn, Oxford: Oxford University Press, pp. 337–510. Jaglom, A.R. (2009), ‘Internet Distribution, E-Commerce and Other Computer Related Issues: Current Developments’, American Law Institute–American Bar Association Continuing Legal Education, 18–20 March.

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Kamp, A.R. (1949), ‘Downtown Code: A History of the Uniform Commercial Code 1949-1954’, Buffalo Law Review, pp. 359–476. Karunatilleka, E. (1999) ‘The Asian Economic Crisis’, http://www.parliament.uk/ commons/lib/research/rp99/rp99-014.pdf, accessed 5 June 2009. Keenan, P. J. (2008), ‘Do Norms Still Matter? The Corrosive Effects of Globalization on the Vitality of Norms’, Vanderbilt Journal of Transnational Law, 41, pp. 27–79. Kenna, P. (2008), ‘Globalization and Housing Rights’, Indiana Journal of Global Legal Studies, 15, p. 397. Kötz, H. (1986), ‘Rechtsvereinheitlichung – Nutzen, Kosten, Methoden, Ziele’, Rabels Zeitschrift für ausländisches und internationals Privatrecht, 50, p. 1. Kramer, E.A. (1996), ‘Uniforme Interpretation von Einheitsprivatrecht – mit besonderer Berücksichtigung von Art 7 UNKR’, Juristische Blätter. Lehmann, K. (2006), ‘The United Nations Convention on the International Sale of Goods: Should South Africa Accede?’, South African Mercantile Law Journal, 18, pp. 317–28. Lookofsky, J. (1993), ‘The 1980 United Nations Convention on Contracts for the International Sale of Goods’, in R. Blanpain (ed.), International Encyclopaedia of Laws, The Hague: Kluwer. Lookofsky, J. (2004), ‘Digesting CISG Case Law: How Much Regard Should We Have?’, Vindobona Journal of International Commercial Law and Arbitration, 8, pp. 181–95, available online at http://www.cisg.law.pace.edu/cisg/biblio/ lookofsky9.html, accessed 5 June 2009. Lookofsky, J. (2008), Understanding the CISG, 3rd (worldwide) edn, Copenhagen: Djøf Publishing. Magnus, U. (2005), ‘Wiener UN-Kaufrecht’, in M. Martinek (ed.) J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetze, Berlin: Sellier–De Gruyter. Magnus, U. (2009), ‘Tracing Methodology in the CISG: Dogmatic Foundations’, in A. Jansen and O. Meyer (eds), CISG Methodology, Berlin: Sellier. Martiny, D. (1996), ‘Internationales Privatrecht’, in C. Reithmann and D. Martiny (eds), Internationales Vertragsrecht, 5th edn, Cologne: Schmidt, pp. 516–49, nos. 625–65. Mazzacano, P.J. (2006), ‘Canadian Jurisprudence and the Uniform Application of the UN Convention on Contracts for the International Sale of Goods’, Pace International Law Review, 18; also available at http://www.cisg.law. pace.edu/cisg/biblio/mazzacano1.html, accessed 5 June 2009. Mendes, E. (1988), ‘The U.N. Sales Convention and U.S.–Canada Transactions: Enticing the World’s Largest Trading Bloc to Do Business Under a Global Sales Law’, Journal of Law and Commerce, 8, pp. 109–44. Mertens, H.-J. (1957), ‘Rechtsvereinheitlichung Rechtspolitisch Betrachtet’, in M. Lutter (ed.), Recht und Wirtschaft in Geschichte und Gegenwart: Festschrift für Johannes Bärmann, p. 657. Michaels, R. (2007), ‘The True Lex Mercatoria: Law beyond the State’, Indiana Journal of Global Legal Studies, 14, p. 447. Nariman, F.S (1998), ‘The Convention’s Contribution to the Globalization of International Commercial Arbitration’, paper delivered at the New York Convention Day Colloquium on 10 June, available online at http://www.uncitral.org/pdf/ english/texts/arbitration/NY-conv/NYCDay-e.pdf, accessed 5 June 2009. New Zealand Law Commission (1992), The United Nations Convention on Contracts for the International Sale of Goods: New Zealand’s Proposed Acceptance Report


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Websites Accessed (all accessed on 5 June 2009) http://cisgw3.law.pace.edu/cases/030606r1.html http://cisgw3.law.pace.edu/cases/961023f1.html http://daccessdds.un.org/doc/RESOLUTION/GEN/NR0/390/70/IMG/NR039070.pdf? OpenElement http://www.cisg.law.pace.edu http://www.cisg.law.pace.edu/cisg/text/queenmary.html http://www.iccwbo.org http://www.iccwbo.org/id93/index.html http://www.iccwbo.org/id96/index.html http://www.uncitral.org http://www.uncitral.org/pdf/english/travaux/arbitration/NY-conv/e-ac/eac424r1N5508097.pdf http://www.uncitral.org/pdf/english/travaux/arbitration/NY-conv/e-conf-26-sr/25N5815727.pdf http://www.uncitral.org/uncitral/en/about/methods.html http://www.uncitral.org/uncitral/en/about/origin.html http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration. html http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/1996Model. html http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2001Model_ signatures.html http://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html http://www.unidroit.org/dynasite.cfm?dsmid=84219 http://www.unidroit.org/english/principles/civilprocedure/main.htm http://www.unidroit.org/english/principles/contracts/main.htm http://www.unilex.info/dynasite.cfm?dssid=2375&dsmid=14276 http://www.wcoomd.org/files/1.%20Public%20files/PDFandDocuments/Conventions/ Hsconve21.pdf http://www.wcoomd.org/home_about_us.htm http://www.wcoomd.org/home_about_us_auhistory.htm http://www.wcoomd.org/home_about_us_our_profile.htm http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact1_e.htm

PART III

Public law

5. The relation between private law and administrative law in view of globalization Frits Stroink 1

THE TRUE NATURE OF ADMINISTRATIVE LAW

What is administrative law? In most manuals you find a definition such as: administrative law is law governing the relation between administration and citizen. That is true, but not the whole truth. Indeed, the administration determines unilaterally the legal position of a citizen when conferring licences, subsidies and so on, but, for a large part, administrative law aims at regulating, directing and determining the legal relation between citizens. Administrative law is an instrument of the administration to realize public policies in society. Administrative law is the result of the policy making process. The law (in fact the people via the parliament) gives the administration the tools, the power to intervene in society. Let me give some examples. The conditions of an environmental licence are of course meant to protect the environment (an aspect of the general interest) but they are also meant to protect the legal position of neighbours (third interested parties). If a licence holder does not meet the conditions of a licence, he can under Dutch law commit a tort against a neighbour. This is a clear example that an administrative decision influences the private law relation between two citizens (a licence holder and his neighbour). This is not only the case with environmental licences but also with other licences like building licences. Another example is to be found in the field of financial administrative law. Banks and insurance companies need a licence for exercising their business. The reason for the licence is to protect the citizen, the customer, against bad banking and insurance. The conditions of the licence are related to the financial situation of the company and the integrity of the board of directors and managers. The administration furthers the trust of the citizen in a bank. This is an example of the fact that administrative law is a precondition for a well-functioning system of contracts betweens banks and clients. Furthermore, the state guarantees the saving deposits of a client to a certain amount. 139

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In recent years there has been a discussion in the Netherlands about the responsibility and liability of a supervising authority when the licence holder does not meet the conditions of the licence. Does the supervisor then commit a tort against an injured person? At this moment the Dutch judge is reserved (only in cases of grave errors) reviewing the case but I do not exclude in the coming years a tendency towards a more strict liability. So, we can say that administrative law very often plays an important role in the civil law relations between citizens. Administrative law is an addition to and a correction of civil law.1 Administrative law contributes to a wellfunctioning system of civil law. In a modern society a well-functioning civil law is unthinkable without the existence of a developed system of administrative law. Civil law and administrative law are closely connected, interwoven. The Benthem case as decided by the Strasbourg Human Rights Court is an apt illustration of the relation between civil law and administrative law. The refusal of the environmental licence affected the applicant’s civil rights and obligations in the sense of Article 6 of the European Convention on Human Rights (ECHR) because the licence requirement limited the applicant’s right of ownership and freedom of contract. This meant that the applicant had a right of access to an independent judicial body as stated in Article 6 ECHR. At that time there was no such right in the Netherlands. In many cases there was a right of administrative appeal to the crown, that is, the Government. In consequence of the Benthem case the Dutch legislator abolished the right of appeal to the Crown and created the possibility of appeal to an independent administrative judge, being a division of the Council of State.2

2

CONTRACTS BETWEEN THE ADMINISTRATION AND THE CITIZEN

Also in another respect there can be an influence of administrative law in civil law relations. If the administration (as a civil law legal person) makes a civil law contract with a citizen, of course civil law is applicable. But that is not the whole story. Very often the administration tries to serve the general interest via private law contracts. Sometimes, even, the administration makes a contract instead of conferring a licence. Under Dutch law this is often forbidden because the public law is usually considered to be exclusive but sometimes it is permitted, for example in the field of spatial law.3 Under Dutch law not only 1 I first developed this approach to administrative law with Rene Seerden in Seerden and Stroink (2007, pp. 155 and further). 2 ECHR 23 October 1985, Series A vol. 97. 3 See note 1, pp. 172 and further.

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is civil law applicable to these civil law relations but also general principles of proper administration. This is, you can say, a kind of mixed legal system. Both civil law and administrative law are applicable to contracts between the administration and the citizen. The reason for this system is that the administration has always to act in the general interest, as well as a civil law legal person. This doctrine was developed by the Dutch Supreme Court4 and laid down in the General Code of Administrative Law in 1994.5 Under Dutch law the civil judge is the competent judge in these cases. But in France, for example, some contracts between the administration and the citizen are considered to be exclusively administrative and therefore only the administrative judge is the competent judge. The decisive criterion is the service public.6 In Germany it is sometimes possible to make a contract between administration and citizen instead of the conferment of a (unilateral) administrative decision.7 In these cases the administrative judge is the competent judge. Under Dutch law the civil judge is also competent concerning the decision to make a civil law contract,8 but France and Belgium know the phenomenon of the acte detachable.9 This means that the administrative judge is competent to test the administrative decision to make a civil contract. The conclusion is that contracts between the administration and a citizen can be purely civil law contracts, exclusively administrative law contracts or of a mixed nature. In many countries the administration also influences the civil law contracts between the administration and the citizen.

3

ADMINISTRATIVE LAW AND GLOBALIZATION10,11

Is there a tendency towards harmonizing and unifying administrative law in Europe and in the world? In the world definitely not. Every country has its own administrative law. Administrative law is national law. In the western

4 5

HR 27 March 1987, AB 1987, 273; NJ 1987, 727. Article 3:1, section 2, Algemene wet bestuursrecht (General Code of Administrative Law). 6 See Auby and Cluzel-Métayer (2007, pp. 72 and further). 7 See Schröder (2007, pp. 116 and further). 8 See art. 8:3, Algemene wet bestuursrecht (General Code of Administrative Law). 9 See about this phenomenon Wauters (2009). 10 Globalization conceived as harmonization and unification of (substantive and non-substantive) administrative law. 11 Kingsbury et al. (2005), http://law.duke.edu/journal/lcp. In spite of the title the authors try to constitute an embryonic field of global administrative law, and the results are preliminary.

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world the administrative law systems are well developed and also contribute – (see Section 1) to the stability of civil law. In developing countries, however, administrative law is underdeveloped and does not even always exist in fact. Of course (see again Section 1) this has a negative effect on civil law. In the European Union the situation is more complicated. Every member of the EU has its own system of administrative law.12 The European Court of Justice accepts the differences of the administrative law systems of the Member States, at least within certain conditions. For example the effectivity of the implementation of EU law in national law must be guaranteed. But there is an autonomy of procedural law and of the organization of the judiciary. In the field of substantive administrative law however there is a strong tendency towards harmonization and unification. But, in spite of the differences of the national administrative law systems in western countries, all administrative law systems have common features. They are governed by the principle of the rule of law (Rechtsstaat). This principle gives guarantees for the quality and legitimacy of administrative law. These common features are: 3.1

The Principle of Legality

This principle is based on the principle of democracy, promotes legitimacy, assures legal certainty and foreseeability, and means that the administration has to act within its powers (the powers of the administration are always limited). 3.2

Principles of Proper Administration

These principles refer to the preparation and taking of administrative decisions. The most important principles are: • • • • • •

no bias (including of course no corruption) audi alteram partem (fair hearing) equality duty to give legal reasons the requirement of careful preparation of an administrative decision honouring legitimate expectations.

The principles can be written (stated in the law) or unwritten (judge-made law).

12

For a survey see Seerden (2007).

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Supervision by a Judge

The judge can be a common judge or an administrative judge. This principle includes a right of access to a judge who is independent and can take binding decisions within a reasonable time, unbiasedly and acting according to the principle of audi alteram partem. Notwithstanding these principles, laid down in the European Convention on Human Rights, there are considerable differences in the powers of the judge and intensity of testing.

4

CONCLUSION

In every country, developed or undeveloped, a well-functioning system of administrative law (the administration complying with general principles of proper administration, acting on the basis of the law and an accessible independent judge) is a precondition for a well-functioning system of civil law. Administrative law partly determines the relation between citizens (via unilateral administrative decisions and civil law contracts) and increases the trust of one party in another party, and the administration sometimes gives protection when a contracting partner fails. In other words, a well-functioning system of administrative law is good for the stability of private law relations. Civil law and administrative law are in developed countries closely interlinked and connected. Is there a possibility of globalizing, that is, harmonizing and unifying, administrative law in the near future? Here we have to distinguish between non-substantive administrative law (roughly speaking the rule of law: the principle of legality, general principles of proper administration, judicial review) and substantive administrative law (the rights and duties of a citizen based on an administrative decision). Maybe, in the distant future, the idea of the rule of law can be realized in the whole world more or less.13 But the globalizing of substantive administrative law is not very realistic, even in the distant future; at best it will be on a very limited scale.14 The differences in economic and law development

13 Kingsbury et al., supra note 11, make a distinction in: (1) procedural participation and transparency; (2) reasoned decisions; (3) review and substantive standards: proportionality, means–ends rationality, avoidance of unnecessary restrictive means, legitimate expectations. 14 Kingsbury et al. supra note 11, distinguish five types of global administration: (1) administration by formal international organizations; (2) administration based on collective action by transnational networks of cooperative arrangements between national regulatory officials; (3) distributed administration conducted by

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between the countries in the world are too big. Furthermore, globalizing of administrative law presupposes a world government. It is not likely that there will be a world government in the near future and or even in the distant future. As long as nations exist, there will be national administrative law. If globalizing of private law in the sense of harmonizing and unifying substantive private law is possible in the (near) future – I cannot judge that – it is advisable to recognize that in many cases civil law relations are influenced by national (or regional) administrative decisions. I think this is an important impediment to harmonizing and unifying private law on a world scale.

REFERENCES Auby, J.-B. and L. Cluzel-Métayer (2007),’Administrative Law in France’, in R. Seerden (ed.), Administrative Law of the European Union, Its Member States and the United States: A Comparative Analysis, 2nd edn, Antwerp and Oxford: Intersentia. Kingsbury, B., N. Kirsch and R.B. Stewart (eds) (2005), The Emergence of Global Administrative Law, http://law.duke.edu/journal/lcp. Schröder, M. (2007), ‘Administrative Law in Germany’, in R. Seerden (ed.), Administrative Law of the European Union, Its Member States and the United States: A Comparative Analysis, 2nd edn, Antwerp and Oxford: Intersentia. Seerden, R. (ed.) (2007), Administrative Law of the European Union, Its Member States and the United States: A Comparative Analysis, 2nd edn, Antwerp and Oxford: Intersentia. Seerden, R. and F. Stroink (2007), ‘Administrative Law in the Netherlands’, in R. Seerden (ed.), Administrative Law of the European Union, Its Member States and the United States: A Comparative Analysis, 2nd edn, Antwerp and Oxford: Intersentia. Wauters, K. (2009, forthcoming), Rechtsbescherming en Overheidsovereenkomsten, thesis to be defended in Maastricht, Antwerp and Oxford: Intersentia.

national regulators under treaty, network or other cooperative regimes; (4) administration by intergovernmental private arrangements; (5) administration by private institutions with regulatory functions.

6. Beyond parochialism? Transnational contextualization in constitutional interpretation in South Africa (with particular reference to jurisprudence of the Constitutional Court)1 Lourens du Plessis 1

INTRODUCTORY OBSERVATIONS AND EXPLANATIONS

According to section 39(1) of the Constitution of the Republic of South Africa, 1996, ‘[w]hen interpreting the Bill of Rights, a court, tribunal or forum … must consider international law’ (section 39(1)(b)) and ‘may consider foreign law’ (section 39(1)(c)). These provisions acknowledge that the Bill of Rights, and the Constitution as a whole, is (also) embedded in a transnational reality beyond both the geographic and the legally and constitutionally defined precincts of ‘the Republic of South Africa’. The attention of judicial interpreters is moreover drawn, with supreme constitutional authority, to this transnational context, requiring international law and allowing foreign law to be considered in Bill of Rights (and constitutional) interpretation. The 1996 Constitution (also referred to as ‘the final Constitution’ – or simply ‘the Constitution’) entered into force on 4 February 1997 and was preceded by – and adopted in terms of the provisions of – the Constitution of the Republic of South Africa, Act 200 of 1993 (also referred to as the ‘transitional’ or ‘interim Constitution’), which, with its commencement on 27 April 1994, introduced constitutional democracy to South Africa. Section 35(1) of this Constitution

1 A thoroughly reworked and extended version of a presentation entitled ‘Beyond Parochialism: International Law and Transnational Learning in Constitutional Interpretation’ at a Research Workshop on ‘Lawmaking and Development of Law in a Globalized World’ presented by the Faculty of Law, University of Stellenbosch, the Ius Commune Research School and Trinity College, Dublin, School of Law, held at the Stellenbosch Institute for Advanced Study, Stellenbosch, 6–8 December 2007.

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was the essentially similar (though somewhat differently worded) predecessor to sections 39(1)(b) and (c) of the 1996 Constitution.2 Section 39(1)(b) is to be read with section 233 of the 1996 Constitution which requires ‘every court’ interpreting legislation to ‘prefer any reasonable interpretation … consistent with international law over any alternative interpretation that is inconsistent with international law’. A similar provision was absent from the transitional Constitution. Section 231 of the 1996 Constitution deals with international agreements and the binding force of the international law emanating from them, and was preceded by sections 231(1)–(3) of the transitional Constitution. Section 232 of the 1996 Constitution, preceded by section 231(4) of the transitional Constitution, recognizes customary international law as ‘law in the Republic, unless it is inconsistent with the Constitution or an Act of Parliament’. Sections 231 and 232 of the Constitution are not a particular focus of attention in this chapter, because, unlike sections 39(1)(b) and (c) and 233, they have not been designed primarily to aid interpretation of the Constitution (or existing law).3 The present chapter focuses on – and is indeed a case study of – how, since 1994, South African courts have performed their constitutional obligation – and have invoked constitutional authorization – ‘to have due regard to’ (in the words of section 35(1)) or ‘to consider’ (in the words of sections 39(1)(b) and (c)) transnational sources of law in constitutional interpretation, and (since the commencement of the 1997 Constitution also) to show preference for reasonable interpretations of legislation consistent with international law. Such a case study can offer useful insights about engagement with transnational sources in (domestic) constitutional interpretation, because, with section 35(1) and, in time, sections 39(1)(b) and (c) as well as section 233 in place, circumstances in South Africa have been entirely conducive to profitable reconnoitring expeditions beyond national boundaries and in ‘other man’s land’. The areas of law that will feature prominently in this study, namely human rights and constitutional law, are moreover very much alive and kicking in ‘global territory’ too. How readily has transnational wisdom been allowed to enlarge on (and even trump) parochial considerations in ‘domestic’ constitutional interpretation in South Africa? And have South African courts, with the Constitutional Court at the helm, unwaveringly and consistently realized the full potential of conditions so very propitious to the exploration and use of transnational

2 Section 35(1) required a court interpreting the provisions of the (transitional) Bill of Rights, which was Chapter 3 of the transitional Constitution, to ‘have regard to public international law’ and added also that it ‘may have regard to comparable foreign case law’. 3 However, sections 231 and 232 often have to be reckoned with when the effects of sections 39(1)(b) and (c) and 233 are assessed.

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(re)sources? These specific questions will give shape to the discussion that follows. The conditions just referred to have often enough, but not invariably, yielded optimal exploration and exploitation of transnational (re)sources. Factors and forces inhibiting the best possible utilization of transnational (re)sources in South African constitutional interpretation will be identified and some remedial action suggested. The discussion will commence with a survey of constitutional jurisprudence that has earned the South African Constitutional Court a complimentary reputation for its universalist interpretation of constitutional rights. It will be shown that the enthusiastic court’s mistaken conflation of international and foreign law, in the process of having ‘due regard to’ (or ‘considering’) them, has nonetheless instilled a useful and usable sense of their shared transnationality. Instances of and patterns in recourse to international law in the Constitutional Court’s jurisprudence on constitutional interpretation will be considered in the second main section of this chapter, tracing the fate of Chaskalson P’s broadminded ‘framework dictum’ in S v Makwanyane and Another.4 The lamentable underuse of section 233 of the 1996 Constitution will also be dealt with. An example of how international law has contributed to the making of South African domestic law regarding resort to travaux préparatoires in constitutional and statutory interpretation will conclude the international law discussion. In the third main section of this chapter constitutional comparativism in South African constitutional interpretation will be discussed, considering enthusiasm as well as scepticism for this endeavour and showing that the former mood unquestionably prevails. Challenges (still) facing constitutional comparativists in South Africa to develop theoretically sound methodologies of comparison will also briefly be identified.

2

GATEWAY(S) TO THE ‘TRANSNATIONAL CONTEXT’

2.1

Section 39 and the Makwanyane Guidelines

Considering the constitutionality of capital punishment with reference to the kind of transnational (re)sources envisaged in section 35(1) of the transitional Constitution, Chaskalson P in S v Makwanyane and Another5 laid down

4

1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para.

5

1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC).

35.

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consequential guidelines for reliance on6 international and foreign law in constitutional interpretation. Most pertinent among these guidelines, also applicable to reliance on sections 39(1)(b) and (c) of the 1996 Constitution, are the following three: 2.1.1

The first guideline

In the course of the arguments addressed to us, we were referred to books and articles on the death sentence, and to judgments dealing with challenges made to capital punishment in the Courts of other countries and in international tribunals. The international and foreign authorities are of value because they analyse arguments for and against the death sentence and show how Courts of other jurisdictions have dealt with this vexed issue. For that reason alone they require our attention. They may also have to be considered because of their relevance to s 35(1) of the Constitution…7

Note that, according to Chaskalson P, it is competent for a South African court construing the Constitution to consider international and foreign authorities (he mentioned them in one breath) regardless of section 35(1) of the transitional (and therefore also sections 39(1)(b) and (c) of the 1996) Constitution. Such authorities may be considered because they are of value in their own right and/or ‘because of their relevance to section 35(1)’ (and sections 39(1)(b) and (c)).8 Since section 35(1) explicitly referred (and sections 39(b) and (c) presently still refer) to interpretation of the Bill of Rights only, Chaskalson P in actual fact laid down binding case law extending the constitutional authorization to consider international and foreign law to the interpretation of constitutional provisions not forming part of the Bill of Rights as well. To do this is, as a matter of fact, decidedly advisable, but optional nonetheless, except when international law binding in terms of ‘black-letter’ provisions in sections 231 and 232 or the presumption in section 233 of the Constitution enters the picture.9

6

‘Having regard to’ international and foreign (case) law in the language of section 35(1) of the transitional Constitution and ‘considering’ international and foreign law in the language of sections 39(1), (b) and (c) of the 1996 Constitution – cf. 1 above. 7 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 34. 8 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 34. 9 On international law thus binding cf. 3.2 below.


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The second guideline (and the ‘framework dictum’)

Customary international law and the ratification and accession to international agreements is [sic!] dealt with in s 231 of the Constitution, which sets the requirements for such law to be binding within South Africa. In the context of s 35(1), public international law would include non-binding as well as binding law … International agreements and customary international law accordingly provide a framework within which chap 3 [the Bill of Rights] can be evaluated and understood, and for that purpose, decisions of tribunals dealing with comparable instruments … may provide guidance as to the correct interpretation of particular provisions of chap 3…10

These dicta involve two findings of far-reaching significance for – and binding on all – South African courts construing the Bill of Rights (and the Constitution). The first finding is that the words ‘international law’ in section 35(1) of the transitional (and section 39(1)(b) of the 1996) Constitution(s) refer to binding as well as ‘non-binding’ international law.11 The second is that international agreements and customary law ‘provide a framework within which … the Bill of Rights … can be evaluated and understood’12 (the ‘framework dictum’). The implications of these findings will be considered when the use of international law in constitutional interpretation is discussed in more detail below.13 2.1.3

The third guideline

In dealing with comparative law we must bear in mind that we are required to construe the South African Constitution, and not an international instrument or the constitution of some foreign country, and that this has to be done with due regard to our legal system, our history and circumstances, and the structure and language of our own Constitution … We can derive assistance from public international law and foreign case law, but we are in no way bound to follow it.14

These words of caution have, in the post-Makwanyane case law, been sounded repeatedly. It is notable too, as was suggested before and as Chaskalson P. explicitly reminds us, that public international and foreign law, from which, in

10 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35. 11 As will be argued in 3.2 below, ‘non-binding’ international law is strictly speaking a misnomer. 12 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35. 13 Cf. 3.3 below. 14 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 39.

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terms of sections 35(1) of the transitional and 39(1)(b) and (c) of the 1996 Constitution, assistance may be derived in constitutional interpretation, are in no way binding on any court. Chaskalson P, however, unfortunately fails to mention that a court must also always be alert to the possibility that it may indeed be bound to follow certain precepts of international law, because it is required by constitutional provisions other than sections 35(1) (and 39(1)(b)) to do so. Coming to mind in this regard are section 231 of the transitional and sections 231–3 of the 1996 Constitution. Chaskalson P’s failure to consider the said possibility created the (probably unintended and mistaken) impression that, as transnational driving forces in constitutional interpretation, international and foreign law are equatable. However, this mistake, as will next be shown, has considerably aided the identification of ‘the transnational context’ with its significant consequences for constitutional interpretation. 2.2

‘Transnational Contextualization’

Kriegler J in Sanderson v Attorney-General, Eastern Cape15 observed that ‘[b]oth the interim and the final Constitutions … indicate that comparative research is either mandatory or advisable’. In the scheme of section 39(1)(b) and (c) of the 1996 (and section 35(1) of the transitional) Constitution only comparative research is/was advisable while consideration of (or having due regard to) international law is/was mandatory. By labelling ‘(public) international law’16 and ‘foreign law’17 with one and the same ‘comparative research’ tag, Kriegler J thus equated and conflated them. A critical yet constructive (and perhaps even ‘creative’) look at this conflation posits a starting-point to explain the use of the phrase ‘transnational contextualization’ in this chapter. The constitutionalization of international law as well as the internationalization of constitutional law are manifestations of a globalization of public law, and have rendered the strict boundaries between domestic constitutional law, foreign constitutional law and international law permeable.18 However, to recognize (and duly reckon with) their intrinsic relatedness and the consequences of the vibrant interaction between them is still a far cry from doing away with appropriate acknowledgement of the distinctiveness of each. In constitutional interpretation in South Africa the distinction between (reliance

15 16

1997 (12) BCLR 1675 (CC), 1998 (2) SA 38 (CC) at para. 26. Mentioned in section 35(1) of the transitional (and in section 39(1)(b) of the 1996) Constitution. 17 Mentioned in section 35(1) of the transitional (and in section 39(1)(c) of the 1996) Constitution. 18 Bryde (2003, pp. 61–75); cf. also Peters (2007, pp. 251–308).


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on) international and foreign law is best upheld because the Constitution requires that, when interpreting the Bill of Rights, international and foreign law are to be considered in different ways: the former must be considered (section 39(1)(b)) while the latter may be considered (section 39(1)(b)). As argued before – on the basis of a dictum of Chaskalson P in S v Makwanyane and Another19 – both international and foreign law may also be considered in the interpretation of the rest of the Constitution. However, the written constitutional text (sections 39(1)(b) and (c) in particular), as well as the case law amplifying it, still does not anticipate all possibilities. Foreign law, in the domestic context, can never have more than persuasive force while some international law may well be as binding or prescriptive as domestic law. This sets international and foreign law apart – and has to be reckoned with in constitutional interpretation and, as a matter of fact, in the interpretation and application of all law. The role of international and foreign law as two distinct sources of authority in South African constitutional interpretation will next be discussed seriatim without, however, suggesting that it is impossible to label them with a generic tag. That both international and foreign law can and do have an effect in constitutional interpretation is a manifestation of legal (and, in particular, a public law) globalization, emphasizing – as was pointed out before – that a national Constitution is also embedded in a transnational reality beyond the geographic and the legally and constitutionally defined precincts of the jurisdiction whose supreme law it is.20 Dealing with international and foreign law in constitutional interpretation thus amounts to a generic reading procedure that may aptly be depicted as transnational contextualization.

3

INTERNATIONAL LAW

3.1

International Law, Globalization and South Africa’s ‘New Constitution’

A hundred years prior to the advent of constitutional democracy in South Africa, a court in the former Zuid-Afrikaanse Republiek declared that the municipal law of that republic must be interpreted in such a way as not to conflict with the principles of international law … ‘[T]he state which disclaims the authority of international law places

19 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 34; cf. 2.1.1 above. 20 Cf. 1 above.

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herself outside the circle of civilized nations.’ It is only by a strict adherence to these recognized principles that our young state can hope to acquire and maintain the respect of all civilized communities, and so preserve its own national independence.21

This dictum signalled a resolve to play a constructive role in international affairs which South Africa, during the first half of the twentieth century, as a faithful member of the League of Nations and as a founder member of the United Nations, indeed did.22 From the mid-1940s, however, South Africa increasingly came under attack because of its racial policies, and quite unintendedly (and unwillingly) then became a major contributor to developing a post-World War II international law – in a ‘negative’ sense, that is, as the ‘target’ of an increasing body of treaty and customary law designed to promote human rights and racial equality, and to facilitate the process of decolonization.23 South Africa’s resolve during the 1990s to negotiate a peaceful and a decided transition to constitutional democracy manifested in, amongst other things, an openness to ‘influences from outside’ and, in particular, a positive attitude towards international law as a potentially formative and informative force in the legal order of a new South Africa. This unequivocal change in attitude at a political level, manifesting in, amongst other things, the inclusion of sections 35(1) in the transitional and 39(1)(b) and (c) (and 233) in the 1996 Constitution,24 resonated with the judiciary too, as is evident from the Constitutional Court’s generous reliance on international and foreign law in constitutional interpretation, verbalized by Chaskalson P in the guidelines laid down in S v Makwanyane.25 A feature of most ‘new’ constitutional texts in the world today is that their drafters have drawn heavily on international instruments – especially human rights declarations and covenants – in formulating their provisions. For comparative purposes a distinction between ‘old constitutions’ – predating important international instruments such as the European Convention on Human Rights and Fundamental Freedoms of 1950, the International Covenant on Economic, Social and Cultural Rights of 1966 and the

21 22 23

CC Maynard et alii v The Field Cornet of Pretoria (1894) 1 SAR 214 at 223. Dugard (2000, pp. 19–20). ‘While apartheid undermined and discredited the law of South Africa, it succeeded, perversely, in injecting notions of racial equality, self-determination and respect for human rights into an international legal order that in 1945 had few developed rules on these subjects.’ Dugard (2000, p. 21). 24 Cf. 1 above. 25 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at paras 34, 35 and 39. Cf. 2.1 above and, in general, du Plessis (2007b, pp. 309–40) at p. 310.


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International Covenant on Civil and Political Rights of 1966 – and ‘new constitutions’ drafted with heavy reliance on these and similar instruments may ‘be particularly fruitful, even if it might be unfamiliar’.26 The German Constitution, generally regarded as a ‘new’ constitution, will, in terms of this distinction, for instance, be an ‘old’ constitution. The South African Constitution, and its Bill of Rights in particular, is a mini-encyclopaedia of international human rights law gleaned from multifarious international declarations, covenants and conventions.27 Since its very inception the South African Constitution has thus been a product of international law to quite a decisive extent, and for this reason alone international law has an important role to play in its interpretation, as the eminently sensible inclusion of provisions such as sections 39(1)(b) and (c) suggests.28 The Constitutional Court, in certifying compliance of the written text of the 1996 Constitution with the XXXIV Constitutional Principles in Schedule 4 to the transitional Constitution,29 considered Constitutional Principle II requiring that ‘[e]veryone shall enjoy all universally accepted fundamental rights, freedoms and liberties’ and concluded that the text it was called upon to certify – and which eventually became the Constitution of the Republic of South Africa, 1996 – complied with this standard as a minimum and in some instances even went beyond it.30 The inclusion in a nation’s supreme constitution of provisions derived from international documents and instruments is a direct and most powerful way of 26 27

Bryde (2005–06, pp. 203–19) at p. 208. In addition to the instruments already mentioned the Universal Declaration of Human Rights of 1948, the American Convention on Human Rights of 1969, the African Charter on Human and Peoples’ Rights of 1981, the International Covenant on the Elimination of all Forms of Racial Discrimination of 1966, the Convention on the Elimination of all forms of Discrimination against Women of 1979 and the Convention on the Rights of the Child of 1989 (CRC) were also freely used – du Plessis (2007b, pp. 309–40) at p. 313. 28 And previously section 35(1) of the transitional Constitution. Cf. 1 above. 29 Section 71 of the transitional Constitution required such certification as part of the process of adopting the 1996 Constitution. There were two Certification Judgments. The Constitutional Court referred the first text submitted for certification back to the Constitutional Assembly holding that, in some respects, it did not comply with the Constitutional Principles: Certification of the Constitution of the Republic of South Africa, 1996, In re: Ex parte Chairperson of the Constitutional Assembly 1996 (10) BCLR 1253 (CC), 1996 (4) SA 744 (CC). The court thereafter, in a second judgment, certified an improved text: Certification of the Amended Text of the Constitution of the Republic of South Africa, 1996, In re: Ex parte Chairperson of the Constitutional Assembly 1997 (1) BCLR 1 (CC), 1997 (2) SA 97 (CC). 30 Certification of the Constitution of the Republic of South Africa, 1996, In re: Ex parte Chairperson of the Constitutional Assembly 1996 (10) BCLR 1253 (CC), 1996 (4) SA 744 (CC) at paras 48–51.

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incorporating international (human rights) law in municipal law. It gives rise to a somewhat curious situation, though, where constitutional provisions with their origins in international law are required to be construed considering international law. Recognized procedures for and aids to the construction of international law – for instance, Articles 31–3 of the Vienna Convention on the Law of Treaties – may be relied on to determine what ‘international law’ in a given situation and/or with reference to a specific issue is. This does not, however, mean that the South African Constitution and Bill of Rights themselves have to be interpreted as if they were sources of international law: they are to be construed in accordance with recognized procedures and reading strategies for the interpretation of enacted domestic law, duly honouring the Constitution’s status as supreme law.31 In the South African context a constitutional provision derived from an international law source could thus be construed to have a meaning different from its accepted meaning in international law. It is, as a matter of fact, conceivable that considering (which also means ‘weighing the merits of’32) international law may indeed give rise to such a differing construction of a human rights provision in a domestic bill of rights. 3.2

‘Binding’ and ‘Non-binding’ International Law

Sections 39(1)(b) and (c) of the South African Constitution (referred to previously33) are provisions not commonly included in constitutions, and reliance on international and foreign law in constitutional interpretation is possible without such constitutional authorization (which does not, however, mean that the inclusion of the said provisions in the South African Constitution is insignificant). More commonly and typically, constitutions provide for the recognition – and incorporation into domestic law – of (treaty and customary) international law. The ‘black-letter provisions’ of the South African Constitution geared to achieve these effects are the previously referred to sections 231 and 232. International law thus recognized and incorporated is sometimes referred to as ‘binding’ international law to distinguish it from ‘non-binding’ international law, which is the vast body of international law not brought to bear in the domestic legal system by virtue of sections 231 and 232.

31 Cf., however, the South African Constitutional Court’s (contrary) view on the status of the Vienna Convention on the Law of Treaties in constitutional interpretation in S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) at para. 16 – discussed below. 32 The Shorter Oxford English Dictionary on CD-ROM 5th edn Version 2.0 (2002), Oxford University Press. 33 In 1 above.


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In accordance with Chaskalson P’s phenomenal finding in S v Makwanyane and Another,34 such ‘non-binding’ international law was ‘public international law’ for purposes of section 35(1) of the transitional Constitution and it may safely be assumed that it has remained ‘international law’ for purposes of section 39(1)(b) of the 1996 Constitution too.35 Strictly speaking the term ‘non-binding international law’ is a ‘South Africanist misnomer’, for there is no really non-binding international law.36 The constitutional injunction to consider international law in Bill of Rights interpretation, for instance, makes all international law ‘binding’, not in the sense that it must straightaway be observed as law, but to the extent that due regard must be had to it. The presumption in section 233 of the Constitution, which will be discussed below37, could have a similar effect. In the discussion that follows the term ‘non-binding’ international law, coined by the Constitutional Court in Makwanyane,38 will thus be used, with the necessary reservations, to signify international law not recognized as and incorporated into domestic law by virtue of sections 231 and 232 of the Constitution. 3.3

Looking Critically at the Framework Dictum in Makwanyane

The framework dictum, after having authorized resort to ‘binding’ as well as ‘non-binding’ international law in constitutional interpretation (the matter just discussed),39 proceeds with the observation that binding as well as non-binding international law provides a framework within which the Bill of Rights ‘can be evaluated and understood’.40 This part of the dictum reflects a decided readiness to have recourse to international law in domestic constitutional interpretation. It is this attitude, combined with a very broad understanding of what ‘international law’ in constitutional interpretation entails,41 that has earned the 34 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35. 35 Cf. 2.1.2 above. 36 Du Plessis (2007b, pp. 309–40) at p. 312. 37 Cf. 3.7 below. 38 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35. 39 Cf. 3.2 above. 40 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35. Mokgoro, in a similar vein, held that the Constitution ‘requires courts to proceed to public international law and foreign case law for guidance in constitutional interpretation, thereby promoting the ideal and internationally accepted values in the cultivation of a human rights jurisprudence for South Africa’ – S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 304. 41 Cf. 3.2 above.

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South African Constitutional Court a complimentary reputation for its ‘universalist interpretation’ of constitutional rights’.42 Chaskalson P cited John Dugard43 as authority for his finding, reflected in the first part of the framework dictum, that – informed by section 35(1) of the transitional Constitution (and section 39(1)(b) of the 1996 Constitution) – both ‘binding’ and ‘non-binding’ (public) international law may be invoked in constitutional interpretation. An implication of this finding is that just about any source of international law may be considered in constitutional interpretation – also, for instance, the European Convention on Human Rights and Fundamental Freedoms, to which South Africa can never become a party. Neville Botha and Michéle Olivier44 contend that Chaskalson P incorrectly relied on the writing of Dugard that he cited in support of the finding just described. What Dugard, according to the authors, probably had in mind were the (less than ‘free for all’) ‘traditional sources of international law’ recognized in Article 38(1) of the Statute of the International Court of Justice, and Dugard apparently confirmed this in a subsequent article.45 Chaskalson P thus seems to have misread the source on which he relied and laid down binding (or prescriptive) case law per errorem, as it were. This piece of judge-made law has nonetheless turned out to be of considerable consequence in the evolution of South Africa’s domestic human rights law, drawing on sources of international law in a distinctly direct and monistic manner.46 As will be shown below47 the Constitutional Court in Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others48 actually retreated from the Makwanyane position, but in time this turned out to be an ad hoc and temporary deviation, and openness to and generous reliance on international law have mostly informed the default (judicial) disposition in constitutional interpretation in South Africa. More, next, about this (temporary) retreat. 3.4

The Framework Dictum Compromised? – AZAPO

The Constitutional Court’s judgment in the politically controversial and dilemmatic Azanian People’s Organization (AZAPO) and Others v President of the

42 43 44 45 46 47 48

Peters (2007, pp. 251–308) at pp. 300–301. Dugard (1994, pp. 171–95). Botha and Olivier (2004, pp. 42–77) at p. 46. Dugard (1995, pp. 241–51). Cf. also Motala and Ramaphosa (2002, p. 37). Cf. 3.4 below. 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC).


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Republic of South Africa and Others,49 with Mahomed DP speaking on behalf of a unanimous court, came on 25 July 1996, one year, one month and 19 days after Makwanyane50 had been handed down. Save for the absence of Kentridge AJ in AZAPO, the panels of concurring judges in the two cases were identical. Not only did AZAPO retreat from Makwanyane’s generous reliance on international law in constitutional interpretation, but it arguably also reversed the court’s position on international law as a framework within which the Bill of Rights ‘can be evaluated and understood’.51 Ironically, AZAPO was probably not intended to have any of these adverse effects, but instead focused on negotiating the very thorny political dilemma of how to deal, in a constitutionally accepted manner, with amnesty for the perpetration of atrocities by both erstwhile protagonists and antagonists of apartheid. An unusual Postamble concluding South Africa’s transitional Constitution emphasized the need for national reconciliation and a healing of the divisions of the past, and required amnesty to be granted ‘in respect of acts, omissions and offences associated with political objectives and committed in the course of the conflicts of the past’. The Promotion of National Unity and Reconciliation Act52 was subsequently enacted, stipulating conditions – and putting in place procedures to apply – for amnesty. An Amnesty Committee was authorized to grant perpetrators of human rights violations immunity from both criminal prosecution and civil liability, provided that their acts of violation could be associated with a political objective (as defined in the Act) and that all relevant facts about such acts had been fully disclosed. Section 20(7) of the Act provided that individual immunity against criminal and civil liability would be consequent upon a successful application for amnesty, and discharged the state – and other bodies, organizations or persons – from (vicarious) civil liability for acts thus amnestied. AZAPO, the Applicant, challenged the constitutionality of Section 20(7) alleging that it breached every person’s right (guaranteed in section 22 of the transitional Constitution) ‘to have justiciable disputes settled by a court of law or … another independent and impartial forum’.53 AZAPO contended that a state is required by international law, and a series of Geneva Conventions in particular, to prosecute the perpetrators of gross human rights violations, and

49 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC). On the politically controversial and dilemmatic dimensions of this case cf. du Plessis (2007a, pp. 51–64). 50 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) at para. 16. 51 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35 per Chaskalson and at para. 304 Mokgoro. 52 34 of 1995. 53 Presently section 34 of the 1996 Constitution.

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that section 20(7) thus breached international law.54 In terms of the said Conventions: ‘The High Contracting Parties undertake to enact any legislation necessary to provide effective penal sanctions for persons committing, or ordering to be committed, any of the grave breaches …’ The Constitutional Court (per Mahomed DP) thought that ‘[t]he issue which falls to be determined in this Court is whether section 20(7) of the Act is inconsistent with the Constitution’ and ‘the enquiry as to whether or not international law prescribes a different duty is irrelevant to that determination’.55 Section 35(1) of the transitional Constitution (the predecessor to section 39(1)(b) of the 1996 Constitution), the court thought, directs it ‘only to “have regard” to public international law if it is applicable to the protection of the rights entrenched in the chapter’ (that is the transitional Bill of Rights).56 This meant that only international law ‘binding’ in terms of black-letter constitutional law qualified to be ‘(public) international law’ as envisaged in section 35(1) of the transitional (and section 39(1)(b) of the 1996) Constitution. This is a far-reaching attenuation (if not reversal) of (the legal effect of) Chaskalson P’s framework dictum in Makwanyane.57 Mahomed DP did not treat ‘binding’ as well as ‘non-binding’ international law as a framework within which the Bill of Rights ‘can be evaluated and understood’, but in his (and the court’s) view only ‘binding’ international law passing muster in terms of black-letter constitutional law qualified to be considered when interpreting the Bill of Rights. The international framework for Bill of Rights interpretation was thus significantly truncated, actually rendering provisions like section 35(1) and section 39(1)(b) superfluous, because a court, tribunal or forum is at any rate bound to follow ‘binding’ international law; there is no need for the said provisions to encourage it to do so. 3.5

Back to the Framework: Grootboom

Fortunately, AZAPO has, within the bigger picture of the Constitutional

54 Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC) at para. 25. 55 Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC) at para. 26. 56 Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC) at para. 27. 57 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35. Cf. also Mokgoro J in S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 304.


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Court’s case law history, not irreversibly or even significantly derogated from the court’s ‘universalist’ attitude towards international law in constitutional interpretation,58 and Government of the RSA and Others v Grootboom and Others59 – a key judgment on the justiciability of socioeconomic rights – tellingly demonstrated this. At issue in Grootboom was the section 26 constitutional right to adequate basic shelter or housing, pending the obtainment of permanent accommodation, of 510 children and 390 adults evicted from their informal homes situated on private land earmarked for formal low-cost housing. In construing section 26, which guarantees everyone’s right to adequate housing60 and enjoins the state to take reasonable legislative and other measures within its available resources to achieve the realization of this right,61 the court per Yacoob J considered, amongst other things, sources of international law, and quoted Chaskalson P’s framework dictum in Makwanyane62 with approval, adding a significant qualification:63 The relevant international law can be a guide to interpretation but the weight to be attached to any particular principle or rule of international law will vary. However, where the relevant principle of international law binds South Africa, it may be directly applicable.

The court thus honoured – and, bearing AZAPO64 in mind indeed restored – the distinction between international law binding on South Africa and other sources of international law that must, in addition to binding law, be considered in the interpretation of the Bill of Rights. The court concentrated its inquiry mainly on Articles 11.1 and 2.1 of the International Covenant on Economic, Social and Cultural Rights (ICESCR) and pointed out differences of interpretive significance between the formulation of the provisions of the Covenant and section 26 of the South African Constitution.65 However, the court also thought that the relevant general comments issued by the United Nations Committee on Economic, Social and Cultural Rights regarding the 58 59 60 61 62

Cf. 3.3 above. 2000 (11) BCLR 1169 (CC), 2001 (1) SA 46 (CC). Section 26(1). Section 26(2). S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) at para. 35. 63 Government of the RSA and Others v Grootboom and Others 2000 (11) BCLR 1169 (CC), 2001 (1) SA 46 (CC) at para. 26. 64 Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC). 65 Government of the RSA and Others v Grootboom and Others 2000 (11) BCLR 1169 (CC), 2001 (1) SA 46 (CC) at para. 28.

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interpretation of the ICESCR ‘constitute a significant guide to the interpretation of section 26’.66 The purpose of the Committee, consisting of 18 independent experts, is to assist the United Nations Economic and Social Council to carry out its responsibilities relating to the implementation of the ICESCR. The court allowed itself to be guided by the Committee’s general comments in order to determine what the notion of ‘a minimum core’ of socioeconomic rights entails. Thus the Makwanyane standard on recourse to non-binding international law was not only restored but also further developed to authorize reliance on a text very much suggested by common sense but not necessarily prescriptive as international law. 3.6

Some Other Judgments Significant for Engagement with International Law in Constitutional Interpretation

Makwanyane,67 AZAPO68 and Grootboom69 constitute a particular (and probably the leading) storyline in the case law narrative of the Constitutional Court’s reliance on international law in constitutional interpretation. Not exactly within – but nonetheless supporting – this storyline are a handful of judgments of the court evincing a certain adjudicative mindset in dealing with human rights issues which are prominent in international law too. Ultimately such a frame of mind is relevant to the manner in which the court considers international law both for purposes of section 39(1)(b) of the Constitution and for instances of constitutional interpretation beyond that. The minority judgment of Sachs J in Ex parte Gauteng Provincial Legislature, In re: Dispute Concerning the Constitutionality of Certain Provisions of the Gauteng School Education Bill of 1995,70 for instance, with which the majority of the Constitutional Court did not disagree, demonstrated how measured reliance on (relevant) international law can contribute to the resolution of a controversial issue or issues in domestic politics – in casu draft legislation that, according to the petitioners in the case, fell foul of guarantees of school learners’ right to instruction, where reasonably practical, in the language of their choice71 and a right to establish, where practi66 Government of the RSA and Others v Grootboom and Others 2000 (11) BCLR 1169 (CC), 2001 (1) SA 46 (CC) at para. 29. 67 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC). 68 Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC). 69 Government of the RSA and Others v Grootboom and Others 2000 (11) BCLR 1169 (CC), 2001 (1) SA 46 (CC). 70 1996 (4) BCLR 537 (CC), 1996 (3) SA 165 (CC). 71 This right was guaranteed in section 32(b) of the transitional Constitution.


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cable, educational institutions based on a common culture, language or religion.72 Sachs J considered the petitioners’ contentions in the broad domestic historical and constitutional context73 and made four assumptions in their favour. He then contextualized these assumptions and counterbalanced them with reference to three significant considerations highlighted by the Constitution.74 This was followed by an assessment of the actual constitutional provision for the entrenchment of the rights allegedly infringed, in terms of six universally accepted principles gleaned from sources of international law on the protection of minorities.75 These were situated in the domestic context. The thus duly contextualized interaction of international and municipal human rights law on the issues in dispute led Sachs J to the conclusion that the petitioners’ misgivings were unfounded. International law looms large where the protection of the rights of vulnerable individuals finding themselves on foreign soil is at issue. In Mohamed and Another v President of the RSA and Others76 the Constitutional Court dealt with the unlawful handing over of a foreign national to the United States of America to be prosecuted for his alleged involvement in the bombing of the United States Embassy in Tanzania. The court, strongly condemning this extradition disguised as the deportation of an unlawful immigrant, adamantly (though alas belatedly) insisted on meticulous compliance with due process in such instances, which in casu would have had to include procuring an undertaking from the US government that the foreign subject would not be executed if eventually convicted in the US.77 Kaunda and Others v President of the RSA and Others (2),78 on the other hand, was, like AZAPO,79 politically dilemmatic. Sixty-nine applicants, all 72 Provided that there shall be no discrimination on the ground of race. This right was guaranteed in section 32(c) of the transitional Constitution. 73 Ex parte Gauteng Provincial Legislature, In re: Dispute Concerning the Constitutionality of Certain Provisions of the Gauteng School Education Bill of 1995 1996 (4) BCLR 537 (CC), 1996 (3) SA 165 (CC) at para. 45. 74 Ex parte Gauteng Provincial Legislature, In re: Dispute Concerning the Constitutionality of Certain Provisions of the Gauteng School Education Bill of 1995 1996 (4) BCLR 537 (CC), 1996 (3) SA 165 (CC) at para. 50. 75 Ex parte Gauteng Provincial Legislature, In re: Dispute Concerning the Constitutionality of Certain Provisions of the Gauteng School Education Bill of 1995 1996 (4) BCLR 537 (CC), 1996 (3) SA 165 (CC) at paras. 55–68. 76 2001 (7) BCLR 685 (CC), 2001 (3) SA 893 (CC). 77 Mohamed and Another v President of the RSA and Others 2001 (7) BCLR 685 (CC), 2001 (3) SA 893 (CC) at para. 68. 78 2004 BCLR 1009 (CC), 2005 (4) SA 235 (CC). 79 Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (6) BCLR 1015 (CC), 1996 (4) SA 672 (CC).

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South African nationals, arrested and detained in Zimbabwe and then charged with various offences related to their alleged complicity in a plot to overthrow the government of Equatorial Guinea, sought the South African government’s intervention on their behalf to secure their release or their extradition to South Africa, and to protect them against assault and detention in atrocious conditions while still in Zimbabwe (and the risk of a death penalty if eventually extradited to Equatorial Guinea). A majority of the Constitutional Court per Chaskalson CJ citing section 232 of the Constitution – thereby to signal reliance on customary international law – construed the right to diplomatic protection of these South African nationals on foreign soil, narrowly holding that ‘[t]raditionally, international law has acknowledged that States have the right to protect their nationals beyond their borders but are under no obligation to do so.’80 The court attached considerable weight to the opinion of a Special Rapporteur of the International Law Commission on the meaning of ‘diplomatic protection’,81 concluding that under current (customary) international law diplomatic protection is not recognized and cannot be enforced as a human right. Diplomatic protection remained the prerogative of the state, to be exercised at its discretion.82 3.7

An Underused Presumption

In section 233 of the Constitution, a long-standing common law presumption of statutory interpretation has been constitutionalized.83 ‘Every court’ interpreting legislation is required to ‘prefer any reasonable interpretation … consistent with international law over any alternative interpretation that is inconsistent with international law’. Erasmus correctly points out that section 233, unlike the conventional presumption, is of effect even where there is no ambiguity in the language of the legislation to be construed – all that is needed for the section to take effect is the existence of international law on the topic or issue under consideration against which various alternative interpretive outcomes can be assessed.84 Though it is a rather helpful and significant interpretive aid, section 233 has, since the commencement of the Constitution in 1997, only been referred

80 Mohamed and Another v President of the RSA and Others 2001 (7) BCLR 685 (CC), 2001 (3) SA 893 (CC) at para. 23. 81 Kaunda and Others v President of the RSA and Others (2) 2004 BCLR 1009 (CC), 2005 (4) SA 235 (CC) at paras 25–8. 82 Kaunda and Others v President of the RSA and Others (2) 2004 BCLR 1009 (CC), 2005 (4) SA 235 (CC) at para. 29. 83 Du Plessis (2002, p. 173). 84 Erasmus (2003, pp. 157–81) at p. 175.


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to twice in constitutional jurisprudence, namely (almost in passing) by Sachs J in S v Baloyi85 to justify his preferred interpretation of a legislative provision, and by Chaskalson CJ in Kaunda and Others v President of the RSA and Others (2).86 Section 233 explicitly mentions the interpretation of legislation (only), but the Constitutional Court, in the latter judgment, had little difficulty in concluding that the presumption it creates ‘must apply equally to the provisions of the Bill of Rights and the Constitution as a whole’.87 The court set section 233 on par with section 39(1)(b) of the Constitution, and that can only be done if ‘international law’ means the same in both sections. The effect of section 233 will then be that, in the interpretation of the Constitution (including the Bill of Rights), due regard to ‘non-binding’ international law will never be optional: such law will, as a matter of fact, apply whenever the presumption is not rebutted! (‘Binding’ international law in terms of sections 231 and 232, of course, applies at any rate.) One effect of this far-reaching interpretation is that section 39(1)(b) stands to be rendered superfluous, since section 233 applies to the Bill of Rights too. There are three possible ways of avoiding this consequence. (i) First, section 233 can be understood to refer to ‘binding’ international law only. (ii) Second, the section can be understood as applying to the interpretation of legislation only (and not to interpretation of the Constitution too). (iii) Third, and by virtue of the maxim generalia specialibus non derogant,88 section 39(1)(b) can be understood as a specific prior provision, pertaining to the Bill of Rights (only), and therefore left unaffected by section 233, a general provision similar in substance but pertaining to the Constitution as a whole. What the Constitutional Court said about section 233 in the Kaunda case89 rules out (ii) above, does not rule out but also does not strongly support a possibility as restricted as (i) above, and is most likely to be understood as suggesting preference for (iii) above. Section 233 can of course be invoked only where, in construing legislation (or the Constitution), there is indeed international law against which alternative interpretive outcomes can be assessed. On the other hand, not to observe the presumption when such international law is at hand is an error in law, as Gerhard Erasmus90 quite correctly points out with reference to the judgment of the Supreme Court of Appeal (per Lewis JA) in A M Moola Group Ltd and

85 86 87

2000 (1) BCLR 86 (CC), 2000 (2) SA 245 (CC) at para. 13. 2004 (10) BCLR 1009 (CC), 2005 (4) SA 235 (CC) at para. 33. Kaunda and Others v President of the RSA and Others (2) 2004 (10) BCLR 1009 (CC), 2005 (4) SA 235 (CC) at para. 33. 88 Du Plessis (2002, pp. 73–4). 89 Kaunda and Others v President of the RSA and Others (2)2004 (10) BCLR 1009 (CC), 2005 (4) SA 235 (CC) at para. 33. 90 Erasmus (2003, pp. 157–81) at p. 175.

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Others v Commissioner, South African Revenue Service and Others.91 Given the paucity of references to section 233 in the case law, there is every reason to suspect that South African courts commit this error quite regularly! 3.8

Travaux Préparatoires in Constitutional Interpretation – an Example of International Law ‘Making’ Domestic Constitutional Law

As was shown previously, the Constitutional Court in S v Makwanyane and Another92 per Chaskalson P laid down binding guidelines for recourse to international law in constitutional interpretation (especially in terms of section 39(1)(b) of the Constitution), thereby creating or forming new law, arguably including (new) international law. That international law can also contribute to the making of domestic law is illustrated by the court’s findings in Makwanyane about resort to travaux préparatoires in constitutional – and statutory – interpretation. The court had to decide whether it could refer to the drafting history of the transitional Constitution to establish why no eo nomine reference to capital punishment was included in the written text of that Constitution. Capital punishment was a profoundly controversial issue among the negotiators and drafters of the transitional Constitution, and they eventually opted for the ‘Solomonic solution’93 of not mentioning capital punishment in that Constitution at all, and leaving it entirely to the Constitutional Court to cast the die on its constitutionality.94 Chaskalson P thus thought it necessary in Makwanyane to take cognizance of the genesis of the text of the transitional Constitution so as to come to grips with the interpretive implications of the constitution-makers’ silence on the issue of capital punishment. In seeking to justify such reliance on ‘preceding deliberations’, the court was faced with a South African common law on statutory interpretation prone to pit itself against – but not wholly excluding – reliance on preparatory material in the interpretation of enacted law.95 Proceeding beyond conventional 91 92

2003 (6) SA 244 (SCA). 1995 (6) BCLR 665 (CC); 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) – cf. 2.1 above. 93 S v Makwanyane and Another 1995 (6) BCLR 665 (CC); 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) at paras 22 and 25. 94 Capital punishment is, of course, not referred to in the 1996 Constitution either, but the reason for this ‘silence’ is that S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) is taken to be the authority that has excluded the possibility of capital punishment once and for all. 95 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) at para. 14; cf. also du Plessis (2002, pp. 268–9).


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common law restraints, Chaskalson P argued that reliance on travaux préparatoires is appropriate in constitutional interpretation, because it is accepted in other ‘countries in which the Constitution is … supreme law’ – and he gave examples.96 ‘The European Court of Human Rights and the United Nations Committee on Human Rights,’ Chaskalson P continued, ‘allow their deliberations to be informed by travaux préparatoires.’97 He cited Article 32 of the Vienna Convention on the Law of Treaties of 1969 as authority for the contention that travaux préparatoires may thus be relied on – also in constitutional interpretation. This Vienna ‘Convention on Conventions’ is ‘international law’ as contemplated in section 35(1) of the transitional (and section 39(1)(b) of the 1996) Constitution, but Articles 31–3 of the Convention are international law applicable (only or, at least, primarily) to the interpretation of international documents and instruments (‘treaties’) and not to the interpretation of a domestic constitution. However, since the Constitutional Court, as South Africa’s highest court in constitutional matters, has held, albeit probably per errorem, that the ‘Convention on Conventions’ may be relied on to guide interpretation of South Africa’s Constitution and Bill of Rights, this has become the law (of interpretation) as it stands in South Africa – an entirely persuasive international law-text, turned into prescriptive domestic law through judicial lawmaking. 3.9

Conclusions Pertinent to the Role of International Law

That international law is readily – and often enthusiastically – invoked in constitutional interpretation in South Africa does not mean that it is always brought into play with unwavering keenness or optimal effect. There is sometimes a reluctance among domestic constitutional actors to assume that international law readily trumps state constitutions.98 This happens all over the world and may sometimes be the case in South Africa too. However, from the case law overview above, it appears that especially (i) deficiencies in the judicial capacity to deal with international law and (ii) (in some instances) a preponderance of domestic political pressure(s) have from time to time impacted adversely (though not fatally) on judicial dealings with international law in South Africa. Deficient capacity – (i) above – accounts for a disinclination in constitutional adjudication to ‘access’ international law directly through the ‘black-letter’ or 96

S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) at para. 16. 97 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391 (CC), 1995 (2) SACR 1 (CC) at para. 16. 98 Peters (2007, pp. 251–308) at pp. 282–5.

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‘hard law’ provisions in sections 231–3. Adjudicators have preferred to ‘consider’ international law – by virtue of section 39(1)(b) – instead. The lamentable underuse of section 233 as a (potentially) valuable aid to statutory and constitutional interpretation has been (as was shown) a consequence of this preference.99 Strictly speaking section 39(1)(b) of the Constitution is not applicable to the interpretation of enacted law other than the Bill of Rights (Chapter 2 of the Constitution): the words ‘[w]hen interpreting the Bill of Rights’ introduce the provision. This means that sections 231–3 – and not section 39(1)(b) – are actually the appropriate provisions to put international law on stage when ‘other law’, including provisions of the Constitution outside of Chapter 2, are to be construed. Inadequate judicial capacity in dealing with international law has, however, not just been damaging, but has, as was shown, resulted in some very creative lawmaking (albeit per errorem).100 Mistakes (of law) made in the process have, as a matter of fact, been conducive (and by no means detrimental) to reliance on international law in constitutional interpretation. These fortuitously favourable outcomes can, of course, not justify inept dealings with international law in an endeavour as crucial as constitutional adjudication. As far as (ii) above is concerned, AZAPO101 illustrated how domestic political pressures can compromise a court’s (and in casu particularly the Constitutional Court’s) otherwise favourable and generous dealings with international law.102 AZAPO has been described as a ‘political’ (and politicized) judgment, thereby to try to explain the Constitutional Court’s by and large unsatisfactory treatment of international law in that particular case.103 But this is an oversimplified assessment. Degree-wise, Makwanyane104 surely was every bit as ‘political’ as AZAPO was, for the Constitutional Court was expected to perform a function (and, in fact, to cast a die) that politicians were (due to insurmountable differences among themselves) not up to – and the court obliged wholeheartedly while, at the same time, it seized the opportunity to articulate its stand on key issues involved in constitutional interpretation and adjudication, including appropriate reliance on international law. Human rights adjudication involving constitutional review is at any rate always ‘polit-

99 100 101

Cf. 3.7 above. Cf. 3.3 and 3.8 above. Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC). 102 Du Plessis (2007b, pp. 309–40) at pp. 337–8. . 103 This is the gist of an article by Motala (1996, pp. 29–59); cf. also Botha and Olivier (2004, pp. 42–51). 104 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC).


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ical’.105 Makwanyane ended up as a judicial tour de force – a ‘bold assertion of constitutional rights and powers’.106 This came about because the Constitutional Court was the Solomon authorized politically to resolve a controversy of significant proportions. What followed was a trailblazing and directional judgment, the outcome of which would, up to this day, probably not receive majority support in a popular referendum! And international law was among the vital forces occasioning such an outcome. Dealing with the constitutional tenability of amnesty for the perpetration of atrocities on political rivals during the apartheid era in South Africa, AZAPO, on the other hand, touched a very raw political nerve. Amnesty was central to the politically negotiated truth and reconciliation process in South Africa, holding the key to a ‘new’ democracy memorializing the past without allowing it to eclipse the future. Had the Constitutional Court in AZAPO relied on international law to the same degree as it did in Makwanyane, it would have had to conclude that section 20(7) of the Promotion of National Unity and Reconciliation Act was unconstitutional. Had it then, pursuant to this finding, struck down the impugned provision, the truth and reconciliation process would certainly have collapsed, with ghastly consequences for the more encompassing project of a closely negotiated, peaceful transition to constitutional democracy in South Africa. As was pointed out previously,107 AZAPO did not irreversibly derogate from the Constitutional Court’s generous approach to the use of international law in constitutional interpretation, as the Grootboom judgment108 – dealing with the highly politicized issue of adjudicating socioeconomic rights – so tellingly demonstrated. In Kaunda109 a political dilemma once again beset the Constitutional Court. Complex relations with a neighbouring state were involved. The court’s political predicament was reflected by its atypical restraint to draw on – and its unduly narrow construction of – international law sources. Political pressures once more took their toll! On the other hand, resort to international law when seized with a (domestic) political controversy can also be a source of considerable instruction – especially if the controversy in question has relevance in international law as

105 106 107 108

Cf. e.g. Klug (1997, p. 185) at p. 194. Klug (1997, p. 185) at p. 194. Cf. 3.5 above. Government of the RSA and Others v Grootboom and Others 2000 (11) BCLR 1169 (CC), 2001 (1) SA 46 (CC). 109 Kaunda and Others v President of the RSA and Others (2) 2004 BCLR 1009 (CC), 2005 (4) SA 235 (CC).

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well. Sachs J’s minority judgment in the Gauteng Schools case,110 which considered the implications of self-determination for minority groups in a crucial area, is a telling example of how political controversy can also prompt a carefully crafted (and instructive) judgment. The Mohamed case, in its turn, illustrated that adjudication with appreciable consequence beyond the boundaries of a domestic jurisdiction can afford a domestic court the opportunity to convey – ‘for the world to know’ – what it intends doing to maintain, within its area of jurisdiction, constitutional democracy in a manner earning it the cooperation and, in time, also the respect of its peers in other jurisdictions.

4

FOREIGN LAW AND CONSTITUTIONAL COMPARATIVISM

4.1

Constitutional Comparativism: Believers and Disbelievers

Generally speaking South African courts (and the Constitutional Court in particular) have so far been as open to the use of comparative (foreign) authorities as they have been to reliance on international law. In K v Minister of Safety and Security111 O’Regan J eloquently verbalized this openness, disciplined by level-headedness, as follows: There can be no doubt that it will often be helpful for our courts to consider the approach of other jurisdictions to problems that may be similar to our own. Counsel for the respondent argued that because our common-law principles of delict grew from the system of Roman-Dutch law applied in Holland, a province of the Netherlands, in the 17th century, we should not have regard to judgments or reasoning of other legal systems. He submitted that the conceptual nature of our law of delict, based as it is on general principles of liability, is different from the casuistic character of the law of torts in common-law countries. These differences, he submitted, render reliance on such law dangerous. Counsel is correct in drawing our attention to the different conceptual bases of our law and other legal systems. As in all exercises in legal comparativism, it is important to be astute not to equate legal institutions which are not, in truth, comparable. Yet in my view, the approach of other legal systems remains of relevance to us. ‘It would seem unduly parochial to consider that no guidance, whether positive or negative, could be drawn from other legal systems’ grappling with issues similar to those with which we are confronted. Consideration of the responses of other legal systems may enlighten us in analysing our own law, and assist us in developing it

110 Ex parte Gauteng Provincial Legislature, In re: Dispute Concerning the Constitutionality of Certain Provisions of the Gauteng School Education Bill of 1995 1996 (4) BCLR 537 (CC), 1996 (3) SA 165 (CC). 111 2005 (9) BCLR 835 (CC), 2005 (6) SA 419 (CC) at paras 34–5.


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further. It is for this very reason that our Constitution contains an express provision authorizing courts to consider the law of other countries when interpreting the Bill of Rights. It is clear that in looking to the jurisprudence of other countries, all the dangers of shallow comparativism must be avoided. To forbid any comparative review because of those risks, however, would be to deprive our legal system of the benefits of the learning and wisdom to be found in other jurisdictions. Our courts will look at other jurisdictions for enlightenment and assistance in developing our own law. The question of whether we will find assistance will depend on whether the jurisprudence considered is of itself valuable and persuasive. If it is, the courts and our law will benefit. If it is not, the courts will say so, and no harm will be done.

O’Regan J’s observations starkly contrast with parochial sentiments manifested by some jurists in the United States of America in the course of an intense debate about domestic courts’ use of foreign law in constitutional interpretation and adjudication in that country. Cheryl Saunders, taking the pulse of this debate, thus remarks:112 The practice [the use of foreign law] remains a topic of fierce debate among scholars … and among judges writing extra-judicially. It has been the subject of critical comment in the press. It has attracted the attention of Congress, spawning a series of proposed resolutions seeking, in one way or another, to discourage judicial reference to foreign constitutional experience, with impeachment a veiled threat in the background.

Denunciation of ‘the practice’ (of comparison) professes to be principled on two accounts. First, reliance on foreign authority is thought to be necessarily at odds with the original intent of ‘the founding generation’ responsible, in the first and final instance, for the making of a constitution believed to be in no need of a ‘current meaning’, that is, an interpretive adaptation to ‘present circumstances’.113 Second, it is claimed that foreign law is not an authoritative source of law for (domestic) judges, and those who invoke it arrogate to themselves a legislative function at odds with trias politica,114 to import, in a counter-democratic manner, the ideas of foreign judges over which the people of the US have no control. This debate is not particularly relevant in constitutional democracies where constitutional comparison as interpretive endeavour is practised, encouraged and, as in South Africa, explicitly authorized by the Constitution. The first objection of the US antagonists of the use of foreign law in domestic adjudication is

112 113

Saunders (2006, pp. 91–127) at p. 92. Du Plessis and de Ville (1993, pp. 356–93) at pp. 376–7 and Murkens (2008, pp. 32–50) at p. 34. 114 Murkens (2008, pp. 32–50) at p. 34.

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premised on an exploded theory of constitutional interpretation (rejected by the South African Constitutional Court in no uncertain terms115 and by South African scholars too116). As to the second objection, these antagonists stand alone in their belief that constitutional comparativism is an inevitable and insurmountable threat to the separation of powers (and democracy). In no jurisdiction where foreign law is allowed to aid constitutional interpretation is it looked upon and invoked as binding law (this is actually one of its strengths117), and courts do not consult it with a ‘legislative frame of mind’ or defer uncritically to the opinions of foreign legal authorities. Comparative constitutional jurisprudence, in the presence of powerful constitutional mechanisms and reading strategies safeguarding the separation of powers, is a very unlikely candidate to be the Achilles heel of trias politica. Some commentators,118 in their account of South African constitutional jurisprudence on the use of foreign law in constitutional interpretation so far, tend to pitch (constitutional) judges enthusiastically favouring comparative constitutional interpretation against the suspected sceptics. Kriegler J’s cautionary remark in Fose v Minister of Safety and Security119 that he declined ‘to engage in a debate about the merits or otherwise of remedies devised by jurisdictions whose common law relating to remedies for civil wrongs bears no resemblance to ours and whose constitutional provisions have but a passing similarity to our section 7(4)(a)’ is, for instance, construed by Cheadle, Davis and Haysom120 as both a questioning of ‘the value of foreign law’ and the expression of an opinion in opposition to Ackermann J’s readiness to take foreign legal authority into account. Laurie W.H. Ackermann,121 writing extrajudicially,122 points out, with reference to relevant passages from Constitutional Court cases, that Kriegler J was not really a sceptic when it came to the use of foreign law and that approving references to foreign authority indeed occurred in Constitutional Court judgments he authored. In S v Mamabolo (E TV, Business Day and Freedom of Expression Institute

115 Cf. South African Association of Personal Injury Lawyers v Heath and Others 2001 (1) BCLR 77 (CC) at para. 19. 116 Corder (1992, pp. 204–24) at pp. 206–14. 117 Ackermann (2005–06, pp. 169–93) at pp. 183–4. Cf. also S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 39. 118 Cf. e.g. Cheadle et al. (2006, p. 33-3) and also Markesinis and Fedtke (2005–06, pp. 66–8). 119 1997 (7) BCLR 851 (CC), 1997 (3) SA 786 (CC) at para. 90. 120 Cheadle et al. (2006, p. 33-3). 121 Ackermann (2005–06, pp. 169–93); and cf. also Ackermann (2006, pp. 497–515). 122 And Ackermann (2005–06, pp. 11–167).


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Intervening)123 he, for instance, explicitly expressed appreciation for the usefulness of ‘comparative study’: particularly where Courts in exemplary jurisdictions have grappled with universal issues confronting us. Likewise, where a provision in our Constitution is manifestly modelled on a particular provision in another country’s constitution, it would be folly not to ascertain how the jurists of that country have interpreted their precedential provision.

Kriegler J’s reluctance to refer to foreign law in certain (over-)publicized instances stemmed from what he perceived to be his own insufficient, personal mastery of foreign material or his belief that he could concur in a colleague’s conclusion without reliance on foreign material.124 Two observations apropos the Kriegler J dictum above will be helpful to take the present discussion further. First, it reminds us that not only international law sources but also the domestic constitutional texts of other jurisdictions have had a definite impact on the making of ‘new constitutions’125 and most definitely on the making of the South African Constitution too.126 Such comparative constitution making inevitably results in a globalization of constitutional law,127 which, in its turn, begets and conduces comparative constitutional interpretation. Second, Kriegler J, not in spite of but in addition to the positive sentiments expressed in the dictum above, was the sentinel among his peers, constantly on the lookout for uses of foreign law that he thought might flout Chaskalson P’s admonition in S v Makwanyane and Another,128 namely that ‘we must bear in mind that we are required to construe the South African Constitution … with due regard to our legal system, our history and circumstances, and the structure and language of our own Constitution.’ A sentiment that weighed heavily with Kriegler J was his profound appreciation for the unique manner in which a political and constitutional settlement in South Africa had been reached through (the give and take of) negotiations and sustained by a ‘Damascene about-turn from executive directed parliamentary supremacy to 123 124

2001 (5) BCLR 449 (CC), 2001 (3) SA 409 (CC) at para. 133. Ackermann (2005–06, pp. 169–93) at p. 186; cf. also Bernstein and Others v Bester and Others NNO 1996 (2) SA 751 (CC), 1996 (4) BCLR 449 (CC) at paras 132–3. 125 For the concept ‘new constitutions’ cf. 2 above. 126 De Waal (1995, pp. 1–29); du Plessis (2005, pp. 1–30), http://www.puk.ac.za/ opencms/export/PUK/html/fakulteite/regte/per/issues/2005_1__Du_Plessis_art_tdp. pdf; and du Plessis (2008, pp. 524–36). 127 Venter (2008, pp. 16–31). 128 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 39, cf. the introductory paragraph to 32.5(c)(v) above.

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justiciable constitutionalism’, about which he said the following in Du Plessis and Others v De Klerk and Another:129 Nowhere in the world that I am aware of have enemies agreed on a transitional coalition and a controlled two-stage process of constitution building. Therefore, although it is always instructive to see how other countries have arranged their constitutional affairs, I do not start there. And when I conduct comparative study, I do so with great caution. The survey is conducted from the point of view afforded by the South African Constitution, constructed on unique foundations, built according to a unique design and intended for unique purposes.

Further through the judgment Kriegler J sounded yet another word of caution, namely that the advent of a new constitution did not warrant ‘the wholesale importation of foreign doctrines and precedents’.130 With constitutional democracy in South Africa in its infancy at the time, such caution was opportune, for the paucity of home-grown constitutional jurisprudence posed a danger of overreliance on the jurisprudence of others or of reliance on inappropriate foreign sources. Kriegler J’s word of caution coupled with the last sentence of his dictum above raised the spectre of unreflective reliance on substantive foreign law, regardless of the peculiar structural environment in which it occurs and/or the distinctive procedural matrix in which it took shape. The Chaskalson P admonition in S v Makwanyane and Another131 already suggested vigilance in this regard and for the reasons mentioned.132 Mark Tushnet133 has, for instance, shown why and how structural and procedural factors inhibit profitable reliance by US courts and comparativists on much of the (exemplary) substantive law on affirmative action in some other jurisdictions.

129 130

1996 (5) BCLR 658 (CC), 1996 (3) SA 850 (CC) at para. 127. Du Plessis and Others v De Klerk and Another 1996 (5) BCLR 658 (CC), 1996 (3) SA 850 (CC) at para. 144. 131 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 39, cf. the introductory paragraph to 32.5(c)(v) above. 132 As Cheadle et al. (2006, p. 33-3) explain: ‘Great care must be taken to ground comparative borrowing, both within the context of the texts from which that authority emanates and as the nature and purpose of our text. For example, the absence of a general limitation clause in the United States Constitution or the fact that the European Convention on Human Rights is an instrument governing the conduct of national states, has a considerable bearing on the nature of the jurisprudence of the United States Supreme Court and the European Court of Human Rights. To borrow uncritically from these jurisdictions, without considering the appropriate context, is an exercise fraught with danger, a fact which was acknowledged by Chaskalson P in Makwanyane.’ Cf. also Sanderson v Attorney-General, Eastern Cape 1997 (12) BCLR 1675 (CC), 1998 (2) SA 38 (CC) at para. 26. 133 Tushnet (2004, pp. 649–63).


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Difference in context, however, in the light of the previously quoted dicta of O’Regan J in K v Minister of Safety and Security,134 seems to be no insurmountable impediment to the comparison of the constitutions and constitutional law of two systems, even where the differences between these systems go to their historical and conceptual roots, as long as the dangers of shallow comparativism are avoided and the foreign jurisprudence considered is of itself valuable and persuasive.135 4.2

The Demonstrable Value and Advantages of Constitutional Comparativism

Constitutional comparativism has since 1994 featured prominently in constitutional jurisprudence in South Africa and not least of all in the jurisprudence of the Constitutional Court. Laurie W.H. Ackermann136 drafted a list of no less than 26 instances and areas in which reliance on foreign law substantially codetermined interpretive and adjudicative outcomes in Constitutional Court cases. Constitutional comparativism has demonstrable practical value besides and beyond lip-service recognition of the actualities of constitutional globalization and of the embeddedness of one’s own constitution and constitutional dispensation in a transnational reality. At the level of mundanity it makes constitutional interpreters aware of law, and especially foreign precedents, that can be invoked to justify their decisions. Brun-Otto Bryde, speaking extra-judicially but from his experience as a constitutional judge, points out that such authority can be particularly helpful lending additional legitimacy to findings and decisions dealing with difficult issues and going against public opinion: ‘Even an old court with much self-confidence can profit from pointing to persuasive foreign precedents.’137 Bryde138 moots the possibility of distinguishing between the interpretive uses of foreign law as inspiration and as legal argument in constitutional adjudication. In the first instance a foreign source is looked at because the way in which it deals with a certain issue ‘is interesting’ to the same extent (and in the same manner) as the opinion of, for instance, a law professor will be ‘interesting’. In this sense there is no numerus clausus of persuasive sources of law and it is mostly broad principles (as opposed to particular rules or norms) that are

134 135

2005 (9) BCLR 835 (CC), 2005 (6) SA 419 (CC) at paras 34–5. K v Minister of Safety and Security 2005 (9) BCLR 835 (CC), 2005 (6) SA 419 (CC) at para 35. 136 Ackermann (2005–06, pp. 169–93) at pp. 187–90. 137 Bryde (2005–06, pp. 203–19) at pp. 207–8. 138 Bryde (2005–06, pp. 203–19) at pp. 213–19.

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looked at. Even a foreign text misunderstood or taken out of context can, according to Bryde, be inspirational. When foreign law is relied on as a legal argument, however, a judge must get it right! Such an argument can draw on foreign experience in the application of national standards, the application of international standards in foreign (domestic) jurisdictions and transnational constitutionalist principles limiting domestic constitutional law. At the level of contemplation, where weighed (self-)reflection holds sway, constitutional comparativism fulfils, according to Laurie W.H. Ackermann, also speaking from practical experience, two vital functions. First, it can feature prominently in identifying issues at hand in a given case.139 With Albert Einstein, Ackermann believes that the formulation of a problem is often more essential than its solution. Foreign law, precisely because it is not binding and therefore does not exert pressure ‘to be of effect’ as ordinary law, creates room for ‘creative imagination’ and ‘to raise new questions, new possibilities, [and] to regard old problems from a new angle’.140 At a critical stage of judicial reasoning, namely where the judge has arrived at a preliminary conclusion or hypothesis, reference to comparative examples assists him or her in vital (and necessary) attempts to falsify such a conclusion or hypothesis.141 Second, ‘the comparative legal approach’ is there for the judge to interrogate her or his own prejudices142 and to engage in a most crucial dialogue with her or himself, in the course of which ‘hypotheses emerge, … intellectual, cultural and other predispositions compete’ and ‘critical rationalism can come into play to test and adapt hypotheses’: It is at this stage, consciously or not, that one’s philosophical, economic and jurisprudential Gestalt enters the picture. At this stage I have found comparative legal concepts to be most helpful.143

Another perspective on the value and uses of constitutional comparativism is that of A.J. van der Walt,144 a legal scholar writing with reference to

139 140

Ackermann (2005–06, pp. 169–93) at pp. 183–5. Albert Einstein quoted by Ackermann (2005–06, pp. 169–93) at pp. 169 and

185. 141 142

Ackermann (2005–06, pp. 169–93) at p. 185. Ackermann (2005–06, pp. 169–93) at p. 191 thus explains: ‘No judge is a “Hercules” or an “Athena”. The best one can do is to strive consciously to become aware of all one’s prejudices, to be aware that, this exercise notwithstanding, one will still have subliminal predispositions, and to toil as honestly as one can in the vineyard.’ 143 Ackermann (2005–06, pp. 169–93) at pp. 191–2. 144 Van der Walt (1999, p. 38).


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comparativism in constitutional property law, his area of specialization. He advances, from his learning experience, the following insightful contentions: Seen as a study of a collection of histories, comparative analysis of foreign property clauses and case law draws our attention to the inevitable and inescapable contextuality of the law and of constitutional property adjudication. As a history of errors, comparative study shows us a range of fallacious doctrines, theories and arguments that have already been discredited and should be avoided. As a history of possibilities, comparative study shows us that certain doctrines, theories and arguments could still be used as possible explanations of or solutions for individual problems. As a history of examples, comparative study shows us the methods, techniques and approaches that are available to us. Like the historical study of law, the comparative study of law liberates us from what we need not do; it cannot and should not enslave us by telling us what we have to do.

4.3

Conclusions Pertinent to Constitutional Comparativism

Two major challenges face constitutional comparativism (and constitutional comparativists) in South Africa. The first is duly to account for the comparative significance of South Africa counting among a number of ‘new’ constitutional democracies with ‘new’ constitutions in an era of ever increasing globalization. ‘Newness’, as was previously pointed out,145 can relate explicitly to having a constitution drafted with reference to and drawing on postWorld War II international human rights instruments.146 However, ‘newness’, alluding to a North–South distinction in comparative constitutional law, can also refer to renewed processes of democratization and constitution-making worldwide, described by some as ‘the third wave of democratization’:147 This process started with the disappearance of the last right-wing dictatorships in Southern Europe, was followed by the breakdown of communism in Eastern Europe and has become a world-wide phenomenon most remarkably in Latin America but also in Africa and Asia. While setbacks are common the overall process is significant.148

This perspective brings with it an awareness of historical possibility149 as promise. Looking forward is distinctively part of a new beginning. At the same

145 146

Cf. 2 above. Such as the European Convention on Human Rights and Fundamental Freedoms, the International Covenant on Economic, Social and Cultural Rights and the International Covenant on Civil and Political Rights. Bryde (2005–06, pp. 203–19) at p. 208. 147 Bryde (1999, pp. 697–705) at p. 701. 148 Bryde (2008, pp. 10–15) at p. 11. 149 As van der Walt (1999, p. 38) would have it.

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time the said perspective evokes memory, included in which is a ‘history of errors’ (à la van der Walt150) as a reminder that achievements and blunders can be equally instructive when the constitutions, constitutional law and, most importantly, constitutional experiences of (new) nations are compared. The unusual success achieved in South Africa with its peaceful transition – and rightly referred to by Kriegler J in Du Plessis and Others v De Klerk and Another151 with hardly disguised pride and appreciation – is no cause for complacency, for constitutional triumphalism remains premature wherever a ‘history of errors’ looms (and may again be in the making). The call to alertness does not of course apply to ‘new’ democracies only (oldness and smugness often prove to be the most likely companions). Where constitutional democracy is tried anew or for the first time, it is of existential urgency that jurisdictions engaged in the endeavour should learn from one another’s positive and negative experiences, and share with one another their expectations of future possibilities and promises. The second challenge, in the first place directed at (but not restricted to) comparativist constitutional scholars,152 is to harness the theoretical strengths and possibilities of (practical experiences of) constitutional comparison, and insights gained from it, in order to reflect on and develop methodologies of comparison.153 This endeavour will have to go beyond reliance on (and use of) foreign law in constitutional interpretation, but will inevitably also include it. Much of what has been said in this chapter about the use of foreign law in constitutional interpretation draws on practical wisdom, profound no doubt, but still inadequately explained and justified in terms of a broader theoretical model or framework. How does the constitutional comparativist, for instance, decide that, as O’Regan J has it in the previously cited dictum from K v Minister of Safety and Security,154 a certain version of comparativism is ‘shallow’ or whether foreign jurisprudence considered in a particular case ‘is of itself valuable and persuasive’? As to Chaskalson P’s155 directional and Kriegler J’s156 constant reminders that ‘we must bear in mind that we are

150 151 152

Van der Walt (1999, p. 38). 1996 (5) BCLR 658 (CC), 1996 (3) SA 850 (CC) at para. 127. Saunders (2006, pp. 92–127) at pp. 119–26, as a matter of fact, convincingly argues that it is important for courts also to take comparative methodological issues to heart. 153 There is, in fact, a paucity of writings in South Africa on constitutional comparativism. Only one monograph has so far been published, namely Venter (2000). Chapter 1 of this work deals with issues of comparative constitutional methodology. 154 2005 (9) BCLR 835 (CC), 2005 (6) SA 419 (CC) at para. 35. 155 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 39. 156 Du Plessis and Others v De Klerk and Another 1996 (5) BCLR 658 (CC),


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required to construe the South African Constitution’, what are the criteria and conditions that make interpretive reliance on comparative materials at all possible and when are two systems of constitutional law (and/or aspects of them) sufficiently compatible to be comparable for interpretive purposes? How is a ‘wholesale importation of foreign doctrines and precedents’ to be distinguished from prudent reliance on whatever (legitimate) instructive value these doctrines and precedents might have?157 And is the debate about the ‘transplantation’ versus the ‘migration’ of foreign law relevant in the South African context?158 As to the suggestion of Bryde159 about the distinction between the use of foreign sources of law as inspiration and as legal argument, how is it to be decided where the one ends and the other begins? Bryde maintains that for the former mode of reliance ‘there are few normative or methodological requirements’ while for the latter mode ‘the methodology has to be more thorough’.160 Apart from suggesting that a thorough methodology entails ‘getting it right’ as far as a judge’s understanding of relevant foreign law is concerned, Bryde is silent on the essential difference between the two methodologies – and it will certainly be worthwhile for constitutional comparativism as such to get that right! Laurie W.H. Ackermann’s thoughtful account of his experiences as a judicial comparativist161 opens possibilities for profitable scholarly enquiry. What is inherent in constitutional comparison that, given the structure of judicial reasoning, makes it helpful in identifying problems and issues, testing hypotheses and interrogating (one’s own) prejudices? More down to earth: can a theoretical account be given of patterns and trends in the manner in which the Constitutional Court has so far relied on foreign materials in constitutional interpretation? And has the fact that there are different methods (or ‘schools’) of constitutional comparison162 at all shown in South African courts’ dealings with foreign law in constitutional interpretation? And finally, how do all the questions above relate to constitutional interpretation and, in particular, the kind of constitutional comparison envisaged in section 39(1)(b) of the Constitution and suggested by the written constitutional text read as a whole?

1996 (3) SA 850 (CC) at paras 127 and 144; Sanderson v Attorney-General, Eastern Cape 1997 (12) BCLR 1675 (CC), 1998 (2) SA 38 (CC) at para. 26. 157 Du Plessis and Others v De Klerk and Another 1996 (5) BCLR 658 (CC), 1996 (3) SA 850 (CC) at para. 144. 158 Cf. Choudhry (2006, pp. 1–36). 159 Bryde (2005–06, pp. 203–19) at pp. 213–19. 160 Bryde (2005–06, pp. 203–19) at p. 214. 161 Ackermann (2005–06, pp. 169–93). 162 Cf. in this regard Tushnet (2006, pp. 67–83).

