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’
authority. 33 Secondly, understand ing the relationship between law and the market in the context of a structured regulatory framework, such as can be found in an integrated or federal structure, may help suggest ways in which this can be achieved. In such a context, cross border externalities and market breakdowns are dealt with by the central legislative authority through harmonised substantive rules. 4 Whereas they take the form of minimum standards for internal market transactions, they are also projected into the world market in the form of internationally mandatory rules, in cases where the European legislator has decided that the connection with the Community is sufficient to justify its interest. 35 In both instances, they designed to provide an effective regulatory framework within which party choice of law can operate effectively. However, whereas harmonised substantive legislation can obviously project a coherent view of the requirements of collective welfare within the internal market, this is clearly not the case in a global setting. The new wine thus resides in the idea that conflicts of economic regulation should be fitted into a larger picture of coherent market regulation, with a clear focus on global welfare. More than a change in vocabulary, it implies redefining the scope and function of the conflicts of laws 5. The dual function of choice of law in the global market. The transformation in perspective highlighted by economic analysis is evidenced by the increasing pressure to include public regulation within the scope of conflicts of laws. Firstly, when desirable, inter-jurisd ictional competition is not perceived as being restricted to fields traditionally bearing the label of private law,, but also extends to the regulation of public goods on offer in different locations to mobile firms and capital. Secondly, absent a central authority or international agreement to deal with third-party effects, the only -albeit second-best -means to reduce the discrepancy between national laws and global markets would be to extend the scope of the conflict of laws to fields currently bearing a public law'label, in order to design appropriate tests with which to allocate economic regulatory authority. Here, then, is the political economy of Inconsistencies leading to over-regulation are obviously particularly intolerable each of the regulations involved provide for criminal sanctions. See the dilemma in the Nippon Papercase, Dorsey J Ellis Jr, Projecting the Long Arm of the Law. Extraterritorial Crim inal Enforcement of US Antitrust Laws in the global Economy, I Wash U Global Stud L Rev 477(2002). But of course, regulatory gaps and overlaps are a well known feature of the unilateralist and monopolistic methodologies by which states define the scope of their economic regulation(see text below, 8 13) asymmetries, see below, fn 49), or ensure aga inst restrictions to competition. On the scope of Europep e These may either provide for consumer/investor protection(essentially designed to cure information contract law, which extends to fields such as competition law not generally included in the category of private contract law, see Stefan Grundmann, The Structure of European Contract Law, 4 European Review of private ,505-528(2001) A close connectionwith the territory of a Mem ber State is usually required for consumer legislation n (see P Lagarde, 'Heurs et malheurs ). The reach of Community competition law is measured by a test resembling the US 'effects test(see below, fn 124) There is considerable debate as to the desirability and feasibility of intemational agreement on conflicts of econom ic regulation(for instance, under the aegis of the WTO); see Eleanor M Fox, 'Antitrust and Regulatory Federalism: Races Up, Down and Sideways, NUY LR 1781(2000). It is also true-and this is the risk inherent in any second-best solution such as that proposed by this paper- that in the absence of agreement, if courts attempt to mimic what international agreement might achieve, prisoner's dilemma dynamics may also set in(see Dodge, Extraterritoria lity and Conflict-of-Laws Theory Shut, p On this discrepancy, see Eleanor Fox, National Law, Global Markets and Hartford Fire: Eyes Wide
authority.33 Secondly, understanding the relationship between law and the market in the context of a structured regulatory framework, such as can be found in an integrated or federal structure, may help suggest ways in which this can be achieved. In such a context, crossborder externalities and market breakdowns are dealt with by the central legislative authority, through harmonised substantive rules.34 Whereas they take the form of minimum standards for internal market transactions, they are also projected into the world market in the form of internationally mandatory rules, in cases where the European legislator has decided that the connection with the Community is sufficient to justify its interest.35 In both instances, they are designed to provide an effective regulatory framework within which party choice of law can operate effectively. However, whereas harmonised substantive legislation can obviously project