Imagine running a company in a country different from your homeland. What would the legal framework be like? Would it allow you to go ahead with your innovative ideas? Would compliance requirements be similar to those with which you are already familiar? Taking into account the number of countries in the world where you can establish business links, the possibilities seem endless. If you are already running a business outside of Britain, why not consider expanding it there?
There are many advantages in such a scenario, described in previous Jordans blog entries. Incorporating a UK company is a very straightforward process, and once the business is set up, its activities can be carried out anywhere in the world. Moreover, when a company is formed in the UK, investors are given access to tax-efficient investment opportunities, as well as a strong and reputable legal system.
Let's focus on this last aspect. What are the characteristics of the English legal system, and where could it be placed amongst other systems worldwide? Historically, an important distinction lies between common and civil law traditions, and their various hybrids. Since common law is an English development, it is found in countries influenced by Anglo-Saxon legacy: therefore, a businessperson from the US, Australia, South Africa or Hong Kong may encounter more similarities between legal settings in their home country and the UK than in (for example) Germany, Italy, Brazil or China. Understanding the fundamental differences between common law and civil law families makes multi-jurisdictional businesses easier to operate.
What are the main differences?
Statistically, civil law systems are more widespread than common law systems (numbers are estimated at 150 and 80 countries, respectively); however, common law is used by the greatest number of people globally. Historically, civil law systems derive from the Roman Empire, and as a result of the adaptation of ancient Roman legal principles by rulers and legislative bodies in continental Europe during the 18th century, comprehensive legal codes were established. By contrast, common law developed in England after the Norman Conquest by justices deciding individual cases brought before them, drawing on local customs, legal principles applied in various regions of the country, and monarchs' rulings.
As a result, the main difference between civil and common law traditions lies in the sources of law and the role of judges. In civil law systems, emphasis is put on legislation as the primary source of law, whereas in common law systems, judges play a more active role by establishing legal precedents. What does this entail for investors entering into contracts in a different jurisdiction? Traditionally, commercial agreements drafted in civil law countries tend to be rather brief, using broad terms (since there is no need to restate codified law); in common law countries, however, their equivalent counterparts are more lengthy and detailed, and intent of the parties, legal definitions, etc. tend to be described in a more descriptive manner. In addition, resolution of commercial disputes varies between civil and common law traditions, with an inquisitorial model in the former, and an adversarial one in the latter.
Are there practical consequences of all of the above for investors based in civil law countries who are considering setting up a UK company? As pronounced as the above differences may appear, most nations do have legal systems reflecting aspects of both civil and common law structures. Although England is the birthplace of common law, and accordingly higher court rulings may affect your business, written statutes governing this area are also abundant. A notable example is Companies Act 2006 (the longest piece of legislation in the UK), the scope of which clearly corresponds to the civil law spirit of in-depth codification.
Establishing or expanding your business overseas may seem a demanding exercise under the best of circumstances, but when faced with a fundamentally different legal reality, it may become even more challenging. This is why being aware of essential differences between the two systems may provide you with crucial insight before you make key business decisions.