Legal Shocks

Abstract

Legal shocks are unexpected changes in law or the application of law that conflict with commercially‒entrenched norms and quickly disrupt widely‒accepted activities. They do so by introducing sudden uncertainty as to how legal rules or procedures view those norms of practice, and making the common adherence to such norms potentially costly. They are especially profound for sectors that treat standardised contract models and behavioural protocols as authoritative, as with day–to–day conduct among professional financial intermediaries in organised national and transnational markets. Legal shocks can thus be identified as those that a reasonable observer would consider unexpected, whether they stem from judicial decisions, through errors in the judicial or regulatory understanding of commercial conduct, or in the unchallenged construction of commercial norms. This paper will assess the impact of examples of instructive judgments from common law jurisdictions involving contractual or statutory interpretation that appear to ignore entrenched practice, resulting in dislocations that can be distinguished from more traditional issues of legal error or uncertainty. Such examples are comparatively rare but sufficient in number and impact to be troubling. This paper proposes a functional definition of such shocks, and examines how they differ from mistakes of law or in the understanding of the law among informed non–specialists. It assesses how shocks may be mitigated by commercial parties, sectoral representative bodies, or through their engagement with legislative, regulatory or judicial processes; and considers whether recent reforms to civil procedure in the creation of a specialist panel in the England and Wales high courts to adjudicate inter alia issues of especial importance to the financial sector provide a means to avoid disruptive shocks of the kind experienced in the modern era in a number of sophisticated jurisdictions.