Richard G. Small, Towards a Theory of Contextual Transplants

• Citation: Vol. 19 No. 3
• Publication year: 2005

TOWARDS A THEORY OF CONTEXTUAL TRANSPLANTS

Richard G. Small^*

INTRODUCTION

Much attention has been lavished on the concept of legal transplants in comparative law scholarship. The debate essentially revolves around the question of whether and to what extent law is transferable between different cultures. On the one hand, the so-called culturalists posit that the success or failure of a legal transplant depends on the culture from which the law originates and the culture into which it is transplanted. On the other hand, the transferists argue that law is autonomous from culture and, as such, good law is transplantable irrespective of culture.¹This Article, building on those theories, argues that although culture may shape the form of a particular law, it is the context that determines the necessity for a law in the first place, and that context is transferable in certain situations.

Using the prohibition of insider trading as an example, this Article argues that the law developed comparatively recently in England after it effectively adopted a context from the United States; a context which drove the development of the U.S. prohibition on insider trading. In contrast to the United States-where, according to conventional wisdom, the modern concept of a prohibition on insider trading originated²-England did not formally address the issue of insider trading until recently,³despite recognizing the need for legislation more than three centuries ago.⁴This Article examines the correlation between the changing context and the development of the law prohibiting insider trading in England, and finds that the law progressed through three distinct stages. During the first stage, the City, as the financial markets in England are commonly referred to, was widely viewed as secondary to industry, and operated along the lines of a "gentlemen's club," with informal regulation being the norm. The second stage is marked by the internationalization of the City, which prompted a reexamination of the informal system of regulation. And in the third stage, following a period of Americanization under the Thatcher government, England gained a context that necessitated increased formal regulation. This Article finds that at each stage, the state and resulting development of the law on insider trading was driven by the underlying context.

Part I of this Article examines the theory of legal transplants from Montesquieu to the present and sets out a theory of contextual transplants. Part II briefly discusses the context against which the insider trading laws in the United States developed. Part III examines each of the three stages through which the development of the law regarding insider trading has passed in England. At each stage the context and the corresponding development of the law are examined. This Article concludes by drawing a parallel with the situation in Japan⁵and asserts that the development of the law was driven, to a certain extent, by a contextual transplant.

I. OF CULTURE & CONTEXT

Whether law can be transplanted, where law has been transplanted, why it has been transplanted, and whether its transplantation has been a success or a failure have been the subjects of active debate since at least the 1700s. Alan Watson maintains that the first recorded legal transplant was the Code of Hammurabi in the seventeenth century B.C.⁶Lord Denning once famously remarked: "Just as with an English oak, so with the English common law. You cannot transplant it to the African continent and expect it to retain the tough character which it has in England. It will flourish indeed but it needs careful tending."⁷

One approach to the subject of legal transplants has been through the juxtaposition of two opposing theories: the culturalist theory and the transferist theory.⁸Although arguably a "dialogue of the deaf,"⁹the culturalist-transferist debate nonetheless provides a useful frame of reference for the study of legal transplants. Regardless of which theory of legal transplants one subscribes to, the focus has invariably been on law that is in some way transplanted from the original host culture and is either a failure or a success in the receiving culture.

The position of the transferists, put forward by Watson and others-and running directly counter to that of the culturalists-holds that law and society are two separate notions, and that therefore law is autonomous from the society in which it operates. Watson argues that lawmakers decide to import or transplant other laws into their society because they perceive the laws to be good.¹⁰Watson maintains that "the Reception [of Roman law in Western

Europe ] shows that legal rules may be very successfully borrowed where the relevant social, economic, geographical and political circumstances of the recipient are very different from those of the donor system."¹¹William Ewald, criticizing Watson's inability to "provide an adequate foundation for a full- blown theory of law and society,"¹²nevertheless concludes that "even the weak versions of Watson's theses are adequate to scupper the traditional mirror [culturalist] theories that have so dominated modern legal thought."¹³

The culturalists, on the other hand, argue that because "law is a culturally determined artefact," it cannot be separated from its original purpose or the circumstances under which it was first promulgated.¹⁴This so-called "mirror theory" effectively dates back to Montesquieu in the mid-1700s¹⁵and was expounded by Savigny,¹⁶Marx,¹⁷and others.¹⁸A number of contemporary

Id. scholars, including F.S.C. Northrop,¹⁹Kahn-Freund,²⁰Friedman²¹and

Legrand,²²continue to support and refine the theory.

