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An international challenge

07 March 2017

An international challenge - read more

Ambiguity in the law’s application needs a coordinated response, says Anthony Hilton

One of the intriguing things about visiting a hotel bar in parts of Africa, or the more remote parts of Asia and South America, is how they often seem to stock varieties of Scotch whisky you have never come across before. These are not to be found in the UK, even in singular outlets that specialise in such drinks.

They are of course counterfeit, manufactured who knows where, and passed off as Scotch, much to the chagrin of the likes of Diageo. The UK-based company is the world’s largest supplier of genuine Scotch and is forced to spend a fortune around the world annually to protect its brands and markets against such fakes and imitations.

This is not easy, partly because it can be difficult tracking down the people or companies actually committing the offence, and partly because the legal process can be painfully slow even when it seems an open and shut case.

“Legal issues lie at the heart of many of the biggest risks facing companies today”

Speaking at a recent event in London, Diageo’s Siobhan Moriarty cited a case in India where the brand name

Vat 99 was registered in spite of the fact that Diageo already had a blend called Vat 69. The company launched a legal challenge but it took 19 years to work its way through the Indian courts to final resolution in the company’s favour.

There was a law and it was finally enforced, but this case underlines how one of the greatest challenges facing business today is the absence of legal certainty and this extends well beyond the relatively well-understood challenges of counterfeiting, theft of intellectual property and passing off. According to Guy Beringer, who retired a few years ago as a senior partner at Allen & Overy, legal issues lie at the heart of many of the biggest risks facing companies today.

He says that of the top six risks faced by a multinational company, four will be rule of law risks in some form or another – namely corruption and integrity; regulatory certainty and predictability; enforceability of obligations; and supply chain integrity.

We have seen in recent weeks that these are very real problems – for example, the decision by RBS to set aside a further £3 billion in provisions against the possible cost of a US settlement relating to the sale of mortgage-backed securities before the financial crash, or closer to home, the huge settlement Rolls-Royce agreed to pay to resolve corruption allegations.

Indeed, these problems can potentially be large enough to cripple a business and yet even the largest companies seem lost when it comes to finding strategies to cope with and mitigate the risks.

Legal certainty is essential for business. It is impossible to run an efficient modern economy unless contracts can be enforced and markets are allowed to function. This requires a legal framework which is not only widely accepted around the world, but is also sufficiently nimble to keep abreast of changes in the world.

“CEOs frequently complain in private that the backlash against globalisation has resulted in business being seen as the enemy by large segments of civil society”

This is potentially a huge problem for two reasons. First, business is changing so fast that it is a challenge for the law to keep up. Its efforts to embrace the impact of digital have been muddled and inconsistent between jurisdictions, but there is much worse to come as artificial intelligence gains traction. What, for example, is the legal status of output produced by computers running on artificial intelligence software?

The second problem is that laws which do exist are only patchily enforced. CEOs frequently complain in private that the backlash against globalisation has resulted in business being seen as the enemy by large segments of civil society. This encourages unscrupulous politicians in some jurisdictions to respond with a threat of expropriation against any company which seeks to assert its legal rights in defiance of government wishes.

That however is an extreme case. More common, and therefore more pernicious, are all the issues around regulatory certainty. Companies know what the rules say, but are never sure how they will be enforced and whether that enforcement will be even-handed between them and local competitors.

They worry too about taxation – whether they will be hit by unexpected and arbitrary levies on their current activities, or whether a retrospective change will create a massive past liability. And they worry about local legal infrastructure – whether the local bureaucrats and enforcement officials are of sufficiently high quality to deliver a fair and even-handed service.

There is no easy solution to any of this, but Beringer believes that the problems are too big for any one company, so it is important that they work together. Accordingly, he has helped shape an initiative known as the Bingham Business Network, which was launched earlier this year by the Bingham Centre for the Rule of Law.

What it does is bring together several of our leading multinationals with top legal brains to develop solutions for areas of concern, shape legal thinking and help create the certainty business needs. English law is a huge asset for global business. The intention is to keep it that way.

Anthony Hilton is Financial Editor of the London Evening Standard

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