CHOICE OF LAW IN INTEGRATED AND INTERCONNECTED MARKETS: A Matter of Political Economy Horatia muir Watt A case of lost innocence 2 Shifts in the public/private divide. Describing the conflict of laws as an issue of political economy can be seen as a response to the tectonic shifts currently wrought by globalisation in respect of the public/private law divide, which shapes trad itional thinking in this field. A new generation of collisions of economic regulation 6 linked to unprecedented transnational mobility of firms, goods, services and capital, challenges mainstream Continental European conceptions of choice of law as a tool geared to the resolution of purely private disputes. 7 Unchallenged throughout the major part of the twentieth century 8 the private interest paradigm which constitutes the foundations of the This essay was presented at the lus Commune Conference in Amsterdam on 28-29 Novem ber 2002 and subsequently a ga in revised. Inspiration for the title comes from a recent article by Paul B Stephan, The Political Economy of Choice of Law,, 90 Geo L/957(2002), which responds to Andrew Guzman's Choice of Law. New Foundations,,90 Geo //333(2002). A similar focus can be found in previous work by the same author, for example, Choice of Law and Its Consequences: Constitutions for Intemational Transactions, 26 BrookJ IntL211(2000 of La we. The phrase was coined by Herbert Kronke in his excellent account of "Capital Markets and the Conflict Rec Cours Acad La Haye, t 286, 249-385, 378 Defined, according to Black's Law Dictionary 7th edn, 1999, as'a social science dealing with the economic problems of government and the relationship between political policies and econom ic processes 4 Outside the Roman tradition, such a div ide has of course been more easily dismantled. Among an abundant literature, see Duncan Kennedy, The Stages of Decline of the Public/Private Distinction, 130UPaL Rev 1423(1982); Mary Anne Glendon, The Sources of Law in a Changing Legal order, 17 Creighton L Rev 663(1983 The public/private divide has served an important purpose within the Continental European tradition insulating private intemational law from political concems. This is less true in the US, where the relationship between la w and politics has been monitored by comity in the intemational arena, even serv ing as a rh bridgein this context(see Joel R Paul, "Comity in Intemational Law, Harv Int7LJ1(1991), while federalism concerns have coloured the conflict of laws with political and public interest. The div ide is, of course, constantly shifting(see H Muir Watt, " Droit public et droit prive dans les rapports internationaux(Vers la publicisation des conflits de lois), Arch philo droit, t 41, 207) The expression was coined by Jurgen Basedow, Conflicts of Econom ic Regulation, Am J Comp L 423 (1994); comp by the same author on this theme, Souvera inete territoriale et globalisation des marches. Le domaine d'application des lois contre les restrictions de concurrence, 264 Rec Cours Acad la haye 9(1997) One reads with interest the following passage in Andreas D Lowenfeld's work on International Litigation and the Quest for Reasonableness, Clarendon Press, 1996, which provides excellent food for comparative thought on this point: ' I do believe that Story was right to think of the conflict of laws as part of the law of nations, and that the term he introduced and that has ga ined currency in Great Brita in and throughout Europe is misunderstood by those who regard private international law as sharply distinct from public law or public international law. Thus my definition and approach are very different from those of Batiffoland Lagarde who define private international law as the collection of rules applicable solely to private persons in their The idea that the conflict of laws is a'recipe' for achiev ing private law policies was expressed in Francescakis' seminal Theorie du renvoi in 1957 and characterises mainstream thinking to the present day( see
CHOICE OF LAW IN INTEGRATED AND INTERCONNECTED MARKETS: A Matter of Political Economy Horatia Muir Watt1 1. A case of lost innocence:2 Shifts in the public/private divide. Describing the conflict of laws as an issue of political economy3 can be seen as a response to the tectonic shifts currently wrought by globalisation in respect of the public/private law divide,4 which shapes traditional thinking in this field.5 A new generation of ‘collisions of economic regulation’6 linked to unprecedented transnational mobility of firms, goods, services and capital, challenges mainstream Continental European conceptions of choice of law as a tool geared to the resolution of purely private disputes.7 Unchallenged throughout the major part of the twentieth century,8 the private interest paradigm which constitutes the foundations of the 1 This essay was presented at the Ius Commune Conference in Amsterdam on 28-29 November 2002 and subsequently again revised. Inspiration for the title comes from a recent article by Paul B Stephan, ‘The Political Economy of Choice of Law’, 90 Geo LJ 957 (2002), which responds to Andrew Guzman’s ‘Choice of Law: New Foundations’, 90 Geo LJ 333 (2002). A similar focus can be found in previous work by the same author, for example, ‘Choice of Law and Its Consequences: Constitutions for International Transactions’, 26 Brook J Int’l L 211 (2000). 