a coherent view of the requirements of collective welfare within the internal market, this is clearly not the case in a global setting. The new wine thus resides in the idea that conflicts of economic regulation should be fitted into a larger picture of coherent market regulation, with a clear focus on global welfare. More than a change in vocabulary, it implies redefining the scope and function of the conflicts of laws. 5. The dual function of choice of law in the global market. The transformation in perspective highlighted by economic analysis is evidenced by the increasing pressure to include public regulation within the scope of conflicts of laws. Firstly, when desirable, inter-jurisdictional competition is not perceived as being restricted to fields traditionally bearing the label of ‘private law’, but also extends to the regulation of public goods on offer in different locations to mobile firms and capital. Secondly, absent a central authority or international agreement to deal with third-party effects, the only - albeit second-best36 - means to reduce the discrepancy between national laws and global markets37 would be to extend the scope of the conflict of laws to fields currently bearing a ‘public law’ label, in order to design appropriate tests with which to allocate economic regulatory authority. Here, then, is the political economy of 33 Inconsistencies leading to over-regulation are obviously particularly intolerable each of the regulations involved provide for criminal sanctions. See the dilemma in the Nippon Paper case, Dorsey J Ellis Jr, ‘Projecting the Long Arm of the Law: Extraterritorial Criminal Enforcement of US Antitrust Laws in the Global Economy’, 1 Wash U Global Stud L Rev 477 (2002). But of course, regulatory gaps and overlaps are a wellknown feature of the unilateralist and monopolistic methodologies by which states define the scope of their economic regulation (see text below, § 13). 34 These may either provide for consumer/investor protection (essentially designed to cure information asymmetries, see below, fn 49), or ensure against restrictions to competition. On the scope of ‘European contract law’, which extends to fields such as competition law not generally included in the category of private contract law, see Stefan Grundmann, ‘The Structure of European Contract Law’, 4 European Review of Private Law, 505-528 (2001). 35 A ‘close connection’ with the territory of a Member State is usually required for consumer legislation (see P Lagarde, ‘Heurs et malheurs’). The reach of Community competition law is measured by a test resembling the US ‘effects’ test (see below, fn 124). 36 There is considerable debate as to the desirability and feasibility of international agreement on conflicts of economic regulation (for instance, under the aegis of the WTO); see Eleanor M Fox, ‘Antitrust and Regulatory Federalism: Races Up, Down and Sideways’, NUY L R 1781 (2000). It is also true - and this is the risk inherent in any second-best solution such as that proposed by this paper - that in the absence of agreement, if courts attempt to mimic what international agreement might achieve, prisoner’s dilemma dynamics may also set in (see Dodge, ‘Extraterritoriality and Conflict-of-Laws Theory’. 37 On this discrepancy, see Eleanor Fox, ‘National Law, Global Markets and Hartford Fire: Eyes Wide Shut’, 68 Antitrust LJ 73 (2000)
choice of law in a market setting. Fostering legislative competition through party choice as long as social and private costs coincide(I), the conflict of laws should also be relied upon to assert a regulatory function in cases of cross-border externalities (ID) I Choice of law as an instrument of inter-jurisdictional competition 6. Reversal of perspectives. Traditional'conflicts'rhetoric suggests that choice of law has a peace-keeping function between rival, mutually exclusive regulatory claims. The various theoretical models reinforce this impression: multilateralism carries a policy of alignment in order to produce decisional harmony out of chaos, whereas neo-statutist theories tend to pursue an agenda of political deference designed to induce reciprocity. Contemporary economic analysis offers a reverse perspective, in which the idea that diversity is a source of disorder to be smoothed out wherever possible, is superseded by the conviction that competition between national legislators is basically salutary. 38 Far removed from its trad itional justifications, party choice in cross-border transactions is viewed through economic lenses as instrumental in stimulating such competition, both in a federal context, where it promotes market integration(A)and, more controversially, on a global level, where it can contribute to efficient horizontal allocation of regulatory authority(B) LA Choice of law and the economics of federalism 7. Three new uses for choice of law. In a federal or vertically integrated structure, inter juris ictional competition appears an alternative to centralized regulation. The theme of regulatory competition, with the correlative question of the optimal level at which regulation should take place, has only recently begun to appear as a subject for debate in the European Union, 9 where it is more common to think of legal diversity as being at odds with the very idea of an internal market. 