Legal Framework for International Business: Code and Common Laws and their implications to Business
(i) Common Law:
It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. It depends less on written statutes and codes. Common law originated from England and it is followed in most of the former British colonies, such as India, UK, the US, Canada, Australia, and New Zealand.
In general, the greater the level of economic development of a country, the more elaborate is its legislative framework. India is an exception as it has the most voluminous income-tax legislation (Exhibit 8.3) in the world despite its relatively much lower rank in terms of GDP.
(ii) Civil Law:
Also known as code or civil law, it is based on a comprehensive set of written statutes. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America. The elaborate legislative codes embody the main rules of the law, spelling out every circumstance.
Laws of most countries have elements of both common and civil law. The complications in a meeting out of non-performance of a business contract also vary widely among the common- and civil-law countries.
For instance, in the common-law countries, the non-performance of a contract due to an ‘act of god’ may include floods, earthquakes, lightening, or similar happenings whereas under the civil law, non-performance is not limited to ‘acts of god’, but also includes ‘unavoidable interference with performance, whether resulting from forces of nature or unforeseeable human acts’, including such factors as labour strikes and riots.
The distinction between the common law and civil law is more in theory rather than in practice. Many common law countries, including the US and India have adapted commercial codes to govern business. The most significant difference in the common law and the civil law countries is in the protection of intellectual property.
Ownership is established by use in common law countries whereas it requires registration in the civil law countries. It is extremely important for certain agreements in civil law countries to get registered, in order to be enforceable, whereas in common law countries, as long as the proof of the agreement can be established, an agreement is binding.
Although there is significant overlapping in practice under the two systems, laws are much more rigid in the countries with civil-law system compared to common-law systems.
In ‘civil law’ countries, judges have to strictly follow the ‘letter of the law’, giving them low flexibility in judicial decisions whereas in common-law countries, greater reliance is placed on the previous rulings and interpretations by other judges in similar cases.
Business contracts tend to be detailed and specific with all contingencies elaborated in civil-law countries whereas contracts tend to be shorter and less specific in common-law countries. The judiciary tends to be less adversarial in civil-law countries where little significance is accorded to legal precedence and traditions compared to common-law countries.
(iii) Socialistic Law:
This law is derived from the Marxist socialist system and continues to influence legal framework in former communist countries, such as the CIS, China, North Korea, Vietnam, and Cuba. Socialist law traditionally advocates ownership of most property by the state or state-owned public enterprises, prohibiting free entry to foreign firms.
(iv) Theocratic Law:
Theocratic law is the legal system based on religious doctrine, precepts, and beliefs. For instance, the Hebrew law and the Islamic law are derived from religious doctrines and their scholarly interpretations. Unlike the countries dominated by Christianity, Hinduism, and Buddhism where either common or civil law is followed, a large number of Islamic countries integrate their legal system based on the Sharia.
The legal system in a number of Islamic countries, including Saudi Arabia, and Iran is integrated with Sharia.
In Arabic, ‘Sharia’ means the clear, well-trodden path to water. In Islam, Sharia is used to refer to the matters of religion that God has legislated for His Servants. Sharia is the canonical law derived from a combination of sources, such as the Koran, the holy book of Islam, the Sunna, teachings and practices of the prophet Mohammed, and the fat was, the rulings of the Islamic scholars.
The Sharia regulates all human actions and places them in five categories, i.e., obligatory, recommended, permitted, disliked, or forbidden. Classic Sharia manuals are divided in four parts: laws related to personal acts of worship, laws related to commercial dealings, laws related to marriage and divorce, and penal laws.
Major similarities between the Sharia and secular law are that in both:
- All people are equal before the law.
- A person is innocent unless proved guilty.
- The burden of proof is on the plaintiff
- Written contracts have a sanctity and legitimacy of their own.
The salient features of Islamic law concerned to business are that
(a) Contracts should be fair to all parties. Partnership is preferred over hierarchical claims.
(b) Gharar, the transaction involving fundamental uncertainty or speculation is prohibited. Gambling is not liked in Islamic countries, but futures and currency hedging also involves speculation. International managers need to be aware of such situations.
(c) Interest on money is prohibited but allows management fees and services. All business transactions must avoid riba, i.e., excessive profit, loosely defined as interest.
(d) Business involving forbidden products or activity, such as alcohol, pork, or gambling is prohibited.
(e) Normally award of damages are in line with practicality but not as inflated as is often the case in the West. In other words, the damages to property will be actual sums relating to repair and replacement of the property. The loss of opportunity for cost of money is not compensated under the Sharia.
(f) Compassion is required when a business is in trouble. In a country with Islamic legal structure, it is not considered appropriate to put pressure in the event of bankruptcy of one’s business partner.
The major difference between Sharia law and the Western law is the idea of reference to a precedent. Under the Sharia, a ruling issued by a judge is not binding on other judges or on him in later cases. While doing business in Islamic countries, international managers need to appreciate the intertwining of religion and Islamic law and take care never to mention the Palestine-Israeli situation.
After independence from erstwhile colonial rulers, most Islamic countries have grappled with the problem of replacing colonial legal systems with the Sharia. The implications of Islamic law vary in terms of degree among the Islamic countries. In most countries, it is applied in conjunction with the common and the civil law.
Under the Islamic law, western style finance is haram, or forbidden, to devout Muslims. The interest-bearing accounts and loans, which fall under the strict ribamles, most futures and options, which are considered speculative and gharar, and insurance, because the outcome of the contract can no way be determined beforehand , are all haram.
In order to enable Islamic investors to benchmark their investment on a regional basis and give product providers the opportunity to develop structured products tailored to the Islamic market, Standard & Poor’s (S&P), brings out Sharia Indices (Exhibit 8.4) that include only those stocks that comply with Sharia law.
This provides investors with a comparable investable portfolio while adopting explicit investment criteria defined by the Sharia. All S&P indices constituents are monitored on a daily basis to ensure that the indices maintain strict Sharia compliance.
A substantial amount of oil-money is invested in Sharia-compliant funds. As the index provides for benchmarking with Sharia, some of these funds may be invested as per the Sharia Indices.