A Curious Question from Hong Kong: What is the Relationship Between Capitalism and Common Law?

By Martin Kwan

Both common law and civil law jurisdictions practice capitalism—i.e. free market economics where the market plays a larger role in driving the economy than the government. In fact, capitalist economies flourish under both systems, such as civil law countries like France and common law ones like the U.S.

Common law is most commonly understood by its two representative features as being an adversarial system (where lawyers guide judges to render a decision) and treating case law as a source of law. The civil law system, by contrast, is inquisitorial (where judges take an active role in inquiry and adjudication) and relies on statutory codes but not precedents. Looking at these distinguishable but equally well-functioning characteristics, there does not seem to be any intuitive link between the two legal systems and capitalism. Certainly, neither the common law system nor the civil law system is at odds with capitalism.

However, recently, public authorities have spoken about Hong Kong Special Administrative Region’s system, and they have often conjoined the capitalist system with the common law system – as if the two were interdependent. In fact, Hong Kong has maintained a capitalist system that is considered highly successful in terms of market freedom from Western perspectives, and has even been recently ranked by the Canadian Fraser Institute as the world’s freest economy. Perhaps the two systems are interlinked merely to distinguish from China’s socialist and civil law system to highlight the policy of “One Country, Two Systems.” However, closer examination reveals this is not the case.

In 2022, the Hong Kong Department of Justice stated, “Hong Kong common law provides a solid foundation for the capitalist system” and “Hong Kong’s capitalist system, supported by the common law, has been working smoothly.”

Likewise, a former judge of the Hong Kong Court of Final Appeal commented in June 2022 that “[t]he Basic Law entrenched the common law as the bedrock of Hong Kong’s capitalist system.”

So, what makes the combination the “capitalist legal” framework?

This article not only seeks to explore, in general terms, the highly interesting relationship between common law and capitalism, but will also consider Hong Kong’s unique context at the end. This issue has profound importance in terms of public diplomacy, because the statements made by local authorities are clearly intended to promote Hong Kong’s distinctive advantages in terms of the interplay between the common law and capitalist system. It therefore matters significantly to global stakeholders who are constantly looking for and assessing international financial opportunities, particularly when Singapore has recently overtaken Hong Kong in a global financial ranking. Ultimately, the significance is not limited to monetary terms, but more broadly about whether and how Hong Kong’s core system allows it to functionally and politically remain as a competitive bridge between China and the world—even in light of both internal and external policy changes due to Covid-19 and the China-U.S. relationship involving trade sanctions.

The compatibility between common law and capitalism

The Hong Kong Department of Justice has briefly elaborated on their interplay, stating that common law is “capable of adapting to societal values and changing circumstances, thus providing certainty and predictability and yet also flexible to deal with businesses’ changing needs by creating a favourable commercial-friendly environment.”

The common law system allows courts to make binding precedents which emphasized property rights protections, which in turn foster trade, investment and capitalism. For example, Michael Hartmann, a former Non-Permanent Judge of the Hong Kong Court of Final Appeal, held in a 2007 ruling that “bearing in mind that the Basic Law entrenches Hong Kong’s capitalist system, [private property rights] are rights, in my view, which warrant a generous interpretation.” In another 2003 judgment, he also declared that “[t]he right to acquire property, to use it; that is, to enjoy its exclusive control, and to transfer it is an integral feature of the capitalist system.” Another eminent judge Andrew Cheung noted in 2010 that “[i]t is trite that a hallmark of a capitalist society is its high respect for personal ownership and property rights.”

Common law also embraces capitalism by favoring the freedom of trade and freedom of contract, in contrast to civil law’s interventionist approach. Moreover, the common law system has more inherent flexibility to adjust the rules for the fast-changing commercial landscape than its civil law counterpart whose “only means of catching up are legislative changes.”

Statutes can also easily become outdated:

“any code-based system depends on the interpretation of something written in a past age for the circumstances of that past age, which makes it less predictable and certain when applied to new commercial situations.”

Furthermore, common law respects judicial independence and hence the rule of law. By nature, common law allows more room for liberal interpretation and legal changes than civil law. In turn, capitalism influences judicial reasoning. In an interesting case, a Hong Kong judge applied his capitalistic “feeling” (business sense), that selling shares at a price higher than the subsequent IPO price would not constitute a criminal conspiracy to defraud, but rather merely selling commodities at a profit. Therefore, the common law system is compatible with capitalism.

The explanation needs elaboration

However, something is missing in the association between capitalism and common law. First, capitalist systems are equally compatible with the civil law system. Advanced economies like France and Switzerland have successfully adopted a combination of capitalism and civil law systems. For example, France upholds the freedom of contract pursuant to Article 1102 of the French Civil Code, which is a “longstanding and uncontroversial principle in French law” that is “of prime importance.”

