The Legal Environments

Firms, as societal entities, operate in particular economic, political, and legal environments. The legal environment is a result of legislative intervention by the government (state) and the positive practices that are recognized and sanctioned by the positive law. Historically, the legal environment has usually been nationally defined, although scholars have tried to group legal systems into various groups, based on their similarities and dissimilarities.

A student of this topic would usually argue that there are two basic groups of legal systems, which traditionally have been opposed: the Anglo-Saxon (Anglo-American) model and the continental European law. However, although both main systems of law may have their distinctive features listed, in fact there are far too many convergences in recent times. In the past the common law (Anglo-Saxon) model would be predominantly based on the precedents, and the continental European law would be primarily based on the codifications.

But, there is ever-increasing legislative activity in the Anglo-Saxon countries, with a number of codifications taking place as judiciary may uphold the consistency of court practice. In either system, a judge may take a stance to create a precedent, but the sources of precedent would differ significantly. Growing empirical literature has attempted to prove the overall superiority of the Anglo-Saxon model. Although it is evident that economies of Anglo-Saxon countries may be doing comparatively better than the others in the long run, it is not empirically corroborated that the growth sustained over a period of time may be directly attributed to the features of the legal system (legal environment).

Legal systems, although they may be classified into larger groups, are basically heavily influenced by national colors and experiences of legal development, especially in revolutionary environments (when there is abrupt change in the development). Scholars studying legal environments would focus more, nowadays, on judiciary independence from the state and the politicians. It is believed that if the judiciary protects consistently property rights, even from the state, the results of development will be better, and in the case-law system, judges historically have been more prone to uphold the sanctity of private property rights.

Ex post judging is far better in responding to local information, rather than the application of abstract law, regulating the principles. However, increasingly the common law countries are resorting to promulgating laws and codices, in order to better capture different areas of law. In the United States, the Uniform Commercial Code (UCC) is probably the best example. The growth in legislative activity may also be seen as a sign of upcoming struggle between judiciary and legislative power for predominant societal influence. Most recently the discussion on “political delegation” would suggest that it is necessary to subsume, at least formally, all institutions of the state to the highest democratically elected body in the country (assembly, parliament, etc.), although that body is controlled exclusively by the politicians.

The literature has also defined a common law system as one in which judges exercise discretion to decide cases in independent and/or adaptive lawmaking ways, while in continental European countries the state would control judicial outcomes and the content of law as well. The basic premise of change between the two wider legal groups has been the perception as to what extent the judicial practice may influence the future legal decision taken by the court. It is a fact that in Anglo-Saxon countries precedents are a source of law and they have to be regarded in the future when the act is required in a similar situation. However, although in the continental European legal system judiciary practice is not a formal source of law, judges take into consideration the prior practice in order to ensure consistency in acting in the court and the country.

In comparative law, the literature is quite often focused on a set of five parameters, like (1) judicial incentives; (2) exogenous legal human capital; (3) the processing of litigant information into judicial error-reducing legal human capital; (4) the cost of producing evidence and legal arguments; and (5) the penalties (damages) levied in adjudication. Judicial incentives may be influenced by the way their independence is defined. Often in the analysis judicial independence features highly, especially as it is believed to be an important feature of the Anglo-Saxon model, which contributed to its better results. In the U.S. model, over 80 percent of serving judges are subject to some kind of election, reelection, or recall voting.

But even in the United States the upper echelons of judiciary are dependent on politicians who decide on their promotion to the highest offices. Similarly, in the continental European countries, the government may have a strong say in appointment of judges, especially in the case of higher courts. However, the very path of professional progression differs between European (especially French) and U.S. judges. In Europe, judges are often career civil servants, who have opted for the judiciary profession almost immediately upon graduation from the university; in the United States, judges are appointed from among practicing lawyers who have had more than 10 years of professional experience.

Comparative analysis of independence has shown more than a puzzle-judges should be independent, but the question is from whom? And, if one is independent, does it mean that he or she is also unbiased (objective)? Often it is assumed that judges, if not appointed by the government directly, will be critical of the government and look at the breaking of law made by the government in an unbiased manner. However, empirical research does not corroborate this claim. Some judges are more independent and unbiased in the way they operate than others, but it cannot be generalized as to what contributes to that. Another important feature is the relationship between precedents and statutes.

Anglo-Saxon law is believed to be based on a set of more or less harmonious precedents (stare decisis), while the continental European legal practices are based on the interpretation of law and the application of the abstract legal (statutory) rule to a concrete situation. However, even in the latter case there is a high level of consistency in judiciary practices, as the higher courts have the right of cassation and therefore for the performance of judges it is important that their decisions not be annulled and/or modified by the higher court. Therefore, even in the continental European legal systems, court practices are consistent, that is, jurisprudence constante.

At the far end, the issue is primarily behavioral-whether the judges will be expansive or rather conservative (narrow) in their apprehension of laws. Some recent empirical research has clearly shown consistency of judicial behavior across various systems. However, de jure legal practice is not a formal source of law in continental European legal systems, but, as already pointed out, will be seriously considered in the process of application of law. In both systems the vast majority of judges will opt not to rock the boat.

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