2 The phrase was coined by Herbert Kronke in his excellent account of ‘Capital Markets and the Conflict of Laws’, Rec Cours Acad La Haye, t 286, 249-385, 378. 3 Defined, according to Black’s Law Dictionary, 7th edn, 1999, as ‘a social science dealing with the economic problems of government and the relationship between political policies and economic processes’. 4 Outside the Roman tradition, such a divide has of course been more easily dismantled. Among an abundant literature, see Duncan Kennedy, ‘The Stages of Decline of the Public/Private Distinction’, 130 U Pa L Rev 1423 (1982); Mary Anne Glendon, ‘The Sources of Law in a Changing Legal order’, 17 Creighton L Rev 663 (1983). 5 The public/private divide has served an important purpose within the Continental European tradition in insulating private international law from political concerns. This is less true in the US, where the relationship between law and politics has been monitored by comity in the international arena, even serv ing as a rhetorical ‘bridge’ in this context (see Joel R Paul, ‘Comity in International Law’, Harv Int’l L J 1 (1991)), while federalism concerns have coloured the conflict of laws with political and public interest. The divide is, of course, constantly shifting (see H Muir Watt, ‘Droit public et droit privé dans les rapports internationaux (Vers la publicisation des conflits de lois)’, Arch philo droit, t 41, 207). 6 The expression was coined by Jurgen Basedow, ‘Conflicts of Economic Regulation’, Am J Comp L 423 (1994); comp by the same author on this theme, ‘Souveraineté territoriale et globalisation des marchés. Le domaine d’application des lois contre les restrictions de concurrence’, 264 Rec Cours Acad La Haye 9 (1997). 7 One reads with interest the following passage in Andreas D Lowenfeld’s work on International Litigation and the Quest for Reasonableness, Clarendon Press, 1996, which provides excellent food for comparative thought on this point: ‘I do believe that Story was right to think of the conflict of laws as part of the law of nations, and that the term he introduced and that has gained currency in Great Britain and throughout Europe is misunderstood by those who regard private international law as sharply distinct from public law or public international law. Thus my definition and approach are very different from those of Batiffol and Lagarde, who define private international law as the collection of rules applicable solely to private persons in their international relations’ (3). 8 The idea that the conflict of laws is a ‘recipe’ for achieving private law policies was expressed in Francescakis’ seminal Théorie du renvoi in 1957 and characterises mainstream thinking to the present day (see
conflict of laws can no longer cope with the increasing interference of state policies in the field of transnational litigation. Of course, European legal theory has been more loath than American scholarship to embrace the idea tha at private law can also serve as a regulatory tool, which explains the poor reception of governmental interests analysis this side of the Atlantic I0 But, as it has been pointed out, fields such as antitrust, securities, banking law export controls, products liability or environmental regulation, which can all affect private transactions, directly or ind irectly, involve interests of an undeniably different order from those premised by trad itional conflicts methodology, introducing concerns previously identified as belonging to the field of public interests and as such beyond the pale of choice of law. In its strictest expression, the latter has been shielded from political concerns by the public law taboo, 2 which led courts to decline to adjud icate other states interests, at least when they give rise to the direct enforcement of foreign public rights. 3 The progressive emergence of an intermed iate category of semi-public, internationally mandatory provisions, or ' lois de police, has contributed somewhat to bridge the methodological gap; while remaining subject to specific unilateral methodology, foreign economic regulation has become amenable to application in domestic courts in private law litigation. 4 Beyond this concession, however, the conflict of laws deals exclusively with private law relationships': governments, it is thought do not care directly about outcomes. 5 However, after losing its for example, in France, the Preface to Grands arrets de lajurisprudence de droit international prive, by B Ancel and Y Lequette, rejecting as corruptive the instrumentalisation of private intemational law by European Community law or human rights ideology ) However, even prior to this clear challenge to sovere ignty-based heories of multilateralism of which the most characteristic is to be found in the work of Etienne bartin (Principes de droit international prive selon la loi et la jurisprudence francaises, 3 vols, Paris, 1930, 1932, 1935), the conflict of laws was, paradoxically, considered to be limited to private relationships. This is clearly a legacy of Von Savignys Treatise of Roman Law(vol vill) 9 That tort law for products liability, for instance, can be used to serve state interests(for instance, in protecting manufacturers or victims)is as banal in the Us(see Hay, Conflicts of Laws and State Competition