Pierre Legrand took up the position of the culturalists in the 1990s by arguing that law and culture are inextricably linked. First, he argues that "[c]ulture . . . derives from historical experience-so do the forms that culture embraces, such as legal rules. It would be absurdly reductionist to see a rule simply as a rule."²³He further states:

A legal rule is an incorporative cultural form. Just as culture is a source of identity, rules, for instance, are a source of identity. Rules help constitute legal-that is, political-identity (which, in one of these recurrent loops, helps constitute rules in its turn). Rules encode experiences. Because rules are but the outward manifestation of an implicit structure of attitude and reference, they are a reflection of a given legal culture. This is true of all rules, even the most innocuous ones.²⁴

Second, Legrand asserts that "rules are not the whole of law."²⁵He states:

The conception of law as a discrete subsystem of (legal) rules within society, operating independently from society, must be abandoned. It has to be understood that the "legal" cannot be analytically separated from the "non-legal" reality of society because the two worlds are inextricably linked. More accurately, law is a social subsystem. In other words, the "legal" can never be perceived on its own terms; to penetrate the "legal" one must appreciate the "social" that underpins it, otherwise the "legal" literally does not make sense.²⁶

Montesquieu, Legrand says, provides valuable lessons in his theory that only once manners and customs (which Montesquieu maintained could not be changed by law) have undergone change themselves, can the "laws and institutions of a nation, through experience, learning and reason, be accommodated to the new manners and customs."²⁷

Legrand is correct in his observations with respect to transplants that have been roughly cut and pasted into an incompatible culture. Such legal transplants may well be rejected because of cultural incompatibilities. For example, Japan initially rejected U.S.-style insider trading laws that were imposed during a period of semi-colonization.²⁸However, culturalist theory fails to account for instances where laws appear to be successfully transplanted despite clearly differing legal cultures. Again, why did Japan suddenly decide to renew and enforce its insider trading laws half a century after they were first unsuccessfully imposed?²⁹

The nexus of the two theories is that it is the law itself that is transplanted, for example, by lawmakers who have observed a "good" law and have decided to "copy" it (but why do they decide to do so in the first place?) or through the imposition of a law during a period of colonization. But what about situations in which, in this era of globalization,³⁰a context, or "manners and customs" in

Montesquieu's parlance, rather than a law, is transplanted? Might such a contextual transplant then necessitate a legal transplant? Several scholars have already touched on this notion, although a theory has yet to be clearly delineated. Foster, for example, notes that "[c]orporate governance thinking crossed the Atlantic to the United Kingdom fairly easily. One might explain this easy acceptance as a result of a similarity of interest between shareholders in U.K.-quoted and U.S.-quoted companies."³¹Nevertheless, in addition to noting the similarity of interest between British and American companies, Foster also explains that the U.K. government took advantage of press-induced public outrage at excessive managerial remuneration to pass new legislation.³²

Unfortunately, Foster does not elaborate further. Kelemen and Sibbitt offer economic liberalization, the overseas expansion of American law firms and political fragmentation, as an explanation for the globalization of American law. The authors argue that "[a]s other jurisdictions liberalize, they subject themselves to many of the same economic conditions that stimulated the emergence of a formal, transparent, and adversarial legal style in the United

States years earlier."³³

In constructing such a theory of contextual transplants, two issues must be addressed. First, a distinction must be made between "culture" and "context." Second, when referring to a contextual transplant, it is necessary to ask where...