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5


GENERAL CONCLUSIONS

(i) Utilization of (and compliance with) international law, on the one hand, and (ii) constitutional comparativism, on the other, erroneously conflated in the jurisprudence of the Constitutional Court,163 are two distinct and active role players on the big platform of globalization. As procedures of constitutional (and, more particularly, human rights) interpretation, they are different modes of access to a transnational legal and constitutional context, (i) more pronouncedly from the perspective of norms and standards universally accepted and upheld and (ii) as the realization of a readiness to learn from (the world of) others both (and simultaneously) different from and similar to the (world of the) self. Transnational contextualization may function as an antidote to parochialism, but may not, in the process, be allowed to become an exterminator of pluralism and diversity. The transnational perspective, apart from drawing attention to what is universal, also facilitates recognition of what is narrow but at the same time matchless in any particular constitutional and human rights dispensation. Transnational contextualization is, in other words, not just a way of taking universal factors into account and bringing macro forces into play, but it must also honour uniqueness and aid its preservation and promotion, and it is definitely not (and ought not to be perceived as) a necessary panacea for each and every possible symptom of national (self)interestedness. That transnational wisdom and expertise have to bend the knee to narrow political pressure(s) is sometimes inevitable (as AZAPO164 showed), is always regrettable (as critics of AZAPO pointed out165), but in a healthy constitutional democracy is hardly ever the end of the road (as the ebb and flow of the Constitutional Court’s jurisprudence on the framework judgment in Makwanyane166 showed167). In any particular country the concretization of human rights law (with its inherent values) entails participation in the dynamic and complex writing of the bigger narrative of human rights in that country. This cannot be a grand or master narrative, planned in advance (and in detail), and with an ever predictable storyline. There are too many aberrations, inconsistencies and imponderables involved. It is therefore also impossible to gauge, with any reli-

163 164

Cf. 2.2 above. Azanian People’s Organization (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC). 165 Motala (1996, pp. 29–59); Botha and Olivier (2004, pp. 42–77) at p. 51. Cf. also 3.9 above. 166 S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC) at para. 35. 167 Cf. 3.2–3.5 above.


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able precision at any given point in time, the specific ‘contribution’ of international and foreign law to that narrative. If the present chapter has as much as indicated approximately how dynamic a force transnational contextualization has become in the unfolding of the South African human rights narrative and in human rights law since 1994 – a dearth of international- and comparative-law skills and capacity among jurists notwithstanding – it may pass as a worthwhile (albeit exploratory) perspective on the divide (and interaction) between international, foreign and national law in an erstwhile pariah state shut off from the dynamism of transnational realities on the platform of globalization for too long.

REFERENCES Cases A M Moola Group Ltd and Others v Commissioner, South African Revenue Service and Others 2003 (6) SA 244 (SCA). Azanian People’s Organisation (AZAPO) and Others v President of the Republic of South Africa and Others 1996 (8) BCLR 1015 (CC), 1996 (4) SA 672 (CC). Bernstein and Others v Bester and Others NNO 1996 (2) SA 751 (CC), 1996 (4) BCLR 449 (CC). CC Maynard et alii v The Field Cornet of Pretoria (1894) 1 SAR 214 at 223. Certification of the Amended Text of the Constitution of the Republic of South Africa, 1996, In re: Ex parte Chairperson of the Constitutional Assembly 1997 (1) BCLR 1 (CC), 1997 (2) SA 97 (CC). Certification of the Constitution of the Republic of South Africa, 1996, In re: Ex parte Chairperson of the Constitutional Assembly 1996 (10) BCLR 1253 (CC), 1996 (4) SA 744 (CC). Du Plessis and Others v De Klerk and Another 1996 (5) BCLR 658 (CC), 1996 (3) SA 850 (CC). Ex parte Gauteng Provincial Legislature. In re: Dispute Concerning the Constitutionality of Certain Provisions of the Gauteng School Education Bill of 1995 1996 (4) BCLR 537 (CC), 1996 (3) SA 165 (CC). Fose v Minister of Safety and Security 1997 (7) BCLR 851 (CC), 1997 (3) SA 786 (CC). Government of the RSA and Others v Grootboom and Others 2000 (11) BCLR 1169 (CC), 2001 (1) SA 46 (CC). K v Minister of Safety and Security 2005 (9) BCLR 835 (CC), 2005 (6) SA 419 (CC). Kaunda and Others v President of the RSA and Others (2) 2004 BCLR 1009 (CC), 2005 (4) SA 235 (CC). Mohamed and Another v President of the RSA and Others 2001 (7) BCLR 685 (CC), 2001 (3) SA 893 (CC). S v Baloyi 2000 (1) BCLR 86 (CC), 2000 (2) SA 245 (CC). S v Makwanyane and Another 1995 (6) BCLR 665 (CC), 1995 (3) SA 391, 1995 (2) SACR 1 (CC).

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S v Mamabolo (E TV, Business Day and Freedom of Expression Institute Intervening) 2001 (5) BCLR 449 (CC), 2001 (3) SA 409 (CC). Sanderson v Attorney-General, Eastern Cape 1997 (12) BCLR 1675 (CC), 1998 (2) SA 38 (CC). South African Association of Personal Injury Lawyers v Heath and Others 2001 (1) BCLR 77 (CC).

Bibliography Ackermann, L.W.H. (2005–06), ‘Constitutional Comparativism in South Africa: A Response to Sir Basil Markesinis and Jörg Fedtke’, Tulane Law Review, 80 (1), pp. 169–93. Ackermann, L.W.H. (2006), ‘Constitutional Comparativism in South Africa’, South African Law Journal, 123 (3), pp. 497–515. Botha, N. and M. Olivier (2004), ‘Ten Years of International Law in the South African Courts’, South African Yearbook of International Law, 29, pp. 42–77. Bryde, B.-O. (1999), ‘North and South in Comparative Constitutional Law – from Colonial Imposition towards a Transnational Constitutionalist Dialogue’, in W. Benedek, H. Isak and R. Kicker (eds), Development and Developing International and European Law: Essays in Honour of Conrad Ginther on the Occasion of his 65th Birthday, Frankfurt am Main, Berlin, Bern, Brussels, New York, Vienna: Peter Lang, pp. 697–705. Bryde, B.-O. (2003), ‘Konstitutionalisierung des Völkerrechts und Internationalisierung des Verfassungsrechts’, Der Staat, 42 (1), pp. 61–75. Bryde, B.-O. (2005–06), ‘The Constitutional Judge and the International Constitutionalist Dialogue’, Tulane Law Review, 80 (1), pp. 203–19. Bryde, B.-O. (2008), ‘Constitutional Law in “Old” and “New” Law and Development’, Verfassung und Recht in Übersee, 41 (1), pp. 10–15. Cheadle, H.M., D.M. Davis and N.R.L. Haysom (eds) (2006), South African Constitutional Law: The Bill of Rights, My LexisNexis. Choudhry, S. (2006) ‘Migration as a new Metaphor in Comparative Constitutional Law’, in S. Choudhry (ed.), The Migration of Constitutional Ideas, Cambridge: Cambridge University Press, pp. 1–36. Corder, H. (1992), ‘Lessons from (North) America. (Beware the “Legalization of Politics” and the “Political Seduction of the Law”)’, South African Law Journal, 109 (2), pp. 204–24. De Waal, J. (1995), ‘A Comparative Analysis of the Provisions of German Origin in the Interim Bill of Rights’, South African Journal on Human Rights, 11 (1), pp. 1–29. Du Plessis, L. (ed.) (2002), Re-Interpretation of Statutes, Durban: Butterworths. Du Plessis, L. (2005), ‘Learned Staatsrecht from the Heartland of the Rechtsstaat: Observations on the Significance of South African–German Interaction in Constitutional Scholarship’, Potchefstroomse Elektroniese Regstydskrif/ Potchefstroom Electronic Law Journal, (1), pp. 1–30, http://www.puk.ac.za/ opencms/export/PUK/html/fakulteite/regte/per/issues/2005_1__Du_Plessis_art_ tdp.pdf. Du Plessis, L. (2007a), ‘AZAPO: Monument, Memorial … or Mistake?’ in W. le Roux and K. van Marle (eds), Law, Memory and the Legacy of Apartheid: Ten Years after AZAPO v President of South Africa, Pretoria: Pretoria University Law Press (PULP), pp. 51–64.


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Du Plessis, L. (2007b), ‘International Law and the Evolution of (Domestic) Human Rights Law in Post-1994 South Africa’, in J. Nijman and A. Nollkaemper (eds), New Perspectives on the Divide between National and International Law, Oxford: Oxford University Press, pp. 309–40. Du Plessis, L. (2008), ‘German Verfassungsrecht under the Southern Cross: Observations on South African–German Interaction in Constitutional Scholarship in Recent History with Particular Reference to Constitution-making in South Africa’, in F. Hufen (ed.), Verfassungen – Zwischen Recht und Politik: Festschrift zum 70. Geburtstag für Hans-Peter Schneider, Baden-Baden: Nomos, pp. 524–36. Du Plessis, L. and J.R. de Ville (1993), ‘Bill of Rights Interpretation in the South African Context (3): Comparative Perspectives and Future Prospects’, Stellenbosch Law Review, 4 (3), pp. 356–93. Dugard, J. (1994), ‘International Human Rights’, in D. van Wyk, J. Dugard, B. de Villiers and D. Davis (eds), Rights and Constitutionalism: The New South African Legal Order, Kenwyn: Juta & Co, pp. 171–95. Dugard, J. (1995), ‘International Law and the “Final” Constitution’, South African Journal on Human Rights, 11 (2), pp. 241–51. Dugard, J. (ed) (2000), International Law: A South African Perspective, 2nd edn, Kenwyn: Juta & Co. Erasmus, G. (2003), ‘The Incorporation of Trade Agreements and Rules of Origin: The Extent of Constitutional Guidance’, South African Yearbook of International Law, 28, pp. 157–81. Klug, H. (1997), ‘Introducing the Devil: An Institutional Analysis of the Power of Constitutional Review’, SAJHR, 13 (2), pp. 185–207. Markesinis, Sir Basil and J. Fedtke (2005–06), ‘The Judge as Comparatist’, Tulane Law Review, 80 (1), pp. 11–167. Motala, Z. (1996), ‘The Constitutional Court’s Approach to International Law and its Method of Interpretation in the “Amnesty Decision”: Intellectual Honesty or Political Expediency?’, South African Yearbook of International Law, 21, pp. 29–59. Motala, Z. and C. Ramaphosa (2002), Constitutional Law: An Analysis and Cases, Oxford: Oxford University Press. Murkens, J.E.K. (2008), ‘Comparative Constitutional Law in the Courts: Reflections on the Originalists’ Objections’, Verfassung und Recht in Übersee, 41 (1), pp. 32–50. Peters, A. (2007), ‘The Globalization of State Constitutions’, in J. Nijman and A. Nollkaemper (eds), New Perspectives on the Divide between National and International Law, Oxford: Oxford University Press, pp. 251–308. Saunders, C. (2006), ‘Comparative Constitutional Law in the Courts: Is there a Problem?’, Current Legal Problems, 59, pp. 91–127. Tushnet, M. (2004), ‘Interpreting Constitutions Comparatively: Some Cautionary Notes, with Reference to Affirmative Action’, Connecticut Law Review, 36 (3), pp. 649–63. Tushnet, M. (2006), ‘Some Reflections on Method in Comparative Constitutional Law’, in S. Choudhry (ed.), The Migration of Constitutional Ideas, Cambridge: Cambridge University Press, pp. 67–83. Van der Walt, A.J. (ed.) (1999), Constitutional Property Clauses, Kenwyn: Juta & Co; Dordrecht: Kluwer.

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Venter, F. (2000), Constitutional Comparison: Japan, Germany, Canada and South Africa as Constitutional States, Lansdowne: Juta & Co; Dordrecht: Kluwer. Venter, F. (2008), ‘Globalization of Constitutional Law through Comparative Constitution-Making’, Verfassung und Recht in Übersee, 41 (1), pp. 16–31.

7. Globalization, state commercial activity and the transformation of administrative law Geo Quinot* 1

INTRODUCTION

One central theme in the globalization1 debate is the changing nature of the state.2 While debate rages within globalization literature about whether the state has vanished, continues to exist only in hollowed-out form or remains a dominant actor within the global picture,3 one thing is more or less accepted – the state’s modus operandi is quite different from what it was a century ago. In assessing the debate about the impact of globalization on the nation state, Georg Sørensen concludes: [S]tates as well as markets have been transformed under conditions of economic globalization. Instead of a reduced role for the state, the role of the state has changed. States operate under different circumstances than before; in some way they are subject to new constraints, but states have also developed new ways of

* BA LLB (Stell) LLM (Virginia) LLD (Stell), Associate Professor, Department of Public Law, Stellenbosch University. 1 I will not attempt to define globalization in this chapter. It seems that the very definition of the notion is as contested as its existence and impact. As Strange (1996, p. xiii) notes: ‘The worst [term] of them all is “globalization” – a term which can refer to anything from the Internet to a hamburger’. See Koenig-Archibugi (2003, pp. 2 et seq.) and also Goodin (2003, pp. 69 et seq.); De Feyter (2007a, pp. 1, 3 et seq.); McGrew (1998, p. 299); Sørensen (2004, pp. 23–6). Instead, I will take Harry Arthurs’ insight, in his analysis of globalization and labour law, as my point of departure. Arthurs argues that ‘globalization is formative, not normative. It changes labour law not by directly amending the substantive rules but by transforming the institutions, structures and processes through which those rules are made and administered’, Arthurs (2006, p. 56). 2 See generally Sørensen (2004). 3 See De Feyter (2007a, pp. 3–4) and Pikalo (2007, p. 17); McCrudden (2007, pp. 580–81); Sørensen (2004) Chapter 1.

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regulating the market. Thus the transformation that has taken place contains elements of states both ‘losing’ and ‘winning’.4

One of the central features of development in statecraft globally over the last roughly two decades has been the idea that public functions do not necessarily have to be delivered through purely public institutions or in public form.5 The result has been the emergence of a complex network of organizational forms and action types that in aggregate constitute the state or the state function.6 Forms stemming from private law play a significant part in this new make-up of the state and state action. Globalization arguably has a considerable impact on this development. International financial institutions, such as the World Bank and IMF, actively promote new forms of statecraft that are much closer aligned to the private sector both conceptually in design and in practice through public–private cooperation.7 Increased use of private law forms to achieve public functions can also be seen as one outcome of the marketization of all aspects of social life, which is another central theme running through the globalization literature.8 The transformed technique of statecraft is perhaps most evident in the state’s participation in the market as a market-player, something which is often used by globalization sceptics to argue that the state has in fact not vanished – for example, by pointing out the massive increase in state participation in the economy as a percentage of GDP.9 If increased marketization of public life is a significant element of globalization10 then it follows that for the body public to retain control over its own 4 Sørensen (2006, pp. 193–4). Also see in the same volume Flinders (2006, p. 224): ‘Neo-liberal attempts to “rollback” the boundaries of the state in a number of advanced liberal democracies in response to a perceived crisis during the 1970s have arguably led not to a reduction in the role, budget or powers of the state but to a redefinition, transformation or change in the structure of the state. There has been a change in governing frameworks from hierarchical bureaucracies to complex networks and markets: a shift from government to governance in which the extent of delegated responsibilities and the role of private contractors has increased. Para-statals and P3s represent instruments for meeting the obligations of the state and offer an infra-structural capacity for coping with crises and public demands’ (references omitted); McCrudden (2007, p. 581); McGrew (1998, p. 299); Van der Westhuizen (2002, pp. 2–3). 5 See Flinders (2006, p. 223); Collins (1999, pp. 303, 305). 6 Sørensen (2004, pp. 34–8). 7 World Bank World Development Report (1997); Harrison (2004); Flinders (2006, p. 230); Stiglitz (2003, p. 58); Bolton (2007, pp. 300, 303). 8 Marsh et al. (2006, p. 172); Goodin (2003, p. 69). See Bolton (2007, pp. 2–3). 9 See Bolton (2007, pp. 3–5). 10 See Goodin (2003, p. 69) who notes that ‘a nation tr[ies] to keep some of [its] fundamental collective decisions safely sequestered from undue influence by others’

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destiny it must increase its participation in commercial markets; that is, it must increasingly play the market game.11 Increased state commercial activity can thus be viewed as an attempt by the state to maintain competitiveness on the global stage, but also on the domestic stage, where globalization has created powerful rivals for the erstwhile sovereign and hence all-powerful state in the form of multinational corporations and competing foreign state commercial actors.12 Competitiveness in this sense is not simply a matter of getting ahead – snatching investment away from competing players or extracting maximum benefits from available resources – but indeed a matter of maintaining existing public goods in the face of competitors with the power to impose farreaching changes to the common (domestic) take on public life. This transformation of state administration in the face of globalization necessitates a reconsideration of the legal measures applicable to the state against the background of such transformation. In short, there is a need to consider the transformation of administrative law. In particular, the state’s increased reliance on non-traditional forms of organization and conduct, notably of a commercial nature, creates a need to carefully reconsider administrative law as traditionally viewed at the core of public law.13 As one political scientist notes: The delegation of tasks [to para-statal bodies and private commercial entities by the state] has largely been bereft of any coherent legal framework or even a broad statement of principle. Functions have largely been delegated on an ad hoc basis, which explains why the fringes of the state tend to be messy, confused and devoid of any underpinning rationale or logic.14

and that ‘[t]hat capacity to do things differently, here from elsewhere, is precisely what old-fashioned trade barriers used to buy us. And that is what is lost with the collapse of those trade barriers and rampant globalization.’Along similar lines Hugh Collins notes: ‘[T]he shift towards contractualization in social life is perhaps one of the most potent symbols of political and business culture at the close of the twentieth century’, Collins (1999, p. 18). 11 See Koenig-Archibugi (2003, pp. 3–7). 12 Arthurs (2006, p. 55) notes that ‘the revenues of any of the top 100 or so global firms exceed the GDP of many nations.’ Sørensen (2004, p. 4). 13 In Pharmaceutical Manufacturers Association of SA and Another: In re ex parte President of the Republic of South Africa and Others 2000 (2) SA 674 (CC) at para. 45, Chaskalson P formulates this traditional view as follows: ‘Whilst there is no bright line between public and private law, administrative law, which forms the core of public law, occupies a special place in our jurisprudence. It is an incident of the separation of powers under which courts regulate and control the exercise of public power by the other branches of government. It is built on constitutional principles which define the authority of each branch of government, their inter-relationship and the boundaries between them.’ 14 Flinders (2006, p. 229).

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In this chapter I want to explore a number of issues facing administrative law within the context of state commercial activity. My interest in this specific field stems from a view that research in this area can act as an incubator for the development of theories, models or, to use a phrase recently introduced to me by Henk Botha, angles of approach15 that can have wider application and that touch upon a number of the most interesting and pressing current legal dilemmas.16 Within the broader context of this project on law and globalization, the chapter aims to unpack the issues emerging from administrative law applied to state commercial activity in a way that facilitates comparison with issues emerging in other areas of law under the influence of globalization themes. In this broader context it is worth noting as a point of departure that the moment state administration loses its conventional command and control characteristics and takes on private law structuring a dilemma is created for the legal framework of such state administration. The conventional basis and accompanying assumptions of the state action being regulated by these legal rules are increasingly inapt and questions emerge about the origin of the legal rules that are being applied, the underlying rationale in their formulation and the regulatory aims served by the enforcement of such rules.

2

‘STATE COMMERCIAL ACTIVITY’

When I talk about state commercial activity, I am interested in all actions of the state, in its various forms, that emulate private market transactions in the private market. In other words I am thinking about the conduct of the state as a market participant. These actions take a wide variety of forms ranging from commonplace public procurement transactions, the state buying goods and services, to fairly complicated public–private partnerships such as the development and running of prisons, public hospitals or police stations. These actions have the common characteristics of being framed in private law form but aimed at fulfilling a public function through state action. State commercial activity is particularly interesting from a globalization perspective given the complex interaction between a state’s welfare spending and its global competitiveness.17 For example one sees a large variety of 15 See Botha (2009). This phrase comes from Ndebele (2003, p. 82) where the last of the four imaginary South African descendants of Penelope waiting for their husbands to return describes her attitude in preparing herself for the moment of reunion: ‘To have an angle of approach rather than a plan. That will do. An approach enables you to imagine yourself in a situation without its details. That should be enough. Otherwise the details can chew away at your options.’ 16 See Quinot (2007) Chapters 6 and 7. 17 See Marsh et al. (2006, p. 186); Koenig-Archibugi (2003, pp. 3–7).


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commercial arrangements being pursued by the state in order to attract (foreign) investment on the global market while these arrangements are domestically often aimed at the provision of public goods. Many state commercial actions thus exhibit a dual purpose. One can often identify in state commercial activity attempts on the part of the state to harness economic mechanisms in pursuit of welfare goals. In such cases it is a public welfare motivation that drives the state’s enthusiasm for market participation. However, the impact also works the other way around, as noted above. In a globalized world, the state is forced to adopt a market role if it wants to share in global wealth. This role has a significant impact on the state’s policy options in relation to welfare programmes.18

3

APPLICABLE NORMS

Traditionally, in common law and civil law systems alike it seemed relatively straightforward to fit state action into either commercial or governmental categories. When the state buys and sells it is acting commercially and its conduct is simply subject to ordinary commercial law. When, on the other hand, the state provides services to the public it is acting administratively and public law applies. However, it has long been recognized that such an approach is simplistic and does not align with reality. As noted above, the marketization of all aspects of public life results in a fusion of the governmental and the commercial. Today, the state has recourse to a large array of tools in exercising its public powers and commercial action features prominently amongst them. Peters and Pierre accordingly note that ‘the linear, autonomous conception of governing had been replaced by far more complex arrangements for making and delivering policy’.19 These complex institutional arrangements imply a much more complex legal landscape against which state action is to be understood. Furthermore, the complex interaction between economic means and social welfare ends has important implications for the legal treatment of the state. The traditionally applicable norms of administrative law are conventionally premised on much simpler relationships between state and citizen in the fulfilment of public functions. The interaction between economic form and public function hence calls for a careful reconsideration of the relationship within legal doctrine between rules aimed at commercial conduct and public functions respectively. 18 Koenig-Archibugi (2003, pp. 5–7) and Stiglitz (2003, p. 58); Sørensen (2006, pp. 203–4). 19 Peters and Pierre (2006, p. 220).

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This emerging complexity is illustrated by a simple privatization example. When the state exclusively supplies water services directly to citizens, the legal relationship between user and supplier is easily characterized as a public law relationship governed by relevant public law rules. The user’s entitlement to water services is clearly aimed directly against the state and any problems with supply are straightforwardly dealt with in terms of that single relationship. However, when the state outsources water services to a private contractor, the legal framework immediately becomes more complicated. A triangle of legal relationships is created between user, private supplier and state, which relationships are often quite difficult to untangle and to conceptualize within existing legal frameworks. Privatization hence evidently calls for detailed and specific regulatory frameworks to set the applicable legal landscape. In common law systems, such as South Africa’s, the legal response to these institutional developments has been fairly simplistic. The predominant approach is still to attempt a classification of action governed by either commercial or public law norms.20 Continental European systems have a much longer and more diverse history of public–private interaction in the realization of public functions. Accordingly, their administrative law systems exhibit a more developed facilitating function in combination with their control functions.21 However, analysis of continental systems indicates that many theoretical problems experienced in common law systems in dealing with state commercial activity are also present and provide similar dilemmas on the continent.22 This is illustrated by the difficulties experienced in classifying state contracts as either administrative contracts or private law contracts in France and Germany23 and by the problems experienced in most EU Member States in creating effective remedies for the judicial review of all state contracts under pressure from EU law on public procurement.24 The shift that has taken place in statecraft, partly linked to globalization, involves commer-

20 21 22 23

Quinot (2007) Chapter 3. See Freedland (1994, p. 98). Quinot (2007, pp. 304–5). Turpin (1982, pp. 28–31); Ehlers (2006, pp. 140–41) and Gurlit (2006, p. 698 et seq.); Brown and Bell (1998, pp. 141–3; 202); Mitchell (1954, pp. 171 et seq.); Arnould (2001, pp. 335–6). 24 Arrowsmith (2006a, p. 86), ‘Case C-212/02, Commission v Austria: The Requirement for Effective Remedies to Challenge an Award Decision’ (2004) 13 Public Procurement LR NA165, ‘France: Actions to Enforce the Community Procurement Rules in France: Decree No. 92-964 of September 7, 1992’ (1993) 2 Public Procurement LR CS12, ‘Enforcing the EC Public Procurement Rules: The Remedies System in England and Wales’ (1992) 1 Public Procurement LR 92; Arnould (2001, pp. 338–40), ‘The French Council of State and the Reform of the Public Contracts Law of 2001’ (2004) 13 Public Procurement LR NA6-13.


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cial action in delivering public functions at levels well beyond administration in private law form hitherto familiar to continental European systems. The new commercial arrangements involving the state are much more complex than in the past, so that continental European systems also experience pressures on administrative law.25 One of the central dilemmas in reassessing the applicable legal framework for state commercial activity relates to the origin of the norms that structure state commercial relationships.26 If the normal legal rules of the market, that is, private law rules, are applied, questions emerge about accountability and public involvement in the creation of the relationship and conduct in terms of it. Private law ordering, especially the law of contract with its inherent notions of privity, reciprocity and individualism,27 seems inept to cater for the unique

25

Peters and Pierre (2006, pp. 210–11) argue that ‘while the emergence of institutionalized forms of concerted action between public and private actors was a novelty to the British political milieu, it was certainly a familiar phenomenon both in (the rest of) Europe and even in the United States’ but go on to note that ‘[e]ven so, however, the British developments over the past couple of decades have been more profound and have had bigger ramifications on the political system than in most other parts of the world’ (references omitted). They continue to argue (p. 220) that in general ‘the linear, autonomous conception of governing had been replaced by far more complex arrangements for making and delivering policy.’ 26 I am not simply referring here to the origin of the formal rules that govern the legal relationships. I am more particularly thinking about the norms that govern the specific transaction or relationship. The essential question is thus who is in control of setting the rules or standards for this specific transaction. 27 Duncan Kennedy argues that ‘[i]ndividualism provides a justification for the fundamental legal institution of … contract’ and that ‘[t]he essence of individualism is the making of a sharp distinction between one’s interests and those of others, combined with the belief that a preference in conduct for one’s own interests is legitimate … it means a firm conviction that I am entitled to enjoy the benefits of my efforts without an obligation to share or sacrifice them to the interests of others.’ In contrast, he identifies the ‘counterethic’ of altruism as ‘the belief that one ought not to indulge a sharp preference for one’s own interest over those of others. Altruism enjoins us to make sacrifices, to share, and to be merciful’, Kennedy (1976, pp. 1713–21); see also Cockrell (1992, p. 40) for an application of Kennedy’s arguments to South African contract law. Most recently, Deputy Chief Justice Moseneke described contract law as follows: ‘The notion of contractual autonomy belongs to a larger worldview and ideology. It flows from classical liberal notions of liberty and the neo liberal penchant for free, self-regulating and self-correcting markets driven by individual entrepreneurs who thrive on freedom of choice and freedom to strike handsome bargains. The law of contract is meant to facilitate the securing of market needs. It is meant to be a valueneutral set of muscular but predictable rules that curb uncertainty whilst inspiring confidence in the market place’, Moseneke (2008), available at http://www.mymaties. com/portal/page/portal/law/index.english/news/20081, accessed 14 November 2008 (hereafter ‘Moseneke Annual Public Lecture 2008’).

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public features of state commercial activity.28 In particular, it is not clear that public interest can be adequately internalized in such relationships via the medium of private law.29 If private law is to provide an effective legal framework for state commercial activity then, as Mark Freedland argues, ‘our primary concern should be to ensure that these private law-based instruments are tuned to register the sound of public interest’.30 The problem is, however, not restricted to facilitating the public interest dimension to the relationship. There are also particular difficulties in private law structuring of the relationship between the primary parties to state commercial transactions. In such transactions the state by and large dictates the terms.31 Fairness vis-à-vis the private party to the transaction hence becomes an issue from a norm generating perspective. However, unlike similar fairness disputes in truly private contracts of adhesion, the decks are significantly stacked against the private party in state commercial transactions. The competing interests are not simply that of one (private and potentially weaker) party against another (more powerful one), but of the public interest (ostensibly represented by the state’s actions)32 against the interest of the private contractor. The need to take account of the power relationship between the parties to state commercial transactions is hence of paramount importance in the applicable legal framework.33 But the complexity of norm generation does not end there. In state commercial transactions it is equally often the case that the particular organ of state involved is also not in control of the terms of the relationship. The terms and conditions for such transactions are often prescribed, even to contracting organs of state, by a central authority, such as a national treasury or a state

28 29 30 31 32

Collins (1999, p. 306). See Quinot (2007) Chapter 4. Freedland (2003, p. 134). Collins (1999, pp. 307–8). Quinot (2008b, p. 109). For the moment I am leaving aside the possibility that the public interest and the interests of the particular state party to the transaction may not be the same thing, which, if accepted, would complicate the relationships even further. 33 Another dimension of state commercial relationships that differs from analogous private relationships is the ability of the state to lawfully resile from transactions on public interest grounds with reliance on the no-fettering principle. In terms of this principle an organ of state cannot bind its future exercise of discretion in a way contrary to the public interest at the time when the discretion is to be exercised. This implies that while an organ of state may validly enter into a binding contract it may be able to resist performance under that contract if such performance would not be in the public interest at that time. In such a scenario the state is clearly in an advantageous power position vis-à-vis the private party. See Davies (2006b, p. 98); Wade and Forsyth (2004, pp. 330–34; 840–84); Hoexter (2007, pp. 285–90); Turpin (1989, pp. 85–90); Bolton (2007, pp. 86–95); Arrowsmith (1992a, pp. 72–8).


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tender board.34 The power of the particular contracting organ of state to determine the structure of the relationship vis-à-vis the central authority adds another layer of complexity to the particular transaction. Again, the individualism of private law does not seem to be well suited to account for this complexity. In state commercial transactions one may thus find two parties35 bound by terms that neither would have chosen freely. Both the public interest in state commercial transactions and the public power that is wielded when entering into and within such transactions necessitate greater public involvement and scrutiny than would be the case in analogous private transactions. Normal rules of commercial law do not provide adequate measures to facilitate such public involvement in setting up the relationship. From a normative point of view, the essential question is this: if, in the words of Moseneke DCJ, ‘[t]he law of contract … is meant to be a valueneutral set of muscular but predictable rules’,36 how can one ensure that the normative values upon which the state is founded and which are hence meant to be foundational to all state action as an important implication of constitutional democracy37 are instilled in the state’s commercial conduct? If the state’s commercial conduct was negligible, this question would have been marginal or simply an academic obscurity – as it perhaps has been for a long time. However, as I have argued, the forces of globalization are increasingly compelling the state towards commercial forms of action. As a result, the tension between commercial form and normative constitutional values is mounting. Even if constitutional values could find their way into state commercial transactions via private law structuring38 the globalization angle raises questions about the particularity of such values.39 If any particular state’s turn to commercial forms of action is a result of external pressures 34 For the position in South Africa see Quinot (2008b, p. 109); Bolton (2007, pp. 368–9) and internationally Arrowsmith et al. (2000, pp. 357–8). 35 Mostly, the contracting organ of state and the central authority that prescribed the terms will be a single legal entity so that in a strict legal analysis the state (with all its organs) constitutes the one party to the transaction, which obviously negates the argument made here. However, I am referring to parties here in a more general and less technical sense to denote the particular physical entities concluding the transaction, i.e. focusing on the particular organ of state rather than the aggregate state. 36 Moseneke (2008). 37 In the South African context these values include accountability, responsiveness, openness, efficiency, transparency, Constitution of the Republic of South Africa, 1996 (hereafter ‘the Constitution’) ss 1, 33, 41, 195. 38 For different views on the possibility of introducing constitutional values into private relations via private law see Lubbe (2004, p. 395); van der Walt (2005, p. 655) and (2006, p. 1); Liebenberg (2008, p. 464). 39 Goodin (2003, p. 69).

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towards increasing participation in the global market, one has to interrogate the pedigree of the constitutional values that may find their way into such transactions. Will private law rules of the global market only allow universal public values into state commercial transactions or is there room for particularity? Tensions evidently occur if constitutional values of a particular state are accommodated. South Africa provides a good example of such tension. One of the important constitutional commitments in South Africa is the eradication of historical inequalities. This includes economic imbalances. In order to achieve this constitutional commitment, the South African state has embarked on a comprehensive Black Economic Empowerment strategy. In its commercial dealings the state has committed itself to giving preference to local black business.40 However, this preference is at odds with a completely free market and even more so when judged from a global market perspective.41 The question is thus how can one instil this specific constitutional value in South Africa within state commercial transactions using legal tools aimed at creating and maintaining a barrier-free global market? Whereas increasing emphasis on accountability and horizontal application of human rights norms have pushed public law into areas of private legal relationships, the changing functioning of the state has brought private law much closer to the centre of the legal structuring of the state, traditionally the province of public law. This move makes it highly relevant to consider the fit between existing private law rules and state functions particularly as far as the facilitating role of law is concerned. However, it is also of critical importance to maintain the control function of administrative law in relation to state action in commercial form. A key rationale for adopting traditional public law forms for state conduct is that such forms constitute public ways of establishing collective priorities.42 It is not clear that substitute or alternative private law forms can achieve a similar function in keeping these state choices public. Accordingly, as Matthew Flinders accurately notes: From a conceptual point of view the increasing institutional hybridity poses questions about the legitimacy and accountability of the state, particularly in light of the fact that traditional understandings and procedures in relation to these concepts have historically been wedded to a state structure that to some extent no longer exists.43

40 Ministries of Finance and Public Works (1997); Preferential Procurement Policy Framework Act 5 of 2000; Preferential Procurement Regulations Government Notice R725 Government Gazette No. 22549 of 10 August 2001. Bolton (2007, pp. 260–96); McCrudden (2007, pp. 245–67). 41 Bolton (2007, pp. 296–306); McCrudden (2007, pp. 273–80). 42 Peters and Pierre (2006, p. 215). 43 Flinders (2006, p. 225).


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I think much of this is true of administrative law and a need consequently arises to consider new legal tools to facilitate and control state functions. Given the hybrid nature of the new state and its conduct, those new tools can only be fashioned through a synergy of public and private law rules.

4

ENFORCEMENT OF NORMS

When one turns from the substance of the applicable norms to their enforcement in state commercial relationships one again encounters complexity. If state commercial activity is viewed as private law based, enforcement of the applicable norms largely rests in the hands of the parties to the transaction.44 It is left to the parties to monitor the counterparty’s compliance with the terms of the regulatory system and, most importantly, to seek judicial intervention, that is legal sanctions, in instances of non-compliance. Enforcement in the regulatory system created by contract law is thus left to the discretion of the particular parties to the transaction.45 Self-regulation in this respect is not restricted to the choice to enforce the regulatory rules, but extends to the manner of enforcement and largely the content of the legal sanctions invoked. At the one end of the spectrum, a party can seek an order for specific performance from a court to strictly enforce the rules of the agreed regulation, or, at the other end, it can negotiate an amendment to the regulatory rules in the light of the counterparty’s non-compliance with the original rules. Hugh Collins describes this dimension of contract law as ‘an extreme example of responsive or reflexive regulation’.46 Reflexivity is a highly desirable characteristic of any regulatory regime. Reflexive regulation, in essence, attempts to be sensitive to the expectations and realities of the particular parties to the regulated social practice.47 The aim is to position the regulation vis-à-vis the communiciation system(s) in terms of which the parties perceive the social practice in such a way as to produce the desired regulatory outcomes without distorting, diminishing or corrupting the social practice within such communication system(s).48 The high measure of control by the parties over enforcement holds a number of key advantages for the regulatory system.49 One major advantage

44 45 46 47 48 49

See Quinot (2007, pp. 355–7). Collins (1999, pp. 66–7). Collins (1999, p. 67). Collins (2004, p. 24). Collins (2004, p. 24); Teubner (1988, p. 311). See Quinot (2007, pp. 356–7).

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is the system’s ability to easily accommodate changing circumstances, both within a particular transaction and generally over time. Unanticipated (and unpredictable) changes in circumstances (both from external factors and the regulation itself) pose a lower regulatory risk since the parties can readily reposition within the system of regulation. While the parties may not be in control of all (or any) external influences on the transaction, they are to a significant degree in control of the way in which the applicable norms are enforced (if at all), thus empowering them to reposition themselves. A further consequence is that the normative framework is accordingly exceptionally stable and can achieve high levels of certainty. There is, however, a downside to party control over enforcement of the applicable norms in state commercial transactions. The problems flow from the same concern with individualism of private law regulation noted above. Here globalization again emerges as a relevant force. Hugh Collins argues that where multiple communication systems simultaneously inform the social practices being regulated one such communication system inevitably will be prioritized above the other(s).50 This is especially the case when it comes to enforcement of norms. Collins notes that in contract law economic analysis is prioritized above other communication systems.51 Contract law thus achieves reflexivity in the context of commercial transactions aimed at wealth maximization by exchange of goods and services.52 The emphasis on market integration as a central tenet of globalization underscores this privileging of an economic view of the social practice. However, where there are different communication systems at work, contract law inhibits reflexive regulation since it generally restricts the parties’ ability to give effect to alternative communication systems in terms of their self-regulation.53 In this regard Collins notes: Starting with the paradigm that contractual practices are dominated by discourses of economic interest, the general rules of contract law will always encounter difficulty in achieving an adequate level of reflexivity when they encounter contractual practices which give priority to other frameworks of communication.54

These arguments hold particular implications for the reflexivity of contract law regulation of state commercial activity.55 Although economic dialogue is 50 51 52 53 54 55

Collins (2004, p. 26). Collins (2004, p. 27). Collins (2004, p. 27). Collins (2004, p. 27). Collins (2004, pp. 27–8). The constitutional principle of cost-effective public administration in fact requires such analysis; see the Constitution s 195(1), (b), 217(1).


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certainly present in the context of state commercial activity, such system of communication is neither the only relevant one nor the most important one. As I argued above there are many competing values underlying state commercial activity. In the present context one can view many of those as different communication systems. Good public governance and transparency is one important such communication system.56 Another is one of morals in which the state is expected to demonstrate only the highest degree of ethics.57 A third framework of communication relates to the important transformative goals inherent in all South African state commercial activity noted above. In the light of these multiple communication systems shaping state commercial activity and the priority of most of these over an economic framework in South Africa, the reflexivity of contract law as regulatory system will be greatly impaired along the lines argued by Collins above.58 A further problem within private law ordering is the exclusion of third parties and the public generally from seeking enforcement. The doctrine of privity of contract in private law states that a contract only binds the parties to that contract and generally does not have any legal significance for third parties.59 In the context of state commercial activity the impact of this doctrine

56 57

See the Constitution s 195(1), s 217(1). See the Constitution s 195(1)(a) and also Langa J’s remarks regarding the state as moral ‘role model’ in S v Makwanyane and Another 1995 (3) SA 391 (CC) at para. 222: ‘Implicit in the provisions and tone of the Constitution are values of a more mature society, which relies on moral persuasion rather than force; on example rather than coercion. In this new context, then, the role of the State becomes clear. For good or for worse, the State is a role model for our society’; Ex parte Minister of Safety and Security and Others: In re S v Walters and Another 2002 (4) SA 613 (CC) at para. 6 and Police and Prisons Civil Rights Union and Others v Minister of Correctional Services and Other 2006 (2) All SA 175 (E) at para. 82. See also the arguments presented by Seddon (2004, pp. 12–13) in the Australian context on the government as ‘moral exemplar’ as reason for placing higher standards on government commercial activities and Davies (2006b, p. 105) on a similar argument in English law. Pakuscher argues that in German law the state is also subject to higher standards irrespective of whether it acts under private or public law because of its obligation to ‘pay respect to the basic rights of the Constitution’. He submits that for this reason ‘the administration cannot evade judicial control, even if the State uses means of private law’, Pakuscher (1971, p. 285). See also Ehlers (2006, pp. 154 et seq.). 58 This problem is directly related to the paradigm view of contract as a monolithic notion aimed at commercial exchange between essentially two autonomous parties, i.e. a practice dominated by economic objectives. If one can shift this paradigm view of contract to embrace a more plural view of contractual practices, it may be possible to enhance reflexivity of contract law in diverse contexts such as state commercial activity. 59 Van der Merwe et al. (2004, pp. 245–50); Furmston (2001, pp. 500 et seq.); Lubbe and Murray (1988, pp. 15 and 407); De Wet and Van Wyk (1992, pp. 2–3);

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is to deny third parties locus standi in iudicio to seek enforcement of the applicable norms, while such third parties may clearly have some interest in the matter. In many instances of state commercial activity the resultant relationships can more properly be described as ‘triangular’ or ‘multipartite’ than ‘bi-polar’ as the privity doctrine would imply.60 The state typically contracts with a private service provider to render services directly to the public. Although only the state and private service provider may be parties to the state contract, and thus have privity in relation to that contractual relationship, the members of the public relying on this service clearly also have an interest in that contractual relationship. In more general terms the public at large has an interest in the proper execution of state functions, even when those are commercial in nature, so that the public generally should have standing to enforce regulation of that conduct,61 something which privity prevents.62 These enforcement problems in private law ordering of state conduct result in a legal system that primarily advances a normative agenda heavily skewed towards individual or sectarian interests rather than public interests. Within such private law framework a party to a transaction is highly unlikely to approach a court for the purpose of ensuring transparency, accountability or responsiveness in state conduct. A party is, rather, likely to approach a court in order to ensure that her bargain is realized and her patrimonial interests hence protected.63 So does the answer from an enforcement perspective simply lie in public law forms of scrutiny? Would a fairly liberal approach to judicial review solve all of these problems? In my view it would not.

Minister of Public Works and Land Affairs v Group Five Building Ltd 1999 (4) SA 12 (SCA) at 17. For discussions of the historical development of this doctrine in common law see Atiyah (1979, pp. 412 et seq.) and in civil law Zimmermann (1992, pp. 5–6, 34 and 45). 60 Harlow and Rawlings (1997, p. 140); Freedland (1994, p. 99); Baxter (1984, p. 58). 61 Mitchell (1954, pp. 236–7) notes that one of the specific results of the development of a separate institution of administrative contract in France is that ‘the rights of third parties are enlarged both as to claims as beneficiaries under the contract and as persons interested in the operation of the administration.’ 62 Collins (1999, p. 306). 63 There may of course be a happy coincidence between these two different sets of purposes, e.g. seeking damages from an organ of state following corruption in a tender process may result not only in the aggrieved applicant recuperating her wasted costs, but also in fighting corruption in public administration and hence advancing responsible, ethical governance. However, these overlapping purposes are merely coincidental and there is no necessary link between them.


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A public law remedies regime would certainly allow for much greater third party involvement in the enforcement of norms.64 Furthermore, public law remedies generally grant much more discretion to courts in fashioning appropriate orders.65 This flexibility enables courts to respond meaningfully to the complexity involved in these cases and to tailor the enforcement of the applicable norms to achieve the desired regulatory outcome66 rather than simply blindly enforcing rules found to be applicable. Public law causes of action also align much closer to direct enforcement of normative constitutional values.67

64 In South African law locus standi in terms of s 38 of the Constitution that governs the enforcement of fundamental rights, including the right to administrative justice, is certainly much more generous than standing in private law matters. 65 Section 172(1)(b) of the Constitution provides that courts ‘may make any order that is just and equitable’ when deciding a constitutional matter. This is echoed in s 8(1) of the Promotion of Administrative Justice Act 3 of 2000, which governs administrative law judicial review. In English law Lord Woolf MR likewise notes in R v HM Coroner for Inner London South District Ex p Douglas-Williams [1999] 1 All ER 344 at 347: ‘When it comes to exercising this discretion I cannot suggest a better test for a court to apply when deciding whether it should give relief than that it should be “necessary or desirable to do so in the interest of justice”’; on the flexibility of public law remedies in English law, also see Woolf et al. (2007, pp. 886; 903 et seq.). 66 An excellent example of the effective use of this discretion to account for the complexity in the review of public tender cases is the order in Millennium Waste Management (Pty) Ltd v Chairperson, Tender Board: Limpopo Province and Others 2008 (2) SA 481 (SCA). In this case the court had to fashion a remedy following its finding of reviewable irregularities in the award of a public tender. At the time of the review the relevant contract was well underway and involved critical public services, which the relevant contracting authority could not provide on its own account. The court noted at para. 23 that ‘[t]o set aside the decision to accept the tender, with the effect that the contract is rendered void from the outset, can have catastrophic consequences for an innocent tenderer, and adverse consequences for the public at large in whose interests the administrative body or official purported to act. Those interests must be carefully weighed against those of the disappointed tenderer if an order is to be made that is just and equitable.’ The court consequently formulated an innovative order to cater for all of these interests. It ordered the contracting authority to evaluate the mistakenly excluded tender of the applicant against the successful tender within a given timeframe. Only if the authority concluded that the applicant’s tender ought to have been accepted, rather than the successful tenderer’s one, would the initial tender award be set aside and then only with prospective effect. The order of invalidity would thus not result in the tender award being void from the outset. The court furthermore expressly underlined this effect by ordering that the successful tenderer will remain entitled to any moneys due to it under the contract up to the date it is set aside. See Quinot (2008b, pp. 119–20) and Quinot (2008a) para. 2.4. 67 While the values that are expressly endorsed in the Constitution, e.g. in ss 1 and 195, are not directly enforceable, they are closely aligned to a number of rights in the Constitution that are justiciable. Causes of action founded on such rights therefore closely resemble direct enforcement of the constitution values. The best examples in

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However, recognition that state commercial activity attracts public law remedies, such as the South African view that all public tender processes are subject to judicial review in terms of administrative law,68 raises problems of its own. A liberal judicial review jurisdiction undoubtedly has adverse implications for the state’s efficiency and effectiveness.69 Public law regulation places increased burdens on the state when compared with other (private) market participants. The higher these regulatory burdens are, the less likely the state will be to compete or fully benefit from free-market competition.70 It should be fairly obvious that this effect largely undermines the very purpose of fulfilling public functions via market means. Norm enforcement via judicial review poses a significant regulatory burden. Even where reviewing courts are highly deferential and apply very low levels of scrutiny to the state action at issue, the mere availability of judicial review holds serious efficiency implications for the state.71 Quite often a claimant can effectively halt government programmes72 and/or

the South African context are the values of dignity, equality and freedom, which are recognized as foundational to South African constitutional democracy in ss 1, 36 and 195, but which are also guaranteed as justiciable rights in ss 9, 10 and 12 of the Bill of Rights. On the role of these values in constitutional adjudication see Transnet Ltd v Chirwa 2007 (1) BLLR 10 (SCA) at para. 16; Minister of Home Affairs v National Institute for Crime Prevention and the Re-Integration of Offenders (NICRO) & Others 2005 (3) SA 280 (CC) at para. 21; Bhe & Others v Magistrate, Khayelitsha & Others 2005 (1) SA 580 (CC) at para. 50; De Reuck v Director of Public Prosecutions (Witwatersrand Local Division) 2004 (1) SA 406 (CC) at para. 62. 68 Steenkamp NO v Provincial Tender Board, Eastern Cape 2007 (3) SA 121 (CC) at para. 21. 69 Quinot (2007, pp. 426–33). 70 Teubner (1988, p. 306) notes that in the regulatory crisis experienced in the modern welfare state: ‘State interventionist law is supposed to be one of the main obstacles to reaching the goal of allocative efficiency’; Khoza and Adam (2005, p. 95); Davies (2006b, pp. 99 and 114) (noting the potential increased price implications of applying strict public law regulation to state contracting). 71 Quinot (2007, pp. 426–8). 72 Judicial review proceedings, especially in a commercial context such as public tenders, are often preceded by applications for interim relief to freeze the relevant administrative action pending the outcome of the review. On the impact of interim relief under EC procurement rules applied in English law, see Arrowsmith (1992b, pp. 100–101, 111–14). She argues that inconvenience to either the public or administration because of the delay in execution of government functions caused by judicial review proceedings may be a factor motivating courts to deny interim or final relief and that English case law seems to suggest that such factor will weigh heavily against interim relief in public procurement cases. A similar approach seems to emerge from recent South African judgments, particularly regarding interim relief. In Digital Horizons (Pty) Ltd v SA Broadcasting Corporation and Another (unreported, High Court of South Africa, Witwatersrand Local Division, case no 2008/19224, 8 September 2008),


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delay their execution considerably73 by simply instituting review proceedings, especially where there is no screening mechanism to filter judicial review applications.74 A final issue regarding norm enforcement by means of public law remedies, which is particularly relevant from a globalization perspective, relates to the central role played by national courts. Regulatory review of a state’s conduct, approaching the traditional judicial review in national courts, is not easily achieved at the international level. International arbitration, which is often favoured in international commercial transactions, is mostly ill-suited to enforce norms that reflect particular public value systems, such as those found

for example, the court refused interim relief pending judicial review of a public tender award despite strong evidence that the relevant tender process was reviewable. In refusing the interim relief Malan J notes at paras 28–29: ‘The public obviously has an interest in the outcome of this application: a failure by the first respondent to comply with its FIFA obligations will not only be embarrassing but also affect international perceptions of the first respondent as a national broadcaster … The risk in this matter is concerned with the first respondent’s ability to comply with its FIFA obligations should the interim relief be granted. To my mind the respondents have shown that this consideration outweighs the applicant’s right to administrative justice. It would, moreover, not serve the public good if the interim relief sought is given and in the circumstances not be “just and equitable”.’ 73 It is of interest to note that the EC Directive 89/665, which contains the remedies for the enforcement of EC public procurement rules, expressly provides in art 2(3) that review proceedings need not have an automatic suspensive effect and in art 2(4) that interim measures may be denied when the negative consequences outweigh the benefits, Arrowsmith (2006b, p. 376). 74 Following the judgment in Steenkamp NO v Provincial Tender Board, Eastern Cape 2007 (3) SA 121 (CC), the (even abstract) possibility of a review application succeeding has now seemingly resulted in a general standstill period following the award of public tenders in South African law, during which time the parties to the public contract proceed with performance under the contract at their own risk should the contract subsequently be set aside. In his majority judgment, Moseneke DCJ held at para. 52: ‘Even where there is a delay [in bringing review proceedings of a public tender award] and a court nonetheless set aside a tender award, I do not accept that ordinarily a prudent and diligent successful tenderer whose award is reversed later is without remedy. He or she too may not leap without looking.’ The minority expressly rejected this argument, stating at para. 83 that ‘it would be an undesirable consequence for the performance of government contracts, were successful tenderers to be anxiously looking over their shoulders in case their contract should subsequently be declared void. Moseneke DCJ impliedly criticises the applicant (it “should have curbed its commercial enthusiasm”) for being quick off the starting blocks in seeking to perform its contractual obligations. We cannot agree. In our view, it would be highly undesirable to suggest that a successful tender applicant should hesitate before performing in terms of the contract, in case a challenge to the tender award is successfully brought. Such a principle, in our view, would undermine the constitutional commitments to efficiency and the need for delivery which are of immense importance

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in a specific state party’s constitution.75 The main problem with arbitration, however, is the same as with traditional enforcement mechanisms in private law, namely that it largely excludes third party interests.76 Moreover, it is not always clear that a state party is able to contract out of its own national courts’ public norm enforcement jurisdiction in this way.77

to both government and citizens alike’ (footnotes omitted). Also see Quinot (2008b, pp. 111–14) where I argue that the adverse impact on the state is not restricted to a delay in performance under government contracts, but that there are also significant cost implications for state commercial activity following the approach taken in the Steenkamp judgment. 75 Note, for example, the debate in arbitration circles about what law to apply in such instances, particularly whether it is only the relevant state’s own administrative and/or constitutional law that should be applied or whether international law and/or principles should also find application, see Bühler and Webster (2005, p. 111). For a comprehensive analysis of this dilemma in international investment arbitration, see Choudhury (2008, p. 775). 76 An interesting development in international commercial arbitration that clearly highlights this defect in traditional arbitration practices is the recent amendment of the rules under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID) to provide for third party briefs in arbitration proceedings, even without the consent of the primary parties, Choudhury (2008, pp. 816–18). Also see De Feyter (2007b, pp. 87–9). 77 It is acknowledged in common and civil law systems alike that the state generally has the power to enter into international commercial arbitration agreements and bind itself thus to norm enforcement by means of international arbitration; see Weigand (2002) Part 4 for accounts of the approach in 10 different legal systems; Sutton and Gill (2003, p. 89); Bühler and Webster (2005, p. 107). It is noteworthy that a number of systems take a more liberal approach to organs of states’ capacity to enter into international arbitration agreements in comparison with domestic arbitration. France is a good example, where art. 2060 of the French Civil Code, which restricts public entities’ capacity to enter into domestic arbitration, has been held not to apply to international arbitration agreements, see Gaillard and Edestein (2001, p. 648). However, it is not always clear in the context of state commercial activity that a dispute is a commercial one and is thus properly subject to commercial arbitration i.e. that the decision to which the dispute relates is arbitrable. See Bühler and Webster (2005, p. 110 fn 148) where it is noted that some states that used to argue that public entities are not able to enter into (international) arbitration agreements now rather argue that the issues are not arbitrable. Also see Bühler and Webster (2005, p. 111). A state party may for example refuse to perform under a contract claiming that such performance will unlawfully fetter its executive discretion to act in the public interest. Whether an assessment of this argument is a commercial question is open to doubt. Even if such a dispute is a commercial one under a broad interpretation of commercial matters – see e.g. the definition of ‘commercial’ in the UNCITRAL Model Law on International Commercial Arbitration in Redfern and Hunter (1999, pp. 1–28) – questions remain about whether it is appropriate or desirable to have international arbitrators decide on what public interest demands on executive discretion are.


5

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PRIVATE AND PUBLIC IN LAW AND SOCIAL PRACTICE

As is evident from the discussion above, the legal control of state commercial activity raises questions about the legal distinction between the public and the private. This is one context where the two seem not only to meet but indeed to merge. While these questions are certainly not new – legal scholars have been grappling with the private–public distinction for a long time – I think the context of state commercial activity raises these questions in interesting ways and forces a careful reflection on the role of the distinction in legal methodology. Of particular interest in this context are the divergent responses from legal scholars to the treatment of the public–private distinction when thinking about regulatory models for the legal control of state commercial activity. These range from arguments pointing to the erosion and artificiality of the distinction78 to calls for increased emphasis on distinct legal treatment of the public and the private.79 One pertinent question is whether the continued debate or disagreement on the distinction between rules of private and public law is not in fact the strength of the dichotomy in the sense that it keeps a creative tension alive that constantly keeps the door open for new solutions to emerge. Applied to the context of state commercial activity this means that the constant uncertainty of whether rules of private law, say general contract law, should apply to the exclusion of or in addition to general rules of administrative law enriches the legal analysis by reminding us of the multiple legal perspectives on a single social practice. The challenge in this regard is to come up with a legal method that will allow substantive evaluation of a matter in terms of various legal perspectives without killing off or denying some of the options from the start or early on in the analysis. Looked at from a different angle, the legal control of state commercial activity provides a bridge between systems of private and public law along which notions from both can pass to the other side, thereby enriching legal responses in terms of both systems. I think this provides a helpful context to assess measures originating from the two systems side by side and to identify and evaluate shared and divergent principles and values. This may be helpful to break through the excessive conceptualism that often obscures similar aims within the two systems. Let me give an example from the South African 78 See Baxter (1984, pp. 62–3); Hoexter (2007, pp. 149–50); Seddon (2004, pp. 18–19; 38 and 325); Cockrell (1993, p. 227); Aronson (1997, pp. 52 et seq.); Cane (2003, p. 248). 79 Turpin (1972, pp. 99-100); Davies (2006a, p. 113; 2006b, 122; 2001, pp. 198–207).

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context. In South African administrative law reasonableness plays an important role as a standard for all exercises of public power. In labour law, fairness is a central principle against which employer conduct is measured. When administrative law and labour law converge in the context of public employment, as one instance of state commercial activity, the possiblity arises to assess whether these standards of reasonableness and fairness relate to the same basic concern with the exercise of power. Developing such understanding may consequently be extremely helpful in refining legal responses to the exercise of all forms of power. Furthermore, an understanding of a particular legal system’s core response to general societal concerns facilitates the comparative engagement with other systems, the value of which can easily be lost in conceptual differences. On a more substantive level, the bridge created between private and public law by legal control of state commercial activity can also assist in working out the application of human rights norms, too often viewed as either of a public law nature or originating from public law, in private legal relationships. The familiarity of private law with the legal forms used by the state to achieve public purposes in the context of state commercial activity can smooth the transition of these norms from exclusively public law application to general legal application. In South African law it is of some interest to note the ostensible difference in response to the direct application of public law norms, in the form of administrative law standards, to state commercial activity80 and the response to the application of public law norms, especially from the bill of rights, to mainstream private law conduct, that is, legal relationships between purely private subjects.81 If the former is experienced as less problematic, the question emerges as to whether administrative law can function as a medium for the translation of public law norms to private law settings. In Europe there is a development that seems loosely similar to this one, which relates to the issue of harmonization of private law. The story of EU public procurement control has been one of increasing harmonization cutting

80 It is now generally accepted that administrative law rules apply to state tendering in South Africa; see Chairperson, Standing Tender Committee and Others v JFE Sapela Electronics (Pty) Ltd and Others 2008 (2) SA 638 (SCA) at para. 19; Steenkamp NO v Provincial Tender Board, Eastern Cape 2007 (3) SA 121 (CC) at para. 21. 81 As Moseneke DCJ notes: ‘[C]ourts have shown remarkable slowness or perhaps reticence in allowing the fundamental rights or values of our Constitution to influence the law of contract through direct or indirect horizontality … courts often acknowledge their duty to develop the law of contract in harmony with the Constitution but stop short of embracing the consequences of contextual or purposive adjudication’, Moseneke Annual Public Lecture 2008 15–16.


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across the public–private divide.82 While harmonization of mainstream private law fields such as contract law remains highly controversial and a European Civil Code seems still far off,83 the high levels of harmonization of public procurement regulation in the EU is far less controversial and seems to me to be furthering commercial (legal) harmonization through the back door. While there is an undeniable public law dimension to state contracting, it should not be forgotten that such action is also of a private law nature. In fact, state commercial activity is increasingly looking more like the commercial conduct of any other significant market player and less of a uniquely public character. Given the high level of harmonization in EU public procurement law, one can ask what impact the hybrid characteristic of the legal control, that is, the addition of administrative law to the angle of approach, has in achieving such harmonization.

6

CONCLUSION

In summary, state use of commercial action raises two distinct concerns for administrative law. Firstly, increased levels of state commercial activity can be viewed as attempts by the state to recapture some of its power, which in its traditional political form is shrinking in favour of economic or market power – the state thus tries to gain market power. To the extent that administrative law is traditionally interested in control of political power and is not really geared to check economic power, administrative law will have to transform to pay much closer attention to economic form and power if it wants to continue its function of legally steering state power or exercises of public power. Secondly, traditional forms of administrative law, especially but not exclusively in common law systems, are simply not adequate to facilitate state participation in the market. Other, more commercial, forms will have to be developed or internalized within the administrative law framework if administrative law wants to remain relevant in structuring state action. The question in substantive law is thus how to structure the legal framework for state commercial activity in a way that facilitates the social reality of this phenomenon without distorting it; that is, a question of reflexive regulation. If the framework is an administrative law one, the administrator is in control of the relationship premised on public instruments of authorization and enforcement, which implies high levels of public involvement. If the framework is a

82 83

See Arrowsmith (2006b, p. 337). See Miller (2007, p. 378) and generally Hesselink (2006).

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private law one, the parties to the transaction are in control of the relationship on a notionally more or less level playing field to the exclusion of all others. The latter framework enables the parties to optimize their respective interests through the transaction; that is, a transaction will only occur on the terms that serve the interests of the parties to the transaction. The problem for the state is that it needs to adopt this latter framework if it wants to effectively compete in the (global) market, but in doing so it necessarily denies the complexity of its conduct and thereby undermines the possiblity for truly reflexive regulation. When I read the literature on the legal control of public procurement I often get the sense that the field is simply viewed as one of technicalities. Typical questions are: How is an organ of state to go about identifying the preferred bidders in a public tender process? To what level must the tender specifications be detailed in the bidding documents? What scope is there for post-tender negotiations? What procedure must be adopted vis-à-vis all tenderers following an award decision? This loses sight of the fact that the legal control of public procurement (and state commercial activity more generally) can provide us with important insights at much more general levels – such as to the legal nature of the state and its relationships, the role of judges in both controlling and facilitating state action, how to deal with multiple perspectives on and interests in a single legal action, how the various parts of the puzzle that make up the legal system – both in relation to substantive areas of law and institutional actors – relate to each other, and eventually also the relationship of law and social practice. I think that theoretical analysis of the legal take on state commercial activity can be of tremendous value in starting to think about some of these issues. As Matthew Flinders notes: ‘It may well be … that the boundaries of the state may offer valuable new civic governance arrangements in which members of the public can be reconnected to the public realm, no matter what type of institution delivers the service.’84 I think the area of state commercial activity, existing at the boundaries of the traditional state, offers us an interesting context to explore the responses of our legal systems to the complexity of our social reality.

REFERENCES Arnould, J. (2001), ‘French Public Contracts Law after the Reform of March 2001’, Public Procurement LR, 10, p. 324.

84

Flinders (2006, p. 239).


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Aronson, M. (1997), ‘A Public Lawyer’s Responses to Privatisation and Outsourcing’, in M. Taggart (ed.), The Province of Administrative Law, Oxford: Hart, pp. 40–70. Arrowsmith, S. (1992a), Civil Liability and Public Authorities, Winteringham: Earlsgate Press. Arrowsmith, S. (1992b), ‘Enforcing the EC Rules: The Remedies System in England and Wales’, Public Procurement LR, 1, pp. 92–118. Arrowsmith, S. (2006a), ‘Implementation of the New EC Procurement Directives and the Alcatel Ruling in England and Wales and Northern Ireland: A Review of the New Legislation and Guidance’, Public Procurement LR, 15, p. 86. Arrowsmith, S. (2006b), ‘The Past and Future Evolution of EC Procurement Law: From Framework to Common Code?’, Public Contract Law Journal, 35, p. 337. Arrowsmith, S., J. Linarelli and D. Wallace (2000), Regulating Public Procurement, Deventer: Kluwer Law International. Arthurs, H. (2006), ‘Who’s Afraid of Globalization?’, in J. Craig and M. Lynk (eds), Globalization and the Future of Labour Law, Cambridge: Cambridge University Press, p. 51. Atiyah, P.S. (1979), The Rise and Fall of Freedom of Contract, Oxford: Clarendon Press. Baxter, L.G. (1984), Administrative Law, Cape Town: Juta Bolton, P. (2007), The Law of Government Procurement in South Africa, Durban: LexisNexis Butterworths. Botha, H. (2009), ‘Refusal, Postapartheid Constitutionalism, and The Cry of Winnie Mandela’, in K. van Marle (ed.), Refusals, Transitions, and Postapartheid Law. Brown, L.N. and J.S. Bell (1998), French Administrative Law, 5th edn, Oxford: Clarendon Press. Bühler, M.W. and T.H. Webster (2005), Handbook of ICC Arbitration, London: Sweet and Maxwell. Cane, P. (2003), ‘Accountability and the Public/Private Distinction’, in N. Bamforth and P. Leyland (eds), Public Law in a Multi-layered Constitution, Oxford: Hart Publishing, p. 248. Choudhury, B. (2008), ‘Recapturing Public Power: Is Investment Arbitration’s Engagement of the Public Interest Contributing to the Democratic Deficit?’ Vanderbilt Journal of Transnational Law, 41, p. 775. Cockrell, A. (1992), ‘Substance and Form in the South African Law of Contract’, SALJ, 109, p. 40. Cockrell, A. (1993), ‘“Can You Paradigm?” – Another Perspective on the Public Law/Private Law Divide’, Acta Juridica, p. 227. Collins, H. (1999), Regulating Contracts, Oxford: Oxford University Press. Collins, H. (2004), ‘Regulating Contract Law’, in C. Parker et al. (eds), Regulating Law, Oxford: Oxford University Press. Davies, A.C.L. (2001), Accountability: A Public Law Analysis of Government by Contract, Oxford: Oxford University Press. Davies, A.C.L. (2006a), ‘English Law’s Treatment of Government Contracts: The Problem of Wider Public Interests’, in J.-B. Auby and M. Freedland (eds), The Public Law/Private Law Divide: une entente assez cordiale?, Oxford: Hart Publishing, p. 113. Davies, A.C.L. (2006b), ‘Ultra Vires Problems in Government Contracts’, LQR, 122, pp. 98–123. De Feyter, K. (2007a), ‘Introduction’, in W. Benedek, K. De Feyter and F. Marrella (eds), Economic Globalisation and Human Rights, Cambridge: Cambridge University Press, pp. 1–14.

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De Feyter, K. (2007b), ‘Localising Human Rights’, in W. Benedek, K. De Feyter and F. Marrella (eds), Economic Globalisation and Human Rights, Cambridge: Cambridge University Press, pp. 67–92. De Wet, J.C. and A.H. van Wyk (1992), Kontraktereg en Handelsreg, 5th edn, Durban: Butterworths. Ehlers (2006), ‘Verwaltung und Verwaltungsrecht im demokratischen und sozialen Rechtsstaat’, in H-.U. Erichsen and D. Ehlers (eds), Allgemeines Verwaltungsrecht, 13th edn, Berlin: De Gruyter. Flinders, M. (2006), ‘Public/Private: The Boundaries of the State’, in C. Hay, M. Lister and D. Marsh (eds), The State: Theories and Issues, Basingstoke: Palgrave Macmillan, pp. 223–47. Freedland, M. (1994), ‘Government by Contract and Public Law’, Public Law, 86, p. 86. Freedland, M. (2003), ‘Government by Contract Re-examined: Some Functional Issues’, in P. Craig and R. Rawlings (eds), Law and Administration in Europe, Oxford: Oxford University Press, p. 134. Furmston, M.P. (2001), Cheshire, Fifoot and Furmston’s Law of Contract, 14th edn, London: Butterworths. Gaillard, E. and J.A. Edelstein (2001), ‘France’, in F.-B. Weigand (ed.), Practitioner’s Handbook on International Arbitration, Munich: C.H. Beck, p. 648. Goodin, R.E. (2003), ‘Globalizing Justice’, in D. Held and M. Koenig-Archibugi (eds), Taming Globalization, Cambridge: Polity Press, pp. 68–92. Gurlit (2006), ‘Verwaltungsrechtlicher Vertrag und andere verwaltungsrechtliche Sonderverbindungen’, in H.-U. Erichsen and D. Ehlers (eds), Allgemeines Verwaltungsrecht, 13th edn, Berlin: De Gruyter Recht, pp. 685–759. Harlow, C. and R. Rawlings (1997), Law and Administration, 2nd edn, London: Butterworths. Harrison, G. (2004), The World Bank and Africa, London: Routledge. Hesselink, M.W. (ed.) (2006), The Politics of a European Civil Code, Alphen aan den Rijn: Kluwer Law International. Hoexter, C. (2007), Administrative Law in South Africa, Lansdowne: Juta. Kennedy, D. (1976), ‘Form and Substance in Private Law Adjudication’, Harvard LR, 89, p. 1685. Khoza, R.J. and M. Adam (2005), The Power of Governance, Johannesburg: Pan Macmillan and Business in Africa. Koenig-Archibugi, M. (2003), ‘Introduction: Globalization and the Challenge to Governance’, in D. Held and M. Koenig-Archibugi (eds), Taming Globalization, Cambridge: Polity Press, pp. 1–17. Liebenberg, S. (2008), ‘The Application of Socio-economic Rights to Private Law’, TSAR, p. 464. Lubbe, G.F. (2004), ‘Taking Fundamental Rights Seriously: The Bill of Rights and Its Implications for the Development of Contract Law’, SALJ, 121, p. 395. Lubbe, G.F. and C.M. Murray (1988), Farlam and Hathaway Contract: Cases, Materials and Commentary, 3rd edn, Cape Town: Juta. Marsh, D., N. Smith and N. Hothi (2006), ‘Globalization and the State’, in C. Hay, M. Lister and D. Marsh (eds), The State: Theories and Issues, Basingstoke: Palgrave Macmillan, pp. 172–89. McCrudden, C. (2007), Buying Social Justice. Oxford: Oxford University Press. McGrew, A. (1998), ‘The Globalization Debate: Putting the Advanced Capitalist State in its Place’, Global Society, 12 (3), p. 299.


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Miller, L. (2007), ‘The Common Frame of Reference and the Feasibility of a Common Contract Law in Europe’, Journal of Business Law, p. 378. Ministries of Finance and Public Works (1997), ‘Green Paper on Public Sector Procurement Reform’, South Africa Government Gazette, No. 17928 of 14 April. Mitchell, J.D.B. (1954), The Contracts of Public Authorities: A Comparative Study, London: G. Bell & Sons. Moseneke, D. (2008), ‘Transformative Constitutionalism: Its Implications for the Law of Contract’, Annual Public Lecture delivered by Justice Moseneke at the University of Stellenbosch on 22 October, available at http://www.mymaties.com/ portal/page/portal/law/index.english/news/20081, accessed 14/11/2008 (‘Moseneke Annual Public Lecture 2008’). Ndebele, N.S. (2003), The Cry of Winnie Mandela, Cape Town: David Philip. Pakuscher, E.K. (1971),‘Judicial Review of Executive Acts in Economic Affairs in Germany’, Journal of Public Law, 20, p. 273. Peters, B.G. and J. Pierre (2006), ‘Governance, Government and the State’, in C. Hay, M. Lister and D. Marsh (eds), The State: Theories and Issues, Basingstoke: Palgrave Macmillan, pp. 209–22. Pikalo, J. (2007), ‘Economic Globalisation, Globalist Stories of the State, and Human Rights’, in W. Benedek, K. De Feyter and F. Marrella (eds), Economic Globalisation and Human Rights, Cambridge: Cambridge University Press, pp. 17–38. Quinot, G. (2007), ‘The Judicial Regulation of State Commercial Activity’, unpublished LLD dissertation, Stellenbosch University. Quinot, G. (2008a), ‘Public Procurement’, Juta’s Quarterly Review of South African Law, 2, para. 2.4. Quinot, G. (2008b), ‘Worse than Losing a Government Tender: Winning It’, Stell. LR, 19, p. 101. Redfern, A. and M. Hunter (1999), Law and Practice of International Commercial Arbitration, 3rd edn, London: Sweet and Maxwell. Seddon, N. (2004), Government Contracts, 3rd edn, NSW: The Federation Press. Sørensen, G. (2004), The Transformation of the State, Basingstoke: Palgrave Macmillan. Sørensen, G. (2006), ‘The Transformation of the State’, in C. Hay, M. Lister and D. Marsh (eds), The State: Theories and Issues, Basingstoke: Palgrave Macmillan, pp. 190–208. Stiglitz, J.E. (2003), ‘Globalization and Development’, in D. Held and M. KoenigArchibugi (eds), Taming Globalization, Cambridge: Polity Press, pp. 47–67. Strange, S. (1996), The Retreat of the State, Cambridge: Cambridge University Press. Sutton, D. and J. Gill (2003), Russell on Arbitration, 22nd edn, London: Sweet and Maxwell. Teubner, G. (1988), ‘After Legal Instrumentalism? Strategic Models of PostRegulatory Law’, in G. Teubner (ed.), Dilemmas of Law in the Welfare State, Berlin: De Gruyter, pp. 299–325. Turpin, C. (1972), Government Contracts, Harmondsworth: Penguin. Turpin, C. (1982), ‘Public Contracts’, in A.T. Von Mehren (ed), International Encyclopedia of Comparative Law: Contracts in General, VII, Tübingen: Mohr Siebeck; Leiden and Boston: Martinus Nijhoff, pp. 28–31. Turpin, C. (1989), Government Procurement and Contracts, London: Longman, pp. 85–90. Van der Merwe, S. et al. (2004), Contract: General Principles, 2nd edn, Lansdowne: Juta.

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Van der Walt, A.J. (2005), ‘Transformative Constitutionalism and the Development of South African Property Law (Part 1)’, TSAR, p. 655. Van der Walt, A.J. (2006), ‘Transformative Constitutionalism and the Development of South African Property Law (Part 2)’, TSAR, p. 1. Van der Westhuizen, J. (2002), Adapting to Globalization: Malaysia, South Africa, and the Challenge of Ethnic Redistribution with Growth, Westport, CT: Praeger. Wade, W. and C. Forsyth (2004), Administrative Law, 9th edn, Oxford: Oxford University Press. Weigand, F.B. (ed.) (2002), Practitioner’s Handbook on International Arbitration, Munich: C.H. Beck. Woolf, H., J.L. Jowell and A.P. Le Sueur (2007), De Smith’s Judicial Review, 6th edn, London: Sweet and Maxwell. Zimmermann, R. (1992), The Law of Obligations, Cape Town: Juta.

PART IV

Corporate governance

8. Globalization: selected developments in corporate law Bas Steins Bisschop* 1

INTRODUCTION

The present globalization is largely based on the past. This is particularly true in the corporate world, where corporations are engaged in business on a global scale whilst maintaining their national and traditional organizational form. Concentrating on the organizational form of doing business it is remarkable to note that, notwithstanding the general and systematic differences in national jurisdictions, in respect of the corporate organization and governance of the national corporations the commonalities are more manifest than the differences. In this chapter we will review these commonalities. The corporate organization may have appeared to be insufficient to face globalized crises such as the current credit crunch, which has led from a US financial problem to a global economic crisis. Nevertheless, there seems to be no reason to fundamentally amend or change this more or less common form of corporate organization in order to prevent the reoccurrence of similar crises. At the end of this chapter we will cautiously explore whether the South African transition from apartheid to a modern democracy presents lessons learned that can be of use in resolving global crises. In Section 2 we will discuss the historical foundation of the corporate organization which can be traced back to the Netherlands in 1602. In that year the Dutch invented a corporate system in which the entrepreneurial activities were separated from the financing of the enterprise. The provision of capital served to finance the business of the corporation without the investors being fully exposed to the commercial risks incurred by the corporation. The investors became shareholders providing capital to the corporation, enjoying limited liability, but at the same time having the benefit of sharing in the profits and wealth of the corporation. * Prof. Dr. Bas T.M. Steins Bisschop is professor of corporate law and corporate governance at the universities of Maastricht and Nyenrode and a solicitor in The Hague.

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In Section 3 we will establish that this form of corporate organization has survived in the major jurisdictions of our time. In particular we will review the features that characterize the similar forms of corporate organization in the US, the UK, France, Germany, Italy, Japan, Brazil, Russia, India and China, thereby drawing an almost global picture of the corporation. In this review we will not concentrate on the differences between the various jurisdictions, but concentrate on the common characteristics in order to verify whether the original corporate model of 1602 survived into the present time. In this section we will conclude that indeed there appears to be a basic organizational form of the modern corporation that is shared in the jurisdictions just mentioned. Notwithstanding these shared characteristics, there are also marked differences. These are discussed in Section 4. One aspect thereof is the distinction between the so-called shareholder and stakeholder models. In the first model the goal of the corporation and thus the corporate governance is primarily linked to serving the interests of the shareholders, whilst in the latter model the interests of the other constituencies of the corporation are taken into account as well. These differences do not validate, however, a conclusion that the governance of the corporations existing in these various jurisdictions materially differs from jurisdiction to jurisdiction. Even in this respect there is a global similarity in the corporate form of doing business. In Section 5 we will discuss some of the main challenges to the corporate system described in the previous sections. Although there is a general trend to react to these challenges by imposing regulation, it should be noted that the law, or regulation, cannot be the sole remedy to corporate misbehaviour or crises. Additionally, we will conclude that the challenges do not seem to require a fundamental change of the corporate form or governance of the modern firm. There are inherent limitations to the effect of legislative action and reaction. Some of these are summarized in Section 6, where the concept of integrity is also discussed. In order to overcome these limitations to the resolution of the current global economic crisis, in Section 7 the process to achieve such a resolution is defined as a transition from one period into another. This approach makes possible a cautious comparison with the transition that took place in South Africa after the abolition of apartheid. An equally cautious conclusion of this chapter is that no major or fundamental changes are to be expected in the global corporate organization or governance, but also that there may be some lessons learned from the South African transition period. Some of these lessons may be useful tools in the efforts to improve corporate governance, not only through regulation but also by introducing ‘integrity’ as a cornerstone for corporate organization and good governance in order to avoid recurrence of the present global economic crisis.

Selected developments in corporate law

2

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THE VOC: HISTORY AND PRESENT1

The VOC (Verenigde Oost-Indische Compagnie), founded in 1602, was the first institutionalized trading company to have many of the attributes of the present public limited company. The VOC participated independently as a legal entity in socioeconomic affairs and its long-term objective assumed that the administrators and financiers alike would come and go. Compared with similar legal forms inside and outside the Republic of the Netherlands prior to 1602, the VOC’s strategy was oriented to far larger scale and longer term business activities. The main focus was no longer on a specific route for one or a few expeditions to distant shores, but on monopolizing, initially with the help of government, the trade with the East for the long term. 2.1

Foundation of the VOC

Even before the foundation of the VOC, people in several countries had thought about how to spread the risks of business activities. In the late sixteenth century, the Amsterdam merchants had to acknowledge that the extremely lucrative trade in goods from the East was dominated by others. Holland and Amsterdam had no trading post of their own on the trade routes, and they had to depend on others who did, such as the Portuguese who defended their trading interests well with the support of their government.2 The geopolitical relations of the time, including the fact that the Netherlands was at war with Spain, made it impossible to acquire independent international concessions for undertaking (protected) expeditions. Amsterdam was forced to restrict itself to the role of mere intermediary, without access to the large profits being made with the import of goods, especially spices. The Amsterdam administrators then decided to end the situation, and ultimately to create a double monopoly. They wanted both international domination of the trade in spices from the East and Amsterdam to be the definitive European trading city. Achieving these objectives necessitated sailing and securing the trade routes. For this purpose in 1602 a company was formed which obtained a patent from the Republic giving the mandate for a trading monopoly for the East. The Republic provided constitutional protection to guard the national interest embodied in the Republic’s trading interests. The corporate interest would therefore appear to coincide with the national interest in a certain sense. The major initiators of the VOC were the merchants, in particular those from Amsterdam, rather than the Republic or the individual States.

1 2

Steins Bisschop and Wiersma (2002, pp. 37–54). Van Dillen (1958, p. 12).

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A novelty, at any rate in the Republic, was that a general appeal was made to the public for funding. Financial participation rights called actiën were issued to the participants. The name actiën is derived from the expected entitlement (action) to dividend and the prospect that the capital could be recovered after lapse of the originally intended investment period of ten years.3 The actiën were later redefined to become more tradable. The trade that followed was lively. The VOC was not a partnership of investors, traders or businessmen, but an independent entity with legal personality. The VOC therefore participated independently in commercial life and pursued its own interests and not primarily the interests of its financiers. These own interests included (the total of) the interests of those involved in the legal entity, which we today would refer to as stakeholders, as well as the interest in the continuity of the business operated by the legal entity founded for the long term. 2.2

‘Act of Magic’

An important part of the VOC’s social and financial success can be attributed to the chosen new legal structure with its capital supply from somewhat arbitrary participants distinct from those who conducted the corporate business. The VOC’s corporate model was based on a separation between the functions of business and undertaking on the one hand and financing on the other hand. This separation resulted in a division of powers, rights, interests and entitlements. From the VOC’s viewpoint, the supply of share capital by the participants meant it could permanently use the capital acquired to finance the enterprise, not through loan capital but by using it without any repayment obligation. The enterprise had the capital at its almost free disposal as the capital contributors, the investing shareholders, had no right to call or reclaim their capital contribution. However, from the investors’ viewpoint, this capital supply would not lead to a lasting loss of liquidity (up to the amount of the capital contribution), because the shares in the VOC could be sold without the VOC being involved. This structure, with this form of financing, therefore resulted in permanent liquidity for both the VOC and the investor. American literature refers to this as an ‘act of magic’.4 The way in which the VOC was financed through the contribution of share capital strongly resembles the way in which the modern corporation is financed.

3 4

Which right the investors ignored as actiën traded above par. Lowenstein (1998, pp. 90–91). Volmer also draws attention to the innovative element of the VOC’s permanent capital in Volmer (2003).


2.3

215

Shareholders’ Rights in Relation to the Corporate Organization

Although the shareholders have no right to reclaim their investment from the corporation, they have the right to control their investment through essential shareholders’ rights. The nature of these rights and how they can or may be exercised are the quintessence of shareholdership and of the debate on the subject both now and at the time of the VOC. The current corporate governance debate and its counterpart in the early decades of the seventeenth century are both concerned with the desirable corporate legal structure, which is based on a dualistic system in which the board is charged with the management of the company and the investors monitor the company’s performance through the exercise of their controlling rights. The shareholders’ rights are exercised in the context of the organizational form of the enterprise. It is interesting to note that the organizational form of the VOC does not fundamentally differ from the form adopted by contemporary firms. As did the VOC from 1602, the modern corporation may be considered to have characteristic features, which are described in a comparative review of the corporate form in certain jurisdictions.5 These features are legal personality, limited liability, delegated management under a board structure, transferable shares and investor ownership. Of these, only legal personality requires intervention by the legislator, who must specifically provide for the award of this status to corporations. The other features are generally also covered in national legislation, but in theory they could also be contracted between the corporation and the relevant party with whom the corporation is engaged in business. In respect of these elements the law serves as a default system on which the parties may rely but from which they may also deviate. Legal personality allows a firm to conduct business in its own name and at its own risk and on its own account. The statutory privilege of legal personality permits the firm not only to engage in business independently from its shareholders but also to have and own assets and incur liabilities. Limited liability therefore is the complementary characteristic of legal personality. In the corporate organization, the providers of capital, the shareholders, and those who are responsible for the usage thereof, the board, have the advantage of not being liable for the debts incurred by the corporation in its own name. Delegated management under a board structure is closely connected to the previous characteristics, as the independence of the corporation is the result of the shareholders having ceased to conduct business themselves and having delegated doing business – and therefore incurring risks – to the legal person,

5

Kraakman et al. (2009).

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and of the fact that the shareholders have not delegated unconditionally but have secured control through the functioning of a board. Transferable shares are required to maintain the separation between the corporation and its shareholders. In Section 2.2 of this chapter we referred to the almost magical function of the capital contributions by shareholders, as this form of financing results in permanent liquidity for both the corporation and the investing shareholder. The corporation may use the contributed capital. The contributing shareholder, however, does not lose but maintains liquidity in about the amount of the contribution. The maintenance of the liquidity of the capital contribution is dependent on the tradability of the shares. In public companies such liquidity is maximized. In joint venture companies the liquidity is almost absent. Investor ownership is a somewhat misleading term. ‘Ownership’ is an absolute right to administer and dispose of the object of ownership. It is clear that shareholders have no such rights in respect of a corporation, let alone its assets. The term ‘ownership’ is a remnant of the times before the separation of financing and managing and should be translated into the term ‘control’. The main control powers, and therefore the essential decision rights of the general shareholders meeting, are the powers to appoint and dismiss management (including the power to instruct management), to adopt the annual accounts (including the profit and the profit distribution), to decide on any matter concerning the capital of the corporation (including issuance and redemption of shares and decrease of capital), and finally, to determine ‘the rules of the game’ (including amending the articles of association or the corporate statute and the decision to liquidate the corporation). In almost all jurisdictions under review, corporate law provides that these are exclusive rights of the general shareholders meeting. 2.4

Conclusion

The foundation of the VOC was inspired primarily by the strategic economic considerations of its founders. Other motives had to do with trade policy. The interests of the founders, the later shareholders, were therefore paramount. However, the initial focus on making profit from the trade with the East gave rise to other and broader objectives, resembling the objectives of present multinational corporations. During the life of the VOC, the investors’ control function was strengthened following incidents similar to today’s bookkeeping and other corporate ‘scandals’. The VOC was also oriented to continuity, so as to serve the interests of the participants and the public interest. This then also implied that the interests of a much wider circle of parties involved in the success of the VOC had a strategic influence on the decisions of the VOC. The history of the VOC ended almost two centuries after its incorporation,


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in the period 1795–98, for commercial and political reasons which foreshadowed today’s commercial and political situation, including short-term speculation, over-leveraging of equity capital, over-valuation of assets, lack of supervision by the investors, uncontrolled agency problems, inefficiency on the part of the supervising governmental authorities and so on.6 The end of the VOC, however, did not mark the end of the corporate form invented by its founders. The five characteristic features described above in Section 2.3 have continued to exist in the modern corporations of the jurisdictions inspected in the comparative review,7 namely the USA, the UK, Germany, France, Italy and Japan. These countries represented the major players in the international and global economy until recently. In this comparative survey we also include the emerging economies of the BRIC countries, Brazil, Russia, India and China in order to establish whether or not there is a fairly global form of corporate organization taken by modern corporations.

3

THE BRIC COUNTRIES

In the following subsections we will briefly review the corporate organization of each of these jurisdictions in a nutshell. 3.1

Brazil

The financial crisis of the beginning of the twenty-first century, which has expanded into a global financial and economic crisis, also severely hits the developing countries including Brazil. The Brazilian government has taken action in order to protect the national interests and has among many other initiatives asserted that Brazil refuses to be ‘mere coffee drinkers’ on the sidelines of the richer nations’ meetings.8 Brazil actively engages in initiatives to restructure organizations such as the International Monetary Fund and the World Bank to give the developing nations more of a voice in decisionmaking. Emerging economies such as Brazil have suffered during the crisis as a result of falling commodity prices and their dependence on exporting these commodities. It is in the interest of Brazil not to be victimized by import reductions and trade protectionism employed by rich countries to overcome their own national crises. The severity of Brazil’s problems is a test of the tenability of its corporate system. 6 7 8

Frentrop (2002, p. 121). Referred to in Section 2.3. Partlow (2008).

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In this connection it should be established whether the Brazilian organizational corporate structure resembles the structure of the corporations existing in the six jurisdictions which formed the subject of the comparative research mentioned above. It appears that the corporate organizational form in Brazil is largely similar. The flaws in the functioning of the corporate form are addressed in the corporate governance discussion which concentrates on the position of the minority shareholders as principals of the majority shareholders, often representing families, and the resulting need for more transparency and for access to legal means to protect their interests.9 The issues raised in the discussions regarding the revision of the Brazilian corporate governance code confirm the trend to maintain the structural organizational form and to improve it in the areas of transparency and accountability.10 3.2

Russia

The global crisis of the present times has hit the republic of Russia perhaps even more. In the early 1990s, Russia terminated abruptly the then existing form of doing business through state-controlled entities without private ownership. This change was effected by mass privatization which began shortly after the raising of the Iron Curtain and the fall of the Berlin Wall in 1989. The privatization took the form of distributing to Russian citizens socalled ‘vouchers’ which reflected ownership rights in the former state enterprises. These vouchers were distributed in the privatization framework and entitled the holder to proportional ownership rights in the privatized entities. Those entities were formed as capital corporations resembling the AngloAmerican style corporation.11 The privatization attempted to create a corporate system with dispersed shareholding, so shifting state ownership into popular ownership. The inevitable conclusion must be, however, that this attempt has failed. Instead of widespread ownership the shares in the privatized corporations’ ownership passed to the hands of oligarchs who engaged in egregious selfdealing, enriching themselves into unheard-of wealth. The oligarchs became ‘kleptocrats’ and the government did little or nothing to control matters but allowed corruption, unfair practices, bank and government defaults on both

9 10

Mallin (2004, p. 200). The Instituto Brasileiro de Governança Corporativa (IBGC) was founded in 1995 and is the greatest advocate of the practices and debates concerning corporate governance in Brazil. In 2004 it issued the third revised and enlarged edition of the Brazilian code. Visit http://www.ibgc.org.br to download the code and for more information. 11 Black et al. (2000, pp. 1731–1808).


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dollar and ruble denominated debt and large-scale tax fraud. Russia’s wealth in terms of commodities, and especially oil, allowed the system to continue from the start of the privatization until the credit crunch, as a result of which Russia was battered by the combined effects of the fall of the oil price, the depreciation of the ruble, and the unavailability of credit. This is a very brief summary of events that are widely described in the literature, of which only a part is used in the present research, as our main focus here is not on the developments in Russia after the credit crunch but on the analysis of Russia’s system of corporate law and on the question of whether or not corporations in Russia have the same or similar characteristics as the corporations existing in the jurisdictions which formed the subject of the comparative research mentioned above. The corporate legislation in Russia aimed to follow the European system and in particular the German model.12 The resulting corporate structure for open and closed joint-stock corporations and for closed limited liability corporations exhibits the aforementioned characteristics,13 but the nature of the Russian companies differs markedly from the nature of the European corporations, largely due to the circumstances just mentioned and because of the undeveloped stock market, a weak banking sector and financial services industry and state interference resulting from expanded regulatory authority.14 3.3

India

The public limited company is the main business form in India and ownership is predominantly in the hands of corporates, wealthy families and – increasingly – institutional investors.15 The legal system introduced in India on the occasion of India becoming an independent nation in 1947 to a large extent consisted of a common law system inherited from the British. In the period until the reforms in 1991 the government implemented an agenda of measures which could be qualified as ‘socialist’.16 In 1991 liberalization occurred, replacing the tight regulatory framework for corporations and central planning policies by freedom of corporations to manage their own affairs. The corporate environment, including the securities market, was modernized to facilitate the emergence of India as a major player on the global market. Additionally, the Confederation of Indian Industry (CII) published a brochure with the title

12 13

Burmistrova (2006, p. 126). Institute of Corporate Law & Corporate Governance (2007). See also PricewaterhouseCoopers (2009, pp. 31–2). 14 Burmistrova (2006, pp. 123–5). 15 Mallin (2004, p. 198). 16 Armour and Priya (2008, p.14).