in the Product Liability System, 80 GeoL R 617)as it is recent in the EU(see, for example, Jane Stapleton Three Problems with the New Products Liability, Essays for Patrick Atiyah, Cane and Stapleton 1991, 291) Newer still is the idea that the private law of contract can be used to regulate markets, through consumer protection, for example(see Hugh Collins, Regulating Contracts, OUP 1999) A characteristic expression of the refusal to accept that state interests can be found in private law can be found in Gerhards Kegels The Crisis of the Conflict of Laws, Rec Cours Acad La Haye, 1964, t 112, 91 I1 Russell J Weintraub, The Extraterritorial Application of Antitrust and Securit ies Laws: An Inquiry into the Utility of a"Choice-of-Law Approach, 70 Tex L Rev 1799(1992) hilip J McConnaughy, "Reviving the "Public Law Taboo"in International Conflict of Laws, 35 Stan J Int7L255; William S Dodge, Extraterritoraility and Conflict-of-Laws Theory: An Argument for Judicial Unilateralism.39 Harv Int1J10 FA Mann, The Intermational Enforcement of Public Rights", published in translation in 77 Rev crit dr internatpr 1(1988) The stimulus has been article 7$ l of the Rome Convention, which prov ides for the operation of foreign mandatory laws which override party choice of law. A similar provision is made in the Hague Agency of foreign public law could arguably be considered a case of incidental application(as both the United Kingrce Convention, 1978, article 16. But these texts concern cla ims initially framed in contract, so that the interfere and Germany argue, in opting out of article 7$1). On such incidental application of foreign public law, see H Baade, The Operation of Foreign Public Law, 30 Tex Int7LJ429(1995) Kegel, The Crisis of the Conflict of Laws
conflict of laws can no longer cope with the increasing interference of state policies in the field of transnational litigation. Of course, European legal theory has been more loath than American scholarship to embrace the idea that private law can also serve as a regulatory tool,9 which explains the poor reception of governmental interests analysis this side of the Atlantic.10 But, as it has been pointed out, fields such as antitrust, securities, banking law, export controls, products liability or environmental regulation, which can all affect private transactions, directly or indirectly, involve interests of an undeniably different order from those premised by traditional conflicts methodology,11 introducing concerns previously identified as belonging to the field of public interests and as such beyond the pale of choice of law. In its strictest expression, the latter has been shielded from political concerns by the ‘public law taboo’,12 which led courts to decline to adjudicate other states’ interests, at least when they give rise to the direct enforcement of foreign public rights.13 The progressive emergence of an intermediate category of semi-public, internationally mandatory provisions, or ‘lois de police’, has contributed somewhat to bridge the methodological gap; while remaining subject to specific unilateral methodology, foreign economic regulation has become amenable to application in domestic courts in private law litigation.14 Beyond this concession, however, the conflict of laws deals exclusively with ‘private law relationships’; governments, it is thought, do not care directly about outcomes.15 However, after losing its for example, in France, the Preface to Grands arrêts de la jurisprudence de droit international privé, by B Ancel and Y Lequette, rejecting as corruptive the instrumentalisation of private international law by European Community law or human rights ideology). However, even prior to this clear challenge to sovere ignty-based theories of multilateralism, of which the most characteristic is to be found in the work of Etienne Bartin (Principes de droit international privé selon la loi et la jurisprudence françaises, 3 vols, Paris, 1930, 1932, 1935), the conflict of laws was, paradoxically, considered to be limited to private relationships. This is clearly a legacy of Von Savigny’s Treatise of Roman Law (vol VIII). 9 That tort law for products liability, for instance, can be used to serve state interests (for instance, in protecting manufacturers or victims) is as banal in the US (see Hay, ‘Conflicts of Laws and State Competition in the Product Liability System’, 80 Geo L R 617) as it is recent in the EU (see, for example, Jane Stapleton, ‘Three Problems with the New Products Liability’, Essays for Patrick Atiyah, Cane and Stapleton 1991, 291). Newer still is the idea that the private law of contract can be used to regulate markets, through consumer protection, for example (see Hugh Collins, Regulating Contracts, OUP 1999). 10 A characteristic expression of the refusal to accept that state interests can be found in private law can be found in Gerhard’s Kegel’s ‘The Crisis of the Conflict of Laws’, Rec Cours Acad La Haye, 1964, t 112, 91. 11 Russell J Weintraub, ‘The Extraterritorial Application of Antitrust and Securities Laws: An Inquiry into the Utility of a “Choice-of-Law” Approach’, 70 Tex L Rev 1799 (1992). 12 Philip J McConnaughy, ‘Reviving the “Public Law Taboo” in International Conflict of Laws’, 35 Stan J Int’l L 255; William S Dodge, ‘Extraterritoraility and Conflict-of-Laws Theory: An Argument for Judicial Unilateralism’, 39 Harv Int’l J 101. 