Law, Ethics, and International Finance

By Buchheit, Lee C. | Law and Contemporary Problems, Summer 2007 | Go to article overview

Law, Ethics, and International Finance


Buchheit, Lee C., Law and Contemporary Problems


I

INTRODUCTION

Cross-border financial flows can have dramatic effects on the recipients of the money--for good or for ill. This is particularly true in countries whose economies and capital markets are underdeveloped. A relatively small inflow of foreign capital into such a country can inflate valuations on a local stock exchange or allow the government to distribute pre-election largesse in the form of subsidies, tax breaks, spending on public works projects, and so forth. A sudden outflow of that capital, however, can have disagreeable consequences of an equal and opposite magnitude.

Ethical questions about who should receive cross-border financing, in what amounts, for what purposes, and on what conditions have long engaged the attention of international financial institutions such as the World Bank, the International Monetary Fund, and the regional development banks. There may even still be a few commercial lenders holding to the view that a private creditor should concern itself solely with the profitability of a transaction and the likelihood that the debt will be repaid, to the exclusion of all other ancillary issues, but these probably constitute a dwindling minority. Like it or not, loans that are susceptible to challenge on grounds of illegitimacy or recklessness run a higher risk of non-payment. So, whether viewed under the light of ethics--morality or profit-loss, the issues cannot be avoided.

What, if anything, does the law add to this discussion of ethics and international finance? The law and the machinery of justice are certainly ubiquitous elements in the lending process. After all, cross-border credits are invariably evidenced by contracts of one kind or another that contemplate enforcement in a national court.

Specifically, are the ethical considerations raised by cross-border loans exclusively matters to be taken into account before the credits are extended, or are they also relevant to the interpretation and enforcement of the legal agreements that eventually evidence the credits?

II

THE RULES

Parties entering into a commercial contract want predictability in its interpretation and enforcement. The outcome produced by the application of the governing law in any particular dispute may be far less important to the parties than the fact that the outcome can be anticipated in advance of signing the contract. Why? Because if the predictable outcome is commercially unacceptable to one or both of the parties, they are free--before they have signed the agreement--to adjust its terms to avoid that result, to switch the chosen governing law if a switch solves the problem, or, as a final resort, to scrap the deal altogether. But what commercial parties find intolerable is the prospect of locking themselves into a contractual arrangement that may subsequently be interpreted or enforced in a manner inconsistent with their presigning intentions.

The ability of a legal regime to deliver a predictable outcome is one of the major reasons why contractual counterparties will choose that regime as the governing law of their contract. This is particularly true in the context of financial transactions. Most lending arrangements involve starkly asymmetrical performance by the parties: the lender's obligations are heavily front-loaded (they lend the money), while most of the borrower's obligations are performed thereafter (they must pay the money back over time). In asymmetrical contracts of this type, the party that must perform first--here, the lender--has an especially keen interest in knowing that it can enforce the subsequent performance of its counterparty or obtain an award of fully compensatory damages if that performance is not forthcoming.

Common-law legal systems, with the importance they attach to judicial precedents, have a natural advantage in this regard. The accumulated weight of those precedents both presage and constrain how the judiciary will interpret the provisions of commercial agreements. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Law, Ethics, and International Finance
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.