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‘Desirable Corporate Governance: a Code’. Its purpose was to ‘develop and promote a code for Corporate Governance to be adopted and followed by Indian companies, be these in the Private Sector, the Public Sector Banks or Financial Institutions’.17 Subsequently there was the institution of a corporate governance commission, reporting in 2000. The key aspects of corporate governance as identified in this report are accountability, transparency and equal treatment of shareholders, which basically conform to the corporate governance principles used in the jurisdictions initially reviewed.18 It is interesting to note that India was less affected by the global financial crisis than other emerging economies such as Brazil. This may be due to a combination of factors. The tight regulation of banks and external capital transactions under the oversight of the reserve Bank of India is mentioned as an explanation why the investment of India’s capital in ‘toxic assets’ is relatively low. India’s banks seem to remain in a relatively sound financial position. On the other hand, there is a marked withdrawal of investments, especially by US firms, and a sharp decline in the demand for goods and services. It is expected, however, that India will continue to see a rather sustainable growth.19 The conclusion in respect of India is therefore that the corporate law system is based on the Anglo-Saxon tradition, that the effects of the financial crisis have not resulted in an alteration of the system and that India’s corporate form will continue to exhibit the commonalities also visible in the jurisdictions initially reviewed. 3.4

China

Of the emerging economies discussed in this chapter China is the largest. The developments in China during the last decades have been exceptional and should also be seen against the background of the ancient history of the country. Prior to modern times China was undisputedly a, if not the, global leading economy. This position was lost in the course of the seventeenth century and China lagged behind the Western world and did not participate in the industrialization process. It maintained a feudal system and agricultural rather than industrial considerations dominated the national policies. In the period from the beginning of the twentieth century until 1949 the modernization of the Chinese model included the establishment of Chinese corporations and the launching of a Company Law in 1904. After the transition of power to the

17 18 19

Kumar in his foreword for the Confederation of Indian Industry (1998, p. 1). Mallin (2004, p. 198). Panagariya (2009).


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communist party in 1949 the economy changed into a planned economy with no room for private ownership or other features of the market economy. There were nationalizations and generally enterprises were state owned and the economic activity took place in a planned economy dominated by the state. Gradually and in line with the developments in other socialist countries, the notion of underperformance, inefficiencies and economic stagnation resulted in a gradual change toward a market economy as from the late 1970s. It was only in the late 1990s that the changes were expedited by a reform of stateowned enterprises into corporations which adopted a more or less Western style. This coincided with law making, the creation of stock exchanges and widespread corporatization. Notwithstanding these developments the State continued to be the owner of the (shares in the) corporation, hindering efficiency and creating conflicts of interest at shareholder and managerial levels. These effects were challenged by introducing modern corporate governance mechanisms without however departing from the concept of a major if not dominant role of the State. The path dependency of the developments in China dictated gradual steps and adaptation in implementing these corporate governance measures whereby the Japanese and German models were seen as a yardstick.20 There are, however, recent developments and structural changes to the Chinese economy which have accelerated since WTO accession in 2001. Competition has increased, government policy is favouring and facilitating industry by easing regulation, whilst the programme of privatization of stateowned enterprises continues. In China, a new Anti-Monopoly Law took effect on 1 August 2008. It is based on various European models and that of the United States. However, there are some Chinese characteristics that evidence the important socialist heritage of China’s largely market economy. Article 4, for example, provides that ‘the State formulates and implements competition rules compatible with the socialist economy, strengthens and perfects macro regulation and control, and completes a unified, open, competitive and orderly market system.’21 The new law is likely to be a valuable tool and protection for multinationals as well as domestic companies to ensure healthy competition in the Chinese market. The conclusion in respect of China is therefore that the corporate law system is based on the country’s own history. The dominant role of the state continues although it is diminishing. There is increased acceptance of corporate governance concepts which are not uncommon in the jurisdictions

20 21

See Mallin (2004, pp. 183–8). Wang (2007).

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initially reviewed. There are marked differences22 between China and these jurisdictions and the other BRIC countries, but convergence23 of the Chinese corporate practice towards the common elements of the corporate systems of these jurisdictions and the other BRIC countries is visible. 3.5

Conclusion

In this section we have verified whether the commonalities underlying the corporate form in the USA, the UK, Germany, France, Italy and Japan are also the commonalities underlying the corporate form in the BRIC countries. We found these commonalities in Brazil and India and to a lesser extent in Russia. China has a corporate system that is entirely different from the other jurisdictions under review, but it is unlikely that the other jurisdictions will be affected by the Chinese system, whilst it may be expected that in the future the corporate governance developments in China, including the orientation on the Japanese and German structures, will show a convergence of the Chinese model towards the common characteristics underlying the corporate form in the other jurisdictions. The jurisdictions dominating the global economy display organizational forms which are similar. This means that the term ‘globalization’ applies in terms of corporate organization. The current credit crunch which has led to the financial and economic crisis equally has a global nature. Any solution to the crisis is therefore likely to be found, at least partly, in global remedies. Corporate law, however, is typically focused on national jurisdictions. A further analysis of the common organizational form of the corporation may therefore assist in finding multi-jurisdictional and possibly global tools that can be used in all jurisdictions. On the other hand, the consistency of the global corporate system identified in the preceding sections could be challenged by national cures or measures in answer to the present crisis. In the following section we will find that also in respect of governance in the national corporate forms there are global similarities.

4

THE CORPORATION AND ITS STAKEHOLDERS

Against the background of these important global commonalities in the corporate form of doing business, it is interesting to also highlight the roles and 22 Olaerts states that ‘Although Chinese Company Law has recently been revised and now contains provisions which can be found in most other jurisdictions, it is unique in its compilation’, Olaerts (2009). 23 See Wang (2008).


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responsibilities of certain of the stakeholders of the corporation. The discussion hereof is required in order to find a corporate law basis for the subsequent discussion of the causes of the current credit crunch which has led to a global financial and economic crisis. 4.1

The Main Players in the Corporate Organization

A summary review of the stakeholders in the corporate organization teaches in the first place that the organizational form is based on the initial capital contribution. The corporate law systems of the jurisdictions under review indicate that the shareholders are to be considered in their role as individual providers of capital and as members of the corporate body formed by the shareholders, namely the general meeting of shareholders. In the second place, the jurisdictions under review provide for statutory arrangements for the role, rights and responsibilities of the board to which corporate body management has been delegated by the shareholders. These statutory provisions indicate that the main tasks of the board are to take responsibility for the strategy of the corporation, to represent the corporation towards third parties and to conduct the day-to-day business. Management and the shareholders meeting are therefore the main corporate bodies. Of course there are also other corporate bodies such as the supervisory board in two-tier jurisdictions, shareholders meetings of special classes of shares, representative boards of shareholders and other possible entities. The corporation is embedded in an environment that is not dominated by shareholders and board members alone, but also by other stakeholders. These other stakeholders are in the first place the creditors, including the workers, customers, suppliers, financiers and others who are directly involved in the operation of the corporation. In order to provide protection against misuse of the privilege of limited liability by management’s opportunistic behaviour, the corporate law of each of the jurisdictions under review provides for creditor protection. Creditor protection could be considered the ‘flipside’ of limited liability. There are, however, also other stakeholders who do not enjoy protection under corporate law. Corporate existence may have and generally does have impact on social and environmental interests. The environment, local communities and society at large could also be considered ‘stakes’ and interest groups representing these stakes are therefore often also included in the term stakeholders. 4.2

Shareholder and Stakeholder Models

The shareholder and stakeholder models can be viewed as competing

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approaches for management.24 In the Anglo-Saxon tradition the interests of the shareholders are generally deemed to be the parameter to determine corporate policy. The equally traditional view in the continental European jurisdictions is that the shareholders’ interest is not dominant and that the interests of other stakeholders should be considered as well. There is debate as to whether there is convergence between the two models and, if so, in which direction. The shareholder model assumes that the firm is primarily an aggregate of individuals united by a set of contracts. The characteristic element of legal personality, referred to above and permitting the firm to own assets and act independently from its constituencies, receives less emphasis and draws on the work of Ronald Coase.25 The shareholder model focuses on the maintenance or enhancement of shareholder value, accepting at the same time that the interests of the other stakeholders are well served by this emphasis. The stakeholder model does not concentrate on the ultimate interests of shareholders, but defines the firm as having a multi-ends purpose consistent with the common good. The firm is to provide sustainably goods and services with profit, at the same time satisfying legitimate stakeholder interests. These interests consist of the interests of managers, employees, suppliers, clients, the environment, the local community, society at large and perhaps also those having an interest in ‘corporate social responsibility’.26 When analysing the differences, and possible similarities or overlaps, between the models, the jurisdictional backgrounds and history in which specific corporate laws and national jurisprudence originated should be discounted. This is particularly true when discussing the similarities in the characteristic corporate forms in terms of key common elements of the corporation in the jurisdictions mentioned in Sections 2 and 3. In our exploration of possible global traits of the corporate form, this path dependency should be taken into account in order to prevent seemingly obvious differences being established whilst such differences do not relate to structural variances but can be explained by aspects of legal culture and the persistence of doctrine.27 4.3

Convergence between these Models?

Given the aforementioned competition between the two models it is relevant to explore the question of whether or not one of these models prevails or is likely to prevail in the present global circumstances. If such hierarchy is not 24 25 26

Melé (2008, p. 2). Coase (1937, pp. 386–405). See for an interesting connection between the shareholder and stakeholder models, implying a definition of both models, Melé (2008, pp. 13–16). 27 Gelter (2008).


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found the question arises as to whether the models will continue to exist separately or are likely to develop in such a manner that the differences become less relevant and that the systems converge and exhibit the same or similar characteristics. As mentioned above, the shareholder model places less emphasis on the characteristic element of legal personality and regards the firm as a means in the hands of shareholders to optimize their value proposition. The model is based on the concept that business activity is to be conducted through the firm if this is economically beneficial to its shareholders. The business activities should not be organized in the form of a firm when the production of goods and services can be achieved at lower costs through direct contracting between the customer and the various producers. When the costs to contract in the open market for the production of these goods and services, the transaction costs, exceed the costs when the production is internally organized through the interposition of the firm, it is economically efficient to conduct business through the firm.28 These Coasian attributes of the firm explain the focus on shareholder value as the paramount and ultimate beneficiary of the business activity which still survives in the present economic thinking. A proponent of the shareholder value model is found in Milton Friedman in his famous article in the New York Times in 1970 stating that the responsibility of business is to make profit and that the social responsibility of business is to increase profit for the benefit of shareholders as owners of the business.29 Other advocates of the supremacy of the shareholder model are Hansmann and Kraakman, who speak of the ‘triumph of the shareholder-oriented model of the corporation’ on the basis of primarily legal arguments.30 On the basis of primarily economic arguments Jensen holds that the debate over shareholder value maximization versus stakeholder interest ‘is often falsely framed as stockholders versus stakeholders’ and that the real debate is about the question of whether the firm should have a ‘single-valued objective’.31 On the basis of the example that it is logically not possible to serve both the goal of maximizing profit and increasing market share he concludes that managers cannot serve two masters in the form of shareholders and stakeholders. He rejects in strong words the stakeholder theory and maintains that any expenditure by the firm should meet the condition that long-term value is added to the firm to the benefit of the shareholders. On the other side of the debate there are arguments that validly question the theory of shareholder primacy. A representative from the Anglo-Saxon 28 29 30 31

Supra footnote 25. Also see Berle and Means (1933). Friedman (1970). Hansmann and Kraakman (2001, pp. 439–68). Jensen (2001, pp. 297–317).

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tradition32 has advanced propositions rejecting the ownership argument for shareholder primacy, stating that shareholders own shares and not the assets of the corporation. Although shareholders are the residual claimants or risk bearers, they are only one of the several groups that have such rights. Strict shareholder primacy may be inefficient and discourage other stakeholders from making their contribution, whilst such a contribution may be essential for the firm’s success. At the same time it is recognized that shareholder primacy does resolve, as a second-best solution, the problem of accountability of the directors. Directors can be held accountable on the basis of the stock price, but it is difficult if not impossible to hold them accountable when the task is formulated as serving the interests of all constituencies of the firm. Nevertheless empirical evidence indicates a tendency away from the shareholder model and into the direction of the stakeholder model. The stakeholder primacy is widely accepted in continental Europe. In certain jurisdictions the model is embedded in the statutory corporate form, such as in Germany and the Netherlands where co-determination by workers is assured in their direct or indirect participation in the formal governance of the firm.33 Against the background of the credit crunch and the economic crisis resulting therefrom, the claims for supremacy of the shareholder model should be reconsidered. Shareholders, and – in recent years – in particular activist shareholders such as hedge funds, have taken a short-term view and exercised shareholders’ rights in order to serve such interests, at the same time aligning the interest of management with such short-termism. The resulting lack of transparency in combination with leveraging of equity capital in an extreme form was one of the reasons for the credit system coming to a halt and for the subsequent outbreak of a global general economic crisis in 2008. Of course, shareholders suffered losses, but the pith is more in the damaging effects of the crisis on the interests of other stakeholders, and the pretence that shareholders’ control disciplines management has gone silent. It is for this topical reason that in present times the resolution of the crisis in terms of corporate governance is not based on the shareholders’ primacy but more on taking due account of stakeholders’ interests. It is unclear whether this implies a clear choice for the one or the other model. Perhaps the developments of corporate law in the UK in respect of the revision of the Companies Act in 2006 indicate that there is a convergence between the two competing models without the need to declare the victory of one of these models.

32 33

See Stout (2002, pp. 1189–1209). See Baums and Scott (2005).


4.4

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The Enlightened Shareholder Model

The revised Companies Act 2006, s.172(1) provides: A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to (a) the likely consequences of any decision in the long term; (b) the interests of the company’s employees; (c) the need to foster the company’s business relationships with suppliers, customers and others; (d) the impact of the company’s operations on the community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct; and (f) the need to act fairly as between members of the company.

Prima facie, this newly introduced provision seems to indicate that British corporate law adopts the stakeholder model. This conclusion, however, should be nuanced. In the first place, the common law tradition dictates a duty of the directors to act in the best interests of the company, whereby the term ‘company’ should be put on the same footing as ‘members’ or ‘shareholders’. This dominant position of the shareholders’ interests has not been negated by the amendments to s. 172(1). The reference to the stakeholders’ interests set out in paragraphs a–f of this section serves as a guideline for directors to determine whether they adequately discharge their duties, which are now defined to be to promote the success of the company. In the second place, the duty ‘to promote the success of the company for the benefit of its members as a whole’ confirms the primacy of the shareholders, although there seems to be an underlying assumption that the six elements to be considered are elements that strategically or in fact contribute to shareholders’ interests when duly taken into account by the board. In the third place, it should be recognized that not the stakeholders but only the company, and in exceptional cases also the shareholders by derivative action, can enforce the obligations of s. 172(1). The stakeholders whose interests are being protected by this clause have no action. This could be different, for example, in the case of a bankruptcy where the interests of the creditors have been neglected in violation of s. 172(1). Whether or not the new provisions in the Companies Act will allow actions against directors instituted by the company, derivative actions by shareholders or actions on behalf of creditors by the receiver in bankruptcy to be successful is a matter to be decided by the courts.34 The courts will of course rely on the existing body of case law on 34

See section 172(3) specifically dealing with the creditors’ interests.

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the common law duty of the directors to act ‘in the best interest of the company’ and they will also note that decisions referred to s. 172(1) are commercial decisions which are the domain of the directors who have a wide discretion to decide what will promote the success of the company as long as they act in good faith and not manifestly unreasonably.35 The duty of the directors to act in the best interests of the company has been replaced by the duty ‘to promote the success of the company for the benefit of its members as a whole’. The term ‘success’ is not defined in the Act but should be interpreted to mean that a commercial transaction by the company, represented by its board, should contribute to the long-term increase in the value of the company. On the one hand, the almost unlimited discretion of the directors will make it difficult to directly enforce stakeholders’ interests on the basis of s. 172. On the other hand, a director actively promoting the interests of certain or all of the stakeholders mentioned cannot easily be held liable by the shareholders stating that a different strategy would result in better financial results. It is perhaps too early to conclude that UK law has adopted the stakeholder model, but it would also seem incorrect to state that the shareholder model has survived unimpaired by the introduction of the concept of enlightened shareholder value. 4.5

Corporate Social Responsibility

The discussion on corporate social responsibility (CSR) is a function of the broader governance discussion and addresses the fundamental notion that corporations can be seen as forming a part of a triangle between market, state and civil society, in which corporations owe a duty of care to a wide variety of stakeholders.36 This notion is also reflected in the UK Companies Act referred to above where reference is made to ‘the impact of the company’s operations on the community and the environment’. The concept of corporate responsibility towards ‘People, Planet and Profit’, known as the triple P strategy, is not a new feature but has existed for decades.37 Even if the Anglo-Saxon jurisdictions were to be seen as being focused on the shareholders’ interests in conformity with the strict interpretation of the shareholder model, the observation must be that many US and UK companies, as well as many continental European companies, pursue the abovementioned triple P strategy focusing on the long-term interest of both the company and its various stakeholders. Historical examples are the Ford Motor Company claiming to serve social goals in order to promote the sales of their cars, and Philips aiming to increase 35 36 37

Prentice (2008, pp. 150–54). Hamers, Schwarz and Steins Bisschop (2005, pp. 1–40). See note 33.


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the output of their workforce by providing social benefits to their employees. The strategy of the Ford Motor Company was successfully challenged, but the CSR strategy of Philips remained undisputed. Modern examples are Nike actively promoting improvement of working conditions in the supply chain and Shell with its campaign to protect the environment. 4.6

Corporate Interest

The container term ‘corporate interest’ reflects the criterion that is to serve as a yardstick for the board, and for the other corporate bodies, to determine their rights and obligations in performing their corporate tasks. With respect to the notion of corporate interest there is a general trait that is in line with the findings regarding the shareholder and stakeholder models. In Section 4.3 we concluded that neither of these models seems to prevail, that both models will probably continue to exist separately and that the differences will become less relevant. With respect to corporate interest a similar observation can be made. In those jurisdictions which embrace the shareholder model, there are mechanisms counterbalancing the primacy of shareholders’ interests, where such primacy would result in unacceptable prejudice to the interests of the other stakeholders. In the jurisdictions that are more orientated to the stakeholder model, the functioning of the various corporate bodies is already required to observe a broader range of interests than shareholders’ interests alone. 4.7

Conclusion

The separation and differences between the shareholder model and the stakeholder model may continue to exist in the various jurisdictions discussed above, but the relevance of the distinction seems to become less outspoken. The wide powers of the board in the US jurisdictions and the concept of enlightened shareholder value in the UK, in combination with corporate practice allowing for CSR, seem to indicate that the interest of the shareholders is not the dominant factor for the board when determining the corporate strategy. In these jurisdictions there are mechanisms counterbalancing the primacy of shareholders’ interests, where such primacy would result in unacceptable prejudice to the interests of the other stakeholders. In the jurisdictions that are more orientated to the stakeholder model, such an assumption of shareholders’ primacy does not exist. In both concepts, the container term ‘corporate interest’ reflects the criterion that is to serve as a yardstick for the board, and for the other corporate bodies, to determine their strategy. Above we pointed to the competition between the two models and we explored the question of whether or not one of these models prevails or is

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likely to prevail in the present global circumstances. There appear to be no significant indications of the supremacy of one model over the other. It is likely that both models will continue to exist separately but also that the differences will become less relevant. It is interesting to note that with the survey of the various jurisdictions we have proposed an almost global picture not only of the corporate organization but also of corporate governance. Path dependency and other distinctive national elements may colour the laws, regulations and practices of national jurisdictions but this does not diminish the fact that such an over-all depiction can be made.

5

CHALLENGES TO THE GLOBAL CORPORATE SYSTEM

Present times, but also many events in the past, have demonstrated that corporate activity may result in corporate misbehaviour, sometimes even leading to crises not only within the corporation but also for society at large. The present credit crunch which has led to a global economic crisis is a striking example of such an event. 5.1

The Systematic Threat Posed by the Credit Crunch

In financial and economic literature38 there are elaborated analyses of the causes of and reasons for the present global crisis. For the purpose of the legal analysis a brief summary is presented. The critical situation began in the US and was caused when certain home-owners defaulted in the loans extended to them by banks to finance the purchase of their houses. The collateral in the form of mortgages to secure the repayment of these loans appeared to be insufficient. The subsequent loss was not carried by the bank that originally provided the loan, but by other banks and institutions that had ‘purchased’ the collateralized loans, not in the form of a novation of the contractual relation between the lender and the original bank, but in the form of the purchase of a ‘package’ of collateralized loans and other financial instruments that through ‘securitization’ were repackaged in a financial ‘product’. The risk profile and other properties of these products were insufficiently clear to the national and international purchasing banks and institutions, which were taken by surprise by the defaults under the original loans causing the products in which they were packaged to lose a substantial part of their value. The national and inter-

38

See for example Friedman and Friedman (2009, pp. 1–36).


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national trade in these products was extensive enough for these ‘bad loans’ to result in very serious financial problems for the many banks and institutions that were involved in such trade. These problems then escalated into an economic crisis affecting the global economy. Initially, these risks did not materialize, mainly because of the fact that the prices of houses continued to rise in the US. Loans that at the outset exceeded the value of the underlying mortgage could benefit from rising market prices and become sufficiently collateralized. In 2007 and 2008, however, the rally on the housing market came to a halt and it surfaced that many of the original loans were provided to lenders with insufficient repayment capacity and against equally insufficient collateral. The bankers engaged in the process of granting the loans and the repackaging thereof were tempted to disregard the risk of default and of insufficient collateral because of the incentive system providing bonuses to the bankers who were able to fabricate these products of securitization. The products became a trade without the market recognizing the underlying loans, collateral and risks, which trade resembles ‘manias’ that have occurred earlier in history.39 As a result many US banks and financial institutions had to accept entire or partial write-offs of these products. This was also true for banks and institutions in many other jurisdictions as the products were traded on a global scale. These problems threatened their solvency and continued existence, resulting in bankruptcies and governmental financial intervention to prevent the collapse of those financial institutions that were considered to be essential to maintain the economic and financial system. The granting of these loans which were repackaged into financial products was the responsibility of bankers who worked under the supervision of their boards. The boards were accountable to their shareholders. Notwithstanding these inherent checks and balances the credit crunch and the ensuing economic crisis occurred. One of the causes of this was the banking remuneration system through which bankers received substantial incentives as a bonus for concluding deals in which financial products were sold on the market. It is held that these bonus systems invited irresponsible behaviour by bankers who concentrated on the marketing of the financial products without giving appropriate consideration to the underlying transactions.40 The system of corporate organization and the division of tasks and responsibilities between the various corporate stakeholders nevertheless appeared to be incapable of preventing this behaviour.

39 One striking example is the ‘tulipomania’ that occurred in the Netherlands during its Golden Age. People traded in tulips, some paying as much as the annual income of a wealthy merchant in those days. Eventually, the trade crashed and the market evaporated. See Dash (2000). For a more general review see Kindleberger (1978). 40 Financial Stability Forum (2009).

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5.2

The Threat Posed by Hedge Funds

Before and concurrently with the credit crunch, there were other examples challenging the corporate system in the form of shareholders’ activism that could be held to be against the interests of the corporation.41 Activist shareholders seem to have had manoeuvring space especially in the Netherlands. In some of the other European jurisdictions there are structural barriers checking the unhindered exercise of power by activist shareholders. In Germany the ‘Depotstimmrecht’ enables banks to vote on the shares deposited by their clients. The banks appear to often favour the views of management. In France there are structural barriers as well. French practice shows dual voting rights, concentration of shareholdings in the hands of families, workers and government, and shareholding pyramids. The French government seems to be prepared to protect ‘national champions’, as was evidenced when the French President announced that the government would not permit that the vulnerable position of Société Générale, caused by the speculation losses in 2008 in the amount of about 5 billion euros in combination with a loss in the amount of about 2 billion euros resulting from the credit crunch, be exploited, suggesting that the government would intervene in case of a hostile bid on the shares of Société Générale. The shares in Italian corporations are often in the hands of one or more families through direct or indirect participations. Although less frequently than in the French situation, the Italian government holds shares in national corporations. Also in Spain corporations are often controlled by families. Banks hold substantial holdings in listed corporations but there is no governmental shareholding. On the other hand, in the United Kingdom there are no technical or structural barriers hampering the exercise of power by shareholders. Analysing these findings in respect of some important jurisdictions of the European market, the conclusion must be that the creation of a level playing field on a harmonized market has not been achieved, as a result of the continued existence and use in the various member states of the EU of a range of different structural and technical barriers to the exercise of shareholders’ powers. 5.3

The Threat Posed by Bookkeeping Scandals

The examples listed above show governance systems that allowed unrestricted power and possibilities for activist shareholders who promoted their own short-term interests, often at the expense of the corporate interest of the corpo-

41

Steins Bisschop (2008).


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rations in which they invested. In the corporate governance discussions during the first years of the twenty-first century, such unrestricted power was generally considered to have the potential of counterbalancing the factors that had created the bookkeeping and other corporate scandals. Many corporate governance codes written or amended in this period specifically refer to the restoration of confidence in the financial markets through tighter and enlarged control by shareholders and the non-executive board members over management.42 5.4

Other Possible Threats

Corporate law will change as a result of and reaction to the crisis. Additional grounds will be explored to protect the corporation against shareholder influence that would be against the corporate interest. One of these new grounds may be derived from the concept of constitutionalization of corporate law, following the concept of constitutionalization of private law.43 This notion could be relevant in the case of attempted influence by activist shareholders or by governments after nationalization of former public corporations. It is conceivable that the corporation would oppose such exercise of influence by these shareholders on the basis of constitutional rights such as the right that ownership be protected.44 Another possible additional complication may be the investments by sovereign wealth funds, entities that invest funds of states with substantial surpluses from base materials and commodities, such as the oil producing states. Emerging economies like the BRIC countries also dispose of substantial means. These funds are frequently invested in listed corporations and such investments give rise to concerns in certain jurisdictions, including the US. The Chinese state investments in the US in the financial sector (Citigroup, Merill Lynch, Morgan Stanley, Nasdaq), private equity houses (Carlyle and Blackstone) and industry (AMD) have generally resulted in substantial losses.

42

Every jurisdiction had to deal with its corporate scandal(s), for example the United States: Enron and Healy (2003); the United Kingdom: Bank of Credit and Commerce International, http://news.bbc.co.uk/2/hi/business/3383461.stm; Germany: Hypovereinsbank, http://www.nytimes.com/1999/10/27/business/internationalbusiness-german-bank-forces-out-executives-after-scandal.html; the Netherlands: Royal Ahold (De Jong et al. (2005)); France: Vivendi Universal (Coffee (2005)); Italy: Parmalat (Ferrarini and Giudici (2005)); India: Satyam (BBC report available at http://news.bbc.co.uk/2/hi/business/7818220.stm); Japan: Livedoor Co. (available at http://www.reuters.com/article/companyNewsAndPR/idUST10637220070216). 43 Smits (2006, pp. 9–22); Lindenbergh (2006, pp. 97–128). 44 See Protocol No. 1 on the Convention for the Protection of Human Rights and Fundamental Freedoms as amended by Protocol No. 11, http://conventions.coe.int/ Treaty/en/Treaties/Html/005.htm, accessed 1 May 2009.

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These losses will have to be explained to the Chinese National People’s Congress and it is unclear what the consequences thereof will be. It is not inconceivable that the Congress will instruct the governmental authority holding these interests, the China Investment Corporation, to exercise the shareholders’ rights for political purposes, now that economic or financial purposes have become largely illusory. These additional observations regarding constitutionalization and sovereign wealth funds may provide supporting arguments to boards when exercising their discretion in determining the corporate strategy independently. If legal personality means that legal persons can invoke constitutional rights, boards could possibly invoke fundamental civil rights to protect the corporation on the same footing as individuals. If sovereign wealth funds were to use their voting rights in order to realize political goals that do not correspond with the corporate goals or interests, boards could possibly maintain that such votes should be held invalid or otherwise ineffective. As the concepts of constitutionalization and sovereign wealth funds’ influence have rarely been tested in legal practice, restraint had to be exercised when formulating the above observations. 5.5

Reflex Responses to the Threats, and Conclusion

There is a general trend to react to the abovementioned threats by imposing regulation to prevent reoccurrence. The following examples illustrate this. The credit crunch prompted regulatory action concentrating on legislation, providing for more supervision of the banking industry by independent corporate constituents and by governmental agencies, such as central banks or international supervising authorities. There are initiatives at EU level to implement reforms to regulation, and in particular to create a European supervisory regime in tune with today’s cross-border realities. The initial attempts to agree on such a regime at short notice in 2009 failed but the efforts continue.45 The activities of the hedge funds resulted in reactive regulation to curb short selling and other techniques manipulating the market or otherwise affecting its integrity.46 The bookkeeping scandals caused renewed emphasis on corporate governance codes and regulation. In the US the Sarbanes-Oxley Act was introduced in 2002 to prevent the reoccurrence of scandals similar to the Enron scandal. 45 46

European Commission (2009). In the Netherlands this resulted in a temporary ban on short selling. Also the FSA, the regulator of the British capital market, decided to temporarily ban short selling. In the US, the SEC will share more detailed information with the public on transactions concerning short selling. See Chung and Masters (2009).


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At this moment, however, strict compliance appears to bring unintended and burdensome disadvantages and the Act has the effect that listed companies now avoid continued listing in the US if possible. It is expected that the Act will be amended to prevent this and other unintended consequences.47 Another observation in this respect is that the Enron scandal occurred in perhaps the most regulated environment in the world and was followed by even more regulation, without considering possible alternative means to prevent the reoccurrence of bookkeeping scandals. The observation regarding the regulatory reaction to the Enron scandal may illustrate the relevance of the question as to what extent legislative action is or can be effective if introduced as a remedy against a societal evil, which in the case of Enron was related to a widespread lack of integrity. This question is particularly relevant now that the action proposed in reaction to the present global crisis seems also to concentrate on legislative measures. It should be noted, however, that none of the threats mentioned above seems to prompt a fundamental discussion about the corporate form or governance of the modern firm. Amendments and refinements in respect of corporate organization and governance, such as the introduction of more transparency by the board and less manoeuvring space for corporate insiders, in combination with better supervision, may improve corporate functioning without completely overhauling the existing system of corporate organization or governance. Legislative measures to achieve this are being undertaken and are likely to be undertaken in the near future. Any of the legislative initiatives will primarily be directed at national laws, as the conclusion of international law making through treaties or otherwise will prove to be very difficult, if possible at all. The present crisis being a global crisis, global remedies will require the consent of national governments and some of these governments are likely to be unwilling to cooperate internationally in view of the conflicting interests. An example is that the emerging states including the BRIC countries will concentrate on growth whilst the EU countries and the US are likely to place emphasis on protection of the status quo. The reflex response to crises in the form of additional or new regulation should therefore be met with caution. History teaches that such reaction may be insufficient and the discrepancy between global problems and national legal systems is a further obstacle to the solution. We will now further discuss these limitations and subsequently try to identify the additional remedies required to prevent the reoccurrence of crises.

47

See Parles (2007).

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6


THE LIMITATIONS OF LEGAL REMEDIES IN THE RESOLUTION OF CRISES

With the knowledge now acquired about the bookkeeping and other corporate scandals during the first years of the twenty-first century, the conclusion could be that shareholders should and could have used their controlling rights to timely request and obtain sufficient information to examine the corporate strategy and to conclude that this strategy was hazardous to the corporation and its stakeholders. The controlling rights of shareholders would then have enabled the shareholders meeting to take appropriate measures, including instructions to the board and if necessary dismissal of board members refusing to follow the instructions. 6.1

Ex Post and Hindsight-Biased Judgments

Nevertheless, no powers or authority could have been exercised with the strict application of existing rules and regulations. Ex post analysis about the causes of an event is not always commensurate with what could or even should have been known at the moment of the occurrence of such an event. This problem obviously also arises in the analysis of the credit crunch. There are generally accepted explanations about the driving factors behind the crisis. One such explanation is related to the banking remuneration policy under which bankers could receive incentives that corrupted the process of responsibly financing banking customers. Indeed, with the benefit of hindsight, it may be concluded that the options and other financial instruments offered to senior bankers may have presented incentives to act in their own interest and not in the interest of the bank or the customers of the bank. It should be noted, however, that the strong condemnation that is now widely heard was entirely absent in recent years, whilst the remuneration system was quite transparent. The question is therefore whether the ex post judgment is hindsight wisdom, resulting in functional comprehension of the past that can be translated into useful strategic measures for the future, or hindsight bias. In the case of the latter, a possibly better or different explanation is prevented. In the case of hindsight bias, proper judgment is blurred because the adverse or negative consequences of the historic act under review are already known and in analysing such act the adverse or negative consequences are already discounted. In other words, an objective analysis of a situation is corrupted by knowledge of the outcome of the event. There are many examples of such bias in the legal practice. The following example may illustrate this point. A defendant has taken reasonable care, but has nevertheless caused a traffic accident. His level of care will be reviewed with the knowledge that the level of care


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was inadequate to avoid injury. His level of care will therefore seem less reasonable in hindsight than it did in foresight.48 Another example is drawn from an American study in which certain possible jury members were asked to assess whether a given act was reckless: 37 per cent of the group that did not know about the consequences thought that the act was reckless, but in the group that did know about the consequences 67 per cent thought that the same act was reckless.49 Earlier studies had already shown that judges, for example, were largely unaware of the effect that outcome knowledge had on their perceptions.50 This ignorance caused them to over-estimate the factual accuracy on the basis of which they formed their judgment. Knowing about the outcome seemingly only contributes to understanding the past and actually prevents learning from it. Knowing about the outcome of ‘the story’ makes that outcome seem inevitable and predictable, but in fact there is distortion of the perception of what could have been predicted.51 Analyses of the causes of the current credit crunch which has led to a global financial and economic crisis may suffer from hindsight bias and prevent proper and effective decision making in the process of restoration of confidence in the financial markets. There are also other factual circumstances that have prevented the – theoretically available – use of shareholders’ rights, including the feature of managerialism in the US and the other structural barriers to shareholder democracy discussed above. It is therefore appropriate to explore to what extent the efficiency of the reflex response to crises, namely the strict exercise of existing legal means in combination with the introduction of new regulation, could be supported by complementary action contributing to efficient implementation of existing regulation and creation of new regulation. The conclusion of these observations must be that there is no clear and convincing explanation of the causes of the present crisis and that the remedies offered do not warrant a stable, consistent or reliable solution. This is a rather alarming observation. The proposed remedies in the realm of regulation should be encountered with modesty about the accuracy of the stated causes of the crisis and the healing effect of regulation. The uncertainty about causes and solutions is also exhibited in various recent reactions, of which some are summarized below.

48 49 50 51

Rachlinski (1998, pp. 571–625). Kroeze (2006). Fischhoff (1975, pp. 288–99). See note 50.

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6.2

Confusion

In the course of 2008 the credit crunch appeared to evolve into a global financial and economic crisis. It was understood that current regulation was insufficient to cure the underlying causes and problems and that new ways had to be found to escape from the present delicate situation. The recommendations and findings were not univocal. Below we present some of the views expressed. In October 2008 Alan Greenspan, who had been Chairman of the Federal Reserve of the United States from 1987 to 2006, admitted to being shocked by the financial crisis. He advocated more and stringent regulation for banks, thereby distancing himself from his own earlier wish to have a more or less entirely free financial market. He considers more regulation to be a prerequisite for resolution of the present crisis. Later that same month the president of the Dutch Central Bank pointed to the resemblance of the crisis to the tulip mania in 1630 and concluded that lack of confidence was the main cause of the crisis. He mentioned that the financial market is especially dependent on confidence in every layer and link in the system, reliable figures, sound people and well-enforced laws against fraud and corruption.52 Confidence is interrelated with and based on the integrity of the market players. The Central Bank would concentrate (more) on the supervision of financial sector integrity. In March 2009 the Caux Round Table issued a reformatted form of the Caux Round Table Principles for Business, which were first published in 1994. In the introduction to these Principles the following is mentioned: ‘Trust and confidence sustain free markets and ethical business practices provide the basis for such trust and confidence.’ The subsequent seven Principles ‘recognize that while laws and market forces are necessary, they are insufficient guides for responsible business conduct’. Upon reflection, this view does not have to differ in principle from the opinion expressed by Alan Greenspan, as it is widely recognized that new regulation should be paired with a normative revival outside the strict domain of mandatory law. In this respect it is interesting to refer again to the general observation that the remuneration systems in the financial industry are generally and often mentioned as one of the causes, or even the primary cause, of the present crisis. As discussed in Section 5 above, the remuneration system for bankers was initially built on bonuses for ‘selling’ mortgaged loans that were repackaged in financial products. In addition to these bonuses there were also other incentive schemes for bankers, and in particular for bankers engaged in

52

Wellink (2008).


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merchant banking who were eligible to receive additional payments related to the size of the transaction in which their bank was active as advisor, broker or in another role. The general opinion now formed holds that the remuneration for bankers, which was brought to an unparalleled high level, was not only unfair but also contained incentives for individual bankers to steer transactions in directions which were not related to the interests of the banking clients but to the personal financial interests of the bankers seeking to achieve bonuses and other extra payments. The general opinion also holds that bankers should have realized that their remuneration was disproportional and that the banking industry itself should have put an end to this. These views can be summarized by referring to the term ‘perverted’ which is often used to describe the remuneration system.53 Notwithstanding the fact that these views frequently seem to suffer from hindsight bias, the general opinion is that disciplining of this ‘perverted’ remuneration system can only be achieved by regulation. Bankers appear to regard the remuneration system as the main cause of the credit crisis.54 It is also found, however, that on the one hand 75 per cent of the bank managers think that the credit crisis demonstrates that the banking sector needs more strict regulation, but that on the other hand only 36 per cent of the bank managers think that the regulator must do more to compensate the banking sector.55 At the European level there is also emphasis on regulation and supervision.56 Another example is that in April 2009 the Dutch Advisory Banking Committee published its recommendations to improve the functioning of the Dutch banking sector and to provide handles for restoration of trust in banks. The report includes recommendations to achieve less influence of shareholders, improved supervision, limits to remuneration and governmental insurance against failing 53

According to the president of the European Commission, José Manuel Barroso. See http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1120 &format=HTML&aged=0&language=EN&guiLanguage=en. 54 In November 2008 the Chairman of KPMG in the Netherlands stated that in general more regulation is not necessarily required, but he added somewhat contradictorily that there should be more supervision and a focus on principle based regulation, which seems to imply more regulation. In January 2009 KPMG published the results of a study into 500 banks. KPMG (2009). 55 See the report from KPMG (2009). A press release is available at http://www.kpmg.nl/site.asp?id=2036&process_mode=mode_doc&doc_id=46550. 56 In October 2008 the European Commission requested the High-Level Group on Financial Supervision in the EU (the de Larosière Group) to give advice on the future of European financial regulation and supervision. On 25 February 2009 the de Larosière Group issued a Report with analyses and recommendations. These recommendations include extensive and motivated suggestions for building a European system of supervision and crisis management. See http://ec.europa.eu/internal_market/ finances/docs/de_larosiere_report_en.pdf, accessed 1 May 2009.

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banks rather than self-regulated solidarity among banks. These recommendations will probably be incorporated in new regulations. It is somewhat remarkable that these reactions from representatives of different stakeholders seem to point to the necessity to introduce new regulation in order to restore confidence mainly through more stringent supervision. The notion that more and other means could possibly also be necessary conditions for the restoration of stability in the financial and economic markets is not fundamentally addressed. It seems that the proposed solutions, of which only a few are summarized above, are based on existing means and especially regulation without, however, addressing the fact that, notwithstanding the availability of these means when the crisis developed, they did not prevent the crisis from occurring. Some of these means were mentioned above, such as the availability of the shareholders’ rights to control the corporation and the tight regulation already in place when the Enron scandal occurred. Another notion, admittedly proposed with hindsight, is that some of the main causes of the crisis were or could have been known. 6.3

No Surprise, Really

The growth of the capital market debt in the US since 1980 has been staggering and amounts to some 350 per cent of GDP in 2008. This enormous amount is financed by national and international investors including foreign governments. Already because of this fact it should be no surprise that any financial problem in the US will cause financial problems in the countries of the lenders. It is now held that banks and individual bankers did not notice this possible effect, continued trading with an emphasis on short-term results, put the savings of their customers at risk when conducting merchant banking and also ignored other signs on the wall such as the ‘perverted’ remuneration systems. This general view expressed in politics and seemingly also by the general public through newspapers has led to reproaches to bankers who have not yet answered thereto. There are some exceptions where bankers have accepted responsibility for the malfunctioning of the banking industry and even apologized for banking behaviour.57 In some countries there were public parliamentary hearings where a critical review took place of the performance by the banking industry and by individual bankers. On these occasions, however, only hesitantly were some excuses formulated by bankers. There seems to be a continued frustration that the causes of the present crisis are largely attributable to the banking industry, but that the banks and the bankers are not being

57

Van den Brink (2008); Deckers (2009).


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held responsible and the problems are being solved retroactively by means of regulation which does not affect the past. It is likely that this frustration impedes the acceptance and legitimacy of the legislative efforts to overcome the crisis. For a successful transition to a new system for the banking industry such acceptance and legitimacy are required. As we will discuss below, a clearly stated apology by bankers may be a necessary or useful intermediate step. In addition to the instances mentioned above there are also other examples of apologies by bankers, but there has not been a clear and unambiguous statement of apology. One of the reasons could be that apologizing for the crisis may result in legal liability for the banker taking or accepting the blame. It would be unreasonable to expect that one banker be prepared to face this liability and provide the other bankers with free-riding possibilities. Additionally, even if such a banker would be insured under a directors’ liability insurance, the terms of such an insurance would probably not allow the banker to admit responsibility and thereby accept liability. To require an apology nevertheless would then lead to a reasonably unacceptable consequence of loss of coverage. For bankers, this would be an acceptable reason for refraining. 6.4

Further Observations

The bookkeeping scandals and the present global financial and economic crisis share a common reflex reaction that the rule of law be employed to prevent repetition and to identify and hold accountable those who have caused the financial and societal harm. Indeed the rule of law, whether or not amended to reflect the new social reality, forms an essential instrument to restore the proper functioning of the financial markets and to indirectly contribute to the resolution of the economic crisis. Strict, modern and goal-oriented regulation, however, does not necessarily ensure the required sound behaviour, and may in some instances even be counter-productive as strict regulation generally also invites efforts to circumvent strict application. In the bookkeeping scandals creditors were misled and harmed by intransparency and often by the pursuit of personal wealth by management. The scandals occurred against the background of a strategy directed at growth. In the credit crisis there was similar misleading and harming of creditors, and perhaps the events were accelerated by the remuneration culture that was a specific characteristic of the banking industry. It is understandable that in corporate governance codes new emphases are placed, including restrictions on remuneration. Also, in other codes and documents that qualify as ‘soft law’, provisions are introduced to advance the level of integrity of the corporation and those who are responsible for its strategy. Soft law has many precedents and a wide range of applicability. It is generally international and it colours the hard law notion of ‘reasonableness’. In this

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fashion soft law has an important, indirect, function in terms of observance of hard law. Nevertheless, the sanction on infringing rules of soft law may lead to disapproval but cannot result in legal sanctioning. There is no debate that the rule of law and the norm of integrity should not be contradictory. The rule of law, however, can be inefficient or ineffective and sometimes even allows infringement of the norm of integrity, as was shown in the bookkeeping scandals and the present crisis. The term ‘integrity’ is widely understood and used as a term of reference for proper behaviour, but there are hardly any leads or concrete points of departure to describe what the norm of integrity actually comprises. Both the law and integrity can therefore be interpreted or used for various and even perhaps conflicting purposes. In this respect it is interesting to refer to a recent interpretation of the term integrity.58 Integrity is seen to exist ‘in a positive realm devoid of normative content’, whilst the adjacent phenomena of morality, ethics and legality are normative virtues about good and bad, right and wrong and what should or should not be. Integrity is therefore an objective state or condition of being whole and complete, and is a ‘necessary condition for workability’. The resultant level of workability ‘determines the available opportunity for performance’. The term integrity can then be concretely and tangibly defined as honouring one’s word: oversimplifying somewhat, honoring your word, as we define it, means you either keep your word, or as soon as you know you will not, you say that you will not be keeping your word to those who were counting on your word and clean up the mess you caused by not keeping your word. By keeping your word we mean doing what you said you would do and by the time you said you would do it.

This definition provides ‘access to the opportunity for superior performance … and empowers the three virtue phenomena of morality, ethics and legality’. This remarkable approach narrows down and crystallizes a philosophical concept and transforms it into a practical and workable tool that can be used to achieve ethical behaviour by persons or organizations, and also to measure the degree of integrity in such behaviour. However, while this concept of integrity, whether or not in combination with or in lieu of more philosophical interpretations of the term, may provide useful guidance to achieve improved corporate governance in the future and therefore the avoidance of repetition of the bookkeeping scandals and the credit crisis, it does not contribute to the necessary restoration of confidence in the financial and economic markets and systems. This restoration of confidence is an indispensable condition for those markets and systems to regain their proper economic function.

58

Erhard et al. (2007).


6.5

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Conclusion

The shareholders’ rights that might have prevented the crises were not used, which is a statement of fact and not of opinion. Ex post judgments about what could or should have been done in order to avoid scandals and crises can be unfair or ill founded. Ex post judgments and proposals to resolve the crisis and avoid repetition of scandals and crises centre on more law and supervision, but added to that is a public demand that those who are deemed responsible for the scandals and the crises apologize and be held responsible. That public demand must be answered to restore confidence in the financial and economic markets. In order to judge past and future, ethical standards are required, but perhaps with the exception of a very practically and newly defined concept of ‘integrity’ it is difficult to catch ethical terms in operational guidelines. The above does not depict a clear vision of the past and the future. It does, however, accurately describe the uncertainty about causes and cures for the present crisis. Yet it is possible to draw the cautious conclusion that in the resolution of the present crisis, at least from a legal point of view, (i) new and amended regulation is required, (ii) supervision of the financial markets should be reinforced, (iii) normative elements of ethics should be addressed in the process, and (iv) confidence in the financial and economic markets must be restored. Resolution of the crisis cannot realistically be expected without these four elements forming the basis thereof. It will be difficult, however, to fulfil the normative conditions, and without a concrete vision of these conditions the drafting and institution of regulation and supervision will be ineffective. In the next sections this problem will be further explored.

7

SUPPORTING LEGAL REMEDIES IN THE RESOLUTION OF CRISES

The current global crisis can also be read as a social crisis threatening the interests of a variety of stakeholders. In such a situation the law cannot provide a solution, but on the other hand any solution without statutory legitimacy may be feeble or even untenable. To the extent that the functioning of banks needs to be changed in order to resolve the problems stemming from the crisis, this is a financial economic movement that cannot be achieved by the law. The function of the law here would be to support the solution found by those who do influence the financial economic environment. These stakeholders include the banks, the customers of the banks, shareholders, other financiers of banks, industry in general and the public. The role of government is indirect through taxation and also regulation. Interference by government through regulation should be seen against this background and also respect the principle of freedom of people and

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the justification of governmental interference (only) if the freedom of others is at stake or in case the general interest requires such interference. The current crisis could be seen as a situation justifying governmental action to protect the general interest that is threatened by the collapse of banks and the transition from a crisis affecting banks to a crisis affecting the economy in general and subsequently general social interests. To the extent that the government resorts to law making the indirect function and effects of regulation should be discounted when relying on the results of such public action. Another principle to be noted is that citizens have the right not to be made subject to law retroactively.59 There are exceptions to this rule but the point of departure is that legislation should affect future rather than past actions.60 This necessarily implies that rules in the form of binding regulation can generally only be effective as from the date of publication onwards and not backwards. Such rules may be aimed at protecting citizens and at regulating society and government, as well as governmental agencies, but cannot for instance provide for new legal grounds that past acts or omissions of banks result in liability of banks or bankers. The protection of citizens also extends to corporations, which can even be considered to be entitled to protection under human rights.61 7.1

Some Further Comments on the Efficiency of Regulation

The above observations regarding the limited effects and indirect function of law making do not imply that regulation could not substantially contribute to the solving of crises. Mentioning only a few aspects, it should be noted that the indirect function of sanctioning certain behaviour may encounter the difficulty of enforcement, but may also have the symbolic effect of establishing normative guidelines. Even ineffective or inefficient laws can nonetheless be of value because of the self-repairing reaction by constituents. Laws are necessarily formulated in words but should be observed through action. A translation from words into acts is therefore a necessary intermediate step between observing the law and reaching the normative goal of the law. Such a translation may entail translation faults or other imperfect transposition, but because of the normative character of the regulation the constituent may correct that translation and apply the rule in conformity with the original intention that was the basis for law making.

59 60 61

Weien (2007, pp. 749–65). Bernitz (2000, pp. 43–58). Steins Bisschop (2008, pp. 32–7).


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There can be unintended but positive effects of regulation. An example is the recent sharp decline of crime in New York. This does not necessarily have to be attributed to the stringent zero tolerance strategy, not allowing any infringement of any rule, but could well be attributed, wholly or partially, to earlier regulation allowing for abortion, which resulted in a sharp reduction in unwanted children, reducing the chance of neglected children and bringing down the likeliness that children would turn into criminal youths.62 Other limitations of the regulatory effect are caused by the fact that regulation often contains open norms (such as ‘reasonableness’) that can be widely interpreted, the translation from words into acts as referred to above, the inherent simplification of the reality by regulation that by definition cannot cover all aspects of the item or issue regulated, and finally the ex post character of regulation. As mentioned above, one of the resolutions offered to address the present crisis is an increased emphasis on supervision. Supervision is a metaphor for the desire to feel in control. The introduction of supervision contributes to a reduction in the feeling of uncertainty and this may be the explanation for the enthusiasm expressed when the idea of more stringent supervision on the banking sector was proposed. It is not yet established whether or not increased supervision is effective. In an earlier publication I have argued that increased supervision by the supervisory board in the two-tier system in the Netherlands is seriously hampered by the information asymmetry between the management and supervisory boards.63 The supervisory board has to rely on information to fulfil its function, which is to control management, on the information it receives from management. Management therefore determines itself the information to be provided to the supervisory board in the exercise of the supervisory board’s function of controlling management. In general, the problem of information asymmetry, which would also affect supervision of the banking industry, cannot easily be overcome. 7.2

Transition

The solution of the global crisis requires a transition from a system that allowed irresponsible banking practices without proper supervision, which ultimately caused a global system crisis, to a system with sufficient warranties against the reoccurrence of these disastrous effects. Transition under such pressing circumstances requires and implies immediate action to address, ex post, visible causes of the crisis. Examples thereof

62 63

Levitt and Dubner (2005) Chapter 4. Steins Bisschop (2003, pp. 129–39).

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are the stringent provisions which are included in the intermediate regulatory measures to curb the remuneration of bankers and the introduction of stricter supervision. Transition also requires addressing long-term possible future effects, similar to the effects that caused the present situation to occur, that could threaten the sustainability of the solution, which effects, however, cannot be known or established ex ante. This poses the prevention paradox that an infinite number of facts, all in causal relation, appear to have caused the event to be prevented in the future, and that such prevention should address all of these facts, which is impossible ex ante.64 This notion prompts legislators and others responsible for the resolution of the crisis to modesty in setting the ambitions in respect of controlling the future. Transition typically coincides with reckoning. The causes and culprits responsible for the crisis are to be identified and exposed, which is to be followed by sanctioning. Because of the fundamental equality of people before the law, legal sanctioning can only take place on the basis of generally applicable and existing regulation. An equally important principle is the separation of powers whereby justice is administered by judges independent from the lawmaker and the executive. The transition and the reckoning that automatically comes with the transition must therefore respect these principles in order to maintain political and civil legitimacy. Drastic regime changes can take place through replacement or transition. In order to prevent violence, which typically goes together with replacement, also occurring in a transition, truth or inquiry commissions are an effective and tested instrument. Although history has shown that violent replacement can sometimes not be avoided, the necessary reckoning with those responsible for the previous regime is problematic. This was illustrated in an article in the Economist of 22 November 2003: Trials, such as those of Balkan war criminals, only provide a punishment after the accused have fallen from power and no longer provide a potent threat. If anything, the threat of trial only serves to make people cling to power at all costs.

Yet the problem has to be addressed because neither truth nor reconciliation is likely to be possible unless the primary tasks of justice have been carried out.65 The inquiry commissions that operated in the recent decades made efforts to mitigate these and other negative effects of regime changes. The South African Truth and Reconciliation Commission is taken as an example, not only because of its unique authority to grant amnesty, but also because there is much information about its method of working and the results of its opera64 65

The notion of the prevention paradox is mentioned by In ‘t Veld (2008). Ashdown (2007, p. 99).


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tions. It may well serve as a yardstick to be used when considering the necessary conditions for a transition from the present crisis into the next era. 7.3

The South African Truth and Reconciliation Commission66

The transition to a modern democracy that took place in South Africa during the period in which the release after 27 years’ imprisonment of Nelson Mandela on 11 February 1990 was a climax and a turning point, is characterized by the operations of the South African Truth and Reconciliation Commission (TRC). The goals of the TRC were to know and acknowledge the truth about past human rights abuses, in order to prevent amnesia about these events, to ensure justice in terms of respect for human rights and the rule of law, acknowledging that prosecution does not always result in justice in a transitional society, and to effect reconciliation aiming at conflict resolution and social rehabilitation. The institution of the TRC was a compromise and the result of negotiations between the ancien régime and the new civil power and was given a constitutional basis in the interim Constitution of 1993, thereby achieving a legal and even constitutional embedding and legitimacy. A unique feature of the TRC was its authority to grant amnesty. This was particularly ambitious against the background of the notion mentioned above that neither truth nor reconciliation is likely to be possible unless the primary tasks of justice have been carried out. In the South African context there were additional considerations for the transition aided by the TRC, with the power to grant amnesty, rather than revolutionary transition. A military victory of the ANC and a subsequent tribunal to try those responsible for apartheid and the blatant infringements of human rights were unlikely to be effective. The chances that a revolutionary transition would result in democracy and respect for human rights were very dim. The perspective of a civil war with the unavoidable atrocities which could be expected to occur, in combination with the threat that the war would spread over the entire African continent, was another reason to seek another form of transition. Further, a criminal tribunal would be very difficult in the multiracial environment of South Africa as the tribunal would inevitably be seen by some, or by many, as not impartial and as unjust. The main goal was not prosecution and punishment but the restoration of the rule of law. All these elements resulted in a negotiated agreement between the two parties, the ANC and the ancien régime. 66 Literature is abundantly available. I have drawn on the general impressions gained from various sources and present my own findings based thereon. Some works were particularly helpful and I have also used these to find research references. These works are Srakin (2004) and Ellian (2004).

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The TRC, as it was finally instituted, was an inquiry commission with the primary task to find and acknowledge the truth, which is a fundamental condition for a transition to be successful. All of the other similar commissions in the continents of South America and Africa and the countries Nepal, Germany and Sri Lanka were also inquiry commissions. The Chilean commission was the first commission that, in addition to the task to find and acknowledge the truth, also included reconciliation in its goal. The commission’s objective was to find the truth and to create on the basis of the truth so found the necessary conditions for achieving national reconciliation. The truth was also seen as a necessary condition to restore the dignity of the victims and to make possible amends for the damage done. The Chilean truth and reconciliation commission has served as an example and precedent for the TRC. Truth and confession are linked to justice and forgiveness. There is also an opening to criminal law that is applied only after the truth has surfaced. 7.4

Amnesty

The TRC was the first commission with the power to grant amnesty. This is normally the prerogative of government. The power was given within legally stringent conditions and only after ensuring, through negotiations, the broad political legitimacy of the concept. In fact, however, there were relatively few people who actually received amnesty. This was due to earlier initiatives in the Indemnity Acts of 1990 and 1992. These acts provided indemnity for thousands of people who did not apply to the TRC for amnesty. This frustrated the main objectives of the TRC, namely both the finding of the truth before justice could be administered, whether or not using amnesty, and the process of reconciliation that is conditional on finding the truth and knowing that justice is done. Nonetheless, the work of the TRC was approved by a majority of the non-white and a substantial minority of the white people. This is a remarkable achievement, especially because the TRC had to surmount opposition and tensions with political parties, and with the prevailing ANC, and had to defend itself against claims and allegations of being partial, predetermined and arbitrary. The TRC had to decide on issues that normally are considered and decided by courts. This was particularly true when amnesty was involved. The TRC did not apply the standards of fact finding that are typically used by courts and, whether or not this was done in a fair manner, there was a public perception that politics and other non-legal considerations did play a role in decisions on amnesty requests. On the other hand, the acceptance of the concept of the TRC proceeding and granting amnesty was based on the constitutional foundation of this authority, which guaranteed that the process of deciding whether or not


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amnesty was given indeed was a process and not an automatic right of the person that invoked the amnesty provisions.

8

BRINGING TOGETHER REGULATION, SUPERVISION, CONFIDENCE AND THE TRC

In the sections above we have considered a wide range of aspects that could be considered in connection with the present global crisis. We found a truly global basis on which corporate activity is organized. This is a relevant notion as the crisis has developed into a global crisis involving and affecting corporations. In the analysis of the global corporate organizational form we have identified essential control rights available to shareholders, which rights, however, apparently have not been used in order to prevent the crisis. In exploring the corporate organization we have also addressed the question of which stakeholders are involved and concluded that the prevailing concept is that corporations do not function primarily to serve the interests of shareholders, but that they generally function to serve a much broader base of stakeholders. Proper and improved functioning of the corporation is therefore in the interest of such broad base of stakeholders. Specifically in respect of the shareholders we have investigated to what extent their rights in terms of shareholder democracy can be exercised in a comparable manner and here again we pointed to global similarities. The main players within the corporate organization are the board and the shareholders and we have identified certain instances in which their power was abused. We have also noted that the global corporate governance systems are proceeding to formulate possible answers to these and similar threats of recurrence of these instances, additionally concluding, however, that there are limitations when legal remedies are employed to address these problems. 8.1

Intermediate Conclusion

The discussion of these features has led to the conclusion that solutions to the corporate scandals and the present global crisis that were focusing on the introduction of more supervision through regulation could not credibly present an effective resolution, as the required legitimacy thereof should be supported by regained confidence in the financial and economic markets. Restored confidence cannot be achieved by regulation alone but must be supported by means that contribute to the legitimacy of the resolution.

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8.2


The Association with the TRC

Establishing this deficiency we noted that the essence of the problem of resolving the present crisis is that the legal solution should be paired with measures directed at creating the legitimacy of the solutions in the form of new and amended regulation. Exploring possible ways to effect this, we compared the present situation with the situation of transition from a failing political system into a new and improved system that provided warranties against the reoccurrence of events that had disqualified the earlier system. History shows precedents of such transitions and we focused especially on the institution of inquiry commissions. In this respect emphasis was given to the South African Truth and Reconciliation Commission. Notwithstanding justified criticism of the TRC, the conclusion must be that the operations and effects of the TRC appear to have played a very important role in the transition from apartheid to a democratic system in which there is respect for human rights and the rule of law. The proceedings before the TRC contributed to finding the truth as a necessary condition for both administering justice and national reconciliation. This process was supported by the unique authority of the TRC to grant amnesty. It is doubtful whether justice and reconciliation could have been achieved without such authority. 8.3

Recommendation

The key elements of the functioning of the TRC were: dealing with the past by exposing as many details as possible; allowing for full revelation of the details that made apartheid an objectionable system; hearing both victims and perpetrators; not offering amnesty in general but allowing amnesty only through due process and on grounds with constitutional foundation; and finally achieving justice and reconciliation on the findings during the public hearings. The results of the TRC contributed to the legitimacy of the new system in South Africa after a social and political transition without the occurrence of violence and perhaps even civil war that otherwise could have threatened the peaceful transition. Resolution of the present crisis also implies transition. The fact that this crisis is not a political one does not mean that the method of the South African transition has no significance for its resolution. The widespread demand that bankers and others responsible for the current crisis apologize and the public hearings in parliaments of some countries support the contention that any regulation to resolve the crisis should be accompanied by measures to create the legitimacy thereof. Referring to the South African TRC in a discussion of the present crisis and proposing initiatives that may assist in the resolution of the crisis requires


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modesty and the exercise of restraint. With this qualification it is suggested that on a national scale it is conceivable that inquiry commissions be instituted with similar tasks and responsibilities as the TRC, aiming at achieving a transition from a system that allowed the present crisis to occur to a regime with regulatory protection against recurrence thereof, but also holding the legitimacy which is required for the new system to be effective. Consideration of the elements that constituted the positive and negative effects of the TRC and designing a similar but adapted process to achieve the effective transition to a post-crisis period is likely to contribute to a regulatory solution that would hold the legitimacy that presently does not appear to be available. National successes could inspire further national and international initiatives.

REFERENCES Armour, J. and L. Priya (2008), ‘Law, Finance, and Politics: The Case of India’, University of Oxford, ECGI and University of Cambridge, Law Working Paper No. 107/2008, http://www.ssrn.com/abstract=1116608, accessed 31 July 2009, p.14. Ashdown, P. (ed.) (2007), Swords and Ploughshares: Building Peace in the 21st Century, London: Phoenix Publishers. Baums, T. and K.E. Scott (2005), ‘Taking Shareholder Protection Seriously? Corporate Governance in the United States and Germany’, European Corporate Governance Institute working paper no. 17/2003, http://ssrn.com/abstract=473185, accessed 31 July 2009. Berle, A.A. and G.C. Means (eds) (1933), The Modern Corporation and Private Property, New York: The Macmillan Company. Bernitz, U. (2000), ‘Retroactive Legislation in a European Perspective: On the Importance of General Principles of Law’, Scandinavian Studies of Law, 39, pp. 43–58. Black, B., R. Kraakman and A. Tarassova (2000), ‘Russian Privatization and Corporate Governance: What Went Wrong?’, Stanford Law Review, 52, pp. 1731–1808. Burmistrova, M. (2006), ‘Corporate Governance and Corporate Finance: A CrossCountry Analysis’, in A. Sell and A. Krylov (eds), Corporate Governance, Unternehmensverfassung im Ost-West-Dialog, Frankfurt am Main: Peter Lang. Chung, J. and B. Masters (2009), ‘US to Increase Clarity on Short Sellers’, 27 July, http://www.ft.com. Coase, R.H. (1937), ‘The Nature of the Firm’, Economica, 4 (16), pp. 386–405. Coffee, J.C. (2005), ‘A Theory of Corporate Scandals: Why the U.S. and Europe Differ’, http://ssrn.com/abstract=694581. Dash, M. (2000), Tulipomania: The Story of the World’s Most Coveted Flower & the Extraordinary Passions it Aroused, New York: Three Rivers Press. De Jong, A., D.V. DeJong, G. Mertens and P. Roosenboom (2005), ‘Royal Ahold: A Failure of Corporate Governance and an Accounting Scandal’, http://www. tilburguniversity.nl/tilec/events/seminars/jong.pdf. Deckers, F. (2009), ‘Excuses van een Fatsoenlijk Bankier’, NRC Handelsblad, 16 March, available at NRC http://www.nrc.nl/opinie/article2182686.ece/ Excuses_van_een_fatsoenlijk_bankier, accessed 1 May 2009.

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9. Globalization and corporate law Philip Sutherland 1

INTRODUCTION [I]f asked to specify what they understand by ‘globalization’, most people reply with considerable hesitation, vagueness and inconsistency. Moreover, much discussion of globalization is steeped in oversimplification, exaggeration and wishful thinking. In spite of a deluge of publications on the subject, analyses of globalization tend on the whole to remain conceptually inexact, empirically thin, historically ill-informed, economically and/or culturally illiterate, normatively shallow and politically naive.1

The globalization debate has become intense in recent years as there is much at stake.2 This chapter will consider the impact of globalization on corporate law by focusing on multinational corporations (MNCs) and their regulation. In doing so it will fall into all of the traps mentioned. It starts with an evaluation of globalization, MNCs and corporate law theory in order to set the stage for further analysis. It will then consider the different manifestations of corporate regulation of MNCs in the globalized environment.

2

WHAT IS GLOBALIZATION?

The term globalization has been used to label almost every important phenomenon of the last twenty years.3 The concept has become so controversial that it is almost impossible to give any uncontested account of it. Perhaps the most helpful, but at the same time vague, definition is that globalization is a ‘process of intensifying interconnectedness’.4 Not only may this interconnectedness

1 2 3 4

Scholte (2005, pp. 1–2). Stiglitz (2006, p. 288). Scholte (2005, p. 15). Kaldor (1999, pp. 3–4). See also Pinto (2005, p. 477 and 487); Scholte (2005, pp. 60 ff.). See Scholte (2005, pp. 49ff.) where he describes globalization as the rise in transplanetary and supra-territorial links between people. See especially pp. 50–52 on the origins of the term globalization. Stiglitz (2002, p. 9) defines globalization as 255

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transcend territory but it may even become disconnected from the concept of territory, or supra-territorial.5 Globalization is often equated with economic globalization.6 But economic goals do not actualize in a vacuum.7 The significance of social and political globalization should not be underestimated. Tavis therefore distinguishes economic integration, democratization and global governance networks as elements of globalization.8 However, even this expanded approach pays too much respect to the economic aspect of globalization. Scholte’s description of globalization focuses on the reduction of barriers to social contacts: the shift in the nature of social space.9 For him globalization means that the global field becomes a social space.10 Humans now often have a global experience of space. They are more able physically, legally, linguistically, culturally and psychologically to interact in a global sphere.11 This has created a global consciousness.12 The global dimension also has been relevant in considering environmental, cultural, equality, health, governance and security issues.13 Nevertheless, there is little doubt that the economic dimension of globalization has been at the core of the globalization discourse.14 It is particularly important for the purpose of evaluating the influence of globalization on corporate law and it perhaps constitutes the most advanced form of globalization. It will accordingly receive considerable attention here although an attempt will be made to consider other aspects of globalization and their interface with economic globalization. ‘closer integration of persons and countries’. The Interim Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises (2006), UN Document E/CN.4/2006/97 (22 February 2006), par. 10 describes the globalized world as one where ‘actors for which the territorial State is not the cardinal organizing principle have come to play significant public roles’. Friedman (2000, p. 8) says the overarching feature of globalization is integration instead of walls and divisions. 5 Scholte (2005, pp. 60–64). 6 See for instance Backer (2006, pp. 287, 290, 309–10); Pillay (2004, pp. 489, 492–3). 7 Pillay (2004, p. 496); Pinto (2005, pp. 487–8). The same will apply on a micro scale: Friedman (2000, pp. 162–3) who states that an emerging society is more important than an emerging market for the survival of globalization. 8 Tavis (2002, pp. 487, 489). 9 Scholte (2005, p. 59). 10 Scholte (2005, p. 61). 11 Scholte (2005, p. 59) does not mention economic interactions but it is believed that they should be included in the list. See Pinto (2005, pp. 487–8) for the impact of this on corporate law scholarship. 12 Scholte (2005, pp. 73, 99–101, 116). 13 Scholte (2005, pp. 62–3, 70 ff., 113–15). 14 Saul (2005, pp. 17–20).

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Technological advances in communication,15 transport16 and information technology have made the world a much smaller place.17 The internet, in particular, has become an important symbol of globalization because it allows for the instant spread of visual and auditory signals across the globe.18 In some ways cyberspace has replaced territorial space. But territorial space is also shrinking. International travel has increased exponentially. This is true for business travellers as well as for religious pilgrims, migrant workers and refugees.19 Technological advances, privatization as well as trade and investment liberalization20 have been central to economic globalization,21 which has occurred on three levels.22 Many production processes are global. Different stages in the production and development of products occur in different locations. Sometimes these activities are performed by large MNCs but global alliances between different firms also occur frequently.23 Furthermore, globalization has impacted on the behaviour of consumers and marketing to consumers. Products that are marketed globally are not new but they have become much more pervasive. Brands such as McDonald’s,24 Nike and Toyota are instantly recognizable across the planet. Finally, finance has become global. Round-the-clock trading occurs in innumerable financial markets.25 Banks provide finance all over the globe and investors maintain global portfolios.26

15 16 17 18 19 20

Scholte (2005, pp. 101–4) on the development of modern communication. See Scholte (2005, pp. 104–5). Tavis (2002, pp. 490, 493); Friedman (2000, pp. 9, 10–11, 46–53). Scholte (2005, pp. 67–8); Friedman (2000, pp. 60ff.). Scholte (2005, p. 68). Backer (2008b, pp. 499, 504); Ratner (2001, pp. 443, 458 ff.) on the impact of the end of the cold war on the new investment approach. States went from attempting to control investment to attempting to attract it. 21 Tavis (2002, pp. 492, 501); Stiglitz (2002, p. 9); Redmond (2003, pp. 69, 73–80). 22 Scholte (2005, pp. 70 ff., 107–13). 23 Tavis (2002, pp. 493–4) speaks of the separation of production over several sites; Friedman (2000, pp. 133–5). 24 McDonald’s is often used to illustrate aspects of globalization, see Fort and Schipani (2002, pp. 389, 391–2) and below text next to fn. 44. 25 Tavis (2002, p. 491) on the importance of the integration of financial markets and p. 514 on movement of capital. It remains to be seen whether the current crisis will impact on this aspect as a driver of globalization; Redmond (2003, p. 77). 26 Scholte (2005, p. 70). Friedman (2000, pp. 13, 112 ff.) refers to investors as the electronic herd. He distinguishes between the short-horn cattle, who invest in securities, and the long-horn cattle, or the MNCs that make foreign direct investments.

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Globalization in the form of supra-territoriality has eroded the power of the nation state.27 It is perhaps no coincidence that the term governance has now replaced government to label the organization of regulation.28 Statism, or governance that is reducible to the state, has been replaced by polycentric or dispersed regulation. Mobility of people and information as well as global economic forces constrain state power.29 Nevertheless, the claims for globalization should not be exaggerated.30 Globalism has not replaced territorialism. Both the territorial and global dimensions now matter.31 Most newspapers, television channels and modes of travel are still oriented towards particular territories. The ubiquitous Google search engine allows country searches on the internet as a primary option. There are limits to economic globalization: there is still more trade between Toronto and Vancouver than between Seattle and Vancouver.32 The end of statism has not meant the end of states.33 Their powers have been amended and in some ways eroded.34 Weaker states are sometimes impotent in the era of globalization, but powerful ones such as the United States have arguably become more influential.35 Furthermore, a considerable proportion of humanity still falls outside networks of global connectivity. Globalization can link people anywhere but it does not follow that it links them everywhere.36 Many do not travel internationally, use global communication methods such as the internet, consume 27

Branson (2002b, pp. 121, 126, 131, 132); Tavis (2002, pp. 489, 501); Stiglitz (2006, pp. 9, 69); Mayer (2002, pp. 585, 648); Friedman (2000, pp. 190–93); Backer (2006, pp. 290–91). Although the decline of the nation state in globalization should not be exaggerated, see pp. 487, 520–23 where it is argued that the state is disaggregating but not disappearing, p. 294 where it is averred that states will be deprived of their monopoly powers in the global sphere. See also the analysis of disaggregation of the state fn. 877. See also pp. 522, 527 where it is called a ‘loss of agenda setting power’. See also Backer (2007, pp. 1739, 1774–7, 1784). See the cautious approach of Twining (2007, pp. 1, 35–7). 28 Stiglitz (2002, p. 21) speaks of a system of governance without government. 29 Scholte (2005, pp. 185 ff.). 30 Westbrook (2006, pp. 489, 491–2); Twining (2006, p. 507). 31 Scholte (2005, pp. 75–8); Stiglitz (2006, p. 22). There often are other layers in between, see Twining (2007, pp. 11–12). 32 Tavis (2002, p. 491). Surprisingly some authors have shown that territorial distance even matters for the keeping of financial assets, Portes and Rey (2005, p. 269). 33 Saul (2005, pp. 232 ff.) especially on the manner in which the new economic powers such as China, India and Brazil focus on their national identity and powers. 34 Scholte (2005, p. 141). See Friedman (2000, pp. 209, 145 ff.) who ascribes an important but neo-liberal role to the state, see also p. xxi. 35 Scholte (2005, pp. 191–2). See Friedman (2000, pp. 367 ff.) on why the US is the ideal country for success under globalization. 36 Scholte (2005, p. 81).


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globally produced or marketed products, or participate in global civil society associations.37 Even if this group is relatively small, or even if it is conceded that no one is left completely untouched by globalization, it clearly has not involved everyone to the same extent.38 Global and territorial spaces are not separate domains but they overlap and interact in complex ways.39 So has globalization been to the benefit or detriment of humanity? This is an almost impossible question to answer and depends completely on perspective. It seems that globalization has had some positive consequences, but that it has also caused considerable harm. Stiglitz points out that globalization has been an enormous force for good, that it also has had detrimental consequences and that both the supporters and detractors of globalization overstate their case.40 Globalization is neither good nor bad. It has the power to do good and for some it has been highly beneficial. For others it has been an unmitigated disaster.41 One of the most important claims of advocates for globalization is that it promotes peace.42 Friedman has developed the golden arch theory.43 His thesis is a simple one: countries with McDonald’s restaurants do not go to war. The theory behind it is that the loss which interconnected societies incur when they go to war is so high that it serves as a major disincentive for violent conflicts.44 There may be some truth in this, but the weakening of states and uncertainties about security and identity probably have also led to an increase in local conflicts, civil wars and terrorism.45 The emphasis on market forces and failure to recognize the importance of politics and culture has provided scope for narrow and destructive forms of nationalism.46

37 38 39

But see Friedman (2000, p. 356). Scholte (2005, pp. 81–2, 119). Scholte (2005, pp. 78–9), see also pp. 79–80 on local–global binaries. See Kaldor (1999, pp. 3–4) who refers to the process as being contradictory. 40 Stiglitz (2002, pp. 4–5, 248); Pillay (2004, p. 491). 41 Stiglitz (2002, p. 20). 42 This is how Annan (2000, p. 9) saw the benefits of globalization. See Tavis (2002, p. 533) especially fn. 237. 43 Friedman (2000, pp. 248 ff.). 44 See Tavis (2002, p. 535) who mentions Kant’s idea that democracies do not go to war. See also on the link between trade and peace Fort and Schipani (2002, pp. 406–8). See the argument of Mayer (2002, p. 651) which indicates that more than just economic globalization is required for peace. 45 Scholte (2005, p. 30); Mayer (2002, pp. 643–4); See Kaldor (1999, pp. 6–7); Friedman (2000, pp. 397 ff.). Saul (2005, pp. 258 ff.) and see 41 ff. on the inability of free trade as such to promote peace. See Fort and Schipani (2002, pp. 415, 421) on identity conflicts albeit that the authors regard globalization as much more important as an engine for peace. 46 Saul (2005) contrasts positive and negative nationalism, at pp. 220, 232ff,

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Next, globalization has led to an increase and spread of trade, investment, economic opportunities, efficiency, productivity and higher living standards. Countries like India, Brazil and China have seen enormous economic growth in the last two decades and much of this can be ascribed to global trade and investment.47 Still, even more have been left behind. Moreover, the wild swings in the movements of international capital and fluctuations of exchange rates and financial values have increased uncertainty, insecurity and vulnerability.48 The victors in the globalized race win on a global scale; the losers fall further behind in relative terms. The winners become more powerful and the losers more impotent. Globalization creates greater inequality or at least magnifies existing inequalities.49 Again the weak are also sometimes able to interconnect and mobilize globally. They have also used greater connectivity to promote their interests. But it is often the weak that are weakly connected to the globalized world while the current emphasis on economic globalization has often benefited the economically powerful.50 Many of the rules according to which global trade takes place reflect the power of developed countries and this further skews the distribution of global wealth.51 It can rightly be asked whether those who live in the industrialized parts of the world have ‘developed the underlying sympathies which are necessary to make the global community work’.52 In the globalization discourse it is often stated that globalization will promote the interests of all because the rising tide carries all boats. However, the destructive power of the rising tide especially to the smaller more fragile boats should not be underestimated.53 243, 246 ff. and 269 ff. He blames this on the insecurities and indignities created by globalization, see p. 244. 47 Stiglitz (2002, p. 4); Saul (2005, p. 21) but see pp. 205–9; Special Representative Report (2006) par. 13; Pillay (2004, p. 493); Friedman (2000, pp. 350–51, 355). 48 Stiglitz (2006, pp. 69, 290–91, 292); Saul (2005, pp. 196–7); Friedman (2000, p. 12); Tavis (2002, p. 514). Rapid change creates opportunities for those who can exploit them but causes disproportionate harm to those who cannot. The latter group mostly consists of those who are poor and uneducated, see pp. 517, 520. See further on the negative consequences of trade globalization Pinto (2005, p. 497). 49 Stiglitz (2006, p. 69); Redmond (2003, p. 77); Pillay (2004, p. 491); Friedman (2000, pp. 306 ff., 429–31). See Saul (2005, p. 103) who contends that developing nations generally have not benefited from globalization; Special Representative Report (2006) par. 13. See also Fort and Schipani (2002, pp. 411–14) with reference to Amartya Sen and the concept of capability deprivation. 50 Scholte (2005, pp. 33–5); Stiglitz (2002, p. 5). See also Tavis (2002, pp. 513–14). 51 Stiglitz (2002; Stiglitz (2006, pp. 9, 62) where free trade is described as asymmetric. 52 Stiglitz (2006, p. 21). 53 Saul (2005, p. 202). Or as Branson (2001b, pp. 321, 351) observes, it carries


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The emphasis on economic globalization and the neglect of humans, human rights and social and environmental concerns has meant that many experience globalization as alienating and disconcerting.54 It creates what Tavis has referred to as the ‘social void’.55 Investment is done by large funds situated in developed countries that can move money with the click of a button. The focus of these investors on short-term gain exacerbates the problem.56 Globalization has transformed capitalism into hyper-capitalism and this has magnified capitalism’s benefits and detriments.57 It has been proposed that globalization has deepened democracy. Electronic interconnectedness has made it more difficult for oppressive regimes to stifle information. It has become easier for activists to co-operate. Global civil society organizations with considerable power now promote causes globally.58 Global investors sometimes have made investment contingent on countries meeting certain democratic standards. Conversely, globalization has diminished the capacity of democratic states to implement policy.59 It has corrupted political processes.60 Globalization has often been equated with cultural homogenization or cultural imperialism, especially along American lines.61 Stiglitz observes that only yachts. See also Mayer (2002, p. 595) who fears that this expression does not give sufficient effect to environmental issues. 54 Tavis (2002, pp. 514 ff.); Stiglitz (2002, pp. 17, 237); Westbrook (2006, p. 500). See Friedman (2000, p. 423) on how the connectedness and networks of globalization can make people feel disconnected, p. 431. 55 Tavis (2002, pp. 513 ff.); Mayer (2002, p. 594); Stiglitz (2006, p. 9). 56 Branson (2004, p. 911); Mitchell (2001, p. 180) fn. 2 colourfully describes these investors as rapacious jackals and he notes that their activities cannot be countered by individual shareholders, referred to by him as the living dead and that the short-termism is enhanced by the activities of short-term day traders. 57 Scholte (2005, pp. 31–2). 58 Special Representative Report (2006) par. 13; Pillay (2004, pp. 492–3, 497, 522). Stiglitz (2002, p. 9) says that organizations such as the Jubilee movement, Greenpeace and Oxfam are relevant here. Although the rise in importance of NGOs may itself undermine democracy, see Saul (2005, pp. 152–4). 59 Scholte (2005, pp. 35–7); Stiglitz (2006, p. 21); Saul (2005, pp. 139–40). See Friedman (2000, pp. 357 ff.), see also below his concept of globalution fn. 99. 60 Stiglitz (2002, p. 8); Saul (2005, p. 140). 61 Stiglitz (2002, pp. 5, 247); Pillay (2004, p. 491); Branson (2001b, pp. 326–7) and part V; Saul (2005, p. 114) emphasizes that globalization is a western movement; Friedman (2000, pp. xix, 9, 23, 291 ff., 379 ff.) especially p. 385. See on globalization and imperialism Westbrook (2006, p. 491) although he observes correctly at pp. 498–9 that ‘McDonalds commands no armies’. See also in this regard Norms on the Responsibilities of Transnational Corporations and other Business Enterprises with regard to Human Rights (with commentary), UN Document E/CN.4/Sub.2/2003/ 38/Rev.2 (26 Aug 2003), paras 10, 12; these Norms are further discussed below text next to fn. 371 ff. See on shareholder culture Pinto (2005, p. 490).

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globalization has not allowed sufficient time for cultures to adapt to changes.62 It is only natural that increased interactions between cultures will reduce diversity. Languages have been disappearing at an alarming rate.63 From the tribes of the Amazon to the Bushmen of the Kalahari, few communities have been able to maintain their lifestyles in the face of globalization.64 Nevertheless, it would be a complete over-simplification to suggest that global culture has become homogenized in any substantive sense. Although English is the global language, it embraces a widening variety of dialects and accents. Even the icon of globalization, McDonald’s, adapts its menu to accommodate local tastes.65 The end of statism has allowed minorities to reassert their cultures. Moreover, the internet and international migration also promote the establishment of new subcultures.66 Still, loss of culture due to globalization has caused marginalization and alienation. Thomas Friedman explains the difficult balance with reference to the Lexus and the olive tree. The Toyota Lexus is the slick symbol of economic globalization: the high-tech reward for the successful participant in globalization. The olive tree represents the local identities and cultures that anchor our lives and gives them a deeper meaning. Yet people are prepared to go to war in places like Jerusalem and Beirut over ownership of these actual and metaphorical olive trees. Globalization sees a constant tug between the forces of the Lexus and the olive tree.67 It seems clear that globalization, even if it is frequently detrimental, is not going to go away.68 Many who are critical of globalization focus merely on economic globalization while they utilize forces of globalization to promote their ideas.69 Stiglitz pithily explains the irony: globalization has united many against globalization.70 The symbols of globalization have been attacked by violent protestors.71 These attacks can to some extent be blamed on misguided 62 63 64 65

Stiglitz (2002, p. 8). Friedman (2000, pp. 303–4). Scholte (2005, pp. 80–81). See however Fort and Schipani (2002, p. 391). Contrast this with McDomination mentioned by Branson (2002b, p. 132). 66 Scholte (2005, pp. 80–81). See Smits (2007, pp. 1181, 1201–3) on the effect of globalization on legal cultures and their relation to states. 67 Friedman (2000, pp. 29–43). See also pp. 406–7. 68 Stiglitz (2002, pp. 214, 222); Stiglitz (2006, pp. 22–3); See Friedman (2000, pp. 406 ff.) on whether globalization is inevitable and pp. xxi–xxii where globalization is compared to the dawn. 69 Scholte (2005, p. 42); Stiglitz (2002, pp. 4, 10). 70 Stiglitz (2006, p. 7). 71 See for the first notable protests in Seattle against the WTO (30 Nov–3 Dec 1999), Genoa at the meeting of the G8 (2001), Geneva against the G8 (June 2003), Testy (2004, p. 87); for the impact on corporate law, Fort and Schipani (2002, p. 414), Pillay (2004, pp. 490, 496), Friedman (2000, pp. 9, 327ff.).


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anarchists. However, they also give expression to real concerns about certain aspects of globalization.72 Hence, although globalization is often beneficial, it also requires substantial rethinking and democratic control. The worst thing we could do today is attempt to sweep Globalization away … We would be equally unwise to deny Globalization’s failure and the self-destructive crisis into which it has slipped … if we cannot calmly cherry-pick the current system’s strengths and admit its failures we may well provoke protectionism and the worst nationalism.73

Neo-liberal apologists for economic globalization believe that it will promote the well-being of the denizens of the planet even though, or perhaps even because, it emasculates governments.74 Politics is a dirty business and politicians have failed the planet and its inhabitants. In economics, public choice theory is used to paint a bleak picture of politics and how it has merely become the playpen for lobbyists and special interest groups.75 According to this vision societies will be better off in a world where the role of politics is reduced and competing firms and customers make choices in effective markets. Markets will allow citizens to make individual choices. These choices will allow them to maximize their own welfare and because the decisions are made in competitive markets no participant in the market will be able to dominate others.76 The function of states in the context of private law merely should be to enforce the contracts concluded and protect the property obtained by means of exercises of these individual choices. However, the current financial crisis and the difficulties with globalization illustrate the dangers of this neo-liberal approach. Neo-liberalism served as an important justification for economic globalization but it has now lost some of its lustre.77 Globalization as perceived by neo-liberals is no longer regarded as inevitable.78 The neo-liberal approach correctly illustrates that global economic activities are not unconstrained even if they are not regulated by states. These activities are restricted by strong market forces. It also underlines that regulation cannot be made without due respect for economic forces and

72 Tavis (2002, p. 514); Branson (2001b, pp. 325, 351–2); Stiglitz (2006, pp. 16, 76, 79); Stiglitz (2002, pp. 3, 9) states that what was new about these protests was that they occurred in the first world, p. 244; Saul (2005, p. 167). 73 Saul (2005, pp. 172–3). See Friedman (2000, pp. xxi–xxii). 74 Scholte (2005, pp. 38–41). See also the summary of the argument, Saul (2005, pp. 15-16, 73). 75 Mitchell and Simmons (1994, p. xviii) but see Udehn (1996). 76 Tavis (2002, pp. 523–4) on the power of markets. 77 Scholte (2005, p. 40). 78 Saul (2005, p. 6).

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the power of special interests. However, although it ‘has been a neat trick, presenting an economic truism through which civilization must be approached’,79 markets are not sufficient to ensure that globalization will not have unacceptable consequences. Economic globalization has outstripped other forms of globalization.80 Furthermore, the economic dimension of globalization requires rethinking.81 Most humans do not want a world that is merely dominated by the cold and inhuman forces of the market. Human existence is about more than just markets and efficiency.82 Neo-liberal economic ideas are premised on the ability of actors to act rationally on the basis of adequate information in well-functioning markets. In reality these conditions are often absent.83 Political and legal regulation will be necessary to make globalization work. With free markets, powerful and inexpensive communication, and no world government, people, capital, and ideas can all float across borders. It is tempting to think that, in this environment, government and governance matter less. In fact, the opposite is true.84

Regulation will be necessary to establish the institutions that make the basic capitalistic elements of economic globalization function adequately and to embed capitalism in the societies in which they have to function.85

79 80 81 82

Saul (2005, p. 14). Stiglitz (2006, pp. 21, 269 and 291). Saul (2005, p. 24). Tavis (2002, p. 514), see the reference in fn. 146 to Rodrick (1997), see the criticism above, text next to fn. 55, of the social void created by globalization. Saul (2005, p. 272) speaks of the contempt of theorists for human reality. 83 Stiglitz (2002) at for instance pp. 74 ff., p. 164 and the comments on the Coase theorem, p. 219; Stiglitz (2006, p. 29), see pp. 199–203 where he also points out that there is no international competition law to address market failures; Saul (2005, pp. 176 ff.). 84 Fort and Schipani (2002, p. 423). Friedman (2000, p. 158) makes a similar point in capital letters. 85 Stiglitz (2002, pp. 139, 160–61, 218); Special Representative Report (2006) par. 21 ‘it is generally believed that economic development, coupled with the rule of law, is the best guarantor of the entire spectrum of human rights’. See pp. 217–18 on relating capitalism to different types of societies, p. 219 where the basic problem is described as ‘market fundamentalism’ and Stiglitz (2006, pp. 9, 26–7, 105). Saul (2005, pp. 199–201) speaks of reregulation.


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GLOBALIZATION, CORPORATE LAW AND MULTINATIONAL CORPORATIONS

So how should corporate lawyers and law respond to the challenges presented by globalization? When it comes to private law generally, Michaels and Jansen have observed that an evaluation of the interaction between globalization and private law has not received the same priority as the study of its effect on public law. They pose the questions:86 To what extent is the state the blind spot in our thinking about private law? Is private law beyond the state still ‘law’? Is private law within the state still ‘private’? To what extent does private law presuppose the state; to what extent is it irreconcilable with the state? To what extent can private law in the ‘postnational constellation’ learn from its experience before and within the state?

