The Law Market

In England, a motorcyclist was recently sentenced to six months in jail for riding at speeds of up to 122 mph on a half-mile stretch of road on his Suzuki Hayabusa. His 14-year-old son was riding pillion. That’s six months in jail for 15 seconds of madness during which no one was hurt.

I do not defend the rider’s actions (although a Hayabusa can go much faster than that) but I wonder how his sentence will compare with those eventually handed out to two (alleged) fraudsters from the US, Allen Stanford and Bernard Madoff, whose actions over a rather longer period – under the watchful gaze of the US Securities and Exchange Commission – have brought about economic mayhem and untold financial misery. Mr Stanford has succeeded in striking a serious blow to the economy of Antigua – where he was the largest private employer – and brought offshore banking into disrepute (as has a bent Texan or two before him). Mr Madoff’s actions, conducted from his Manhattan offices, have resulted in the financial ruin and suicides of many perfectly decent people. And the offshore fund business is, as I write, being reduced to a fraction of its former size, in no small part due to his efforts.

In addition to dealing with the fraudsters themselves, President Obama intends to deal with the places from which they operated – or so we are told. No, he is not talking about New York and Texas but the offshore jurisdictions which provided them with the vehicles through which their frauds were perpetrated. So, to return to our motorcyclist, by analogy the president should presumably be promoting a “Stop Motorcycle Abuse Act” designed to crack down on Japan, where Suzuki Hayabusa (and a host of other beautiful and incredibly fast sports bikes) are built – except he wouldn’t. As we know, it’s a daft approach and the Japanese wouldn’t let him get away with it. The problem lies with the rider, not the motorcycle.

So why is the general declaration of war on the offshore centres any less daft? Surely, it couldn’t simply be a popular distraction designed to take away from the onshore greed and incompetence which gave rise to the world’s current economic crisis?

Erin O’Hara and Larry Ribstein’s new book, The Law Market may suggest to some that it is. I hope that President Obama will find time from bailing out US banks and insurance companies from the consequences of their fiscal irresponsibility and inept behaviour to read it; he may (or may not) be surprised to learn from this book how many states have sought, and still seek, to emulate the offshore centres which he so publicly denounces.

But, of course, the main point of the book is not to demonstrate this particular fact. The authors, two highly respected academics, principally seek to address what they perceive to be an unforeseen by-product of globalisation: the increasing ease with which corporations and individuals can shop among various countries and states for the laws most favourable to the actions they wish to take.

The authors comment that faster communication via the Internet, combined with a global trade and transportation network, make it relatively easy to shop for a legal system beneficial to certain areas of life. One is no longer stuck with a single legal system that governs all business or personal activities.

The authors suggest that the law market has a significant drawback, principally in the area of consumer protection, in that it limits the ability of any individual government to enforce regulations and protect people from harmful activities. But, they also note, a law market offers significant potential for improved, streamlined laws that offer rules better-suited to larger numbers of people.

In The Law Market, Ms O’Hara and Mr Ribstein explore the implications of law as a commodity for which individuals and businesses can shop and propose a system of contractual choice-of-law rules designed to maintain a balance between legal protection and the positive evolution of laws in a global environment. “If we want the law market to achieve its potential for improving our laws, we need to take a conscious approach to it that reflects an understanding of how it’s structured and how it currently operates as well as the economic, legal and political forces that influence it,” Ms O’Hara says. “A contractual approach is the simplest, most effective way to maximise the benefits of the law market while tempering its social costs.”

The authors also discuss new areas of conflict of laws such as the recognition of same-sex marriages, gestation contracts and durable powers of attorney giving instructions as to what is to happen if the donor falls into a vegetative state.

From the offshore reader’s point of view, the authors’ purview is unfortunately limited to the domestic US. It is a pity that they do not consider, in any detail, the operation of the law market in the wider world – particularly the offshore. The better offshore financial centres have been attracting business with carefully crafted laws, sensible regulation and court systems capable of resolving complex disputes in an equitable, predictable manner, for several decades. Surprising as it may seem to President Obama and John Grisham, as well as their respective followers, confidentiality laws are only a small – and decreasing – part of the appeal of the offshore jurisdictions.

It would have been interesting for the authors to have analysed why states such as Colorado and Montana, which seek to attract offshore banking business, or Arizona and South Carolina, which seek to attract captive insurance business, have largely failed to compete against the major offshore centres. Or why the Cayman Islands should attract suspicion for having so many incorporations when Delaware does not. Or why the offshore centres should be held up to suspicion for marketing so-called asset protection trusts when at least eight states passed legislation in the late 1990s in an attempt to attract such business (unsuccessfully, we are told).

The authors give interesting insights into other areas where the domestic states compete with each other for business in much the same way as do offshore jurisdictions. One example of this is the abolition by many states of the rule against perpetuities as a means of attracting trust business (and thereby creating an opportunity for wealthy US families to avoid taxation). I also found it fascinating to learn that Delaware and South Dakota repealed their usury laws in order to attract credit card companies which, as a result, are legally unconstrained in the interest rates and late fees which they can charge customers. One can only wonder if an offshore financial centre would be allowed to get away with that.

I hope that the authors will consider a second edition of their book to examine the law market in a broader context.

The Law Market was released by Oxford University Press in January 2009. 

For a great place to keep up with the latest scholarship on jurisdictional competition, visit Larry Ribstein’s ideoblog at