13 FA Mann, ‘The International Enforcement of “Public Rights”’, published in translation in 77 Rev crit dr internat pr 1 (1988). 14 The stimulus has been article 7 § 1 of the Rome Convention, which provides for the operation of foreign mandatory laws which override party choice of law. A similar provision is made in the Hague Agency Convention, 1978, article 16. But these texts concern claims initially framed in contract, so that the interference of foreign public law could arguably be considered a case of incidental application (as both the United Kingdom and Germany argue, in opting out of article 7 § 1). On such incidental application of foreign public law, see H Baade, ‘The Operation of Foreign Public Law’, 30 Tex Int’l L J 429 (1995). 15 Kegel, ‘The Crisis of the Conflict of Laws’
neutrality'in the 1970s by allowing in result-selective considerations in private law, b choice of law also seems destined to lose the "innocence which once served to keep it distinct from international politics 2. The additional challenge of market integration for European conflicts theory. Tod Member States of the European Union are also facing the fact that a federal or integrated political structure bears necessarily on the way in which conflicts between the laws of component units are perceived and solved, and that allocation of legislative jurisdiction within such a structure does indeed give rise to governmental concerns. Indeed, while efforts to approximate national legislations might seem to de-dramatise the conflict of laws the creation of a closer community seems paradoxically to focus more attention on state interests; issues of regulatory power within the internal market become central to the function of the conflict of laws, while political theories of choice of law seem bound to flourish. 8 The novelty from a European stand point lies not only, once again, in the blurring of the public/private divide and the inadequacy of the trad itional private interest paradigm to explain the transformations induced by new quasi-federalist concerns, but also in the need for dual choice of law system, geared on the one hand to dealing with cross-border activities within the internal market, on the other to defining the scope of Community regulation vis-a- vis the law of third states. 19 Such a cleavage between interstate and international conflicts-or rather, between conflicts subject to state or federal authority 20-has long existed in the United States, the former being to a certain degree constitutionalised. I The latter, formulated The belief widely held in Europe that govemments do not have a direct stake in outcomes in conflicts cases does not mean that legislators do not show concern forthe implementation of substantive policies in private law. This gives rise to alternative choice of law rules, such as those designed to promote the interest of he child in the field of fam ily relationships(for example, articles 311-16 to 311-18 of the French civil code) 17 Thus, mutual recognition and the home country rule tend to frame choice of law asa political issue, as is apparent from the study by Jukka Snell, Goods and Services in EC Law: A Study of'the Relationships between the freedoms. OUP 2002 Fundamental nights ideology will no doubt be the vehicle of such an approach within Europe. For ar example of the way in which various rights impact on the conflict of laws in the field of family law, see A Bucher, ' La famille en droit intemational prive, 283 Rec Cours Acad La Haye 9-186(2000). It may be, on the other hand, that a polit ical theory of negative rights, such as the one proposed by Lea brilmayer (Rights, Fairness and Choice ofLaw,,98 Yale /1277(1989)is unnecessary in the European Union, because of guarantees built into European conflict of laws or judicial jurisdiction to ensure freedom from unfair surprise or interference. Fundamental freedoms and the principle of proportionality may serve a similar end At present, this system is particularly complex as decision-making in both these fields is multi-level Not all the choice of law rules of the Mem ber States in fields which might affect the work ing of the internal market are harmonised as yet, and conflicts with third states are subject to community law only to the extent that it prohibits opting-out of harmonised protection. See on this last aspect, P Lagarde, Heurs et ma heurs de la protection internationale du consommateur dans IUnion europeenne, in Le contrat au debut du xXleme siecle explains that the real distinction between the Second Restatement on the Conflict of Laws and the lhiyl1) Lea Brilmayer( The Extraterritorial Application of American Law, 50 Law Contemp Probs 11) Restatement on Foreign Relations lies in the existence or not of federalregulation. Thus, some intermational conflicts are subject to choice of law under the Second restatement, when they arise in a field such as tort which is not subject to federal legislation. On the other hand, when a claim is governed by federal regulation federal courts have subject-matter jurisdiction, and approach conflict of laws situations in terms of "prescriptive jurisdiction The current state of the law on this point results from Allstate Insurance v Hague, 1981, 101S Ct 633