Corporate law is a form of private law in the wider sense.87 But the statements about the neglect of private law in globalization discourses are only partly true for corporate law. Therefore corporate law may be one of the port keys to the understanding of the relationship between globalization and private law. Globalization in general and economic globalization in particular has important consequences for corporate law.88 The MNC personifies globalization. MNCs raise difficult questions for corporate law. Although there is also interplay between globalization and corporate law, on other levels, the emphasis in this chapter will be on globalization and the MNC. MNCs have spheres of influence that exceed national boundaries or sometimes even for which national boundaries mean little.89 MNCs became controversial in the 1960s and 1970s and much was written on them before the rise of globalization as a topic for analysis, if not as a phenomenon. Yet, they are the instruments of globalization in the form of economic integration90 and they 86 87

Michaels and Jansen (2006, pp. 843, 844). Although there is no unanimity on this point, this statement is certainly true for purposes of ‘private law’ as defined by Michaels and Jansen (2006, p. 847) where corporate law is seen as part of the law of persons. See the cautious argument of Greenfield (2002, pp. 581, 591 ff.). 88 But see Branson (2002b, p. 126) who states that the growth of these firms went unnoticed for some time. 89 The term multinational corporation rather than transnational corporation will be used in this chapter. See the definitions of ‘transnational corporations’ in Norms on the Responsibilities of Transnational Corporations and other Business Enterprises with regard to Human Rights, UN Document E/CN.4/Sub.2/2003/12/Rev.2 (26 Aug 2003), par. 20; Weissbrodt and Kruger (2003, pp. 901, 907–8); Redmond (2003) fn. 1. For a definition of an MNC, see Backer (2007, p. 1743) and the reference to Dunning (2006, p. 173) and fn. 1. See on the origin of the concept Duruigbo (2008, pp. 1, 19–22). 90 Tavis (2002, pp. 491–3).

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have increased geometrically91 in size and number in recent times, especially through mergers.92 It may even be asked whether the term ‘multinational corporation’ remains appropriate to describe corporations that are not bound to territories. However, the term will be accepted as settled for purposes of this contribution. Technically MNCs seldom if ever operate as single corporations. They normally are groups of corporations with holding corporations and hosts of subsidiaries. But for the most part they can be treated as single phenomena in the type of discussion that is undertaken here.93 The claims of the apologists for globalization are that MNCs are central to delivering the benefits of globalization. MNCs are large but bulk is needed to allow them to compete globally.94 The foreign direct investment of MNCs has done much to narrow the gap between some developing and developed countries.95 They help to raise standards and bring products to developing countries while they provide them with access to global markets. They supply cheaper products of increasing quality to developed nations.96 The neo-liberal dream for MNCs is that they: would be transferring research and development (R&D) efforts to satellite operations in a meaningful way.97 Some of those receiving satellites would be located in newly industrializing countries, and, perhaps, in less developed countries as well. MNCs would be engaged in significant direct foreign investment (DFI). By forming subsidiaries and joint ventures in countries around the globe, MNCs would be making significant investments in plant and other production facilities, in modern-

91 Branson (2002a, pp. 1207, 1211) with reference to Orts (1998, pp. 1947, 1962); Branson (2002b, pp. 127–130, 351); Branson (2000, p. 669). 92 Branson (2001b, pp. 352–5); Branson (2002b, pp. 127 ff.); Branson (2000, pp. 672 ff.). See the interesting perspective of Saul (2005, p. 190) on the real role of these organizations. 93 See on this aspect Sub-Commission on Prevention of Discrimination and Protection of Minorities, The Impact of the Activities and Working Methods of Transnational Corporations on the Full Employment of all Human Rights, in Particular Economic, Social, and Cultural Rights and the Right to Development, Bearing in Mind Existing International Guidelines, Rules and Standards Relating to the Subject Matter, UN Document E/CN.4/Sub.2/1996/12 (2 July 1996), par. 72; McLoughlin (2007, pp. 153, 158, 170–73); Weissbrodt and Kruger (2003, pp. 907–8); Backer (2007, p. 1775); Backer (2006, pp. 303, 363 ff.); Backer (2008b, p. 507). Compare also the approach of Redmond (2003) fn. 1. 94 Stiglitz (2006, pp. 197–8); Mayer (2002, p. 593). See the criticism of Saul (2005, pp. 80–81, 176–7). 95 Stiglitz (2002, p. 188). 96 Stiglitz (2002, p. 188); Dickerson (2004, pp. 533, 538) with reference to Bhagwati (2002) again refers to the rising tide argument; Redmond (2003, p. 71). 97 Stiglitz (2002, pp. 5, 10).


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ization efforts, and in human resources so as to be able to decentralize the financial, marketing, and other ‘nerve center’ aspects of their businesses. Simultaneously, MNCs would be shaking free from their roots and national origins, converging on a global model of governance and operation.98

It even has been proposed that MNCs have the potential to promote peace and democracy.99 However, MNCs and their role in globalization have been blamed for many of its ills.100 Global civil society has railed against the harms done by MNCs.101 Indeed some have viewed globalization as the Trojan horse for global corporations.102 There is considerable doubt whether MNCs indeed spread the benefits of economic globalization to any real degree.103 The evidence is that MNCs are often still anchored in particular nations and that they hoard the benefits of globalization for these nations.104 MNCs have been lightly regulated. Testy lists the reasons for this from a US perspective:105 a pervasive distrust of regulation and belief in the value of private ordering, the privileged status of financial capital in corporate governance and the focus of managers and investors on short-term profits. However, regulation of MNCs is difficult even if there is a will to regulate.

98 Doremus et al. (1998) especially pp. 84–5 and 93; Branson (2001b, p. 340); Branson (2002b, p. 124); Stiglitz (2006, pp. 58, 188). 99 Fort and Schipani (2002, pp. 392, 400 ff.) especially pp. 432–3 and the impact of learning by doing. See Friedman (2000, pp. 167 ff.) who calls this globalution although he accept the limits of this hypothesis. International capital (the herd) will one day ride ‘into town like the Lone Ranger demanding the rule of law, and the next day … stomp right out like King Kong, squashing everything in its path’, see p. 168 while he accepts that this will be countered by the diminution of the state under globalization, pp. 190–93. 100 Branson (2001b, p. 352); Redmond (2003, p. 71); Ratner (2001, pp. 446 ff.); Stiglitz (2006, p. 187) who notes that ‘[t]he left (and the not-so-left) often vilifies corporations portraying them … as greedy, heartless entities that place profit above all else’ and ‘[f]or many people multinational corporations have come to symbolize what is wrong with globalization: many would say they are the primary cause of its problems’. See the balanced approach in Special Representative Report (2006), fn. 4, at paras 20–30. See the sources mentioned: Testy (2004) at fn. 8–10. See the Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises, John Ruggie (2008), A/HRC/8/5, (7 April 2008), par. 16 for a discussion of human rights abuses by MNCs. 101 Backer (2006, p. 309). 102 Branson (2004, p. 912) and fn. 8. 103 Doremus (1998) especially at pp. 84–5 and 93; Stiglitz (2006, p. 58). See the criticism of Saul (2005, pp. 126, 142, 143) on the type of growth which MNCs produce. 104 Branson (2001b, p. 340); Branson (2002b, p. 124). See below, in this section, for further discussion of this aspect. 105 Testy (2002, p. 1227–8).

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The size and economic mobility of MNCs will allow them to move their activities to territories where it will be the cheapest to perform them.106 They will engage in regulatory arbitrage to avoid the costs of complying with standards that are put in place to protect those who are affected by their activities (the stakeholders).107 Accordingly, they exploit employees in developing countries when they manufacture there at low cost and their employees in developed countries because they are abandoned in favour of plantation production in the developing world.108 The internal structures of MNCs ‘have again given the West access to cheap labour abroad’.109 Inequalities of income are maintained because high-skilled activities are mostly performed in developed nations and low-skilled activities in developing ones.110 MNCs are blamed for environmental degradation.111 They tend to produce in jurisdictions that allow them to flout good environmental practices. They frequently are less responsive to social problems in countries where they invest than local firms.112 The lack of transparency in some countries allows MNCs to apply double standards. Seemingly reputable firms do not think twice about bribing officials in developing countries. In Southern Africa this is illustrated by the corruption of European engineering and construction firms involved in the Lesotho Highlands Water Project and of arms manufacturers in South Africa.113

106 Sub-Commission on Prevention of Discrimination and Protection of Minorities The Realization of Economic, Social and Cultural Rights: The Relationship Between the Enjoyment of Human Rights, in Particular, International Labour and Trade Union Rights, and the Working Methods and Activities of Transnational Corporations UN Document E/CN.4/Sub.2/1995/11 (24 July 1995), par. 101. 107 Arbitrage by MNCs will be analysed in greater detail below text next to fn. 228 ff. 108 Branson (2002b, p. 126); Branson (2001b, pp. 358, 359). See the cautious statement of Stiglitz (2002, p. 68). The so-called outsourcing problem has been of particular significance to developing nations, see Stiglitz (2006, pp. 270–72). 109 Saul (2005, p. 149). 110 Sub-Commission on Prevention of Discrimination (1995) at par. 57; SubCommission on Prevention of Discrimination and Protection of Minorities, Working Document The Realization of Economic, Social and Cultural Rights: The Question of Transnational Corporations, UN Document E/CN.4/Sub.2/1998/6 (10 June 1998), (henceforth Sub-Commission on Prevention of Discrimination 1998), paras 1, 8. 111 Branson (2002b, p. 126); Stiglitz (2006, pp. 190–91); Oshionebo (2007, pp. 1, 3); Mayer (2002, pp. 599 ff.). 112 Stiglitz (2002, p. 57); Stiglitz (2006, p. 196). 113 See Information Portal on Corruption in Africa, at www.ipocafrica.org, accessed 15 January 2009, on corruption in Southern Africa. Stiglitz (2006, p. 191), see pp. 139–142, 151 ff. on transparency and corruption. Sometimes these concerns are generally levelled at public corporations: Testy (2004, pp. 91–2). See generally on corruption and MNCs Fort and Schipani (2002, p. 396). See in this regard Norms with Commentary (2003) at par. 11; the Norms are discussed below, text next to fn. 378 ff.


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MNCs frequently are so big and powerful that they dominate smaller economies who host them. They prefer to deal with other MNCs and make it difficult for domestic firms to compete with them or to grow sufficiently. They may prevent smaller and especially developing countries from establishing powerful indigenous firms on a broad front even if there are country-specific comparative advantages.114 MNCs cannot fill the void left by the weakening of nation states.115 The idea that they can fill the vacuum left by the loss of political power of states because of globalization ‘does sound a bit silly when you lay it out like that’.116 The power of MNCs allows them to play politics117 and they may have a destabilizing influence on the politics of nation states because of their sheer bulk. Their activities have been particularly damaging in developing countries that are democratically and institutionally weak and in conflict zones.118 The lobbying activities of MNCs are a major contributing factor to the evils pointed out by public choice theorists. MNCs have been particularly successful in lobbying powerful states to skew the international trade system in their favour.119 MNCs have on occasion had interests in promoting conflict and even war.120 Moreover, they have sometimes privatized violence in developing countries.121 Mining and oil companies in Africa, for instance, frequently have large armies that guard their interests while they occasionally support military groups and armies with dubious agendas. Military power that is not subject to democratic constraints is always dangerous.122 MNCs have been a major contributor to the cultural homogenization blamed on globalization.123 The growth in the demand for their products and the efficiency of their workforces often depend on reduced cultural diversity and cultural alienation. Even worse is the allegation that MNCs are not culturally

114 Backer (2006, p. 312); Stiglitz (2002, pp. 68–9); Stiglitz (2006, pp. 6, 192); Saul (2005, pp. 176–7). 115 Saul (2005, p. 222). 116 Saul (2005, pp. 81–3). 117 Sub-Commission on Prevention of Discrimination (1995) at par. 53. 118 Stiglitz (2006, p. 197); Backer (2006, p. 313); Backer (2008b, p. 505); Special Representative Report (2006), fn. 4, at paras 29–30; Duruigbo (2008, p. 61). 119 Stiglitz (2006, p. 197); Saul (2005, p. 82). 120 Fort and Schipani (2002, p. 399) although they accept that business will more often be interested in promoting peace. See in this regard Norms with Commentary (2003) at paras 3–4, the Norms are discussed below text next to fn. 378 ff. 121 Tavis (2002, p. 534). See Kaldor (1999, pp. 6–7) such as Shell in Nigeria. See also in this regard the proposals Special Representative Report (2008), fn.100, at paras 47–9. 122 Oshionebo (2007, p. 2); McLoughlin (2007) at fn. 1. See Saul (2005, p. 189) on the role of corporations in the Iraq wars. 123 Branson (2002b, pp. 132–3); Branson (2001b, p. 357).

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neutral but that most still identify closely with powerful Western countries: that they contribute to globalization as a new form of cultural imperialism.124 Branson has observed that ‘[n]ational differences persist – are “hard wired into core corporate structures” and “embody distinctive and durable ideologies or, as some analysts now prefer to call them, belief-systems”.’125 Many MNCs have retained very specific, often American or European, nationalities despite globalization and despite being active in many countries.126 Although global corporations have spread their production processes headquarters have become more concentrated in the West.127 Too much must not be made of these criticisms although there is at least a grain of truth in each of them. Again the constraining effect of market and other non-economic forces of globalization should not be underestimated. Some claims are exaggerated because the claims of globalization are themselves overblown128 and because faceless MNCs are convenient scapegoats for the sins of globalization.129 It is also dangerous to blame all the ills of globalization on corporations because, in many ways, they are merely its instruments.130 However, as with globalization, the idea that MNCs are sufficiently inhibited by market forces alone and will be an unmitigated force for good is unrealistic and tainted by blind ideology. Market failures occur often enough in developed countries and very frequently in developing countries. MNCs are frequently able to externalize the cost of their activities. They have been described as psychopathic externalizing machines.131 Furthermore, markets cannot sufficiently protect the interests and values of societies against abuses by MNCs.132 The instances of misbehaviour are sufficiently widespread to indicate that it is systemic and that there is a need for corrective measures.133

124 125

Branson (2001b, pp. 341–3, 358). Branson (2001b, p. 341) quoting Doremus (1998, p. 15) and see also the further quote p. 342. 126 Saul (2005, pp. 83, 178). 127 Saul (2005, p. 125). Although Orts (1995, p. 253) is correct in observing that some MNCs are becoming stateless, in which case the ‘neo-mercantilist’ argument that corporations are instruments of their incorporating states becomes problematic. 128 Doremus (1998); Branson (2002b). 129 Fort and Schipani (2002, p. 392). 130 Stiglitz (2002, pp. 188–9) who argues that MNCs for the same reason cannot be blamed for increased materialism. 131 Stiglitz (2006, pp. 190, 192–5). See Bakan (2004), especially pp. 56–7 for a stimulating albeit exaggerated description of corporations as psychopaths. See the broader explanation of schizophrenia in conservative thinking: Byers (2004, pp. 921, 940 ff.). 132 See the analysis of the extent of managerial discretion, Tavis (2002, pp. 527–9), although the aim of this analysis is to determine to what extent corporations can promote social responsibility despite the market. 133 Stiglitz (2006, p. 189).


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CORPORATE LAW THEORY

Globalization creates difficulties and opportunities for corporate law. To determine how the law should respond, there is a need to foray into corporate law theory. Theory must help to answer two questions: (1) for whose benefit should MNCs exist? (2) what role should regulation of MNCs play?134 The recent failures in the global economy and the role of MNCs in it mean that the timeless questions regarding the nature of corporations have again become timely.135 The corporate theory that evaluates the relationship between corporations, participants in activities of corporations and states needs to be analysed. Traditional jurisprudential analysis of corporations and corporate law had become a stale subject. It did not contribute much to attempts at answering the vexed questions of contemporary corporate law.136 Nevertheless, economists have invigorated corporate law theory in recent times.137 This has led to the establishment of a new ontology of corporations. The economic theory of the firm, or so-called contract theory, has exerted enormous influence on the current understanding of corporations. According to the economist Ronald Coase the function of a firm, such as a corporation, is to save transaction costs.138 It receives funds and uses them to purchase inputs and employ workers. The transaction costs of doing so by concluding specific contracts that precisely define performance, would be exorbitant. Accordingly, authority replaces contracts inside the corporation. Managers wield this authority to allocate resources and costs. They do deliberately what the market would do spontaneously, in order to save transaction costs. Relationships are internalized in the firm in order to save transaction costs. Hence, the question whether a relationship is internalized or not depends on transaction costs in comparison to the cost of exercising authority through management.139

134 Backer (2006, p. 310); there is also a third question: where must regulation of global corporations take place? But this question has to be answered separately. 135 This line is borrowed from Testy (2002, p. 1228). 136 Bratton (1989a, pp. 1471, 1491 and 1508 ff.) and Bratton (2001, p. 737) where it is referred to as Dewey’s indeterminacy argument after an article by Dewey (1926, pp. 655, 667–78). Bratton ultimately also believes this is true of the economic approach. See on these theories Bratton (1989a, pp. 1482 ff.); Millon (1990, p. 201); Tsuk (2003, pp. 1861, 1871 ff.). See especially the colourful description of Buxbaum (1993, pp. 867, 868). 137 Easterbrook and Fischel (1991); Ulen (1993, p. 301). Although this approach is not unrelated to previous perspectives on corporations: Millon (1990, p. 229). 138 Coase (1937, p. 386); Cheung (1983, p. 1); Coase (1988, p. 33). 139 Bratton (1989a, p. 1477) calls this the weaker version because it does not

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Especially in the United States, Coase’s ideas were expanded to focus on the separation of shareholders and managers, which had become the dominant feature of large US corporations.140 Authors then started to describe a corporation as a nexus of contracts (contract in the economic rather than the legal sense).141 Management as the agents (again in the economic rather than legal sense) of shareholders have an incentive to shirk or to refrain from acting in the interest of shareholders. There is a dissonance between the interests of shareholders and managers. Managers will not maximize value for shareholders as it is not in their own interest to do so. Monitoring systems are established to allow the shareholders to supervise the extent to which managers promote their interests.142 Further, efforts will be made to bring the interests of managers into line with those of shareholders, through bonding. Managers are bonded to corporations by the structuring of their compensation and by making them shareholders of the corporation. Monitoring and bonding are not perfect in achieving maximization of shareholders’ wealth. The cost of monitoring and bonding is evaluated and shareholders and management put mechanisms in place that balance these costs with the risks of managerial opportunism.143 Hence, standard contract theory results in several fundamental conclusions. First, peremptory regulation of corporations is inefficient and inappropriate. The legal rules that constitute corporate law are intended merely to save transactions costs. Shareholders and management should be allowed to depart from them in situations where they are inefficient. Only a small number of rules that are not contractible should be peremptory.144 Secondly, contract theory has contributed substantially to the justification of the ‘hegemony of shareholder primacy’.145 In the words of the economist Milton Friedman, ‘[t]he social responsibility of business is to increase its profits’.146 Shareholders should be the ultimate beneficiaries of the actions of regard the market as operating internally. See also Bratton (1989b, pp. 407, 416–17) but also p. 421 and the description of the approach of the institutional economists, especially Williamson. See the criticism of Alchian and Demsetz (1972, pp. 777, 794). See also on the property rights theory Blair and Stout (1999, pp. 247, 259–61). 140 Millon (1990, p. 230). 141 Bratton (1989a) at fn. 28; Ulen (1993, pp. 319–21) on the origin of the term. In institutional economics greater emphasis is placed on structure and the role of the contract itself becomes very limited, see Williamson (1981, p. 1537) and Williamson (1984, p. 1197). See Bratton (1989b, pp. 446 ff.) on the meaning of contract in this context. 142 Meese (2002, pp. 1629–31). 143 Bratton (1989a, p. 1478); Bratton (1989b, pp. 417–19). 144 Millon (1990, pp. 230–31); Ulen (1993, pp. 322–3). 145 Testy (2002, pp. 1230–32). 146 New York Times 13 September 1970 (Magazine), p. 32. Friedman’s more scholarly treatment of his arguments was laid out in Friedman (1962).


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management. Corporate law should be antipathetic to all but the suppliers of capital.147 This approach does not mean that the interests of society are irrelevant to corporate law. Two of its most illustrious proponents state that: All thoughtful people believe that corporate enterprise should be organized and operated to serve the interests of society as a whole, and that the interests of shareholders deserve no greater weight in this social calculus than do the interests of any other members of society. The point is simply that now, as a consequence of both logic and experience, there is convergence on a consensus that the best means to this end (that is, the pursuit of aggregate social welfare) is to make corporate managers strongly accountable to shareholder interests and, at least in direct terms, only to those interests.148

Only if shareholders bear the residual risk of the success of the corporation will they have the necessary incentive to ensure that corporations are managed efficiently.149 Although a corporation is regarded as a nexus of a wide range of contracts and not just the contracts between shareholders and manager, the contracting problems in other relationships are generally regarded as easier to resolve.150 Regulation of these relationships should be external to corporate law and should take place in labour law, consumer law and human rights law: ‘[m]uch of the economic analysis of corporations … strips these other contracts of normative importance for corporate law’.151 The contractarian view apparently has considerable academic support in the United States and, to a lesser extent, even outside of it.152 It has been

147 See in this respect also the influential article of Alchian and Demsetz (1972), see the discussion below, text next to fn. 201. See the description of Hodes (1983, pp. 468, 487) where the approach of Friedman is described as fundamentalist because it is based on the notion that a corporation can only have an economic function. 148 Hansmann and Kraakman (2001, pp. 439, 441). See also the evaluation from a different perspective Greenfield (2002, pp. 605–6). 149 Meese (2002, p. 1631) ‘this “principal–agent” account of the public corporation, in turn, implies a “shareholder primacy norm”’. See Testy (2002, pp. 1237–8) on the criticism that the definition of ‘stakeholder’ in terms of the stakeholder approach, discussed below, text next to fn. 159 ff., is too vague. See Millon (1990, p. 220) on the influence of Friedman. See generally on the contribution of Berle and Means, Bratton (2001). See Blair and Stout (1999, pp. 258–65) who call this the ‘grand-designprincipal–agent model’. 150 Cf. Licht (2004, pp. 649, 708–12). 151 Whincop (2001, pp. 168–9), see also the analysis below, text next to fn. 214 ff. See Williamson (1984, p. 1197) who gives an economic but very sophisticated picture of the role of different contracts in the corporation. 152 Although the position must not be over-simplified: Branson (2004, pp. 918–19).

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described in the United States as a bastion of economic conventionalism.153 In practice, legislation and court judgments can sometimes be explained with reference to it. The shareholders are regarded as residual claimants; they are perceived as the group that have the ultimate interest in the corporation,154 and are believed to have ultimate control over the corporation.155 Furthermore, contract theory provides the theoretical underpinning in corporate law for justifying the light regulation of MNCs under globalization.156 The antithesis of contract theory, for simplicity, can be called corporate social responsibility (CSR).157 There are many hues of CSR and this brief analysis will necessarily be a gross oversimplification.158 Indeed the ideas that are grouped together here as CSR have variously been referred to as CSR,159 the stakeholder approach,160 progressive corporate law161 and communitarian corporate law.162 Corporate law and corporations are, according to this approach, not merely aimed at promoting the interests of shareholders but are concerned with a much wider range of stakeholders. Some CSR scholars feel that corporate social responsibility should be promoted extra-judicially and that it can be legitimized on the basis of market forces. Conversely, others are strongly anti-capitalist and anti-market. However, most strands of CSR recog-

153 See the influential Hansmann and Kraakman (2001), discussed below, text next to fn. 266 ff. Greenfield (2002, p. 583) accepts that it is the conventional position in the United States. 154 Williams and Conley (2005, pp. 493–5) state that this approach is understood to ‘valorize shareholder value’. See Dodge v Ford Motor Co 170 NW 668, 684 (Mich 1919); Katz v Oak Industries Inc 508 A2d 873, 879 (Del Ch 1989). 155 But see the criticism of Bainbridge (2002, p. 45). 156 Backer (2006, pp. 308–9) ‘globalization also embraces the structural status quo’. See the arguments listed by Mensch (2006, pp. 243, 248). 157 Testy (2002, p. 1232) calls these approaches ‘counter hegemonic’ but that perhaps is only true for the United States. In many other countries they receive much broader acceptance. 158 Testy (2002, pp. 1246–7); Backer (2006, pp. 300–8); Backer (2008a, pp. 591, 607, 609–12). See the list of models set out in Hansmann and Kraakman (2001, pp. 443 ff.). 159 Or in the US ‘new corporate social responsibility’ to distinguish it from the variant that applied in the 1970s, see Testy (2002, p. 1229); Branson (2001a, pp. 605, 639–46). Testy above p. 1238 also notes that this is the most aggressive form of progressive corporate law. It is not clear from the manner in which the term is used by others that this is always true. 160 Licht (2004, pp. 722 ff.); Testy (2002, pp. 1237–8) mentions that this term arose in the context of the anti-takeover mechanisms in the US in the 1980s. 161 Mitchell (1995); Testy (2004, pp. 91 ff.); Licht (2004, pp. 713–14). See for the origin of the term Tsuk (2003, p. 1863). 162 Testy (2002, pp. 1228–9) and especially pp. 1241 ff. See Branson (2002a, pp. 1217–18).


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nize the benefits of market capitalism as well as the need for proper regulation of its institutions to promote their proper functioning. They are not anti-corporate but acknowledge the dangers of the powers of large corporations, especially MNCs.163 Earlier forms of CSR required powerful constraints on the activities of corporations, but current versions are more cautious. They are more closely focused on corporate theory and the internal structuring of corporations.164 ‘Instead of regulating the uses to which the tool is put, these commentators took the redesign of the tool itself’.165 Many proponents of CSR emphasize sustainability or responsibility reporting by corporations (sometimes as a singular aspect of CSR but more often as one of a range of aspects).166 CSR has itself been questioned, even by those who share its broad ideals. It has sometimes been slated as window-dressing for large corporations, or as a form of corporate commodification.167 It also may be suggested that there is an inherent conflict between the interests of shareholders, managers and other stakeholders. It will then follow that CSR will not sufficiently restrain the forces that lead management to act in their own interest or in the short-term interests of shareholders where they conflict with the interests of other stakeholders.168 The emphasis which some proponents of CSR have placed on reporting and disclosures also has been subjected to criticism because it does not establish clear principles according to which the conduct of managers can be measured.169 It presupposes that stakeholders in the corporation will have 163 164 165

Testy (2004, pp. 93, 104). Below, text next to fn. 174 ff. See Mitchell (1995, p. xiv) referred to in Testy (2002, p. 1228); Testy (2004, pp. 92, 103). 166 Williams and Conley (2005, p. 503): greater promotion of disclosure of nonfinancial information is merely one aspect of the greater promotion of the interests of stakeholders. See the argument of Testy (2002, pp. 1235–6) who refers to this approach as corporate social accountability. See on the approach in the United States, Branson (2002a, pp. 1218–20). See below, fn. 169, on sustainability reporting. 167 Testy (2002, p. 1239) on commodification; Williams and Conley (2005, p. 501) who caution that the CSR debate may be dominated by corporations who merely use it to ‘provide safe venues for the disaffected to let off steam’. See also Bakan (2004) especially pp. 18–20, 26, 28 ff. and 109 where he states that the term is an oxymoron. 168 Williams and Conley (2005, pp. 501–2). 169 See on the monitoring and disclosure movement: Backer (2006, p. 304) and Backer (2008a) especially at p. 600. See also generally on social responsibility reporting the Global Reporting Initiative www.globalreporting.org, accessed 7 December 2008, which provides for a sustainability reporting framework of which the most important element is the Sustainability Reporting Guidelines; Branson (2002a, pp. 1218–20); Backer (2008a, p. 642) on this and other initiatives. See also Blair et al. (2008, p. 325) on providing assurance services in this context.

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sufficient incentives to glean disclosed information and will be able to take steps to ensure that corporations or their managers do not harm them.170 Nevertheless, the major conflict remains between CSR and contract theory. Although some more recent versions of stakeholder theory are more structural and take contractarians on, on their own turf,171 the two approaches remain incommensurable.172 They are self-contained and there are few exchanges between disciples of opposing views. The differences between these points of departure have resulted in a stalemate that has now persisted in corporate law theory since the debate between Adolf Berle and E. Merrick Dodd in the United States in the 1930s.173 Two aspects can be highlighted. Most strands of CSR are communitarian in their world-view.174 They recognize the establishment of group identities. Humans identify with, respond to and rally around corporations as social institutions.175 CSR borrows from aggregate theory. It emphasizes that corporations aggregate a large number of persons.176 They exist for the benefit of a range of stakeholders from employees through suppliers to consumers and the environment.177 The emphasis mostly is on the institutional nature of corporations.178 Contract theory ignores these institutional characteristics of corporations. It implicates a completely different conception of the corporation. The economic approach to corporations is materialistic and individualistic.179 It deconstructs the corporation and does not regard it as an entity in any meaningful sense.180 170 171 172

Testy (2002, pp. 1235–6). Testy (2002, p. 1230). See the analysis of Tavis (2002, pp. 531–2). Licht (2004) who explains this with reference to behavioural economics. Dickerson (2004, p. 534) says there is a discontinuity between these visions of corporations. 173 Berle and Means (1932); Berle (1931, p. 1049); Berle (1932, p. 1365); Dodd (1932, p. 1145). Berle later conceded the argument in Berle (1954, p. 169). For interesting summaries of the Berle and Dodd debate, see: Tsuk (2003, pp. 1880–1900); Backer (2006, p. 295); Licht (2004) especially at pp. 690 ff.; Bratton (2001). 174 Whincop (2001, pp. 213–14). Byers (2004, pp. 975–6) distinguishes the corporate governance and progressive movements as well as the communitarian theory of responsibility. 175 See Nesteruk (2002, pp. 437, 443–4) juxtaposing Fischel (1982a, pp. 1259, 1273) and Millon (1993, pp. 1373, 1388), Solomon (1994, pp. 271, 281), see also Nesteruk above pp. 449–51. 176 Millon (1990, pp. 226–7). 177 Testy (2004, p. 91). 178 Even in institutional economics the institutional aspect of corporations, in this sense, is underplayed, see above, fn. 139. 179 See Bratton (1989b, pp. 439–41) for the impact of liberal individualism. 180 Bratton (1989a, pp. 1498–9); Bratton (1989b, pp. 418–20, 423, 428–9). However, Bratton in his last mentioned article shows that this idea should not be exaggerated, there remains a ‘nexus’, see pp. 429–30.


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Contractarian theory borrows a central concept from classical liberalism by characterizing the internal workings of corporate life from an atomistic perspective, which reposes trust and belief in the power of individuals to steer their economic destinies. While this permits the theorists to indulge a romanticized view of corporate reality, it also drops corporate accountability out of the equation, because a ‘corporation’ has no existence outside of individuals.181

The CSR approach emphasizes the power of corporations and their ability to exploit it.182 It looks directly at the impact of corporations on society.183 Markets and contracts often will fail to check the powers of corporations in general and MNCs in particular. Emphasis on greed and profits in the market will not create sustainable markets.184 Group identities ensure proper co-operation within the corporation. However, they will also mean that corporations create a them-and-us mentality. This impacts on the manner in which those inside the corporation perceive those who are affected by its activities but are outside it. The organization of business accordingly is not a mere private matter.185 Corporations have to be subjected to regulation by institutions that are democratically accountable.186 Conversely, contract theory eschews the existence of hierarchy and the abuse of power by management.187 It makes use of transaction economics to present a highly technical analysis of one aspect of corporate structure.188 It refashions the firm in bold outlines ‘to anchor its location on the private side of the public private debate’.189 It makes use of the assumptions of neo-classical micro-economics and is underscored by the

181 182 183 184 185

Byers (2004, p. 978). Testy (2002, p. 1228); Fort and Schipani (2002, pp. 431–2). Dickerson (2004, p. 534). Fort and Schipani (2002, pp. 428, 430). Millon (1990, p. 226); Bratton (1989b, pp. 437–9); Testy (2004, p. 91) and the idea that corporations can be viewed as quasi-public entities. 186 See Tavis (2002, pp. 511–13) on the legitimization of international governance networks, discussed below text next to fn. 352 ff. This point of departure is sometimes criticized by realists and law and economics scholars, for being an expression of the old concession theory. Hansmann and Kraakman (2001) at fn. 5. According to this theory corporations exist merely by the grace of states that allow for their incorporation. The rejection of the concession theory can be supported and becomes apparent from the existence of global MNCs, which frequently pay homage to no state. Nevertheless, there is no necessary link between this theory and CSR, see Bratton (1989a, p. 1497) and especially Bratton (1989b, pp. 433 ff.). 187 Bratton (1989a, pp. 1478, 1480, 1499–1500); Bratton (1989b, pp. 415–17, 420). This is true also of institutionalists or property rights theorists, but to a lesser extent, see Hart and Moore (1990, pp. 1119, 1121). See the argument of Blair and Stout (1999, pp. 264–5). 188 Dickerson (2004, pp. 534, 538–42). 189 Bratton (1989b, p. 442).

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belief that market competition will place adequate restraints on the activities of corporations.190 It does not recognize the sociological and political significance of corporations.191 It is very difficult to express a reasoned preference for one approach over the other. A choice will necessarily be pre-determined by political orientation. Contract theory unveils several truths about the nature of corporations and their function in market-oriented societies. When neo-classical contract theory meets neo-liberal globalization, it confirms and justifies the optimism of the advocates of economic globalization. It illustrates the difficulty with state regulation because of the political processes by which these decisions are made.192 However, the criticisms of globalization and MNCs illustrate that there are difficulties with conventional contract theory. The problems with contract theory are magnified in the global context. Accordingly, the basic point of departure in this chapter will be that there is a need for comprehensive legal control of corporations in the interest of a wide range of stakeholders, but that it must be done with due respect for markets and the interests of shareholders. Even in the United States, where contract theory has a strong hold over legal regulation, there is peremptory regulation of corporate governance, especially through the Federal Sarbanes-Oxley Act, albeit that it is mostly aimed at promoting and protecting investment.193 This conclusion is bolstered by more recent works that have questioned conventional contract theory with reference to its internal logic.194 Behavioural economics is changing our perception of law and economics and it has fundamental implications for contract theory.195 First, behavioural law and economics scholars show that individuals do not merely act on the basis of economic considerations but that they are also motivated by non-economic beliefs and values. This weakens the normative justification of the efficiencyfocused contractarian fetish with shareholder primacy.196 Secondly, the antiregulatory conclusions of contract theory are grounded in the assumptions that actors attempt to maximize profit and that they are able to determine their best

190 191

Bratton (1989b, pp. 417–19); Dickerson (2004, p. 538). Although contract theory is by no means apolitical, see Bratton (1989b, pp. 428–9, 432). 192 See above, fn. 75, on public choice theory. 193 Pub L No. 107–204, 116 Stat 745 at 403 (2002), see for example Hemingway (2005, pp. 225, 234–6). 194 Testy (2002, p. 1235). See also Backer (2008a, pp. 606–7) who also makes use of economics, albeit ideas outside the mainstream, in order to justify corporate social responsibility. 195 Although behavioural economics can be used to argue that the shareholder primacy model should be maintained if certain conditions prevail, see Licht (2004). 196 Greenfield (2002, pp. 613 ff.) on the link between efficiency and fairness.


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interests, but psychologists have shown that human beings are much more complex and that these premises are gross simplifications. Parties who contribute and participate in the activities of corporations are prone to cognitive biases and they do not merely think of utilitarian efficiency. Like those who resist the materialism of globalization, they also include non-economic values in their considerations. The anti-regulatory arguments of contractarians accordingly must be approached with caution. Individuals are not always able to establish their best interests and the law may need to intervene to ensure that the interests of stakeholders of corporations are properly protected and indeed may even be required to achieve efficiency. Corporate law should remain a significant source of regulation of relationships inside and around corporations.197 Furthermore, Blair and Stout accept the postulate that a corporation is a nexus of contracts and they reject the communitarian notion of a corporation.198 Yet they are critical of the emphasis which conventional contractarians place on the agency relationship between managers and shareholders and the commonly expressed notion that shareholders are the indirect owners of the corporation, who have residual claims to the business and assets of the corporation.199 Blair and Stout contend that corporations are aimed at resolving the problem of team production. Where inputs are produced by members of a team and it is impossible to discern the input of each team member in the indivisible result,200 it will be difficult to ensure efficient production by the team and determine appropriate remuneration for the members of the team. Conventional contract theory is to the effect that team members will shirk, that monitoring will be necessary in these situations and that shareholders as residual right-holders will, through management and the board, be motivated to undertake supervision.201 Nevertheless, Blair and Stout point out that if inputs could be established by monitoring, specific contracts could be concluded with team members. The really troubling situations are those where it will be impossible to determine inputs accurately despite careful scrutiny. Blair and Stout stress that team production often will be effective only if members invest in the acquisition of specific skills but that team members will make these investments only

197 Greenfield (2002). See also, on the influence of rationality on views of corporate law, Fanto (2002, pp. 1041, 1053). 198 Blair and Stout (1999, pp. 253, 286) especially fn. 83. 199 Blair and Stout (1999, pp. 290–93). 200 Comparable with the case where ingredients become indistinguishable in the baking of a cake, see Testy (2002, pp. 1233). 201 Alchian and Demsetz (1972), see the valid criticism of Blair and Stout (1999, pp. 265–9) because the authors accepted that employees were undifferentiated.

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if they know that they will receive the benefits. In these situations the problem will be exacerbated if residual rights are given to another participant in the corporation. If rewards for performance of team members are determined ex ante, they will shirk. If it is done ex post, members will be loath to make the specific investments required to allow them to contribute to the team, for fear that those who have residual rights will engage in rent seeking. The authors conclude that the directors should be given the final say as to who should be rewarded for production and how this should be done, in order to resolve the problem of opportunism in team production. Directors then become the ‘mediating hierarchs’ who decide how the collective residual produced by the firm should be divided.202 Only if the team members are rewarded by the board, as a mediating hierarch, would teams be rewarded properly while team members would continue to invest sufficiently in firmspecific skills.203 Despite their explicit rejection of the CSR approach, the Blair and Stout analysis supports the central tenet that runs through much of CSR: that shareholder supremacy is untenable. Corporate law cannot be fixated on the interests of shareholders. Others also make important investments in the corporation, like shareholders their contracts are frequently incomplete and they must receive proper returns on their contributions to ensure that corporations operate properly. Shareholders are unlikely to exercise their power of supervision effectively. They are as likely to act opportunistically and promote their own interests at the expense of the other contributors to the corporation, such as its managers.204 Shareholders who are mobile often focus on the shortterm benefits that are to be derived from corporations. There is no final arbiter who can serve as the last custodian of efficiency within the corporation. The installation of shareholders into this position can be justified only on the basis of other pre-existing and unexpressed preferences. The shareholder primacy model is based on an a priori ideological position and does not flow necessarily from the basic premises of contract theory. Blair and Stout’s views appear incomplete and not entirely coherent. First, even if their approach may be tenable in explaining where corporate law should go, their attempt to explain current corporate law phenomena such as derivative claims for shareholders, fiduciary duties and voting rights for share-

202 Blair and Stout (1999, pp. 276, 282) on the activities ascribed to the board, it goes beyond mediation. See Greenfield (2002, pp. 627–8). 203 See generally Blair and Stout (1999) especially at pp. 265–76 and the summary Meese (2002, pp. 1637–45). 204 See Meese (2002, p. 1669) who suggests that this problem will be addressed by giving the right to the residual to the ultimate monitor; such an approach does not appear to be correct.


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holders in terms of the team production theory do not appear to be persuasive.205 Secondly, the traditional team production approach on which Blair and Stout built has been criticized in the nexus-of-contract literature.206 It is not obvious that team production problems are so pervasive that all the basic features of the corporate law of public corporations should be explained in terms of it. Thirdly, the Blair and Stout model has the veneer of an economic approach but differs from economic approaches to the firm in various respects.207 It is particularly concerned with the ‘rhetoric’ and ‘corporate culture’ that lead to an obsession with shareholder primacy.208 Fourthly, Blair and Stout do not indicate how the board will be able to settle disputes regarding rewards and why the board will do this properly.209 Their approach also undermines the benefits that derive from entrusting the corporation to specialized managers who are able to manage it within wide parameters.210 Fifthly, Blair and Stout believe their approach to apply only to public corporations. However, it is difficult to see how a logical distinction can be drawn between private and public corporations for this purpose.211 Finally, Blair and Stout’s approach may not be as different from the traditional contractarian view as it may appear at first glance. If directors have to balance the interests of different stakeholders it may mean that very little will change. Investors often have the ability to walk away and this may mean that they will still be able to hold

205 Blair and Stout (1999, pp. 290–319). To illustrate this, the arguments for only granting shareholders voting rights appear particularly thin. They contend that shareholders have voting rights as a representative because they are relatively homogeneous and that they will be less likely to exhibit pathologies and indulge in rent seeking, while their aim of increasing the value of their stock will benefit all. Further they submit that shareholders may be more vulnerable than other groups. These arguments all suggest that the shareholder primacy model is preferable. Oddly they do not refer to constituency statutes in this context. See the comments of Meese (2002, pp. 1673–1700). 206 Bratton (1989a) at fn. 37. 207 See the arguments regarding directors in this section below and the observation by Blair and Stout (1999, p. 323) that corporations are political. 208 Blair and Stout (1999, pp. 327–8). 209 Blair and Stout (1999, pp. 268–9, 292) describe Holmstrom’s (1982, p. 324) model that provides for a budget breaker but it is not clear to what extent they import it, at p. 274 they merely speak of the hierarch receiving a ‘nominal share of the team’s output’, p. 283 where they emphasize that the board will have to act properly to ensure continuation of employment, pp. 315–18 where Blair and Stout depart furthest from the approach of traditional economics by relying on normative concepts; Meese (2002, pp. 1665–71). See also the analysis by Licht (2004, p. 715). 210 Meese (2002, pp. 1662–5) and especially p. 1667 on the incentive for constituencies to monitor the hierarch and the effect of this. 211 See the approach of Blair and Stout (1999, pp. 275, 281, 322–3) and the criticism by Meese (2002, pp. 1646–62).

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directors to ransom. Other stakeholders, such as employees, may be in a much weaker position. This will be particularly true where large investors continue to indulge in short-termism.212 However, Blair and Stout’s approach may be helpful in recasting the legal duties of directors.213 It may promote the serious concern for a broad range of stakeholders simply by regarding the consideration and balancing of their interests as a core element of corporate governance. It may promote the achievement of long-term sustainable profits. Furthermore, it exposes some of the flaws in conventional contract theory’s description of the purpose of corporations. The last anti-regulatory stand of contract theory could then be that, even if it is conceded that the activities of corporations should be regulated by peremptory norms for the benefit of a range of stakeholders, this should not be the domain of corporate law.214 Fischel states that the solution to the problem of corporate social responsibility, ‘assuming one exists’, is to be found in the ‘political process, not in changing the governance of public corporations’.215 Regulation of corporations should accordingly take place outside corporate law. Corporate law sets up the basic governance structures for corporations but other areas of law should do the work beyond this point. Naturally, there are limits to what corporate law can do to create responsible corporations. Other forms of regulation are fundamental to the fair and efficient operation of corporations. Hence, the call for a regulatory corporate law is not the same as the call for an imperialistic one. However, this argument cannot be taken too far. What, in the final instance, is the difference between a law which provides for a minimum wage and one that requires management to respect the rights of employees?216 The latter may dilute the rights owed to shareholders on the basis that a duty on management to protect a broad range of interests may cause them to lose focus and that the right would then become ‘essentially vacuous’.217 Nevertheless, it seems likely that, in a number of situations, the establishment of corporate structures that promote social goals may be more effective in achieving those goals than direct legislation aimed at achieving the same end.

212 Testy (2004, pp. 102–3); Millon (2000, p. 1001); Testy (2002, pp. 1234–5). See in the context of globalization, Blair and Stout (1999, pp. 324–8) which confirms this fear. 213 Testy (2002, pp. 1234–5). 214 See also Branson (2000, pp. 1212–16); Gevurtz (2002, p. 645). 215 Fischel (1982a, pp. 1259, 1260); Hansmann and Kraakman (2001, p. 441); Jensen (2001, pp. 297, 300–301). See the analysis of Fischel’s argument: Greenfield (2002, pp. 593 ff.); Licht (2004, pp. 706–7). 216 Greenfield (2002, p. 594). 217 Hart (1993, pp. 299, 303); Licht (2004) especially at pp. 717–21. See the problems with regarding corporate law as a regulatory tool, Greenfield (2002, p. 600).


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Company law rules that promote social goals may not cause a greater loss of focus than external rules. Even if a loss occurs, the gain to society may be more than the cost. Fairness to stakeholders other than shareholders may be crucial even where the aim of corporate law is economic efficiency. Fair and equitable governance structures may reduce the cost of monitoring and produce greater efficiency whereas legislation that promotes fairness outside the governance structures may promote fairness without having the same positive utilitarian consequences.218 Next, it will be obvious that, where broader social goals are to be realized, structures must be created by corporate law in order to ensure that the values which we believe they should embrace are internalized or embedded. We should not be surprised if we have psychopathic corporations where the law does not establish structures that are based on underlying values and are designed to promote the broader values according to which corporations should operate.219 Finally, it cannot be assumed that MNCs will necessarily operate in environments where the regulation outside corporations will be adequate. In these situations internal regulation becomes crucial. Corporate law therefore has much to contribute in guiding the operations of corporations in general and MNCs in particular.220 When it comes to MNCs, contract theory looks out of place. In this sphere the main issue is not how agency problems between shareholders and managers can be resolved, but rather how managers can be prevented from over-performing in their relentless pursuit of profit and to the detriment of many who are affected by the MNCs’ activities. Branson refers to this as horizontal corporate governance and contrasts it with contractarian vertical governance.221

5

WHAT FORM SHOULD CORPORATE REGULATION TAKE IN THE GLOBALIZED WORLD?

So, corporations and MNCs require regulation in order to protect stakeholders,

218

Greenfield (2002) especially at pp. 591 ff. and 640 ff.; Fort and Schipani (2002, p. 430) argue, that in any event, well-run corporations already attempt to promote a multiplicity of goals. 219 See Fort and Schipani (2002, p. 433) on the community that will be created by a corporation if the promotion of peace is one of its goals and its impact on individual behaviour. 220 See Fort and Schipani (2002, pp. 426–8) and the sophisticated argument against what they call the ‘balance of power approach’. 221 Branson (2002b, p. 122), Branson (2001b, p. 361).

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or those that are affected by MNC activities.222 Yet globalization means that the establishment of regulation for MNCs is no simple matter.223 5.1

Regulation in National Law

Conventional corporate law theory focuses on the difficulties that arise because of the separation of ownership and control. Interference by the state in the affairs of corporations is at times questioned on a policy level but it is assumed that states have the ability to regulate.224 In the era of globalization no such assumption can be made.225 The regulation of the activities of MNCs by national laws is difficult because of the fragmented system of national corporate laws.226 Some have therefore declared the irrelevance of corporate law and the identity of the incorporating state for MNCs.227 When governments develop national regulation they interact with MNCs in a complex manner. When it comes to MNCs we are forced to abandon the traditional notion that states make law and corporations merely react.228 ‘This … suggests the possibility that the power to control the authoritative discourse over corporate characteristics and responsibilities could be wrested from the institutions controlling the national discourse of corporate law.’229 The difficulties of nation states are structural and substantive. Structurally, the most important restriction on a state is that its jurisdiction is territorially limited. Substantively, nation states may make regulations that are regarded as inappropriate by those who are regulated or may find that they cannot be effectively monitored and enforce regulations. Mobile MNCs are able to exploit the gaps which globalization has opened up in the once seamless web of national regulations.230 Large global corporations are mobile. Enforcement of norms

222

Byers (2004). See Tavis (2002, p. 538) ‘[g]lobal regulation is critically important to mitigate market pressures’. 223 See Backer (2006, p. 310) and the list of complicating factors in the globalized discourse, they concern: broader constituencies, a broader range of institutions, dispersed power. 224 See Backer (2008b, pp. 501–2). For an interesting account of the role of the state and government in private law, see Michaels and Jansen (2006, pp. 846–60). 225 Branson (2001b, pp. 356, 359–60); Branson (2002b, pp. 130–32). 226 Pillay (2004, p. 499); Branson (2002b) especially at pp. 122, 126, 131–2; Branson (2001b, p. 357); Backer (2007, p. 1747); Ratner (2001, pp. 535–6). 227 Branson (2002b, p. 132). 228 Danielsen (2005, p. 411), see especially pp. 411–12 on the different ways in which corporations can shape regulatory regimes. 229 Backer (2006, p. 310); Backer (2008b, pp. 505–6). 230 Backer (2007, pp. 1745–9).


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on MNCs is hampered by their ability to arbitrage between regulatory systems and by the collective action problems of the states that attempt to regulate them.231 Rogue states lack the will, or more charitably perhaps, the resources, to regulate large multinationals operating within their borders. Other states deplore the situation, but persist in ‘free riding’ on the efforts of the states that do exhibit a will to attempt regulation.232

States regard it as important to have headquarters of MNCs in their territories. They are important sources of tax revenue as well as top-end skilled employment, economic power and prestige. The jurisdictions where MNCs have their headquarters (home states)233 and whence they exert influence may find it difficult to control their activities.234 If the activities of MNCs are spread out widely it is relatively easy for them to move their headquarters. A firm that is not given a free hand to maximize profits in a particular state is soon taken over by another firm from another jurisdiction, which effectively means that headquarters move. This is particularly true of MNCs that have their seats in developing or relatively small developed countries such as South Africa or Canada.235 South Africa has lost the headquarters of many corporations such as Old Mutual, Anglo-American and South African Breweries. It is therefore one of a small number of countries that feel the pressures of globalization both as the developed home of MNCs and as the developing host of these enterprises. But even strong developed states feel these pressures intensely. Moreover, even when MNCs are unlikely to move because of their national identities, they often perform harmful activities outside the territories where they have their headquarters and home states are loath to regulate these activities because they benefit from them with the MNCs. This problem is exaggerated when, as is often the case, the headquarters are in developed countries and harmful activities are performed in developing ones. 231

Branson (2002b, pp. 126, 134); Branson (2001b, pp. 356, 358–60); Stiglitz (2006, pp. 188, 195); Pillay (2004, p. 490); Backer (2006, pp. 291 and 309) on their ability to allocate risk; Backer (2008a, p. 619); Backer (2008b, pp. 503–4) calls this a matter of territorial disjunction; Friedman (2000, pp. 134 ff.). Compare on the difficulties of moving around: Bebchuk and Roe (1999, pp. 127, 162–3). Foreign investments by MNCs are frequently made only if they are granted special privileges that may be harmful or reduce the benefit of investment, Stiglitz (2002, pp. 71–2). 232 Branson (2002b, p. 136). 233 Sometimes also referred to as chartering states. 234 Branson (2002b, p. 136); Branson (2001b, pp. 356–7). See on policy difficulties, Special Representative Report (2008), fn.100, at paras 39–41. 235 Special Representative Report (2008), fn.100, at par. 14. Although Branson (2002b) at fn. 66 argues that few corporations have actually moved.

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Similarly, the jurisdictions in which MNCs perform activities but where they are not headquartered (host states) find it even more difficult to regulate their activities locally.236 In developing countries MNCs are handled with kid gloves because of the need for investment, employment and economic progress.237 If MNCs are truly global, they will of course also function in powerful developed host countries. These countries may be more competent to regulate activities performed within their jurisdiction, but again MNCs are able to arbitrage harmful activities to weaker jurisdictions. The resultant loss of employment in the relatively highly regulated areas is not of the type against which capitalist economies can regulate. The abuse of workers and the environment in the jurisdictions where manufacturing activities then take place go unpunished because of light or even non-existent regulation.238 Moreover, attempts by host states to enforce regulation extra-territorially, especially in home states, are doomed to failure, especially if the host states are developing countries and the home states are in the developed world.239 Too much should not be made of the inevitable impotence of states caused by globalization.240 States make a choice to regulate activities or not, albeit that those choices have economic and political consequences.241 Despite difficulties, there are some national laws that can be used to address the extraterritorial activities of MNCs.242 International law may impose obligations on states (home states in particular) to enforce certain standards for corporate behaviour.243 Many countries have enacted legislation to punish corporations that indulge in fraud, bribery or corruption outside of their borders.244 The United States already enacted

236 Special Representative Report (2008), fn.100, at par. 14, paras 34–6; Branson (2002b, p. 131); Branson (2001b, p. 356); Orts (1995, pp. 258–60); Duruigbo (2008, p. 60); Redmond (2003, p. 73); Ratner (2001, p. 462). 237 McLoughlin (2007, pp. 154–5). 238 Branson (2002b, pp. 133–4). 239 On the difficulties of regulating corporations in developing countries, see Fort and Schipani (2002, p. 432). 240 See e.g. the argument of Michaels and Jansen (2006, pp. 868 ff.) but compare p. 884. 241 See Saul (2005). 242 Backer (2007, p. 1744) especially the examples pp. 1744–5; Backer (2008b, p. 502). See, on liability for international crimes committed by MNCs, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Corporations and other Business Enterprises (2007), A/HRC/4/035 (9 February 2007), paras 23–32 and see par. 34 on liability for other human rights violations. See below text next to fn. 433 ff., on the liability of corporations in international law. 243 Below, text next to fn. 440 ff. 244 Stiglitz (2006, pp. 208–9).


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such legislation, in the form of the Foreign Corrupt Practices Act, in 1977.245 Many other countries did not prohibit and sometimes even condoned foreign bribery. In some host countries bribes by MNCs were even tax deductible. However, the members of the OECD adopted the OECD Convention on Combating Bribery of Foreign Officials in 1997.246 They have given effect to the convention and the OECD is reviewing compliance.247 Furthermore, the General Assembly of the United Nations adopted the Convention Against Corruption on 21 October 2003. It has been ratified by many countries and it determines explicitly that states must enact legislation to criminalize the bribing of foreign public officials.248 The OECD’s efforts, in particular, have been quite successful. Yet, these examples illustrate the limits of international obligations on states in this area. There are still very few if any international obligations that bind all states and these obligations address only specific problems such as bribery. There have also been difficulties with the implementation of these norms.249 Tort claims against United States (and even some other) MNCs have been brought in terms of the United States Alien Tort Claims Act of 1789 (rediscovered in 1980) for acts committed in other countries.250 The European Court

245 246

15 USC §§ 78dd-1, et seq. DAFFE/IME/BR(97)20 available at www.oecd.org/dataoecd/4/18/38028044. pdf, accessed 9 May 2009. 247 OECD Working Group on Bribery in International Business Transactions Consultation Paper, Review of the OECD Instruments on Combating Bribery of Foreign Public Officials in International Business Transactions Ten Years After Adoption (January 2008), available at www.oecd.org/dataoecd/18/25/39882963.pdf, accessed 10 May 2009. 248 Available at www.unodc.org/pdf/crime/convention_corruption/signing/ Convention-e.pdf, accessed 22 February 2009. Art. 16 and see art. 26 on criminal liability of juristic persons as well as arts 34–5 on private law enforcement. See also on regional legal instruments: Council of Europe, Criminal Law Convention on Corruption, 1999; African Union, Convention on Preventing and Combating Corruption and Related Offences, 2002, available at www.africa-union.org/ official_documents/Treaties_Conventions_Protocols/Convention on Combating Corruption.pdf, and Organization of American States, Inter-American Convention against Corruption, 1996, at www.oas.org.Juridico/english?treaties/b-58.html, accessed 22 February 2009. See also Ratner (2001, pp. 482–3). 249 Transparency International, Progress Report OECD Anti-Bribery Convention (2008), at www.tranparency.org, accessed 22 February 2009, especially on the problems that arose in the UK with BAE in the Al Yamamah arms deal with Saudi Arabia, which culminated in the House of Lords judgment of R (on the application of Corner House Research) v Director of the Serious Fraud Office [2008] UKHL 60, and the contrast with the prosecution of Siemens in Germany. 250 McLoughlin (2007, pp. 165–70); Mensch (2006, pp. 255–63); Redmond (2003, pp. 80–83) especially p. 80 on the possibility of similar remedies in other countries.

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of Justice has decided that national courts of Member States may not dismiss actions against corporations domiciled in the states on the basis that there is a more appropriate forum.251 In Australia, a court will only dismiss a claim on this basis if the forum is ‘clearly inappropriate’.252 Admittedly, attempts to make use of these kinds of mechanisms have met with innumerable obstacles such as narrow scope, technical legal difficulties and the placing of obstructions in the way of proceedings by home states. Yet, they have achieved some success.253 It may be argued that these measures are imperialistic, but as long as they are brought before courts of the home states of defendant corporations, there appears to be a sufficient basis for regulation.254 On a national level the most realistic solution would be to attack the problems of MNCs with a measure of practical humility and theoretical ambition. We are unlikely to see wide-ranging grand attempts by states to establish effective rules to regulate MNCs in national law in the near future. However, states have a unique opportunity to assert and in some jurisdictions reassert that corporations have social responsibilities, as the neo-liberal approach to both globalization and the theory of corporations is in some difficulty. It could perhaps be in some ways tenable to restrict regulation of corporations in corporate law and to give full sway to the markets where those corporations act in relatively homogeneous territories subject to strong legal and social constraints. However, the argument has little traction when it is applied to MNCs in heterogeneous and weak regulatory environments. It is suggested that at least some of the constraints that national jurisdictions experience in regulating MNCs can be overcome by conceptualizing the corporation in the CSR likeness.255 It has been contended that there is no evidence that European MNCs, incorporated in countries that focus on CSR, are more socially responsible than American corporations that traditionally follow the contractarian model.256 However, this may be true only because corporate social responsibility models thus far have been inwardly focused. A broader perspective on the responsibility of MNCs is required. It should be asked whether it would suffice for MNCs, with the enormous power which 251 252

Owusu v Jackson [2005] ECR-I-1283. Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 (HCA). See also on extension of these remedies to other countries Pillay (2004, p. 512). 253 Pillay (2004, pp. 499 ff., 504 ff.); Stiglitz (2006, pp. 205–7); Special Representative Report (2008), fn.100, at paras 88–91; Redmond (2003, pp. 85–6). 254 McLoughlin (2007, p. 155). See the argument of Redmond (2003, pp. 86–7). 255 Stiglitz (2006, pp. 198–9). See the argument of Greenfield (2002, pp. 609–10). 256 Branson (2004, p. 912) who submitted that at the time only 47 of the world’s 100 largest multinationals were American and that the others are domiciled in Germany (11), the United Kingdom (9), France (8), the Netherlands (6) and Switzerland (5).


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they wield, to comply with the law and the rules of the market place. Mayer argues that the power of these corporations brings responsibility to contribute positively to the welfare of the environments in which they operate.257 Indeed, it will become apparent from the ensuing analysis that countries will have to consider CSR seriously in order to comply with international human rights obligations.258 This embracing of corporate social responsibility, as such, would only establish a weak constraint on the activities of MNCs. It is weak because it does not by itself create enforcement mechanisms outside the corporation. It does not remove the difficulties of fragmented regulation by states that have lost some of their power. Indeed, most CSR arguments thus far have been based on the notion that states are able to regulate corporations. It still leaves the focus on ex ante rather than ex post regulation of MNCs.259 However, it will establish the legal structure that is conducive to the development of corporations that are socially responsive and can embed a culture of social responsibility. Additionally, the establishment of CSR as a basis for corporate law would give rise to more specific rules that would constrain the activities of MNCs. Indeed it is suggested that it would be difficult to establish a coherent basis for regulating MNCs without a sound theoretical basis for developing such rules. Finally, it may be suggested that any movement towards CSR will be of little consequence without a general convergence on this basis, as firms will merely arbitrage away from it. The issue of convergence will be taken up in greater detail in the next section. However, it may be that corporations that are set up to be socially responsible are already more reluctant, and it cannot be asserted more strongly, to indulge in regulatory arbitrage to the lowest level of regulation. Neo-liberals will argue that corporations in general and MNCs in particular only react to monetary incentives. However, the earlier analysis of corporate theory shows that this world-view may be over-simplistic. Law is not conclusive in setting standards for behaviour but law matters in determining behaviour. These types of approaches may become all the more important in a globalizing world where the voice of civil society as monitor of corporate behaviour is growing as a further constraint on harmful corporate behaviour.260

257 Mayer (2002, pp. 588–9, 603–6, 631) with reference to Milton Friedman above, fn. 146. 258 Below 6.2.1. 259 Byers (2004, pp. 923–4). 260 Below, 6.2.3 and 6.2.4.

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5.2


Convergence of National Corporate Laws

A convergence of national corporate laws could contribute to a coherent regulatory system for MNCs.261 Converged rules would make arbitrage between jurisdictions more difficult. It would allow only for arbitrage on the basis that certain states do not enforce rules. Arbitrage on such a basis is much more difficult to justify to stakeholders, both for states and MNCs. Furthermore, convergence could eventually facilitate the creation of a singular international corporate law for MNCs.262 Indeed, globalization has been central to the discourse about convergence of corporate law.263 It has been contended that globalization itself will promote the convergence of uniform corporate law norms that are necessary for its own sustainability. MNCs and those who support them may work towards convergence to save transaction costs.264 But globalization may also benefit convergence in other ways. Up to now, and especially in the context of globalization and corporate law, the prophets of convergence have frequently been radical free-marketeers who have predicted that the American or sometimes the Anglo-American corporate governance model will triumph over others.265 As this model is contractarian in nature, they prophesy a predestined convergence on this basis because of its superior efficiency. Hansmann and Kraakman believe the contract model, which they refer to as the standard model, has its epicentre in the US and the UK266 and they conclude: Although there remained considerable room for variation in governance practices and in the fine structure of corporate law throughout the twentieth century, the pressures for further convergence are now rapidly growing. Chief among these pressures is the recent dominance of a shareholder-centered ideology of corporate law among the business, government, and legal elites in key commercial jurisdictions.

261 262 263 264

Cf. Branson (2001b, p. 327). See below 5.3. Pinto (2005) especially at pp. 486–7. See Smits (2007, p. 1190) who argues that the importance of transaction costs should not be overestimated. 265 See the discussion: Bratton and McCahery (1999, pp. 213, 236–43); Fanto (2002, pp. 1052–53); Backer (2008b, p. 505); Bainbridge (2002). See also Gordon (1999, p. 219), who further observes that convergence will be around issues important to shareholders, and the emphasis he places on the role of cross-border mergers although this issue could of course cut both ways. It may also promote convergence on other bases depending on the structure and power relationships in the merger cf. Branson (2001b, p. 341); see also the careful support of Gilson (1996, pp. 327, 331, 334) and Tavis (2002, pp. 526–7). 266 Hansmann and Kraakman (2001, p. 468).


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There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value. This emergent consensus has already profoundly affected corporate governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as well.267

Primarily, they argue that this convergence is brought about by economic forces and the rise of public and diffuse shareholding. When it comes to the former they distinguish three aspects: the force of logic, showing the shareholder primacy model to be more efficient; the force of example, that is, actual examples showing the model to be more efficient; and the force of financial markets and product competition, which through greater internationalization will bring about convergence on this model because of the competitive forces at play. With regard to the second force, they stress that public shareholders now are able to exert great influence to protect their interests.268 There is some South African evidence to support at least a weak version of this convergence narrative. Even though the South African government, on the face of it, promotes a left-of-centre form of social capitalism, its proposals for a new Companies Act in core areas reflect the shareholder primacy model.269 A similar observation can be made about the corporate laws of some former Soviet states that accepted American models of corporate law, even though they are closely affiliated to continental Western European legal systems in most respects.270 Yet, it is an over-simplification to suggest that legal systems that have been more communitarian or CSR oriented in their outlook are coming around to the American or Anglo-American model because this model is economically superior.271 Buoyed by hubris and hyperbole, some scholars have projected the US model over the face of the earth, upon scant evidence positing a ‘global’ convergence in corporate governance. Two academic elites have even decreed the ‘end of history’ for corporate law and further evolution of the governance model. One wonders what those two scholars will do for an encore, positing as they have that perfection in corporate governance has been achieved. They may turn to writing fiction, but the case may be made that with the ‘end of history,’ they have already made that transition.272

267 268 269 270 271 272

Hansmann and Kraakman (2001, p. 439). Hansmann and Kraakman (2001, pp. 449 ff.). See especially the Companies Act 71 of 2008, s 76. Hopt (2006, pp. 1161, 1168). See the comments of Branson (2001b, p. 336). See Fanto (2002, p. 1049); Branson (2001b); Williams and Conley (2005, p. 495). Branson (2002a, p. 1208). See also the criticism of this form of imperialism in Branson (2001b) at especially pp. 325–6, 331 ff., 343–8 on embedded capitalism in the US and other variants of capitalism in other countries.

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The only predestined inevitability was that contractarians would meet up with the prophets of neo-liberal economic globalization. This approach is based on a simplistic view of shareholder primacy and contract theory in the United States and the United Kingdom which ‘distorts both the positive and normative aspects of the convergence debate’.273 There is not always a clear dichotomy between Anglo-American corporate law and other systems such as those in Japan and continental Europe. The most significant commonality in the UK and the US is that both share a particular brand of shareholder capitalism which has culminated in a wide spread of shareholding in listed corporations. In continental Europe and Japan shares are often held in large blocks.274 Accordingly, there are important differences between UK and continental corporate law and this makes it difficult to harmonize European corporate law.275 However, corporate law in the United Kingdom and the United States has always diverged in fundamental respects and the United Kingdom may have moved to a position that is somewhere between the US and the continental approach.276 The forces that favour CSR are much more powerful in the UK than in the US.277 The UK government, to some extent under the influence of the EU, has played a more important role in promoting the social responsibility of corporations.278 Institutional investors in general, and institutional investors with long-term perspectives in particular, are much more prevalent in the UK than in the US.279 It is therefore dangerous to speak of Anglo-American corporate law. Furthermore, Hansmann and Kraakman’s justifications for predicting the convergence on the shareholder primacy model are weak. It has been shown earlier that there are serious theoretical concerns with this model. Moreover, the current economic crisis which has emanated from the US and, to a lesser

273 274

Bainbridge (2002, p. 47). Pinto (2005, p. 480); Williams and Conley (2005, p. 530), for wider similarities see p. 536. In continental Europe major conflicts in companies are often between majority and minority shareholders rather than between management and shareholders, see Hopt (2006, pp. 1161, 1165–6). This system is often contrasted with the blockholder systems where shareholding is concentrated: Bratton and McCahery (2001, p. 745); Tavis (2002, pp. 526–7). 275 Williams and Conley (2005, pp. 506–7, 530–33). 276 Williams and Conley (2005, pp. 495 ff.) and especially p. 499 on the ‘institutional pressures’ that are changing UK corporate law and pp. 530–36; Licht (2004, p. 734). See below, text next to fn. 291, on s 172 of the UK Companies Act of 2006. 277 Although CSR in many respects originated in the US in the 1970s it has lost momentum there, see Branson (2002a). 278 Millon (1990, pp. 226–9); Williams and Conley (2005, pp. 530–36). 279 Williams and Conley (2005, pp. 536 ff.) bolstered by a strong NGO sector centred on London, see pp. 547–50. That is not to say that no CSR activity takes place in the US but just that it is much weaker than in the UK, see pp. 545–7.


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extent, the UK has exposed several flaws in Anglo-American capitalism.280 Even Hansmann and Kraakman admit that there are several reasons why market forces will not deliver us all to the shareholder primacy model.281 Furthermore, it is difficult to see how the rise of the public shareholder argument can serve as a justification for the shareholder primacy model. The argument that shareholders are now more powerful could be an explanation for the rise of this model but it is not a justification for it. The authors seem to justify shareholder primacy on the basis that public shareholding will ensure that shareholder primacy will benefit all.282 However, even if shareholding is widespread in some countries there are still few, if any, countries where the spread will be wide enough to ensure equity and clearly many where it will not be. Moreover, this argument cannot be used to justify the shareholder primacy model in the case of MNCs. The link between shareholders and other stakeholders is often very weak for these corporations and they operate in countries which, by the authors’ own admission, will not have wide spreads of public shareholding. More than anything else, the acceptance of the shareholder primacy model in the new Companies Act in South Africa and in other states may reflect the ability of American advisors to promote and market their approach to technocrats: what Fanto has called the ‘relentless promotion and exportation’ of the American model.283 If globalization does not mean Americanization, a broader exchange of ideas needs to take place.284 The convergence process has to be more thoughtful. Corporate law is not embedded in culture in the same manner as, say, family law or the law of succession, but it does not exist in isolation from national institutions and cultures.285 Furthermore, convergence on the basis of the shareholder model is counteracted by the global CSR movement.286 The CSR movement is itself chipping away at the differences in national corporate laws.287 It is likely that the current dynamics in globalization and corporate theory debates will strengthen this movement. However, it is difficult to predict the future of 280 See the criticisms by Branson (2001b, p. 334). See already the earlier views of Fanto (2002, p. 1054). 281 Hansmann and Kraakman (2001, pp. 450–51). 282 Hansmann and Kraakman (2001, p. 452). 283 Fanto (2002, p. 1048). 284 See on Americanization, globalization and the impact of the EU Michaels and Jansen (2006, pp. 867–8); Pinto (2005, p. 498); Branson (2001b, pp. 350–52). 285 Licht (2004) and his argument why different cultures may approach corporate governance differently. 286 Williams and Conley (2005, pp. 495–6); Branson (2001b, p. 333) and the authorities mentioned there. 287 Williams and Conley (2005, pp. 495–6).

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these developments. It may be contended that convergence on this basis is impossible. Some powerful nations, the United States in particular, are very settled in their contractarian ways. However, it is doubtful whether the shareholder primacy model has ever been applied with a measure of consistency. The contractarian approach has never been put into practice in any comprehensive sense in the US. Certainly, some aspects of corporate law can be justified in contract theory but even the most contractarian of corporate law jurisdictions, such as that of the state of Delaware, only allows a measure of contracting about corporate governance. In reality, it may be more appropriate to describe the American corporate law model as one of director primacy.288 Furthermore, most United States jurisdictions have so-called ‘constituency statutes’ that allow for, but do not oblige, the consideration of a wide range of stakeholders. They were enacted to allow boards to thwart hostile take-overs but are wide in their import.289 In Europe social responsibility has played a role in attempts at greater convergence.290 In the United Kingdom the enlightened shareholder model is prescribed in s 172 of the Companies Act of 2006. It gives expression to the interests of shareholders, corporate social responsibility and the dangers of short-termism. It determines that directors of a corporation must act in the best interest of its members. Yet, in doing so, they must consider the long-term effect of those actions, their impact on stakeholders such as employees, suppliers, customers and the environment, as well as the desirability of maintaining a reputation for high standards of business conduct. In corporate law, the UK is the mother jurisdiction for many countries around the globe. There is a strong likelihood that this provision will reverberate throughout the commonwealth.291 Finally, globalization unleashes forces of convergence outside the market through transnational co-operation.292 States have taken international anticorruption measures,293 and attempts to oblige states to establish uniform norms for the protection of human rights against abuse by MNCs are being

288 Bainbridge (2002). See the explanation of the manager primacy model: Hansmann and Kraakman (2001, p. 444). 289 Testy (2002, p. 1237); Springer (1999, p. 85); Branson (2001b) at fn. 63; Backer (2006, p. 306); Fort and Schipani (2002, p. 430); Licht (2004, pp. 700–705). See also Tavis (2002, p. 527). 290 Although the process of convergence, even in Europe, has been tortuous, see henceforth Hopt (2006, pp. 1161, 1174–8). See Hansmann and Kraakman (2001, p. 454) who regard Europeanization as a weak force for convergence. 291 Hansmann and Kraakman (2001) at fn. 13. See also Branson (2001b, p. 336) on the transferability of UK law. 292 Backer (2008b, pp. 507–8). 293 Above, text next to fn. 243 ff.


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made.294 These measures only deal with a limited range of issues and attempts to oblige MNCs not to infringe human rights have thus far come up against innumerable obstacles, but they will play some role in undermining a contractarian convergence.295 So globalization will cause most states to recognize the economic need for uniformity and efficiency, but it is doubtful whether any grand convergence will occur.296 Both in attempts at achieving efficiency and deciding whether efficiency is the primary goal, states will remain sensitive to local culture,297 politics, path dependence and pay-off structures298 as well as the needs of local economies that are at different stages of development.299 It is more likely that a number of convergences will occur due to globalization.300 Convergences will take place around several loci, and dynamic convergence and fragmentation of corporate law will continue to occur despite economic globalization.301 Moreover, although major convergence on traditional legal rules appears unlikely, some convergence is occurring beyond national legal systems on the basis of norms that acquire a quasi-judicial status. First, corporate governance codes have burgeoned.302 These codes have sometimes been directly promoted by governments but some, like the King Reports on Corporate

294 295 296

Below, 6.2.1. This will be taken up in greater detail below, 6.2.1. Hopt (2006, pp. 1161, 1188) notes that the answer to the question of whether convergence will take place is neither a simple yes nor a no. 297 Above, text next to fn. 285. 298 Gordon (1999, p. 224). See especially on path dependence in this context, Bebchuk and Roe (1999, p. 127) especially pp. 151–3, 160–61 on the effect of globalization still does not pay sufficient heed to the different perspectives, but see pp. 167–9; Coffee (1999, pp. 641, 660–61); Milhaupt (1998, p. 1145). 299 Tavis (2002, pp. 525–7); Williams and Conley (2005, pp. 494–5); Coffee (1999, pp. 643–7); Fanto (2002, p. 1050); Bratton and McCahery (1999, p. 213); Branson (2001b, p. 341); Licht (2001, p. 147); Pinto (2005, pp. 491 ff.); Cheffins (2002, p. 13). Cheffins (2001, p. 87) evaluates the statement that globalization will lead to convergence along Anglo-American lines by considering a number of these influences. See also Fanto, above p. 1092, ‘All this leads to the final conclusion that there is a need to develop a better way of debating about corporate finance and governance. The system should be designed to lead to governance results that promote the most overall economic wealth, given a country’s legal, political, and cultural constraints.’ See Smits (2007, pp. 1189 ff.) on the dangers of thoughtless unification: he argues that it may be neither possible nor desirable with reference to Legrand (1997, p. 44); Legrand (2006, p. 13); Mahoney (2001, pp. 503, 505); Teubner (1998, pp. 11–12). 300 Branson (2002a, p. 1210). 301 Branson (2001b, p. 327). 302 See on the effect of these codes: McCahery (2006, pp. 172–3); Licht (2004, pp. 741–5).

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Governance in South Africa,303 have their origin outside the state. Nevertheless, most codes have received some support from the state. These codes tend to be quite similar and they are frequently drafted by committees who do considerable cross-referencing to other codes.304 Secondly, international law firms usually act as the advisers to MNCs and these firms frequently standardize their training and the advice they give clients, without too much reference to the jurisdictions they operate in.305 Thirdly, financial advice and auditing services are normally provided to MNCs by international accounting firms and they apply or have to apply international standards. They also develop standard practices according to which they apply these standards.306 Fourthly, the practices and internal standards of MNCs and their international managers are often standardized and international investors often require standardization.307 These systems and practices will contribute to conformist behaviour by firms and the development of uniform hard law, although they do not appear to be powerful enough to establish grand convergences. Economic globalization is probably the most important driver of these developments and they will in turn bolster the types of convergences that are prophesied by contractarians. However, this is not always true. The codes are focused on shareholder protection and increasing shareholder value, but the protection of a wider range of

303 King Report on Corporate Governance (1994) known as King I and King Report on Corporate Governance (2002) known as King II. 304 Hopt (2006, pp. 1161, 1165, 1182–4). See also the International Corporate Governance Network which promotes the establishment of corporate governance standards, at www.icgn.org, accessed 4 May 2009. 305 Hopt (2006, pp. 1161, 1165, 1169). 306 Many countries around the world formally or informally adopt the International Financial Reporting Standards. These norms are set by the International Accounting Standards Board. It is the standard-setting body of the International Accounting Standards Committee Foundation. The Foundation has trustees who appoint members of the board and provide oversight of its activities. Trustees in turn are accountable to a Monitoring Board comprising leaders from the Emerging Markets and Technical Committees of the International Organization of Securities Commission (IOSCO), the European Commission, the Japan Financial Services Agency (FSA), and the US Securities and Exchange Commission (SEC). Trustees appoint other trustees subject to approval by the Monitoring Board, see International Accounting Standards Board, Who We Are and What We Do (2009), available at www.iasb.org, accessed 3 May 2009. See Coffee (1999, pp. 672–3). The US does not apply IFRS but US GAAP. The highest authority for laying down US GAAP is the Financial Accounting Standards Board. It is recognized as the standard-setting body by the Securities and Exchange Commission in the US. However, these standards are converging in the aftermath of the so-called Norwalk agreement, see Financial Accounting Standards Board website, at www.fasb.org, accessed 6 May 2009. 307 On the international market for managers see Pinto (2005, p. 488).


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stakeholders is a significant feature of some codes such as the OECD Principles of Corporate Governance308 and the South African King Reports.309 Auditors are also becoming more involved in sustainability reporting310 and the auditing of compliance with certain corporate social responsibility standards.311 Finally, globalization will promote the progression of comparative corporate law.312 The deficiencies in the theory of corporate law and the chauvinism of some American corporate law theorists originate in narrow or over-simplified perspectives of corporate law beyond home states.313 Traditionally there has been very little contact between corporate lawyers in the English-speaking world, on the one hand, and continental Europe and countries that have been strongly influenced by it, on the other. This has changed for the UK due to its membership of the EU and close legal interactions with continental European members of the EU. Some parts of the English-speaking world outside the UK have therefore retreated into Commonwealth corporate law scholarship.314 However, globalization contributes and will in future contribute to a deepening of comparative corporate law beyond these traditional spheres. A conception of globalization that goes beyond economic globalization may assist in furthering sophisticated comparative corporate law. Although we must rid ourselves of the notion that there is a necessary causal link between comparative law and convergence,315 advances in this form of comparative law probably will promote weak and diverse but sensible and effective convergences of corporate laws. 308 www.oecd.org/dataoecd/32/18/31557724.pdf, accessed 3 May 2009; first drafted in 1999 and updated in 2004. 309 Where a more inclusive approach is followed, see King II Report on Corporate Governance (2002) introduction paras 4–6, 18.4–18.5, 29.2, 35–7. 310 See above fn. 169. 311 See below 6.2.2 and 6.2.4. 312 Hopt (2006, p. 1161) especially pp. 1167 ff. and his plea p. 1190; Pinto (2005) on the relationship between globalization, corporate governance and corporate governance scholarship; Kirk (2006, p. 177) on the idea that this will be one of the most important consequences of globalization. See Michaels and Jansen (2006) and their analysis of a transnational legal science, pp. 868–9, 879 on coherence that could be created by a transnational legal science and pp. 862–3 where this issue is discussed in the context of Europeanization. Twining (2007, p. 13) humorously typifies current comparative law as falling within the country and western tradition. He proposes that this approach will require reconsideration under globalization. 313 Hopt (2006, pp. 1161, 1172) mentions that law and economics have led to renewed interest in comparative law but it may be asked whether it has been helpful in developing a sound basis for analysis. 314 The standard textbook in South Africa, Blackman et al. (2002), is rich in comparative analysis but, with the exception of a few references to jurisdictions in the United States, all the references are to Commonwealth countries. 315 Hopt (2006, pp. 1161, 1174).

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5.3


International Rules

There are several problems with domestic law as a regulator of MNCs in the globalized world.316 It will be difficult to force MNCs to comply with fragmented national corporate laws. Even with convergence of laws there will still be inconsistent enforcement. Moreover, even if the laws of national jurisdictions are enforced, they may still be inappropriate for dealing with the problems of MNCs because they are generally focused on dealing with domestic situations.317 These difficulties can be addressed if international rules are made for MNCs by means of treaties.318 However, it is unlikely that treaties that adequately deal with MNCs can realistically be established. It will become apparent from the ensuing analysis that most attempts to establish comprehensive international rules have failed dismally.319 Moreover, there are serious difficulties with the application of international law to corporations, while international rules by themselves would not establish effective enforcement mechanisms.320 A further alternative would be the establishment of an international authority that enforces or creates and enforces international, or if you will global, legal norms:321 a type of global government or even an institution like the EU322 that could deal with the problems caused by MNCs under globalization. It has been proposed that the United Nations, the Bretton Woods institutions, the World Bank, the IMF or the WTO could fill the void left by the reduced presence of states in the globalized world.323 The Bretton Woods institutions, and especially the last two, have contributed substantially to economic globalization through their promotion of

316 317

See Sub-commission on Prevention of Discrimination (1996) at par. 60. See, on the idea of inappropriate national rules, Michaels and Jansen (2006,

p. 880). 318 Ratner (2001, pp. 538–9). See Michaels and Jansen (2006, p. 866) and Tavis (2002, p. 502). 319 Redmond (2003, p. 99). 320 These aspects will again be taken up below, text next to fn. 433 ff. A further possibility is to develop international law, and especially human rights law, in order for it to become directly applicable to MNCs: Redmond (2003, p. 99) but this argument is also unlikely to succeed on a sufficiently broad front. 321 See Stiglitz (2006, pp. 207–8); Ratner (2001, pp. 539–40). See Michaels and Jansen (2006, pp. 854 ff). 322 Michaels and Jansen (2006, p. 864). 323 Tavis (2002, pp. 503–4); Branson (2002a, p. 1211); Branson (2002b, pp. 134, 136–7). See also Michaels and Jansen (2006, pp. 866–7). The international institutions have gained importance under globalization, see Stiglitz (2002, p. 10).


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free trade and neo-liberal economic policies.324 It may be asked whether their mandates could not be extended to establish them as organs that are responsible for addressing its negative consequences. Indeed these institutions have in recent times become serious about addressing some of the concerns about the negative consequences of globalization.325 It is frequently contended that they should promote and protect human rights in the face of an onslaught by MNCs. Although Alston has suggested that trade organizations should not be used to promote human rights as it would subordinate the human rights agenda to the trade agenda,326 it is suggested that such regulation could be a significant step forward in the promotion of acceptable conduct by MNCs.327 Yet, it will take a true idealist to envisage that effective rules, equivalent to those imposed by national or regional authorities on local corporations, can emanate from, let alone be enforced by, these bodies.328 International institutions are hampered by nationalistic interests, narrow briefs and ideological narrow-mindedness. In any event, traditional rule-making or enforcement by an institution that is not subject to democratic constraints seems in many ways more dangerous than having no rules at all.329 It seems that the most important contribution made by these institutions will remain limited and indirect.330

6

ALTERNATIVE SYSTEMS FOR CONSTRAINING THE ACTIVITIES OF GLOBAL CORPORATIONS

Globalization will diminish the power of states to regulate corporations. A 324 The Bretton Woods institutions have been responsible for imposing the neoliberal policy regime which Friedman (2000, pp. 101 ff.) refers to as the Golden Straitjacket, see Branson (2002b, p. 137). See generally for the impact of the World Bank and OECD on globalization Pinto (2005, p. 491). 325 Pillay (2004, pp. 494–5, 518); Branson (2002b, pp. 137–8); Tavis (2002, p. 503). 326 Alston (2002, p. 815); Howse (2002, p. 651); Pillay (2004, pp. 513–15). 327 Petersmann (2002, p. 621). 328 Branson (2002b) at fn. 74; Pillay (2004, pp. 518 ff.). See Tavis (2002, p. 503) on steps that would bring the UN closer to being a global government in the economic sense. See the careful optimism of Wallace (2002, pp. 141, 151–2). 329 Branson (2002b) at fn. 75. Fort and Schipani (2002, p. 431) accept that corporate governance should not be aimed merely at profit for shareholders but they ultimately baulk at the idea that this can be established by international legislation. Although there is some democratic basis for these institutions because many of their members are democratic states, see Tavis (2002, p. 512). 330 See above on anti-fraud initiatives text next to fn. 243 ff. and more generally below, 6.2.1.

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conventional unified system of law that contains consistent legal norms for regulating corporations in a globalized world is unlikely to develop in the foreseeable future. Limited adoption of a range of global CSR models and nodal convergences of corporate law could contribute to creating frameworks for legal regulation of MNCs, but their influence will remain weak. Moreover, it seems unlikely that international laws and institutions can be created to fill this void. Yet, there are alternative regulatory systems that will go some way towards constraining abuses by global corporations. 6.1

A System of Competing Rules

A possible source of effective constraint for MNCs is competition of norms. Arbitrage among national legal systems has been described as a flaw of national legal systems as regulators of the activities of MNCs.331 But can this fragmentation be a systemic strength when viewed in another light? Global diversity and free choice may allow incorporators to choose the regulatory regime that they want for their corporations. Competition of norms can take two forms.332 In the informal system the laws of different jurisdictions compete or are allowed to compete. In the formal system an optional international system of corporate law rules is provided for which parties can opt.333 It is a bottom-up solution that allows users of the law to create their own law and, in the process, establish the norms that they prefer.334 A process of competition of norms may, but will not necessarily, lead to convergence of norms.335 Convergence will occur only where the system becomes static or where adjustment to best norms occurs relatively quickly and the needs of users of norms are homogeneous. The aim of creating a competitive system is not convergence but the establishment of choice for what parties regard as the best possible norms. According to this approach regulation becomes a commodity.

331 332

Above, 5.1. See McCahery (2006, pp. 155 ff.) for analysis of the types of conditions that will have to be met before competition will occur. 333 See generally on competition of norms: Hopt (2006, pp. 1161, 1189); Armour (2006, p. 369); McCahery (2006, p. 155) especially the description p. 159; Smits (2007, p. 1196) especially pp. 1197 ff. on the creation of a formal system especially with reference to Tiebout (1956, p. 416). See Michaels and Jansen (2006, pp. 863–4) on competition of norms in Europe and its relation to other approaches to European law and p. 867. See also Backer (2007, pp. 1742 and 1748) on the relationship between competition of norms and the creation of international norms. 334 On the benefits of competition see McCahery (2006, p. 158). 335 See McCahery (2006, pp. 157, 185) and his discussion of differences between the EU and 19th-century America; Smits (2007, pp. 1198–9).


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If competition occurs, it may mean that the best norms will receive greater acceptance. However, the corporate law experience of competition of norms has not necessarily been positive. In the United States incorporators are free to choose the state where they want to charter corporations. States receive an income from those corporations that are chartered in their jurisdictions. They have an incentive to compete for charters. Although some have touted this as a competitive system that has allowed for the best-possible rules to be provided by supply and demand, it seems that the better view is that it has led to a so-called race to the bottom. Weak regulation of corporations often has attracted the greatest number of charters. The problems that exist in the US will be magnified if it is applied in a world that is much more diverse and where regulation outside corporate law is much weaker.336 Many stakeholders are affected by the activities of corporations. Competition of norms will work only if there is careful scrutiny of the ideal norms by a broader range of stakeholders that are affected by them and if their preferences can be reflected in a balanced manner in the final decision to choose norms.337 Managers have the strongest incentive to investigate and consider the rules that will apply to a corporation if it is incorporated in particular jurisdictions. They are mostly responsible for selecting legal advisers who, in turn, help them to select jurisdictions that are most favourable to their interests. Other stakeholders are not informed or powerful enough to counter the influence of managers. Competition of rules therefore allows managers to exploit the situation in their favour. Furthermore, it is unlikely that information will be properly evaluated in order to ensure optimal choices. The cost of obtaining information and comparing norms will be so high that those who choose norms will not make rational choices.338 First mover advantages may favour particular rules even though they are not rationally the best rules.339 Culture often pre-determines choices to such an extent that it is unlikely that incorporators will choose the optimal system.340 Some systems may lose ground for reasons that have nothing to do with their real ability to meet the needs of the stakeholders to the corporation. 336 See generally Cary (1974, p. 663); Baysinger and Butler (1985, pp. 431, 433); Fischel (1982b, p. 913); Kahan and Kamar (2002, p. 679); Bebchuk and Hamdani (2002, p. 553); Roe (2003, p. 588); Smits (2007, p. 1199); Barnard (2000, p. 57). 337 See McCahery (2006, pp. 160–61) who accepts that competition will not work where externalities are generated. 338 Smits (2007, p. 1200) admits to these difficulties but proposes some solutions although it is doubted whether they will properly address the concerns. 339 Coffee (1999, pp. 703–4). 340 See the comments of McCahery (2006, pp. 178–9) on the role of culture in the EU.