40 Borrowed from US scholarship, 4 the economics of federalism now raises new issues both as to the ways in which legislative authority should be allocated 38 While emphasising the importance of the conflict of laws, this perspective also reinstates comparative law as a source of informed choice See fora first, excellent, account, Wolfgang Kerber, "Interjurisdictional Competition within the (2000); A Ogus, ' Competition between National Legal Systems: A Contribution of Economic Analysis 3 Eichenberg on the concept of FoCJ'(functional, overlapping, competing jurisdictions), in"FOCJ: Competitive Governments for Europe, 16 IntT Rev L& Econ 315(1996) Indeed, until recently, a strong trend towards centralisation of regulatory authority within the EU tended to make diversity suspect; integration seemed to imply harmonisation at the highest level, and the attendant'death'of conflicts and comparative law(see, for the latter, Ch von Bar, From Principles to Codification: Prospects for European Private Law, 8 Colum Eur L 379(2002), Symposium on Methodology and Epistemology of Comparative Law, Brussels, October 2002, to be published by Hart Publishing) The volume of literature on this subject is impressive. See, in particular, the special issue of the Journal of International Economic La(2000), devoted to Regulatory Competition in Focus, with contributions by Daniel C Esty, Richard L Revesz, Damien Gerardin, Jonathan R Macey, Alan O Sykes and Joel P Trachtman, concerning a wide range of different substantive fields. See also Ulen, 'Economic and Public Choice Forces in Federalism, 6 Geo Mason L Rev 921; Frank H Easterbrook, Federa lism and European Business Law, 14 Intt Revl d econ 125
choice of law in a market setting. Fostering legislative competition through party choice as long as social and private costs coincide (I), the conflict of laws should also be relied upon to assert a regulatory function in cases of cross-border externalities (II). I Choice of law as an instrument of inter-jurisdictional competition 6. Reversal of perspectives. Traditional ‘conflicts’ rhetoric suggests that choice of law has a peace-keeping function between rival, mutually exclusive regulatory claims. The various theoretical models reinforce this impression: multilateralism carries a policy of alignment in order to produce decisional harmony out of chaos, whereas neo-statutist theories tend to pursue an agenda of political deference designed to induce reciprocity. Contemporary economic analysis offers a reverse perspective, in which the idea that diversity is a source of disorder to be smoothed out wherever possible, is superseded by the conviction that competition between national legislators is basically salutary.38 Far removed from its traditional justifications, party choice in cross-border transactions is viewed through economic lenses as instrumental in stimulating such competition, both in a federal context, where it promotes market integration (A) and, more controversially, on a global level, where it can contribute to efficient horizontal allocation of regulatory authority (B). I.A Choice of law and the economics of federalism 7. Three new uses for choice of law. In a federal or vertically integrated structure, interjurisdictional competition appears an alternative to centralized regulation. The theme of regulatory competition, with the correlative question of the optimal level at which regulation should take place, has only recently begun to appear as a subject for debate in the European Union,39 where it is more common to think of legal diversity as being at odds with the very idea of an internal market.40 Borrowed from US scholarship,41 the economics of federalism now raises new issues both as to the ways in which legislative authority should be allocated 38 While emphasising the importance of the conflict of laws, this perspective also reinstates comparative law as a source of informed choice. 39 See for a first, excellent, account, Wolfgang Kerber, ‘Interjurisdictional Competition within the European Union’, in The Deregulation of Global Markets, Weimar Symposium 1998, Fordham Int’l LJ 217 (2000); A Ogus, ‘Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law’, 48 ICLQ 405 (1999). On the complex multi-level character of such competition, see Frey & Eichenberg on the concept of ‘FOCJ’ (functional, overlapping, competing jurisdictions), in ‘FOCJ: Competitive Governments for Europe’, 16 Int’l Rev L & Econ 315 (1996). 40 Indeed, until recently, a strong trend towards centralisation of regulatory authority within the EU tended to make diversity suspect; integration seemed to imply harmonisation at the highest level, and the attendant ‘death’ of conflicts and comparative law (see, for the latter, Ch von Bar, ‘From Principles to Codification: Prospects for European Private Law’, 8 Colum J Eur L 379 (2002); Symposium on Methodology and Epistemology of Comparative Law, Brussels, October 2002, to be published by Hart Publishing). 41 The volume of literature on this subject is impressive. See, in particular, the special issue of the Journal of International Economic Law (2000), devoted to ‘Regulatory Competition in Focus’, with contributions by Daniel C Esty, Richard L Revesz, Damien Gerardin, Jonathan R Macey, Alan O Sykes and Joel P Trachtman, concerning a wide range of different substantive fields. See also Ulen, ‘Economic and Public Choice Forces in Federalism’, 6 Geo Mason L Rev 921; Frank H Easterbrook, ‘Federalism and European Business Law’, 14 Int'l Rev L & Econ 125