‘neutrality’ in the 1970s by allowing in result-selective considerations in private law,16 choice of law also seems destined to lose the ‘innocence’ which once served to keep it distinct from international politics. 2. The additional challenge of market integration for European conflicts theory. Today, Member States of the European Union are also facing the fact that a federal or integrated political structure bears necessarily on the way in which conflicts between the laws of component units are perceived and solved, and that allocation of legislative jurisdiction within such a structure does indeed give rise to governmental concerns.17 Indeed, while efforts to approximate national legislations might seem to de-dramatise the conflict of laws, the creation of a closer community seems paradoxically to focus more attention on state interests; issues of regulatory power within the internal market become central to the function of the conflict of laws, while political theories of choice of law seem bound to flourish.18 The novelty from a European standpoint lies not only, once again, in the blurring of the public/private divide and the inadequacy of the traditional private interest paradigm to explain the transformations induced by new quasi-federalist concerns, but also in the need for a dual choice of law system, geared on the one hand to dealing with cross-border activities within the internal market, on the other to defining the scope of Community regulation vis-à- vis the law of third states.19 Such a cleavage between interstate and international conflicts - or rather, between conflicts subject to state or federal authority20 - has long existed in the United States, the former being to a certain degree constitutionalised.21 The latter, formulated in 16 The belief widely held in Europe that governments do not have a direct stake in outcomes in conflicts cases does not mean that legislators do not show concern for the implementation of substantive policies in private law. This gives rise to alternative choice of law rules, such as those designed to promote the interest of the child in the field of family relationships (for example, articles 311-16 to 311-18 of the French civil code). 17 Thus, mutual recognition and the home country rule tend to frame choice of law as a political issue, as is apparent from the study by Jukka Snell, Goods and Services in EC Law: A Study of the Relationships between the Freedoms, OUP 2002. 18 Fundamental rights ideology will no doubt be the vehicle of such an approach within Europe. For an example of the way in which various rights impact on the conflict of laws in the field of family law, see A Bucher, ‘La famille en droit international privé’, 283 Rec Cours Acad La Haye 9-186 (2000). It may be, on the other hand, that a political theory of negative rights, such as the one proposed by Lea Brilmayer (‘Rights, Fairness and Choice of Law’, 98 Yale LJ 1277 (1989)) is unnecessary in the European Union, because of guarantees built into European conflict of laws or judicial jurisdiction to ensure freedom from unfair surprise or interference. Fundamental freedoms and the principle of proportionality may serve a similar end. 19 At present, this system is particularly complex as decision-making in both these fields is multi-level. Not all the choice of law rules of the Member States in fields which might affect the working of the interna l market are harmonised as yet, and conflicts with third states are subject to community law only to the extent that it prohibits opting-out of harmonised protection. See on this last aspect, P Lagarde, ‘Heurs et malheurs de la protection internationale du consommateur dans l’Union européenne, in Le contrat au début du XXIème siècle. Etudes offertes à Jacques Ghestin’, LGDJ 2000, 511. 20 Lea Brilmayer (‘The Extraterritorial Application of American Law’, 50 Law & Contemp Probs 11) explains that the real distinction between the Second Restatement on the Conflict of Laws and the Third Restatement on Foreign Relations lies in the existence or not of federal regulation. Thus, some international conflicts are subject to choice of law under the Second Restatement, when they arise in a field such as tort, which is not subject to federal legislation. On the other hand, when a claim is governed by federal regulation, federal courts have subject-matter jurisdiction, and approach conflict of laws situations in terms of ‘prescriptive jurisdiction’. 21 The current state of the law on this point results from Allstate Insurance v Hague, 1981, 101 S Ct 633