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It is also difficult to determine the extent to which choices should be allowed. In the context of contract law it has been proposed that a system of competition should allow for a choice of specific norms and not only a choice of systems.341 The reason for this proposal is obvious. If systems can be chosen (as is generally the case in US corporate law) the choosers will be (at least to some extent) captured once a system is chosen, whether they like a particular norm or not. A choice of jurisdiction then requires a difficult evaluation of the aggregate effect of a set of norms. However, the notion that specific norms can be chosen is equally problematic. Norms are not discrete enough to allow for specific selection and the cost of doing continuous comparisons will in most cases be so exorbitant that parties will not engage in it effectively. Those not blinded by public choice theory and neo-liberalism will still believe that states set normative standards through law and that it should not be obliterated by a bottom-up system. It seems that competition of norms in the climate that has persisted in the last few years presents more of a danger than an opportunity. Competition of norms may have a chance of limited success in a world that has been transformed by the sobering events of the credit crunch and a new humility regarding the benefits of free markets. The current financial crisis may cause shareholders and stakeholders to become more responsive and this may be mirrored in more balanced choices by managers of incorporating firms, but too many obstacles to optimal choices will remain. Competition of norms probably will play a very weak role in the regulation of MNCs. 6.2

The Establishment of Constraints outside Traditional Law342

The consideration of corporate law and its application in a globalizing world should not merely be concentrated on law in the traditional sense.343 Globalization in the Twenty-First Century brings with it a whole host of problems that corporate law has not faced previously. In fact, perhaps corporate law is not up to the task and will never face the problems posed by the size and geographical reach of large multinationals … Rather than the organic corporate law of nation states, under which corporations are formed and regulated, and the power allocated among the various governance organs of the corporation, our attention will be shifted away from what we have heretofore dealt with as ‘corporate law’. Instead, in the large multinational corporate sphere, we will focus much more upon soft law.344 341 342

Smits (2007, pp. 1199–1200). See Stephan (1996–97, pp. 681, 707) and Special Representative Report (2007) at par. 45 on the meaning of soft law. 343 Backer (2006) especially at pp. 321–2; Friedman (2000, pp. 205 ff.). See Michaels and Jansen (2006, p. 868). 344 Branson (2002b, p. 138); Branson (2000, p. 670); Backer (2008b, pp. 508–9).


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Michaels and Jansen correctly show that our conception of law requires some reconsideration because of globalization.345 Globalization transfers a measure of control from governments to global governance networks.346 The conduct of MNCs will not only be constrained by impersonal markets but also by the pressures of several overlapping governance networks.347 As the recent financial crisis has indicated, market exchanges depend on trust. This may be enhanced by regulation and it may be in the interest of MNCs to participate in the creation of regulation.348 States will not be irrelevant in these networks. They will participate in them but will not be able to exercise their traditional state powers.349 International institutions will not replicate the state when it comes to global activities but they will be significant actors in these networks. Moreover, private participants that include non-governmental organizations and MNCs will themselves be involved in many of them, while MNCs will be the target of others.350 The forces that constrain MNCs in the globalized world will reflect the complex interconnectedness produced by globalization.351 So whence will these networks derive their validity and legitimacy?352 The justification for the legal rules of many nation states is founded in a democratic process. But for networks there are no simple answers to this question.353

345 346

See Michaels and Jansen (2006, pp. 868 ff.); Smits (2007); Twining (2007). Tavis (2002, p. 489) see above, text next to fn. 27 ff. See also Backer (2007) who speaks of ‘autonomous systems for the regulation of economic behaviour’ and see the description of actors pp. 1748 ff. and the reliance of the sociological idea of functional differentiation and polycentric globalization, see also pp. 1768, 1776, 1783. See also Backer (2008b, pp. 508–9) on regulation of functionally distinct communities and the engagement of regulation at the interstices of lawmaking. 347 Fort and Schipani (2002, pp. 425–6). 348 Backer (2007, pp. 1747–8). 349 Backer (2007) at fn. 5 with reference to Teubner (1993, p. 41), see also Backer above pp. 1768–74, 1777 on structural coupling and the limits of private networks, see also pp. 1761–2 on the role of the state in private networks and Backer (2008, pp. 522–3). 350 Tavis (2002, pp. 489, 501 ff., 532–3, 538, 543). 351 See Michaels and Jansen (2006, pp. 869–71) and their analysis of privately created orders; Friedman (2000, pp. 286 ff.). 352 See Michaels and Jansen (2006, pp. 873–7) who discuss different bases for determining validity of law in the time of globalization. See also Special Representative Report (2007) at par. 92 on the standards which grievance mechanisms must meet. 353 Michaels and Jansen (2006, p. 880) who state that it will be difficult to justify non-state law that is not rooted in closed communities, although they state at p. 881 that private law was never completely justified in democracy because of the role of technocrats in developing it.

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Sometimes legitimacy will be rooted in the indirect involvement of states.354 In other situations legitimacy will have to be achieved by more sophisticated means. Perceived accountability, transparency and the ability to achieve goals that are regarded as worthy will be essential in achieving legitimacy.355 6.2.1 International institutions International institutions have thus far favoured voluntary codes of conduct as tools for keeping the activities of MNCs in check. The Governing Body of the International Labour Organization (ILO) adopted the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy in 1977.356 The declaration merely offers guidelines. Yet, periodic surveys are conducted to determine the effect of the declaration and a party who disputes an interpretation of its provisions can apply to the ILO for an interpretation through a procedure that was developed in 1981. The Organisation of Economic Co-operation and Development (OECD) has issued the Guidelines for Multinational Enterprises.357 They were drafted by the Member States of the OECD and give guidance to MNCs on labour practices, environmental practices, consumer protection and anti-corruption measures. These guidelines are also voluntary,358 but states adhering to them are obliged to set up National Contact Points that, inter alia, must deal with grievances with MNCs.359 The OECD is frequently viewed as an elitist representative of the rich developed nations. But, it similarly represents the countries that mostly serve as homes for MNCs and this enhances the legitimacy of its guidelines.360 The World Bank has issued the Legal Framework for the Treatment of Foreign Investment,361 which lays down standards for foreign investments 354 See also Tavis (2002, p. 539) and his discussion of the ISO (further analysed below, text next to fn. 522) and the Council of Chemical Associations. 355 Tavis (2002, pp. 509–11, 543). See the basis upon which divisions are made in the Special Representative Report (2007) at par. 6. 356 Available at www.ilo.org/public/english/employment/multi/download/declaration2006.pdf, accessed 30 November 2008. It has been updated twice, in 2000 and 2006. 357 See OECD, Guidelines for Multinational Enterprises (1999), available at www.oecd.org/daf/cmis/cime/mneguide.htm, accessed 15 April 2009. 358 See how they are applied by institutional investors in the UK: Williams and Conley (2005, p. 542). 359 Special Representative Report (2008) at paras 85, 98–9; Special Representative Report (2007) at par. 50. 360 Special Representative Report (2007) at par. 49 notes that these instruments are widely referenced by governments and business and that they may crystallize into harder norms. 361 (1992) at www.worldbank.org, accessed 4 May 2009.


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that are to be applied by host states and investors. These norms again are voluntary but they have gained broad acceptance.362 They are also bolstered by the support of the International Finance Corporation, which is a member of the World Bank group.363 It sets performance standards which borrowing corporations must meet and these include human rights elements. Depending on the type of project, impact studies may be required for financing. These studies will include the human rights impact of a project. An ombudsman who may hear complaints has been appointed to ensure that borrowers comply with the standards.364 Next, although attempts of the United Nations to create hard law in this area are inauspicious, they have contributed substantially to the establishment of soft law.365 In the wake of certain misadventures by MNCs, especially their involvement in the overthrow of a Marxist government in Chile, the UN became interested in these undertakings. The UN General Assembly established the Commission as well as an Information and Resource Center on Transnational Corporations in 1974.366 This Commission prepared the draft UN Convention on Transnational Corporations (UNCTC), but it came to naught in the mid-1990s.367 The draft Convention attempted to determine the relationship between MNCs and host countries.368 Yet, it was too ambitious and was stymied by cold war and north–south conflicts.369 The UNCTC was

362

Wallace (2002, pp. 145–6). Ratner (2001, p. 537) who also notes that the World Bank considers the human rights impacts of its projects. 363 See the IFC website, www.ifc.org, accessed 3 May 2008. 364 Special Representative Report (2007) par. 51. 365 Tavis (2002, p. 502) calls the contribution of the UN and related institutions ‘modest’. 366 The Commission was established pursuant to the Economic and Social Council (ECOSOC) Resolution 1913, UN ESCOR, 57th Session Supplement No. 1A, at 31, UN Document E/5570/Add. 1 (1974). The Information and Research Center was established by ECOSOC Resolution 1908, UN ESCOR, 57th Session Supplement No. 1, at 13, UN Document E/5570 (1974). See Rubin (1976, p. 73). See Ratner (2001, pp. 456–7) for an analysis of the political atmosphere in which these developments took place. 367 Final draft version, UN Document E/1990/94 (June 1990). For the development, see also Draft United Nations Code of Conduct on Transnational Corporations, UN Document E/C.10/1982/6 (5 June 1982). For the subsequent revision, see Draft United Nations Code of Conduct on Transnational Corporations, UN Document E/1983/17/Rev.1 (1983), reprinted United Nations Draft International Code of Conduct on Transnational Corporations International Legal Materials, 23 (1984), 626. See Branson (2002b, p. 136); Rubin (1995, pp. 1275, 1285–6); Redmond (2003, pp. 96–7). 368 Hillemanns (2003) par. 2. 369 Mensch (2006, p. 263).

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absorbed into the UN Conference on Trade and Development (UNCTAD) in 2002. UNCTAD has continued to keep information on MNCs.370 In the meantime, the regulation of MNCs found a home in the UN’s human rights institutions.371 The Sub-Commission on the Promotion and Protection of Human Rights (prior to 27 July 1999 the Sub-Commission on Prevention of Discrimination and Protection of Minorities) was the major subsidiary body of the United Nations Commission on Human Rights.372 The Human Rights Commission is a political body consisting of representatives of states, but the Sub-Commission is a body of experts. In 1998 the Sub-Commission established a sessional working group to examine the working methods and activities of MNCs.373 The mandate of the working group was extended for a further three years in 2001.374 It drafted and finalized the Norms on the Responsibilities of Transnational Corporations and other Business Enterprises with regard to Human Rights in 2002 and 2003.375 The Norms were then

370

See http://unctc.unctad.org/aspx/UNCTCEvolution.aspx, accessed 30 April 2009, outlining the reorganization of the economic sector that resulted in the dissolution of the UNCTC and the transfer of the programme on transnational corporations to UNCTAD. See Backer (2006, p. 315). 371 Backer (2006, p. 321). 372 In 2006 this institution was replaced by the United Nations Human Rights Council. 373 Sub-Commission on Prevention of Discrimination and Protection of Minorities, Resolution 1998/8, UN Document E/CN.4/Sub.2/Res/2001/3 (20 Aug 1998). The idea of a working group for this purpose had its origin in resolution 1997/11, Report of the Sub-Commission on Prevention of Discrimination and Protection of Minorities on Its Forty-ninth Session, Res. 1997/11, UN Document E/CN.4/1998/2, UN Document E/CN.4/Sub.2/1997/50 (1997) which asked El-Hadji Guissé to present a working document to the committee, see Sub-Commission on Prevention of Discrimination (1998). 374 Sub-Commission on Human Rights. Resolution 2001/3, UN Document E/CN.4/Sub.2/Res/2001/3 (15 Aug 2001). 375 These Norms were grounded in three reports: Sub-Commission on Prevention of Discrimination (1995), above fn. 106; Sub-Commission on Prevention of Discrimination (1996), above fn. 93; Sub-Commission on Prevention of Discrimination (1998), above fn. 110. The agenda of the working group was set in 1999, Report of the Sessional Working Group on the Working Methods and Activities of Transnational Corporations on Its First Session, UN Document E/CN.4/Sub.2/ 1999/9. A first draft was prepared and considered in August of 2000, Report of the Sessional Working Group on the Working Methods and Activities of Transnational Corporations on Its Second Session, UN Document E/CN.4/Sub.2/2000/12, paras. 26–58. Members of the working group then organized a seminar in March 2001, Report of the Seminar to Discuss UN Human Rights Guidelines for Companies, UN Document E/CN.4/Sub.2/2001/WG.2/WP.1. A second draft was considered in August 2001, Draft Universal Human Rights Guidelines for Companies, Introduction, UN Document E/CN.4/Sub.2/2001/WG.2/WP.1. At working committee meetings in July/August 2002


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approved by the Sub-Commission in 2003,376 they were revised and re-issued with a commentary on 26 August 2003.377 The Norms were the first international attempt to create human rights oriented rules that are specifically aimed at corporations.378 The basic philosophy behind them was that MNCs had gained power, that responsibility came with power and that human rights standards were necessary to ensure responsibility.379 The Norms recognized that MNCs operated across borders and that this meant that they could conduct economic activities beyond the influence of national laws.380 They acknowledged that states were the primary bearers of responsibility for human rights. They accordingly were meant to oblige states to ensure compliance with the Norms.381 But most controversially, they also addressed corporations and their employees directly. They referred directly to the responsibilities and even obligations of corporations to respect, protect and promote human rights recognized in national and international law. Corporations were to do this within their respective spheres of influence.382 The obligations under the Norms were to apply equally in host and home states.383 On a substantive level the Norms mostly did not create anything novel. They reflected norms that had already gained acceptance in the codes, guidelines and the Norms started to take their current form, UN Document E/CN.4/Sub.2/2002/ WG.2/WP.1. The working group then received comment on the draft document. The documents were again revised and the working group agreed on drafts to be presented to the Sub-Commission at its meetings in July/August 2003, see Report of the Sessional Working Group on the Working Methods and Activities of Transnational Corporations, UN Document E/CN.4/Sub.2/2003/13 with reference to Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, UN Document E/CN.4/Sub.2/2003/12/Rev.1 and Commentary on the Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, UN Document E/CN.4/Sub.2/2003/38/Rev.1. For a more comprehensive analysis of their development, see Backer (2006, pp. 328–33); Weissbrodt and Kruger (2003, pp. 903–8); Weissbrodt (2005, pp. 55, 67–9). 376 Resolution 2003/16 UN Document E/CN.4/Sub.2/2003/L.11 (13 Aug 2003) at p. 52; Backer (2006, p. 330). 377 The Norms were set out in Norms without Commentary (2003) and with a commentary, Norms with Commentary (2003). 378 Hillemanns (2003) par. 1. 379 UN Document E/CN.4/Sub.2/2003/12/Rev.2 (26 Aug 2003) preamble; Weissbrodt and Kruger (2003, p. 901). See the argument of Backer (2006, pp. 371–4) on the effect of this argument on the distinction between the role of states and corporations or the public–private debate. See also the further argument Mensch (2006, p. 249) that MNCs often performed public activities. 380 Norms without Commentary (2003) preamble. 381 Norms without Commentary (2003) preamble, paras 1, 17, 18. 382 Norms without Commentary (2003) preamble, par. 1. 383 Norms with Commentary (2003), at par. 1(a).

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other normative frameworks of corporations, the ILO, the OECD, and civil society organizations.384 The Norms also acknowledged that they had to be subject to review as new issues emerged.385 When it came to enforcement and implementation a wide-ranging scheme was proposed.386 The Norms were to form the basis of all contractual relations of MNCs and were to be adopted as the internal rules of corporations.387 They foresaw a comprehensive scheme for monitoring the activities of MNCs on an international level. Monitoring was to involve the UN, other national and international governance networks, civil society and MNCs themselves.388 Monitoring and implementation was to require ‘amplification and interpretation of intergovernmental, regional, national and local standards with regard to the conduct of transnational corporations’.389 The UN’s human rights bodies were to monitor implementation by imposing reporting duties on states and adopting general comments and recommendations interpreting obligations. The structures of the UN Commission on Human Rights were to use the Norms and other relevant international standards to raise concerns about the activities of MNCs. The Sub-Commission and its working group were also to monitor compliance and establish best practice by receiving information from civil society and giving MNCs an opportunity to respond.390 It was further envisaged that MNCs would have to establish transparent monitoring and reporting mechanisms, establish proper and formal avenues for complaints about compliance with the Norms, do periodic assessments of the human rights impacts of their activities with reference to the Norms and, to the extent of their resources and abilities, do similar impact assessments before pursuing new projects or initiatives. Assessments that exposed inadequate compliance were also to set out plans for remedial action or reparations.391 States were to establish and reinforce legal and administrative frameworks to ensure that corporations implement the Norms.392 Corporations were to use due diligence 384 385 386 387

Backer (2006, pp. 343 ff.); Redmond (2003, p. 101). Norms without Commentary (2003) preamble. See the summary Backer (2008a, pp. 634–7). Norms with Commentary (2003) at par. 15. This approach is controversial in international law, see Backer (2006, p. 334) with reference to Wiener (1999, p. 20) and the impact of this approach, pp. 371 ff. and especially pp. 375–84; Backer (2008a, p. 633). 388 Norms without Commentary (2003) at par. 16; Weissbrodt and Kruger (2003, pp. 915 ff.); Backer (2006, p. 385) and the description of the difficulties that arose here. 389 Norms with Commentary (2003) at par. 16(a). 390 Norms with Commentary (2003) at par. 16(b). The Special Representative Report (2006) at par. 59 regarded the approach in the Norms to be excessive but ‘largely symbolic’. 391 Norms with Commentary (2003) at par. 16(d)–(i). 392 Norms without Commentary (2003) at par. 17.


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to ensure that their activities did not constitute human rights abuses and that they did not benefit from abuses.393 They were to pay reparation to persons who were adversely affected by breaches of the Norms.394 These Norms accordingly would have established a very robust framework for regulating MNCs. However, it became apparent that powerful countries and business regarded the Norms as unpalatable. In 2004 the Norms got into difficulty.395 The imposition of direct duties on MNCs was labelled in contravention of international law. The Norms were criticized for being in some respects vague, being unnecessarily strict and blurring the distinction between states and corporations as promoters of human rights.396 A process was set in motion by the Human Rights Commission which meant that the Norms were shelved. They became a statement of voluntary, aspirational goals.397 It could be argued that they have an enhanced status as they received considerable support from sectors of civil society.398 However, the failure to adopt the Norms meant that the UN only continued with more modest

393 394

Norms with Commentary (2003) at par. 1(b). Norms without Commentary (2003) at par. 18: for the purpose of damages, the imposition of criminal sanctions or otherwise national or international courts were to apply national or international law. See generally Weissbrodt and Kruger (2003, pp. 912–13). 395 See Weissbrodt (2005, pp. 70–71) on the role of big business and the Milton Friedman argument, mentioned above fn. 146, that business has no social responsibilities. 396 Report of the United Nations High Commissioner on Human Rights on the Responsibilities of Transnational Corporations and Related Business Enterprises with Regard to Human Rights, UN Document E/CN.4/2005/91 (15 Feb 2005), see especially paras 20–21 for the arguments for and against the Norms, see Backer (2006) especially at pp. 374–80. See also the argument of Mensch (2006, pp. 265–6) on why developing countries did not like the Norms. She refers to the Norms as being ‘dead on arrival’ at p. 268. 397 Decision 2004/116 UN Document E/CN.4/Sub.2/2003/12/Rev.2, the Commission recommended that the Economic and Social Council (1) confirm the importance of the question of the responsibilities of multinational corporations (2) request the Office of the High Commissioner for Human Rights to compile a report setting out the scope and legal status of current initiatives in the field (3) affirm that the Norms have no legal status, had not been requested by the Commission and could not be monitored by the Sub-Commission. The office of the High Commissioner then produced a report which proposed merely that the Commission should ‘maintain the draft Norms among existing initiatives and standards on business and human rights, with a view to their further consideration’, see Report of the United Nations High Commissioner on Human Rights on the Responsibilities of Transnational Corporations and Related Business Enterprises with regard to Human Rights, UN Document E/CN.4/2005/91 (15 Feb 2005). See Backer (2006, p. 331); Weissbrodt and Kruger (2003, pp. 913–22). 398 Backer (2006, p. 288).

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attempts to regulate the activities of MNCs and the Norms have had a limited impact on further developments. In the wake of the failure of the Norms, the much more business-friendly Global Compact (GC) became the most important instrument for constraining the conduct of MNCs. The UN Secretary-General introduced the idea to promote corporate social responsibility in 1999399 and this proposal culminated in the GC. It became operational on 26 July 2000. It is less ambitious than the Norms when it comes to an enforcement strategy but it emphasizes participation to a greater degree than the Norms. Although promoted by the Secretary-General, endorsed by the General Assembly of the UN and supported400 by six participating UN agencies,401 the GC is a multi-stakeholder initiative. Governments, NGOs, and corporations are also involved in it as actors.402 A corporation commences participation by sending a letter to the Secretary-General expressing its support for the compact.403 The corporation is then expected to change business practices, publicly advocate the GC and publish an annual communication on progress in its annual or sustainability report.404 The GC focuses on leadership and it specifically requires those who lead corporations to subscribe to the principles of the GC.405 The GC prescribes ten principles. However, compliance with these principles is not formally monitored or policed.406 The GC operates on two levels. It aims to get participating corporations to internalize the values of the compact and facilitate collective

399 See www.unglobalcompact.org, accessed 6 May 2009. The GC started when the Secretary-General of the UN, Kofi Annan, gave an Address at the World Economic Forum in Davos of 31 January 1999, UN Document SG/SM/6448 (1999). See Backer (2007) at fn. 46. 400 See the renewed mandate A/res/62/211 of 2008. 401 The Global Compact, The Global Compact’s Next Phase (2005), par. 3.15, available at www.unglobalcompact.org, accessed 20 November 2008. 402 Although it has perhaps not obtained sufficiently broad support yet, see Oshionebo (2007), above fn. 111, at pp. 25–30. 403 The Global Compact, What is the Global Compact? (2008), 4 available at www.globalcompact.org, accessed 20 November 2008. 404 The Global Compact, What is the Global Compact? (2008), 4 available at www.globalcompact.org, accessed 20 November 2008. 405 The Global Compact, What is the Global Compact? (2008), 4 and Policy on the Communication on Progress (updated 2008), available at www.globalcompact.org, accessed 20 November 2009. 406 See for instance the weak enforcement measures, The Global Compact, The Global Compact’s Next Phase (2005), part 4, available at www.globalcompact.org, accessed 20 November 2009, especially its procedure for dealing with complaints, Oshionebo (2007, pp. 24–5).


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problem-solving between them.407 It establishes networks within which participants can act to promote its values. Dialogue between participants, isolation of problems and co-operative resolution of those problems lie at the heart of the GC.408 Learning forums aid corporations in putting principles into practice by means of case studies.409 Networks established along regional, national and industrial lines allow corporations to engage with stakeholders.410 Through these mechanisms, the GC not only provides an avenue for dialogue between business and civil society, it also hopes to ‘weave a web of values around the global marketplace’, foster cooperation between business and civil society, and identify and promote the adoption and dissemination of best practices.411

In summary, the main features of the global compact are that it is reflexive, interactive and self-referential.412 Naturally, the GC has met with mixed reactions. Some see it as a great step forward for global regulation of MNCs. It can allow business to retrieve its moral purpose.413 It stresses the importance of embedding values rather than enforcing them.414 Others criticize its voluntary nature and lack of strict enforcement mechanisms in the traditional legal sense. It allows corporations to promote their images without truly improving their conduct,415 creates the impression that respect for human rights is not peremptory,416 gives MNCs

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UN Global Compact, How the Global Compact Works: Mission, Actors and Engagement Mechanisms (2003), p. 2; The Global Compact, Report on Progress and Activities July 2002–July 2003 (2003), 27 both available at www.globalcompact.org, accessed 20 November 2009. 408 UN Global Compact Office, How the Global Compact Works: Mission, Actors and Engagement Mechanisms (2003), p. 5 available at www.globalcompact.org, accessed 20 November 2009. 409 The Global Compact, Report on Progress and Activities July 2002–July 2003 (2003), 33–9, available at www.globalcompact.org, accessed 20 November 2009; Kell (2003, pp. 35, 39–41). 410 The Global Compact, What is the Global Compact? (2008), 4 available at www.globalcompact.org, accessed 20 November 2009; Global Compact, The Global Compact: A Network of Networks 2 and Guidance for Networks (2005), available at www.globalcompact.org, accessed 20 November 2009; Kell and Levin (2003, p. 151). 411 Oshionebo (2007, p. 16), the passage quoted by him comes from Ruggie (2002, pp. 297, 301). 412 Oshionebo (2007, p. 16). See generally on self-referential networks for constraining MNCs, Backer (2007, pp. 1779–80). 413 Ruggie (2002, p. 297); Williams (2004, pp. 755, 761). 414 See above, text next to fn. 219, on the importance of this argument in justifying CSR. 415 See Oshionebo (2007, p. 18) on the limits of shaming as an enforcement tool. 416 Ibid.

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inordinate power in international institutions, is based on the simplistic and incorrect premise that MNCs do not deliberately infringe human rights but rather they do so because of a lack of knowledge417 and illustrates the unwillingness or inability of the UN to address the problems created by MNCs headon.418 At least the GC does not mark the end of the road for the UN and its attempts to ensure that MNCs respect human rights. John Ruggie was appointed as the Special Representative of the Secretary-General on the issue of Human Rights and Transnational Corporations on 28 July 2005 against the backdrop of failed attempts within the UN to establish strong norms to regulate the activities of MNCs. His mandate is to research and make recommendation for the strengthening of the environment that provides protection against human rights abuses by MNCs.419 The Special Representative accepts that states bear the primary responsibility for vindicating human rights in this context and sees his mandate as strengthening the promotion and protection of human rights in relation to MNCs. For this purpose, he primarily has to obtain evidence and provide conceptual clarification.420 His three reports to the Commission on Human Rights, now the Human Rights Council, record his progress.421 The Special Representative accepts that markets and MNCs as actors in those markets are important drivers of economic development but that they only function properly if they are embedded in rules, customs and institutions. Markets pose the greatest risk when their scope and power far exceed their institutional underpinnings.422 Globalization has caused governance gaps and

417 418

Oshionebo (2007, pp. 20–22). Taylor (2001, p. 975); Oshionebo (2007) who also lists a number of other crit-

icisms. 419 The Commission on Human Rights requested the Secretary-General to appoint a special representative for 2 years and it set out the mandate for such a representative, see Decision 2005/69; for the content of the resolution see UN Document E/CN.4/2005/L.11/Add. 7, and for the resolution see UN Document E/CN.4/2005/ L.10/Add.17 (April 20, 2005). The Economic and Social Council approved the request on 25 July 2005 by Decision 2005/273, available at www.un.org/ecosoc/docs, accessed 2 May 2009. The Human Rights Council extended this mandate by Resolution 8/7 A/HRC/RES8/7 (18 June 2008) available at www.ap.ohchr.org/documents/E/HRC/ resolutions, accessed 2 May 2009. See also Weissbrodt (2006, p. 137). 420 Special Representative Report (2006) at par. 7. 421 Special Representative Report (2006); Special Representative Report (2007); Special Representative Report (2008), fn.100. 422 Special Representative Report (2006) at par. 18; Special Representative Report (2007) at paras 1–2, 83; Special Representative Report (2008) at par. 2. See also Weissbrodt and Kruger (2003, p. 902).


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the major concern is to determine how these gaps can be narrowed.423 Developing host states often do not have the institutional capacity to address abuses and home states are unwilling or do not have the legal frameworks that enable them to address the commission of offshore abuses of human rights.424 The Special Representative acknowledges that the international community is at an early stage of developing norms that provide protection against human rights abuses by MNCs.425 The business and human rights debate lacks an authoritative focal point. There are many initiatives but they have not reached the scale where it can be said that protection is adequate.426 Substantial international protection is already afforded to MNCs through bilateral investment treaties which allow for binding arbitration.427 Yet, the same cannot be said of protection against abuses of human rights committed by MNCs.428 To illustrate this, the Special Representative refers to a recent challenge by a European corporation of South Africa’s BEE laws.429 The Special Representative goes to considerable trouble to evaluate the Norms.430 He concludes that they contain useful elements. The survey of rights that could be affected by business and the descriptions of the types of practices that must or should be avoided could rightly have focused the debate on substantive issues.431 Instead, the Norms ‘became engulfed by its own doctrinal excesses’.432 Two aspects are emphasized. First, the Norms overshot the mark when it came to attempts to impose obligations on corporations.433 Unlike individuals, corporations cannot be brought before the

423

Special Representative Report (2006) at par. 9 ff.; Special Representative Report (2007) at par. 2; Special Representative Report (2008) at paras 3, 11. 424 Special Representative Report (2008) at par. 14. 425 Special Representative Report (2008) at par. 1; Special Representative Report (2006) at par. 54. 426 Special Representative Report (2008) at par. 5. 427 See also in this regard Wallace (2002, pp. 146–7). 428 Special Representative Report (2008) at paras 11–16. See the first part of the argument Special Representative Report (2006) at par. 12; Redmond (2003, pp. 79–80). 429 Piero Foresti, Laura De Carli and others v Republic of South Africa (International Centre for Settlement of Investment Disputes Case No. ARB (AF)/07/1). See also Special Representative Report (2008) at paras 34–6. 430 Special Representative Report (2006) at par. 54; see also the many references to his reports in the discussion of the Norms above, text next to fn. 378 ff. 431 Special Representative Report (2006) at paras 57–8. 432 Special Representative Report (2006) at par. 59. See generally on the problems with the Norms, Special Representative Report (2008) at par. 51. See also on the criticisms of the Norms, Backer (2008a, p. 637). 433 Special Representative Report (2006) at paras 60–65. See the criticism, Special Representative Report (2008) at paras 65–72, and his earlier views, Special Representative Report (2007) at par. 9. See generally on the duties imposed on MNCs:

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International Criminal Court.434 Arguably, if direct international law duties are imposed on individuals and not only on states then those duties will apply also to corporations. Yet, it is generally accepted that individuals and thus corporations will seldom be subject to these types of duties. They are limited to an exceptional list of gross violations of human rights. Secondly, the proposals did not get the balance between the responsibility of states and corporations rights.435 The Norms were accordingly regarded as a distraction rather than a basis for moving the debate forward.436 The Special Representative accepts that there is no single bullet solution to the difficulties that he has to confront. States, business and civil society need to learn to do things differently and these things must cohere and become cumulative.437 For this purpose he established a framework.438 The framework is constructed on three pillars: the duty of states to guard human rights, the responsibility of corporations to respect human rights and the provision of remedies for abuses of human rights committed by corporations.439 As to the first pillar, it is accepted that the international human rights regime rests upon the bedrock role of states.440 There is disagreement as to whether home states are obliged to provide protection against human rights abuses committed by corporations based within their territories, if those abuses are committed abroad. However, there is greater agreement that states

Weissbrodt and Kruger (2003, pp. 915–16); Weissbrodt (2006, pp. 135, 136–7) especially p. 139 and Weissbrodt (2008, pp. 373, 386). On the criticism voiced against the approach in the Norms, Weissbrodt (2005, p. 67). 434 Redmond (2003, pp. 71–2); McLoughlin (2007, pp. 159–60); Pillay (2004, p. 521); Special Representative Report (2007) at par. 19 ff. stresses that direct application is only relatively certain in the context of criminal liability, see par. 44; Special Representative Report (2006) at paras 61–4 with reference to Sosa v Alvarez-Machain 542 US 692, 732 (2004). These issues are controversial and there are arguments either way. The approach of Ruggie was heavily criticized by some NGOs; for a good summary of all arguments, see Duruigbo (2008). See the more expansive approach of Ratner (2001) but see also his explanation of the more conventional position pp. 466, 490–92. See also Backer (2006, p. 369) who foresees a role for the International Criminal Court in terms of the Norms. 435 Special Representative Report (2006) at paras 66–8. See Weissbrodt (2008, p. 385) and his analysis of the same argument in Ruggie (2007, pp. 819, 826). See also the comments of Duruigbo (2008, pp. 50, 74); see also Duruigbo’s list of arguments for and against extending liability for MNCs 64ff. Backer (2006, pp. 293, 378–84) states that it could cause end-running by corporations. 436 Special Representative Report (2006) at par. 69. 437 Special Representative Report (2008) at par. 7. 438 Special Representative Report (2008) at paras 8–9, 17. 439 Special Representative Report (2008) at paras 9, 17. 440 Special Representative Report (2008) at para. 50. See Backer (2007, p. 1784) on the diminished role of states in international relations.


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are not prevented from doing so, once certain basic requirements are met.441 Moreover, it is confirmed that states have a duty to provide protection against human rights abuses that affect persons in their territories or jurisdictions, albeit that they may decide what measures are appropriate for complying with these duties.442 Yet, the Special Representative laments that states do not find the correct mix of policy measures in order to protect human rights against infringement by MNCs.443 Much can be done to strengthen a corporate culture that is favourable to human rights, for instance by considering it in determining criminal liability; moreover government policies must be aligned to ensure that they are aimed at preventing human rights abuses by business.444 The Special Representative also proposes a network to give guidance to states that, in many ways, mirrors the engagement methodologies of the GC.445 Next, the Special Representative is at pains to avoid saying that corporations have or should have obligations in international law. He merely refers to their ‘responsibilities’ to respect human rights.446 These responsibilities exist independently from and do not merely mirror the responsibilities of states.447 The responsibility to respect human rights is a ‘baseline responsibility’.448 To respect rights means not to infringe on the rights of others, that is, to do no harm.449 Not doing harm is not the same as being passive.450 What is required is due diligence. This concept describes the steps that a corporation must take to become aware of and address human rights impacts.451 The Special Representative emphasizes the importance of having human rights policies, integration of policies, embedding of respect for human rights452 and the role

441 Special Representative Report (2008) at par. 19; Special Representative Report (2007) at par. 15. 442 Special Representative Report (2008) at paras 18, 21; A/HRC/4/35/Add.1; Special Representative Report (2007) at paras 10–14, 16, emphazing that states often rely on soft law, 18. 443 Special Representative Report (2008) at paras 22, 27; Special Representative Report (2007) at paras 16–17, see also addenda 1 and 2. 444 Special Representative Report (2008) at paras 29–42; Special Representative Report (2007) at par. 28. 445 Special Representative Report (2008) at paras 43–6. 446 Special Representative Report (2008) at para. 23 mentions that this responsibility is recognized in soft law instruments. See on duties under international law Special Representative Report (2007) at paras 19–23, 33–44. 447 Special Representative Report (2008) at paras 53, 54. 448 Special Representative Report (2008) at paras 24, 54, 55. 449 Special Representative Report (2008) at par. 24. 450 Special Representative Report (2008) at par. 55. 451 Special Representative Report (2006) at paras 76–8; Special Representative Report (2008) at paras 25, 56–64. 452 Special Representative Report (2008) at par. 60.

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which the GC can play in taking this process forward.453 The corporate responsibility to respect human rights includes avoiding complicity in human rights abuses. It is not possible to define complicity clearly, but there is an obvious relationship between complicity and due diligence. Corporations can avoid complicity by employing the due diligence process.454 Finally, the Special Representative considers access to remedies and grievance mechanisms. The current patchwork of mechanisms is incomplete and flawed. It must be improved in its parts and as a whole.455 As part of a state’s duty to guard human rights it must establish effective grievance mechanisms. Treaty bodies increasingly recommend that states investigate and punish human rights abuses and provide redress when it affects persons within the jurisdiction.456 These state-based mechanisms may be judicial or non-judicial. Judicial mechanisms are often under-equipped, especially when it comes to claim for redress in the home country of a corporation, where that harm was suffered abroad. The Special Representative proposes that states should strengthen judicial capacity to hear complaints against corporations that operate or are based in their territories.457 Non-judicial mechanisms can involve state-sponsored mediation services or national human rights institutions. Some proposals for improving the effectiveness of these mechanisms are made.458 A list of requirements which non-judicial grievance mechanisms should meet in order to be credible and effective is given.459 The benefits and flaws of nonstate grievance procedures established by corporations, multi-stakeholder networks or industry initiatives and financiers are then investigated.460 Ultimately, two proposals are made for the improvement of all grievance and enforcement procedures. Lack of knowledge about the range of remedies can be improved by means of education.461 Intended and unintended limitations in the competence and coverage of mechanisms should be addressed by appointing a global ombudsman, although clear requirements will have to be met before such a proposal can be implemented effectively.462 The Special Representative’s views can be subjected to a number of criticisms. He has been attacked from some quarters for not being bullish enough 453 454

Special Representative Report (2008) at par. 64. See Special Representative Report (2008) at paras 73–81; McLoughlin (2007, p. 160). See also on complicity Special Representative Report (2007) at paras 31–2. 455 Special Representative Report (2008) at par. 87. 456 Special Representative Report (2008) at paras 82–3. 457 Special Representative Report (2008) at paras 88–91. 458 Special Representative Report (2008) at paras 84–5, 96–9. 459 Special Representative Report (2008) at par. 92. 460 Special Representative Report (2008) at paras 93–5, 100–101. 461 Special Representative Report (2008) at par. 102. 462 Special Representative Report (2008) at par. 103.


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about the obligations of MNCs to respect human rights and for his hostility towards the Norms.463 His observations about the ‘responsibilities’ of corporations involve a careful play with words. Moreover, few of the real difficulties that exist in this area of law are decisively and conclusively resolved in his reports. His failure to answer the question as to whether home states have a duty to protect human rights against abuses committed abroad by locally registered corporations is understandable but problematic. His proposal for a global ombudsman is unlikely to succeed. Yet, his approach also has various strengths. His views seem to be quite balanced and are devoid of obvious and strong ideological preferences. They represent respect for the perspectives of corporations as well as those that are affected by their actions. He makes a number of highly innovative and useful proposals and observations while avoiding some of the pitfalls of his predecessors. His emphasis on embedding respect for human rights in corporations fits well with the approach of CSR and the GC. The greatest strength of his work is that he proposes a comprehensive and creative framework by which the activities of MNCs can be addressed internationally. His proposals require a long-term strategy for promoting human rights against abuses by MNCs.464 For those who impatiently try to provide protection against corporate human rights abuses this may be difficult to stomach, but there appear to be few short-cuts. 6.2.2 Self-regulation by MNCs465 It has become commonplace for MNCs to have codes of conduct and ethics.466 These documents are central to ensuring the social responsibility of MNCs.467

463 See Letter to Professor John Ruggie of 25 October 2007 (final version) and his response, Letter of John Ruggie to Julieta Rossi, Director ESCR-Net of 15 October 2007, Misereor & Global Policy Forum, Problematic Pragmatism: The Ruggie Report 2008: Background, Analysis, Perspectives (June 2008), to which Ruggie responded in a letter dated 2 June 2008. All are available at www.business-humanrights.org except the letter of 25 October 2007 which can be found at www.escr-net.org (both were accessed on 10 May 2009). See also above, fn. 433 for the criticisms of one of the drafters, David Weissbrodt. 464 Special Representative Report (2007) at par. 4. 465 Special Representative Report (2007) at par. 63 expressly does not regard this as a form of soft law. See Backer (2007, p. 1747) on the effects of globalization on the importance of self-regulation although he probably overstates the case. He refers to codes as a ‘system of law developing side-by-side with traditional law’. 466 Special Representative Report (2006) at paras 31–8; Mensch (2006, p. 251); Backer (2007, pp. 1752–6). See Ratner (2001, p. 532) and Redmond (2003, pp. 87–8) on the origins of these codes. See the description of Backer (2008b, pp. 508 ff.) of the code of the MNC GAP. 467 Broader networks may promote these codes in dynamic ways, see Backer (2007, pp. 1780–82).

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Corporations often make considerable investments in connecting their brands and names to compliance with such codes and this will serve as a strong incentive for them to comply with their codes.468 Codes will help to create awareness of the type of conduct that is expected of corporations.469 They will do much to embed social responsibility in corporations.470 Drafters of these codes will have experience in the areas of business of corporations to which they apply and they will be able to address particular problematic situations unique to particular types of businesses. These codes are easier to get off the ground than more formal types of soft and hard law. Moreover, the standards in these codes are often taken from recognized soft law instruments such as the Global Compact or from other codes. This enhances the status of the borrowed norms and promotes greater consistency.471 Accordingly, codes will help to establish the types of standards around which stronger law can coalesce.472 Nevertheless, codes are not the panacea for all problems concerning global MNCs.473 Not all MNCs will have codes of conduct, while some have ones that are merely superficially aimed at improving their images and brands.474 Although codes sometimes refer to other recognized systems of norms, the multiplicity of codes creates an impenetrable variety of norms which are sometimes of doubtful quality. Cross-referencing, as described earlier, apparently does not sufficiently counter these centrifugal forces.475 Even with the best will in the world MNCs will be constrained by the markets in their attempts to be socially responsible. If investors, consumers or other stakeholders are weak or not interested in compliance with a code, it is unlikely to serve as a constraint on a corporation.476 Mechanisms will have to be created to ensure that code provisions meet certain basic requirements477 and that proper organizational implementation, grievance, monitoring and reporting procedures are put in place. Some or all of these mechanisms are frequently absent or ineffective.478 468 469 470 471 472 473 474

Redmond (2003, pp. 90–91). Ratner (2001, p. 532). Tavis (2002, pp. 523 ff.); Ratner (2001, p. 531). Backer (2007, pp. 1754–5). Ratner (2001, p. 533). Redmond (2003, pp. 91–5); Backer (2008a) at fn. 106. Tavis (2002, pp. 507, 540–41). US courts have also accepted that tort liability can be restricted if corporations have proper monitoring systems in place. 475 Ratner (2001, p. 532). 476 See Backer (2007, pp. 1759–60) who describes stakeholders as essentially weak but regards the provision of information as critical. See on the disinterest of consumers in social responsibility: Backer (2008, pp. 631–2). 477 See on the difficulties regarding the vagueness of codes Backer (2008a, pp. 612 ff.). 478 Special Representative Report (2008) at paras 93–5. See Mensch (2006, p. 266); Ratner (2001, p. 532).


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The logical extension of codes for particular corporations is statements or codes of alliances of corporations. Some important examples can be mentioned.479 The Caux Round Table (CRT) was founded by executives of corporations in Europe, Japan and North America. They published the Caux Round Table Principles for Business, which have been implemented by a large number of corporations. These principles require respect for all stakeholders, the letter and spirit of the law as well as the environment.480 Furthermore, there are several initiatives that cater for specific industries.481 The International Council of Toy Industries (ICTI) has national toy trade associations and their affiliates as its members and it has produced the Code of Business Practice. It focuses on workplace and labour standards.482 Worldwide Responsible Accredited Production (WRAP) is an industry initiative in the clothing sector composed of industry associations and it provides standards for factories in the sector.483 The Electronic Industry Code of Conduct (EICC) is a coalition of firms in the electronics industry, including many of the major names. It has produced a code of conduct that concerns labour, health and safety and employment standards with which its members must comply.484 The Equator Principles are the result of an industry initiative by financial institutions involved in project finance whereby members agree not to provide finance to corporations that do not comply with its principles. The principles incorporate the Performance Standards on Social and Environmental Sustainability of the IFC.485 Finally, the International Council 479 See Mensch (2006, pp. 252–3) who also mentions Responsible Care, see their website, www.responsiblecare-us.com, accessed 8 May 2009; see also Blair et al. (2008, pp. 339 ff.) on this initiative; Redmond (2003, p. 88); OECD Directorate for Financial, Fiscal and Enterprise Affairs, Codes of Conduct – an Expanded Review of their Contents TD/TC/WP(99)56/final (May 2001), available at http://appli1.oecd.org/ olis/1999doc.nsf/LinkTo/td-tc-wp(99)56-final, accessed 7 June 2009; OECD, Corporate Responsibility: Private Initiative and Public Goals (2001), available at www.oecd.org.dataoecd/46/36/2075173.pdf, accessed 7 June 2009; Backer (2008b, p. 511). 480 Tavis (2002, pp. 507–8). It has also produced the Principles for Responsible Globalization, which are addressed at governments. See generally the Caux Round Table website at www.cauxroundtable.org, accessed 3 May 2009. 481 Special Representative Report (2006) addendum 4. 482 See the International Council of Toy Industries website, at www.toy-icti.org, accessed 4 May 2009. See also the Code of Conduct subscribed to by member associations that is aimed at consumer protection. 483 Worldwide Responsible Accredited Production website, at www.wrapapparel.org, accessed 4 May 2009. See Blair et al. (2008, pp. 340–41). 484 Electronic Industry Code of Conduct website, at www.eicc.info, accessed 4 May 2009. 485 The Equator Principles website, at www.equator-principles.com, accessed 4 May 2009; see above, text next to fn. 361ff, for an analysis of the IFC principles.

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of Mining and Metals (ICMM) is a CEO-led organization that represents many of the major mining and metals corporations as well as regional and national commodity associations who commit to conform to its Sustainable Development Framework. The framework is based on ten principles that concern a wide range of issues.486 This initiative and the Equator Principles also include the protection of minority and cultural rights and require community consultations and impact assessments.487 Only the ICMM and the EICC prohibit bribery in their codes.488 These types of codes will extend the benefits of corporate codes. They will create greater uniformity when they are directly supported and are used for cross-referencing. The pressures on corporations to comply with them are stronger than in the case of individual corporate codes of conduct. Corporations have an incentive to monitor the behaviour of their competitors to ensure that they compete on an equal playing field. However, industry codes may be open to free riding by firms who benefit from the improved image of an industry without subscribing to the industry code.489 Furthermore, enforcement mechanisms remain generally weak. Of the initiatives mentioned only WRAP and the ICTI allow for factories to apply for certification which will only be given and maintained following an audit,490 while the ICMM provides for external assurance of compliance.491 All require some form of reporting but only the Equator Principles and ICMM require public reporting.492 The EICC and the Equator Principles explicitly require that grievance procedures must be set up.493 Governments could move to strengthen codes but their contributions have thus far been indirect.494 In 2000 Australian Senator Vicky Bourne failed to promote successfully the Corporate Code of Conduct Bill.495 The Bill aimed to impose social responsibility standards on Australian corporations operating 486 International Council of Mining and Metals website, at www.icmm.com, accessed 4 May 2009. 487 Special Representative Report (2007) at paras 144–5, 156–7. 488 Special Representative Report (2007) at par. 160. 489 Redmond (2003, p. 94). 490 See Special Representative Report (2007) addendum 4 par. 151, the ICM is developing an external verification mechanism. 491 The Special Representative Report (2007) at par. 154 mentions that this mechanism was being developed and it became effective in 2008. 492 See Special Representative Report (2007) at par. 153. The ICMM and Equator require compliance with the Global Reporting Initiative Guidelines, while the others have their own standards, par. 152. 493 See Special Representative Report (2007) at par. 154. 494 See also below 6.2.4 on the role of states in governance networks. 495 Available at www.aph/gov.au, accessed 12 December 2008. See McLoughlin (2007, pp. 171–2).


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abroad. In the United States Congresswoman Cynthia McKinney lost her seat before she could complete the promotion of her Corporate Code of Conduct Act for the United States. It would have required US MNCs to have codes of conduct and would have imposed liability for breaches of such codes.496 6.2.3 Non-governmental organizations Non-governmental organizations (NGOs) operate on both a local and global level to promote socially responsible conduct of corporations.497 The establishment of a global civil society takes globalization beyond mere economic globalization. Globalization creates opportunities for NGOs because of the weakening of states and the increased social emphasis on the global dimension.498 In governance networks the most important sanctioning mechanism is that stakeholders such as local communities and employees, but especially customers and investors, withdraw their support from offending MNCs. However, several obstacles prevent them from constraining the activities of MNCs. Those who suffer the most harm are often the weakest. It may be difficult for stakeholders to co-operate to exert pressure on MNCs that act improperly. Some stakeholders may be reluctant to act when they benefit from the activities of MNCs even if others are injured. Stakeholders frequently will not have the type of information that will convince them to exert pressure on MNCs even if they would have been prepared to do so if they were better informed.499 NGOs are therefore essential in mobilizing stakeholders and in engaging with MNCs.500 NGOs can perform a range of functions to constrain the activities of MNCs, such as reporting abuses, monitoring the activities of MNCs, setting standards of conduct for MNCs501 and establishing formal and informal engagements with MNCs or their stakeholders.502 Good examples of this are the reports which Human Rights Watch has produced to expose human rights abuses by Enron in India and international oil companies in Nigeria503 and the report of the National Labour Committee that exposed unacceptable

496 Corporate Code of Conduct Act HR 2782 107th Cong (2001), available online at www.theorator.com/bills107/hr2782.html; see also www.aph.gov.au/senate/ committee/corp_sec_ctte/reports.htm, both accessed on 14 December 2008. 497 See generally Bunn (2004, p. 1265). 498 Above, text next to fn. 27 ff. 499 McLoughlin (2007, p. 157). 500 Special Representative Report (2006) at paras 14–16 where the reasons for this are discussed. For the dynamic functioning of networks, see Backer (2007, pp. 1780–82); Backer (2008b, pp. 519–20). 501 Backer (2007, pp. 1756–8). See the standards of CERES below, text next fn. 515. 502 See also Dickerson (2004, p. 534) on the role of NGOs. 503 See Ratner (2001, pp. 447, 526–8).

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labour practices of suppliers to Wal-Mart.504 NGOs such as Human Rights Watch have been held up as organizations that interact with MNCs in a constructive manner.505 Greenpeace now also engages positively with business over acceptable environmental business practices.506 Moreover, NGOs, like corporations, may form alliances.507 There are two major reasons for this. First, it may be more difficult for NGOs to gain legitimacy than for some other global actors because of the absence of accountability to all but donors and members.508 There is a danger in allowing one group of unaccountable actors, in the form of NGOs, to oversee the activities of another, in the form of MNCs.509 Alliances may help NGOs achieve legitimacy. Secondly, alliances may help NGOs to perform their functions more efficiently. Global NGOs may, for instance, join coalitions with local ones to enhance their authenticity and local footprint, while local ones may partner with global ones to obtain access to greater resources and skills as well as global credibility.510 Nevertheless, NGOs are not always effective counterweights to MNCs.511 Some engagements with MNCs are ideological and unnecessarily confrontational. Some NGOs are criticized for falling prey to a visceral anti-MNC bias that arouses suspicion on the part of MNCs about the value of the human rights movement in business.512 Although some NGOs or alliances of NGOs will obtain considerable legitimacy and will be important actors in governance networks, many will not find acceptance that is universal enough to allow them to serve as a counterweight to mighty MNCs. Moreover, NGOs struggle to persuade investors and customers to turn their backs on offending MNCs in a world where people are information saturated. Hence, attempts by NGOs to have MNCs sanctioned for their improper conduct will seldom succeed. Only a few causes will receive the type of attention that will force MNCs to alter their behaviour.

504 Backer (2007, pp. 1762–7). See also the description of GAP’s engagement with NGOs, Backer (2008b, pp. 509 ff.). 505 Ibid. 506 Friedman (2000, p. 208). See also above on the role of NGOs such as the Jubilee movement, fn. 58. 507 Tavis (2002, pp. 510–11) on the legitimacy of these organizations. 508 Ratner (2001, p. 533). 509 See Backer (2006, pp. 386–8) on the role of NGOs in terms of the Norms as initially envisaged. 510 See Tavis above, fn. 507. 511 See also Blair et al. (2008, p. 347) on the argument that they may undermine regulation because governments cede regulatory powers to them. 512 Ratner (2001, p. 533). Friedman (2000, p. 355) states that it is important to determine how globalization can be used rather than how it can be torn down.


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6.2.4 Tightly knit multi-stakeholder networks It already should be apparent from the introduction to this section, the description of the UN Global Compact and the analysis of self-regulation and NGOs, that multi-stakeholder networks are central to transnational regulation of MNCs.513 In this section some of the tightly knit and formalized multi-stakeholder networks will be described. A multitude of these networks perform an extremely wide range of tasks in the global arena and representative examples will have to suffice.514 Some networks do not involve MNCs directly but have NGOs and other stakeholders, such as investors, as major actors in order to strengthen legitimacy and the ability to condemn improper behaviour. CERES is a coalition between investors and environmental or public interest organizations. It is the successor to the Coalition for Environmentally Responsible Economics. It drafted the CERES Principles (formerly known as the Valdez Principles) in 1999 in response to the Exxon-Valdez oil spill disaster. It creates a broad front for engaging with business about environmental issues and it gets corporations to endorse its Principles.515 Although MNCs participate in the Extractive Industries Transparency Initiative (EITI), its outstanding feature is that it harnesses state power and MNCs can fall within its ambit without their consent. The EITI was announced by former British Prime Minister Tony Blair at the World Summit for Sustainable Development in Johannesburg in October 2002. Its aim is to achieve revenue transparency in the extractive industry. If a country applies to become EITI compliant it must go through a rigorous process of validation. But once a country is recognized to be EITI compliant, all payments made by relevant corporations to the government must be disclosed by them, while countries must disclose all revenues received. Other countries, corporations in the extractive industry, NGOs and international organizations who are not 513 Special Representative Report (2007) at par. 5, although the definitions used for different networks will sometimes differ from those in the report. 514 Apart from those initiatives mentioned here see also the Ethical Trading Initiative (ETI) which is a multi-stakeholder initiative requiring participating companies in the UK to comply with a base code. It does not monitor compliance but requires reporting and it engages with companies that do not comply, see www.ethicaltrade.org, accessed 14 November 2008, and see Special Representative Report (2007) addendum 4. The Global Sullivan Principles have their origin in the anti-apartheid movement but were drafted by a Core Committee of business leaders in consultation with the Rev. Leon H. Sullivan. They were launched in November 1999 at a special ceremony at the UN, attended by the Secretary-General, see www.thesullivanfoundation.org/gsp/ default.asp, accessed 14 November 2008, and Mensch (2006, p. 254). See also generally Blair et al. (2008, p. 342). 515 Coalition for Environmentally Responsible Economics, at www.ceres.org, accessed 4 May 2009; Mensch (2006, pp. 253–4); Zondorak (1991, p. 457).

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bound in this manner participate in the EITI by endorsing it and providing oversight and support for its activities.516 In other networks, countries participate as actors but MNCs and their consent to participate are central to the functioning of the networks. The Voluntary Principles on Security and Human Rights (VPs) involve countries, corporations and NGOs. It sets out principles that provide practical guidance to corporations in the extractive industry when providing security for their businesses. In developing countries these corporations often make use of private security forces or formal (public) security forces. These forces may pose a danger to neighbouring communities. The initiative is aimed at addressing these forms of harm. Participants must meet certain participation criteria. A new participant will only be accepted with the consent of all existing members. Every participant must report on its compliance with and support for the principles on an annual basis and reports must be submitted to the Steering Committee. The VPs provide for robust but constructive engagement between members. Participants may raise concerns regarding the compliance of other participants with the VPs. If certain requirements are met such a concern may then be referred to a plenary meeting of participants. The plenary meeting may then decide what action to take (in the case of countries a super majority of 66 per cent will be required for these decisions, while an ordinary majority will suffice for other participants). The plenary meeting must make its decision for the purpose of deepening the VPs. If the participant at whom the decision is aimed categorically fails to implement it, it may be expelled but only with the consent of all remaining members.517 Many networks have MNCs and NGOs as major participants. The Fair Labor Association (FLA) grew out of the Apparel Industry Partnership, which was intended to end sweatshop conditions in the clothing industry. It is an alliance between MNCs and advocacy groups. The Partnership issued a Code of Conduct. Corporations who join the FLA must comply with the Code and monitor compliance, submit to independent monitoring and report on conditions in the factories of suppliers. Independent monitoring takes the form of audits and the results of these audits are published. The FLA requires remedial action where infringements have occurred and it monitors such actions. The 516 Extractive Industries Transparency Initiative website, at www.eitransparency.org, accessed 6 May 2009; Special Representative Report (2007) at para. 45. See the discussion in the report of the Kimberley Process paras 52, 54, 57–9 and also Special Representative Report (2006) at par. 47, see www.kimberleyprocess.com, accessed 2 June 2009. States also actively participate in this initiative to prevent the trade in blood diamonds. 517 Voluntary Principles on Security and Human Rights website, at www.voluntaryprinciples.org, accessed 7 May 2009; Special Representative Report (2006) at paras 48–51.


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FLA has concluded that monitoring is not enough and it has developed strategies to build capacity that will ensure compliance with acceptable practices in developing countries.518 Several networks are focused on establishing standards for socially responsible conduct and certifying compliance with those standards.519 The Forest Stewardship Council (FSC) comprises corporations and representatives in the forestry profession and timber trade, environmental and social groups and indigenous community organizations. It sets principles and criteria for forest management. The principles concern environmental, labour and human rights issues. The FSC provides for the certification of compliant participants by accredited, independent certification organizations. Such participants may then label products to show that they have been produced or handled by compliant firms. Many large retailers in the US support the FSC and it has even gained the attention of the investment community.520 Social Accountability International is an NGO that has created a social responsibility standard, the Social Accountability or SA 8000. The standard was developed consensually by representatives of trade unions, human rights organizations, academia, retailers, manufacturers, contractors, and consulting, accounting, and certification firms. It focuses on labour standards. Certification for compliance with the standard is given on the basis of an audit done by accredited auditors. Certified firms are subject to semi-annual reviews and revisits.521 The International Organization for Standardization (ISO) develops and publishes international standards. Its members are the standards bodies of states and they enforce compliance standards. It therefore is slightly different from the other multi-stakeholder networks listed here. Many of its members are state institutions but it is not an international institution in the strict sense as some of these members are private organizations set up by national partnerships of industrial organizations, while business plays an important and direct role in standard-setting. It has set highly authoritative environmental and quality management systems standards and is currently involved in setting a social responsibility standard ISO 26000.522

518 Fair Labor Association website, at www.fairlabor.org, accessed 7 May 2009; Special Representative Report (2006) at paras 43–4 and Addendum 4; Special Representative Report (2007) at paras 79–80; Tavis (2002, pp. 508, 539); Friedman (2000, pp. 207–8); Ratner (2001, pp. 529–30). 519 See also the Kimberley Process above, fn. 516. 520 Forest Stewardship Council website, at www.fsc.org, accessed 8 May 2009; Branson (2002b, p. 137); Blair et al. (2008, p. 343). See also on other social labelling schemes: Ratner (2001, p. 532); Mensch (2006, p. 253). 521 Social Accountability International website, at www.sai-int.org, accessed 8 May 2009; Special Representative Report (2006) addenda 3 and 4. 522 See the International Organization for Standarization website, at

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This brief survey illustrates how the benefits of governance networks can be strengthened if the different types of actors in them organize their interactions formally.523 These tightly knit networks allow for direct engagement by parties who are concerned with the activities of MNCs. They enable MNCs and other stakeholders to learn from one another and benchmark their actions against best practice. Where other stakeholders, such as NGOs, participate in establishing a network with MNCs, fine balances must be struck that do not undermine the legitimacy or interests of those participants or the ability of MNCs to make profits. The need for the participation of NGOs and other participants in order to legitimate a network means that they cannot simply be pushed around by MNCs. As a result, the norms laid down by these networks generally are quite strict. With the exception perhaps of the Voluntary Principles, they provide for expansive monitoring, verification and enforcement procedures. Moreover, the centralization of norm creation establishes a more consistent and intelligible regulatory framework. However, these networks also suffer from many of the flaws that have already been highlighted in the context of self-regulation and NGOs. MNCs will be able to capture some of these networks. Despite some centralization, the multitude of frameworks still creates fragmentation. Most networks are still voluntary and the pressure to participate in them will sometimes remain weak.524 6.2.5

Conclusions regarding the restraining of the activities of MNCs outside traditional law The analysis of existing governance networks shows that MNCs do not operate in an unregulated global environment, even if they may be subject to very little by way of formal law.525 These networks have several advantages over hard law. They are effective precisely because they are easier to get off the ground, are tailor-made for specific purposes and can be applied more flexibly than traditional legal rules.526 Furthermore, it seems that it will be impossible to replace these networks with hard law, even if it were acknowledged that they always produce secondbest results and that they ought to be so replaced. National law will remain an imperfect tool for regulating MNCs, while it seems unlikely that a comprewww.iso.org/iso, accessed 3 May 2009. See Blair et al. (2008, pp. 329 ff., 343–4) on ISO 8000 and 9000. See Mayer (2002, p. 644). See also Tavis (2002, p. 507) on the role of private entities in standard-setting. See above, fn. 169, on sustainability reports and the Global Reporting Initiative. 523 Special Representative Report (2007) at par. 59. 524 Backer (2006, p. 318) and the complaints about volunteerism. 525 Special Representative Report (2006) at par. 70. 526 See generally on the value of soft law, Weissbrodt (2008, p. 389) and Ruggie (2007, pp. 819, 839–40).


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hensive international legal regime for this purpose will be established any time soon. Developed nations are loath to give up their economic and political power and developing nations will regard the imposition of obligatory norms as a form of imperialism.527 The political compromises that will have to be made to develop laws for this purpose may create more problems than solutions. The failure of the Norms shows that attempts to create international norms before the political and social environment is ready do not take efforts to regulate MNCs forward but rather set them back. However, as governance networks suffer from many flaws and are not selfsufficient, some situations will require the centralized and formal weight of hard law. The real trick will be to determine the situations in which governance networks should be replaced by hard law and to establish how these networks can be supported by hard law. In this process, care must be taken to ensure that valuable elements of soft law and governance networks are not destroyed by inappropriate, rigid hard laws.528 Law can learn much from the social experiments that have been conducted through these initiatives. Ideally, there should be fluidity between hard and soft law initiatives.529 A modest proposal is to create international rules that would improve the information that MNCs provide about the impact of their activities and to provide for institutions that monitor MNCs on the basis of such information, without trying to lay down specific international norms. The governance networks would then have to distil the information and mobilize for corrective actions. The difficulties of establishing specific norms would be side-stepped. This approach relies heavily on the ability of markets to discount and balance the perspectives of different stakeholders about acceptable behaviour and the ability of other actors such as states and NGOs to ensure that those markets function effectively. It appears that markets can achieve this to some extent.530 However, this type of strategy has its limits. Perhaps it should be perceived as one of the starting points in the development of a more comprehensive regulatory regime for MNCs.531 Transnational efforts to establish critical mass on norms and enforcement mechanisms should continue alongside developments such as this. The proposals of the Special Representative of the UN SecretaryGeneral, John Ruggie, are invaluable because they start to develop realistic frameworks for taking the broader regulation of MNCs further.

527 528 529

Backer (2008a, pp. 618–20). See Backer (2007, p. 1777) on the value of dispersion of power. Backer (2007, p. 1761) speaks of the migration of norms. Although this migration will be difficult, see Backer (2008a, p. 608). 530 Backer (2008a). See especially his reliance on binary economics pp. 606–7. 531 See Backer (2008a, p. 643) on the development of values.

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7


CONCLUSION

Although increased globalization is unlikely to give birth to a major convergence between the laws of different states or the establishment of strong international rules, it will probably promote a conversation between the local rules and the global initiatives that constrain the conduct of corporations. There is considerable tension between attempts to regulate MNCs in states and supraterritorially.532 Backer, referring to the position of the United States, distinguishes the national corporate law discourse focused on economics, and to some extent politics, where corporate law is regarded as a form of private organization, and the transnational and international corporate law discourse that is focused on social responsibilities and human rights. For people in these fields of law and policy, the traditional forms of nation-centered normative corporate regulatory systems, centered on the economics of shareholder wealth maximization, hold no special magic. Instead of economics and private law, public law and public accountability provide a better model for corporate regulation, which can be articulated as policy, and eventually as law. At this level, the domestic law framing of the issue of corporate social responsibility – the extent to which the corporation may or must take into account the effects of its actions on others, and the fundamental limitation of ultimate corporate purpose to shareholders – is increasingly rejected. State governance and corporate governance theory conflate in norm making outside the nation-state.533

Backer proposes that the ‘power to control the authoritative discourse over corporate characteristics and responsibilities could be wrested from the institutions controlling the national discourse’.534 This discourse has thus far given birth mainly to soft law norms. The national discourse will remain of importance to corporate law, but the global perspective requires a rethink of national approaches to corporate law. The focus on human rights and the social impact of corporations on the global stage illustrates that the contractarian approach to corporations is based on gross oversimplifications. MNCs have power and therefore must be submitted to public law regulation that will in some ways mirror regulation of state power.535 In countries with strong political institutions the contractarian approach could perhaps make some sense because their activities will be constrained outside of corporate law. But MNCs also operate in environments where institutions are weak. Here the constraints imposed by

532 533 534 535

Backer (2008b, p. 508). Backer (2006, pp. 305–8); Backer (2008, pp. 601–2). Backer (2006, pp. 358 ff.); Backer (2008, pp. 505–6). Backer (2006, pp. 307, 320, 333, 334, 340, 357 ff.). See Bottomley (1997, pp. 277, 313) and his idea of corporate constitutionalism.


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corporate governance structures become critical. International human rights and national corporate social responsibility movements meet at this juncture in their attempts to embed values in corporations. Perhaps globalization, beyond economic globalization, will ultimately have the unexpected result of clinching the indeterminate debate about the role of corporations and corporate law in favour of greater corporate social responsibility. The forging of ties between human rights law and corporate law, promoted on an international level, cannot ignore economic efficiency. However, the global perspective suggests that a careful balance of the interests of a wide range of stakeholders in corporations is required in corporate law. Moreover, it is not obvious that such a shift in corporate law will be inefficient. One of the major reasons for the current economic crisis was a bizarre focus on short-term gain. This approach to corporations and corporate law may promote the sustainability of the activities of corporations.536 Furthermore, globalization has affected the power of nation states to regulate. It has not made states impotent but has undermined their power to make law. The regulation of corporate law in the globalized world is and will remain a complex affair.537 Three models for constraining their activities exist. According to the neo-liberal approach, markets will be sufficient to prevent abuse of economic power. According to the moral restraint model, voluntary guidelines for the behaviour of MNCs are provided and those who have submitted to the guidelines are then scrutinized. According to the control model, the activities of MNCs must be submitted to legal constraints.538 The first model clearly illustrates that markets are central to globalization and the benefits that it has brought. Yet, it focuses too much on economic globalization and a naive belief in the power of markets to control power. It would appear to be more sensible to have other forms of regulation to work in tandem with markets, to ensure that markets work efficiently but also to assert values that are regarded as important, even though they may limit market efficiency.539 So, how should such regulation look? It will fall somewhere between the second and third alternatives enumerated above. Governance networks should continue to perform a significant role as a regulatory mechanism. But this does not mean that we should be in denial about the weaknesses of governance

536 537

See the examples of Mayer (2002, pp. 645–6, 649–51). Backer (2006, p. 294): ‘[r]egulatory power appears to be flowing up from states to international bodies and out from states to non-public actors’. 538 Ratner (2001, p. 462) on the importance of conceiving of power beyond political power, with reference to Strange (1996, pp. 16–43). 539 Backer (2006, pp. 317–19).

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networks.540 There is a need to find the right mix of attainable and workable soft and hard law and to understand how and when soft law should migrate into hard law. Perhaps developments in the area of corporate law can contribute to broader attempts in other areas of law that are aimed at understanding the concept of soft law and its relationship to hard law.

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PART V

Procedural issues

10. Civil procedure in a globalizing world Remco van Rhee 1

INTRODUCTION

At the start of the 21st century, the world’s civil procedural landscape is diverse. The main origin of diversity can be found in the historical differences in the approach to civil litigation in the Common Law and Civil Law families of procedural law.1 However, even within these families the differences have become considerable, and it has been stated that because of that, the dichotomy between Civil Law and Common Law may soon have lost much of its relevance.2 An obvious example of major differences within one family can be seen when comparing England and Wales (shortly ‘England’ below) and the United States of America. In England, the jury has nearly disappeared from civil trials,3 whereas the right to a jury trial is a constitutional right in the US.4 Also, the role of pre-trial discovery (currently known as disclosure in England) is radically different in these two jurisdictions. Whereas discovery in the US is extremely extensive, at least from a European perspective,5 stringent limits have been introduced in England by the Woolf Reforms (1999).6 At the same time, it seems that occasionally the differences between jurisdictions from

1 2

For example, van Caenegem (1973) Chapter 2; Van Rhee (2005a). Andrews (2009): ‘This project also shows that a jurisdiction’s historical association with the Common Law or Civil Law tradition is not an immutable genetic stamp. Arguably, this backward-looking distinction will soon have lost any clear value in modern procedural structures.’ And also: ‘These differences [between the USA and English systems, and between the various civil law jurisdictions] make a nonsense of the glib phrase “Anglo-American procedure” and, especially, of the crude expression “Civilian procedure”.’ See also Storskrubb (2008, p. 285). 3 Andrews (2003) Nos. 34.08–34.10; Supreme Court Act 1981, Section 69; Stürner (2005, pp. 201–54) p. 225; Van Rhee (2005b, p. 154). 4 Seventh Amendment of the US Constitution. 5 Burnham (2006) Chapter 7. 6 Woolf (1996) Chapter 12, paras 37 ff., available at http://www.dca.gov.uk/ civil/final/index.htm, last consulted April 2009; Andrews (2003) 26.01–26.128. 343

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different families are becoming less pronounced.7 When one compares modern English civil procedure with the procedure of various continental European jurisdictions, it appears, for example, that both in England and in large parts of the continent the judge has become an active case manager in civil proceedings, albeit in England mainly as regards the formal aspects of litigation.8 In this respect, England has moved away from the traditional Common Law approach and in the direction of the European Continent.9 The question may be asked to what extent the study of these differences and similarities is relevant for a modern lawyer. After all, it is not immediately evident why civil procedure should be studied from a comparative perspective. Often, civil procedure is considered to be a purely national branch of the law, which is partly due to the lex fori rule. This rule implies that, unlike for example in various areas of substantive law such as the law of contract, litigants may not choose the procedural law applicable to their case. Litigants are obliged to observe the procedural law of the forum where they litigate. This is not surprising, since the organization of the courts and several of their rules of procedure are closely linked to issues of the organization of the State and therefore touch upon matters that often have a constitutional significance.10 Nevertheless, there has already been some interest in comparative civil procedure for a considerable amount of time, especially in Germany and Italy, and currently such interest is on the rise on a worldwide scale.11 This interest is in my opinion to a certain extent the result of globalization, or at least of ‘internationalization’, that is, the integration and/or interdependence of economic, political, and cultural systems, either across the globe (globalization) or on a more local level (internationalization, for example at the level of the European Community).12 In the present chapter I will discuss three areas where an interest in comparative civil procedure is – at least in part – due to internationalization or globalization:

7 8 9

See e.g. Lindblom (1997, pp. 11–46, p. 20). Woolf (1996) Section II; Van Rhee (2008, pp. 11–25). Van Rhee (2003, pp. 217–32). See, for an overview of the major similarities and differences between the world’s civil procedural systems, ALI/UNIDROIT (2006, pp. 4–7). 10 Storme (1994, pp. 37–9). See also Storskrubb (2008, p. 22); ALI/UNIDROIT (2006, pp. xxxii–xxxiii). 11 See for example the various publications of the International Association of Procedural Law, http://www.uni-regensburg.de/Fakultaeten/Jura/gottwald/iapl/, last consulted April 2009. 12 I will use the terminology ‘European Community’ in the present text and not ‘European Union’, since most of the issues discussed here are only relevant for the European Community pillar (i.e. the supra-national pillar) of the European Union, and not for the second and third pillars (i.e. the intergovernmental pillars).

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• law reform at the national level • competition between national civil procedural systems • harmonization of procedural law on an international and a global scale.

2

LAW REFORM AT THE NATIONAL LEVEL

Comparative civil procedure is often popular where attempts are made to reform a national procedural system. Under these circumstances, foreign procedural law is closely studied and compared with the existing national system under scrutiny. In such cases, civil procedural systems that are closely related to the system in need of reform are especially of interest. When reforming a procedural system, a comparative approach seems wise, since foreign experiences offer information on the functioning of procedural rules in practice. Examples may be quoted from the 15th- and 16th-century Low Countries, where one may observe the adoption of French–Burgundian procedural law,13 and I do not exclude the possibility that there are earlier ones. In more recent times, examples abound. Reference may be made to examples from the 19thand 20th-century Netherlands14 and Belgium.15 One may question whether the interest in comparative civil procedure in law reform should be viewed as the result of globalization or at least internationalization. This is, in my view, indeed the case because, as stated, the civil procedural systems that are used as a source of comparison are usually systems that are closely related to the system in need of reform. The relationship between the various procedural systems is very often the result of a close contact, not only in the procedural field but also as regards the economy, politics and culture. The 15th- and 16th-century Low Countries, for example, were culturally and linguistically close to their French–Burgundian model. As regards the 19th-century Netherlands and Belgium, the French legislation introduced after the annexation of these territories by France was not repealed after the defeat of the French emperor. Therefore, from a legal point of view (and, before the defeat of the French emperor at Leipzig, also from the political and economic perspective), the Netherlands and Belgium were integrated into the French system, something that especially in Belgium was reinforced by the French cultural and linguistic orientation of the elite of that country during the 19th and a large part of the 20th centuries.

13 Examples from the 16th century may be found in Van Rhee (1997, pp. 313 ff.). See also Van Rhee (2000, pp. 589–611). 14 Jongbloed (2005, pp. 69–95). 15 Heirbaut (2009, pp. 89–117).

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The result of the interest in comparative civil procedure in law reform on a national scale has given rise to a process of spontaneous harmonization, or rather ‘approximation’, of civil procedural law on an international scale.16 This process can be observed in various parts of the world, at least as regards aspects of civil procedural law. In this respect, one may refer to the procedural systems of several Member States of the European Community. As stated, within the European Community even the divide between Civil Law and Common Law has become less pronounced in the area of civil procedure. An example of spontaneous approximation is what may be called the process of ‘deformalization’. Although procedural forms should be adhered to since formality guarantees justice,17 too much formality may lead to a denial of justice.18 Another example of spontaneous harmonization is the increase in the case management powers of the judge in the majority of European jurisdictions.19 This development started at the end of the 19th-century in Austria and affected England in 1999. The original 19th century idea, expressed in the highly influential French Code de procédure civile of 1806, was that civil litigation was a private matter and only of interest to the parties to the lawsuit.20 According to this Code, the parties were considered to be free in deciding how they would conduct their case. They could opt for litigating expeditiously or to have their case move forward at a snail’s pace.21 16 Van Rhee (2003, pp. 217–32). The use of the term ‘approximation’ is based on the title of the Report of the Storme Group, discussed below (Storme, 1994). 17 Montesquieu (2006) Chapter 1: ‘Les formalités de la justice sont nécessaires à la liberté.’ 18 Montesquieu (2006) Chapter 1: ‘Mais le nombre en pourrait être si grand, qu’il choquerait le but des lois mêmes qui l’auraient établis.’ See also Van Rhee et al. (2008), especially the contributions by Cadiet (pp. 271–301) and Asser (pp. 323–33). 19 Van Rhee (2008, pp. 11–25). 20 On the history of the French Code of Civil Procedure, see Wijffels (2008, pp. 5–73). 21 A caveat is necessary here. Franz Klein (1854–1926), the ‘father’ of the 1895 Austrian Code of Civil Procedure, which would herald a new era of civil procedure in Europe (see below), claimed in the 1890s that even though the French Code of Civil Procedure did not grant the French judge far-reaching case management powers, such powers were, in practice, exercised by him without a legal basis in the Code. See Klein (1891, p. 25): ‘Dem französischen Rechte ist der Richter in Prüfen, Glauben und Urteilen eine lebendige Person mit zu achtenden intellektuellen und moralischen Bedürfnissen, nicht ein blutleerer Judicaturapparat, wie sich ihn das gemeine Recht ausgesonnen hat. Diese so unscheinbare Wahrheit … erklärt, warum in Frankreich freie Instructionstätigkeit des Richters ohne besondere gesetzliche Anerkennung bestehen, die allercursorischste Normierung genügen kann.’ That claim echoes an observation constantly made by French authors themselves writing on civil procedure from the latter part of the 19th century onwards, though of course verifying the veracity of such


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Austria was one of the first post-Napoleonic nations that experienced a change, due to the ideas of Franz Klein (1854–1926), the father of the Austrian Code of Civil Procedure.22 Klein’s aim was the realization of the so-called ‘social function’ (Sozialfunktion) of civil litigation. This ‘social function’ may be viewed as a reaction against the 19th-century liberal ideal of procedure. It meant that litigation should be considered not only as a means to solve individual lawsuits between private litigants but as a phenomenon that affected society as a whole.23 Civil procedure should serve the public interest (Wohlfahrtsfunktion), but it had to be viewed from an economic perspective as well. The economic perspective meant that one should, for example, guard against civil procedure being used as a means to postpone payment of a debt or to obtain money at a low interest rate.24 According to the Austrian Code, the judge was given the task to make sure that court time was used in the right manner. He obtained what would currently be described as far-reaching case management powers. These powers were also needed because the parties were only theoretically equal (the premise of equality lies at the basis of the French Code de procédure civile of 1806). Conducting litigation in an inefficient manner was usually not the result of a joint decision of the parties, but only of one party who would gain from protracted litigation. It took more than a century for these ideas to become generally accepted in Europe. During the last decades this has occurred at an increasing pace.25 It comes as no surprise that this development is very pronounced in Western Europe, given the fact that the States of Western Europe have for a long time been in close contact with each other, for example within the framework of the European Community or the European Free Trade Association. It is not surprising either that the judge’s case management powers are more problematic in the former Eastern Bloc States,26 given their isolation from Western Europe during the Cold War and their radically different political and economic make-up at that time.

statements would require extensive research of the French case law and of day-to-day practice during this period. 22 Oberhammer and Domej (2005, pp. 118–23). 23 Klein asked the following rhetorical question: ‘Sollte das “Processeigentum” stärker als alles sonstige Privateigentum sein, und muss erst gesagt werden, welches die öffentlichen Interessen sind, mit denen die uns so selbstverständliche schrankenlose Disposition über den Processinhalt collidirt, und was sich dann gerade aus der Eigentumsanalogie ergibt?’, Klein (1891, p. 17). 24 See Fasching (1988, pp. 97 ff.) and van Caenegem (1973, p. 97). 25 Van Rhee (2008, pp. 11–25); Stürner (2005, pp. 226–7). 26 Van Rhee (2005a, p. 23).

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Due to the increasing pace of internationalization and globalization, one may expect spontaneous harmonization as a result of national law reform to occur on an ever larger scale in the future.

3

COMPETITION BETWEEN NATIONAL SYSTEMS OF CIVIL PROCEDURE

Apart from an interest in comparative civil procedure in the area of law reform at the national level, such attention may also be witnessed where States are contemplating the competitiveness of their national procedural systems on the international litigation market. Where such attention exists, it is definitely the result of some form of internationalization or globalization, since without it there would not be an international litigation market and competition between jurisdictions. Although it is true that litigants cannot influence the procedural law applied by the State courts, they can – as stated above – in many cases decide about the forum where they litigate. As is shown in a study by Stefan Vogenauer and Chris Hodges (Oxford), businesses have certain preferences in this respect.27 These preferences may result in businesses avoiding the State courts altogether, submitting their cases to arbitration or other types of alternative dispute resolution. However, if they do not opt for ADR, they can often choose a particular jurisdiction for litigating their cases. In this way, they indirectly choose the applicable rules of procedural law and, in the study by Vogenauer and Hodges, it is shown that as regards choices of forum the procedural law applied by the forum is one of the factors that is taken into consideration.28 States who consider it important to attract international litigation should therefore consider whether their procedural law – either positively or negatively – affects a choice of forum. Comparative civil procedure is relevant for these States because comparing a national procedural model with foreign procedural regimes is indispensable in order to evaluate the strengths and weaknesses of a particular procedural system in an international context.29 States may be interested in attracting litigation for various reasons. One reason might be that they want cases that are in one way or another linked to their own jurisdiction litigated before their national courts. Another reason

27 28 29

Vogenauer and Hodges (2010). Vogenauer and Hodges (2010). In a European context, the various reports of the European Commission for the Efficiency of Justice (CEPEJ) are of interest (http://www.coe.int/T/dghl/ cooperation/cepej/default_en.asp, last consulted 3 June 2009). See Albers (2008, pp. 9–28). See also idem (2009, pp. 57–74).


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might be related to attracting businesses. A preference by the international business community for the courts of a particular State may be held to indicate that this community regards this State as an attractive place, not only from the perspective of litigation but also from the perspective of doing business.30 Most likely, businesses that choose the forum of a particular State trust the proper functioning of the organs of that State in general, that is, not only that of the courts. Another reason for a State’s interest in attracting international litigation is that such litigation may be an incentive for the development of the national legal services market. One step States may take in improving their competitiveness in the international litigation market is to change their rules of procedure, both for domestic cases and for international cases. However, this is a very drastic step which may not be effective, since different litigants may have different preferences. Another approach is introducing some flexibility in the application of the lex fori rule, allowing litigants a certain choice in the applicable procedural regime, for example by allowing them to opt for the application of certain foreign procedural rules as regards certain aspects of their case. This might not be as problematic as it may seem, since not all procedural rules are closely related to the overall procedural model of a country or have constitutional significance. An example is the rules on the computation of time, but also various rules as regards conciliation, the commencement of the proceedings or the subject-matter of the litigation.31 In my opinion, a distinction should be made between rules that are closely related either to national substantive law or to the procedural system or that have constitutional significance – such as those concerning the available means of recourse against judgments which impact on judicial organization, that is, a constitutional issue – and rules that can be viewed in isolation and that do not have such significance. It is unlikely that States would be willing to subject the former procedural rules to the parties’ preferences. However, the story may be different regarding the latter rules. By being flexible in this respect, States might offer an attractive and, therefore, competitive forum for businesses.

30 In this respect the Doing Business Reports of the World Bank are of interest. Part of the comparison made by the World Bank concerns the national justice systems of the various economies (181 in total in the 2009 Report). See the chapter on enforcing contracts in the 2009 Report, pp. 49–53 (the report is available at http://www.doingbusiness.org/, last consulted June 2009). 31 See, e.g., the various proposals for harmonization in Storme (1994).

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4


HARMONIZATION OF PROCEDURAL LAW ON AN INTERNATIONAL AND A GLOBAL SCALE

One of the major reasons for the recent growth of interest in comparative civil procedure is the attempts to harmonize civil procedural law in various parts of the world or even on a global scale. Two such harmonization attempts are the Storme Report32 and the Transnational Principles of Civil Procedure of the American Law Institute and Unidroit.33 These initiatives may obviously be classified as the results of internationalization and globalization, since they are direct consequences of the markets and the citizens of (parts of) the world coming into closer contact with each other. The Storme Report is the result of such a development on a European scale, whereas the Transnational Principles are the result of a similar development in the area of commercial disputes on a worldwide scale. 4.1

The Storme Report: Harmonization on a European Scale

Harmonization and even unification of civil procedural law may be required for various reasons. Although litigants may, in several cases, opt for a court with their preferred procedural regime, this is not always possible. Apart from legislation prescribing the litigants to conduct their lawsuit before the courts of a specific jurisdiction (for example, where the case concerns immovable property), a choice of forum may not be feasible for financial reasons. In an economic area such as the European Community, this may create problems from the perspective of the four freedoms (free movement of persons, goods, capital and services). Citizens may, for example, decide to abstain from purchasing certain goods outside their own jurisdiction because of (perceived) problems when litigation should become necessary. Additionally, businesses may be influenced by differences in procedural law in deciding to produce and market products in the various Member States. The result is a fragmented market and not the single internal market that is the objective of European cooperation.34 Additionally, the result is differences as regards access to justice which within the context of the European Community – or the wider context of the Council of Europe – may be considered undesirable.35

32 33

Storme (1994). ALI/UNIDROIT (2006). Another example is the Código Procesal Civil Modelo para Iberoamérica (1994). The text may be found at the website of the Centro de Estudios de Justicia de las Americas (http://cejamericas.org/, last consulted April 2009). I will not discuss various initiatives as regards Arbitration and the Hague Conventions on civil procedure in the present chapter. 34 See Art. 3 European Community Treaty (ECT). 35 Storskrubb (2008, pp. 1–3, 78).


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To start with the Council of Europe: due to Article 6 of the European Convention on Human Rights (ECHR) (which is comparable to Article 14 of the International Covenant on Civil and Political Rights) and especially the case law of the European Court of Human Rights, Member States of the Council must guarantee the observance of some fundamental procedural guarantees, in the area of both criminal and civil litigation (obviously, I will only discuss civil litigation here). Article 6(1) runs as follows: In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice.

The case law of the European Court of Human Rights on Article 6 has been instrumental in laying down the minimum requirements each national procedural regime of the Member States should meet. On the basis of this case law, it has appeared that Article 6 prescribes the following guarantees:36 1. 2.

3. 4. 5.

access to justice37 a fair hearing (trial), which includes38 a. the right to adversarial proceedings b. the right to equality of arms c. the right to be present at the trial d. the right to an oral hearing e. the right to a fair presentation of evidence f. the right to a reasoned judgment a public hearing, including the public pronouncement of judgment a hearing within a reasonable time a hearing before an independent and impartial tribunal established by law.

Although Article 6 does not necessarily lead to unification as regards procedural rules sensu stricto, some harmonizing (approximating) effects of the fundamental principles of Article 6 have been witnessed during the last decades, for example as regards legal aid and other measures increasing access to justice, the reasonable time requirement, the rise of the oral element in civil 36 37 38

See also Andrews (2009, pp. 54–5). Golder v UK, 4451/70, judgment of 21 February 1975. Van Dijk et al. (2006, pp. 578–96).

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litigation and the admissibility of the parties as witnesses.39 These effects are also important within the context of the European Community, since all Member States are parties to the ECHR and because Article 6 ECHR and the case law based on it are part of the acquis communautaire40 of the European Community.41 Even though Article 6 ECHR has had a harmonizing effect, this is not necessarily the aim of this Article: it only aims at laying down some fundamental guarantees. In actual fact, the need for harmonization for a group of 47 European countries42 that are rather diverse may not be felt as urgently as within the context of an economic entity such as the European Community. This is not surprising, taking into consideration that even within the European Community harmonization of procedural law is a controversial issue. In actual fact, apart from the fundamental procedural principles of Article 6 ECHR that should be observed in all Member States, the harmonization that has been achieved in the European Community is only focused on international cases, leaving purely national cases outside the discussion (see below). Within the context of the European Community, Article 65 (jo 61) of the Treaty Establishing the European Community (ECT), introduced by the Treaty of Amsterdam in 1999, is of utmost importance from a civil procedural point of view.43 It states that: 39 40 41

See also Freudenthal (2007, pp. 269–70). I.e. the total body of European Community law accumulated this far. Art. 6(2) Treaty on European Union (TEU). See also the Charter of Fundamental Rights of the European Union (Official Journal C 364, 18/12/2000, pp. 1–22), Art. 47: ‘Everyone whose rights and freedoms guaranteed by the law of the Union are violated has the right to an effective remedy before a tribunal in compliance with the conditions laid down in this Article. Everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal previously established by law. Everyone shall have the possibility of being advised, defended and represented. Legal aid shall be made available to those who lack sufficient resources in so far as such aid is necessary to ensure effective access to justice.’ 42 Nearly all European countries are members of the Council of Europe, with the exception of Belarus because of this country’s lack of respect for human rights and democratic principles. 43 The Lisbon Treaty, which aims at amending, amongst other things, the ECT, but which has not entered into force since it was rejected in an Irish referendum in 2008, introduces a new Article 81 (replacing Article 65) in Chapter 3 on judicial cooperation in civil matters: 1. The Union shall develop judicial cooperation in civil matters having cross-border implications, based on the principle of mutual recognition of judgments and of decisions in extrajudicial cases. Such cooperation may include the adoption of measures for the approximation of the laws and regulations of the Member States. 2. For the purposes of paragraph 1, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall adopt measures, particularly


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Measures in the field of judicial cooperation in civil matters having cross-border implications, to be taken in accordance with Article 6744 and in so far as necessary for the proper functioning of the internal market, shall include: (a) improving and simplifying: – the system for cross-border service of judicial and extrajudicial documents; – cooperation in the taking of evidence; – the recognition and enforcement of decisions in civil and commercial cases, including decisions in extrajudicial cases; (b) promoting the compatibility of the rules applicable in the Member States concerning the conflict of laws and of jurisdiction; (c) eliminating obstacles to the good functioning of civil proceedings, if necessary by promoting the compatibility of the rules on civil procedure applicable in the Member States.

