Buying commercial law: Choice of law, choice of forum, and network externalities

Abstract

This paper applies network effect theory to transnational commercial law, arguing that commercial parties selecting law through choice of law and choice of forum clauses can be likened to consumers selecting a product, and thus equally susceptible to the effects of network externalities. The number of “consumers” who subscribe to the same legal norms is analogous to the number of consumers who use a product. As the number of “consumers” increases, so too does the inherent value of selecting that jurisdiction, inducing even more parties to “purchase” that body of law. This is a network effect. I argue that transnational commercial law is ideally calibrated so as to generate a network effect. This stems from the inherent nature of commerce. The discussion distinguishes between two kinds of externalities, direct and indirect network externalities, concluding that network systems that possess both kinds of network externalities (as is the case with law-selection decisions in commercial contracts), are the best candidates to produce a robust network effect. I then examine how the twin ingredients of fluid interaction and frequent choice present in commerce precipitate a network effect; expansive interaction places a higher premium on the need for synchronization, and frequent opportunities to select law in the contracts of fresh commercial relationships allow for an incremental drift towards a specific jurisdiction. The paper ultimately concludes that, as a result, network externalities indeed play an influential role in the ascension of particular jurisdictions over others in law-selection decisions, an important conclusion as it points to an unrecognized influence underpinning the current development of transnational commercial law.