ertically within the EU, emphasising the importance of subsid iarity, 42 and, paradoxically for deregulation is linked to the perceived dangers of centralisation as giving rise to rent. re to the importance of emulation between national legislators as a factor of integration. 43 Des seeking and problems of public choice, excessive bureaucratisation and an inability to respond to individual preferences. 4 Lowering the level at which regulation takes place in order to introduce more market pressure on legislators implies reintroducing the conflict of laws in fields which might have been mapped out for unification. However, as an economic tool of federalism, the conflict of laws has to fit into a sophisticated, multi-level scheme which affects its trad itional function in several ways. Firstly, by maintaining a field of free regulatory competition between national laws, it is an important instrument in the vertical allocation of competences within the Union(a). Secondly, under the pressure of market integration, it has simultaneously to promote fundamental market freedoms(b). Finally, extend ing its scope to the market for public goods, it must ensure that competition between national economic policies remains undistorted (c) 8. (a) Setting the vertical allocation of competences. European contract law+5 rests upon the distinction between centrally harmonised regulation, designed to cure market failures, 46 on the one hand, and national choice-facilitating rules+ which remain amenable to the conflict of laws, and in particular to free party choice, on the other. 48 Party autonomy thus operates within a centralised regulatory framework which cures informational asymmetries and restrictions of competition. 49 However, ensuring the full cross-border effect of party The links between subsidiarity and regulatory competition on various levels also give rise to an abundant literature. See, for example, R van den Bergh, Subsidiarity as an Econom ic Demarcation Principle and the Emergence of European Private Law, 5 Maastricht Journal 129(1998); George Bermann, " European Community Law from a US Perspective, 4 TulJInt7& Comp L5(1995) Christian Kirchner, The Principle of Subsidiarity in the Treaty on European Union: A Critique from the Perspective of Constit utional Economics TulJ Int'l& Comp L 291(1998), Breton, Cassone& Fraschini, "Decentralization and Subsidiarity: Toward a Theoretical Reconciliation,, 19U PaJ Int/ Econ L 21(1998) ee Demarcation Principle, on competition as a learning process and its contribution to integratio Kerber, "Interjurisdictional Competition,, 218 This distinction is central to the 1980 Rome Convention on the Law Applicab le to Contractual Obligations, where it appears in article 3(party freedom )and articles 5 to 7(intemational mandatory rules The regulation of market failures is designed essentia ly to remedy informationalasy mmetries, through mandatory disclosure rules(on the priority given by the ECJ as from its Cassis de Dijon ruling in 1979to mandatory disclosure over substantive protection, see Grundmann, The Structure of European Contract Law 513). Market failures are also addressed through Community rules against restriction of competition, caught by article 7. State failure, as opposed to market breakdown, is addressed through subsidiarity These are essentially the rules of classical contract law perta ining to the formation and perfo the contract, and designed to help parties use their market freedom Nationalrules of this category are not subject to scrutiny under fundamental freedoms: ECJ Alsthom Atlantique, 24 Jan 1991, C-339/89 49 Protective legislation applica ble to cross-border consumer contracts or internationalsecurities transactions, such as those adopted by European Community secondary legislation, are designed to eradicate ormational asymmetries, which might otherwise lead to faulty choice-includ ing choice of the applicable law focus of Community law on disclosure rather than on substantive rules of consumerprotection