terms of isdiction, are subject to the supposed constraints of public international law or comity; 2 they involve defining the international reach of federal economic legislation, and, when a claim is not supported by the latter, leave no room for the enforcement of foreign public law. 23 3. New perspectives: Economic theory of choice of law in a market setting. Thus, the European perspective on the conflict of laws is being reshaped by the pressures wrought by globalisation and by internal market integration, which both, for different reasons, challenge the private law model and focus attention on the political importance of ensuring the proper allocation of regulatory authority. The thesis of this paper is, very simply, that an economic analysis of the relationship between law and the market might be used to clarify the function of choice of law in both a global and an internal market setting, and highlight some of the transformations to which the new economic and institutional environment transforms trad itional theory. It draws on recent US scholarship, which has suggested that economic analysis could provide renewed foundations for choice of law, 24 although its conclusions may differ from these proposals in many respects. 25 In common with them, however, it relies on Phillips Petroleum v Shutts, 1985, 105 S Ct 2965, Sun Oil v Wortman, 1988, 108 S Ct 2117. There is debate as to whether, in fact, constitutional constra ints also extend to the exercise of jurisdiction, at least judicial jurisdiction, in the international arena(see Brilmayer Norchi, "Federal Extraterritoriality and Fifth Amendment Due Process, 105 Harv L Rev 1217). On the impact of federa lism on US conflicts, see Robert Sedler, 'American Federalism, State Sovereignty and the Interest Analysis Approach to Choice of Law, in Law and Justice in a Multi-state World: Essays in Honor of Arthur T von Mehren, Transnational Publishers 2002 See Third Restatement on Foreign Relations Law 1987. Sect 403 and Andreas F Lowenfeld International Litigation and the Quest for Reasonableness, 17. For a critique of the way in which comity rhetoric has been used by the courts, sometimes as a bridge between law and politics and sometimes as a wall, see again Joel R Paul, Com ity in International Law Indeed, in the absence of a federal question arising from the applicability of federal legislation, the federalcourts lack subject-matter jurisdiction Andrew Guzman, 'Choice of Law. This text is heralded as a compelling framework for all future scholarship'by Paul B Stephan, The Political Economy of Choice of Law, at 969. Among the abundant, previous literature, see Michael Solimine, 'An Econom ic and Empirical Analysis of Choice of Law, 24 Ga L Rev 949(1989); Erin O'Hara Larry E. Ribstein, From Politics to Efficiency in the Choice of Law, 67 Chi L Rev 1151(2000); Michael Whincop Mary Keyes, "Putting the Private Back into International Law. Default Rules and the Proper Law of Contract, 21 Melbourne UL Rev 515(1998); Michael Whincop Mary Keyes Towards an Econom ic Theory of Private International Law, 25 Australian ournaloflegal Philosophy 10 (2000); Joel P Trachtman, "Conflict of Laws and Accuracy in the Allocation of Government Responsibility,26 Vand Transnat7L975(1994); Joel P Trachtman, Economic Analysis of Prescriptive Jurisd iction and Choice of law, 42 Va/Int7L 1(2001); see, from a European perspective, H Muir Watt, "Law and Economics" Quel apport pour le droit international prive,, in Le contrat au debut du xxleme siecle. Etudes ofertes a Jacques Ghestin 685 Particularly as far as it seems to encourage excessive deregulation and"privatisation'of the conflict of laws. There is, however, disagreement within this new movement as to the extent to which deregulation and privatisation should be encoura ged. See, on the one hand, Erin OHara larry Ribstein, From Politics to Efficiency, Michael Whincop Mary Keyes, "Putting the Private Back,, and on the other hand, critical of excessive privatisation, Andrew Guzman, "Choice of Lawand Joel P Trachtman, " Economic Analysis of Prescriptive Jurisdiction. In many cases, too, economic analysis appears to reinvent the wheel, through insufficient attention to traditional conflicts theory. On the benefit the law and economics movement in choice of law might ga in from comparative analysis, see Jan Kropholler Jan von Hein, From Approach to Rule Orientation in American Tort Conflicts, Law and ustice in a Multi-state World: Essays in Honor of Arthur T. von Mehren, 317. This applies, in particular, to the idea that the welfare of individuals, not sovereignty, is the right yardstick for the conflict of laws
terms of ‘prescriptive jurisdiction’, are subject to the supposed constraints of public international law or comity;22 they involve defining the international reach of federal economic legislation, and, when a claim is not supported by the latter, leave no room for the enforcement of foreign public law.23 3. New perspectives: Economic theory of choice of law in a market setting. Thus, the European perspective on the conflict of laws is being reshaped by the pressures wrought by globalisation and by internal market integration, which both, for different reasons, challenge the private law model and focus attention on the political importance of ensuring the proper allocation of regulatory authority. The thesis of this paper is, very simply, that an economic analysis of the relationship between law and the market might be used to clarify the function of choice of law in both a global and an internal market setting, and highlight some of the transformations to which the new economic and institutional environment transforms traditional theory. It draws on recent US scholarship, which has suggested that economic analysis could provide renewed foundations for choice of law,24 although its conclusions may differ from these proposals in many respects.25 In common with them, however, it relies on Phillips Petroleum v Shutts, 1985, 105 S Ct 2965, Sun Oil v Wortman, 1988, 108 S Ct 2117. There is debate as to whether, in fact, constitutional constraints also extend to the exercise of jurisdiction, at least judicial jurisdiction, in the international arena (see Brilmayer & Norchi, ‘Federal Extraterritoriality and Fifth Amendment Due Process’, 105 Harv L Rev 1217). On the impact of federalism on US conflicts, see Robert Sedler, ‘American Federalism, State Sovereignty and the Interest Analysis Approach to Choice of Law’, in Law and Justice in a Multi-state World: Essays in Honor of Arthur T. von Mehren, Transnational Publishers 2002. 