Business and the Rule of Law

Business support for the rule of law – a growing global movement

Public support for the rule of law by business is a relatively new concept and it is fast gaining traction. Recent developments at the international level and domestically in Australia are shining light on how initiatives to strengthen the rule of law can give business more certainty to invest and grow.

In this blog, I articulate the business case, as well as the direction of international policy and leadership on this topic. I then turn to critically examine the status quo in Australia and point to opportunities where business can take action to improve the rule of law and in turn, improve its own long-term profitability and sustainability, as well as Australia’s reputation as an attractive place to do business.

The business case

The ‘rule of law’ involves complex legal ideas. This can make it difficult to fully appreciate the scope of its relevance to business confidence. So let’s break it down. In real terms, strong rule of law fosters an enabling environment for economic activity by:

Ensuring accountability

Jurisdictions with public institutions, which are effective, accountable, transparent and inclusive, lay the foundations for peace and stability. Businesses are attracted to investing in these jurisdictions as the stability provides them with the confidence to make long-term investment decisions. Strong rule of law also helps to promote equality, legal identity and empowerment, which in turn, encourages full economic participation and improved productivity.

Supporting access to justice and elimination of corruption

Jurisdictions with high levels of access to justice and low levels of corruption are attractive to do business in, as they create a level playing field and result in cost-savings. Business has more confidence to invest and grow where investments do not hinge on bribes and where mechanisms exist to recover stolen assets and combat illicit financial and arms flows.

Providing certainty on intellectual property and business transactions

When making investment decisions, business looks for certainty in enforcing contractual, intellectual property and other associated rights. This relates back to the basic rule of law principle that the law is capable of being known by all and is enforceable against all.

Fairness and transparency in dispute resolution

Day-to-day, businesses are focused on growing through core activities. Litigation is a hindrance to this growth. Business leaders therefore look to invest in jurisdictions with an independent judiciary; speedy and cost-effective dispute resolution mechanisms, which will enable them to get back to running their businesses faster.

Rule of law and business in Australia

What sort of rule of law issues concern Australian businesses?

Intellectual property rights

These have been the topic of various high-profile legal disputes. This can be illustrated with the Phillip Morris tobacco plain packaging international arbitration, where the Commonwealth Government enacted public health policy and legislation, but in doing so, arguably failed to consider the full scope of its international treaty obligations. Equally, film, music and software piracy in Australia has resulted in drawn out intellectual property disputes such as the Dallas Buyers Club litigation, where currently the film production company is at pains as to how to most effectively enforce its rights against 4,726 internet users! Compounded, these issues can raise rule of law risks with regard to intellectual property protection in the minds of prospective investors.

Government tender reversals

These are starting to effect perceptions of sovereign risk in the minds of international infrastructure constructors. Although one would hope the Victorian Labor Government’s decision to scrap the East-West Link upon election (once contracts had been issued) was an isolated case, the ACT Opposition party’s threat to cancel the Canberra Light Rail if elected, feeds uncertainty into the minds of would-be tenderers that contracts will not be honoured when doing business in Australia.

Access to justice

This is reportedly an issue for small and medium businesses, which make up 95% of the Australian economy and are the ‘missing middle’ in terms of access to justice. Often they do not have the financial resources to enforce their rights against bigger corporates. In the age of ‘digital disruption’ this may be preventing entrepreneurial start-ups from enforcing their intellectual property against larger conglomerates and thereby, stifling innovation.

A recent survey of 301 companies ranks Australia as second only to the People’s Republic of China for perceived rule of law risk for foreign investors. Eight per cent of respondents cited rule of law as a significant issue in Australia, with greatest concern over enforcing intellectual property rights. Disconcertingly, the study was undertaken before recent development such as the East-West Link cancellation.

Opportunities for Australian business

An opportunity therefore exists for affected businesses to take action and support the rule of law in Australia, to improve their own confidence to invest and grow, but to also improve the performance of their industry and in turn, the Australian economy. This might be in the form of promoting transparent business activities or including pro bono services as an ordinary part of business costs. When considering international expansion, Australian businesses could consider promoting more rule of law capacity building projects in overseas jurisdictions, in order to reduce the need for international arbitration.

Businesses internationally have shown great leadership on how business can support the rule of law as a complement to government action. As a result, they have gained the confidence to further invest and grow in operating jurisdictions. It is now up to Australian businesses to harness international momentum and follow this lead by actively engaging in a dialogue with government to promote the rule of law.