vertically within the EU, emphasising the importance of subsidiarity,42 and, paradoxically, as to the importance of emulation between national legislators as a factor of integration.43 Desire for deregulation is linked to the perceived dangers of centralisation as giving rise to rentseeking and problems of public choice, excessive bureaucratisation and an inability to respond to individual preferences.44 Lowering the level at which regulation takes place in order to introduce more market pressure on legislators implies reintroducing the conflict of laws in fields which might have been mapped out for unification. However, as an economic tool of federalism, the conflict of laws has to fit into a sophisticated, multi-level scheme, which affects its traditional function in several ways. Firstly, by maintaining a field of free regulatory competition between national laws, it is an important instrument in the vertical allocation of competences within the Union (a). Secondly, under the pressure of market integration, it has simultaneously to promote fundamental market freedoms (b). Finally, extending its scope to the market for public goods, it must ensure that competition between national economic policies remains undistorted (c). 8. (a) Setting the vertical allocation of competences. European contract law45 rests upon the distinction between centrally harmonised regulation, designed to cure market failures,46 on the one hand, and national choice-facilitating rules47 which remain amenable to the conflict of laws, and in particular to free party choice, on the other.48 Party autonomy thus operates within a centralised regulatory framework which cures informational asymmetries and restrictions of competition.49 However, ensuring the full cross-border effect of party 42 The links between subsidiarity and regulatory competition on various levels also give rise to an abundant literature. See, for example, R van den Bergh, ‘Subsidiarity as an Economic Demarcation Principle and the Emergence of European Private Law’, 5 Maastricht Journal 129 (1998); George Bermann, ‘European Community Law from a US Perspective’, 4 Tul J Int’l & Comp L 5 (1995); Christian Kirchner, ‘The Principle of Subsidiarity in the Treaty on European Union: A Critique from the Perspective of Constit utional Economics’, Tul J Int’l & Comp L 291 (1998), Breton, Cassone & Fraschini, ‘Decentralization and Subsidiarity: Toward a Theoretical Reconciliation’, 19 U Pa J Int’l Econ L 21 (1998). 43 See Kerber, ‘Interjurisdictional Competition’, and Van den Bergh, ‘Subsidiarity as an Economic Demarcation Principle’, on competition as a learning process and its contribution to integration. 44 Kerber, ‘Interjurisdictional Competition’, 218. 45 This distinction is central to the 1980 Rome Convention on the Law Applicab le to Contractual Obligations, where it appears in article 3 (party freedom) and articles 5 to 7 (international mandatory rules). 46 The regulation of market failures is designed essentially to remedy informational asymmetries, through mandatory disclosure rules (on the priority given by the ECJ as from its Cassis de Dijon ruling in 1979 to mandatory disclosure over substantive protection, see Grundmann, ‘The Structure of European Contract Law’, 513). Market failures are also addressed through Community rules against restriction of competition, caught by article 7. State failure, as opposed to market breakdown, is addressed through subsidiarity. 47 These are essentially the rules of classical contract law pertaining to the formation and performance of the contract, and designed to help parties use their market freedom. 48 National rules of this category are not subject to scrutiny under fundamental freedoms: ECJ Alsthom Atlantique, 24 Jan 1991, C-339/89. 49 Protective legislation applicable to cross-border consumer contracts or international securities transactions, such as those adopted by European Community secondary legislation, are designed to eradicate informational asymmetries, which might otherwise lead to faulty choice - including choice of the applicable law. On the focus of Community law on disclosure rather than on substantive rules of consumer protection
autonomy50 also requires the removal of national regulatory barriers which interfere with the access to national markets. Regulation of market failure doubles up as a market integration issue. I Community law therefore imposes a second, parallel, series of constraints on Member States, which must refrain from applying measures which will lead to over-regulation or multiple burdens which restrict access to foreign markets. Scrutiny under market freedoms article 3 of the Rome Convention. Thus, the conflict rule governing transactions on thf E may apply to any form of mandatory state regulation which is internationally enforceable under articles 5 to 7 of the Rome Convention, includ ing measures implementing Community directives, 2 but does not apply to the choice-facilitating rules which fall within the scope of internal market draws a double divid ing line: it demarcates internationally mandatory regulation from the scope of free choice, while simultaneously ensuring the vertical allocation of competence between Community law, imposing minimum(consumer protection) or maximum standards(market freedoms), and regulation at the lower, Member State level of the garden variety of contract law. If the double line ad mitted ly lacks clarity in some cases, it may be due to fluctuations in the case- law of the European Court of Justice as to the desirable extent of state competition. 