In today’s fast-paced business and legal landscapes, business leaders need to understand the legal environment in which they operate. This is particularly vital for international business because legal and economic principles influence each other. Although the most basic economic principle is that companies act in their own self-interest as they aim to achieve profitability, they must do so within the confines of the law.

However, when operating across borders, multinationals often face differing legal systems. International legal systems are diverse, reflecting the unique cultures, histories and values of differing jurisdictions. Understanding Different Legal Systems is crucial for navigating cross-border business transactions. This article provides an overview of international legal systems and how they impact global trade.

Common Law Systems

English common law is a legal system that gives written judicial decisions the force of law. As a consequence, common law jurisdictions, such as the US and the UK, recognise the courts’ ability to interpret and apply judicial law to future cases through the doctrine of precedent.

Precedent means a judicial opinion that’s considered legal authority for future similar cases. The benefit of common law systems is their consistency and the ability to resolve legal disputes without requiring parties to take matters to court.

The common law legal system is adversarial, meaning that the parties to the dispute bring their case to the court for resolution. The jury or judge hears the parties’ arguments and evidence before rendering a final determination. In this legal system, it is the parties’ burden to investigate the facts, argue the law and present their best case. Juries and judges neither conduct independent investigations, nor are they responsible for helping parties make their arguments.

Another key characteristic of common law legal systems is that juries of the parties’ peers often determine cases. In both criminal and civil matters, parties have the right to have a jury selected from the local citizenry to help resolve the dispute. When a jury is tasked with determining the outcomes, the judge serves as a gatekeeper to decide what evidence and legal arguments the jury can consider. In such instances, the judge’s role is to ensure that the parties receive a fair trial.

Common law systems are unique to England, the US and former British colonies. Although there are minor differences among common law legal systems, all recognise the doctrine of precedent, and none of them relies solely on legislative codes.

Key Characteristics of Common Law Legal Systems

• The legal system is adversarial.
• The written judicial decisions of higher courts serve as binding legal authority for lower courts when interpreting similar legal questions.
• The outcome of a case is often determined by a jury of the parties’ peers.

Civil Law Systems

Civil law legal systems developed in Europe and were based on Napoleonic and Roman law. They are also known as code systems because legal rules are codified in one or more legislative enactments. These codes are used to resolve disputes brought to the courts, which judges usually decide without a jury.

Civil law systems are inherently inquisitorial, meaning that judges actively investigate cases to gather evidence. In civil jurisdictions, the judge has the authority to shape the parties’ legal arguments and to request testimony and documents. Meanwhile, the judge is not required to follow the decisions of other courts in similar cases.

The rationale behind this approach is that the law is what’s codified in legislation, rather than as interpreted by courts. The legislature is viewed as the primary institution for enacting and modifying laws, rather than the courts.

Civil legal systems are prevalent in Europe, South America, Central America, Africa and Asia. Germany, Spain, France, Portugal and the Netherlands had colonies outside of Europe, and many of these colonies adopted the colonial legal systems after gaining independence.

Key Characteristics of Civil Law Legal Systems

• The legal system is inquisitorial.
• All legal rules are in comprehensive statutes called codes.
• Written judicial decisions are not a binding legal authority.

Customary Law Systems

Customary law is a set of laws based on customs, traditions or norms of a local community. It is often applied in many countries around the world, but in conjunction with common, civil and religious legal systems. For instance, in the US, the traditions and customs of Native American tribes are binding and enforceable in tribal courts.

Pure customary legal systems are used by a monarchy and are designed to grant specific legal powers to the sultans, kings, queens or tribal leaders as heads of state. However, these legal systems are becoming less common. The main challenge is that the ruler is perceived as being above the law because the laws they create do not apply equally to the ruler and their subjects.

There are only a handful of monarchies in the world, and even the few remaining have adopted hybrid legal systems.

Key Characteristics of Customary Law Legal Systems

• Used by monarchs and tribes.
• Grant specific legal power to the monarch or the tribe leader.
• Monarchs and leaders are often perceived as being above the law.

Religious Law Systems

Unlike common and civil systems, religious legal systems rely on sacred texts of religious customs that apply to all aspects of life, including business and social relations. In religious legal systems, a religious text, such as the Bible or the Koran, is used as the primary source of law.

All major religions – Christianity, Islam, Judaism, Hinduism and Buddhism – have a religious legal system. However, the Islamic legal system, known as Sharia law, is the most widely used religious legal system globally.

It is worth noting that most jurisdictions with religious legal systems use them to complement their secular national laws. Only the Vatican (Christian) and Saudi Arabia (Islamic) are pure theocracies with only a religious legal system.

Key Characteristics of Religious Legal Systems

• Religious texts are the primary source of law.
• Most religious legal systems use them to supplement a secular national system.

Hybrid Law Systems

Also known as mixed legal systems, hybrid legal systems combine one or more legal systems. India is a classic example of a jurisdiction with a hybrid legal system. As a former British colony, the country has a common law system which recognises the doctrine of precedent. However, most of its laws are codified, a characteristic of a civil law system. In addition, India has separate personal codes that apply to Muslims, Hindus and Christians. As a result, India has a hybrid legal system that comprises civil law, common law and religious law systems.

Key Characteristics of Hybrid Legal Systems

• Combines two or more legal systems.

Why Common Law Legal Systems Are Better for Business

When businesses must choose the law to apply to their contracts, they often opt for common law, especially when expanding globally. Common law jurisdictions follow precedent, which is a product of adapting to a changing business environment and adversarial arguments. In contrast, comprehensive codes provided by civil law jurisdictions attempt to lay down rules for every situation that can arise from business transactions and compel parties to adopt that approach.

Here are the advantages of the common law legal system for businesses.

It Is Flexible and Open to Innovation

Flexibility is crucial for businesses operating in innovative sectors, such as financial and technology services. In common law jurisdictions, courts strive to devise logical solutions to novel issues by building upon existing case law, without requiring new legislation.

This way, the law can quickly adapt to commercial innovation unforeseen by legislators in a manner that the more prescriptive and controlling civil legal systems cannot. Moreover, the freedom of parties to agree what they want, subject to limited limitations aimed at preventing exploitation, contrasts with the civil code’s aim of uniformity.

Certainty of Case Outcome

The purposive method of legislative interpretation in civil law legal systems can lead to unpredictability due to inconsistencies among judges. In contrast, the emphasis on precedent in common law systems enables businesses to predict legal outcomes with greater certainty.

Highly Skilled, Impartial Dispute Resolution

Common law jurisdictions, such as the UK, have independent, fair-minded judiciaries that are bound by precedents set by the most experienced and competent judges.

Concluding Thoughts

Understanding business law and international legal systems is essential for successfully running a business, as a solid understanding of how laws are created and applied helps avoid liability and minimise risk. In business, it is not sufficient to operate ethically; a thorough knowledge of business law is essential. Ultimately, business leaders should be able to recognise legal issues, minimise liability exposure and know when to consult a lawyer.

International legal systems vary significantly in their objectives and the methods they employ to resolve disputes. Common law legal systems are adversarial and adhere to the principle of precedent. Civil law systems are inquisitorial and do not recognise precedent. Many jurisdictions have hybrid legal systems that combine two or more international legal systems.