22 See Third Restatement on Foreign Relations Law, 1987, Sect 403 and Andreas F Lowenfeld, International Litigation and the Quest for Reasonableness, 17. For a critique of the way in which comity rhetoric has been used by the courts, sometimes as a bridge between law and politics and sometimes as a wall, see again Joel R Paul, ‘Comity in International Law’. 23 Indeed, in the absence of a federal question arising from the applicability of federal legislation, the federal courts lack subject-matter jurisdiction. 24 Andrew Guzman, ‘Choice of Law’. This text is heralded as ‘a compelling framework for all future scholarship’ by Paul B Stephan, ‘The Political Economy of Choice of Law’, at 969. Among the abundant, previous literature, see Michael Solimine, ‘An Economic and Empirical Analysis of Choice of Law’, 24 Ga L Rev 949 (1989); Erin O’Hara & Larry E. Ribstein, ‘From Politics to Efficiency in the Choice of Law’, 67 U Chi L Rev 1151 (2000); Michael Whincop & Mary Keyes, ‘Putting the Private Back into International Law: Default Rules and the Proper Law of Contract’, 21 Melbourne U L Rev 515 (1998); Michael Whincop & Mary Keyes, ‘Towards an Economic Theory of Private International Law’, 25 Australian Journal of Legal Philosophy 10 (2000); Joel P Trachtman, ‘Conflict of Laws and Accuracy in the Allocation of Government Responsibility’, 26 Vand J Transnat’l L 975 (1994); Joel P Trachtman, ‘Economic Analysis of Prescriptive Jurisdiction and Choice of law’, 42 Va J Int’l L 1 (2001); see, from a European perspective, H. Muir Watt, ‘“Law and Economics”. Quel apport pour le droit international privé?’, in Le contrat au début du XXIème siècle. Etudes offertes à Jacques Ghestin, 685. 25 Particularly as far as it seems to encourage excessive deregulation and ‘privatisation’ of the conflict of laws. There is, however, disagreement within this new movement as to the extent to which deregulation and ‘privatisation’ should be encouraged. See, on the one hand, Erin O’Hara & Larry Ribstein, ‘From Politics to Efficiency’, Michael Whincop & Mary Keyes, ‘Putting the Private Back’, and on the other hand, critical of excessive privatisation, Andrew Guzman, ‘Choice of Law’ and Joel P Trachtman, ‘Economic Analysis of Prescriptive Jurisdiction’. In many cases, too, economic analysis appears to reinvent the wheel, through insufficient attention to traditional conflicts theory. On the benefit the law and economics movement in choice of law might gain from comparative analysis, see Jan Kropholler & Jan von Hein, ‘From Approach to Rule - Orientation in American Tort Conflicts’, Law and Justice in a Multi-state World: Essays in Honor of Arthur T. von Mehren, 317. This applies, in particular, to the idea that the welfare of individuals, not sovereignty, is the right yardstick for the conflict of laws
liberal market theory, according to which private agreement is the optimal means of allocating resources, in the absence of market failure or social costs, by empowering ind ividuals to act in their self-interest. markets deliver efficient satisfaction of diverse personal preferences. 26 Public regulation becomes necessary, on the other hand, in the presence of externalities. The normative implications of this basic distinction for the regulation of international markets may look, in many ways, like old wine in new bottles Cross-border transactions raise conflicts of laws or in terms more familiar to law and economics scholarship, require an allocation of regulatory jurisdiction. 28 Market theory considers party choice of law as the optimal means of allocating such authority, 29 unless there is a risk that private choice and public interest do not coincide. In such a case, when cross border externalities exist in an international context, legislative competition will be superseded by some form of mandatory allocation of decision-making authority. Most Western systems of private intemational law project this model into the field of market transactions; these are generally left to party autonomy, which is, however, restricted in the name of state interests or public policy 30 So where, then, is the new wine? 4. Unilateralism and global welfare. The change is not merely in vocabulary. I Firstly, rephrasing choice of law in terms of market theory draws attention to issues of global welfare raised by the unilateralism inherent in current approaches to prescriptive jurisdiction in the international arena. 