53 However, the encounter between the economic dynamics of Community law and the more trad itional private law concerns of the conflict of settle. +Thus, pre-emptive law under market freedoms is not necessarily internationall laws inevitably brings about shifts in trad itional categories, which may also require time mandatory within the trad itional meaning of article 7 of the Rome Convention, whereas national public economic regulation may similarly be disqualified as such and subjected to party choice (mandated as far as national measures are concerned by the Court of Justice in Cassis de Dijon and as far as concerns the Community legislator by funda mental freedoms and proportionality ) see Stefan Grundman, The Moloney, EC Securities Regulation, Oxford EC Law Library, 200 e field of securities regulation, see Niamh Structure of European Contract Law. On similar developments in the 50 Such is the primary function of internal market freedoms under the EU Treaty; see Grundmann,"The Structure of European Contract Law, 510 51 On the fact that the integration issue sometimes eclipses substantive policies, in particularinvestor protection in the field of securities regulation, see Niamh Moloney, EC Securities Regulation See, for example, CJCE C-369/96& C376/96, 23 Novem ber 1999, Arblade; 15 March 2001, Mazzoleni, extending the scrutiny to rules providing for internationally manda tory rules of the forum-host state providing for minimum salary; see also below, under(b ). The scrutinised measures may include rules not traditionally seen as contract law, including rules of public law, see Grundmann, The Structure of European Contract Law See Jukka Snell, Goods and Services in EC La. In implementing the economic freedoms, the Court of Justice seems to hesitate between a model which fosters state competition, towards a more centralised model, in which EC scrutiny encroaches on cases in which there is no protectionist intent or effect, pre-empting choice of law and restricting party autonomy. Thus, the 1995 Bosman case implements a very expansive reading of the to caty, based on the idea of market access, in which, practically, the very existence of a conflict of laws seems see Jukka Snell, Goods and Services in EC L 54 On these shifts, see Hans Ulrich Jessurun d'Oliveira, The EU and a Metamorphosis of Private International Law, in Reform and Development ofprivate International Law: Essays in HonourofSir Peter North. OUP. 2002. 111 The allocation of regulatory com petence between the home and host countries in the areas subject to scrutiny under the econom ic freedoms concems points of both public and private law, a given determination of the applicable law may be pre-empted under the home country principle if it gives rise to a multiple burden for
autonomy50 also requires the removal of national regulatory barriers which interfere with the access to national markets. Regulation of market failure doubles up as a market integration issue.51 Community law therefore imposes a second, parallel, series of constraints on Member States, which must refrain from applying measures which will lead to over-regulation or multiple burdens which restrict access to foreign markets. Scrutiny under market freedoms may apply to any form of mandatory state regulation which is internationally enforceable under articles 5 to 7 of the Rome Convention, including measures implementing Community directives,52 but does not apply to the choice-facilitating rules which fall within the scope of article 3 of the Rome Convention. Thus, the conflict rule governing transactions on the internal market draws a double dividing line: it demarcates internationally mandatory regulation from the scope of free choice, while simultaneously ensuring the vertical allocation of competence between Community law, imposing minimum (consumer protection) or maximum standards (market freedoms), and regulation at the lower, Member State level, of the garden variety of contract law. If the double line admittedly lacks clarity in some cases, it may be due to fluctuations in the case-law of the European Court of Justice as to the desirable extent of state competition.53 However, the encounter between the economic dynamics of Community law and the more traditional private law concerns of the conflict of laws inevitably brings about shifts in traditional categories, which may also require time to settle.54 Thus, pre-emptive law under market freedoms is not necessarily internationally mandatory within the traditional meaning of article 7 of the Rome Convention, whereas national public economic regulation may similarly be disqualified as such and subjected to party choice.55 (mandated as far as national measures are concerned by the Court of Justice in Cassis de Dijon and as far as concerns the Community legislator by fundamental freedoms and proportionality), see Stefan Grundman, ‘The Structure of European Contract Law’. On similar developments in the field of securities regulation, see Niamh Moloney, EC Securities Regulation, Oxford EC Law Library, 2002. 50 Such is the primary function of internal market freedoms under the EU Treaty; see Grundmann, ‘The Structure of European Contract Law’, 510. 51 On the fact that the integration issue sometimes eclipses substantive policies, in particular investor protection in the field of securities regulation, see Niamh Moloney, EC Securities Regulation. 