Many of the subjects mentioned in this Article have subsequently been addressed in European legislation45 (applicable to all Member States, usually with the exception of Denmark), by way of either Regulations or Directives.46 when necessary for the proper functioning of the internal market, aimed at ensuring: (a) the mutual recognition and enforcement between Member States of judgments and of decisions in extrajudicial cases; (b) the cross-border service of judicial and extrajudicial documents; (c) the compatibility of the rules applicable in the Member States concerning conflict of laws and of jurisdiction; (d) cooperation in the taking of evidence; (e) effective access to justice; (f) the elimination of obstacles to the proper functioning of civil proceedings, if necessary by promoting the compatibility of the rules on civil procedure applicable in the Member States; (g) the development of alternative methods of dispute settlement; (h) support for the training of the judiciary and judicial staff. 3. Notwithstanding paragraph 2, measures concerning family law with cross-border implications shall be established by the Council, acting in accordance with a special legislative procedure. The Council shall act unanimously after consulting the European Parliament. The Council, on a proposal from the Commission, may adopt a decision determining those aspects of family law with cross-border implications which may be the subject of acts adopted by the ordinary legislative procedure. The Council shall act unanimously after consulting the European Parliament. The proposal referred to in the second subparagraph shall be notified to the national Parliaments. If a national Parliament makes known its opposition within six months of the date of such notification, the decision shall not be adopted. In the absence of opposition, the Council may adopt the decision. 44 Article 67 ECT lays down the procedure for the adoption of legislation under, amongst other Articles, Article 65. See Storskrubb (2008, pp. 47–8). 45 I will not discuss the European Judicial Network here, nor judicial training and some other measures. See Storskrubb (2008, pp. 233 ff.). 46 A Regulation is a legislative act which becomes immediately enforceable as law in all Member States simultaneously. Regulations can be distinguished from Directives, which need to be transposed into national law by the Member States.

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As regards Article 65 sub a, the following Regulations can be mentioned: 1.

2.

3.

4.

5. 6.

Regulation (EC) No. 1393/2007 of the European Parliament and of the Council of 13 November 2007 on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters; Council Regulation (EC) No. 1206/2001 of 28 May 2001 on cooperation between the courts of the Member States in the taking of evidence in civil or commercial matters; Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters; Council Regulation (EC) No. 2201/2003 concerning jurisdiction and the recognition and enforcement of judgments in matrimonial matters and in matters of parental responsibility; Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings; Regulation (EC) No. 805/2004 of the European Parliament and of the Council of 21 April 2004 creating a European Enforcement Order for uncontested claims.

Article 65 sub b deals with the conflict of laws and will not be discussed in detail here, since the topics that have so far been brought under this heading are not directly relevant for civil procedural law. The two most important topics that may be mentioned are a Proposal for a Regulation of the European Parliament and of the Council on the law applicable to contractual obligations (Rome I) [COM(2005) 650 final – Not published in the Official Journal] and the Regulation (EC) No. 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II). Article 65 sub c has given rise to the following European legislation: 1. 2.

Regulation (EC) No. 861/2007 of the European Parliament and of the Council of 11 July 2007, establishing a European small claims procedure; Regulation (EC) No. 1896/2006 of the European Parliament and of the Council of 12 December 2006, creating a European order for payment procedure;

Directives may give rise to different national legislative solutions in order to reach the aim of the Directive. All Regulations and Directives mentioned in this chapter can be found on the website of the European Union: http://europa.eu/ (last consulted April 2009).


3.

4.

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Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 on certain aspects of mediation in civil and commercial matters; Council Directive 2003/8/EC of 27 January 2003 to improve access to justice in cross-border disputes by establishing minimum common rules relating to legal aid for such disputes.

As stated, the harmonization resulting from the instruments mentioned above only concerns international cases. This means that purely national cases continue to be governed by the rules of civil procedure of the Member State where the case is brought. In my opinion, this is unfortunate, especially since it would have been possible to interpret Article 65 sub c broadly, in the sense that it may form the basis of an alignment of the civil procedural laws of the Member States irrespective of the national or international character of litigation. After all, it could be claimed that differences between the procedural laws of the Member States always have cross-border implications, for example in the sense that businesses may be affected by these differences when deciding where to produce and market their products. The free movement of persons, goods, services and capital within the EU and, consequently, the proper functioning of the internal market are affected by the restrictive interpretation. In my opinion, the differences in civil procedural law can often only be removed by Community action and not by action at the respective national levels and, consequently, the principle of subsidiarity of Article 5 ECT does not prevent the Community from using its powers under Article 65 ECT. Also, the principle of proportionality mentioned in the same Article 5 does not seem to hinder Community action. Nevertheless, this interpretation of Article 65 ECT is currently politically unacceptable for the Member States.47 Although the European approach excludes purely national cases, a debate on the ‘approximation’ of the national procedural laws of the Member States of the European Community was launched already in the late 1980s, that is, before the introduction of Article 65 ECT. The initiative was taken by a working group chaired by Professor Marcel Storme from Ghent (Belgium). The report this working group produced does not distinguish between national and international cases and is aimed at the then 12 Member States of the European Community. In his introduction to the report, Professor Storme states that

47 Storskrubb (2008, pp. 39 ff., 272–3). The European Small Claims Procedure, for example, was originally envisaged as also being applicable in purely national disputes. At a late moment in the drafting process, however, it was decided that it would only cover international cases, leading to a discrimination as regards purely domestic cases in jurisdictions where the national rules are less favourable than the European rules. See Storskrubb (2008, pp. 220–21).

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harmonization of civil procedural law is more feasible than harmonization of other fields of law. The author claims that this is the result of, amongst other things, the fact that in the area of procedure many of the rules are not interrelated with other rules, either procedural or substantive48 (apart from some procedural rules which are, for example, closely interwoven with substantive law, such as those concerning marriage and divorce).49 Consequently, an immediate overall overhaul of the system is not needed and harmonization may proceed on a piecemeal basis.50 The original idea of the Storme Group was to produce a model code, to be implemented by way of a Directive.51 However, it was soon realized that there were still too many differences between the procedural systems of the 12 Member States to make a generally acceptable, all-encompassing proposal possible. Therefore, the Working Group concentrated on 16 separate issues: (1) Conciliation, (2) Commencement of the Proceedings, (3) Subject matter of litigation (pleadings, that is, statements of case), (4) Discovery, (5) Witnesses, (6) Technology and Proof, (7) Discontinuance, (8) Default, (9) Costs, (10) Provisional Remedies, (11) Order for Payment, (12) Enforcement, (13) Astreinte, (14) Computation of time, (15) Nullities and (16) some general rules concerning judges and judgments (appeal and disqualification of judgments). In the report, the rules as regards some of these issues are very detailed (for example, commencement of the proceedings), whereas other issues are regulated in a rather sketchy manner (for example, witnesses). Although the rules themselves are available in both French and English, the accompanying explanatory memorandum, comments and recitals are only available in either French or English (depending on the language skills of the person responsible for a certain part of the memorandum), which is due to the limited means available to the Working Group.52 Criticism was soon to come. To mention but one example, in the European Review of Private Law, Per Henrik Lindblom discussed various issues which in his opinion showed the weaknesses of the Storme Report.53 He claimed that the report did not make clear whether it meant to lay down only minimum requirements or standard rules.54 Professor Lindblom stated that if the report was meant to formulate standard rules, it might not give rise to an improve-

48 49 50 51 52 53 54

Storme (1994, pp. 53 ff.). Storme (1994, pp. 57–8). Storme (1994, p. 54). Storme (1994, p. 61). For a definition of a Directive, see footnote 46. Storme (1994, pp. 62–3). Lindblom (1997). Lindblom (1997, pp. 32, 45).


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ment in countries that have higher quality rules.55 At the same time, the author held that if only minimum rules were given, it might be questioned whether this would lead to harmonization or approximation.56 Additionally, Professor Lindblom observed that several of the rules suggested by the report were rather general and often did not address the real problems in the area of civil procedural law. He demonstrated this, amongst other things, by mentioning that the report contains only one article (Article 5) concerning witnesses, an article which in his view stated the obvious, since it only lays down that ‘[a]ny person duly summoned in accordance with the law of a Member State to give evidence before a court of that State shall be under a duty to appear before that court and give evidence.’57 Although the criticism may be justified, it should be remembered that the Storme Report was the first of its kind and, consequently, should not be judged too harshly. One of its achievements is that it has been a source of inspiration for other projects, notably a project initiated by the American Law Institute and later also sponsored by Unidroit, that is, the Principles of Transnational Civil Procedure.58 4.2

The Principles of Transnational Civil Procedure and Harmonization on a Worldwide Scale

In the comparative study of civil procedure, the Principles of Transnational Civil Procedure are of considerable importance. According to one author, disregarding the Principles ‘might be declared a form of procedural illiteracy’.59 They are a major achievement, considering that the majority of comparatists were of the opinion that harmonization of civil procedure on a worldwide scale was not possible.60 The initiators of the project, Geoffrey Hazard Jr and Michele Taruffo, originally intended to draft a code of rules for national courts that would set aside domestic procedural rules: (1) when litigation between parties from different States took place or (2) whenever property in one State was the object of litigation by a party from another country. These rules would form a code acceptable from both the Common Law and the Civil Law perspective.61 In 1997 the

55 56 57 58

Lindblom (1997, p. 45). Lindblom (1997, p. 32). Lindblom (1997, p. 36). ALI/UNIDROIT (2006, p. 3). See for an extensive bibliography on the Principles: ibidem, pp. 157 ff. 59 Andrews (2009, p. 52). 60 Stürner (2005, p. 203). 61 Stürner (2005, p. 204).

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American Law Institute adopted the project62 and in 2000 Unidroit joined.63 This gave rise to a change, since Unidroit did not feel that civil procedure rules of some detail would be acceptable to different cultures. It was of the opinion that it was better to develop a set of general Principles.64 Finally, only the Principles were adopted by the American Law Institute and Unidroit, although it was felt that the rules represent a possible example of implementation of the Principles.65 The final draft of the Principles of Transnational Civil Procedure dates from 2004. It was published in 2006 by Cambridge University Press in English and French.66 The publication also includes a commentary. According to their drafters, the Principles must be seen as best practices and a benchmark for national procedures.67 Consequently, they are not necessarily only aimed at international cases, but may also be used within a national context, for example in national reform projects (see below). They are a blend of elements from the Civil Law and the Common Law:68 discovery, for example, is limited in nature,69 but this is corrected by a liberal approach towards shifting the burden of proof.70 Additionally, the hearing of the case is concentrated, but this does not necessarily mean that there should only be a single trial.71 The hybrid character of the Principles may also be viewed slightly less favourably. According to Neil Andrews, ‘[e]verywhere the restraining hand of the Civil Law is visible and robust Common Law tendencies are curbed.’72 The Principles aim in the first place at transnational commercial litigation.73 This approach was adopted in order to increase the chances that the Principles would be acceptable to lawyers from various jurisdictions. After all, in commercial litigation there is no jury and the existence of the jury in civil cases is a major issue separating the US from most other jurisdictions. By only focusing on commercial litigation, the whole subject of the jury could be

62 63 64

ALI/UNIDROIT (2006, p. xxxi). ALI/UNIDROIT (2006, p. 4). Stürner (2005, pp. 205–6). On the three types of Principles that may be distinguished, see Storskrubb (2008, p. 290). 65 ALI/UNIDROIT (2006, p. 4); Stürner (2005, pp. 205–9, 215). 66 ALI/UNIDROIT (2006). 67 ALI/UNIDROIT (2006, p. xxix). 68 ALI/UNIDROIT (2006, p. 11). 69 ALI/UNIDROIT (2006) Principle 16. 70 ALI/UNIDROIT (2006) Principle 21. 71 ALI/UNIDROIT (2006) Principle 9. 72 Andrews (2009, p. 53). 73 ALI/UNIDROIT (2006) ‘Scope and Implementation’ (p. 16). The terms ‘transnational’ and ‘commercial’ are not defined precisely. See ALI/UNIDROIT (2006) Comment P-B and P-C.


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excluded from consideration.74 Additionally, it was felt that international commercial litigation is less subject to national legal traditions than other types of litigation because the existence of a body of well-developed rules of commercial arbitration offers a good common starting point.75 Apart from transnational commercial litigation being a field where harmonization is feasible, there are also intrinsic reasons for concentrating on this area. In the introduction to the Principles we find the following comment: The explosion in transnational commerce has changed the world forever. International commerce and investment are increasing at an enormous rate and the rate of change is continuing to accelerate. The legal procedures applicable to the global community, however, have not kept pace and are still largely confined to and limited by individual national jurisdictions.76

Consequently, there is a need for initiatives in this area, since the current situation is said to diminish international trade and investment. In the opinion of the drafters, the existing international conventions (Hague Conventions)77 on civil procedure and related topics are not an answer to the problems, since they only address aspects of civil litigation (such as commencement and recognition) and say little about the actual procedure to be followed.78 From this perspective, they may also be highly relevant from a European Community perspective, as many of the existing European Regulations on civil procedure show the same limitations as the Hague Conventions (see above). Even though the Principles aim at transnational commercial litigation, this does not mean that they are without use in other fields. On the contrary, they may, for example, (1) influence the further development of the rules of national and international arbitration (to which they are themselves indebted),79 (2) be used by national law reformers as an example of worldwide accepted guidelines and standards of procedural law,80 and (3) be consulted by national judges in the interpretation of national procedural rules and international conventions that are formulated in a way which leaves the

74 75 76 77

ALI/UNIDROIT (2006, p. xxvii); Stürner (2005, pp. 209–10). Stürner (2005, p. 210). ALI/UNIDROIT (2006, p. xxix). See for an overview: http://www.hcch.net/index_en.php?act=text. display&tid=10#litigation (last consulted May 2009). 78 Hazard et al. (2001, pp. 770–71). 79 ALI/UNIDROIT (2006, pp. 10–12). See also ALI/UNIDROIT (2006) Comment P-E. 80 ALI/UNIDROIT (2006, pp. 10–11); ibidem, Scope and Implementation (p. 16).

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necessary room for judicial interpretation.81 Finally, they may (4) be used as standards against which foreign judgments and arbitral awards may be measured when a decision has to be taken as regards their recognition and enforcement.82 The procedural model suggested by the Principles aims to avoid favouring national parties in international litigation.83 It is a flexible model, which accommodates all of the existing national procedural models. Nevertheless, the Principles suggest a preferred model.84 This model consists of three stages: the pleading stage (statements of case), an interim stage (scheduling) and a final stage (main hearing).85 This model is popular in many European countries such as Germany, England and Spain. Stürner calls it the ‘main hearing model’.86 The Principles assume an active judge87 and in this respect they take the German–Austrian model as an example (see above).88 This active stance of the judge means that the court is also responsible for determining issues of law, including foreign law.89 On the other hand, the Principles lay down that the court is never permitted to introduce new facts not previously advanced or at least briefly mentioned by the parties to litigation.90 It is, however, again the court’s responsibility to ensure that justice is administered promptly,91 a responsibility that is to some extent shared with the parties.92 There is no notice pleading like in the US, which means that the assertion of detailed facts and the submission of exactly specified means of evidence during the pleading phase is required.93 All contentions of the parties should be considered by the court.94 The principle of finality is adhered to.95 The Principles do not follow the American rule as regards costs.96 However, they do recognize the amicus curiae.97 Appeal is not a new hearing, but limited to re-evaluating the

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

ALI/UNIDROIT (2006, p. 4). ALI/UNIDROIT (2006) Comment P-A (p. 16); Stürner (2005, pp. 210 ff.). ALI/UNIDROIT (2006, pp. 1–4). Stürner (2005, pp. 223, 226). ALI/UNIDROIT (2006) Principle 9. Stürner (2005, pp. 224–6). ALI/UNIDROIT (2006) Principle 14. Stürner (2005, pp. 226–7). Stürner (2005, p. 228). ALI/UNIDROIT (2006) Principle 10; Stürner (2005, p. 229). ALI/UNIDROIT (2006) Principle 7.1; Stürner (2005, p. 227). ALI/UNIDROIT (2006) Principle 11.2. ALI/UNIDROIT (2006) Principle 11.3; Stürner (2005, p. 233). ALI/UNIDROIT (2006) Principle 22. ALI/UNIDROIT (2006) Principle 26. ALI/UNIDROIT (2006) Principle 25; Stürner (2005, p. 251). ALI/UNIDROIT (2006) Principle 13.


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judgment of first instance.98 The Principles discuss sanctions on parties, lawyers and third persons for failure or refusal to comply with the obligations concerning the proceeding.99 According to Neil Andrews, several issues are not (sufficiently) addressed by the Principles. The author mentions (1) pre-action co-ordination of exchanges between the potential litigants (pre-action protocols as known in England since the Woolf reforms) and (2) multi-party litigation. Andrews also states that greater attention could be given to the interplay of mediation and litigation, costs and funding, evidential privileges and immunities and transnational and protective relief.100 For these and other reasons, the Principles should not be seen as the final stage in the development of procedural harmonization on a global scale, but as an initiative which will certainly witness various follow-ups in the years to come.

5

FINAL REMARKS

The comparative study of civil procedure has gained considerable importance in the 20th and 21st centuries. Currently, it is a major topic on the international legal research agenda. This has been demonstrated in the present chapter by showing the importance of comparative civil procedure in national reform projects, and as regards competition between national civil procedure systems and attempts to harmonize civil procedure on a regional and even global scale. In each particular case, the impetus for comparative study is internationalization or globalization, that is, the integration and/or interdependence of economic, political, and cultural systems, either across the globe (globalization) or on a more local level (internationalization, for example at the level of the European Community). Without such integration and/or interdependence, comparative civil procedure would have been intellectually challenging but not directly relevant for legal practice. As has been demonstrated, this is very different in our modern, globalizing world, where legal practice demands an ever-growing attention to the approach to litigation of the various procedural systems from across the globe.

98 99 100

ALI/UNIDROIT (2006) Principle 27. ALI/UNIDROIT (2006) Principle 17. Andrews (2009, p. 57).

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REFERENCES Albers, P. (2008), ‘Judicial Systems in Europe Compared’, in C.H. van Rhee and A. Uzelac (eds), Civil Justice between Efficiency and Quality: From Ius Commune to the CEPEJ, Antwerp/Oxford/Portland: Intersentia, pp. 9–28. Albers, P. (2009), ‘Quality Assessment of Courts and the Judiciary: From Judicial Quality to Court Excellence’, in C.H. van Rhee and A. Uzelac, Access to Justice and the Judiciary, Antwerp: Intersentia, pp. 57–74. ALI/UNIDROIT (2006), Principles of Transnational Civil Procedure, Cambridge: Cambridge University Press. Andrews, N. (ed.) (2003), English Civil Procedure: Fundamentals of the New Civil Justice System, Oxford: OUP. Andrews, N. (2009), ‘A Modern Procedural Synthesis: The American Law Institute and UNIDROIT’s “Principles and Rules of Transnational Civil Procedure”’, Tijdschrift voor Civiele Rechtspleging, 2, pp. 52–7. Asser, W.D.H. (2008), ‘Deformalisering en case management in Nederland’, in C.H. van Rhee, D. Heirbaut and M. Storme (eds) (2008), The French Code of Civil Procedure (1806) after 200 years: The Civil Procedure Tradition in France and Abroad, Mechelen: Kluwer, pp. 323–33. Burnham, W. (ed.) (2006), Introduction to the Law and Legal System of the United States, 4th edn, St Paul, Minn.: Thomson/West. Cadiet, L. (2008), ‘Déformalisation et case management en France’, in C.H. van Rhee, D. Heirbaut and M. Storme (eds) (2008), The French Code of Civil Procedure (1806) after 200 years: The Civil Procedure Tradition in France and Abroad, Mechelen: Kluwer, pp. 271–301. Fasching, H.W. (1988), ‘Die Weiterentwicklung des österreichischen Zivilprozessrechts im Lichte der Ideen Franz Kleins’, in H. Hofmeister (ed.), Forschungsband Franz Klein (1854–1926): Leben und Wirken, Vienna: Manz, pp. 97 ff. Freudenthal, M. (ed.) (2007), Schets van het Europees Civiel Procesrecht, Deventer: Kluwer. Hazard, G.C., M. Taruffo et al. (2001), ‘Introduction to the Principles and Rules of Transnational Civil Procedure’, New York University Journal of Law and Politics, pp. 769–84. Heirbaut, D. (2009), ‘Efficiency: The Holy Grail of Belgian Justice? Civil Procedure in Belgium (1806–2008)’, in A. Uzelac and C.H. van Rhee (eds), Access to Justice and the Judiciary: Towards New European Standards of Affordability, Quality and Efficiency of Civil Adjudication (Ius Commune Europaeum, 77), Antwerp/Oxford/ Portland: Intersentia, pp. 89–117. International Association of Procedural Law, http://www.uni-regensburg.de/ Fakultaeten/Jura/gottwald/iapl/, last consulted April 2009. Jongbloed, A.W. (2005), ‘The Netherlands (1838–2005)’, in C.H. Van Rhee (ed.), European Traditions in Civil Procedure (Ius Commune Europaeum 54), Antwerp/Oxford: Intersentia, pp. 69–95. Klein, F. (ed.) (1891), Pro Futuro: Betrachtungen über Probleme der Civilprocessreform in Oesterreich, Leipzig/Vienna: Franz Deuticke. Lindblom, P.H. (1997), ‘Harmony of Legal Spheres. A Swedish View on the Construction of a Unified European Procedural Law’, European Review of Private Law, pp. 11–46. Montesquieu, C. (2006), De l’esprit des loix, Book XXIX. Oberhammer, P. and T. Domej (2005), ‘Germany, Switzerland and Austria (ca.


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1800–2005)’, in C.H. van Rhee (ed.), European Traditions in Civil Procedure (Ius Commune Europaeum 54), Antwerp/Oxford: Intersentia, pp. 103–28. Storme, M. (1994), Rapprochement du droit judiciaire de l’Union européenne/Approximation of Judiciary Law in the European Union, Dordrecht: Martinus Nijhoff. Storskrubb, E. (ed.) (2008), Civil Procedure and EU Law: A Policy Area Uncovered, Oxford: OUP. Stürner, R. (2005), ‘The Principles of Transnational Civil Procedure. An Introduction to their Basic Conceptions’, Rabels Zeitschrift, pp. 201–54. Van Caenegem, R.C. (1973), ‘History of European Civil Procedure’, in International Encyclopedia of Comparative Law, vol. 16, Tübingen: Mohr Siebeck. Van Dijk, P. et al. (eds) (2006), Theory and Practice of the European Convention on Human Rights, Antwerp/Oxford: Intersentia, pp. 578–96. Van Rhee, C.H. (ed.) (1997), Litigation and Legislation: Civil Procedure at First Instance in the Great Council for the Netherlands in Malines (1522–1559), Brussels: Archives générales du Royaume, pp. 313 ff. Van Rhee, C.H. (2000), ‘Civil Procedure: A European Ius Commune?’, European Review of Private Law, pp. 589–611. Van Rhee, C.H. (2003), ‘Towards a Procedural Ius Commune?’, in J. Smits and G. Lubbe (eds), Remedies in Zuid-Afrika en Europa, Antwerp: Intersentia, pp. 217–32. Van Rhee, C.H. (2005a), ‘Introduction’, in C.H. van Rhee (ed.), European Traditions in Civil Procedure (Ius Commune Europaeum 54), Antwerp/Oxford: Intersentia, pp. 3–23. Van Rhee, C.H. (ed.) (2005b), European Traditions in Civil Procedure (Ius Commune Europaeum 54), Antwerp/Oxford: Intersentia. Van Rhee, C.H. (2008), ‘The Development of Civil Procedural Law in TwentiethCentury Europe: From Party Autonomy to Judicial Case Management and Efficiency’, in C.H. van Rhee (ed.), Judicial Case Management and Efficiency in Civil Litigation, Antwerp: Intersentia, pp. 11–25. Van Rhee, C.H., D. Heirbaut and M. Storme (eds) (2008), The French Code of Civil Procedure (1806) after 200 years: The Civil Procedure Tradition in France and Abroad, Mechelen: Kluwer. Vogenauer, S. and C. Hodges (eds) (2010), Civil Justice Systems in Europe. Implications for Choice of Forum and Choice of Contract Law, Oxford: Hart Publishing. Wijffels, A. (2008), ‘The Code de procédure civile (1806) in France, Belgium and the Netherlands’, in C.H. van Rhee et al. (eds), The French Code of Civil Procedure (1806) after 200 years. The Civil Procedure Tradition in France and Abroad, Mechlen: Kluwer, pp. 5–73. Woolf, L. (1996), Access to Justice: Final Report, available at http://www.dca.gov.uk/ civil/final/index.htm, last consulted April 2009.

PART VI

Human rights and the environment

11. Fundamental rights in private law: anchors or goals in a globalizing legal order? Siewert Lindenbergh* 1

HUMAN RIGHTS IN PRIVATE LAW

Is a woman who has at the age of 21 signed for possible future debts of her father liable for these debts, even if this inevitably leads to a heavy lifelong burden? Can an employer of an employee who appears seven months pregnant on the day she returns from her parental leave revoke his consent with her early return? Can a taxi company argue successfully against a passenger who suffers severe injuries due to a taxi driver’s fault that his liability is limited by law to an amount of 137 000 euros, while the loss amounts to a tenfold? Does a property developer who leaves his land unused for years lose his property to farming neighbours due to limitation? These questions can be regarded as the most classical issues in private law. Does a given promise bind under all circumstances? Under which circumstances does fraud or deceit lead to annulment of an agreement? Do statutory rules bind parties in a contract? And what are the consequences of not exercising property rights for a long period of time? All modern jurisdictions, be it with a common law tradition or a civil law tradition or with a combination of the two, have private law rules that are, no doubt, able to regulate these issues. Yet, the above examples have in common that they deal with essential values for the development of one’s personality: financial independence, equal treatment of women and men, compensation of personal injury, property. Of course, a modern jurisdiction should, and in most cases will, be able to protect these interests to a certain extent. However, the development of fundamental rights in constitutions or human rights treaties may raise the question of whether the protection provided in private law is adequate and sufficient from the viewpoint of enforcement of human rights.

* Professor of civil law, Rotterdam Institute for Private Law, Erasmus University of Rotterdam, the Netherlands.

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This issue, the influence of fundamental rights in private law, raises fundamental questions, not only of a dogmatic and technical nature (How can these rights, which often stem from a public law tradition, be applied in private law? What does this mean for the structure of private law?1) but also in a legalpolitical sense (What are the implications for the role of the (national) legislator and of the (national or transnational) judiciary? Can fundamental rights provide sufficient guidance ex ante to influence the behaviour of private parties? What does their influence imply for the certainty for private law parties?) Furthermore, the influence of fundamental rights in private law is by its nature not a strictly national matter; it is almost by definition a cross-border issue, related to globalization in several ways. On the one hand fundamental rights may lead private law to new horizons and they may provide incentives for more fair solutions in specific cases. They may very well furnish tools for development of a more just society.2 On the other hand their influence challenges the structure both of private law and of the national legal order in relation to its international legal environment. In theory, private law should be able to apply, protect and enforce fundamental rights of private persons adequately, as it is aimed at and suited for regulation of relationships and conflicts between private parties. The traditional accent in private law on matters of patrimonial rights and dogmas may yet be a cause of an underrating of the fundamental rights at stake. In this view the influence of fundamental rights in private law is merely a matter of a ‘border struggle’ between private law and public law: are fundamental rights sufficiently recognized in private law? One can, however, also notice a much more substantial influence of human rights or fundamental rights on private law. For example in countries such as South Africa and in parts of Eastern Europe and Latin America, the substantial and global moral pressure of international organizations, such as the United Nations, and (other) international politics give rise to the question of whether private law is indeed sufficiently able to accommodate what is necessary for liberalization and for protection of human rights. In this respect the international public order seems to overwhelm the entire structure and development of private law. It is, however, not only the material influence of the development of protection of personality interests in public law that has fuelled the debate concerning fundamental rights in private law. A major contributory factor has, at least in Europe, been the development of multi-level jurisdictions, which has had its effect on private law as well. The area of private law is thus no longer left to

1 2

See on this van der Walt (2003, p. 183) and Smits (2003, pp. 57 ff.). See for South Africa, for instance, Mostert (2003, p. 119).

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the exclusive competence of the traditional national civil court, but it is in Europe influenced substantially by either a national constitutional jurisdiction (for example the German Bundesverfassungsgericht) and/or by supranational jurisdictions, such as the European Court of Human Rights (Strasbourg) and the European Court of Justice (Luxembourg). This has not only brought about a strong influence of ‘human rights thinking’ in general, but also – at least to some extent – a shift of judicial power to decide what is ‘adequate and sufficient’ with respect to the protection of fundamental rights in private law issues. In order to evaluate the influence of fundamental rights in private law in relation to globalization, this chapter is structured as follows. First, a few concrete examples will be presented in order to illustrate how private law is in Europe influenced by fundamental rights. Secondly the more technical question of the working of fundamental rights in private law will be addressed: what is the relationship between private law and public law in this respect? Thirdly the (potential) added value of fundamental rights in private law will be examined. Fourthly, the development and influence of constitutional courts will be addressed. Then the relevance of the influence of fundamental rights in private law will be discussed in relation to globalization. In that respect a new development – the enforcement of fundamental rights through private law – will be observed. Finally a few closing remarks will be made.

2

FOUR ILLUSTRATIONS

Four remarkable cases in Europe may serve to illustrate the influence of human rights in private law disputes. These cases do not only represent different areas of private law (contract, tort and property), but they also reflect different jurisdictions: the German constitutional court (Bundesverfassungsgericht), the European Court of Justice, the European Court of Human Rights, and a domestic (Dutch) civil law court. 2.1

The Bürgschaft Case

A profound illustration of the strong influence of fundamental rights on contract law is the German Bürgschaft case.3 The case concerns a woman who in 1982 at the age of 21 agreed to act as a surety for her father’s credit towards a bank. The daughter had no relevant professional experience; she was mostly unemployed or earned a very modest income. When her father could not pay his debts, she was held liable for 160 000 DM. The daughter was at that time

3

BVerfG 19 October 1993, BVerfGE 89, 214.

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a young mother without a job. This meant that she would most likely not be able to free herself from this debt until the end of her life. The case must be seen against the background of the hard line of the Bundesgerichtshof with regard to personal surety, according to which it upheld the principle of the binding character of a promise. The Bundesgerichtshof did not relent in this case either, as it upheld the unilaterally binding character of the surety.4 The German constitutional court, the Bundesverfassungsgericht, however, judged that the Bundesgerichtshof had with its decision violated Article 2, section 2 of the Grundgesetz, which guarantees the right to self-determination. This right includes the right to private party autonomy, which was, according to the Bundesverfassungsgericht, offended as the daughter had not been able to decide freely about the closing as well as the content of the contract. In typical cases in which one of the contractual parties is in a structurally weaker position and the consequences of the contract are very severe for that party, the Grundgesetz requires according to the Bundesverfassungsgericht that private law provide remedies. As a consequence, the Bundesgerichtshof judged in a new decision that the surety was contrary to good morals and should thus be declared void.5 This case shows that private law can be substantially influenced by fundamental rights within the domestic legal order. It is not only an illustration of this substantial effect but also of the influence of a constitutional court, which put an end to a discord in the policy of two different chambers of the Bundesgerichtshof. 2.2

The Case of Wiebke Busch

Another telling example of influence of fundamental rights in private law is the case of Wiebke Busch, a German nurse who had taken parental leave for a period of three years but had expressed the wish to return to work before the end of this period. Immediately after her employer had consented to her return to work, the woman informed him of her seven-month pregnancy, and she announced that she would take and was entitled to maternity leave on full pay. The employer tried to reverse his agreement to the return to work on the basis of error and fraud. The European Court of Justice holds that the protection of the pregnant woman laid down in EU directives and enshrined in domestic legislation means that the woman was not obliged to notify her employer of her preg-

4 5

BGH 16 March 1989, NJW 1989, p. 1605. BGH (IX) 24 February 1994, NJW 1994, 1341.


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nancy.6 Further, the Court holds that the directive does not permit an employer to revoke his consent to a female employee’s return to work before the end of a parental leave period on the ground of error as to the pregnancy of the employee under domestic law. This case illustrates the strong influence of EU law regarding equal treatment on private law issues,7 as it shows that domestic rules on error may not be applied in the – according to private law – usual sense, but should be strictly interpreted according to EU law. 2.3

The Traveller Case: Limitation of Liability

A strong impulse for the influence of fundamental rights in private law is the jurisdiction of the European Court of Human Rights in Article 1 of the First Protocol to the European Convention on Human Rights (ECHR) regarding the right to the peaceful enjoyment of one’s possessions.8 Due to the extensive interpretation of this article by the Court, especially with regard to the concept of ‘possession’, its influence on private law issues has increased substantially. This article has thus become a crowbar in many cases, varying from classical private law questions regarding property and ownership even to matters of personal injury. Illustrations of the latter are the cases in the Netherlands in which the application of statutory rules on limitation of liability with regard to passenger transport is concerned. An example of a successful claim with reference to Article 1 of the First Protocol to the ECHR is the judgment of the Amsterdam Court of Appeal in the case of a young woman who suffered severe injuries (she lost both legs) due to the fact that the Dutch railway company (Nederlandse Spoorwegen) had not maintained adequate safety standards.9 The Court held that the appeal to the statutory limitation of liability of Article 110 (section 1) of Book 8 of the Dutch Civil Code (which holds a maximum liability of 137 000 euros in case of death or personal injury) had to be set aside, as this appeal was considered unacceptable according to the standard of reasonableness and fairness (good faith). The Court was of the opinion that the fact that limitation may serve a legitimate purpose (controllability of the entrepreneurial risk and

6 ECJ 27 February 2003, Nederlandse Jurisprudentie 2003, 654 (Wiebke Busch/Klinikum Neustadt). 7 I consider the European freedoms as fundamental rights as well. See on these freedoms Ganten (2000). 8 See Loof (2000); Barkhuysen et al. (2005). 9 Hof Amsterdam 12 August 2004, Nederlandse Jurisprudentie Feitenrechtspraak 2004, 543, LJN AR2333.

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insurability) did not alter the fact that this case lacked a fair balance between the general interest on the one hand and the protection of individual rights on the other hand. In this context, the Court also considered it relevant that a rather old limit up to a modest sum, non-indexed for inflation purposes, had been used (which the Court thought was even ‘quite low’), whereas, the tendency in international treaties showed an increase in amounts of limits. The Court thus declared the appeal to the statutory limitation unacceptable. Remarkably, in later cases the Court of The Hague and the Court of Arnhem declared similar appeals unacceptable only to a certain level of the limitation. The Court of The Hague independently ‘raised’ the limitation to 200 000 euros10 and the Court of Arnhem thought, referring to the compulsory insurance amount for motor vehicles, a limit of 1 million euros adequate.11 These cases illustrate that fundamental rights may serve as a rich source for arguments in private law issues where statutory law can be considered to be no longer up to date. They also throw light on the problem that arises once such a specific statutory rule is put aside. This, of course, is not a matter that is specific to fundamental rights, but it can nevertheless be an important result of judicial activism in this area of the law. 2.4

The Pye Case: Deprivation of Possession, or Not?

Perhaps one of the most exciting issues of the influence of fundamental rights in private law is the question of whether domestic regulation of ownership of land can be set aside with an appeal to Article 1 of the First Protocol of the ECHR. This was at stake in the case of Pye Ltd v United Kingdom, where Pye had been deprived of his land by the operation of domestic rules (the Land Registration Act 1925 and the Limitation Act 1980) on adverse possession. Pye, a property developer, had bought land in 1975 and 1977. At that time the legal regime included the risk of losing the interest in the land after 12 years of adverse possession (this rule was abandoned in 2002). Pye had in 1983 agreed on a grazing licence on behalf of his neighbour Graham. Graham tried to continue that agreement in 1984, but Pye refused, because he wanted to start building on the property soon. Graham’s attempts to contact Pye were not answered and Graham kept using the fields for his cattle. In 1997 Graham placed a ‘warning’ in the Land Registry that no longer Pye but Graham was entitled to the land.

10 Rechtbank Den Haag 17 January 2007, Jurisprudentie Aansprakelijkheid 2007, 119. 11 Rechtbank Arnhem 27 May 2008, LJN BD2533, Jurisprudentie Aansprakelijkheid 2008, 97.


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The House of Lords decided – reluctantly – that, according to the old Land Registration Act, Graham was entitled to the land.12 Pye brought the case before the European Court of Human Rights and in 2005 the Court decided, in the smallest possible majority, that United Kingdom law was not in line with Article 1 of the First Protocol of the ECHR, because it did not offer Pye any compensation for the deprivation of his property right.13 Because of the fundamental character of the issue, the case was then brought before the Grand Chamber of the European Court of Human Rights, which in 2007 ruled that the law on adverse possession was not in violation of Article 1 of the First Protocol of the ECHR, because the interference with Pye’s right should not be regarded as a deprivation of possession, in which case compensation is mandatory, but should rather be considered as a ‘control of use’ of the land. The Court found that the result of the control of use by the Land Registration Act (the loss of property by Pye) did not upset the fair balance between the aim of the interference and the means employed.14 These cases stress that, although the European Court of Human Rights appears in the end to be reluctant to interfere with domestic regulation of property of land, this area of domestic law, which could be considered at the heart of private law, is not ‘safe’ from the influence of the Court.15 They illustrate, therefore, not only that this area is not immune from the influence of fundamental rights but also the, be it cautious, willingness of the European Court of Human Rights to interfere with domestic law in this domain.

3

BRIDGING THE TRADITIONAL DICHOTOMY BETWEEN PRIVATE LAW AND PUBLIC LAW

The above described cases have all, at least initially, been solved in private law disputes, settled before civil courts. There is also little doubt that private law can – by its flexible structure – technically dispose of adequate and sufficient tools to deal with issues of fundamental rights. Yet, there can be much dispute about the question of how fundamental rights could find their way – in a more technical way – into private law, as well as about the question of to what extent

12

Pye v Graham [2003] 1 A.C. 419. See on the English decisions also Zwalve (2005, p. 336). 13 ECHR 15 November 2005, nr. 44302/02 (Pye v United Kingdom I). 14 ECHR 30 August 2007, nr. 44302/02 (Pye v United Kingdom II). 15 See on the influence of fundamental rights on property rights in South Africa for instance van der Walt (1995) pp. 169 ff.; van der Walt (2002, pp. 254 ff.); van der Walt (1999).

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fundamental rights should influence the outcome of private law disputes. The first question will be addressed shortly in this section; the ‘added value’ of the fundamental rights perspective in private law will be discussed in the next section. An essential question in the debate about the influence of fundamental rights in private law is how an appeal to fundamental rights may be interpreted in private law issues. In other words, how can fundamental rights, which seem to spring from a public law tradition, fit into the structure of private law debates? For a large part, this question reflects the distinction between the direct and indirect effects of fundamental rights,16 but even if one prefers the approach of indirect effect, different modes of influence of fundamental rights in private law can be distinguished.17 First, several fundamental rights have found their way into specific private law regulations, such as the law regarding labour contracts or medical treatment, which in many respects contain ex ante assessments by the legislator with regard to individual rights and freedoms. In these cases the private law rules can be said to have been influenced ab initio by fundamental rights. The influence of human rights from an extra-national source seems most problematic for this category of private law rules, because it immediately appeals to the issue of supremacy. Secondly, fundamental rights may find their way through general clauses in the private law domain, such as unlawfulness, negligence, good morals or good faith.18 Private law thus offers several structures such as ‘open norms’ which may serve the influence of fundamental rights in the process of balancing of interests. Thirdly, private law occasionally seems to allow a specific role for a fundamental right in forming a basis for an action in court. For example, a fundamental right may, then usually under the flag of a personality right (German Persönlichkeitsrecht, Dutch persoonlijkheidsrecht), be recognized as a ‘private law right’ as such.19 The Dutch Hoge Raad has, for instance, spoken of the general personality right underlying basic rights, such as the right to privacy, the right to freedom of thought, conscience and religion, and the freedom of expression. This shows that fundamental rights may constitute a source for solutions in a private law context, even if they have not been articulated in detail in constitutional rights and without the need to address formal effect issues.

16 17

See for an early strong advocate of direct effect Nipperdey (1950, pp. 121–8). See on the state of affairs with regard to direct and indirect effects recently Mak (2007, pp. 46 ff.). 18 See Heldrich and Rehm (2001, pp. 113 ff.). 19 See on this role of persoonlijkheidsrechten Lindenbergh (1999, pp. 1665–1707) and Nehmelman (2001).


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All in all, private law seems technically sufficiently flexible to accommodate fundamental rights properly. One can of course argue that as a result the added value of fundamental rights in private law is limited, because fundamental rights take a subsidiary position in private law, as private law itself is (at least more or less technically) decisive for their influence, and that the diffuse character of fundamental rights accounts for a lack of guidance to solve private law disputes.20 This may be true, but it does not detract in any way from the ability of private law to host and vindicate fundamental rights in private law. The argument is, furthermore, weakened by the above described examples, which show the material influence of fundamental rights in solving conflicts in a private law setting. With this in mind, it can be said that private law technically offers adequate tools for the accommodation of fundamental rights and, consequently, it allows rights and values from other domains, such as public law, to influence the private law domain. It seems, however, too simple to think that fundamental rights are public law features which have originated from public law and which only recently have tended to ‘invade’ private law by interpretation. It can be said that the nature and the maintenance of fundamental rights not only originate from public law; they have private law roots, at least as well.21 It is, therefore, questionable to see the influence of fundamental rights in private law as an issue of conflict of public and private law and it would be better to approach it as a matter of convergence: fundamental rights are of a universal nature that exceeds the distinction between the private and public law domains. This, of course, brings us to an evaluation of the material influence of fundamental rights in private law. It does, however, also stress the importance of the issue of jurisdiction in a multi-level setting. The question is no longer primarily whether it is a civil court or an administrative court that has jurisdiction over a specific fundamental rights issue, but much more whether a traditional civil law or public law jurisdiction is influenced by a national or supranational court that is willing and able to guarantee fundamental rights and to place their vindication on its policy agenda. This aspect will be addressed later on.

20 21

Smits (2003, pp. 1–161); Smits (2005, pp. 9–22). See on this thought Banakis (2005, pp. 83–96).

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4


THE ADDED VALUE OF A FUNDAMENTAL RIGHTS APPROACH IN PRIVATE LAW

Of a more normative nature than the question of how fundamental rights can find their way technically into the structure of private law debates is the question of whether, and to what extent, these rights should influence private law. In this respect, there seem to be ‘believers’ as well as ‘non-believers’. Smits, for instance, advocates scepticism by arguing that private parties are, as a matter of principle, not bound by fundamental rights, because these rights are by their origin and nature meant to protect the free sphere of private parties from state influence.22 Whether this is true or not, this view seems to be based on a rather traditional distinction between private and public law. The debate about the value of fundamental rights in private law precisely shows that the fundamental values enshrined in these rights are of profound influence and cannot be neglected in the private law debate. This is not altered by the fact that human rights may have a different meaning and effect in private law relationships from those they have in the relationship between the state and a citizen.23 The added value of a fundamental rights approach in private law has been an – often unforeseen – change of perspective on rather classical private law issues. Fundamental rights thus primarily serve as a source of inspiration that can add new viewpoints to a more traditional dogmatic civil law approach. Looking at the above described cases, a fundamental rights argument offers, in each case, a surprising angle that has been of more or less influence on the solution of the conflict. It is primarily this aspect that shows the added value of fundamental rights in private law: an enrichment of legal discourse in private law.24 This is not only a matter of argumentation; it also stresses the importance of essential values and interests that might, in a more patrimonially oriented civil law model, otherwise be disregarded. Fundamental rights may thus serve as a source of inspiration for what is considered a just solution in society, as a signal of the seriousness of a case in which human dignity is at stake,25 and – if necessary – as a crowbar to vindicate these interests.

22 23

Smits (2005, p. 19). See on this issue in relation to the private sphere for example Clapham (1993, p. 134): ‘The State has no right to privacy; it has a claim to secrecy.’ 24 See also Nieuwenhuis (2005, pp. 1–8). 25 Cf. Smits (2005, p. 22).


5

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CONSTITUTIONAL AND/OR SUPRANATIONAL COURTS AS DRIVING FORCES

There is little doubt that the establishment of courts that have the protection of fundamental rights as a more or less specific mission has been of unmistakable influence for the development of fundamental rights in private law. In Europe, the European Court of Human Rights, the European Court of Justice and the German Bundesverfassungsgericht each have shown that the interpretation and application of private law is no longer the sole domain of national civil courts. This can be seen as an aspect of globalization in the sense that external jurisdictions influence the development of domestic (private) law. In my opinion this development should be judged as beneficial. Fundamental values enshrined in fundamental rights can thus exceed the national territorial borders as well as the traditional boundaries of the legal domains of private law and public law. In this respect the law seems to have become more flexible; at least there has been a challenging appeal to its flexibility. The reverse of this is that the relative success of fundamental rights in private law is, to a certain extent, dependent on the competence as well as the ‘political’ agenda of these courts. Although the above described case of the influence of Article 1 of the First Protocol of the ECHR on the limitation of liability exemplifies that national civil courts can allow influence to fundamental rights independently, it is not plausible that this would have happened had the European Court of Human Rights not stressed the importance of the Article in earlier decisions. This does not only emphasize the dependence of the development of fundamental rights in private law upon the existence of a supranational legal order; it also limits this development to the specific agendas of the courts in charge. The impact of this limitation must, however, not be overestimated. The supranational jurisdiction does not necessarily have to be one at a global level. Regional jurisdictions have, for instance in Europe, proved to be successful as well. Moreover, different jurisdictions in the same region, such as the German Bundesverfassungsgericht, the European Court of Human Rights and the European Court of Justice, have had their effects in the same region.

6

ISSUES IN RELATION TO GLOBALIZATION

The influence of fundamental rights in private law typically crosses traditional theoretical distinctions as well as national borders and can, therefore, be seen as an example of legal globalization. As human rights often have their source in international treaties, the influence of human rights on private law can be seen as a globalizing influence on private law: the national private law jurisdiction no

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longer has sovereignty in issues of private law. National private law is influenced not only by the explicit conversion of human rights treaties into national law, but also by a more ‘sneaking’ influence of human rights through judgments in which national courts apply fundamental rights with international origins in specific local private law matters. The above described examples show that human rights may offer inspiring viewpoints that offer new horizons. In individual cases this may lead to favourable solutions on an ad hoc basis, but on a more fundamental level it raises questions about the role of the national legislator in relation to the international judiciary. Who is competent with regard to which issue and who decides eventually what the law is? Human rights may also be from another perspective relevant in relation to globalization. In a globalizing world multinational corporations and other international organizations more and more seem to define the normative agenda that affects national citizens even in their most local setting. This raises the question of the democratic standard of such rules. From this perspective fundamental rights can possibly serve as proper tools to set aside rules that lack a sufficient democratic basis. They can, from an ‘internal’ or national perspective, serve as guards for the democratic standard of legal rules. Both of the above described functions show the ability of private law to host fundamental rights as well as the flexibility of private law to apply these rights. The influence of fundamental rights in private law is however, also in relation to globalization, far from unproblematic. In the first place fundamental rights usually consist of rather ‘raw’ legal material that offers little guidance.26 This makes the application as well as an outcome of the application of fundamental rights in private law situations unpredictable and it can therefore affect legal certainty. This also raises the question of whether the judiciary can sufficiently deal with the application of fundamental rights in individual cases and which cases are more suitable for the legislator to decide. The Dutch example of the strongly diverging amounts of the limits of liability in transportation cases (the court of The Hague chose 200 000 euros; the Arnhem court thought 1 million euros to be adequate) illustrates that some issues would better be covered by the legislator in order to avoid arbitrariness. In the second place the application of fundamental rights by an international court or institution may impose values that exceed or are contrary to locally approved values. The universality of fundamental rights seems to a certain extent to vary according to their nature as well as to the location of their application, and thus their weight may be valued differently in concrete

26 See for example on the already many different aspects of personal freedom Marshall (2009).


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situations. For example, the right to life and freedom will probably be valued as more fundamental than the right to economic development or the right to equal opportunity,27 and the right to economic development will be valued differently in varying economic situations.28 From this point of view the benefit of the concept of universality of fundamental rights in relation to globalization – fundamental rights are so fundamental that they can and should be applied everywhere and any time – may prove to be a drawback: the fundamentality of these rights can be challenged in all places, at all times and in every specific situation.

7

A DIFFERENT PERSPECTIVE: PRIVATE LAW AS A TOOL FOR PROTECTION OF FUNDAMENTAL RIGHTS

With respect to fundamental rights private law may, however, have something else to offer that can be of importance in a globalizing legal order. Recently, attention has been paid to the question of how private law can help to provide rules to present incentives for companies to respect fundamental rights in their production and trade, both in their country of origin and elsewhere. Van Dam, for instance, advocates the application of the tort concept of negligence to companies in order to motivate them to respect fundamental rights.29 Thus a company should apply due diligence with regard to fundamental rights, not only in its own actions but also in relation to its daughter-companies and business partners. It must be said that the tools for plaintiffs to vindicate their rights in an international setting are yet limited, but for instance the American Alien Tort Claims Act illustrates that claims with regard to human rights can be heard in a foreign jurisdiction.30 Moreover, the violation of fundamental rights by companies may call for regulation to protect the level playing field of competition, since the production of companies obeying fundamental rights may be more expensive than that of companies which disregard and violate fundamental rights. In this way protection of the economic market may serve as a vehicle that results in protection of fundamental rights.31

27 28

See on the latter Benson (2001, pp. 201 ff.). See for instance on ‘freedom rights’ versus ‘social rights’ Hesselink (2002, pp.

177 ff.). 29 30 31

See Van Dam (2008). In Europe this possibility is yet very limited. See Zegveld (2008). Van Dam (2008, p. 52).

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Furthermore, private law may play a role in – indirect – vindication of fundamental rights through consumer law. If consumers derive and vindicate rights from fair trade labels, this may influence company behaviour with respect to fundamental rights.32 These aspects throw a new light on the function of private law with respect to fundamental rights in a globalizing world: not only may they serve as anchors for the interpretation of private law, but also national private law may also become a tool to protect fundamental rights elsewhere in the world. If one cannot export fairness by directly imposing fundamental rights elsewhere, one can impose it indirectly by importing it.

8

CONCLUDING REMARKS

The development of fundamental rights in private law seems to be an inspiring example of fundamental values presenting incentives as well as tools to exceed traditional national structures of both private and public law. Furthermore, the development of supranational jurisdictions, which have stimulated the development of fundamental rights profoundly, has formed an important aspect of globalization of the legal arena. In this respect fundamental rights have the characteristics of potentially successful carriers of legal development in a globalizing legal order. These characteristics, however, have their reverse side as well. As described above, the development and influence of fundamental rights in private law seems to a large extent dependent on the existence and power of supranational jurisdictions. Furthermore, fundamental rights are, at least in their original structure, rather vague and undetermined, which makes their direct implementation difficult. And, finally – this may be the most difficult characteristic – in a global setting, the universality of fundamental rights may not be so self-evident. What is considered fundamental, and which specific consequences this fundamentality should have in a certain case, seems to a large extent to be dependent on the region in which the question is raised. For instance, the right to equal treatment of men and women may in several areas of the world be considered fundamental, but it is not at all obvious that this will, or perhaps should, lead to the outcome of the earlier described case of Wiebke Busch wherever such a case is brought before a court. Therefore, although fundamental rights are often presented as carriers of universal values, their weight may be assessed differently in varying countries and cultures. It will be a serious challenge for the global legal order to account for and deal with this fundamental problem.

32

See on this Castermans (2008).


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REFERENCES Banakis, S. (2005), ‘The Constitutionalisation of Private Law in the UK: Is There an Emperor Inside the New Clothes?’, in T. Barkhuysen and S.D. Lindenbergh (eds), Constititutionalisation of Private Law, Leiden/Boston: Martinus Nijhoff, pp. 83–96. Barkhuysen, T., M.L. van Emmerik and H.D. Ploeger (2005), De Eigendomsbescherming van Artikel 1 van het Eerste Protocol bij het EVRM en het Nederlandse Burgerlijk Recht, Preadvies Vereniging voor Burgerlijk Recht, Deventer: Kluwer. Benson, P. (2001), ‘Equality of Opportunity and Private Law’, in D. Friedmann and D. Barak-Erez (eds), Human Rights in Private Law, Oxford: Hart Publishing, pp. 201 ff. Castermans, A.G. (2008), ‘De Burger in het Burgerlijk Recht’, inaugural lecture, University of Leiden. Clapham, A. (ed.) (1993), Human Rights in the Private Sphere, Oxford: Clarendon Press, p. 134. Ganten, T.O. (ed.) (2000), Die Drittwirkung der Grundfreiheiten, Berlin: Duncker & Humblot. Heldrich, A. and G.M. Rehm (2001), ‘Importing Constitutional Values through Blanket Clauses’, in D. Friedmann and D. Barak-Erez (eds), Human Rights in Private Law, Oxford: Hart Publishing, pp. 113 ff. Hesselink, M.W. (ed.) (2002), The New European Private Law: Essays on the Future of Private Law in Europe, The Hague/London/New York: Kluwer Law International, pp. 177 ff. Lindenbergh, S.D. (1999), ‘De Positie en Handhaving van Persoonlijkheidsrechten in het Nederlandse Privaatrecht’, Tijdschrift voor Privaatrecht, pp. 1665–1707. Loof, J.P. (ed.) (2000), The Right to Property, Maastricht: Shaker Publishing. Mak, C. (ed.) (2007), Fundamental Rights in European Contract Law: A Comparison of the Impact of Fundamental Rights on Contractual Relationships in Germany, the Netherlands, Italy and England, Alphen aan den Rijn: Kluwer Law International, pp. 46 ff. Marshall, J. (ed.) (2009), Personal Freedom through Human Rights Law?, Leiden/Boston: Martinus Nijhoff Publishers. Mostert, H. (2003), ‘De Invloed van die Grondwetlike Eiendomsklousule op die Eiendomskonsep in die Suid-Afrikaanse Reg’, in J. Smits and G. Lubbe (eds), Remedies in Zuid-Afrika en Europa: Bijdragen over Privaatrecht en Constitutioneel Recht in Zuid-Afrika, Nederland en België, Antwerp: Intersentia, p. 119. Nehmelman, R. (ed.) (2001), Het Algemeen Persoonlijkheidsrecht, dissertation, University of Utrecht; Deventer: W.E.J. Tjeenk Willink. Nieuwenhuis, H. (2005), ‘Fundamental Rights Talk, An Enrichment of Legal Discourse in Private Law?’, in T. Barkhuysen and S.D. Lindenbergh (eds), Constitutionalisation of Private Law, Leiden/Boston: Martinus Nijhoff, pp. 1–8. Nipperdey, H. (1950), ‘Gleicher Lohn der Frau fur gleiche Leistung’, Recht der Arbeit, pp. 121–8. Smits, J.M. (2003), Constitutionalisering van het Vermogensrecht, Preadvies Nederlandse Vereniging voor Rechtsvergelijking no. 64, Deventer: Kluwer. Smits, J.M. (2005), ‘Private Law and Fundamental Rights: a Sceptical View’, in T. Barkhuysen and S.D. Lindenbergh (eds), Constitutionalisation of Private Law, Leiden/Boston: Martinus Nijhoff, pp. 9–22.

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Van Dam, C. (2008), Onderneming en Mensenrechten, Zorgvuldigheidsnormen voor Ondernemingen ter Voorkoming van Betrokkenheid bij Schending van Mensenrechten, Inaugural lecture, Utrecht University, The Hague: Boom Juridische Uitgevers. Van der Walt, A.J. (1995), ‘Tradition on Trial: a Critical Analysis of the Civil-Law Tradition in South African Property Law’, SAJHR, 11, p. 169. Van der Walt, A.J. (ed.) (1999), Constitutional Property Clauses, Cape Town: Jutta. Van der Walt, A.J. (2002), ‘Exclusivity of Ownership, Security of Tenure, and Eviction Orders: A Model to Evaluate South African Land-Reform Legislation’, Tydskrif vir die Suid-Afrikaanse Reg (TSAR), pp. 254 ff. Van der Walt, A.J. (2003), ‘’N Nuwe, Grondwetlike, Ius Commune?’, in J. Smits and G. Lubbe (eds), Remedies in Zuid-Afrika en Europa: Bijdragen over Privaatrecht en Constitutioneel Recht in Zuid-Afrika, Nederland en België, Antwerp: Intersentia, p. 183. Zegveld, L. (2008), ‘Rechtsherstel voor Slachtoffers van Schending van het International Humanitair Recht’, inaugural lecture, University of Leiden. Zwalve, W.J. (2005), ‘What a Condition Would Man Be In!’ (three cases on prescription and adverse possession), Stellenbosch Law Review Regstydskrif, 16, p. 336.

12. Globalization and multi-level governance of environmental harm Michael Faure 1

INTRODUCTION

1.1

Starting Point

The starting point for most of the chapters in this book is that lawmaking, and more particularly the development of private law, poses specific challenges in the era of globalization. It is this particular influence of the broad globalization phenomenon on private lawmaking that has been the central focus of the contributions in this book. This chapter will take up the challenge to examine this relationship between globalization and (private) lawmaking as far as the area of environmental law is concerned.1 There are potentially so many interfaces between globalization and environmental problems that one could easily write an entire monograph simply dealing with this relationship. The aim of this chapter is, however, more modest. I will merely attempt to identify the influence of environmental issues on globalization and vice versa, from both a positive and a normative perspective. This will allow me to identify a few issues that play a role in this respect and to indicate a few areas where the relationship between globalization and environmental law could lead to tensions.2 Within the scope of this chapter it is not possible to even attempt to resolve these tensions. One can at most try to identify some core questions and analyse to what extent environmental issues pose problems or challenges for globalization that may be different from those in other areas discussed in this volume. 1

See on this topic also the challenging paper by Wirth (2007). However, according to some authors these tensions are highly exaggerated. See for example Wirth (2007, p. 1): ‘Pitting globalization and environment against each other as conflicting goals is a simplistic and self-defeating perspective.’ Also Howse holds that it is at this moment no longer useful to discuss whether globalization as such is good or bad: ‘This debate, I argue, is over, above all because the antiglobalizers have themselves gone global’ (Howse 2008, p. 1529). See, however, for a different perspective the contributions in Speth (2003). 2

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The central issue discussed in this chapter is hence how an analysis and discussion of environmental pollution and the related environmental law and policy issues can contribute to a quest for the relationship between globalization and private law, which lies at the heart of the contributions to this volume. 1.2

Challenges

There is a broad literature on the relationship between globalization and specific environmental problems. In this respect, one can for example refer to the broad literature on sustainable development3 or one could focus on the question of how international law could be used as a remedy against transboundary environmental pollution4 or on the literature on multi-level governance and the environment.5 These and many other issues are debated under the heading of globalization and environmental problems. Some economists pay particular attention to the relationship between economic competitiveness and environmental issues6 or to the relationship between free trade and environmental protection.7 It is of course impossible within the scope of this chapter to discuss all of these issues in detail. Hence, a different approach will be followed. I will rather try to identify the various types of potential conflicts between environmental protection and globalization by structuring the various potential topics along two main lines of division (although I immediately admit that in some cases it is not so easy to sharply distinguish where a particular issue or conflict should best be categorized). A first dividing issue is whether the problem concerns the influence of environmental problems on globalization or whether it is rather the reverse – that globalization has a particular influence on environmental law and policy. A second dividing line would be to identify the positive analysis whereby one would examine or rather describe the mutual relationship between environmental pollution and globalization. This would be distinguished from the situation where a normative statement would be

3 See more particularly on the relationship between globalization and sustainable development Baker and McCormick (2004) and Martens and Zywietz (2006, pp. 331–50) as well as Martens (2007, pp. 39–47) and Sands (2000, pp. 369–409). And see the contributions in Bugge and Voigt (2008). 4 See for example Birnie and Boyle (2002) and Sands (2003). See also the contributions in Faure and Song (2008) and in Bratspies and Miller (2006). 5 See generally on multi-level governance de Prado (2007) and Follesdal et al. (2008) and see on multi-level governance and environmental issues especially the contributions in Winter (2006). 6 See more particularly Porter and Van den Linde (1995, pp. 97–118) and Copeland and Taylor (2004, pp. 7–71). 7 See for example Vogel (2004, pp. 231–2).

Multi-level governance of environmental harm

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formulated concerning this particular relationship. In the latter case, the analysis would involve arguing whether the influence of globalization on environmental issues is desirable or not. In order to be able to provide such a normative statement, one undoubtedly needs a point of reference. To the extent that this chapter will provide such a normative indication concerning the relationship between environmental problems and globalization, the reference point used is usually the one provided by economics, namely efficiency. I consider the economic approach to law generally, and to environmental law and policy in particular, a very useful methodology not only to structure particular questions but also to provide an indication of the desirability of particular developments.8 With this, I of course do not argue that efficiency is the only criterion that should guide environmental policy. Other criteria such as the desire to provide a high level of environmental protection may also play a role at the policy level, for example to examine the influence of globalization on environmental issues. Still, in that particular case economic analysis remains useful. It will for example allow indicating whether the choice of a high level of environmental protection may come at a (too) high price. Even though it may in some cases be artificial to separate particular issues along the lines suggested above, I will try to order the various questions that could arise along those lines merely because I hope it may provide a framework to structure the otherwise too complex and manifold questions. The structure is hence merely chosen for reasons of presentation, not always for contents. This chapter will on the one hand discuss the relationship between globalization and environmental problems generally. However, since that may be slightly too ambitious and complex, the major focus will, within the general framework of this project, obviously be on the particular relationship between globalization and environmental law and policy. Given the general focus of the other chapters in this volume on the influence of globalization on private lawmaking, there will equally be a strong focus on private law. However, given the important influence of regulation in environmental law and policy, many issues will deal with environmental regulation as well as with private law. 1.3

General Background

The goal of this chapter is to contribute to the general aim of this book, being to identify particular challenges posed by globalization for environmental law

8 A summary of the economic approach to environmental law and policy can be found in Faure and Skogh (2003).

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and policy. Hence, some of the more general questions, also indicated in the introduction to this volume, concerning the relationship between globalization and private lawmaking will be analysed within the specific context of environmental problems. One particular issue that will play a major role in the globalization debate generally and hence also for environmental problems is to what extent there is a ‘lawmaking beyond the nation state’. The challenges posed by this multilevel governance lead to the institutional questions of who sets the agenda and who takes decisions on the appropriate remedies for (also transboundary) environmental harm.9 The general question, being to what extent a shift to higher levels of governance leads to increasing problems of accountability and legitimacy, will also be a crucial one in the environmental context. The goal of this chapter will be to identify the specific issues and topics that arise in that respect and perhaps to indicate in what direction solutions may be found. An equally central focus of this chapter will be that, although many problems to be discussed in this contribution seem ‘global’ in the sense that, for example, lawmaking emerges from international organization or deals with transboundary environmental pollution, the problems often have effects for individuals in private legal relationships. It is more particularly this relationship between the various legal orders (international, regional (such as European), state and local levels) that poses interesting questions for the way environmental problems are dealt with in a specific context. 1.4

Structure

The remainder of this chapter is structured as follows: after this introduction, the influence of environmental issues on globalization will first be analysed from a positive perspective (2); next, the influence of environmental issues on globalization will be analysed from a normative perspective (3). Then, the influence of globalization on (private) environmental law and policy will be analysed positively (4) as well as normatively (5). Finally, an indication will be provided of the particular contribution of environmental problems to the debate on the influence of globalization on private lawmaking (6).

9 See for the various possible remedies for transboundary environmental harm Nollkaemper (2008).


2

387

INFLUENCE OF ENVIRONMENTAL ISSUES ON GLOBALIZATION: POSITIVE ANALYSIS

One can easily identify some environmental problems that have shaped, or at least influenced, the globalization debate. For now, I will simply mention a few of those issues and mainly be content with describing them; in the next section (3) an attempt will be made to address some of these developments from a more normative perspective. 2.1

Increase of Transboundary Pollution

It seems like pushing at an open door to argue that one way in which environmental problems have ‘gone global’ is that pollution problems have increasingly become transboundary.10 To a large extent, this may be the result of an increased awareness of the transboundary character of environmental pollution.11 Environmental pollution probably always had a transboundary character, but perhaps it is also due to increased technological abilities that the sources can be traced back to transboundary pollution.12 Originally, the focus of environmental awareness was on the so-called point source pollution coming from particular identifiable sources (such as emissions by factories), in addition to problems for workers,13 leading to pollution of the soil and (local) surface or ground waters. Most likely, already during the time of industrialization, emissions by particular factories caused transboundary air pollution, but lacking technical abilities we were often prevented from tracking down the sources of air pollution. In the second half of the last century, the attention shifted as a result of an increasing awareness that many environmental problems have a transboundary character. Hence, the focus increasingly rested on problems caused by so-called long-range air pollution and acid rain.14 From an economic perspective, the basic problem was that local industry exported environmental pollution, leading, at least, to a de facto ‘externalization’ of pollution problems. Economists have often argued that the reasons for

10 11

See inter alia Lemke (2006). See for a fuller account of the importance of transboundary impacts Handl

(2007). 12 Also Bhagwati (2007) believes that globalization has been driven in an important way by technical change. 13 Notice that environmental law in many countries originated from a shift in attention from safety at work to the so-called external safety around the factory. 14 See for example the 1979 Geneva Convention on Long-Range Transboundary Air Pollution (LRTAP) and the subsequent protocols.

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the transboundary character of environmental pollution problems are well known: local politicians will not have many incentives to act strongly against polluters who may be able to export large quantities of the pollution outside the borders of the national territory. Thus the polluting activity could result in socio-economic benefits for the nation (increased tax revenues and job security), whereas the negative effects (referred to as externalities by economists) are shipped to the neighbouring countries.15 Since politicians primarily need to be re-elected by the citizens within their particular state, their primary concern may not be with the transboundary effects of pollution caused by factories within their nation. In that sense, one could even argue that one should not be surprised that such an externalization of pollution to other countries takes place. That problem is as such well known and not new. It has been, as mentioned in the introduction, the task of international environmental law to provide remedies against this externalization of pollution. These remedies, however, emerged long before globalization became an issue on the political or academic agenda. There is, however, one particular issue that has definitely changed the political and academic agenda, namely what was referred to in the 1990s as global environmental change and in this century simply as the problem of climate change. If there is one example of a ‘global’ environmental problem it is undoubtedly climate change. Not only can sources not be traced back just to particular polluters in specific nation states, but so-called non point source pollution (such as aviation) has also largely contributed at least to increased CO2 emissions and arguably to climate change as well. The example of climate change immediately shows the difficulty in arguing that there would be a causal relationship between globalization and a particular environmental problem. One can undoubtedly argue that climate change is the ultimate example of a global environmental problem and in that sense it influences the globalization debate. On the other hand, it is obviously not necessarily (economic) globalization in the sense of lowering restrictions on trade that would have caused the climate change problem. For a more in-depth discussion of the legal aspects of climate change we refer to the relevant literature in that respect16 and more particularly to Chapter 13 by Spier in this volume. 2.2

Increased Mobility of Products and Services

Another clear example of a relationship between environmental issues and globalization (even though again the direction of the causality is not that clear) 15 16

See Faure and Betlem (2008, pp. 129–91). Johnston (2008); Van Ierland et al. (2003), Stewart and Wiener (2003), Faure et al. (2003), Douma et al. (2007b) as well as Peeters and Deketelaere (2006).


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relates to the mere fact that as a result of technological changes, increased possibilities of transport, lower transportation costs and so on the mobility of products, capital, labour and services has strongly intensified. It is precisely this increased mobility which according to some qualifies as ‘globalization’. The increased mobility and the corresponding increasing (international) trade have undoubtedly led to significant welfare gains which have been described in many economic studies. However, at the same time, many have also pointed to the fact that with an increased mobility of products and services not only do the beneficial aspects of these products increasingly travel but also the negative side-effects, earlier referred to as externalities. Indeed, one aspect is that the increased mobility not only applies to regular products but also for example to waste. The increasing technological possibilities provide inter alia for producers of waste possibilities to use economies of scale and enable them to look for the place where, for example, incineration costs (or taxes) may be the lowest.17 This export of environmental problems, leading effectively to a globalization of trade in pollution (more particularly waste), does not go undisputed. Other examples of this relationship between increased mobility and environmental issues can be provided. Particular problems arise, for example, when products from a country with low environmental (or labour) standards are imported into countries with higher standards, whereby the question arises to what extent the higher environmental standards can also be imposed upon the imported products, which would effectively raise barriers to trade.18 In addition, in some cases, differences in the environmental standards (or in the pollution absorbing capacity) of countries have led to a mobility of firms. In that sense, the possibilities of increased mobility have effectively been used by many polluters who have, according to Tiebout’s theory, ‘voted with their feet’ and moved particularly polluting activities to other jurisdictions.19 The increased exodus of, for example, textile firms from Europe towards Southeast Asia is one important example.20 Some argue that the enlargement towards Eastern Europe also provides increased possibilities for environmental mobility of firms in Western Europe to the east.21

17 18 19 20

See Lavrysen (1995). See on this issue inter alia Vogel (2004). See Tiebout (1956). Although this obviously took place not only because of differences in environmental standards but also because of differences in labour costs, taxation, costs of raw material etc. 21 See Faure and Johnston (2009).

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The most literal form of an interrelationship between pollution and globalization could probably be found in systems where a trading in pollution rights is allowed. Whereas some economists still considered such a trading system as an original but rather crazy idea in the 1990s, after some experiments in the US, emissions trading has gained popularity at the policy level as the main instrument to fight climate change. Even though there is not yet a full globalization in the sense of an international emission trading scheme, there are important regional emission trading schemes, such as the one for greenhouse gases in the European Union.22 2.3

Lowering Environmental Quality?

The probably more interesting issue is whether the relationship between globalization and environmental pollution leads also to a lowering of environmental quality.23 The hypothesis would thus be that the increasing transboundary character of pollution would lead not only to an increased mobility of pollutants, but also to more pollution and hence to a lowering of environmental quality. This corresponds with an intuitive feeling, launched for example by the so-called anti-globalists, that free trade would be the enemy of environmental protection.24 The intuitive appeal of this argument rests on the economic notion referred to above that states will attempt to externalize environmental pollution. If this externalization took place without remedies, more trade would undoubtedly lead to more pollution.25 Another theoretical backing for this statement is that states would increasingly engage in a competition for ever lower environmental standards. Since states would desire to attract industry, they would lower their environmental standards and, since competing firms would do the same, a prisoner’s dilemma would emerge, resulting in an overall lowering of environmental quality. It is the well-known problem of the race to the bottom.26

22 23

For an account of the first experiences, see Faure and Peeters (2008). See for a strong statement that economic globalization negatively affects environmental quality: Mander (2003); for a more nuanced picture with a review of the empirical literature see Copeland and Taylor (2004, p. 7 ff.) (arguing inter alia that increased trade and economic growth also raises environmental quality). 24 Here again, one notices that it is difficult to distinguish between environmental problems affecting globalization versus globalization influencing environmental issues. The feeling is often that free trade agreements have a ‘chilling effect’ on domestic regulation to protect public health and the environment, so Wirth (2007, p. 1). 25 For a critical perspective on this ‘transboundary externality’ argument in favour of centralization see Revesz (1996). 26 For a critical perspective on this race-to-the-bottom rationale for centralization see equally Revesz (1992).


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Notwithstanding the theoretical appeal, the empirical evidence for this race-to-the-bottom hypothesis is rather weak; at least it depends on the specific territory where one examines this phenomenon. David Vogel has for example powerfully argued that there is empirical evidence that states do not always engage in a race to the bottom, but in some cases in a so-called race to the top.27 The basic intuition is that export-oriented firms that have to comply with stringent (environmental) standards abroad will also strive for more stringent standards in their home country. Based on the experience in the state of California, this is referred to by some as the California effect.28 However, Princen shows that this California effect (competing for higher environmental standards) only works with strong public interest groups that collide with the interests of industry. The intuition here is that export-oriented firms may have an interest in imposing the stringent standards with which they have to comply in the export country also domestically, probably partly in an effort to raise barriers to entry. Their interests may hence coincide with those of green NGOs that are also (but obviously for different reasons) in favour of more stringent environmental standards in their home country and thus form a coalition with industry. However, when those coalitions do not emerge (and hence no trading up takes place), there is also a risk that free trade may win from environmental protection. Empirical evidence depends very much upon the region one considers. For example, within the US and Europe, empirical evidence shows that industry does not relocate to ‘pollution havens’ simply because environmental costs in other (member) states would be lower.29 However, empirical research also indicates that environmental costs may be one of the elements taken into consideration by firms when deciding upon a new location.30 The relevant question is whether the benefits of moving (being the marginal costs related to the differential in costs of compliance with environmental standards) outweigh other costs (such as relocation costs).31 Another issue is of course to what extent environmental costs constitute an important element in total production costs. This may explain why, for example, for a firm in Germany it may be beneficial to move production to Indonesia (since marginal cost differences may be substantial) but not to Belgium (since marginal cost differences may be minimal).

27

It is what David Vogel refers to as the phenomenon of ‘trading up’: Vogel

(1995). 28 See in this respect the interesting doctoral dissertation by Princen where he has analysed this phenomenon in detail: Princen (2002). 29 See Faure (1998, pp. 171–3). 30 See Jaffe et al. (1995). 31 See Kolstad and Xing (2002) as well as Becker and Henderson (2000) and Greenstone (2002).

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Whether increased ‘globalization’ (in the sense of mobility) of environmental pollution therefore leads to a lowering of environmental quality very much depends on the particular circumstances and the regions concerned.32 Roughly speaking, one could argue that within large federal systems like the EU and the US there is hardly a race to the bottom between (member) states (leading to a lowering of environmental quality) but that such a race to the bottom may be realistic in case of mobility from the developed north to the less developed south.33

3

INFLUENCE OF ENVIRONMENTAL ISSUES ON GLOBALIZATION: NORMATIVE ANALYSIS

Again, I should stress that one can debate whether the issues really concern the influence of environmental issues on globalization or whether it is rather the reverse. The division presented here is, as was mentioned, merely chosen for reasons of presentation, not so much for contents. The normative questions that follow from the relationship between environmental issues and globalization which have been identified positively in Section 2 will now be addressed at a more normative level. Normatively, the question of course arises regarding to what extent one considers some of the phenomena resulting from an increased relationship between globalization and environmental pollution as desirable or not. Without attempting to provide a final answer to these complicated issues, I will only attempt to identify some ways in which one could address these problems. This may help in structuring the research and policy agenda. The increase in the transboundary character of environmental problems (and thus the globalization of environmental pollution) undoubtedly leads to questions related to, for example, the institutions that need to address these globalized environmental problems, the level of governance at which issues should be addressed and the consequences of the normative environmental standards to be imposed. 3.1

Multi-Level Governance

A first question at the normative level is, to put it simply, whether the globalization of environmental problems makes a globalization of law neces32 33

See Faure and Johnston (2009). See in this respect Gupta (2006) who is for that reason very critical of applying the idea of regulatory competition also in the north–south relationship. For a detailed overview of the empirical literature in this respect see also Copeland and Taylor (2004).


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sary.34 The straightforward argument would be that a globalization of pollution necessitates a globalization of environmental law.35 Even though it sounds rather simplistic, the argument may have some support from economic analysis from two different angles. One angle would be that as soon as pollution crosses national borders and a risk of an externalization of environmental pollution thus emerges, a remedy should be found at a higher level to force the ‘pollution exporting’ state towards an internalization of its transboundary pollution.36 However, even though the argument that some legal remedy is necessary against this transboundary pollution is undoubtedly valid, the question remains as to whether this really should take the form of a centralization or harmonization of law. An alternative presented in the literature is simply the transboundary application of domestic standards on transboundary pollution.37 There are many examples of this. In the European context one could notice an important evolution in the case law of the European Court of Justice allowing victims of transboundary environmental pollution to sue foreign polluters either in the state of the polluter or in the victim state.38 In the latter case (which is obviously more favourable for the victim) a foreign polluter would be confronted with an extra-territorial application of the victim state’s law. For example in the Netherlands this has led to many cases brought by environmental NGOs and individual victims against Belgian and French polluters (of the rivers Rhine and Meuse) effectively claiming the application of Dutch law to pollution which had its source in Belgium and France respectively.39 However, while these types of remedies40 may work in particular contexts

34

Many of those issues are also addressed in the contributions in Winter (2006) and in Follesdal et al. (2008). 35 See Esty and Ivanova (2003). 36 See Van den Bergh (2000, pp. 88–92). 37 This could be done via a liability suit whereby a downstream victim of pollution sues upstream polluting firms. See on those possibilities Faure and Betlem (2008), Boyle (2006) and Nollkaemper (1998). 38 This was decided by the European Court of Justice in the well-known ruling in the Bier case (case 21/76 Bier v Mines de potasse d’Alsace, (1976) ECR 1735, 1748–9: ‘The expression “place where the harmful event occurred”… must be understood as being intended to cover both the place where the damage occurred and the place of the event giving rise to it. The result is that the defendant may be sued, at the option of the plaintiff, either in the courts for the place where the damage occurred or in the court for the place of the event which gives rise to and is at the origin of the damage.’ 39 See for a detailed discussion of these examples Faure and Betlem (2008, pp. 129–91). 40 Also advocated in many publications by Esty and Geradin. See inter alia Esty and Geradin (1997, 1998 and 2001).

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(like the Belgian–Dutch damage claims) the transboundary application of domestic standards can, as we will discuss below, to some extent also conflict with rules concerning free trade, emerging from either regional organizations (like the EU) or from world trade law. Hence, to some extent, the remedy against this transboundary pollution may have to come from a standard setting at a higher legal order. Institutionally, the transboundary character of the pollution would thus constitute an argument in favour of harmonization of environmental law, or at least in favour of a centralization of the decision making.41 A second related argument would be that when pollution crosses national borders, a decision-making authority has to be found that is large enough to deal adequately with the pollution problem. The justification in that particular case would simply be one of economies of scale: by looking for an authority which has jurisdiction over the entire territory covering the pollution problem, substantial savings on transaction costs could be achieved. This type of argument would hence justify, for example, shifting the standard setting for water pollution in transboundary rivers like the Meuse or Rhine to a body like the EU. It would equally justify shifting the decision making for a global environmental problem like climate change to an authority with global jurisdiction like the UN.42 3.2

Shift of Governance for Local Pollution?

The first normative issue I dealt with was the relatively straightforward case where the pollution crosses national borders. In that case, an argument in favour of shifting powers to a higher legal order (hence: globalization of pollution leading to globalization of law) is not that difficult to make. But what if the pollution is confined within national borders? There are still economic justifications for shifting powers to a higher legal order (centralization and eventually harmonization) even if the pollution problem remains local, but the case is weaker. I discuss this from two separate angles.

41 Centralization should indeed not necessarily mean harmonization. An obvious alternative is to shift powers (e.g. because of economies of scale advantages) to a higher level but to have the central authority impose differentiated standards. See in this respect inter alia Arcuri (2001, p. 37). 42 Hence, the fact that the UN dealt with the climate change problem in the wellknown Framework Convention on Climate Change has a strong economic justification in this economies of scale argument.


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3.2.1 Danger of a race to the bottom? Above, I have already introduced the race to the bottom as one phenomenon that could explain a lowering of environmental quality resulting from an increased mobility of products, firms and pollutants. The resulting question is to what extent this race to the bottom may justify a centralization of the decision making, or at least a shift of the decision making to a higher legal order. The literature in this respect usually indicates that this all depends on whether there is indeed empirical evidence of such a race to the bottom (which would then justify centralization).43 As I have already indicated above,44 the empirical evidence in that respect is not that clear. In cases where there would be evidence of a so-called California effect (precisely the reverse of the race to the bottom) there would not be any argument in favour of centralization. In the other case (competing for lower environmental standards), the question arises as to in which direction the empirical evidence goes. I have already indicated that within the EU and the US evidence of such a race to pollution havens is weak, even though after enlargement the EU may be confronted with an environmental race to Eastern Europe (all depending upon whether the Eastern European Member States have to comply with the acquis communautaire45 and whether the European Commission will also actually enforce the stringent EU standards upon the new Member States). The strongest empirical evidence rather comes from a race towards pollution havens in developing countries, which normatively therefore constitutes a pretty strong argument in favour of a regulation of environmental standards in developing countries. The difficulty in that particular case is, however, that a high level of environmental protection may not correspond to the preferences of citizens in low-income countries, who may prefer to give priority to economic development.46 Forcing developing low-income countries to comply with high levels of environmental protection may thus constitute a type of undesirable paternalism from the north. Recent empirical evidence shows that the stringency of environmental regulation may at least have an influence on the ex ante decision of firms concerning location. Moreover, Esty and Gerardin have shown that, even in cases where there is no race to the bottom in the sense of a relocation to pollution

43 44 45

See in this respect also Chapter 3 by Van den Bergh in this volume. See supra 2.3. In most of the accession treaties, the new Member States were allowed large transition periods before they had to apply the environmental directives to the full extent. See for example treaty concerning the accession of the Republic of Bulgaria and Romania to the European Union, 21 June 2005, Official Journal L 157. 46 Schäfer (2006, p. 120) and compare Dunoff (2007, p. 88).

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havens, the fear of losing local industry to competing states with lower environmental standards could lead to a so-called ‘regulatory chill’, preventing the state from imposing more stringent environmental standards, because of the fear of a relocation.47 An argument which has sometimes been advanced in the EU in this respect is that environmental standards should be harmonized in order to create a level playing field for industry. The argument is sometimes referred to as the need for a ‘harmonization of marketing conditions’.48 Law and economics scholars have, however, powerfully shown that such a harmonization of marketing conditions cannot justify the need for harmonization of laws. The simple reason is that marketing conditions always differ (if not, there would be no trade) and, even if all legal rules were harmonized, marketing conditions would still be different because of totally other reasons (like differences in labour costs, tax level, unionization of the labour force, availability of natural resources and so on).49 The only relevant question is therefore whether these differences constitute a barrier to interstate trade, which is seldom the case.50 3.2.2 The trade–environment dispute In fact, the mirror image of the race to the bottom (whereby states would engage in an inefficient race towards lowering environmental standards) is the danger that some nations may impose very stringent domestic environmental standards. Since these will obviously also apply to imported products, they can endanger free trade. It is the well-known conflict between free trade and environmental concerns that has led to many regulations and publications both within federal systems (US, EU) and at the international level (WTO law).51 The bottom line is that most regulatory solutions start from a distrust of (member) states that use environmental reasons to, for example, prohibit the

47 48

See Esty and Geradin (2001). In Europe an important goal of harmonization of laws has always been to remove differences in national environmental legislation, assuming that these would have a detrimental effect on the common market (see for example Jans and Vedder (2008, pp. 4–5)). See for example the observations preceding directive 76/464 of 4 May 1976 (OJ L 29): ‘Whereas any disparity between the provisions on the discharge of certain dangerous substances into the aquatic environment already applicable or in preparation in the various Member States may create unequal conditions of competition and thus directly affect the functioning of the common market’. 49 See also Ogus (2004, pp. 177–9) and Revesz (1997). 50 See generally Esty (1999). 51 See Wirth (2007, p. 1). Under WTO law the issue is regulated by the agreement on the application of Sanitary and Phytosanitary Measures, known as the SPS Agreement. For a commentary see Scott (2007) and Van den Bossche and Prévost (2005). And see especially Prévost (2009).


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import of supposedly polluting products.52 The obvious danger that can always arise in those situations is that the environmental reasoning will be abused simply to favour local industry. Hence, many of the free trade agreements start from the negative position, namely that they prohibit local protectionism, even if it were for environmental reasons (although a genuine use of the environmental argument to ban polluting products may under some circumstances be accepted).53 Looking at the cases, legal doctrine has shown that the approaches seem to differ somewhat between the EU, the US and the WTO level. To start with the last: commentators have indicated that the tuna–dolphin case seems to indicate that the free trade interests have won. Indeed the US lost a challenge initiated by Mexico under the auspices of the predecessor of the WTO:54 the US ban on Mexican tuna (which was legitimately caught in a way that killed air-breathing dolphins) was considered an illegal discrimination against Mexican tuna. This US embargo amounted to an attempt of the US to dictate Mexico’s environmental policy, which could have serious disruptive effects on international trade.55 The same seems to a large extent to be the case in US national law where the Supreme Court has decided that state laws may not create barriers to an interstate trade of waste.56 The EU approach, on the other hand, seems to be more flexible in the sense that it allows more room to call on environmental arguments to justify protective measures.57 For example, in the Danish bottle case a recycling system imposed by Denmark and clearly imposing costs on (also foreign) producers (thus potentially restricting trade) was allowed, given the environmental interests the Danish wished to achieve with the particular recycling system.58 Whereas the Danish bottle measure was still non-discriminatory, the Walloon 52 Hence international obligations in the area of trade law are often considered ‘negative’ in the sense that they place constraints on the possibilities of national governments to protect the environment or public health (Wirth 2007, p. 2). 53 For an interesting overview of the empirical and theoretical literature concerning the environmental consequences of economic growth and international trade see Copeland and Taylor (2004). 54 The General Agreement on Tariffs and Trade (GATT). 55 See Wirth (2007, pp. 2–3). 56 This has been based on the interpretation of the Commerce Clause, known as the Dormant Commerce Clause, whereby the Supreme Court reasoned that State and Local Laws had effectively created barriers to the interstate market in solid waste (see for example Fort Gratiot Sanitary Landfill, Inc. v Mich. Dep’t of Natural Res., 504 U.S. 353 (1992); City of Philadelphia v New Jersey, 437 U.S. 617 (1978) and C&A Carbone, Inc. v Town of Clarkstown, N.Y., 511 U.S. 383 (1994). 57 See generally on this case law van Calster (2002, pp. 482–5). 58 Case 302/86 Commission v Denmark, 1988 ECR 4607. See generally Temmink (2000).

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region in Belgium went a lot further by simply prohibiting the import of foreign waste into the Walloon region. Even though this measure was clearly discriminatory, the European Court of Justice (to the surprise of many commentators) upheld the measure.59 It called on the so-called proximity principle as a justification, arguing that the waste should in principle be treated or recycled as close as possible to the place where it has been produced.60 Hence the Walloon government was allowed to ban foreign waste even though the measure was clearly discriminatory. Commentators hold that in principle multilateral environmental agreements should solve these problems.61 Moreover, others stress that one major problem in all of these trade–environment conflicts is scientific uncertainty.62 Often one country or legal system bans the import of particular products (such as GMOs or beef with hormones) because of particular food safety or environmental concerns, whereas the exporting country holds that these risks are either non-existent or largely exaggerated so that the importing state is again mainly abusing the environmental or health concern to ban imports, favouring local industry. That the latter concern may always play a role will be no surprise if one just remembers, for example, how quick the French were in banning British beef during the BSE crisis, obviously favouring local producers.63 Commentators indicate that the key to solving this conflict is to evaluate the validity of the local arguments (and especially the scientific uncertainty surrounding it) on the basis of expert science. However, since many of the recent conflicts have also shown that experts may strongly disagree as well, one key issue is to determine the procedure by which these kinds of decisions are taken (including, for example, whether one relies only on expert evidence or potentially also on public participation).64 Another issue is how, after risks have been appropriately assessed, one can find an agreement on the contents, notwithstanding different preferences and differences in risk aversion and perception.

59 60

Case C 2/90 Commission v Belgium, 1992 ECR I-4431. This reasoning can of course be criticized from an economic perspective since it does not allow for making use of economies of scale in waste treatment and moreover may seriously limit competition. See for a critical analysis Von Wilmowsky (1993) and Doherty (2004). 61 Compare Brunnée (2006). See also Wirth (2007, pp. 4–5). 62 See Wiener (2004) and Zander (2009). 63 See on these issues in further detail Vos (2000). 64 There is overwhelming psychological evidence showing that unfortunately experts seem as prone to overconfidence as lay people, resulting in catastrophic misjudgements by experts as well (see Slovic et al. (2000, pp. 109–10)).


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Increasingly, commentators also ask the question whether, more specifically in issues relating to international trade, the WTO appellate body is the appropriate forum to answer many of these rather complicated technical issues. 3.3

Mobility of Products, Firms and Services

When dealing with the relationship between environmental problems and globalization there are of course also a number of normative issues involved, which to some extent go beyond the economic approach on which I have so far largely relied. One of the consequences of an increased mobility of polluters and pollutants may be that pollution is to a large extent exported to communities who do not reap the benefits from the social activities that cause the pollution. These kinds of issues are in the literature discussed under the heading of ‘environmental justice’.65 Of course these complicated questions do not generate simple answers, but these environmental justice concerns will undoubtedly also (and rightly so) strongly determine the policy agenda concerning the relationship between environmental pollution and globalization. Just a few examples illustrate the relevance of these environmental justice issues. One obvious question is to what extent competition and economies of scale can determine where to locate particular polluting industries. For example, in the north–south dialogue an economic approach may well propose the shipment of hazardous waste to the Sahara desert, where it could probably be stored at lower costs than the dismantling in, say, Europe would cost.66 However, such a race to the bottom to a pollution haven understandably raises important environmental justice concerns that may even trump the economic arguments.67 Similar questions also arise with respect to the application of environmental standards in developing countries. The question arises for example as to whether in the environmental protection–economic development trade-off policy makers should always respect the preferences of the citizens. This would lead to the conclusion that the inhabitants of, say, Togo would, given their higher preference for economic development than for environmental protection (and their lower income), probably not be prepared to pay the same high price for environmental protection as the citizens of, for example, Germany. A strict economic reasoning would thus lead to a differentiation of 65

See generally the contributions in Boyle and Anderson (1996) and Heringa

(2006). 66 67

For a critical approach see Van Der Linde (2000). See generally on this issue Porter (1999).

