Harold Paisner
Bryan Cave Leighton Paisner, London
Harold.Paisner@bclplaw.com

Globalisation and economics

Globalisation has fundamentally accelerated and altered business transactions. The search for low labour costs and cheap raw materials has led to a proliferation of international transactions and large international law firms are being called on to participate in complex transactions generally and help businesses tap into sources of finance around the world for investment.

Now, how have law firms developed as their clients have become more international, and in particular, why have US and UK based firms grown more than law firms from other major economies?

As US companies expanded internationally, the major US law firms who advised them found opportunities to work with their clients and local law firms, helping to find ways in which US companies, used to their own legal system, could operate in a less familiar environment. US law firms, therefore, acquired significant experience of operating in other environments in the post war decades.

In the early post war years, Britain continued to trade largely with its colonies as well as with Australia, Canada, New Zealand and South Africa – and, of course, the United States. However, the rapidly changing environment as European powers decolonised, and as Europe began to prosper, meant that Britain had to find new markets for its trade.

Fortunately for the major City of London based law firms at that time, a chance development in the international capital markets led to the creation of a new market which had not previously existed.

In the capitalist world, the economy that thrived most in the aftermath of the war was the US. The high levels of income the US then enjoyed relative to the rest of the world meant that the US was a major source of capital to companies in other countries as they recovered from the war and developed and expanded. The US was therefore a frequent investor in the debt and equity raised by growing companies in the remainder of the free world.

In 1963, the US changed its tax laws so as to impose an interest equalisation tax on US holders of foreign securities to reduce US demand for such securities. Clever bankers and lawyers from the City of London therefore came up with the concept of the offshore bond, or Eurobond, enabling investors to own US Dollar bonds outside the US and thus be free of the new tax charge.

The first Eurobond was issued in 1963 in the City of London by an Italian company, Autostrada. It was listed on the Luxembourg Stock Exchange, which was an easier place to list debt than the London Stock Exchange. The first issue was followed by dozens, then hundreds and then thousands more, leading to the rapid growth of international debt markets based in London and documented under English or New York law.

As businesses have moved from their domestic roots to become international and then global – experienced partners at major US and UK law firms have frequently acquired a ‘trusted adviser’ mantle, advising companies and banks not only on the law, but in relation to culture and custom in new environments and are often asked to make difficult judgement calls. This gave rise to the growth of ‘relationship lawyering’ under which an adviser not only advised on points of law, but on more general issues faced by a company or bank expanding into a new environment.

Then there is the matter of reputation. As Professor John Flood of the University of Westminster has written:

‘While the large law firm is a secular institution and globalisation follows non theocratic routes, large law firms nevertheless possess a sacred role. It is they who sanctify the relationships that global actors form when they engage in business.’^[1]

The best known and amongst the most profitable law firms are the global elite, the Wall Street ‘White Shoe’ firms and UK based Magic Circle firms, who comprise the largest law firms in revenue, usually having some 20 to 30 offices in major financial centres and cities globally.

There are also now many firms who have globalised using the Swiss ‘Verein’ model, which enables them to present themselves and operate as a single firm, but in reality, continue operations as separate firms in separate jurisdictions and with separate profit centres but with overriding cooperation arrangements.

Of course, no law firm can be present everywhere and all firms continue to work with other law firms in different jurisdictions as client work demands.

The large international law firm is therefore a pillar of globalisation – globalisation cannot succeed without the large law firm. How then did the large law firm come to occupy such a position?

Obviously, the English language as the language of international business has been of great help – but the answer is much more complex.

US law firms

According to de Tocqueville, the French political thinker and historian – and best known for his work, Democracy in America – lawyers have always enjoyed a relatively elevated status in the US compared to the status they enjoy in Europe.^[2]

For the US, it was the industrial revolution and the spread of the railroads that spurred the growth in the number of law firms and their size.

Nor can we underestimate the effect of the federal constitutional structure of the US. There are, of course, 50 separate legal jurisdictions but all in one politically unified country – ‘e pluribus unum’.

Despite the US developing later than the United Kingdom, the large law firm emerged first in the US rather than the UK.

The year 1870 not only marked a surge in commerce and business in the U but also the rise of the new American law school when Christopher Columbus Langdell became dean of Harvard law School. And to quote from Professor Flood again:

‘Langdell borrowed the pedagogical techniques of the chemistry laboratory to create the case study method of teaching law, which enabled law students to be finely graded and with the best students becoming the editors of the law review, law firms were able to select the most qualified graduating students as their new associates.’^[3]

Law firm recruitment could move away from a socially based model towards merit-based selection. While Langdell provided the model for the new law school, Cravath, a New York attorney – and a founder of the firm of the same name – was devising improvements to and creating the organisation of the new corporate law firm. All of these moves were part of the idea that law was a science.