52 See, for example, CJCE C-369/96 & C376/96, 23 November 1999, Arblade; 15 March 2001, Mazzoleni, extending the scrutiny to rules providing for internationally mandatory rules of the forum -host state providing for minimum salary; see also below, under (b). The scrutinised measures may include rules not traditionally seen as contract law, including rules of public law; see Grundmann, ‘The Structure of European Contract Law’, 515. 53 See Jukka Snell, Goods and Services in EC Law. In implementing the economic freedoms, the Court of Justice seems to hesitate between a model which fosters state competition, towards a more centralised model, in which EC scrutiny encroaches on cases in which there is no protectionist intent or effect, pre-empting choice of law and restricting party autonomy. Thus, the 1995 Bosman case implements a very expansive reading of the Treaty, based on the idea of market access, in which, practically, the very existence of a conflict of laws seems to generate EC competence. On the extent to which it may be necessary to distinguish the different freedoms, see Jukka Snell, Goods and Services in EC Law. 54 On these shifts, see Hans Ulrich Jessurun d’Oliveira, ‘The EU and a Metamorphosis of Private International Law’, in Reform and Development of Private International Law: Essays in Honour of Sir Peter North, OUP, 2002, 111. 55 The allocation of regulatory competence between the home and host countries in the areas subject to scrutiny under the economic freedoms concerns points of both public and private law; a given determination of the applicable law may be pre-empted under the home country principle if it gives rise to a multiple burden for
9.(b) Ensuring the full extent ofeconomic freedoms. Indeed, harmonisation of Member State legislation designed to remedy market failure does not preclude regulatory competition entirely, as national legislators are often free to adopt measures more stringent than those required by Community directives. 6 Here, however, the application of more stringent national measures to cross-border situations justifies scrutiny under fundamental freedoms, in order to avoid reconstitution of regulatory barriers. Such scrutiny has given rise to the well known distribution of Member State regulatory authority under Keck and its progeny, in the form of mutual recognition. The home country may apply its regulation in relation to the product itself, whereas host country law prevails as far as selling arrangements are concerned57A similar division can be found, for example, in the field of financial service where the host country may impose rules of conduct, while the service itself is shaped through prudential and supervisory requirements according to home country provisions Interestingly, such a design gives rise to the formulation of a new generation of choice of law rules. which raise familiar issues of characterisation and definition of connecting factors. 59 Designed to prevent discrimination in the form of a double regulatory burden imposed on goods or services entering a foreign market, the new rules pre-empt divergent national conflicts solutions, and apply whatever the nature of the measures involved(public/private mand atory/default).60 Products and services may thus enter foreign markets freely, without being deprived of their original competitive ad vantage. At the same time, citizen preferences are maintained as host states are free to look for the most efficient marketing arrangements Here again, the shifts in trad itional categories become apparent: in exercising supervisory the importer, for example, whether or not it is technically a nationally imperative rule under article 7. Moreover, under the home country principle, according to which domestic consumers benefit from goods and services shaped by foreign regulation, national measures reinforcing the minimum requirements of directives lose their mandatory character, since those consumers will always be able to opt out of the scope of domestic regulation if they prefer a foreign offer. At the same time, regulatory competition among states may well extend to public 56 This is far from being true in all cases, however, particularly as far as information rules are concemed see, for example, the 1993 Investment Serv ices Directive or the new 2002 Distance Marketing of Consumer Financial Services directive See jukka snell. Goods and Services in EC Law 58 An altemative approach is present in the 2002 Financial Distance Marketing Directive and the E Commerce Directive (2000/31). The latter prov ides for the law of the Member State from which the service is provided and allocates authority and jurisdiction to ensure compliance to the Member State of the suppliers see Michael Wildespin Xavier Lewis, 'Les relations entre le droit communautaire et les regles de conflit fo 3. home. However, it does not indicate that it does not provide rules of private international law. On this ambig lois, I Rev crit DIP 299(2002); Corcoran& Hart, The Regulation of Cross-Border Financial Services in the EU Intemal Market 8 Colum Eur L 221 at 246 59 As in more trad itionalcases, these are not without difficulty, and require reflection upon the specific aims of division of regulatory competences(on the two possible readings of the Treaty on this point- the one decentralised and anti-protectionist, the other a more intrusive 'economic freedom'reading-see Jukka Snell, foods and Services in EC Law). For instance, the 1995 Alpine Investments case(C-384/93, ECR 1-1 141)shows that the very notion of ' selling arrangements as distinct from product rules may be difficult; it has thus been proposed to sub-distinguish static and dynamic selling arrangements(see Jukka Snell, Goods and Services in EC Law, 94. For a different, interesting example of the formulation of a conflict of laws rule relating to takeovers, on cross-border bids, see Moloney, EC Securities Regulation, 836 On these controversial occult conflict rules, see among a bundant literature the recent study by Michael Wildespin Xavier Lewis, 'Les relations entre le droit communautaireet les regles de conflit de lois