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environmental standards.68 However, justice notions may well, for example, lead companies that export their activities from Germany to Togo to adopt the same environmental standards in Togo as in Germany. Such a duty to export domestic high-level environmental standards to developing countries is sometimes defended under the heading of corporate social responsibility.69 However, one has to be very careful about accepting these justice arguments at face value, the problem being that they can lead to paternalism whereby developing countries are forced to accept a higher level of environmental protection on the basis of an interpretation of environmental justice in the north. The result may be that prices of products and services in developing countries in the south increase to an extent that does not correspond to their preferences. The crucial question is therefore who defines the precise contents of this environmental justice and whether these justice concerns can eventually set aside preferences of citizens.

4

INFLUENCE OF GLOBALIZATION ON (PRIVATE) ENVIRONMENTAL LAW: POSITIVE ANALYSIS

Again I should stress that the many aspects of the relationship between globalization and environmental pollution addressed in this chapter are strongly related. For reasons of presentation I will now focus on some consequences of globalization for (private) environmental law. With globalization in this particular context I refer both to economic globalization and to the fact that environmental problems have assumed a more global nature, as I discussed in Section 3. Given the focus of this book on the relationship between globalization and private law I will try to focus on some consequences for private environmental law, even though it may be clear that many of these consequences apply to other aspects of environmental law as well. 4.1

Institutional

One undeniable consequence of globalization for environmental law is that a shift has occurred towards more globalized lawmaking. Above I indicated that the transboundary character of the pollution problem merits the search for a level of governance by an institution with authority broad enough to cover the pollution problem to be regulated. That is effectively what to a large extent has

68 69

See Schäfer (2006) and Faure (2008). See on this notion Chapter 9 by Sutherland in this volume as well as Nollkaemper (2006) and Ebbesson (2006).


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happened. In the area of environmental law one can undoubtedly notice a trend towards ‘institutional globalization’ in the sense of a shift of powers towards higher legal orders. For example, in regional organizations like the EU one can notice an increasing shift of competences, more particularly as far as environmental law is concerned, towards the regional level. A recent research calculated that in the Netherlands approximately 66 per cent of Dutch environmental law consists of EU environmental law.70 Hence, one simple consequence of the shift of powers to a higher legal order (resulting from the globalization of environmental problems) is that the national law of the nation state is increasingly affected and influenced by law which emerges from higher legal orders (in Europe, the EU). Generally one can argue that the institutional globalization leads to a multilevel governance (lawmaking at different levels of government). In addition to environmental law generated by the nation state, one increasingly notices lawmaking by: • international organizations, to deal with transboundary pollution problems, for example, the UN for climate change, the International Maritime Organization (IMO) for marine oil pollution and the Nuclear Energy Agency (NEA) of the OECD (Organisation for Economic Cooperation and Development) for nuclear liability • regional organizations like the EU.71 A consequence of the shift of powers to these higher legal orders is that the norms generated at these higher levels subsequently have to be transposed or implemented (of course depending upon the national legal system) in national law, which raises particular problems such as lacking compliance (with international environmental agreements)72 or lacking implementation (in the case of EU law).73 4.2

Procedural

4.2.1 Integration of various legal spheres The shift of powers to the higher legal orders mentioned above, as well as the multi-level governance of environmental problems (referring to the fact that norms are generated at the international, regional – for example, EU – and

70 71

Douma et al. (2007a). See for a detailed account of the meanwhile very complicated and elaborated European environmental law inter alia Jans and Vedder (2008). 72 See on compliance problems Faure and Lefevere (2004). 73 See Macrory (2005, 2006) reprinted in Macrory (2008, pp. 713–34).

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national levels), leads to specific procedural issues and changes in the way traditional environmental law is applied. One can argue that this globalization has changed the way in which the judiciary deals with (private) environmental law.74 One consequence of the fact that standard-setting powers have often been shifted to higher levels (international or regional) is that the norms generated at these higher levels will also influence the adjudication in particular cases under national law.75 Since the national law that the judge is applying in the private legal relationships may often emerge from the international level, questions can arise with respect to the correct transposition or implementation of these norms in national law.76 The traditional tasks of the judge’s judicial review have hence changed to include also the compatibility of national law with international (and European) legal rules.77 This raises important questions with respect to the application and validity of these international norms in private legal relationships. Of course the extent to which these international norms can and do play a role in private legal relationships may well strongly depend upon the nature of the international legal norms and the legal system in which they are applied. However, increasingly one can notice that (in various forms and to various extents) these international norms also affect the adjudication by national judges of private legal relationships. One example is the fact that environmental human rights play an increasingly important role in national environmental law as well. The European Court of Human Rights has repeatedly accepted that particularly serious cases of environmental pollution can constitute a violation of the right to life.78 4.2.2 Effect of international law on private law Within this setting of a multi-level environmental governance, questions also arise not only as to whether national judges are bound by higher legal norms (within the framework of judicial review) but also as to the extent to which

74 75

See (more generally) Brown (2008) and Eckes (2008). See on these changing tasks for the judiciary as a result of ‘the globalization of law’ also Cassese (2005). 76 See on the duty to transpose environmental directives in the EU into national law generally Jans and Vedder (2008, pp. 127–64). 77 See more generally on judicial review of administrative acts in the Member States of the European Union and the United States the contributions in Seerden (2007). 78 The European Court of Human Rights has broadened the application of art. 8 of the European Convention on Human Rights (protecting the right of private life and family life) such that it now encompasses claims that are essentially claims of environmental justice (see for example the case of Mrs. Lopez Ostra v Spain (9 December 1998)).


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individuals (such as victims) can call on these higher legal norms or whether they can be held against particular individuals (polluters). The history of environmental human rights shows that these rights can provide individual victims of environmental pollution with a direct right of action, even if not granted in the national legal system. The general rule in international law was that international legal rules only bind states and not individuals. Therefore the District Court of Bonn could decide that an individual victim (a farmer) of the Chernobyl incident could not sue the Soviet Union for a violation of international law.79 There have been situations, however, where norms of international law have played a role in transboundary liability suits. An example is a suit brought by Dutch market gardeners in the 1970s against the Mines de Potasse d’Alsace (MDPA) for discharging too much salt into the river Rhine, so that they could not make use of the water of the Rhine any more. In a remarkable judgment, the District Court of Rotterdam held that, since no rule of national law could be found to decide this case, it had to turn to unwritten international law and hence it applied the principle that no state can use its territory for activities that cause harm to another state.80 The District Court of Rotterdam thereby explicitly refers to the well-known Trail Smelter Case, which applied the so-called good neighbourliness principle.81 These cases show that the traditional boundaries between international and national environmental law become increasingly blurry, since in various ways the international level clearly influences adjudication at the national level as well.82 4.2.3 Effect on public participation International environmental norms have also clearly affected the administration of environmental justice in national legal systems. One can easily name various international conventions related to access to justice that provide victims in national (member) states increasingly with rights to, for example, challenge administrative decisions that may negatively affect their interests. In this respect one should not merely point to conventions with respect to the

79

See for a discussion of this decision of the Civil Court of First Instance of Bonn of 29 September 1987 Rest (1997, pp. 116–22) and Nollkaemper (1998, pp. 3–4). 80 District Court of Rotterdam, Nederlandse Jurisprudentie 1979, 113, Netherlands Yearbook of International Law, 1980, volume 11, 326, and District Court of Rotterdam, 16 December 1983, Nederlandse Jurisprudentie 1984, 341, Netherlands Yearbook of International Law, 1984, volume 15, 471. 81 For a discussion of this Trail Smelter Arbitration see Bratspies and Miller (2006) and Sands (2003, pp. 241–2 and pp. 318–19). 82 See Boyle (2007).

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transboundary environmental impact assessment83 but also to the Aarhus Convention with respect to public participation.84 Interestingly, some commentators point to the fact that the implementation of some international norms and decisions (more particularly following from the WTO appellate body) may endanger national rights with respect to public participation. Whereas on the basis of national (in this case US) law victims would enjoy broad rights of public participation, the (international) obligation to comply with a decision of an international body can in some instances lead to the duty of the state to implement these decisions, thereby infringing upon rights of public participation which national law would normally grant the citizens.85 4.2.4 Tendency toward consensual solutions? Another interesting issue of a procedural nature is that one can increasingly notice a tendency towards bargaining and alternative dispute resolution as a solution to environmental conflicts. For example, with respect to the rivers Rhine and Scheldt, international commissions have recently been given important tasks to improve the quality of the water in those transboundary rivers on the basis of a procedure of consultation and large stakeholder involvement.86 As far as the river Rhine is concerned, this consensual approach had a positive result in the sense that the target of getting the salmon back into the river Rhine was achieved.87 Also at the international level one can notice that transboundary environmental disputes are almost never solved by the judiciary. An environmental chamber of the International Court of Justice, instituted in 1993, was never used for that purpose and was therefore not reinstituted from 2006.88 The deci83 Such as the Convention on Environmental Impact Assessment in a Transboundary Context (1991), referred to as the Espoo Convention. For a discussion see Jacobs (2008). 84 The UNECE Aarhus Convention regulates access to environmental information, public participation in decision making in environmental matters and access to justice in environmental matters. 85 So Wirth (2007, pp. 5–6). 86 See for a description of these procedures Peeters (2008, pp. 192–224). 87 Internationale Kommission zum Schutz des Rheins (IKSR), Stromaufwärts. Bilanz Aktionsprogramm Rheins, Koblenz, 2003, 31 pp., http://www.iksr.org/fileadmin/user_upload/Dokumente/apr_iksr_dt_foto.pdf. 88 On the website of the ICJ (consulted on 11 December 2007) one can read ‘With respect to the formation of a chamber pursuant to article 26, par. 1, of the statute, it should be noted that, in 1993, the court created a Chamber for Environmental Matters, which was periodically reconstituted until 2006. In the chambers thirteen years of existence, however, no state ever requested that a case be dealt with by it. The court consequently decided in 2006 not to hold elections for a bench for the said chamber.’


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sions taken by the International Court of Justice (ICJ) and the International Tribunal for the Law of the Sea (ITLOS) also show the reluctance of the judges to come to firm decisions providing a final solution to the entitlements of both parties. In many cases, the judges remarkably provide a few indications on how to resolve the dispute and then send the parties back to the negotiation table.89 Hence, the shift towards a higher legal order and the globalization of environmental problems has apparently also led to a different role of the judiciary in resolving (transboundary) environmental disputes: rather than providing firm and final entitlements (as is often the case in national environmental disputes) in the transboundary context, the judiciary seems more cautious and tends to stimulate bargaining between parties and consensual solutions.90 4.3

Contents

The question one could of course ask is whether the globalization of lawmaking in the environmental area has also led to a convergence in the sense of a harmonization of environmental law. Centralization in the sense of shifting powers to a higher legal order should indeed not necessarily be equated with harmonization. Theoretically the central authority could also decide to issue differentiated environmental standards that take into account, for example, differing local environmental conditions.91 However, the shift to a higher legal order (resulting from the globalization of environmental pollution) has in almost all cases led to a harmonization of lawmaking as well. Centralization has therefore in this environmental area often in practice meant harmonization. Of course it may depend upon the particular area and the international legal norm concerned whether there still is room for differentiation. However, in most cases, whether the norm

89 See for example the so-called Southern Bluefin Tuna dispute which was dealt with by the International Tribunal for the Law of the Sea (ITLOS) which prescribed in a provisional measure inter alia ‘Australia, Japan and New Zealand should resume negotiations without delay with a view to reaching agreements on measures for the conservation and management of Southern Bluefin Tuna’ (for details see Romano, 2000, pp. 207–8). 90 Also in the Gabcikovo–Nagymaros dispute the International Court of Justice held that the parties should ‘find an agreed solution that takes account of the objectives of the treaty, which must be pursued in a joint and integrated way, as well as the norms of international environmental law and the principles of the law of international water courses’ (case concerning the Gabcikovo–Nagymaros project (1997) ICJ Reports 7, para. 140–41). For a discussion see Sands (2003, pp. 469–77) and Romano (2000, pp. 246–60). 91 See inter alia Arcuri (2001).

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emanates from an international organization (such as the UN, IMO,92 NEA93) or from a regional one (EU) there may be some scope left for differentiation.94 However, especially at the EU level, one increasingly gets the impression that the scope for differentiation is relatively limited and that the policy objective is to strive for a convergence of norms.95 Even though convergence through harmonization of legal rules may often be the policy objective, that does of course not mean that that objective can always be realized. In many cases European directives, for example, will provide a framework that has to be implemented in national Member States. Given the large differences in legal cultures of the Member States (and also in legal language), even one single text may lead to different interpretations and to differentiation between Member States.96

5

INFLUENCE OF GLOBALIZATION ON (PRIVATE) ENVIRONMENTAL LAW: NORMATIVE ANALYSIS

I will now address the same issues that were discussed from a positive perspective in Section 4 in a more normative analysis. Again, the aim is not to provide a final answer on how to solve the challenges identified in Section 4, but rather to provide a framework within which these questions could be addressed. To an important extent this will again rely on the economic analysis of law, although some other approaches may be used as well. 5.1

Institutional

5.1.1 Lawmaking beyond the nation state In Section 4 we addressed a general feature of the relationship between

92 93 94

International Maritime Organization. Nuclear Energy Agency (of the OECD). For example the international conventions with respect to the civil liability for the operator of a nuclear power plant provide the broad scope of the financial compensation but leave some freedom to the states to determine (within particular limits) the precise amounts. For details see Faure and Van den Borre (2008, pp. 219–87). 95 However, also there one should be careful: in the early years European environmental policy was undoubtedly striving for a harmonization of national laws in order to avoid ‘distortions of competition’ (see Jans and Vedder, 2008, pp. 4–5). However, nowadays unilateral measures by Member States to protect their own environment remain, under strict conditions, still a possibility (see Van Calster, 2002, p. 484). 96 See for a particularly strong argument that harmonization and convergence of legal rules within Europe would be impossible Legrand (2008, pp. 13–40).


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globalization and environmental law, namely that powers of lawmaking are increasingly shifted, in the words of Smits, ‘beyond the nation state’.97 One can notice shifts to international organizations (like the UN, IMO or NEA, but many others could be mentioned as well) or to regional organizations such as the EU. It is no surprise that the further away from the citizens concerned the decision making takes place, the greater the risk is that a countervailing power, taking into account the interests of the citizens, may be lacking. The literature in many domains, but also in the environmental area, has held that the shift of powers to higher legal orders (in other words centralization) may lead to a few of the questions central to this entire volume: • Legitimacy: to what extent do international organizations have democratic legitimacy for their decisions?98 That problem will more particularly emerge when environmental standards are set not by international organizations but by private (often industry related) organizations as well. • Accountability: to what extent can politicians or bureaucrats that take decisions on environmental standards in international or regional organizations be held accountable for their decisions, for example by parliaments or other institutions representing the voice of the citizens?99 • Transparency: to what extent does decision making at the international or regional level take place in a transparent way, so that citizens can verify how a particular decision concerning an environmental standard was taken, which interests have played a role and why the decision was made to weigh the interests involved in a particular way, leading to the environmental standard concerned? 5.1.2 Victim and environmental protection doubtful Many examples have been advanced in the literature showing that in the environmental area international organizations often take decisions where the legitimacy is doubtful, accountability is lacking and a transparency on how the decision was made is largely absent. Examples can be found in the area of the liability of the licensee of a nuclear power plant for a nuclear accident and the liability of the tanker owner for marine oil pollution. In both cases, international organizations (the IMO in the maritime area; the NEA and the

97 See Chapter 1 by Smits in this volume and see also Sand (2006). See also Hooghe and Marks (2003). See on this concept also Jansen and Michaels (2008). 98 See for an analysis of the legitimacy deficit in the EU as well as for methods to increase the democratic accountability in case of multi-level (environmental) regulation Follesdal (2008). 99 See generally on accountability (of legal institutions) Bovens (2007).

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International Atomic Energy Agency (IAEA) in the nuclear field) created international conventions in the 1960s which are largely beneficial for the particular industries: liability is strict, channelled to the operator or the tanker owner (thus excluding the liability of other parties potentially contributing to the risk).100 Most importantly: the liability is limited by imposing a financial cap on the damages due by the potential injurer. This deviates from the normal rules of tort law and can thus constitute an important benefit (in fact a subsidy) to the industry concerned. Legal commentators have therefore held that in both areas treaties were created that largely benefited the interests of industry and only to a very limited extent addressed environmental concerns or concerns of victims.101 The reason for this imbalance has equally been indicated in the literature: in the lawmaking process within these international organizations there was (at least at the time when they were being created) a lack of a countervailing power representing the interests, for example, of victims or of the environment as such. Given the superior expertise of the regulated industries involved (the nuclear and the shipping industry respectively), it is clear that they could easily influence (via their national representatives, present at the negotiation table) the outcome of the treaties. It is striking in that respect that the outcome of the negotiations concerning the nuclear liability conventions is even more favourable for industry than the outcome in the civil liability convention with respect to marine oil pollution (regulating the liability of tanker owners). In the nuclear liability field, a countervailing power (for example, representing potential victims or non-nuclearized states) was absent, whereas in the maritime field the interests of the various states concerned do not all go in the same direction, since some states may be primarily maritime states (thus having a large interest in protecting the maritime industry) whereas others may be mostly the coastal states potentially affected by marine pollution. Moreover, in the maritime area not only the interest of the maritime industry is involved but also that of the oil industry, to which the maritime industry would like to shift part of the responsibility.102 It is also striking that, for example, where decisions concerning the liability in the same areas were not taken by international organizations but at a national level, the liability of the nuclear operator and the tanker owner respectively was surprisingly higher. A typical example in that respect is of course the case of the US. The US was always actively involved in negotiating the 100 See for the nuclear accidents Trebilcock and Winter (1997) and for marine oil pollution Boyd (2002, 2003), Wang (2007), Verheij (2007) and Hendrickx (2007). 101 See the sources quoted in the previous footnote. 102 See on this struggle between the different interests in the coming into being of the maritime liability conventions Wang (2007, pp. 197–241).


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international conventions, more particularly because this would serve its interests.103 Originally, this also provided a limitation on the liability of the operator of the nuclear power plant, but later the regime changed, as a result of which the Price-Anderson Act is much more favourable today than the international regime: substantially higher amounts for compensation are generated (roughly ten billion US dollars in the US regime versus one billion in the international regime) and public funding in the US regime is totally excluded.104 A similar story could be told as far as the liability for the oil pollution risk is concerned: instead of joining the international conventions, the US created the Oil Pollution Act which, again, is much more favourable (in the sense of no limits on the liability and higher amounts of compensation) than the international regime.105 5.1.3 Green treaties or protectionism? These examples show (and many others could be provided) that shifting powers to higher legal orders may lead to problems of accountability and transparency, thus allowing a greater influence of industrial interests, leading to a lower quality environmental standard. However, in some cases the reverse may be true, in the sense that industrial lobbying may lead to the imposition of inefficiently stringent environmental standards. That is the case more particularly when standards are used to create barriers to entry, thus limiting competition on the market. Typical examples of this protectionism can be found in the EU, where industry within ‘green’ Member States may typically lobby in favour of the imposition of stringent (but sometimes inefficient) standards at the EU level. The reason is that they already have to comply with stringent domestic environmental standards and may thus have an interest in imposing those at the EU-wide level as well. It may give the opportunity to erect barriers to entry, for example to southern competitors who are probably not able (and may not need) these stringent environmental standards.106 Similar problems may also arise at the national level. In most legal systems the executive has the treaty-making power. A shift to a higher level of governance (more particularly to international organizations) can thus at the national level lead to a more limited role of parliaments. In some cases they merely have the power to confirm or reject the treaty negotiated by the executive but not to

103 The US strongly lobbied in favour of the Paris Convention; at the same time the US created for the nuclear risk in 1957 the Price-Anderson Act (see for details Van den Borre (2007)). 104 See Faure and Van den Borre (2008, pp. 219–87). 105 Wang (2007, pp. 197–241). 106 See Faure (1998, pp. 169–75).

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influence its contents.107 This general problem of the lack of democratic legitimacy of international lawmaking has of course often been mentioned and, as was just shown, plays a role in environmental cases as well.108 5.1.4 Limited public participation The current shift of powers to the higher legal order may lead to limited public participation for the citizens concerned in various ways. First, international organizations may not have involvement of the civil society (like environmental NGOs) in the decision-making process to the same extent as would be the case at the national level. In this respect the situation has of course largely changed compared with the 1960s, when the conventions concerning nuclear liability and marine oil pollution (referred to above) were drafted. Many international organizations now allow for a large stakeholder involvement in the decision-making process,109 but important differences still exist between the various international regimes concerned. Second, the influence of civil society is as such, as a result of the shift to a higher legal order, also limited for the simple reason that there is less to decide at the local level. One notices that, for example, when within national Member States decisions have to be taken on environmental standards, the debate often ends with the statement by the executive that these are international obligations that have to be implemented at the national (local) level. This limits the room for democratic control by parliament, but also for public participation or NGO involvement when setting these standards at the local level. To an important extent, the shift of powers to the higher legal order (even though necessary as far as transboundary pollution is concerned) may thus not be totally unproblematic. To the extent that there is a lack of transparency and accountability, industrial interest groups may have more possibilities for successful lobbying and it is easier (given the lack of transparency) for politicians to provide what the interest groups demand. This may inevitably have a negative consequence for the quality of environmental standards.

107 See on these challenges to accountability and democracy resulting from multi-level regulation Wessel and Wouters (2008). 108 Also in US legal doctrine the dominant position of the president in negotiating international treaties and the subordinate function of Congress has been criticized (see Wirth, 2004, p. 399). 109 This increasing attention to stakeholder involvement and to the role of NGOs corresponds with a shift in the way (environmental) treaties are viewed, which is characterized as a shift from the sovereignty approach towards a managerial approach. See in this respect Chayes and Chayes (1995). This is a shift that one can also increasingly notice in international environmental agreements. See Faure and Lefevere (2004, pp. 163–80).


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5.1.5 Shift problematic It seems as if this creates a dilemma: the normative answer to these problems is obviously not to shift back powers to local institutions. Indeed, above I have indicated that to the extent that environmental problems cross national borders it makes absolute sense to shift powers to a higher legal order.110 The wellknown saying ‘global problems need global solutions’ makes some sense in this respect. However, it was equally indicated that for a variety of reasons (mostly because it serves the interests of the industry involved and perhaps some bureaucrats in regional or international organizations as well) more powers are shifted to the international level than would be warranted on economic grounds. This is more particularly the case when powers are shifted to a higher level for pollution problems whose consequences are confined within the borders of the Member States. The race to the bottom and the ‘harmonization of marketing conditions’ are then advanced as reasons for shifting powers to higher legal orders, but I indicated that these reasons are both theoretically and empirically very weak.111 That may be a reason to be slightly more careful with shifting lawmaking powers to higher levels when transboundary pollution is not at stake. Given the danger of a lack of transparency and a strong influence of industrial interest groups at the international level, it may constitute yet another argument in favour of decentralization where centralization is not absolutely necessary on economic grounds.112 But even in cases where the transboundary character of the pollution problems merits a shift to a higher legal order, problems may still arise, especially when the civil society has not been involved in the decision making. This is more particularly a problem since, while decision making can take place at a higher legal order, implementation has ultimately to take place at the local level (following yet another popular one-liner ‘think globally, act locally’). 5.1.6 Possible remedies There may be obvious remedies to these problems (although not simple to implement in practice): • One remedy would consist of seriously rethinking the shift of powers to higher legal orders and limiting this to the cases where centralization is needed on economic grounds (more particularly when there is a transboundary externality or empirical proof of a race to the bottom). 110 111 112

volume.

See supra Section 3.1. See supra 3.2. A similar argument is also made by Van den Bergh in Chapter 3 of this

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• Second, one could work towards increased transparency at the international level as well.113 This would in public choice terms increase the costs of lobbying by interest groups. If the public at large can (as a result of increased transparency) notice that politicians are in fact favouring interest groups, lobbying becomes more difficult and there is a greater likelihood that environmental standards are set in the public interest. • Third, it is obvious that the involvement of the civil society and public participation in general (also at the international level) can increase the quality of the decision making. By allowing in environmental NGOs with strong commitment and expertise in the environmental field, a serious counterweight against lobbying by industry can be provided. These normative solutions are obviously not new. One can now increasingly notice that in more recent environmental treaty regimes there is indeed more transparency and a greater stakeholder involvement. It is the first remedy, implying that when pollution problems do not cross national borders there may be strong arguments in favour of decentralization rather than centralization, that seems to be the most difficult one to be implemented in practice. This may, to some extent, be due to the fact that bureaucrats in international organizations (and regional ones like the EU) of course also have a strong interest in continuing the shift of powers to higher legal orders since it confirms their authority and power. To a large extent the fact that more centralization takes place than is strictly needed (for example, in Europe) can be explained by the strong powers of the bureaucracy involved. 5.2

Procedural

5.2.1 Distinction international–national becomes blurry Above, we have already indicated that one consequence of the ‘globalization of law’ is that norms set by regional or international organizations increasingly play a role in private legal disputes in national states as well. Moreover, the national judge will often be called to examine whether national law corresponds with these supranational norms.114 Hence, also the contents of judicial review have changed. There seems to be an interesting shift of paradigm in the relationship between national and international law in the sense that the old dogma that international law is only binding upon the national states (in a broad sense) is changing as well. Above we referred to the decision of the District Court of 113 114

See Prechal and de Leeuw (2007, 2008). See on these issues also Whytock (2007) who refers to the governance of transnational activity by domestic courts as ‘transnational judicial governance’.


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Bonn, refusing to apply international law in a dispute between a German farmer and the Soviet Union. However, the District Court of Rotterdam had no difficulty in calling on international law in a private legal dispute between market gardeners in the Netherlands and the Alsacian salt mines in France. Perhaps this constitutes a paradigm shift whereby the worlds of national and international law are no longer so strongly separated.115 The result would be that international law would not only play a role after appropriate transposition in member states, but that under certain circumstances citizens may also directly call on (self-execution) provisions in international legal treaties.116 5.2.2 Successful bargaining? An interesting tendency described above is that international disputes are increasingly settled through bargaining and negotiations rather than by allocating firm and definite entitlements. There may be a strong economic logic for this: the judiciary may well lack the necessary information to determine entitlements in a final way. Moreover, there is a likelihood that when entitlements are wrongly allocated, negotiations will (as a result of strategic behaviour by states) not be possible and inefficiencies may emerge. Several examples were provided above showing that consensual solutions are increasingly used to solve international disputes. Also the judiciary seems in many cases to send the parties back to the negotiation table, merely providing them with some indications on how to solve the dispute. That may thus be a strategy to facilitate efficient bargaining.117 At first blush, there seems to be some empirical evidence that these consensual solutions are, at least as far as the resolution of transboundary environmental pollution is concerned, effective.118 Interestingly, there is some empirical evidence that the consensual solution chosen in the river Rhine case (through the Rhine Commission) generated better ecological results than a regulatory (command and control) approach followed in the Great Lakes case in the US.119 However, one still has to be careful: the mere fact that there now are a few examples where the consensual solution may have worked should not immediately lead to a generalization of conclusions. One problem that still remains

115 116

That is a claim inter alia made by Nollkaemper (2008). For a more detailed account of these developments see Boyle (2006, p. 559) and Nollkaemper (1998, pp. 3–11). 117 Leading to efficient solutions as proposed by Coase (1960, pp. 1–44). See also Ayres and Talley (1995), Farrell (1987) and Johnston (1995). 118 See Peeters (2008, pp. 192–224). 119 Verwey (2000, pp. 1007–54).

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is that these ‘softer’ consensual solutions may lack enforcement teeth in case of non-compliance.120 5.3

Contents: Differentiation of Standards

The policy logic so far has always been that, since transboundary environmental problems require transboundary solutions, a centralization of decision making is needed. Moreover, the centralization has in practice almost always automatically been equated with a harmonization of environmental standards. This leads to the normative question regarding to what extent a total convergence of environmental standards is indeed desirable. There is an important strand of law and economics literature121 holding that (in the absence of transboundary externalities and empirical evidence of a race to the bottom) there should still be room for divergence. The arguments in favour of divergence, in the environmental field implying a differentiation of environmental standards, can be based on a variety of grounds. First of all, with respect to environmental problems, location specific circumstances are always different. Hence, there can be a strong technical reason to adapt standards to varying location specific circumstances. Second, the legal cultures are also strongly divergent. Many have, moreover, indicated that even if one were to harmonize law formally this would not necessarily lead to a convergence in practice. The reason is that even a similar wording (for example, imposed by a European directive) may be differently interpreted in different (member) states, taking into account their own legal culture.122 Moreover, harmonization of law in practice often means that particular standards representing the legal cultural values of a majority (or of the strongest players) will be imposed. In practice, this may mean that more particularly in a globalizing world harmonization would not respect differing values in the multicultural society. On the contrary, many legal and economic scholars have pointed to the advantages of differentiation. This could lead to competition between legal orders. This competition can have the advantage that learning processes occur whereby legislators can benefit from various experiences in different legal systems.123 That benefit would be lost if the monopoly of one harmonized

120

See on potential problems with negotiated (environmental) agreements generally Johnston (2000) and Grimeaud (2004). 121 Well represented and summarized in this volume in Chapter 3 by Roger van den Bergh. 122 See in this respect also Van Dam (2007, pp. 53–76). 123 This point is strongly made in many publications by Van den Bergh. See inter alia Van den Bergh (2000) and Chapter 3 by Van den Bergh in this volume.


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legal system were imposed. A similar argument in favour of divergence has been strongly presented by Smits in many publications. He argues in favour of diversity, especially in the area of private law, maintaining that parties should (more particularly in contract law) have the possibility to choose from a variety of legal solutions.124 The conclusion is therefore straightforward: from this economic but also legal perspective globalization of law should not necessarily lead to a globalization of (environmental) standards but could lead to a differentiation, taking into account differing preferences, cultures and location specific circumstances.

6

CONTRIBUTION OF ENVIRONMENTAL LAW TO THE GLOBALIZATION DEBATE

6.1

Environmental Issues that Shape the Globalization Debate

As a summary, and by way of conclusion, an attempt can be made to indicate how environmental problems contribute to the debate on the influence of globalization on private law. One can certainly argue that environmental problems have played an important role in that debate, since many of the legal issues related to globalization more particularly play a role with regard to environmental problems. One example is the issue of multi-level governance, that is, the question of at what level of governance decisions should be taken and how these various levels mutually interact. Given the inherent transboundary character of environmental problems, environmental issues have certainly influenced the debate on the optimal level of decision making. Another area where environmental issues have shaped the debate is the well-known question (that has led to an abundant literature) of how free trade can be reconciled with environmental concerns. 6.2

Influence of Globalization of Environmental Private Law

It is also not difficult to state that globalization has had a clear influence on private legal relationships, including in the environmental area. One can for example point to international conventions (like Aarhus) that promote environmental rights, access to justice and information, and public participation. These are undoubtedly examples of international conventions that have had a

124

Smits (1998, p. 328).

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positive influence on public participation. To the extent that these international conventions are regarded as an element of globalization, this could be judged a positive result. On the other hand, I have equally indicated that many developments resulting from this globalization (more particularly the shift to higher legal orders) undoubtedly also have a negative effect as far as the involvement of civil society is concerned, since decision making takes place further away from the citizens concerned. The role of national parliaments or local authorities is then often reduced to implementing international obligations. Here, one can undoubtedly argue that the increasing shift to higher legal orders (resulting from globalization) has led to problems of accountability, transparency and democratic legitimacy of (environmental) decision making. Another aspect that environmentalists would undoubtedly consider a negative consequence of globalization is that local (state) laws protecting the environment can in some cases be set aside for violating rules of free trade. It is a well-known criticism of WTO law by anti-globalists. Also, the interpretation of the US Commerce Clause by the Supreme Court shows that trade concerns often win over environmental concerns. Only the case law of the European Court of Justice seems to give more room to environmental concerns, even when this limits free trade in a discriminatory way. However, this case law certainly does not go undisputed. 6.3

Many Unresolved Issues…

A brief look at the way in which globalization and environmental legal issues interrelate shows that there are many unresolved issues that need further attention. In that sense the environmental issues can help to shape the research agenda. To mention just a few: • There is undoubtedly a need to increase the transparency of decision making and the accountability of international institutions responsible for drafting international environmental standards. Important steps have already been taken in this respect (more particularly in the climate change regime), but a lot still remains to be improved. • More generally, the accountability and democratic legitimacy of foreign policy affecting environmental issues needs to be increased. The involvement of stakeholders and parliament at an early stage of the decision making needs to be improved. • The level of the decision making in a multi-level governance setting needs to be rethought: there seems to be too large a shift of powers to the regional/international level, including in cases where this may not be strictly needed. Possibilities of combining centralization (where this is


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needed) on the one hand with the setting of differentiated norms on the other hand also need to be further explored. • In order to increase the respect for the rule of law and the accountability of decision-makers at the international level, access to justice, public participation and the involvement of civil society could be further improved. • The framework for striking the balance between free trade and environmental concerns also merits further research. This is particularly the case when there is scientific uncertainty, which raises the question of who shall take decisions on the extent to which environmental concerns can trump free trade. The question also arises regarding to what extent these decisions can/should only be based on scientific evidence and to what extent public participation is needed as well. 6.4

… Need Multidisciplinary Research!

It may be clear that answering some of these questions goes beyond the scope of legal research and may need the involvement of other disciplines. For example: • Economists may be needed to assist in determining how to set efficient standards and to determine what is (within a multi-level governance setting) an optimal level of decision making. • Social scientists are needed to assist in explaining how an involvement of civil society, public participation and better access to justice can be guaranteed, but also how standards can be set in a multicultural setting, respecting differences in preferences and (legal) cultures. • Political scientists have important insights into how to provide a countervailing power to industrial lobbying, how the transparency of the decision-making processes at the international level can be increased, and in general how decision making concerning environmental standards can be done in the public interest. In sum, in order to answer some of the challenges posed by the relationship between globalization and environmental problems, undoubtedly a multidisciplinary approach is needed.

REFERENCES Arcuri, A. (2001), ‘Controlling Environmental Risk in Europe: The Complementary Role of an EC Environmental Liability Regime’, Tijdschrift voor Milieuaansprakelijkheid (Environmental Liability Review), pp. 37 and following.

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13. The rule of law and judicial activism: obstacles for shaping the law to meet the demands of a civilized society, particularly in relation to climate change? Jaap Spier* There was a time when it was thought almost indecent to suggest that judges make law – they only declare it. Those with a taste for fairy tales seem to have thought that in some Aladdin’s cave there is hidden the Common Law in all its spendour and that on a judge’s appointment there descends on him knowledge of the magic words Open Sesame. Bad decisions are given when the judge has muddled the pass word and the wrong door opens. But we don’t believe in fairy tales any more.1 ‘It [the rule of law] may well have become just another of those self-congratulatory rhetorical devices that grace the public utterances of Anglo-American politicians. No intellectual effort need therefore be wasted on this bit of ruling-class chatter.’2 In theory … one could construct a model of judicial activism which accorded top judges … complete liberty to decide what they wanted to decide. … At the other end of the spectrum one could imagine a model which gives judges no leeway whatsoever to use their own discretion and which effectively requires them to serve as electronic calculators … Between these two extremes – a lottery machine on the one hand and a calculator on the other – there are innumerable intermediate positions. What differentiates them is the extent to which they reflect a preparedness on the part of the judges to expound – and justify – their personal view of the law.3

*

Advocate-General in the Supreme Court of the Netherlands, honorary Professor at the University of Maastricht. 1 Reid (1972, p. 22). 2 Judih Shklar, quoted by Lord Bingham of Cornhill in a speech given at the Faculty of Law, University of Cambridge, on 16 November 2006, www.cpl.cam.uk/ past_activities/ the_rule_of_law_text_transript.php. 3 Dickson (2007, pp. 369–70). 426

The rule of law and judicial activism

1

427

THE NEMESIS OF CLIMATE CHANGE

At the conference at Stellenbosch in December 2008, I had the honour to talk about the evil climate change is going to cause if we stick to business as usual. My assessment was – and still is – that there is literally no hope that politicians and enterprises are going to change course in due time.4 This was obvious – if one is prepared to read newspapers, say once a month – and it is has become more and more clear. True, the topic is on the agenda. Often rather vague promises to cut emissions after 2020 or preferably as early as 2050 are launched. They are of little, if any, avail. First, quite a lot must be done right now. And those who steer the wheel these days will no longer be in power in 2050; not even in 2020. So, how on earth can they decide what is going to happen then? Western leaders harp more and more on the tune that they are prepared to take bold steps as long as developing countries will do the same. The latter are reluctant to do so. Understandably. After all, they did not cause the problem. Even today their emissions per capita are considerably less than those of most western countries. And, last but not least, a (often significant) part of their population is appallingly poor. The leaders of developing countries refuse to sacrifice their poor, and they are right. But what then about the western claim that ‘different speeds’ would create a competitive advantage for the developing countries? The argument is not necessarily invalid, but not sincere. It overlooks the fact that the western world has benefited from a competitive advantage for decades because of its industrial development in times of low oil prices, not to speak of the unjustified gains of its colonial past and other evil done to major parts of Asia and Africa.5

2

A CALL FOR LEGAL ACTIVISM IN THE FIELD OF CLIMATE CHANGE?

A legal approach might serve as a – and arguably is the most promising, if not only – way to get things on the move. Yet, the argument harvests a storm of fierce criticism: that sounds like a call for judicial activism … Could one think of anything worse?

4 It is happily not entirely trouble and affliction. A very few states (such as Sweden; see The Guardian 8 February 2006) and some states of the US (such as California, Texas, Florida and Maine; see an interview with Lester Brown, Green Futures, July 2008 p. 31) have very ambitious plans in the much shorter term. The EU has adopted plans which aim to reduce emissions quite considerably in the mid-long and even more in the long term. Promising as this may be, it is too late and too little. 5 See, inter alia Farber (2008, pp. 377 ff.).

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Some learned senior judges strongly fulminate against judicial activism. The Australian High Court Justice Dyson Heydon may serve as an example. With apparent agreement he quotes Lord Camden in a case from 1765 (Entick v Carrington): ‘If it is law, it will be found in our books. If it is not to be found there, it is no law.’ Or, in his own words: ‘Judges are appointed to administer the law, not elected to change or undermine it.’6 Further down, he writes: Even in the short life of judicial activism in this country [Australia], there have been extraordinary instances of the freaks of fortune and the instability of judicial grandeur, and many brave new developments have already become entombed in the urns and sepulchres of mortality.7

3

JUDICIAL ACTIVISM: A BRIEF INTRODUCTION The term judicial activism begs more questions than it answers.8

Before addressing this intriguing topic, a few words about the ambiguous meaning of judicial activism.9 According to the current Chief Justice of New Zealand (Dame Sian Elias), there is no ‘working definition’.10 In Dickson’s view, judicial activism means ‘an approach to adjudication which seeks to locate the particular decision in the context of a wider legal framework, pointing out what the consequences of the decision are likely to be for fact situations which are different from those currently before the court’.11 Devlin describes ‘activist lawmaking’ as ‘the business of keeping pace with change in the consensus’.12

6 That seemingly is also the view of the brilliant conservative Justice Scalia. According to the Boston Globe (29 September 2004) at a talk at Harvard’s Kennedy School of Government, he denied that the Constitution is a living document: ‘It is blindingly clear that judges have no better capacity than the rest of us to determine what is moral.’A similar point was made by Jim Allen, quoted by Harris (2007, p. 288). I cannot escape from the impression that they overestimate many members of society and underestimate judges (of the superior courts). 7 www.://quadrant.org.au/php/article_view.php?article_id=277. 8 Roach (2007, p. 72). 9 See about a related topic (the rule of law) Lord Bingham’s eloquent and well considered ‘The Rule of Law’, o.c.; Kniec (2004, pp. 1463 ff.). Mark Tushnet (2007, p. 415) observes that the term is ‘irresolubly ambiguous’; on p. 417 he mentions qualifications by others. Harris (2007, p. 273) suggests the more neutral term ‘judicial creativity’. 10 Quoted by Harris (2007, p. 298). 11 O.c. p. 370. 12 Quoted by Corder (2007, p. 323).


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Posner distinguishes between two interpretations: enlarging judicial power at the expense of the power of the other branches of government and ‘the legalist conceit that this technique for deciding cases minimizes judicial power by transferring much of that power back, as it were, to the officials’. He rightly criticizes the ‘legalist’ view. Literal interpretation would often have awkward results.13 I tend to believe that it is not necessarily either of the two. Whether judges like it or not,14 they often make – in a sense – political choices,15 but rarely ‘at the expense of the government’. Those choices have nothing to do with the views of a political party; they rarely interfere in the political debate or touch upon highly political issues. But judges often have an option to give a verdict for the plaintiff or the defendant in cases where the arguments for both views are more or less in balance. They may (and often will) try to hide that by legal techniques, vague or pertinent phraseology,16 but the fact remains that a different choice would have been possible. Even if the choice is just about ‘equity’ (which party ‘deserves’ to win), it remains a choice. Others, such as the learned Justice Heydon, have described ‘judicial activism’ as ‘using judicial power for a purpose other than for which it was granted’.17 That occasionally happens, and as a general rule it may well be wrong. But not necessarily so, as I hope to show below. Before going into the heart of the matter, it may be useful to point out that recent research reveals that, contrary to what one might expect, conservative judges may well be more activist than liberal judges are.18 Not surprisingly, so

13 14

Posner (2008, p. 287). So, with due respect, I dare to challenge Posner’s view that ‘Acknowledging that they were making political choices would also undermine their [i.e.: the judges’] confidence in the soundness of their decisions’ (p. 289). 15 See also McHugh’s speech at the Australian Bar Association Conference, London, 5 July 1998: McHugh (1998), www.hcourt.gov.au/speeches/ mchughj_london1.htm. This happens, e.g., in cases where several conflicting (human) rights are at stake; see about this important topic many contributions in Brems (2008). The mere fact that under the ECHR national states (and courts) often have a wide margin of appreciation is telling; see e.g. Ducoulombier (2008, pp. 217 ff.). 16 See e.g. Van den Brink (2008, p. 40). 17 O.c. 18 See Ringhand (2007), http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 765445. In an editorial ‘Psst … Justice Scalia … You Know, You’re an Activist Judge, Too’, the New York Times (19 April 2005) points out that Justice Scalia ‘has been more than willing to ignore the Constitution’s plain language, and has a knack for coming out on the conservative side in cases with an ideological bent. The conservative partisans leading the war on activist judges are just as inconsistent: they like judicial activism just fine when it advances their own agendas.’ It adds that the conservative majority regularly overturns laws passed by Congress. According to Polak (member of

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called ‘activist judgments’ are criticized by advocates of both the left and the right wing.19 Finally, one should bear in mind that ‘activists’ can avoid criticism by playing the card of belonging to the legalist camp.20 So, we should not be fixated on the way judgments are phrased or ‘sold’.

4

A CLOSER LOOK

Over the centuries, the law (legislation and case law alike) has developed. The former President of the Belgian Supreme Court Verougstraete put it as follows:21 L’apport de la Cour dans l’évolution et l’harmonisation du droit est plus que jamais à l’avant-plan des préoccupations de la Cour. Ce n’est pas qu’elle rêve d’une ‘justocratie’ ou d’un ‘gouvernement des juges’. Mais les circonstances ont forcé la Cour à être audacieuse et par ailleurs l’émulation d’autres institutions ne peut être sousestimée. … Une complexité excessive des normes légales est le résultat d’efforts héroïques de donner une réponse aux besoins très multiples et contradictoires des individus, mais ces efforts aboutissent paradoxalement à un déficit démocratique.

For the adepts of Montesquieu’s paradigm that judges should be ‘la bouche de la loi, des êtres inanimés qui n’en peuvent modérer ni la force, ni la rigeur’22 (or, as Lasser put it in relation to ‘all that contemporary American judicial … debate’ which ‘also contains remarkably large doses of vehemently anti-policy rhetoric, … this anti-policy stance often goes hand in hand with an understanding of the judicial role which valorizes the passive, and mechanical judicial application of legal norms’)23 judicial activism obviously is a nightmare. But times have changed. So has the prevailing view. Already Portalis – one of the drafters of the French Civil Code of 1804 – acknowledged that legislathe judiciary pillar of the Dutch Council of State) it depends on the case whether an active or a more ‘defensive’ approach is preferable (2008, p. 1091). 19 Roach (2007, pp. 73–5). 20 Roach (2007, p. 28). 21 Verougstraete (2008, pp. 221 and 222). 22 Montesquieu (1758). 23 Lasser (2007, p. 72). Strikingly, Lasser adds that ‘an interesting and unmistakable pattern emerges: every time – with only one minor exception – that the [US Supreme] Court (or any of its members) used the term “policy” to describe how a fellow judge or jurist justified his proposed interpretation, it did so to dismiss that argument. “Policy”-based interpretation … turns out to be inappropriate in the American judicial context’ (p. 73 with examples on the subsequent pages).


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tors cannot anticipate everything.24 He understood that something had to be done in that legal vacuum: Le législateur n’exerce moins une autorité qu’un sacerdoce. Il ne doit pas perdre de vue que les lois sont faites pour les hommes, et non les hommes pour les lois; qu’elles doivent être adaptées au caractère, aux habitudes, à la situation du peuple pour lequel elles sont faites; qu’il faut être sobre de nouveautés en matière de législation, parce que s’il est possible, dans une institution nouvelle, de calculer les avantages que la théorie nous offre, il n’est pas de connaître tous les inconvéniens que la pratique seule peut découvrir. … qu’il serait absurde de se livrer à des idées absolues de perfection, dans des choses qui ne sont susceptibles que d’une bonté relative.25

For those who still believe that the law is always clear, a quotation from one of the giants of the common law may serve as a wake-up call: at the moment it is really rather hard to know exactly what the common law is in some areas in the light of the Convention [on human rights].26

Someone has to adapt the law in specific cases and, in the absence of any specific law or ‘precedent’,27 to cut the knot. That heavy task has been put on the shoulders of judges and they are the best fit for that purpose, which is not to say that they do not make mistakes (they do). Denying that view is not at all innocent. It implies that the law is given for once and forever, unless the legislator changes it; that those parts of the law which are black holes are doomed to stay a lawless realm until the legislator takes action. Not overly attractive, is it? More importantly, many cases submitted to the courts are not black and white, seen from a legal angle. Apart from the appreciation of the facts and the evidence (which are unrelated to judicial activism), the arguments put forward by the parties often are more or less in balance.28 The court ‘just’ has to decide 24

His famous ‘Discours préliminaire du projet de Code civil’, Locré (1827, pp.

251 ff.). 25 26 27

O.c. No. 5. Rogers (2002, p. 62). One should bear in mind that the doctrine of precedent is a peculiar phenomenon of the common law. Most (if not all) continental European courts are not bound by precedent, although it will often be a source of inspiration. So are judgments of superior courts; not because they are binding, but because a judgment that ignores them runs a fair risk of being reversed on appeal. 28 Ronald Dworkin goes to considerable lengths to argue that there is only one right answer, even in hard cases (1977, pp. 279 ff.). I tend to agree with him in a series of cases (such as recoverability of economic loss and whether capital punishment is cruel). In less extreme cases, I tend to challenge his view. The issue probably is of

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which of the two is most persuasive. This holds particularly true for the great many blanket norms, such as equity, good faith, reasonable(ness), contributory negligence, victim,29 unreasonable delay,30 due process,31 actionable nuisance32 and so on and so forth.33 Giving meaning to such norms may (will) – in particular instances – come close to judicial activism, but it can hardly be avoided. Courts cannot help it that their duty is to interpret the law. Can they be blamed if they decide that a defendant committed a tort in the grey zone, or if they hold that equity requires deviation from stringent rules if the law provides such an opportunity? I do not think so. In doing so, courts do not play the role of an activist. That is not necessarily the case even if the consequences of their judgments may contrast with the ‘will’ of the legislator, as the legislator could not anticipate each and every set of circumstances. Judges cannot help it that legislation does not provide clean-cut solutions for every single case. Nor can they be blamed that the law does not (and to some extent cannot) keep pace with the demands of society.34 If one is not prepared to accept that courts cannot escape from making choices or that they have to decide, even if the law is unclear and/or precedents are not available, no justice could be done in a great many cases. After all, in this – rather unattractive – view, all lawmaking would be up to the legislator. No solution would be available if legal provisions collide.

limited practical importance. Even if he were right, courts will not always ‘find’ the right answer, as becomes manifest inter alia when they reverse earlier judgments shortly after having delivered them. So I feel more comfortable with Hart’s criticism of Dworkin’s theory (1994, pp. 272 ff.). Hart puts it as follows: a judge ‘must always have some general reasons justifying his decision and he must act as a conscientious legislator would by deciding according to his own beliefs and values. But if he satisfies these conditions he is entitled to follow standards or reasons for decision which are not dictated by the law and may differ from those followed by other judges faced with similar hard cases’ (at p. 273). 29 E.g. art. 41 ECHR. 30 Art. 6 para. 1 ECHR. The ECHR has developed a vast case law about this topic. 31 See, inter alia, Harlan’s dissenting view in Poe v Ulman, 367 U.S. 497, 541–2 (1961). 32 See inter alia, McManus (2008, pp. 493 ff.). 33 This does not mean that courts should act as ‘êtres inanimés’ if the law does not grant the power to harp on the equity tune. As Carbonnier (quoted by Lasser, o.c. pp. 45–6) put it: ‘Because the judge is a man and not a syllogism machine: he judges by his intuition and his sensitivity as much as he does by his knowledge of [legal] rules and by his logic.’ 34 See about this topic, from the angle of the development of tort law, Bell (2007, pp. 19 ff.).


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Are judges overstretching their powers if they rule, say, that Article 2 ECHR is more compelling than most other human rights?35 Or are they just doing their job? Or should we say that all the above is ‘only’ a matter of interpretation of the law? If so, where and how to draw the line between interpretation and further development of the law?36 Another ‘difficulty’ is that society changes over time. So do views on morals, justice, equity and the demands of society.37 More often than not, legislators lag far behind all those developments.38 Is this to say that courts should stick to old-fashioned interpretations or outdated laws?39 Is it their duty to ignore the demands of society? To close their eyes for the evolution of morals, as Aubert put it?40 Delicate questions that cannot be answered in black 35 36

See about this topic e.g. Cariolou (2008, pp. 259 ff.). Kerr (2003) rightly observes, in this context, that reasonable people can disagree on many legal questions. 37 In his speech for the Bar Association of India, Australia-India Council (New Dehli, 6 January 1997), the Australian Justice Michael Kirby quotes the Indian Justice J.S. Verma: ‘The judiciary will continue to respond to the changing needs of the times. That is how activism has evolved’ (www.hcourt.gov.au/speeches/kirkbyj/kirkbyj_ indialt.htm). He adds that the Indian Supreme Court has a respected reputation for creativity and ingenuity in the development and adaptation of the common law to the enormous contemporary problems and opportunities of the country (he subsequently mentions a series of cases). The Australian Justice Frank Kito (quoted by Justice Kirby) adheres to a fundamentally different view. So does the present President of the US Supreme Court (Justice Roberts), as follows from his confirmation hearing: judges ‘do not have a commission to solve society’s problems, as they see them, but simply to decide cases before them according to the rule of law’ (www.cfif.org/htdocs/legislative_issues/federal_issues/hot_issues_in_congress/supreme_-judiciary-questionnaire. htm). 38 Soli Sorabjee (former Attorney-General of India) – quoted by Justice Kirkby, o.c. – put it as follows: ‘indignant critics forget that it is the Executive’s failure to perform its duty and the notorious tardiness of legislatures that impels judicial activism and provides its motivation and legitimacy. When gross violations of human rights are brought to its notice, the judiciary cannot procrastinate. It must respond.’ Justice Kirby rightly points out that politicians tend to confine themselves to issues that have a ‘vote in it’. In his view, judges may ‘feel willing’ to act if ‘the permanent values are clear and the issue is relatively discrete and manageable’ in the face ‘of clearly established needs’. See also Raes (1997, p. 165). Justice McHugh made the same point, but put it slightly more nicely: ‘Modern legislators simply do not have the time to continually monitor and amend legal rules … If judges were to become reluctant to adapt the law to a changing society, public confidence in the rule of law would be seriously impaired because large areas of law would be out of touch with the needs of society. If the law did not remain the appropriate mechanism by which citizens regulate their affairs and resolve their disputes, it would become largely irrelevant’, o.c. 39 The question is convincingly answered in the negative by – inter alia – Justice David, o.c. 40 Jean-Luc Aubert, D.2001 Chron. 489 (2001).

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and white terms.41 But even Sir Owen Dixen, often called Australia’s greatest lawyer and a judge who believed in strict legalism, admits that judges ‘must proceed, not from political or sociological propensities, but from deeper, more ordered, more philosophical and perhaps more enduring conceptions of justice’.42 Justice McHugh is right, I think, commenting that this sounds nowadays43 like a voice from another world … my clear impression … is that the majority of the common law judges today accept that social conditions can generate changes in legal principles and rules and that the judicial method is not so restrictive as Sir Owen’s analysis indicates.44

A similar point was made by Justice Cardozo. After having observed that the law is influenced by logic and tradition, he states that ‘[t]he end which the law serves will dominate them all. … not the origin but the goal is the main thing.’45 The European Court on Human Rights put it as follows: law (the convention) is a living instrument.46

41 This, I think, is also the answer to those (many) commentators who do not cease to harp on the tune that the making of the law is the task of the elected legislator; see e.g. Roach (2007, p. 76). Apart from the fact that few elections are about core issues, let alone legislation, the problem is that legislators, the world around, do not take their job seriously when it comes to topics requiring a long-term view, such as environmental degradation, over-exploitation of natural resources, climate change and the eradication of poverty; see for a similar view Salzberger (2007, p. 223). In most countries many other vital topics could easily be added to this list. It is equally very much open to debate whether it is true that judges could not be controlled if they greatly (and consistently) overstretch their powers. The mere fact that this is rarely done is telling, isn’t it? Governments (politicians) are seemingly – all in all – happy that others do what they do not dare but ought to do. In other words: I challenge the view (ventured inter alia by Kerr, o.c.) that ‘the more the courts roam, the less the elected branches retain’. Yet, the former Australian Chief Justice Gibbs (2004) is certainly right in saying that, in single cases, it may be unclear whether or not the law has been improved. Not surprisingly, however, there are rather famous learned lawyers who strongly oppose any judicial activism; among them Campbell (2003, p. 307). 42 Quoted by Justice McHugh, o.c. 43 I.e. thirty years later. 44 Ibid; he elaborates on this point further down. The need for judicial lawmaking. A similar point was made by Justice Gummow (also quoting Lord Radcliffe) in Wik Peoples v Queensland (1996) 187 CLR 1 at 179 and Stone (1936, p. 20). 45 Cardozo (1921, pp. 66 and 102) (also quoted by Justice McHugh). 46 Settled case law; see inter alia Johnston and others v Ireland, Series A no. 112 pp 24–5, § 53 and E.B. v France, appl. no. 43546/02 § 46. In Demir and Bakayra v Turkey (12 November 2008) the Court goes quite far, in that it holds that it has never ‘considered the provisions of the Convention as the sole framework of reference for interpretation of the rights and freedoms enshrined therein … It has always referred to the “living” nature of the Convention, which must be interpreted in the light of present-


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It remains true, of course, that judges should be cautious to develop the law by bold or creative interpretation and even more so by applying too easily approximative or vague concepts such as equity, good faith and the like. All the more so in specific fields, such as real property law, the law of succession, inheritance, time limitation, parts of insurance law, and even more so some parts of family law and, more generally, realms of the law where legal certainty is of utmost importance. In other fields, such as major parts of contract law, tort law and environmental law, they can afford to be less reluctant, I think. This leaves untouched that courts and judges should arguably be reluctant to play easily the card of too outspoken views on moral issues or the absurdity of a specific outcome.47 One of the major concerns of the antagonists of judicial activism is their fear of ‘political judgments’.48,49 True, judges are not a political day conditions, and that is has taken account of evolving norms of national and international law’(para. 67/68). It recalls that it has used ‘intrinsically non-binding instruments of the Council of Europe organs’ (para. 74), whereas it cannot disregard ‘rules and principles that are accepted by the vast majority of States’ which ‘reflect a reality’ (para. 76). In searching for the common ground ‘it has never distinguished between sources of law according to whether or not they have been signed or ratified by the respondent State’ (para. 78). 47 Lanner quotes an advisory opinion of Advocate-General Charbonnier: ‘It would be morally unacceptable that … Such a solution would be all the more shocking in that … It would simply be scandalous that …’ (o.c. p. 253). Such a very outspoken view arguably is slightly overdone. 48 This point is made by many outstanding lawyers. E.g. Jon Bruning [talking about the US] stresses that people ‘would prefer to have policy decided by their elected officials, not by appointed judges’: testimony before the Committee on the Judiciary United States Senate, 3 March 2004, p. 24 (Mr Bruning is Attorney-General of Nebraska). A similar view is ventilated by the US Court of Appeals Court Judge Diarmuid F. O’Scannlain (2008). In the same session Senator Edward Kennedy eloquently and convincingly argued that legislators often waste their time addressing minor issues, instead of tackling matters that really count (he is fairly concrete on that point): o.c. p. 41. 49 On the other hand, one should not be over-sensitive. In a speech given on how a British Bill of Rights and Responsibilities fits into a long British tradition, the Lord Chancellor Jack Straw complains about the ‘lamentation’ of the opposition against the law. Repealing the Human Rights Act ‘would reduce the margin of apprecation that UK courts enjoy. It would have the effect of restricting the flexibility and the application of the balance within the UK courts’. He described the HRA as ‘a living development of rights to assist our citizens’ – ‘a floor and not a ceiling’. Further on, he claims among his party’s ‘proudest achievements’ equality and a right to administrative justice, adding with obvious approval that ‘Judicial review has developed significantly in recent years; and … really does help ensure that executive decisions are made with proper regard for the rights of the individual’ (publication of the Ministry of Justice, 21 January 2008). Justice Kirby quotes a Lord Chancellor (Lord Mackay of Clashfern): ‘The extent to which that [i.e. development of the law by judges] is permissible … is

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branch.50 Politics are, in principle, not their domain. However, Posner rightly observed that judges who prefer a modest role still are politicians, but timid ones.51 Or, as John Bell put it, ‘judges can decide not to deal with problems by change, but they have an impact by that refusal’.52 This is not to say that courts can (easily) ignore the law as it stands.53 They must be cautious to break new ground. They should be very reluctant to hold that laws have become obsolete. They should give serious attention to the potential consequences of their innovations.54 The more uncertain those consequences are, the more reluctant judges should be. They should realize that, unlike most pieces of legislation, case law tends to have retroactive effect,55 which may have draconian and unexpected consequences.

not easy to formulate. … I find it difficult to enunciate what the boundary is. … Development of the law is part of the traditional role of the judges over the years under our system. It has been a healthy and powerful influence of the law and on the development of the law and the protection of our people in the various centuries when it has been done, and continues with complete health and robustness at the present time.’ Justice David (Supreme Court of New South Wales) quotes the former Australian Chief Justice Sir Anthony Mason: ‘[W]e must recognize that the courts are institutions which belong to the people and that the judges exercise their powers for the people. The requirement that judges respond to the needs of the individual members of society contains within it the expectation that judges will intervene in order to achieve justice.’ Justice David (2004) adds that ‘judicial responsibility is the function of an institution that serves the community’. 50 Roach (2007, p. 76). 51 O.c. p. 289. 52 O.c. p. 19. 53 If they do not, the ultimate solution is that the executive or political branch might envisage appointing more and other judges, as President Franklin D. Roosevelt pursued when the US Supreme Court had invalidated major parts of his New Deal in the 1930s (O’Scannlain, o.c.). Subsequently, the Court gave in. See for an Indian example Iyer (2007, pp. 130 and 133). 54 The consequences can be manifold and to the extent possible they should be taken into account: e.g. coverage by insurance, insurability, opening the floodgates and legal certainty. Justice Gibbs points to a judgment (Brodie v Singleton Shire Council, (2001) 206 C.L.R. 512) where the law of maintenance was further developed. In his view, it was by no means clear that the law was improved. After all, it might mean that the Council spent ‘large sums in compliance with the decision [and] would be unable to find the money to perform other essential functions’, Gibbs (2004). 55 This point is stressed by – inter alia – Harris (2007, p. 285) and Gibbs (2004); he adds that courts should hesitate before venturing into fields which to the court are unknown or at best imperfectly appreciated. O’Scannlain (2008) rightly observes that predictability and uniformity are important. In his view, the essence of judicial activism is that a judge fails to apply the law but sways according to his own sentiment. Yet, he also mentions that it often is impossible to say with certainty in any given case whether or not the judge’s sentiments will lead to a ‘bad’ decision.


5

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A FEW EXAMPLES

A few examples may serve to illustrate the points made above. 5.1

Dutch Cases I

As a general rule, judgments that declare that laws have become obsolete and have to be ignored are fraught with risk. But adhering to obsolete legislation may have unacceptable effects. According to Dutch law (as it stood in those days)56 an insured party was not entitled to receive compensation in excess of the actual damage when an insured loss occurred. Despite this unambiguous law, insurers provided coverage for losses caused by fire; they promised to pay the amount agreed upon, even if the actual value of the insured premises was less and/or the premises were not rebuilt. So the insured might gain from a fire. It rather speaks for itself that the premium was based on the agreed coverage. This was standard practice. Denying payment in accordance with the insurance contract would favour the insurer and would mean that part of the premium was paid for nothing. In this light, the Supreme Court held that the relevant legal provisions had become obsolete and had to be ignored.57 Unacceptable judicial activism or realism? The latter view seems far more attractive than the former, which would obviously have led to injustice (that is, an unjust enrichment of the insurers). Under Dutch law, liability for labour accidents is based on fault on the part of the employer (Article 7:658 Civil Code). Over the years the Supreme Court has developed its case law very much to the benefit of the injured employee,58 although the legal basis did not change in this respect.59 Since 199260 it has provided an additional somewhat haphazard protection on the basis of (what presently is) Article 7:611 Civil Code (the requirement of proper conduct on the part of the employer; see below). True, the Court‘s case law is in a sense courageous, but it remains within the scope of the law. In a sense it is legal activism; at least insofar as the interpretation of the law has progressed over time. But this does not mean – let alone necessarily – that its present case law may be described as ‘activism’.61 It is equally possible that the old case law

56 57

The law was enacted in the early 19th century. Hoge Raad 3 March 1972, Nederlandse Jurisprudentie 1972, 339; see for more details and further development of this case law Asser et al. (1998, pp. 236 ff.). 58 Albeit that this case law arguably is not always fully consistent. See about this case law the contribution of Faure and Hartlief (2008). 59 It did in other parts, but I leave those aside. 60 Hoge Raad 16 October 1992, Nederlandse Jurisprudentie 1993, 264. 61 See for a more general perspective Shapo (2003, pp. 132 ff.).

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was (or had become) unduly mean to plaintiffs. Yet, it is suggested that it is neither of the two. The development is, I think, broadly speaking, in line with the changing concept of fairness and the changing demands of society, as perceived by many.62 Is this to say that the development is wrong? Frankly, I fail to see why, all the less so as the new case law remains within the scope of the law entirely. This goes not only for the text of the law but also for the rather ambiguous debate on the law when enacted in Parliament. Moreover, the debates in Parliament do, in my humble view, not necessarily provide much guidance; at least, one should be careful not to overestimate the literal text. Apart from the fact that in the course of the debates most attention is often paid to minor details and/or that the argument goes in all directions, not seldom without a conclusive and clear outcome, they can easily be misunderstood, as the following case may illustrate. The Dutch Supreme Court had to decide a case about liability for allegedly improper supervision of a small insurance company by an agency of the State. One of the questions was whether or not the norm violated aimed to protect the victims (Article 6:163 Civil Code, the ‘relativity requirement’). The Court answered the question in the affirmative.63 This finding was based on observations by the Minister of Finance in Parliament that the supervisory legislation was (also) in the interest of the public. But does this mean that the relativity requirement was met? I am far from sure. First, the observations by the Minister (not a lawyer) can easily be understood as a nice gesture without any further implication. Politicians often harp on tunes that sound good. More importantly, I do not think that the Minister realized, let alone intended, that the supervisor could be liable (in full, as there is no cap) in case of improper supervision. I may be mistaken, but the very least to say is that one could argue both ways if one is prepared to give this point more than cursory attention, which the Court, with due respect, seemingly did not.64 This goes to the heart of the matter. As long as we do not know (let alone with sufficient precision) what the legislator meant and the text of the law leaves room for various interpretations, discussions about judicial activism often are not very useful, or are even beside the point.

62

Over the last decade the social security system has eroded significantly. This may have played a role. 63 Hoge Raad 13 October 2006, Jurisprudentie Aansprakelijkheid 2007, 2; Nederlandse Jurisprudentie 2008, 527. 64 Needless to say, this point is ignored altogether in the discussion about the Supreme Court’s judgment. I tend to believe that the Court did realize that its reading (and reasoning) was far from compelling, but – as it turned out, rightly – assumed that this would be overlooked as its argument is based on many – though in my submission not conclusive – quotations.


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I just mentioned the case law based on Article 7:611 Civil Code. It started with a case about damage to an employee’s car, incurred in the course of his work. The Supreme Court held that the employer had to bear the costs of repair.65 The next case was about a car accident in the course of his work, caused by negligence of the employee; the accident caused personal injury to the employee. There was no way back: the Court understandably and unavoidably held that the employer had to bear the loss.66 Since then, other cases have been submitted to the Court.67 I will not go into detail as Dutch law is probably not your prime concern. It suffices to say that the Court faced (and still faces, as more cases are pending) a delicate dilemma. Seen from the angle of justice and – in a sense68 – consistency, injustice would be done in denying the new claims. For the same reason, there are no solid arguments to dismiss claims in related cases. Yet, this is a slippery slope, as it will ultimately blow up the system, as it would introduce a strict liability which would certainly not be in line with the intention of the legislator, nor with the text of the law, which, in this respect, is unambiguous. 5.2

A Slippery Slope

The gist of my argument is that developing the law in specific cases can lead courts into a legal quagmire. At a certain point in the development of case law, difficulties arise when new cases, aimed at further developing the law on the basis of the existing precedents, are submitted to the court, and it comes to realize that – with the benefit of hindsight – something may have gone ‘wrong’ in the past. ‘Wrong’ to the extent that the outcome of earlier cases was (often) undisputedly reasonable and equitable, but it was never anticipated that plaintiffs would submit ever more related cases and whilst there are no convincing arguments for not applying the same ‘rules’ to the new cases which come very close69 to those decided earlier. In each single new case, there are no (longer) persuasive arguments for not applying the new rule. Is this to say that judges should resist the temptation to do justice in specific cases? Definitely not. But they should try hard – harder than they sometimes do – to avoid difficulties as just mentioned. Yet, they will fail from time to 65 66

Hoge Raad 16 October 1992, Nederlandse Jurisprudentie 1993, 264. Hoge Raad 12 January 2001, Nederlandse Jurisprudentie 2001, 253 and 9 August 2002, Nederlandse Jurisprudentie 2004, 235. 67 Hoge Raad 1 February 2008, Nederlandse Jurisprudentie 2009, 330 and 331, and Hoge Raad 12 December 2008, Nederlandse Jurisprudentie 2009, 332. 68 I mean: in relation to the cases decided earlier on the basis of art. 7:611 CC. 69 That is to say: there is a marginal difference. But when more and more cases are submitted, all those marginal differences together amount to a completely different type of case and would create a new ‘rule’.

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time. In those instances it is open to debate whether the developments in case law truly are a matter of ‘activism’. The first case (damage to the car, discussed above) arguably was. But the subsequent cases probably are no more than a ‘logical’ and in a sense inevitable follow-up of the first. It is suggested that they are ‘only’ the inevitable consequences of earlier decisions, which may have been insufficiently considered, but were certainly appealing on the facts or their own merits. 5.3

Dutch Cases II

Article 21 Interimwet bodemsanering provided a legal basis for recourse actions by the State against the polluter for costs incurred by the State for cleaning polluted premises of third parties. Those claims foundered on the relativity requirement,70 although it was crystal clear that the legislator had tried (admittedly, seen from a very strict legal point of view, in a clumsy way) to create a legal basis for the recourse. The legislator subsequently tried to repair the damage by enacting new legislation to remove this requirement. That attempt failed too.71 How to interpret this case law? Is it a matter of activism? Was the Court’s obvious unwillingness to apply the legislation influenced by the – in a sense72 – retroactive effect of the legislation?73 If so, is that conservative or progressive activism? There are arguments for both views. Conservative, in that the court accepted a very literal and obviously unintended reading. Departing from the latter view: has this anything to do with activism? Is it just interpretation of the law? Or is this an example of progressive activism, in that ‘higher values’ (probably the impulse to restrict retro-activity)74 played a predominant role? I do not want to pursue this Dutch topic any further. The reason for mentioning this case is that it highlights how difficult it is to put a specific case in a pigeon-hole.

70 71 72

Hoge Raad 9 February 1990, Nederlandse Jurisprudentie 1991, 462. Hoge Raad 30 September 1994, Nederlandse Jurisprudentie 1996, 196. The easy way out would have been transfer of the claim of the owner of the polluted premises to the State. But for reasons that will probably always remain shrouded in mystery (more likely than not stupidity or wooden-headedness), neither the State nor its attorney opted for this easy solution. 73 See inter alia Harris (2007, p. 285). 74 Hoge Raad 9 February 1990, Nederlandse Jurisprudentie 1991, 462, could be interpreted in this way.


5.4

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The Human Rights Perspective

The UN Committee against Torture held that a contracting State can be (and in the case at hand was) obliged to submit a case concerning a leading politician to the competent authorities for the purpose of prosecution.75 Besides, marginal punishment can (also) violate Article 2 ECHR.76 Seen from this angle, it is all the more striking that the Dutch Supreme Court holds that Dutch legislation, which requires that decisions concerning prosecution of Ministers are entirely in the hands of the Lower Chamber of Parliament or the government, does not violate international conventions (including the ECHR).77 The first two judgments are bold. Are they examples of ‘judicial activism’? Perhaps. But, though courageous, they do not invalidate any legal provision, nor are they in any sense contrary to any provision of the European Convention. The third decision is more surprising. It seems a deed of – to put it nicely – ‘conservative activism’. 5.5

Compelling Requirements of Equity

Some diseases, such as mesothelioma, have a very long incubation period. If the applicable legal provisions were applied strictly, most claims against those who negligently caused the disease would often be time-barred. This would obviously be very unfair. Courts in various countries have found ways to avoid this appalling result.78 The Dutch Supreme Court in this respect applied a legal provision reading that a rule binding by virtue of law does not apply to the extent that, in the given circumstances, this would be unacceptable according to the criteria of reasonableness and equity.79 Judicial activism? Yes and no. Yes, insofar as the rules on prescription were denied application. But the court could rely on a legal basis.80 It is obvious that it did so because (a) the legislator had not anticipated this kind of problem and (b) strict application of the law would not be in line with the demands of a decent society at the time the

75 17 May 2006, comm. no. 118/2001 Suleymane Guengueng et al. v Senegal; see for more details NJCM bulletin 2007 (2) pp. 199 ff. See for a similar judgment (albeit not about torture) of the ECHR 30 November 2004 (Öneryildiz v Turkey). 76 ECHR 30 November 2004 (Öneryildiz v Turkey). 77 Hoge Raad 19 October 2007, Rechtspraak van de Week 2007, 878. 78 See for more details Hondius (1995) particularly his general report pp. 11 ff. and the various national reports. 79 Hoge Raad 28 April 2000, Nederlandse Jurisprudentie 2000, 430, and 20 October 2000, Nederlandse Jurisprudentie 2001, 268. 80 Article 6:2 para. 2 Civil Code.

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judgment was rendered.81 So, it is far from obvious that the court can be ‘accused’ of any real activism. 5.6

French, Belgian and Italian Cases

As early as 1897 the French Supreme Court interpreted Article 1384 para. 1 Civil Code82 in a very extensive way.83 Up to today, this remains a landmark decision. Probably indeed an act of judicial activism, with the apparent aim to protect victims, despite the fact that the Court’s interpretation does not go against the text and despite the fact that the legislator did not envisage or intend such a wide interpretation, whereas earlier decisions had derived a much narrower meaning from the same paragraph.84 In the Anca judgment85 the Belgian Supreme Court dealt with the question of whether the State could be held liable for damage caused by incorrect judgments. The Court answered the question in the affirmative ‘in view of the present state of the legislation’ (gezien de huidige stand van de wetgeving). Yet, liability is restricted to cases which are reversed on appeal because the lower court had violated ‘an established rule of law’ (een gevestigde rechtsnorm). According to the Court, its judgment did not disrespect the trias politica, the Constitution, or the independence of magistrates who are not liable in person. No doubt a courageous and potentially far-reaching judgment. Despite the many words used, the Court barely gives insight into its grounds. I tend to think that this judgment falls under the umbrella of judicial activism. The Court may have taken the view that liability matches the demands of a modern society. The same holds true for the fascinating Italian case law about danno biologico or danno alle salute, a species of damages in case of personal injury available besides compensation for actual loss of income and for pain and suffering.86 This, finally, is an entirely new, bold concept next to wellestablished, internationally recognized concepts of damages.87 81 This is not to say that the judgment was universally applauded. Victims took the view that the Court did not go far enough in that it did not hold that time limitation had to be set aside in all cases. Insurers sounded the alarm, which turned out not to be a brilliant move. Since, the legislator has taken action for future cases; as a consequence defendants and insurers will be worse off, compared with the cautious and balanced approach of the Supreme Court. 82 ‘On est responsable non seulement du dommage que l’on cause par son propre fait, mais encore de celui qui est causé par le fait des personnes dont on doit répondre, ou des choses que l’on a sous sa garde.’ 83 Civ. 16 June 1896 (Teffaine), DP 1897, I. 433. 84 See for more details Viney and Jourdain (1998) par. 628. 85 19 December 1991, TBBR 1992, pp. 60 ff. 86 See for more details Busnelli and Comandé (2003, pp. 180 ff.). 87 See Koch and Koziol (2003, p. 424) and Rogers (2001, p. 246).


5.7

443

Hard Cases on the Edge of Moral

More delicate (for both moral and substantive reasons) are cases about wrongful birth and wrongful life.88 Courts in several countries have rendered judgments favourable for the plaintiffs.89 In a sense, they are examples of judicial activism par excellence, as they extend the concepts of liability and damages.90 Yet, it is open to debate whether this prima facie view is entirely justified. First: the courts could not escape from deciding these cases, whereas one can hardly dispute that a (considerable) loss is suffered. Solid arguments (in international doctrine and case law) can be found for decisions either way. Under these circumstances, it is not easy to explain why only a judgment favourable for the plaintiff would qualify as judicial activism. Or would a judgment for the defendant also be judicial activism? That would be an odd result, I think. 5.8

Non-European Cases

The New Zealand Court of Appeal accepted that damages could be awarded against the Crown as a remedy for a breach of the Bill of Rights, a judgment called ‘creative’.91 And the South African Constitutional Court dealt with a case of rape by policemen. This obviously did not belong to their duties. Nevertheless, the Court held that the employer was vicariously liable. This judgment, too, is labelled ‘most far-reaching ‘ and ‘activist’.92 This label may93 be justified, seen from a local angle. Seen from a comparative angle, it hardly is. As to the latter: opinions are divided in Europe, but liability is well in line with case law in Belgium, France, Greece, Italy (perhaps), the Netherlands, Poland, Portugal (perhaps), and also in Israel.94

88 The issue was heavily debated in the European Group on Tort Law. Opinions greatly diverged; many members preferred a cautious approach (i.e. no compensation), particularly on moral grounds. See for more details, also about recent case law in various countries: Koziol and Steininger (2008, pp. 138 ff.). 89 See for more details Koziol and Steininger, Tort and Insurance Law Yearbooks, European Tort Law 2003, 2004, 2005 and 2006.. 90 See inter alia Radé and Bloch (pp. 117–18); and the various contributions in Koziol and Steininger, Tort and Insurance Law Yearbooks, European Tort Law 2003, 2004, 2005 and 2006 and Kortmann and Hamel (2004) (with several contributions in English). 91 Harris (2007, p. 304). 92 Corder (2007, p. 357). 93 See the next footnote. 94 See for more details: Spier and Haazen (2003, pp. 318 ff.). If the South African report by South Africa’s leading tort law expert Neethling is correct (2003, p. 228), the Court’s judgment was far from ‘activist’ or far-reaching but in line with the prevailing view in South Africa.

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One of the best-known landmark decisions was Brown v Board of Education95 holding that the segregation of white and ‘Negro’ children denies equal protection. In M.C. Mehta v State of Tamil Nadu96 the Indian Supreme Court ruled out the employment of children in match factories as it is hazardous. In other cases it accepted various measures aiming at child welfare.97 No doubt, those judgments will have shocked many. They have changed the law and the country. But I dare to challenge the view that those courageous judges are zealous activists. They are not, I think. The activists were all those who upheld an unsustainable system, which, in view of the accepted social and moral standards of (at least) our time, was obviously in gross violation of all kinds of human rights and fundamental principles of law. But I realize that this view is far from universally accepted and will be decried by many as the acme of activism. 5.9

The Struggle between Judiciary and Legislator

Case law sometimes paints a fascinating picture of the struggle between the legislator/executive and the judiciary.98 The Indian Supreme Court ruled that where judicial redress is sought for legal injury to a person, or a determinate class of persons who, by reason of poverty, helplessness, socially or economically disadvantaged position or disability, are unable to approach the court for relief, any member of the public, acting bona fide and not for oblique considerations, may maintain an action on their behalf.99 More generally the Supreme Court has been innovative in the interpretation of the right to life, which, in its view, encompasses a right to food, clothing, a livelihood, health, development, education, protection against environmental degradation, and even a right to roads in hilly regions.100 The Court also explains why it went so far:

95 96 97

347 U.S. 483 (1954). AIR 1991 SC 417. E.g. Lakshami Kant Pandey v Union of India (1987) 1 SCC 667. Noticeable is, in particular, Kesavananda Bharati v State of Kerala about the sovereign power of Parliament. Mr Sorabjee called this decision Palkhivala’s ‘greatest contribution to our constitutional jurisprudence. The judgement has been a salutary check on Parliament’s tendency to ride roughshod over fundamental rights and its insatiable appetite to encroach upon fundamental rights’ (first Palkhivala lecture, February 2003). 98 See for a spectacular example Iyer (2007, pp. 126 ff.). 99 1981 (Supp) SCC 87 (SGuptaUnion of India). See for many other examples Arora (2001). See further Vandenhole (2008, pp. 559 ff.). 100 Iyer (2007, pp. 145–6).


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The concern shown [by the law] to the poor and the disadvantaged [should be] much greater than that shown to the rich and well-to-do because the latter can, on account of their dominant social and economic position and large material resources, resist aggression on their own rights where the poor and the deprived just do not have the capacity or the will to resist and fight.101

These examples show that the Indian Supreme Court goes quite far and does not shy away from judicial activism. It is, of course, a matter of appreciation whether one likes this stance. The very least to say, is, in my submission, that its approach, bold and courageous as it is, is far more attractive than a more reluctant one in which judges close their eyes to large-scale misery and injustice (in the proper sense of the word; not in the doctrinal one). According to Brice Harris the question is whether ‘informed people think, given a realistic appreciation of the demands of society for governance and the system of government that exists, that any creative action taken by the court is the best way the country’s governance structure could have reached to a situation that required a rule making or rule-application initiative’.102 In this sense, which I whole-heartedly endorse, the Indian Supreme Court’s courage can only be applauded. There is a lot more, such as cases about appalling working conditions, about the right to basic needs and all aspects of equality (gender, race and otherwise). It goes far beyond the scope of this chapter to tackle them. Some probably are examples of judicial activism, others are hardly more than admitting the only acceptable outcome and by the same token, in my submission, no deeds of activism at all. 5.10

Historical Wrongs

Fascinating also are cases about historical wrongs. Colonization brought much evil to many countries.103 The people who lived in a country (often in peace) were killed, or at least lost their land. In the last 15 years or so, they have tried to ‘rewrite’ history with some noticeable successes. Several courts were not indifferent to the appeal that – as Justice McHugh put it – ‘they must repudiate rules developed in earlier times when those rules have become out of touch with contemporary notions of value.’104 Apparently following this reasoning, victory was on the side of the ‘oppressed’ in cases about the title to (their) land.105 The 101 102 103

Quoted by Iyer (2007, p. 146). In Dickson (2007, p. 273). See inter alia Mike Davis’s impressive Late Victorian Holocausts (London: Verso, 2001). 104 O.c. 105 Mabo (2), (1992) 175 CLR 1; Wik Peoples v Queensland, (1996) 141 ALR

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same holds true for various kinds of Holocaust claims, claims concerning slavery and claims about forced labour during the Second World War. Legislators in various countries understood the changing tide and acted accordingly.106 5.11

Climate Change Litigation

Last but not least, one of the many cases on the battleground of climate change: Massachusetts et al v EPA.107 The US Supreme Court held, inter alia, that EPA’s refusal to regulate presents an actual and imminent risk of harm and that the refusal to regulate at a minimum contributes to injury. The Court rejects the ‘after you argument’ (reduction in the US is of no avail as long as other countries (developing countries included) do not do the same). These two findings probably are the most important and most spectacular. But I do not think they have anything to do with judicial activism, as they are based on solid grounds and do not violate any existing law.108

6

LEGISLATOR AND JUDICIARY

It follows from the above that there is no clear and obvious line between (the powers of) the legislator and the judiciary. In the political system of most countries the legislator has the final word in most cases. That means that he has the power to ‘overrule’ judgments he dislikes. As a matter of fact, he rarely seems to use this power. Yet, this ‘primate’ is not universal. National law may be in conflict with international rules, human rights or ius cogens. Even if the (national) legislator takes the view that his national law supersedes international law in the sense just described, it is far from obvious that the courts have to follow this isolationistic view.109 However, this a huge topic. For the purpose of this chapter I confine myself to an interesting proposal put forward by Anant and Singh.110 They distinguish three forms of judicial activism: interpretational, legislative and executive. As to the latter two, they point that the social costs may greatly exceed any social benefits. A risk apt to

129 and for more details Richard Ogden, [1998] Victoria University of Wellington Law Review 16; Canadian Pacific Ltd. v Matsqui Indian Band, [1995] 1 S.C.R. 3; Delgammuukw v British Columbia [1997] 3 S.C.R. 1010 and Ronen (2008, pp. 521 ff.). 106 See for more details Spier (2007, pp. 16–17). 107 549 US 2007. 108 Although that view is fiercely challenged by the Court’s minority. 109 See also Harris (2007, p. 277). 110 Anant and Singh (2002, pp. 4433 ff.).


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materialize as courts are not equipped to make technical choices or sample the distribution of preferences in a society.111 They conclude as follows: The persistent justification of the courts in all cases of either executive or legislative judicial activism has been that the courts have been forced to take an activist stance precisely because of the executive or legislative failures. However, this activism cannot substitute for the failed institutions, any more than, allegorically speaking, equating marginal costs to marginal benefits in all markets in response to the prevalence of inoptimal conditions in one market can insure a global optimum. Judicial activism … acts to breach separation of powers, which in turn upsets transnational efficiency and raises social costs. Indeed if the executive or the legislature has become dysfunctional – rotten boroughs of obsolete executives and unrepresentative legislatures – the solution is not in expanding the judicial enterprise, but in restructuring the dysfunctional institutions.112

A major objection to this view is that it seems to overlook the moral angle. Apart therefrom, it may fairly be assumed that the learned authors seriously mean that their advocated solution could bring solace. That view, however, is fundamentally unrealistic and by the same token irrelevant. Anant and Singh do not show or even point to how dysfunctional institutions could be restructured, let alone who could achieve that goal. Executives, business people and politicians, more often than not, have, at best, a short-term view. They are systematically indifferent to everything that goes beyond the sway of the day. And, quite frankly, politicians can often hardly be blamed for it, as – with ever fewer exceptions – only those issues are addressed by the media. Yet, if nobody else cares for doing inevitable justice, courts cannot look backwards. That particularly goes for topics which are of utmost importance for humankind or significant groups.

7

INTERIM CONCLUSION

Judicial activism is a very controversial topic. It follows from the above that the discussion often paints caricatures of the judiciary and its judgments. Things tend to be seen in black and white. In the vast majority of cases judges just apply the law as it stands, without any fiddling with the foundations of the law as enshrined in acts or precedents. Yet, judges in many countries are after an equitable result in the case at point. In most cases this can easily be reached within the framework of the law as it stands, whether or not by applying concepts of equity, good faith, boni mores,

111 112

O.c. p. 4438. Ibid. pp. 4438–9.

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negligence and so many more open norms: concepts which, quite often, are part of the law (case law and/or acts, conventions, treaties). In a minority of cases – that is, those which are discussed at length in doctrine and at conferences – the law, in the sense of a clear-cut precedent or act, is insufficiently clear or even not available. In those cases judges have to make a choice. In my submission this has little, if anything, to do with judicial activism. In a very few cases – no doubt the most spectacular – courts break truly new ground. In that respect some judges are more courageous than others. Some go quite far to ‘develop’ the law in order to cope with – in their view – unacceptable situations. The Indian Supreme Court may serve as an – in my view shining – example. Others seem to adhere to the view that it is not their task to keep pace with the changing demands of society. Some judgments undoubtedly are acts of judicial activism. Criticizing the phenomenon, more often than not, is a rather concealed way to criticize the outcome, more than the process. Interestingly, it seems though extremely conservative judgments/judges are rarely accused of activism. Having said that, I have to admit that truly activist judgments are, of course, not entirely unproblematic seen from a ‘democratic angle’ or, which largely amounts to the same, the perspective of legitimation. It may fairly be assumed that (most) courts will take criticism seriously; at least they should. It is certainly not beyond imagination that they will change course, particularly if the judges are persuaded by the criticism. Besides, in most cases (not – necessarily – always, as briefly illustrated in Section 6 above) the legislator can ‘overrule’ case law he does not like. If he fails to do so, courts may well interpret the legislator’s silence as a ‘silent consent’. Be it as it may, I tend to challenge the view that each and every judgment that keeps pace with the demands of society can be labelled as a deed of ‘judicial activism’. Personally I would prefer to use that term only for those cases where courts develop fundamentally new concepts which were not yet ‘in the air’ or go downright against clear and unambiguous acts. It is a matter of taste (and largely depends on the outcome of every single case) whether or not one likes those judgments. Admittedly, courts should be reluctant in this respect. But they should not be cowardly. In some cases they must show courage. Climate change is such a topic. But it is by no means the only one.

8

BACK TO CLIMATE CHANGE AND OTHER TOPICS OF TRULY SIGNIFICANT IMPORTANCE

Occasionally cases are about truly vital issues, that is, topics that stir major parts of society or even a significant part of humankind in general, such as


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climate change.113,114 If the law is clear and obvious, it should be applied, at least as a general rule. More often than not in those instances, the law is pretty unclear, because the issue is either ignored altogether by politicians115 or – worse – governed by ill-conceived, badly considered international compromises based on the short-term interests (more often than not only) of a few powerful states.116 Those pieces of (international) legislation tend to disregard the interests of major parts of society and/or of many not so powerful, often poor countries. They are fundamentally indifferent to future generations, to developing countries and emerging economies, which often suffer most from a series of humanly made catastrophes. Even in those cases, courts cannot manoeuvre merely on the basis of personal views or their assessment of fairness, nor on merely personal ‘ideology’.117 Yet, it seems entirely justified – if not necessary – that courts do not confine themselves to the easiest available sources. Judges must also address the question whether or not the international compromises comply with other pieces of national and international law and with human rights.118 True, this is a thorny path. But I do not think it is fair to say that those conscientious judges who follow this path belong to the class of ‘soigné, fastidious, civilized, cultured and cultivated patricians of the progressive judiciary – our new philosopher-kings and enlighted despots’.119 Nor would I dare suggest that politicians who have created the mess are (necessarily) uncivilized despots. They may have done the best they could in the given circumstances. They

113 There is a huge body of doctrine about this topic. See inter alia: Verheyen (2005); Smith and Shearman (2006); Faure and Nollkaemper (2007, pp. 123 ff.) and Spier (2006, p. 346). 114 This is certainly not the only topic of utmost importance. The same goes for environmental degradation, over-exploitation of natural resources, destroying the oceans and the eradication of poverty. 115 Dietrich v the Queen (1992) 177 C.L.R. 292, 329. 116 Lord Irvine has fiercely criticized this kind of extra-judicial statement (quoted by Kirkby). No doubt Lord Irvine has a point. On the other hand, openness in this field might have a preventive effect in that courts do not come into play any more, which would be beneficial to everybody, would it not? 117 Harris (2007, p. 288) and Iyer (2007, p. 166). 118 That is, I think, Hans Corell’s (2008) point stressing that any agreements entered into must be effectively implemented (Corell has been UN Legal Counsel). Justice Gibbs quotes Lord Reid: the court can extend the law ‘by the development and application of fundamental principles’. He adds that it may also find a new principle (o.c.). Many have pointed to the increasing importance of those realms of the law; see inter alia Lord Bingham, o.c., noting that the rule of law surely requires legal protection of fundamental human rights. Raes (1997, p. 166) also points to general principles of law. See also Clapham (2006, pp. 87 ff.). 119 Heydon (2003).