The strong commercial bargaining power of the US government, banks and companies after 1945 gave rise to the strong growth, internationally of American law firms and of New York law as an acceptable international standard.

British law firms

The common law which forms the basis of both the English and US legal systems of course developed in England before the founding fathers first sailed to the Americas in the 17th century. The term ‘common law’ derives from the idea of a legal system applying to the whole country and administrated by the King and his ministers, as opposed to the regional laws and legal systems that had applied in medieval times.

English common law was therefore the basis of the legal systems which developed in the countries which were at one time British colonies, including the US, Canada (other than Quebec), Australia, New Zealand, India and a further 50 or so countries in Asia, Africa, the Caribbean and the Pacific.

As the British Empire grew in the 18th and 19th centuries, trade within the Empire was frequently governed by English law or a common law system that was very similar. The City of London therefore saw the growth of very strong business law focussed firms in the 19th century, well used to dealing with the legal systems of other countries within the Empire.

After 1945, initially greater opportunities flowed to the US firms for the reasons explained earlier. In the 1960s however, as noted above, the Eurobond market was created in London and a small number of business-focussed British law firms enthusiastically embraced the opportunity which arose. US and international companies and financial institutions quickly became comfortable with English law, as well as New York law, as the governing law of some of the instruments created, which led to significant growth of international capital markets work based in and from London. This gave British law firms the opportunity, which their American colleagues had had for the previous 20 years or so, to work increasingly with companies and financial institutions globally, as international capital markets grew.

Given the financial trade and historical ties between Britain and the US, many large British firms opened offices in New York at this time.

The importance of Brussels as the effective ‘capital’ of the European Union led to many British firms opening offices in Brussels, as a ‘listening-post’ and to advise particularly on EU competition – anti-trust law.

By the mid-1970s, banks and other financial services groups based in either the US or Europe generally had a strong presence on both continents. However, few had much presence in the growing markets of Asia. Britain’s continued presence in the Crown Colony of Hong Kong gave banks and financial services companies an opportunity to set up a presence in Asia under a familiar common law system and thus trade throughout the 24-hour cycle. British law firms quickly spotted the opportunities that opened up, and many City of London firms established significant operations in Hong Kong in the 1970s and 1980s.

Working initially in and from Hong Kong, as markets liberalised, many major British law firms then expanded into the Far East generally.

The break-up of the former Soviet Union and the freedom obtained by its former satellite states in Eastern Europe following the fall of the Berlin Wall, gave London-based law firms opportunities to work with newly emerging economies as they privatised their industries and raised capital internationally. The proximity of such countries to the UK and old ties from the pre-communist era meant that London was well placed to become the centre for this work.

Common law versus civil law

One of the most important reasons for the dominance of British and US law firms is that both English and New York law are common law systems, based on a combination of legislation and case precedent. English law is not set out in a single civil code. This approach has enabled English law to be flexible, adaptable and practical when dealing with the developing needs of commerce, as technology, evolving markets and new techniques all continue to revolutionise the ways in which we do business.

The principles of English law are clear and well established. Within broad parameters, businesses and their advisers have the legal freedom and flexibility to agree to whatever terms they want on their transactions. The laws and rules themselves are less prescriptive when interpreting the intentions and actions of the parties and instead, the courts will interpret what the parties have written in the contract. This makes it relatively straight-forward for businesses to transact and to understand clearly what their rights and obligations are under the contract, just by reading what is written in it. This is particularly helpful where one or more of the parties do not have English as their first language.

The greater certainty and, therefore, predictability created by the adoption of English law (particularly mercantile law) has great value to parties, especially international parties, when undertaking business across the globe. Generally speaking, freedom of contract is found to be preferable to the constraints and lack of flexibility imposed by many civil systems.

Historically, civil law is the group of legal ideas and systems ultimately derived from the Justinian Code, but heavily overlaid by Napoleonic, Germanic and other local practices, as well as local codes.

Its most prevalent feature is that its intellectual basis is core principles which are codified into a referable system which serves as the primary source of law.

This is in contrast to common law systems, whose intellectual basis comes from judge made decisional law which gives precedential authority to prior court decisions on the principal that it is unfair to treat similar facts differently on different occasions.

Civil law proceeds from abstractions and formulates general principles. It holds case law to be secondary and subordinate to statutory law. Judges generally have wide latitude to interpret statutes – increasing the risk of nasty legal surprises.

Conclusion

Accordingly, there is strong evidence to suggest that the dominance of American and Britain law firms globally is due to a combination of history, economics, reputation, the role of common law and the use of English as the international language of business.