Additionally, property rights are protected in civil law countries. Self-evidently, civil law countries like China, Japan, and South Korea, are within the top 10 for attracting venture capital in the world, showing that they are equally capable of promoting trade and investment.

An important jigsaw piece

The better view is that common law promotes capitalism by virtue of its precedential nature. This “precedential” nature refers to the power of the courts to make binding law (i.e. “judge made law”). However, in the context/systems of civil law, precedents are not a source of binding law, and instead merely persuasive.

The precedential system, in effect, allows market force to determine the content of law. Although common law is “generally uncodified” and relies on scattered statutes (i.e. legislative decisions), it is more principally based upon precedent. This grants substantial power to the "market place" which functions as the independent judiciary that upholds competence to create any rules and regulations.

The litigants are the “market force” signaling their demands for the establishment of a new law, which in turn, engenders a new interpretation. Accordingly, the judges adjudicate competing demands and supply through law in response to demands. Unlike the political legislature, judges “have no agenda to be implemented” and the courts respond predominantly to the market force. In this sense, the common law system alludes to the workings of capitalism, resembling a “coordinated” or “organized” market economy.

Furthermore, the efficiency theory of common law corresponds to the capitalist pursuit for productivity under the “invisible hand”:

“Inefficient legal rules would yield to more efficient rules because there would be more cases in litigation due to the inefficient rules. As such rules became more efficient as a result of litigation, they would no longer be challenged, which would lead to maintenance of the more efficient rules. The more inefficient the rule, the greater the stakes for high-stakes litigants to litigate to a decision to change the rule…This extension would suggest that eventually there would be greater efficiency in common law over time.”

By contrast, statutory law would represent the government’s market interventions that are not necessarily motivated by the market force alone as manifested in environmental regulations as well as tax and welfare provisions.

In sum, common law proffers the market capacity and flexibility to shape its legislative content, especially in commercial law. Such favorable circumstances bring about capitalist functioning, thereby gratifying capitalist needs.

How has Hong Kong reinforced the dynamics of the common law system to cater for fast-changing market needs?

Hong Kong’s common law system has two additional features which signal openness and responsiveness to market needs. If there is a foreign commercial law that is well-perceived by the market, the Hong Kong system (1) not only is capable of and incentivized to identify that market rule swiftly because of its international common law personnel, (2) but it is also very willing to adopt that efficient rule.

First, Hong Kong has sent the rather unusual, yet market-friendly, signal that, as long as a rule is efficient, the local courts are willing to adopt it even if it is a foreign one. Art.84 of the Hong Kong Basic Law constitutionally entrenches the ability to refer to “precedents of other common law jurisdictions.” The reinforced openness to international standardsallows Hong Kong to flexibly and responsively cater for market demands and developments. Ng and Jacobson (2017)have found “overwhelming evidence that citing to foreign cases is a common, everyday practice” in Hong Kong, with over 60% of sampled reported judgments cited foreign precedents as reference and 97% of which even cited them “affirmatively as legal authority.”

This is a significant advantage of the “common” law, allowing judges to cherry-pick suitable legal rules from the “international common law fraternity.” Justice Robert Tang (a Non-Permanent Judge of the Hong Kong Court of Final Appeal) even lauded how this and the following proud features “ensure that Hong Kong would remain a member of the international common law community.”

By contrast, other jurisdictions do not necessarily share the same open willingness to shape local law according to efficiency and market needs. For example, in India which also practices hybrid common law and capitalism, a Supreme Court judge reportedly expressed the view that “there’s no necessity to refer to the foreign judgments” because Indian law is already “substantially developed.”

Second, Hong Kong has also sent strong signals to market stakeholders that their needs can be reflected effectively through representative lawmakers (international judges and lawyers). Hong Kong uniquely welcomes a large number of foreign judges from the highest courts in Australia, Canada, and the U.K. to join the Hong Kong Court of Final Appeal. There is “unusually” no nationality requirement for judges at all levels of courts, except for the two Chief Justices of the Court of Final Appeal and the High Court respectively. By contrast, other common law jurisdictions like Singapore and Malaysia have reportedly ditched foreign judges. In the UK, judges must be citizens of the UK, Republic of Ireland, or a commonwealth country. In terms of the supply of lawyers, Hong Kong recognizes foreign legal qualifications much more flexibly than Singapore. Singapore has a limited list of approved foreign law schools, but there is no such in Hong Kong. These two features have been commonly understood as bringing Hong Kong excellent legal minds and rules, but they actually also promote capitalism by sending efficiency-driven free market signals.

Martin Kwan is a researcher at the OBOR Legal Research Centre and an Associate in Research at Harvard University’s Fairbank Center for Chinese Studies. He was selected as the 2021 United Nations RAF Fellow from China. He can be reached at martinkwan11@gmail.com.

Hong Kong Harbour Night 2019 is by Benh LIEU SONG and is licensed under CC BY-SA 4.0.