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cannot help it that a long-term view and consideration for those whose future is frittered away does not appeal to the people who have to elect them. Yet, I would expect that courts, around the globe, will be courageous enough to find ways to avoid the extremely significant evil that is going to materialize if we stick to business as usual by emitting huge amounts of CO2 or if we leave it to politicians and CEOs of enterprises to change course.20 Even if that would require bold judicial activism (to an unheard-of extent), they will, in my submission, be the only responsible people and they will be remembered in history. The latter may also go for the others, in that they will be held in scorn. After the defeat of Napoleon, a congress was convened in Vienna. A huge series of topics, all about the future of Europe, were discussed. Among them was the abolition of the slave trade, strongly advocated by the English delegation. The proposal met fierce criticism from the Spanish and Portuguese delegates. Palmella, the Portuguese representative, bluntly observed that this was not a topic covered by international law. Some progress was made a few days later. A declaration was adopted which called this trade immoral and abhorrent.121 Those who object to judicial activism would probably support Palmella’s view that judges are doomed to abstination in the absence of clear and authoritative legal support for any ‘action’. Seen from a purely academic angle, this may be an interesting view. The consequences obviously are unacceptable. That holds true for any topic that affects fundamental human rights and more generally vital interests of society or future generations or significant parts thereof. Denying the latter view amounts to a lawless world, where only shortterm interests, power play or ignorance triumph. If nobody else feels responsible, lawyers must stem the tide. And, whether one likes it or not, there are and will always be courageous courts that take the lead and are indifferent to pleas of academics whose only focus is legal theory. Besides, I would suggest that legal theory (this chapter included) will barely have any impact on judges (be they progressive, conservative or just capable craftsmen). Or, as Lord Justice Alan Moses put it in a lecture at Trinity

120 Surprisingly, even banks, pension funds and supervisory institutions do not seem to care. To the best of my knowledge, (re-)insurers still provide coverage, at least in the realm of liability. The latter is all the more surprising as they (understandably) exclude coverage for economic loss caused by genetically modified organisms, inter alia because of incalculability (Ebert and Lahnstein 2008, pp. 577–8). Yet, some awareness seemingly has arisen. AIDA and the Geneva Association are in the process of some fact finding, although it is difficult to understand why they think that the facts are (still) insufficiently alarming. 121 Adam Zamoyski, Rites of Peace: The Fall of Napoleon and The Congress of Vienna, HarperCollins, 2007, ch. 25.


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College, Oxford, quoting a professor of Moral Philosophy who allegedly started his course saying: But I remind you of one important point. Some of you, when you go down from the University … A few – I hope a very few – will become teachers and Dons. Let me make this clear to you. Except for those in the last category, nothing that you will learn in the course of your studies will be of the slightest possible use to you in afterlife.122

It follows that those who contribute to a decent development of the law, and by the same token to a better world, do not have to fear. True, they will be despised by (often very bright, though narrow-minded) academics and conservative members of the judiciary for their judicial activism. Bold and courageous judges will readily accept this fate. For sure, the criticism is not going to have any impact on the development of the law. It never has. At her farewell speech the Canadian Supreme Court Justice Claire L’Heureux-Dubé cited Camus: ‘La justice n’est pas seulement une idée, c’est une chaleur d’âme.’123 All we have to do is materialize ‘justice’. The highly academic issue of judicial activism can be left to the citizens of ivory towers.

REFERENCES Anant, T.C.A. and J. Singh (2002), ‘An Economic Analysis of Judicial Activism’, Economic and Political Weekly, 26 October, pp. 4433 ff. Arora, N. (2001), Judicial Activism in India: Floated Myths and Flouted Realities, http://www.indlaw.com. Asser, C., P. Clausing and J.H. Wansink (1998), Mr C. Asser’s Handleiding tot de Beoefening van het Nederlands Burgerlijk Recht, Bijzondere Overeenkomsten, De Verzekeringsovereenkomst, Deventer: W.E.J. Tjeenk Willink. Bell, J. (2007), ‘The Development of Tort Law’, in H. Koziol and B. Steininger (eds), European Tort Law, pp. 19 ff. Bingham, Lord (2006), ‘The Rule of Law’, http://www.cpl.law.cam.ac.uk/past_activities/ the_rule_of_law_text_transcript.php. Brems, E. (ed.) (2008), Conflicts between Fundamental Rights, Antwerp, Oxford, Portland: Intersentia. Busnelli, F. and G. Comandé (2003), ‘Compensation for Personal Injury in Italy’, in B.A. Koch and H. Koziol (eds), Compensation for Personal Injury in a Comparative Perspective, Vienna, New York: Springer. Campbell, T. (2003), ‘Judicial Activism – Justice or Treason’, Otago Law Review, 10, p. 307.

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Moses (2006). Supreme Court of Canada, www.scc-csc.gc.ca/AboutCourt/judges/speeches/ CeromonyCLHD_e.asp.

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Cardozo, B.N. (ed.) (1921), The Nature of the Judicial Process, New Haven: Yale University Press. Cariolou, L. (2008), ‘The Search for an Equilibrium by the European Court of Human Rights’, in E. Brems (ed.), Conflicts between Fundamental Rights, Antwerp, Oxford, Portland: Intersentia. Clapham, A. (ed.) (2006), Human Rights Obligations of Non-State Actors, Oxford: Oxford University Press. Corder, H. (2007), ‘Judicial Activism of a Special Type: South Africa’s Top Courts Since 1994’, in B. Dickson (ed.), Judicial Activism in Common Law Supreme Courts, Oxford: Oxford University Press. Corell, H. (2008), ‘The Right Climate for the Rule of Law’, International Bar News, April, pp. 20 ff. David, J. (2004), ‘Ethical Problems with Judicial Activism’, edited version of a paper given at a conference in Beijing and Shanghai, October, http://www.lawlink.nsw. gov.au/lawlink/Supreme_Court/II_sc.nsf//vwPrint1/SCO_ipp1. Dickson, B. (2007), ‘Comparing Supreme Courts’, in B. Dickson (ed.), Judicial Activism in Common Law Supreme Courts, Oxford: Oxford University Press. Ducoulombier, P. (2008), ‘Conflicts between Fundamental Rights and the European Court of Human Rights: An Overview’, in E. Brems (ed.), Conflicts between Fundamental Rights, Antwerp, Oxford, Portland: Intersentia. Dworkin, R.D. (ed.) (1977), Taking Rights Seriously, London: Duckworth. Ebert, I. and C. Lahnstein (2008), ‘GMO Liability: Options for Insurers’, in B.A. Koch (ed.), Economic Loss Caused by Genetically Modified Organisms, New York: Springer. Farber, D.A. (2008), ‘The Case for Climate Change Compensation: Justice for Climate Change Victims in a Complex World’, Utah Law Review, 2, pp. 377 ff. Faure, M.G. and A. Nollkaemper (2007), ‘International Liability as Instrument to Prevent and Compensate for Climate Change’, Stanford Journal of International Law, 43 (A), June, pp. 123 ff. Faure, M.G. and T. Hartlief (2008), ‘The Netherlands’, in H. Koziol and B.C. Steininger (eds), European Tort Law 2007 (European Tort Law Yearbook), Vienna: Springer, pp. 416–39. Gibbs, J.H.T. (2004), ‘Judicial Activism and Judicial Restraint: Where Does the Balance Lie?’, Constitutional Law Conference UNSW, 20 February. Harris, B. (2007), ‘Judicial Activism and New Zealand’s Appellate Courts’, in B. Dickson (ed.), Judicial Activism in Common Law Supreme Courts, Oxford: Oxford University Press. Hart, H.L. (ed.) (1994), The Concept of Law, 2nd edn, Oxford: Oxford University Press. Heydon, J.D. (2003), ‘Judicial Activism and the Death of the Rule of Law’, Quadrant Magazine, 47 (1), p. 9. Hondius, E.H. (ed.) (1995), Extinctive Prescription: On the Limitation of Actions, The Hague, London, Boston: Kluwer Law International. Iyer, V. (2007), ‘The Supreme Court of India’, in B. Dickson (ed.), Judicial Activism in Common Law Supreme Courts, Oxford: Oxford University Press. Kerr, O.S. (2003), ‘Legal Affairs’, Magazine at the Intersection of Law and Life, March/April, http://www.legalaffairs.org/issues/March-April-2003/feature_ marapr03_kerr.msp. Kirkby, J.M. (ed.), Judicial Activism, http://www.hcourt.gov.au/speeches/kirkbyj/ kirkbyj_indialt.htm.


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Kniec, K.D. (2004), ‘The Origin and Current Meanings of “Judicial Activism” ’, California Law Review, October, pp. 1442 ff. Koch, Bernhard A. and Helmut Koziol (eds) (2003), Compensation for Personal Injury in a Comparative Perspective, Vienna and New York: Springer. Kortmann, S.C.J.J. and B.C.J. Hamel (eds) (2004), Wrongful Birth and Wrongful Life, Deventer: Kluwer. Koziol, H. and B. Steininger (2008), ‘Schnadenersatz bei ungeplanter Geburt eines Kindes’, Österreichische Richterzeitung, 6, pp. 138 ff. L’Heureux-Dubé, C., Farewell speech, www.scc-csc.gc.ca/AboutCourt/judges/ speeches/CeremonyCLHD_e.asp. Lasser, M.E. (ed.) (2007), Judicial Deliberations, A Comparative Analysis of Judicial Transparency and Legitimacy, Oxford: Oxford University Press. Locré, J.-G. (1827), La législation Civile, Commerciale et Criminelle de la France, I, pp. 251 ff. McHugh, J.M.H. (ed.) (1998), The Judicial Method, http://www.hcourt.gov.au/ speeches/mchughj_london1.htm. McManus, F. (2008), ‘The Law of Nuisance and Human Rights’, in E. Brems (ed.), Conflicts between Fundamental Rights, Antwerp, Oxford, Portland: Intersentia. Montesquieu, C. (ed.) (1758), De l’esprit des lois. Moses, L.A. (2006), ‘The Mask and the Judge’, Margaret Howard Lecture, Trinity College, Oxford, http://www.judiciary.gov.uk/publications_media/speeches/ 2006/sp150506.htm. Neethling, J. (2003), ‘Liability for Damage Caused by Others’, in J. Spier (ed.), Unification of Tort law: Liability for Damage Caused by Others, The Hague, London, Boston: Kluwer Law International. O’Scannlain, D.F. (2008), ‘On Judicial Activism’, Open Spaces Quarterly, 3 (1). Polak, J.E.M. (2008), ‘Enkele Aspecten van Rechterlijke Toetsing van Overheidshandelen, over Activistische en Defensieve Rechters’, Nederlands Juristenblad, 18. Posner, R.A. (ed.) (2008), How Judges Think, Cambridge: Harvard University Press. Radé, C. and L. Bloch (2003) ‘La réparation du dommage corporel en France’, in Bernhard A. Koch and Helmut Koziol (eds), Compensation for Personal Injury in a Comparative Perspective, Vienna and New York: Springer. Raes, K. (ed.) (1997), Tegen Betere Wetten in: Een Ethische Kijk op het Recht, Gent: Academia Press. Reid, Lord (1972), ‘The Judge as Lawmaker’, Journal of the Society of Public Teachers of Law, 12, p. 22. Ringhand, L.A. (2007), ‘Judicial Activism: An Empirical Examination of Voting Behaviour on the Rehnquist Natural Court’, http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=765445. Roach, K. (2007), ‘Judicial Activism in the Supreme Court of Canada’, in B. Dickson (ed.), Judicial Activism in Common Law Supreme Courts, Oxford: Oxford University Press. Rogers, W.V.H. (2001), ‘Comparative Report of a Project Carried Out by the European Centre for Tort and Insurance Law’, in W.V.H. Rogers (ed.), Damages for NonPecuniary Loss in a Comparative Perspective, Vienna and New York: Springer, pp. 245–96. Rogers, W.V.H. (2002), ‘Tort Law and Human Rights: A New Experience’, in H. Koziol and B.C. Steininger (eds), European Tort Law, Vienna: Springer, New York 2003, pp. 62 ff. Ronen, Y. (2008), ‘The Dispossessed and the Distressed: Conflicts in Land-Related

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PART VII

Comparative conclusions

14. Comparative and concluding remarks Michael Faure and André van der Walt 1

LAWMAKING BEYOND THE NATION STATE

Nancy Fraser has noted that the effects of globalization in the post-Cold War era, including ‘the growing salience of supranational and international organizations, both governmental and nongovernmental, and of transnational public opinion’, are making it increasingly difficult to assume that ‘the modern territorial state is the appropriate unit for thinking about issues of justice, and that the citizens of such states are the pertinent subjects of reference’.1 Similarly, Hans Lindahl has argued that the increasing political power of multinational corporations challenges ‘legal liberalism’s assumption that law is coterminous with state law’, forcing us to recognize that ‘even constitutional law can be generated outside the state’.2 Amongst other things, globalization involves the growth of an international or supranational normative value system that directly and indirectly affects lawmaking in national states. This undermines traditional assumptions about lawmaking in that it establishes new, transnational and transcultural norms and standards that increasingly dominate regional and national discourses about constitutionalism and human rights. Through the pressure exerted by a combination of international, regional and other transnational bodies, powerful states, neighbours and trading partners, nongovernmental interest groups and international or transnational corporations, municipal constitution- and lawmaking bodies are obliged to ensure (or simply find) that their own law conforms to the international value system. The most visible effect is the inclusion of certain human rights norms and standards in bills of rights and in normal domestic legislation so as to bring about the desired institutional arrangements (the establishment of constitutional watchdog bodies; independence of the courts) and to entrench recognition and protection of core human rights (equality, protection of democratic participation, press freedom, security of the person, social security). This process is most visible in young and

1 2

Fraser and Bourdieu (2007, pp. 17–35). Lindahl (2007, pp. 149–52). 457

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emerging democracies, but it also happens in established democracies, as appears from the promulgation of the Human Rights Act 1998 in the UK. A second process of international and supranational influence functions via the bargaining power of international corporations to persuade national legislatures and governments, especially in younger and poorer democracies that are anxious to attract foreign investment, to adopt legislation and procedures that favour international trade. This is evident from the incorporation of tradefriendly standards and procedures in areas such as labour law, tax law, state regulation of business and property interests and (national and international) trade law. In richer and established democracies a similar process might assume the form of regional agreements that promote unification or integration of law, at least in certain areas, so as to promote cooperation, free movement of persons and goods, and trade. The unification of private law in the European Union through the development and adoption of alternative regimes, such as the ‘opt-in’ system described by Jan Smits, is an example of how lawmaking is influenced by globalization in this sense.3 A third aspect involves the indirect influence of globalization on normal lawmaking processes, particularly in private law, through what has been described (in a different context) as the ‘seepage’ of higher-level norms and values. In general the first process described above will have most effect on lawmaking in the sphere of public law, in the sense that it will influence the making of constitutional and regulatory law, whereas the second process will have most effect in commercial law. Apart from and in addition to these processes, globalization can influence the seemingly constitution- and tradeneutral areas of private law indirectly. As a general rule, adoption of international norms and standards will introduce or strengthen constitutional supremacy, independence of the judiciary and judicial review, which will in turn affect both the style of adjudication (directly) and the substance of private law (indirectly). When international norms and standards are adopted as part of municipal law the ‘normal’ development of private law doctrine must inevitably be complemented by reforms and developments driven by extraneous norms and standards (for example, contract law must adapt to equality and non-discrimination standards), which could raise problems for ‘normal’ lawmaking if the courts are uncertain about their new roles or hesitant to move away from their traditional roles. This process of indirect influence could create problems if courts or lawyers resist external pressure on the development of private law doctrine; in the area of eviction the adoption of international housing standards has caused problems in jurisdictions as divergent as South Africa and England.

3

Smits (2007, pp. 1181–1203).

Comparative and concluding remarks

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As was mentioned in the introduction, many chapters in this volume point to the fact that an obvious (institutional) effect of globalization appears from the tendency to shift lawmaking powers away from the nation state, where decision-making power was traditionally vested. Some chapters merely identify aspects of this process of ‘lawmaking beyond the nation state’, while others address some of the consequences and questions it raises. The contributors identified, among others, the following elements inherent in lawmaking beyond the nation state: 1.

2.

An obvious shift of decision making to a higher level of institutions, sometimes referred to as multi-level governance (see for example Chapter 2 by Curtin). This shift to higher level institutions was particularly identified with respect to problems that also cross national borders, such as environmental pollution (Michael Faure in Chapter 12) and climate change (Jaap Spier in Chapter 13). At the same time, contributors also pointed out that the shift to a higher level of decision making does not always imply a shift to formal institutions (for example, leading to formal treaties being concluded). In some cases, decision-making power shifted to international organizations such as UNCITRAL, leading to the creation of soft law instruments, for example in the area of international trade law (Sieg Eiselen in Chapter 4). In some cases, power even shifted to non-state actors, such as corporate actors and organizations. Many contributors stressed the increasing importance, as far as norm generation is concerned, of multinational corporations, a shift that is to an important extent also driven by financial globalization (see especially Bas Steins Bisschop in Chapter 8 and Philip Sutherland in Chapter 9). These findings led some contributors to question whether one needs the state to have law. C.H. van Rhee points out how historical examples show that there has been ‘law without a state’ in the past and Sieg Eiselen points to the lex mercatoria as an important source of law not necessarily originating from a state.

In discussing the consequences of globalization particularly for private law, many of the contributors distinguish between positive and normative issues. On the positive side, some mention that lawmaking beyond the nation state inevitably leads to a centralization of powers and a convergence of legal norms via harmonization. More attention is given to that point below in Section 5. On the normative side, contributors especially ask questions concerning the consequences of the shift in lawmaking powers beyond the nation state for fundamental aspects of the quality of law, such as the democratic nature of the decision making, the legitimacy of the bodies that create the norms, and their accountability. Jan Smits argues in Chapter 1 that, even though one effect of

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globalization is that it may not always be formally democratically elected parliaments that create norms in private law, at the normative level this does not necessarily mean that the decision making is undemocratic. Smits argues that one has to look carefully at the goal of democracy as far as norm creation in the area of private law is concerned, and he holds that the fact that, as a result of globalization, other actors than traditional national states increasingly create the norms should not necessarily be problematic, as long as the functions of democracy are fulfilled through other instruments. Smits illustrates this by using the Draft Common Frame of Reference (DCFR) as an example. This draft has been criticized in the literature for not being democratic, which should, according to Smits, not necessarily be problematic as long as it is, as it claims, a non-binding optional instrument which can be used as a source of inspiration for contracting parties. With respect to the question of what one can expect from the quality of norm generation outside national parliaments, Deirdre Curtin shows in Chapter 2 that insights from political sciences can provide a useful input to judge the quality of the lawmaking process. She argues that it is possible to develop public accountability beyond the nation state. She illustrates this argument with reference to the EU, where innovative arrangements have emerged to hold agents accountable, even though she also cites examples where ex post accountability of particular agents has failed.

2

REACTION TO GLOBALIZATION BY PRIVATE ACTORS

As has already been mentioned, the shift to ‘lawmaking beyond the nation state’ implies not only a shift to higher levels of governance such as international organizations but also a shift towards an increasingly important role for non-state actors that seem to have lawmaking powers. In some cases, one can identify the increasing role of private actors in lawmaking activities at the policy level in their increasing use of self-regulation, soft norms and trade customs. The importance of these instruments is clearly explained in Chapter 4 by Sieg Eiselen, who reiterates that the involvement of bodies other than national states in the creation of international trade law raises questions from the angle of democratic principles. Interestingly, both Bas Steins Bisschop (in Chapter 8) and Philip Sutherland (in Chapter 9) point to the development of codes of corporate conduct and corporate social responsibility, whereby (organizations of) multinational corporations in fact create norms as alternatives to lawmaking by the nation state. It may be clear that the increasing involvement of non-state actors (partly resulting from globalization, but partly also unrelated to it) raises questions of


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democracy, legitimacy and accountability that exceed the mere shift to state actors or international organizations at a higher level of governance. Deirdre Curtin explains in Chapter 2 that in the field of private lawmaking the mixed role of public and private actors is often salient, referring (like Jan Smits in Chapter 1) to the Draft Common Frame of Reference to show how a group of private individuals (experts) or a study group can draft a document that is afterwards ‘rubber-stamped’ by the European Commission as a supranational public actor.

3

REGULATION AND CONTROL

Some undoubtedly perceive the abovementioned shifts of lawmaking powers to private actors as undesirable and to some extent even scary, since regulation no longer seems to be the monopoly of the nation state. However, this development may also inspire thinking about new methods and instruments to control these non-state actors involved in private lawmaking. Philip Sutherland points out (in Chapter 9) the important role of multinational corporations and argues that it is not as clear as one may think at first blush how the increasing influence of these MNCs should be constrained. A control model would, especially in the wake of the financial crisis, weigh in favour of more stringent regulation, but the possibilities and real powers of the nation state to control corporations acting internationally may be limited. Even though there is some scepticism concerning the effectiveness of codes of corporate conduct, Bas Steins Bisschop shows in Chapter 8 that it may be interesting to think about entirely new instruments to control activities of MNCs, such as a truth commission, according to the South African example.

4

PRIVATE–PUBLIC LAW

Many of the chapters also (implicitly and explicitly) make clear that the traditional distinction (at least in legal systems with a civil law tradition) between private and public law has become increasingly blurry. This is not surprising, since many contributors point to the fact that traditional tasks of the nation state such as lawmaking (public law) are increasingly no longer the monopoly of state actors and have partially shifted to private actors. The increased reliance on self-regulation, soft law and codes of corporate conduct shows that traditional lawmaking powers have shifted to non-state actors. Other chapters show that there is often such a strong interdependency between private and public law that one could speak of grey zones rather than analytically distinct concepts. For example, in Chapter 11 Lindenbergh addresses the influence of fundamental rights in private law, a process that has been described as the

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‘constitutionalization’ of private law. Jaap Spier similarly shows how activist judges could use a private law concept such as liability to force not only emitters of greenhouse gases but also governments to reduce greenhouse gases fundamentally in order to mitigate the problem of climate change (Chapter 13). Faure also argues in Chapter 12 that traditional distinctions, for example between international (environmental) law and national (private) law, become increasingly blurry. Even norms of international law (which traditionally only bound nation states) are now used by national judges in private law suits to construct liability of (foreign) polluters. The interdependencies between private and public law become especially clear in the chapters devoted to public law in Part III. Geo Quinot makes clear that international financial institutions promote active participation of the state as market player (Chapter 7), partly as a result of globalization. Interestingly, Quinot also argues that, whereas the national state may lose political power to other actors (see Section 1 above), the increased levels of state commercial activity can be viewed as an attempt of the state to regain (market) power. The private law form is therefore also increasingly used to fulfil public functions. This involvement goes, so Quinot shows, far beyond the ‘traditional’ area of public procurement. The emergence of various public/private partnerships (also with respect to public activities such as schooling, hospitals and so on) raises questions about the rules that control state commercial activities. The combination of contract law and administrative law which may be necessary to regulate the role of the state as market player may pose specific challenges. This is made equally clear in Chapter 5 by Frits Stroink, who also argues that administrative law and the administration in general are increasingly influencing private legal relationships. An issue that inevitably comes up in that respect is to what extent it is useful and possible to develop a ‘global administrative law’, as was attempted in a well known NYU project. Curtin refers in Chapter 2 to this experiment as a helpful perspective on an emerging culture of administrative law, but Stroink stresses in Chapter 5 that, while this concept may indeed be theoretically challenging, the results are still quite preliminary. In Chapter 6 Lourens du Plessis argues that globalization of public law norms is sometimes related to the role of international law (a higher and more centralized level of lawmaking), but that it is also sometimes linked to the use of comparative analysis of law, which is something completely different. As different procedures of constitutional and human rights interpretation, they are ‘different modes of access to a transnational legal and constitutional context’. The danger of sacrificing diversity and uniqueness on the altar of transnational convergence exists in both cases, although the strategies and methodologies differ. Du Plessis argues in favour of a methodology of legal and constitutional interpretation that would prevent unnecessary loss of diversity purely for the sake of convergence.


5

463

CONVERGENCE, DIVERGENCE, HARMONIZATION

The question of the usefulness of global administrative law as a theoretical or policy concept relates to another issue addressed by contributors, namely to what extent globalization (of trade) has also led to a globalization of law. In that respect a distinction is made between the question of whether globalization has, in addition to a shift towards a higher level of governance, that is centralization, also led to convergence of norms and the question of whether such a convergence is desirable. Contributors distinguish the positive question (whether one can observe convergence of norms in practice) from the normative issue (whether this convergence is desirable). Sieg Eiselen clearly shows in Chapter 4 that in the domain of international trade law there have been a variety of (state initiated and soft law oriented) projects towards harmonization of standards. To some extent, the UN agency UNCITRAL has been the motor behind these events; a similar role has also been played by the International Chamber of Commerce; but Eiselen argues that some harmonization has indeed taken place. Interestingly a similar conclusion is reached by C.H. van Rhee on an area that is traditionally thought to be strongly linked to national legal cultures, namely civil procedure. Van Rhee argues (Chapter 10) that some of the traditional differences between jurisdictions from different families are becoming less pronounced as a result of globalization and convergence. The evidence seems to be less conclusive as far as corporate law is concerned. Both Steins Bisschop (Chapter 8) and Sutherland (Chapter 9) distinguish between different models of corporate governance (mainly the well-known distinction between the stakeholder and the shareholder models), but whereas Steins Bisschop seems to argue that some convergence has in recent years taken place between these models, Sutherland seems to stress that distinctions are still real. More difficult is probably the question of whether convergence of norms (sometimes referred to as harmonization) can be qualified as desirable at the normative level. This should, so it is argued by many contributors, be distinguished from the question of whether a shift to a higher legal order is desirable. For example, Faure argues (Chapter 12) that, given the transboundary nature of environmental problems, a shift to a level of governance high enough to deal with transboundary problems may be indicated, but that in theory the contents of the norms could still be differentiated, taking into account location specific (and cultural) differences. For some (especially lawyers), centralization is equal to harmonization, resulting for example in a drive by centralized institutions such as the EU towards harmonized rule making. In some areas where differences between legal rules inhibit globalized trade, harmonization may indeed be meaningful. Thus Eiselen makes a strong case (Chapter 4) in favour of harmonization of standards for international trade. Similarly, van

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Rhee argues (Chapter 10) that some harmonization of procedural laws may facilitate transboundary civil procedure. From an economic perspective, Van den Bergh (Chapter 3) is far more critical of generalized harmonization, pointing out the heterogeneity of preferences and the advantages of decentralized information and innovation. This corresponds with an often heard concern that harmonization may not respect the benefits of cultural diversity or that (perhaps worse) harmonization may lead to the imposition of a (dominant) Western culture, thus (once more) disrespecting cultural differences. The level at which law should be made is, as is shown by Curtin (Chapter 2), also closely related to the question of accountability. The more public powers are shifted away from the people concerned, the more this may result in gaps in the accountability of (public) actors for the exercise of authority. These arguments from political science (Curtin) and economics (Van den Bergh) thus point to the necessity to be more cautious (especially at the European level) with the overall tendency towards convergence and harmonization that disrespect differences in legal cultures and values. The question of to what extent a global culture of legal values indeed exists also arises in the area of the protection of human rights, as is made clear by Lourens du Plessis (Chapter 6) and Siewert Lindenbergh (Chapter 11). Discussing various cases where private law rights were either enforced or limited on the basis of human rights, Lindenbergh rightly points to the fact that these (Dutch and German) cases were based on a particular interpretation of human rights in those countries, whereas these interpretations may not be shared by all. Du Plessis (Chapter 6) similarly shows how unthinking conflation of reliance on international law and constitutional comparison could undermine respect for local context and national or cultural differences and variety.

6

REINSTALLING LEGITIMACY AND ACCOUNTABILITY

A shared view coming (at least implicitly) from many of the chapters is that there is a general fear, as was mentioned above, that one effect of globalization (in the sense of lawmaking beyond the nation state) may be that public accountability and legitimacy of private lawmaking may be reduced. It is related to the issue of to what extent a shift to other actors than the nation state necessarily leads to greater reliance upon other instruments of regulation and control (Section 3 above). As was made clear above, authors can think differently about whether there is a problem of accountability and legitimacy and how accountability and legitimacy of private lawmaking could be increased. As far as the first question is concerned, we can once more refer to Chapter 1, where Jan Smits argues that some commentators assume too easily that the


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mere fact that a document such as the Draft Common Frame of Reference was drafted by an academic study group signifies a problem from a democratic perspective. Deirdre Curtin also argues in Chapter 2 that other instruments could increase public accountability even when private lawmaking does not originate from the traditional nation state. However, she equally makes clear that the example of the European Union shows that to some extent still much is left to be desired in that respect. Various contributors discuss different techniques to reinforce the accountability and legitimacy of the process of private lawmaking in cases where lawmaking takes place beyond the nation state. For example, Frits Stroink (Chapter 5) highlights the importance of general principles of administrative law and more particularly the legality principle, which indicates that in a democracy the powers of the administrative authority are essentially limited. Interestingly, Sieg Eiselen points to the fact (also suggested by Smits in Chapter 1 and Curtin in Chapter 2) that, even if norms are generated through so-called soft law (in the case of harmonization of international trade law), the drafters will ensure that the harmonizing agent is sufficiently representative of all the stakeholders in the field. Eiselen shows (Chapter 4) that the most successful of the harmonizing instruments were remarkably also those that were built on basic democratic principles. As long as private law legal norms emerging from other sources than the nation state are still created on democratic principles, the shift of lawmaking powers to non-state actors should therefore not necessarily be problematic. Furthermore, both Bas Steins Bisschop (Chapter 8) and Philip Sutherland (Chapter 9) argue that soft law instruments such as codes of corporate governance and corporate social responsibility could be introduced as (soft law) mechanisms to control the behaviour of multinational corporations to an extent that formal legislation would perhaps not be able to do. Lourens du Plessis (Chapter 6) and Siewert Lindenbergh (Chapter 11) raise the question of to what extent human rights can be invoked as (harmonizing) principles to correct lawmaking or other behaviour by non-state actors where necessary. They show that, even though the human rights perspective has a lot of potential, there are limits as well, more particularly related to their inherently vague nature and to the already mentioned question of whether these rights can always be regarded as carriers of universal values, notwithstanding differences between legal cultures.

7

PROCEDURAL ISSUES

Many contributors stress questions of a procedural nature, both procedural in the broad constitutional sense (who sets the agenda for private lawmaking) and in a more narrow sense (referring to issues of civil procedure).

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One of these questions concerns the influence of globalization on access to justice, which Frits Stroink refers to as one of the important principles of administrative law (Chapter 5). Michael Faure notices (Chapter 12) how (some aspects of) globalization may endanger access to justice and public participation in environmental matters. This issue is also at the core of the challenging contribution by Jaap Spier (Chapter 13) on judicial activism. Where some have questioned to what extent issues related to globalization affect the traditional trias politica, Spier has no doubt that it is the task of the judiciary (irrespective of whether or not the legislative branch takes its responsibility) to act and protect the globe from really threatening problems like climate change and poverty. Globalization (of trade) unavoidably creates specific challenges for transboundary civil procedure. Remco van Rhee explains (Chapter 10) that this has led to the creation of principles of transnational civil procedure. These principles, so van Rhee shows, go far beyond the international context and may also be of importance in national reform projects, thus potentially leading to further convergence of norms of civil procedure. An interesting question is the role of arbitration. The lex mercatoria referred to by Sieg Eiselen (Chapter 4) is effectively applied in some cases of international commercial arbitration, raising interesting questions for the future of arbitration and more particularly whether, in legal systems where there may be less confidence in the judiciary, arbitration can provide a valuable alternative. However, given the price of arbitration, some may doubt that this is an instrument that can fundamentally contribute to access to justice for the poor. Interestingly Faure also shows in Chapter 12 that international adjudication of transboundary pollution cases (between states) takes place rarely via the formal circuit (of the International Court of Justice) and more often via arbitration, which seems to suggest that arbitration is a more appropriate instrument to deal with global challenges.

8

REMAINING ISSUES AND CHALLENGES

It may be clear that the subject of the influence of globalization on private lawmaking is so broad that the contributors to this book did not aspire to provide final answers to the question this relationship raises. The goal of this book is on the one hand to contribute to the setting of the research agenda by indicating that globalization indeed poses specific problems that need careful attention. Moreover, the contributors have also aimed at taking the debate further by providing some indications of specific questions that result from globalization and its effect on private law. Hence the (modest) ambition of this book is to show ‘the way forward’ and not to provide final answers.


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The researchers involved in the project that gave rise to this book realize that there are still many issues that need to be addressed more carefully and they hope to have the occasion to address (some of) these issues, preferably of course in collaboration with other research groups interested in similar issues. At the theoretical level further research could for example be undertaken into common values and how these may affect private lawmaking. Much of the debate on private lawmaking has focused on harmonization of private law in Europe. The question is to what extent European (legal cultural) values are comparable to those in for example Africa, the Americas or Asia. Moreover, the question of which effects of globalization on private lawmaking are (normatively) desirable and which are less desirable still needs further attention and refinement. The question also arises as to whether, given the shift of powers for private law lawmaking beyond the nation state, it can still be guaranteed that the norms that result from this process are democratic, legitimate and in the public interest. Some first steps to answer this important question are taken in this book, but this issue definitely still deserves more attention. Moreover, some of the general (theoretical and policy oriented) questions concerning globalization and private law could also be applied to specific problems, such as poverty and climate change and the challenges posed by the current financial crisis. These major global problems provide excellent opportunities to test whether some of the theoretical perspectives provided in this book could be applied in a meaningful way to address these global issues. We hope that this book provides a fruitful contribution to the debate which will, given the many global problems and challenges that still exist, undoubtedly continue.

REFERENCES Fraser, N. and P. Bourdieu (2007), ‘Reframing Justice in a Globalizing World’, in T. Lovell (ed.), (Mis)recognition, Social Inequality and Social Justice, London; New York: Routledge, pp. 17–35. Lindahl, H. (2007), Book Reviews: Constitutional Rights after Globalization and Sovereignty and its Discontents: On the Primacy of Conflict and the Structure of the Political, Social & Legal Studies, 16, pp. 149–52. Smits, J. (2007), ‘Lawmaking in the European Union: On Globalization and Contract Law in Divergent Legal Cultures’, Louisiana Law Review, 67, pp. 1181–1203.

Index Aarhus Convention 404, 415–16 abortion 245 academic lawyers: Draft CFR 15–16, 37–8 access to justice 140, 351 environmental issues 403–4, 415–16, 417 accountability 22, 32–3, 50–51, 416 corporate law 218, 220, 226, 304 definition of 20–21, 45–6 Draft CFR 22, 23–4 environmental law 407, 409, 410, 416, 417 governance 32–3, 40–41 actors 34–8 instruments 39–40 multi-level 33–4 legitimacy and democracy in EU 41–5, 50–51, 407 market 23–4, 27 regulators 78 relationships 45–7 as a social relationship 49–50 state commercial activity 189, 191, 192, 196 types of 21 as a virtue 47–8 accounting/bookkeeping scandals 232–3, 234–5, 241, 242, 243 accounting firms, international 296 Ackermann, L.W.H. 170, 171, 173, 174, 177 administrative law 139–40 contracts between administration and citizen 140–41 global 51, 141–4 state commercial activity and 183–6, 203–4 actions of the state 186–7 applicable norms 187–93 enforcement of norms 193–200 private and public in law and social practice 201–3

Afghanistan 117 Africa 248, 269, 427 see also individual countries agent–principal problem 62, 272, 279, 283 Albania 117 Albers, P. 348 Alchian, A.A. 272, 273, 279 Alston, P. 299 alternative dispute resolution (ADR) 348 arbitration see separate entry conciliation 115–16, 349 mediation 316, 355, 361 altruism 189 Amazon 88 AMD (Advanced Micro Devices) 233 Anant, T.C.A. 446 Andersen, C.B. 104 Andrews, N. 343, 351, 357, 358, 361 Anglo-American 285 Annan, K.A. 259 antitrust/competition law 61, 62–3, 379 apartheid 152, 247 applicable law 98–9, 125, 302 civil procedure 344, 349, 350 transboundary pollution 393 arbitration 110, 117–18, 313, 348, 359, 360 International Court of Arbitration 119 state commercial activity 199–200 Trail Smelter case 403 UNCITRAL 115–16 Model Law 111, 116, 118 UNIDROIT 125 Arcuri, A. 394, 405 Argentina 121 Armenia 111 Armour, J. 219, 300 Arnould, J. 188 Aronson, M. 201 Arora, N. 444 Arrowsmith, S. 188, 190, 191, 198, 199, 203 469

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Arthurs, H. 183, 185 Ashdown, P. 246 Asia 427 Southeast 389 see also individual countries Asser, W.D.H. 346, 437 Atiyah, P.S. 196 Aubert, Jean-Luc 433 Auby, J.-B. 141 auditing/auditors 296, 297, 320, 324 August, R. 97, 110, 113, 114, 116, 120, 121, 122 Australia 109, 111, 112, 117, 288, 320–21, 428, 434 Austria 109, 111, 125, 346, 347 Ayres, I. 413 Azerbaijan 111, 117 Backer, L.C. 97, 99, 256, 257, 258, 265, 266, 267, 269, 271, 274, 275, 276, 278, 284, 285, 286, 290, 294, 300, 302, 303, 306, 307, 308, 309, 310, 313, 314, 317, 318, 319, 321, 322, 326, 327, 328, 329 Bahrain 111 Bainbridge, S.M. 274, 290, 292 Bakan, J. 270, 275 Baker, S. 384 Banakis, S. 375 Bangladesh 111, 117 Bank of Credit and Commerce International 233 bankruptcy 227, 231 banks 230–31, 234, 238, 240–41, 257, 450 documentary credits: UCP rules 113, 120, 122 Germany 232 India 220 licences 139–40 remuneration 231, 236, 238–9, 240, 241, 246 Russia 219 Spain 232 supporting legal remedies 243–5, 250 transition 245–9 Barkhuysen, T. 371 Barnard, C. 78, 301 Barroso, José Manuel 239 Baums, T. 226

Baxter, L.G. 196, 201 Baysinger, B.D. 301 Bazinas, S.V. 104 Bebchuk, L. 285, 295, 301 Becker, R.A. 391 behavioural economics 278–9 Belarus 111, 125, 352 Belgium 345, 397–8, 442, 443 Bell, J. 432, 436 Ben-Shahar, O. 23 Benson, P. 379 Benz, A. 35 Berle, A.A. 225, 276 Bermuda 112 Bernitz, U. 244 Bernstein, L. 69 Besselink, L. 32 Bhagwati, J. 266, 387 Bianca, C.M. 35, 101, 102, 103 bilateral investment treaties 313 Birnie, P.W. 384 Black, B. 218 Black, J. 20 Blackman, M.S. 297 Blackstone 233 Blagescu, M. 48 Blair, M.M. 272, 273, 275, 277, 279, 280, 281, 282, 319, 322, 323, 325, 326 Blair, Tony 323 Blasé, F. 101 Bohmann, J. 45 Bolton, P. 184, 190, 191, 192 Bonell, M.J. 104, 107, 113, 125 bookkeeping scandals 232–3, 234–5, 241, 242, 243 Botha, H. 186 Botha, N. 156, 166, 178 Bottomley, F. 328 Bovens, M. 48, 49, 407 Boyd, J. 408 Boyle, A. 393, 399, 403, 413 brands 257, 318 Brandsma, G.J. 50 Branson, D.M. 258, 260, 261, 262, 263, 265, 266, 267, 268, 269, 270, 273, 274, 275, 282, 283, 284, 285, 286, 288, 290, 291, 292, 293, 294, 295, 298, 299, 302, 305, 325 Bratspies, R.M. 384, 403

Index Bratton, W.W. 271, 272, 276, 277, 278, 281, 290, 292, 295 Braucher, R. 101 Brazil 103, 233, 258, 260 corporate law 217–18, 222, 235 bribes 268, 286–7, 320 Briner, R. 117 British Virgin Islands 117 Brown, L.N. 188 Brown, R.S. 402 Brunnée, J. 398 Bryde, B.-O. 150, 153, 173, 175, 177 Bugge, H.C. 384 Bühler, M.W. 200 Bulgaria 111, 395 Bunn, I.D. 321 burden of proof 358 bureaucracies 79 Burmistrova, M. 219 Burnham, W. 343 business-to-business (B2B) and business-to-consumer (B2C) relations 87–8 see also contract law Busnelli, F. 442 Busuioc, M. 50 Buxbaum, R.M. 271 Byers, E. 270, 276, 277, 284, 289 Cadiet, L. 346 Cafaggi, F. 15, 18, 33 Cambodia 111 Cameron, B. 99 Camesasca, P. 63 Campbell, T. 434 Canada 111, 112, 285 Cane, P. 201 Cape Verde 117 capital punishment 147, 164 Cardozo, B.N. 434 Cariolou, L. 433 Carlyle 233 Cary, W.L. 301 Cassese, S. 51, 402 Cassis de Dijon judgment 73 Castellucci, I. 125 Castermans, A.G. 380 Caux Round Table Principles for Business 238, 319 centralization see decentralization versus harmonization

471

CERES 323 Chayes, A. 410 Cheadle, H.M. 170, 172 Cheffins, B.R. 295 Chernobyl incident 403 Cheung, S. 271 children 444 Chile 111, 248, 305 China 103, 111, 117, 233–4, 258, 260 corporate law 220–22, 235 Choudhry, S. 177 Choudhury, B. 200 Christiansen, T. 47 Chung, J. 234 Citigroup 233 civil law 15, 24–5, 26, 98, 188–9, 200, 430–31 CISG 104 civil procedure 343–4, 346, 357, 358 French and German codes 101 fundamental rights 376 legal certainty 67 civil procedure 343–5, 361 harmonization 346 Europe 346–7, 350–57 worldwide 357–61 national systems competition between 348–9 law reform 345–8 Clapham, A. 376, 449 classification of goods for tariff purposes 126–7 Clémentel, Etienne 117 climate change/global warming 65, 388, 394, 401, 416, 459 emission trading schemes 390 judicial activism 446, 448–51 see also environmental law clothing/textile sector 319, 320, 324–5, 389 Coase, R.H. 64, 224, 271–2, 413 Cockrell, A. 189, 201 codex alimentarius 18 Coffee, J.C. 233, 295, 301 Collins, H. 184, 185, 190, 193, 194, 196 Collyer, G. 122 Colombia 117 colonization 445 commercial law see contract law; corporate law; international trade law, harmonization of

472


Committee of European Securities Regulators (CESR) 36–7 common law 15, 26, 98, 109, 188, 200, 203, 431 CISG 104 civil procedure 343–4, 346, 357, 358 corporate law 227–8 precedent 67 statutory interpretation 162 competition, jurisdictional/regulatory 23–4, 27, 58–9, 63, 69–70, 84–5, 90–91 heterogeneity of preferences 59–61, 89 level playing field 70–71, 79 MNCs: regulatory arbitrage 268, 284–5, 286, 289, 290, 300–302 race to bottom or top 69, 75–7, 84, 85, 90, 92, 390–92, 395–6, 399 types of 72–5 competition law 61, 62–3, 379 conciliation 115–16, 349 constitutional law 457, 458 South Africa see transnational contextualization: constitutional interpretation constitutionalization of corporate law 233, 234 consumer groups 78, 84 consumer protection 25, 27, 84 economic analysis 60, 79, 86, 87–8, 89 information asymmetries 90, 91 regulatory competition 75, 84, 90–91 European Union 37, 40, 58, 80, 88, 89, 91, 92 Consumer Sales Directive 35–6, 83 learning processes 90 regulatory competition 75, 84 consumers and fair trade 380 contract law 39, 435, 458 applicable law 98–9, 302 democratic legitimacy 16, 17, 27 design or organism 25–7 market accountability 23–4 participation 25, 27 economic analysis 79, 86, 87–8, 91, 92

externalities, interstate 83 free choice of law 60 heterogeneity of preferences 89 regulatory competition 75, 84, 85, 90–91 standardized contracts 69, 86, 87, 88 fundamental rights 369–70 relational contracts 87 state commercial activity 189–90, 191, 193, 194, 195–6, 201, 203 UNIDROIT Principles of International Commercial Contracts 113, 124, 125 see also consumer protection; international trade law, harmonization of contract theory of the firm 224, 225, 271–4, 276–9, 280, 281–2, 283, 290–92, 294, 295, 328 Convention on the Carriage of Goods by Sea (1978) 116 Convention on International Interests in Mobile Equipment 124 Convention for the International Sale of Goods (CISG) 25, 102–6, 107, 108, 119, 128, 212 case law 104–5, 108–10 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) 110, 117–18 Copeland, B.R. 384, 390, 392, 397 Corbin, A.L. 101 Corder, H. 170, 428, 443 Corell, H. 449 corporate law 211–12 BRIC countries 217–22 challenges 230–35 constitutionalization of 233, 234 creditor protection 223 crises: limitations of legal remedies 236–43 crises: supporting legal remedies 243–9 regulation, supervision, confidence and TRC 249–51 delegated management 215–16 directors, duties of 227–8, 282, 294 economic analysis 60, 61, 85

Index integrity 212, 235, 238, 242, 243 legal personality 215, 224, 225 limited liability 215, 223 MNCs see multinational corporations shareholders see separate entry stakeholders 222–3, 229–30, 249, 268, 319 corporate interest 229 corporate social responsibility see separate entry main players 223 multi-stakeholder networks 323–6 shareholder model, enlightened 227–8, 294 shareholder and stakeholder models 212, 223–30 team production theory 279–82 theory see corporate law theory under multinational corporations transferable shares 216 VOC: history and present 213–17 corporate social responsibility (CSR) 224, 228–9, 297 convergence of national laws 291–4, 297 corporate law theory 274–6, 277, 278, 280, 282–3 multinational corporations 288–9, 300, 310, 321–2, 329, 400 codes of conduct 18, 317–21, 324–5 corruption 268, 286–7, 320 cost and freight (C&F) 120–21 cost insurance freight (CIF) 120–21 Council of Europe see European Convention on Human Rights; European Court of Human Rights Craig, J.D.R. 18 Craig, P. 51 credit crunch 211, 217, 222, 226, 234, 240–43, 329 bank remuneration 231, 236, 238–9, 240, 241, 246 confusion 238–40 ex post and hindsight-biased judgments 236–7, 239, 243 France 232 India 220 integrated markets 97 location of incorporation 302

473

reputation mechanism 88 Russia 218, 219 supporting legal remedies 243–51 trust 303 United Kingdom 293 United States 230–31, 292–3 Critical Legal Studies 16 Croatia 111, 117 Crown 443 cultures 261–2, 345 fundamental rights 378–9, 380 legal 414–15 multinational corporations 269–70, 301, 320 Curtin, D. 17, 34, 41, 45, 51 customary international law 146, 149, 152, 154, 162 customs duties 114, 125–7 Cyprus 111 Dahl, R. 19 Dalhuisen, J.H. 97 damages 60, 371–2, 378, 406, 408–9, 442, 443 Danielsen, D. 284 D’Arcy, L. 113, 116, 118, 120, 121 Dash, M. 231 David, R. 107 Davies, A.C.L. 190, 195, 198, 201 Davis, Mike 445 De Búrca, G. 18, 19, 20, 22, 45, 51 De Feyter, K. 183, 200 De Jong, A. 233 De Larosiere, J. 37 De Ly, F. 98 De Prado, C. 384 De Waal, J. 171 De Wet, J.C. 195 decentralization versus harmonization distributional goals 58 economics see economic criteria: optimal regulatory level environmental law 405–6, 411, 412, 414–15, 416–17 Deckers, F. 240 Delbrück, J. 18, 20, 27 deliberative democracy 21, 43–4 democratic legitimacy 15–17, 27–8, 41–5, 50–51, 407 corporations 277

474


multinational 267, 269, 299, 303–4, 378 Draft CFR 15–16, 22, 27–8 accountability 23–4 design or organism 25–7 participation 24–5, 27 environmental law 407, 410, 416 functions of democracy 19–22 fundamental rights 378 globalization 261, 263 international institutions 299 international trade law, harmonization of 110–11, 112, 113, 122, 127, 128–9 judicial activism 448 law without a state 17–19 terminology 20 see also accountability Denmark 111, 353, 397 Depoorter, B. 65 developing countries 142, 143, 324, 327 climate change 427, 446, 449 environmental standards 392, 395, 399–400 foreign direct investment of MNCs 266–7, 268, 269, 270, 285, 286, 325 headquarters of MNCs 285 Dewey, J. 271 Dickerson, C.M. 266, 276, 277, 278, 321 Dickson, B. 426, 428, 445 DiMatteo, L.A. 109 diplomatic protection 162 directors, duties of 227–8, 282, 294 discovery 343, 358 distributive justice 26–7 Dodd, E.M. 276 Doherty, M. 398 dolphins 397 Dominican Republic 111 Doremus, P.N. 267, 270 Douma, W.T. 388, 401 Du Plessis, L. 152, 153, 155, 157, 162, 163, 164, 166, 169, 171 Ducoulombier, P. 429 Dugard, J. 107, 108, 152, 156 Dunleavy, P. 79 Dunn, J. 19 Dunning, J.H. 265 Dunoff, J.L. 395

Duruigbo, E. 265, 269, 286, 314 Dworkin, R. 26, 431 e-commerce 110, 112, 115–16, 117, 118 e-signatures 118–19 Easterbrook, F.H. 271 Eastern Europe 347, 368, 389, 395 Ebbesson, J. 400 Eberlein, B. 17 Ebert, I. 450 Eckes, C.H.R. 402 economic analysis and contract law 194 economic criteria: optimal regulatory level 57–9, 91–3, 417 externalities, interstate 63–5, 81–3, 387–8, 389, 390, 393 heterogeneity of preferences 59–61, 89 information benefits and costs 62–3, 89, 90, 91 innovation 63, 85, 89–90 lessons for private law 80–81 benefits of decentralization 89–91 cost savings 85–9 externalities, interstate 81–3 regulatory competition 84–5 public choice perspective 77–80, 81, 82 regulatory competition 58–9, 69–70, 84–5, 90–91 level playing field 70–71, 79 race to bottom or top 69, 75–7, 84, 85, 90, 92, 390–92, 395–6, 399 types of 72–5 scale economies 65, 66, 68, 86 transaction cost savings and removal of trade barriers 65–9, 85–8 education 160–61 Egeberg, M. 47 Egypt 112 Ehlers 188, 195 Einstein, A. 174 Eiselen, S. 98, 103, 105, 109, 110, 120 electronics industry Code of Conduct (EICC) 319, 320 Ellian, A. 247 Elster, J. 44 employment law 27 Enron 233, 235, 240, 321

Index environmental law 383–6, 435, 459 contribution to globalization debate 415–17 economic analysis 76–7, 78 heterogeneity of preferences 61 information asymmetries 62 environmental licences 139 globalization: influence on 400 institutional 400–401 procedural 401–6 globalization: influence on: normative analysis 406 contents: differentiation of standards 414–15 institutional 406–12 procedural 412–14 influence of environmental issues on globalization 382, 387–92 influence of environmental issues on globalization: normative analysis 392, 394 mobility of products, firms and services 399–400 multi-level governance 392–4 race to the bottom 395–6 trade–environment dispute 396–9 MNCs 268, 319, 322, 323, 325 differences in standards 389, 390–92, 395–6, 399–400 Eörsi, G. 110 Equator Principles 319, 320 Erasmus, G. 162, 163 Erhard, W. 242 Eritrea 117 Estonia 112, 117 Esty, D.C. 393, 396 ethics 195, 242, 243, 317 European Commission 16, 37–8, 40, 50, 64, 68–9, 79, 80, 395 European Competition Network (ECN) 37 European Convention on Human Rights (ECHR) 152, 156, 434 Art 2: right to life 402, 433, 441 Art 6: fair trial 140, 351–2 Art 8: private and family life 402 First Protocol Art 1: enjoyment of possessions 233, 371–3, 377 European Court of Human Rights 140, 351, 369, 371, 373, 377, 402, 434

475

European Court of Justice (ECJ) 37, 67, 78, 81, 86, 369 Cassis de Dijon judgment 73, 74 fundamental rights 370–71, 377 multinational corporations 287–8 trade–environment dispute 398, 416 transboundary pollution 393 European Free Trade Association 347 European Parliament 16, 37, 38, 41, 64, 80–81 European Union 458 accountability 23–4, 32–3, 46, 47, 49, 50–51 governance, shift in 34–8 hard and soft law 39–40 civil procedure 344, 346–7, 350–57, 359 comitology committees 37, 49–50 contract law 203 corporate law 232, 235, 292, 297 Council of Ministers 37, 50 Draft CFR 15–16, 22, 27–8, 37–8, 39–40 accountability 23–4 design or organism 25–7 participation 24–5, 27 economic criteria: optimal regulatory level 57, 58, 60, 63, 80–81 competition law 61, 62–3 innovation 90 interstate externalities 64–5, 82–3 market integration argument 58, 66, 68–9, 88, 91–2 public choice perspective 78, 79, 80 regulatory competition 70–71, 72, 73–5, 76–7, 84–5 safety and health standards 63, 66 scale economies 66 transactions costs 67, 86 environment 391, 392, 393–4, 395, 396, 401, 406, 407 centralization 412 free trade 396, 397–8 greenhouse gases 390, 427 protectionism 409 financial regulation of 234, 239 internal market 355 legitimacy and democracy in 41–5, 50–51, 407

476


mutual recognition 73–5, 77, 81, 93 open method of coordination 37 product liability 82–3, 85 proportionality principle 355 public health 89 public procurement 188, 198, 199, 202–3 public–private interaction 188–9 social security 89 subsidiarity principle 355 Evans, M.D. 99 eviction 458 ex works (EXW) 120–21 experts 34, 35, 37–8 externalities 63–5, 81–3, 270 pollution 63, 64, 65, 387–8, 389, 390, 393 extractive industries 323–4 extradition 161 fair trade 380 Fanto, J.A. 279, 290, 291, 293, 295 Farber, D.A. 22, 427 Farrell, J. 413 Fasching, H.W. 347 Faure, M. 61, 78, 81, 82, 87, 89, 384, 385, 388, 389, 390, 391, 392, 393, 400, 401, 406, 409, 410, 437, 449 federal states: economic theory 63, 65 Felemegas, J. 125 Fenster, M. 21 Ferrari, F. 104, 105, 109, 110 Ferrarini, G.A. 233 financial crises 97 credit crunch see separate entry financial institutions banks see separate entry Equator Principles 319, 320 Fischel, D.R. 276, 282, 301 Fischer, F. 22 Fischer-Lescano, A. 24 Fischhoff, B. 237 Flinders, M. 184, 185, 192, 204 Follesdal, A. 384, 393, 407 forced labour 446 Ford Motor Company 228–9 Forest Stewardship Council (FSC) 325 Forsyth, C.F. 98, 99, 100 Fort, T.L. 257, 259, 260, 262, 264, 267, 268, 269, 270, 277, 283, 286, 294, 299, 303

Foster, K. 18 France 125, 141, 288, 398, 430–31, 443 civil procedure 345, 346, 347 corporate law 217 credit crunch 232 judicial activism 442 state commercial activity 188, 196, 200 Vivendi Universal 233 franchises 124 Fraser, N. 457 fraud 286 free on board (FOB) 120–21 free riding 60, 78, 320 free trade 394, 396–9, 415, 416, 417 Freedland, M. 188, 190, 196 Frentrop, P.M. 217 Freudenthal, M. 352 Fried, C. 27 Friedman, H.H. 230 Friedman, M. 225, 272 Friedman, T.L. 256, 257, 258, 259, 260, 261, 262, 263, 264, 267, 285, 299, 302, 303, 322 fundamental rights in private law 367–9, 373–80 four illustrations 369–73 Furmston, M.P. 195 Gabriel, H. 120, 121 Gaillard, E. 200 Gambia 117 game theory 69, 76 Ganten, T.O. 371 Garn, G. 21 Garoupa, N. 27 Garro, A.M. 110 GATT (General Agreement on Tariffs and Trade) 126 Geistfeld, M. 85 Gelter, M. 224 Gerardin, D. 47 Germany 61, 109, 112, 141, 248, 288 civil procedure 344, 360 Constitution 153 Constitutional Court 369–70, 377 corporate law 217, 226, 232 Hypovereinsbank 233 international law and individuals 403, 412–13 state contracts 188

Index Gibbs, J.H.T. 436 Gillies, P. 116 Gilson, R.J. 290 Glaeser, E.L. 26 Global Accountability Framework 48 global warming see climate change globalization, characteristics and evaluation of 97, 183–4, 255–64, 270 GMOs (genetically modified organisms) 398, 450 Goldring, J. 22 Goode, R. 99, 107 Goodin, R.E. 183, 184, 191 Google 258 Gopalan, S. 125 Gordon, J.N. 295 governance 32–3 actors 34–8 instruments 39–40 multi-level 33–4 Grant, R.W. 46 Greece 112, 443 Greenfield, K. 265, 273, 274, 278, 279, 280, 282, 283, 288 Greenpeace 322 Greenspan, Alan 238 Greenstone, M. 391 Grimeaud, D.J.E. 414 Grossmann-Doerth, H. 99 Gruber, U.P. 98 Guatemala 112, 117 Gupta, J. 392 Gurlit 188 Gustavsson, S. 44 Guyana 117 Guzman, A. 64, 65 Habermas, J. 19, 21 Hadfield, G. 23 Hague-Visby Rules 116 Hamburg Rules (1978) 116 Hamers, J.J.A. 228 Handl, J. 387 Hansmann, H.B. 225, 273, 274, 277, 282, 290, 291, 293, 294 Harlow, C. 36, 196 harmonization civil procedure 346–7, 350–61 contract law 203

477

corporate law 232 decentralization versus distributional goals 58 economics see economic criteria: optimal regulatory level environmental law 405–6, 411, 412, 414–15, 416–17 environmental law 396, 405–6, 411, 412, 414–15, 416–17 legitimacy and level of 22 public procurement 202–3 Harris, B. 428, 436, 440, 443, 445, 446, 449 Harrison, G. 184 Hart, H.L. 432 Hart, O.S.D. 277, 282 Hayek, F.A. von 26, 63 Hazard, G.C. 357, 359 hazardous waste 399 health and safety 63, 66, 86 food safety 398 Healy, P.M. 233 Heine, K. 60, 72 Heirbaut, D. 345 Heldrich, A. 374 Hemingway, J.M. 278 Hendrickx, R. 408 Heringa, A.W. 399 Héritier, A. 22, 24 Hesselink, M.W. 16, 25, 38, 45, 47, 203, 379 Heydon, J.D. 449 Hillemanns, C. 305, 307 hindsight wisdom or bias 236–7, 239, 243 Hirst, P. 20 historical wrongs 445–6 Hobhouse, S. 99, 107 Hodes, L. 273 Hoexter, C. 190, 201 Holdsworth, J.L. 103 Holmstrom, B. 281 Holocaust 446 Holzinger, K. 77 Hong Kong 111 Honnold, J.O. 102, 103, 105, 120, 121 Hooghe, L. 34, 407 Hopt, K.J. 291, 292, 294, 295, 296, 297, 300 housing, right to adequate 159

478


Howse, R. 299, 383 Huber, P. 105 Huber, U. 120, 121 human rights 89, 152, 175, 202, 261, 457–8 children 444 corporations 244, 289, 294–5, 299, 322, 325, 328–9, 379, 380 United Nations 305–17 ECHR see European Convention on Human Rights environmental 402–3 horizontal application 192 judicial activism 449, 450 life, right to 402, 433, 441, 444–5 South Africa 247 international and foreign law see transnational contextualization: constitutional interpretation see also fundamental rights in private law Human Rights Watch 321, 322 Hungary 112 Hurst, Cecil 101 Hypovereinsbank 233 In ‘t Veld, R. 246 India 103, 112, 233, 258, 260, 321 corporate law 219–20, 222, 235 judicial activism 444–5, 448 indigenous communities 325 individualism 189 inequality 260, 347 information 245, 258, 261, 264, 321, 322 access to environmental 404, 415–16 corporate disclosure 275–6 economic criteria: optimal regulatory level 66–7, 84 decentralized information 62–3, 86, 89, 90 information costs 66–8, 78, 86, 87, 91 Tiebout’s theory 60–61 Inman, R. 65 innovation 63, 85, 89–90 insolvency law 115–16 insurance companies 139–40, 450

interest groups public choice theory 77–80, 81, 82, 263, 269, 302, 412 International Atomic Energy Agency (IAEA) 408 International Chamber of Commerce (ICC) 113, 115, 119–22 International Competition Network (ICN) 37 International Court of Justice (ICJ) 156, 404–5 International Covenant on Civil and Political Rights (1966) 153, 351 International Covenant on Economic, Social and Cultural Rights (1966) 152–3, 159–60 International Criminal Court 314 International Financial Reporting Standards (IFRSs) 296 International Labour Organization (ILO) 304, 308 International Law Commission 162 International Maritime Organization (IMO) 401, 406, 407 International Monetary Fund (IMF) 17, 184, 217, 298–9 International Organization for Standardization (ISO) 325 international trade law, harmonization of 97–100, 127–9 agents and their methods 114 ICC (International Chamber of Commerce) 119–22 UNCITRAL 114–19 UNIDROIT 123–5 WCO (World Customs Organization) 125–7 economic analysis 69 history of 100–106 methods 106–7 conventions 107–11 model laws or codes: countries 111–12 voluntary codes: individual parties 113 International Tribunal for the Law of the Sea (ITLOS) 405 internet 87–8, 97, 105, 257, 258, 262 interpretation of conventions: CISG 109 Iran 112

Index Ireland 112 Israel 443 Italy 109, 232, 233, 344, 442, 443 Iyer, V. 444, 445, 449 Jacobs, J. 404 Jaffe, A.B. 76, 391 Jaglom, A.R. 119 Jans, J.H. 396, 401, 402, 406 Jansen, N. 26, 36, 407 Japan 76, 103, 112, 117, 217, 233, 292 Jensen, M.J. 225 Joerges, C. 36 Johnston, J.S. 388, 413, 414 joint venture companies 216 Jongbloed, A.W. 345 Jordan 112 judges 458 case management powers 344, 346–7, 360 compatibility of national law with EU and/or international law 402, 412, 446 judicial activism, rule of law and climate change 426–36, 447–51 examples 437–46 legislator and judiciary 446–7 judicial review 188, 198–9, 402, 412 transboundary environmental disputes 405, 413 juries 343, 358–9 jurisdictional competition see competition, jurisdictional/ regulatory justice 26–7, 246, 247, 248, 250 Kahan, M. 301 Kaldor, M. 255, 259, 269 Kamp, A.R. 101 Karunatilleka, E. 97 Kassim, H. 47 Kazakhstan 117 Keenan, P.J. 97 Kell, G. 311 Kenna, P. 97 Kennedy, D. 16, 189 Kenya 112, 117 Kerber, W. 69, 72, 74, 84 Kerr, O.S. 433

479

Khoza, R.J. 198 Kickert, W. 36 Kindleberger, C.P. 231 Kingsbury, B. 20, 51, 141, 143 Kirk, D. 297 Klein, Franz 346, 347 Klug, H. 167 Kniec, K.D. 428 Koch, B.A. 442 Koenig-Archibugi, M. 183, 185, 186, 187 Kohler-Koch, B. 34, 44 Kolstad, C.D. 391 Korea, Republic of 112, 117 Kortmann, S.C.J.J. 443 Kötz, H. 99, 101, 104, 107 Koziol, H. 89, 443 Kraakman, R.R. 61, 215 Kramer, E.A. 104 Kroeze, M.J. 237 Kronman, A. 26 Kumar, N. 220 Kyrgyzstan 117 language 67, 262, 356, 358 English 97, 104, 105, 262 Lasser, M.E. 430, 432 Latin America 368 Latty, F. 18 Lavrysen, L. 389 lawyers academic lawyers: Draft CFR 15–16, 37–8 international firms 296 League of Nations 123, 152 leasing 124 legitimacy 20, 41–2, 246, 250, 251 corporate law and MNCs 303–4 environmental law 407–8, 410, 416 European Union 41–5, 50–51, 407 input 42–4, 48 judicial activism 448 NGOs 322 output 35, 36, 42, 43 see also democratic legitimacy Legrand, P. 67, 295, 406 Lehmann, K. 110 Lemke, P. 387 Lesotho Highlands Water Project 268 Levitt, S.D. 245

480


lex fori rule 344, 349 lex mercatoria 69, 86, 98, 99, 101, 125 Licht, A.N. 273, 274, 276, 278, 281, 282, 292, 293, 294, 295 Liebenberg, S. 191 life, right to 444–5 ECHR: Art 2 402, 433, 441 limitation periods 441–2 Lindahl, H. 457 Lindblom, P.H. 344, 356, 357 Lindenbergh, S. 233, 374 Lithuania 112 Livedoor Co. 233 Lloyd, R. 48 Locré, J.-G. 431 Loof, J.P. 371 Lookofsky, J. 103, 105 Lord, C. 42 Lowenstein, L. 214 Lubbe, G.F. 191, 195 Macau 111 McCahery, J.A. 295, 300, 301 McCrudden, C. 183, 184, 192 MacDonald, E. 51 McDonald’s restaurants 257, 259, 262 Macedonia, former Yugoslav Republic of 112 McGrew, A. 183, 184 McHugh, J.M.H. 429 McLoughlin, A.N. 266, 269, 286, 287, 288, 314, 316, 320, 321 McManus, F. 432 Macrory, R. 401 Madagascar 112, 117 Magnus, U. 101, 102, 103, 105, 106, 109 Mahoney, P.G. 295 Majone, G. 43 Mak, C. 374 Malawi 117 Mallin, C.A. 218, 219, 220, 221 Malta 112 managerialism 237 Mandela, Nelson 247 Mander, J. 390 Markesinis, B. 170 Marks, S. 51 Marsh, D. 184, 186 Marshall, J. 378 Martens, P. 384

Martiny, D. 100 Mattei, U. 16 Mauritius 117 Mayer, D.O. 258, 259, 261, 266, 268, 289, 326, 329 Mazzacano, P.J. 98, 101 mediation 316, 355, 361 Meese, A.J. 272, 273, 280, 281 Melé, D. 224 Mendes, E. 101 Mendes, J. 44 Mensch, N.L. 287, 305, 307, 309, 317, 318, 319, 323, 325 mergers 63 Merill Lynch 233 Merriman, J. 38 Mertens, H.-J. 107 mesothelioma 441 Mexico 76, 112, 117, 397 Michaels, R. 17, 19, 98, 99, 101, 265, 284, 286, 293, 297, 298, 300, 303 Milgrom, P. 69 Milhaupt, C.J. 295 Miller, L. 203 Millon, D. 271, 272, 273, 276, 277, 282, 292 mining companies 269, 319–20 Extractive Industries Transparency Initiative (EITI) 323–4 minorities 161, 168, 262, 320 Mitchell, J.D.B. 188, 196 Mitchell, L.E. 261, 274, 275 Mitchell, W.C. 263 Moldova 117 Mongolia 117 monopolies, natural 65 Montenegro 117 Montesquieu, C. 346, 430 Moravcsik, A. 45 Morgan Stanley 233 Moseneke, D. 189, 191 Moses, L.A. 451 Mostert, H. 368 Motala, Z. 156, 166, 178 multidisciplinary approach 417 multinational corporations (MNCs) 185, 255, 328–30, 378, 457, 458, 459 alternative regulatory systems 299–300, 302–4, 326–7 competing rules 300–302

Index international institutions 303, 304–17 multi-stakeholder networks 323–6 non-governmental organizations (NGOs) 321–2, 323, 326 self-regulation 18, 317–21 arbitrage, regulatory 268, 284–5, 286, 289, 290, 300–302 China 221 codes of conduct 18, 238, 317–21, 324–5 codes, corporate governance 234, 295–7 corporate law theory 271–83 behavioural economics 278 contract theory 224, 225, 271–4, 276–9, 280, 281–2, 283, 290–92, 294, 295, 328 corporate social responsibility (CSR) 274–6, 277, 278, 280, 282–3 team production 279–82 form of regulation 283–4 convergence of national corporate laws 290–97 international rules 298–9 national law 284–9, 326 globalization 255–64, 270 corporate law 265–70, 302–3 tort claims against 287, 379 Murkens, J.E.K. 169 mutual recognition 72, 93 European Union 73–5, 77, 81, 93 Nariman, F.S. 118 Nasdaq 233 nation states 24, 258, 259, 329, 401 multinational corporations 267, 269–70, 321 convergence of national corporate laws 290–97 human rights 314–15, 316, 317 regulation in national law 284–9, 326 state commercial activity see separate entry national parliaments debates on legislation 438 legitimacy of private law 15, 16, 17, 18–19, 24–5, 27–8, 47, 409–10, 416

481

national executives and 32 nationalism 259, 263 natural monopoly 65 Ndebele, N.S. 186 Neethling, J. 443 negligence 379, 441, 448 Nehmelman, R. 374 neo-liberalism 263–4, 266–7, 288, 289, 299, 302, 329 Nepal 117, 248 Nesteruk, J. 276 Netherlands 25, 125, 231, 233, 288, 345 administrative law and private law 139, 140 contracts between administration and citizen 140–41 banks 238, 239–40 corporate law 211, 226, 232, 245 VOC: history and present 213–17 environment 393, 401, 403, 413 fundamental rights 371–2, 374, 378 international law and individuals 403, 413 judicial activism 437–40, 441, 443 network forms of governance 35–8 Neven, D. 78 New Zealand 112, 117, 428, 443 Nicaragua 112 Nieuwenhuis, H. 376 Nigeria 112, 117, 321 Nike 229, 257 Nipperdey, H. 374 Niskanen, W. 79 Noam, E. 77 Nollkaemper, P.A. 386, 393, 400, 403, 413 non-governmental organizations (NGOs) 321–2, 323, 326 environmental 322, 323, 391, 393, 410, 412 North, P.M. 98, 99, 100 Norway 112 nuclear liability 401, 403, 407–9 Oates, W. 65, 81 Oberhammer, P. 347 OECD (Organisation for Economic Cooperation and Development) 287, 297, 304, 308

482


Nuclear Energy Agency (NEA) 401, 406, 407–8 Ogus, A. 23, 63, 71, 79, 89, 90, 396 oil companies 269, 321, 408 Olaerts, M. 222 Old Mutual 285 Oly, G.G. 101 Oman 112 One World Trust 48 Orts, E.W. 266, 270, 286 O’Scannlain, D.F. 435, 436 Oshionebo, E. 268, 269, 310, 311, 312 Ott, C. 68 Page, E.C. 47 Pakuscher, E.K. 195 Panagariya, A. 220 Papadopoulos, I. 36 Paraguay 112 Parles, L. 235 Parmalat 233 participation transnational rules 20, 22, 24–5, 27, 43–4, 48, 51, 110, 112 Partlow, J. 217 paternalism 395, 400 path dependency 221, 224, 295 Peeters, M. 388, 404, 413 Pelinka, A. 19 Pelkmans, J. 74 pension funds 450 Peru 112 Peters, A. 150, 156, 165 Peters, B.G. 187, 189, 192 Petersmann, E.U. 299 Philippines 112 Philips 228–9 Piergiovanni, V. 17 Pikalo, J. 183 Pillay, S. 256, 259, 260, 261, 262, 284, 285, 288, 299, 314 Pinto, A.R. 255, 260, 261, 290, 292, 293, 295, 296 plant location 76, 84, 85 Polak, J.E.M. 429 Poland 112, 117, 443 political scientists 417 pollution economic analysis 62, 76 externalities 63, 64, 65, 387–8, 389, 390, 393

marine oil 401, 407–9 transboundary see separate entry Porter, G. 399 Porter, M. 71, 384 Portes, R. 258 Portugal 103, 443, 450 Posner, R.A. 429, 436 precedent 67 Prechal, S. 412 pregnancy 370–71 Prentice, D. 228 pressure groups 77, 78, 81, 92 Prévost, M.D. 396 Princen, S.B.M. 391 principal–agent problem 62, 272, 279, 283 prisoners’ dilemma 76, 390 privity of contract 195–6 product liability 82–3, 85 property law 26 protectionism 97 trade–environment dispute 396–9, 409–10 public choice theory 77–80, 81, 82, 263, 269, 302, 412 public goods 187 optimal provision of local 23, 59–61, 81 public health 89 public procurement 197, 198, 204 European Union 188, 198, 199, 202–3 see also state commercial activity and administrative law public–private partnerships see state commercial activity and administrative law Quinot, G. 186, 188, 190, 191, 193, 197, 198, 200 Rabel, Ernst 101 race to bottom or top see under competition, jurisdictional/ regulatory Rachlinski, J.J. 237 racial equality 152 Radé, C. 443 Raes, K. 433, 449 Ramberg, C. 110, 120, 121

Index Ratner, S.R. 257, 267, 284, 286, 287, 298, 305, 314, 317, 318, 321, 322, 325, 329 Rawls, J. 21 reciprocal non-compliance 64, 65 Redfern, A. 200 Redmond, P. 257, 260, 265, 266, 267, 286, 287, 288, 298, 305, 308, 313, 314, 317, 318, 319, 320 reflexive regulation state commercial activity 193–5, 203 regulators 36–7, 78 Reid, Lord 426 relational contracts 87 reputation mechanisms 64, 65, 69, 86, 87, 88, 91 retaliation 64, 65 retroactive law 244, 440 Revesz, R. 76, 390, 396 Rhinard, M. 47 Rhine river 64, 393, 394, 403, 404, 413 Richardson, J. 47 Ringhand, L.A. 429 Roach, K. 428, 430, 434, 436 Rödl, F. 19 Rodrick, D. 264 Rodriguez, A.M. 98 Roe, M.J. 301 Rogers, W.V.H. 89, 431, 442 Roman law 100–101 Romania 117, 395 Romano, C.P.R. 405 Romano, R. 85 Ronen, Y. 446 Rose-Ackermann, S. 76 Rosett, A. 99, 104, 107, 110 Royal Ahold 233 Rubin, E.L. 20 Rubin, S.J. 305 Rubino-Samartano, M. 116, 118 Ruggie, J.G. 267, 311, 314, 317, 326, 327 Rühl, G. 67, 87, 88 rule of law 142–3, 241–2, 247 Russian Federation 112, 121, 125, 233 corporate law 218–19, 222, 235 Rwanda 117 Sabel, C.F. 37 Salmon, P. 73

483

Salzberger, E. 434 Sand, P.H. 407 Sands, P. 384, 405 Sarbanes-Oxley Act 234–5, 278 Satyam 233 Saul, J.R. 256, 258, 259, 260, 261, 263, 264, 266, 267, 268, 269, 270, 286 Saunders, C. 169, 176 scale economies 65, 66, 68, 86 Schäfer, H.B. 88, 395, 400 Scharpf, F. 43 Schedler, A. 21 Schiek, D. 18 Schlechtriem, P. 101, 102, 103, 105, 106, 110 Schmid, C. 36 Schmidtchen, D. 69, 87 Scholte, J.A. 255, 256, 257, 258, 259, 260, 261, 262, 263 Schröder, M. 141 Schwenzer, I.H. 98, 105, 110 Scotland 112 Scott, J.S. 396 Scott, W.R. 20 security interests 115–16 Seddon, N. 195, 201 Seerden, R.J.G.H. 140, 142, 402 Seita, A.Y. 4 self-regulation 18, 120, 193, 325 multinational corporations (MNCs) codes of conduct 18, 238, 317–21, 324–5 codes of corporate governance 234, 295–7 see also corporate social responsibility; soft law separation of powers 169, 170, 246, 447 Serbia 112, 117 Shapiro, M. 33 Shapo, M.S. 437 shareholders 223, 249, 290–94 agent–principal problem 62, 272, 279, 283 challenges to corporate system 231, 232–4, 236, 237, 240, 243, 249, 283 corporate law theory 280, 281–2 contract theory 224, 225, 272–4, 278, 279, 283, 290–92, 294, 295

484


corporate social responsibility 275 rights 215–16, 234, 236, 237, 240, 243, 249, 282–3 stakeholder and shareholder models 212, 223–30 Shell 229 Singapore 112 Sinn, H.-W. 84 Slaughter, A.-M. 18 slavery 446, 450 Slovakia 117 Slovenia 117 Slovic, P. 398 small and medium-sized enterprises 78 Smith, J. 449 Smits, J.M. 23, 37, 47, 233, 262, 290, 295, 300, 301, 302, 303, 368, 375, 376, 415, 458 Social Accountability or SA 8000 325 social contract 23 social scientists 417 social security 89 Société Générale 232 soft law 128, 459 corporations 241–2, 302, 305, 327, 328, 330 codes 18, 234, 238, 295–7, 317–21, 324–5 CSR see corporate social responsibility International Chamber of Commerce (ICC) Incoterms 113, 120–21, 122 Uniform Customs and Practice for Documentary Credits (UCP) 113, 120, 122 model laws or codes for adoption by countries 111–12, 116, 117, 118–19, 200 UNIDROIT: Principles of International Commercial Contracts 113, 124, 125 Solomon, R.C. 276 Sørensen, G. 183–4, 185, 187 South Africa 103, 112, 117, 126, 127, 368 constitutional law see transnational contextualization: constitutional interpretation corporate law 291, 293, 297

code on corporate governance 295–6, 297 eviction 458 judicial activism 443 multinational corporations (MNCs) 268, 285 state commercial activity 188, 192, 195, 197, 198, 201–2 transition from apartheid to democracy 211 Truth and Reconciliation Commission 246–9, 250 South African Breweries 285 South America 248 Southeast Asia 389 sovereign wealth funds 233–4 Soviet Union, former 291 Spain 112, 121, 213, 232, 360, 450 specific performance 193 Speth, J.G. 383 Spier, J. 443, 446, 449 Springer, J.D. 294 Srakin, J. 247 Sri Lanka 112, 248 stakeholders see under corporate law standardization organizations 18, 325 state commercial activity and administrative law 183–6, 203–4 actions of the state 186–7 applicable norms 187–93 enforcement of norms 193–200 private and public in law and social practice 201–3 statutory interpretation 162 travaux préparatoires 147, 164–5 see also judicial activism under judges; transnational contextualization: constitutional interpretation Steins Bisschop, B.T.M. 213, 232, 244, 245 Stephan, P.B. 99, 110, 302 Stewart, R.B. 388 Stiglitz, J.E. 184, 187, 255, 258, 259, 260, 261, 262, 263, 264, 266, 267, 268, 269, 270, 285, 286, 288, 298 Stone, J. 434 Storme, M. 344, 349, 350, 355–6 Storskrubb, E. 343, 344, 350, 353, 355, 358

Index Stout, L.A. 226 Strange, S. 329 Stürner, R. 343, 347, 357, 358, 359, 360 Suchman, M. 41 Sun, J.M. 74 sustainability reporting 275, 297 Sutton, D. 200 Sweden 427 Switzerland 288 Tamanaha, B.Z. 26 Tanzania 117 tariffs: classification of goods 126–7 Tarrow, S. 24 Taruffo, Michele 357 Tavis, L.A. 256, 257, 258, 259, 260, 261, 263, 264, 265, 269, 270, 276, 277, 284, 290, 292, 294, 295, 298, 299, 303, 304, 305, 318, 319, 322, 325, 326 taxation 85, 285, 287, 389 Taylor, A.M. 312 technical standards 18 Temmink, H. 397 Testy, K.Y. 262, 267, 268, 271, 272, 273, 274, 275, 276, 277, 278, 279, 282 Teubner, G. 17, 18, 193, 198, 295, 303 Thailand 112, 117 Thomassen, J. 43 Tiebout, C. 23, 59–61, 81, 300, 389 time limits 441–2 tort 26, 408, 435 administrative law and 139, 140 economic analysis 79 externalities, interstate 82–3 heterogeneity of preferences 89 regulatory competition 84, 85 multinational corporations (MNCs) 287, 379 product liability 82–3, 85 time limits 441–2 US Alien Tort Claims Act 1789 287, 379 wrongful birth and wrongful life 443 toy trade 319, 320 Toyota 257, 262 transboundary pollution 63, 64, 65, 384, 387–8, 390, 393–4, 400–401, 410, 411, 414, 459 consensual solutions 404–5, 413

485

environmental impact assessment 404 Netherlands 393–4, 403 transnational contextualization: constitutional interpretation 145–7, 150–51, 178–9 foreign law and constitutional comparativism 147, 175–9 believers and disbelievers 168–73 value and advantages of 173–5 gateways: s. 39 and Makwanyane guidelines 147–50 international law 165–8, 178–9 AZAPO case 156–8, 160, 166, 167, 178 binding and non-binding 154–5 framework dictum 149, 155–60 Grootboom case 158–60, 167 mistakes of law 156, 166 other judgments 160–62 presumption, underused 162–4, 166 South Africa’s ‘New Constitution’, globalization and 151–4 travaux préparatoires 147, 164–5 transparency 20, 21, 51, 122, 127, 323–4, 416 accountability as a virtue 47–8 conventions on international trade law 110 corporate law 218, 220, 226, 235, 241, 268, 304 environmental law 407, 409, 410, 411, 412, 416 multinational corporations 268, 304 regulators 78 state commercial activity 191, 195, 196 transnational rules 22, 25–7 transport law 115–16 travaux préparatoires 147, 164–5 Trebilcock, M.J. 408 Tsuk, D. 271, 274, 276 ‘tulipomania’ 231 tuna 397, 405 Tunisia 112 Turkey 112 Turpin, C. 188, 190, 201 Tushnet, M. 172, 177, 428 Twining, W. 258, 297, 303

486


Udehn, L. 263 Uganda 112, 117 Ukraine 112 Ulen, T.S. 272 uncertainty, scientific 417 UNCITRAL (UN Commission on International Trade Law) 102, 114–19 CISG 25, 102–6, 107, 108–10, 119, 128 Model Laws 116, 117, 118–19 Electronic Commerce 112 International Commercial Arbitration 111, 116, 118, 200 UNIDROIT (International Institute for the Unification of Private Law) 101–2, 114, 123–5, 350, 357, 358 Principles of International Commercial Contracts 113, 124, 125 United Arab Emirates 117 United Kingdom 61, 102, 103, 112, 117, 189, 197, 198, 450 adverse possession 372–3 Bank of Credit and Commerce International 233 civil procedure in England and Wales 343–4, 346, 360, 361 corporate law 217, 226–8, 229, 232, 288, 290–94, 297 eviction 458 Human Rights Act 435, 458 United Nations 116, 117, 120, 152, 298, 368 Committee against Torture 441 Convention against Corruption 287 environment 394, 401, 406, 407 multinational corporations 305–6 Global Compact 310–12, 315, 316, 318 Norms on human rights 306–10, 313–14, 327 Special Representative 312–17, 327 UNCTAD 306 United States 97, 103, 109, 112, 117, 119, 121, 211 accounting standards 296 Alien Tort Claims Act 1789 287, 379

capital market debt 240 civil procedure 343, 358, 360 American Law Institute 350, 357, 358 competition law 61 constitutional comparativism 169–70, 172 corporate law 217, 228–9, 235, 290–94, 297, 328 competition of norms 301 contract theory 272, 273–4, 278, 294 Delaware 85, 294 multinational corporations 267, 288, 321, 325 corruption abroad 286–7 credit crunch 230–31, 237 crime in New York 245 environment 76–7, 391, 392, 395, 404, 413 climate change 427, 446 Commerce Clause 416 emissions trading 390 free trade 396, 397 marine oil pollution 408–9 nuclear liability 408–9 globalization 258 judicial activism 444 pre-trial discovery 343 president and Congress 410 Sarbanes-Oxley Act 234–5, 278 sovereign wealth funds 233–4 Uniform Commercial Code (UCC) 25, 101, 122 unjust enrichment 25 Uzbekistan 117 Van Alstine, M.P. 104 Van Caenegem, R.C. 15, 343, 347 Van Calster, G. 397, 406 Van Dam, C. 379, 414 Van den Berg, P.A.J. 24 Van den Bergh, R. 61, 63, 64, 80, 82, 84, 89, 90, 393, 414 Van den Borre, T. 409 Van den Bossche, P. 396 Van den Brink, D. 240 Van den Brink, G. 429 Van den Linde, C. 384 Van der Linde, M. 399

Index Van der Merwe, S. 195 Van der Walt, A.J. 174, 175, 176, 191, 368, 373 Van der Westhuizen, J. 184 Van Dijk, P. 351 Van Dillen, J.G. 213 Van Gerven, W. 46 Van Ierland, E.C. 388 Van Kersbergen, K. 33 Van Rhee, C.H. 343, 344, 345, 346, 347, 459 Van Schendelen, M.P.C.M. 47 Van Zelst, B. 16 Vanberg, V. 73 Vandenhole, W. 444 Vaquer, A. 15 Venezuela 112 Venter, F. 171, 176 Verbeke, A. 16, 45 Verheij, A. 408 Verheyen, R. 449 Verougstraete, A. 430 Verwey, M. 413 vicarious liability 443 Vienna Convention on the Law of Treaties (1969) 108, 154, 165 Vietnam 117 Viney, G. 442 Vivendi Universal 233 Vogel, D. 384, 389, 391 Vogenauer, S. 348 Volmer, F.G. 214 voluntary law 18 see also soft law Von Bar, C. 15, 38 Von Wilmowsky, 398 Vos, E. 398 Wade, C. 190 Wagner, G. 84, 88, 90 Wal-Mart 322 Wallace, C.D. 299, 305, 313 Wang, H. 408, 409 Wang, J.Y. 222 Wang, P. 221 war 259, 269 criminals 246 warranties, bank 87 Warsaw Convention (1929) 110 waste disposal 389, 397, 399

487

water services 188 Wauters, K. 141 Weatherill, S. 74, 85, 88 Weien, G.C. 244 Weigand, F.B. 200 Weiler, J. 42, 74 Weinrib, E.J. 26 Weissbrodt, D.S. 265, 266, 307, 308, 309, 312, 314, 317, 326 welfare provision 186–7 Wellink, N. 238 Wessel, R. 410 Westbrook, D.A. 258, 261 Whincop, M.J. 273, 276 Whytock, C.H.R.A. 412 Wiener, J. 308 Wiener, J.B. 398 Wijffels, A. 346 Wilde, R. 51 Will, M.R. 104 Williams, C.A. 274, 275, 291, 292, 293, 295, 304 Williams, O.F. 311 Williams, R.C. 126 Williamson, O.E. 272, 273 Winn, J.K. 119 Winter, G. 384, 393 Wirth, D.A. 383, 390, 396, 397, 398, 404, 410 witnesses: Storme Report 357 Wolf, R.C. 116 Wool, J. 99 Woolf, H. 197 Woolf, L. 343, 344 World Bank 17, 184, 217, 298–9, 304–5, 349 World Customs Organization (WCO) 114, 125–7 World Trade Organization (WTO) 17, 114, 221, 298–9, 404 economic criteria: optimal regulatory level 57, 58, 81, 93 interstate externalities 64, 65 regulatory competition 70–71, 74 trade–environment dispute 396, 397, 399, 416 Wouters, J. 65 wrongful birth and wrongful life 443 Zambia 112, 117

488 Zamoyski, Adam 450 Zander, J. 398 Zegveld, L. 379 Zimbabwe 112

Globalization and private law Zimmermann, R. 196 Zondorak, V.A. 323 Zwart, S.G. 110 Zweigert, K. 38, 99, 101

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