32 In the absence of a central authority, the extent to which public interest concerns interfere with party choice is left to the unilateral decision of each state, which then defines independently the scope of its own legislation and pursues its own conception of the est way of dealing with social international setting. Risks of und regulation are thus endemic to the global market and surely unconducive to general well being, which would seem to require, at the very least, a coherent allocation of regulatory Hugh Collins, Regulating Contracts, 70 Ibid. Thus appears a traditional division of functions between private law, which supports self- interested action, and public law, which compels market participants to take social costs into account and thus protects preferences which are not adequately protected through the market. However, not only do labels shift (private law may appears a regulatory tool), but incentives to internalise social costs may be achieved through an allocation of property rights or liability rules, which are traditionally private law. For an interesting analogy between property rights and regulatory jurisdiction, see Joel P Trachtman, Econom ic Analysis of Prescriptive Jurisdiction See again Joel P Trachtman, " Economic Analy sis of Prescriptive Jurisdiction Market theory views regulation itself as a public good, subject to inter-jurisdictional competition. On the theory of inter-jurisdictional competition, developed in the context of the economics of federa lism, see below in 39 41 See, for example, articles 3, 5-6, 7 and 16 of the 1980 Rome Convention on the Law Applicable Contractual obligations The European reader who wonders how fareconom ic concepts are merely a change in la wyers conversationalrepertoire should read Bruce Ackerman, Law, Economics and the Problem of Legal Culture Duke Law Journal929(1986) 32 Concluding, similarly, that ana lysis of choice of law in efficiency terms draws attention to concerns of global welfare, see Paul B Stephan, The Political Economy of Choice of lay
liberal market theory, according to which private agreement is the optimal means of allocating resources, in the absence of market failure or social costs; by empowering individuals to act in their self-interest, markets deliver efficient satisfaction of diverse personal preferences.26 Public regulation becomes necessary, on the other hand, in the presence of externalities.27 The normative implications of this basic distinction for the regulation of international markets may look, in many ways, like old wine in new bottles. Cross-border transactions raise conflicts of laws, or, in terms more familiar to law and economics scholarship, require an allocation of regulatory jurisdiction.28 Market theory considers party choice of law as the optimal means of allocating such authority,29 unless there is a risk that private choice and public interest do not coincide. In such a case, when crossborder externalities exist in an international context, legislative competition will be superseded by some form of mandatory allocation of decision-making authority. Most Western systems of private international law project this model into the field of market transactions; these are generally left to party autonomy, which is, however, restricted in the name of state interests or public policy.30 So where, then, is the new wine? 4. Unilateralism and global welfare. The change is not merely in vocabulary.31 Firstly, rephrasing choice of law in terms of market theory draws attention to issues of global welfare raised by the unilateralism inherent in current approaches to prescriptive jurisdiction in the international arena.32 In the absence of a central authority, the extent to which public interest concerns interfere with party choice is left to the unilateral decision of each state, which then defines independently the scope of its own legislation and pursues its own conception of the best way of dealing with social costs in an international setting. Risks of under- or overregulation are thus endemic to the global market and surely unconducive to general wellbeing, which would seem to require, at the very least, a coherent allocation of regulatory 26 Hugh Collins, Regulating Contracts, 70. 27 Ibid. Thus appears a traditional division of functions between private law, which supports selfinterested action, and public law, which compels market participants to take social costs into account and thus protects preferences which are not adequately protected through the market. However, not only do labels shift (private law may appear as a regulatory tool), but incentives to internalise social costs may be achieved through an allocation of property rights or liability rules, which are traditionally private law. For an interesting analogy between property rights and regulatory jurisdiction, see Joel P Trachtman, ‘Economic Analysis of Prescriptive Jurisdiction’. 28 See again Joel P Trachtman, ‘Economic Analysis of Prescriptive Jurisdiction’. 29 Market theory views regulation itself as a public good, subject to inter-jurisdictional competition. On the theory of inter-jurisdictional competition, developed in the context of the economics of federalism, see below fn 39, 41. 30 See, for example, articles 3, 5-6, 7 and 16 of the 1980 Rome Convention on the Law Applicable to Contractual Obligations. 31 The European reader who wonders how far economic concepts are merely a change in lawyers’ conversational repertoire should read Bruce Ackerman, ‘Law, Economics and the Problem of Legal Culture’, Duke Law Journal 929 (1986). 32 Concluding, similarly, that analysis of choice of law in efficiency terms draws attention to concerns of global welfare, see Paul B Stephan, ‘The Political Economy of Choice of Law’