9. (b) Ensuring the full extent of economic freedoms. Indeed, harmonisation of Member State legislation designed to remedy market failure does not preclude regulatory competition entirely, as national legislators are often free to adopt measures more stringent than those required by Community directives.56 Here, however, the application of more stringent national measures to cross-border situations justifies scrutiny under fundamental freedoms, in order to avoid reconstitution of regulatory barriers. Such scrutiny has given rise to the wellknown distribution of Member State regulatory authority under Keck and its progeny, in the form of mutual recognition. The home country may apply its regulation in relation to the product itself, whereas host country law prevails as far as selling arrangements are concerned.57 A similar division can be found, for example, in the field of financial services, where the host country may impose rules of conduct, while the service itself is shaped through prudential and supervisory requirements according to home country provisions.58 Interestingly, such a design gives rise to the formulation of a new generation of choice of law rules, which raise familiar issues of characterisation and definition of connecting factors.59 Designed to prevent discrimination in the form of a double regulatory burden imposed on goods or services entering a foreign market, the new rules pre-empt divergent national conflicts solutions, and apply whatever the nature of the measures involved (public/private; mandatory/default).60 Products and services may thus enter foreign markets freely, without being deprived of their original competitive advantage. At the same time, citizen preferences are maintained as host states are free to look for the most efficient marketing arrangements. Here again, the shifts in traditional categories become apparent: in exercising supervisory the importer, for example, whether or not it is technically a nationally imperative rule under article 7. Moreover, under the home country principle, according to which domestic consumers benefit from goods and services shaped by foreign regulation, national measures reinforcing the minimum requirements of directives lose their mandatory character, since those consumers will always be able to opt out of the scope of domestic regulation if they prefer a foreign offer. At the same time, regulatory competition among states may well extend to public goods. 56 This is far from being true in all cases, however, particularly as far as information rules are concerned; see, for example, the 1993 Investment Services Directive or the new 2002 Distance Marketing of Consumer Financial Services Directive. 57 See Jukka Snell, Goods and Services in EC Law. 58 An alternative approach is present in the 2002 Financial Distance Marketing Directive and the ECommerce Directive (2000/31). The latter provides for the law of the Member State from which the service is provided and allocates authority and jurisdiction to ensure compliance to the Member State of the suppliers’ home. However, it does not indicate that it does not provide rules of private international law. On this ambiguity, see Michael Wildespin & Xavier Lewis, ‘Les relations entre le droit communautaire et les règles de conflit de lois’, 1 Rev crit DIP 299 (2002); Corcoran & Hart, ‘The Regulation of Cross-Border Financial Services in the EU Internal Market’ 8 Colum J Eur L 221 at 246. 59 As in more traditional cases, these are not without difficulty, and require reflection upon the specific aims of division of regulatory competences (on the two possible readings of the Treaty on this point - the one decentralised and anti-protectionist, the other a more intrusive ‘economic freedom’ reading - see Jukka Snell, Goods and Services in EC Law). For instance, the 1995 Alpine Investments case (C-384/93, ECR I-1141) shows that the very notion of ‘selling arrangements’ as distinct from product rules may be difficult; it has t hus been proposed to sub-distinguish static and dynamic selling arrangements (see Jukka Snell, Goods and Services in EC Law, 94. For a different, interesting example of the formulation of a conflict of laws rule relating to takeovers, on cross-border bids, see Moloney, EC Securities Regulation, 836. 60 On these controversial ‘occult’ conflict rules, see among abundant literature the recent study by Michael Wildespin & Xavier Lewis, ‘Les relations entre le droit communautaire et les règles de conflit de lois’