The law’s singular role in trust, trade and investment

– Professor Dame Diane Coyle, University of Cambridge 

In old spy movies, the exchange of agents across the Glienicker Bridge in Cold War Berlin is a moment fraught with tension, as the two walk towards each other through swirling fog and darkness, then cross halfway. Will the deal be honoured by the other side?

It’s an apt metaphor for economic transactions in the absence of trust, trust that depends on the enforceability and the enforcement of deals. Economies are systems of exchange, and they cannot go much beyond person-to-person barter or face-to-face transactions in small communities without a functioning legal system that ensures people can trust whoever is on the other side of the transaction.

In the law we trust

How the law functions is a crucial issue for economic growth, a key priority for the current government. The UK exports legal services, but much more important is the role that Britain’s highly reputed system of laws and justice plays in creating the environment of trust that is a precondition for commerce, investment and growth. With the civil courts in a state of neglect, that trust may well start to crumble.

In previous centuries – before modern legal systems fulfilled their crucial trust-building role – personal reputation within institutions such as guilds, or trade networks[ref] Greif, A. 1993. Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition. American Economic Review 83. 525–48. Available from: https://web.stanford.edu/~avner/Greif_Papers/1993%20Greif%20AER%201993.pdf. [/ref] formed from specific communities, provided some assurance that contracts or transactions would be honoured. Rulers have always proclaimed standards for weights and measures to ensure trade in local markets can take place. But in today’s globally extended, impersonal, large-scale economies, only the law will do: a predictable system of administrative, civil and criminal law, impartially and rapidly applied, with the enforcement of legitimate remedies and sanctions when required.

The legal system is part of the institutional environment that the latest Economics Nobel winners, Daron Acemoglu, Simon Johnson and James Robinson, found to be associated with long-term economic development. The causal relationships are, as they acknowledged, hard to untangle. In particular, richer economies can support and sustain more effective legals systems, so there is two-way causality. But the evidence is clear that the legal system positively influences the economic environment in many ways, from personal security (in poor countries where violence is rife), through checks and balances on arbitrary government actions or corruption, to clear property rights, the enforcement of contracts, and tort law that awards compensation for harms to the victims.

Many economists consider property rights and contracts to be the essential foundation for trade and growth that the law provides. Anything other than barter or personal  relationship requires the making, keeping and enforcing of promises over time and space. Without reliable contracting, the scope for exchange is limited. As economies grow in scale, formal legal institutions play an increasingly essential role in sustaining the trust required for transactions.

In Britain and other advanced economies today, we are in the position of generally being able to take for granted the assurance our legal framework gives us – whether in shopping online for goods at the other end of a supply chain across the world on the assumption they will turn up, investing in financial products advertised on the train with reasonable confidence the scheme is not a fraud, or even in trusting the food and drinks we buy not to make us ill. As Paul Seabright wrote in his wonderful 2010 book, The Company of Strangers, any one of us may “nonchalantly step out of the front door of a suburban house and disappear into a city of 10 million strangers” with scant worry about relying on a complex network of economic transactions in every aspect of daily life. It’s hard to imagine the Merchant of Venice being set in a supermarket, he adds.

For all the current strains on the courts, at some level people seem to intuit how much we continue to rely on justice system. The judicial system and courts are – even now – the most trusted of UK institutions according to the annual ONS survey:[ref] Office for National Statistics (ONS). 2024. Trust in government, UK: 2023. Available from: https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/bulletins/trustingovernmentuk/2023. [/ref] nearly two thirds (62%) say they trust them (compared to the 70% who say they trust “people in general”, and is five times more than the mere 12% who trust political parties).

However, from this impressive starting point, there could be a long way to slide. As an OECD study points out,[ref] OECD. 2017. Trust and Public Policy: How Better Governance Can Help Rebuild Public Trust, OECD Public Governance Reviews. Available from: https://dx.doi.org/10.1787/9789264268920-en. [/ref] survey evidence is typically based on perceptions rather than personal experience, and there are increasingly reasons to be concerned about the quality of that experience in the UK for those who need recourse to justice.

The state of civil justice

The criminal justice system attracts most attention and has experienced a growing backlog in the criminal courts;[ref] Rowland, C, & Davies, N. 2024. Fixing public services: The criminal justice system. Institute for Government. Available from: https://www.instituteforgovernment.org.uk/publication/fixing-public-services-labour-government/criminal-justice-system.  [/ref] prisons are full, and public trust in policing and criminal justice is in decline. And yet criminal justice is probably the least relevant area of all the many ways in which the justice system touches on economic activity. Many of the multiple bodies and processes involved in civil and administrative law, or employment law, tax law or corporate law, also show signs of strain, reflecting the long underfunding of public services in general. The Ministry of Justice (MoJ) budget – current and capital – started to decline in real terms in the 2011/12 financial year; justice is an ‘unprotected’ area, a low priority compared to health and education for any Chancellor. The Autumn 2024 Budget included additional funds for the MoJ, but the overwhelming focus is on criminal rather than civil justice.

For individuals and businesses alike, the forum for finally resolving disputes and securing rights against one another or the state will sometimes be a specialist tribunal (such as an Employment Tribunal), but will often be the county courts, which handle all residual civil matters. Both individuals and businesses would also generally prefer to avoid the cost, time and distraction of going to court. Bodies such as Acas[ref] See https://www.gov.uk/government/organisations/acas.  [/ref] (Advisory, Conciliation and Arbitration Service) in the employment sphere, or the Financial Ombudsman Service[ref] See https://www.financial-ombudsman.org.uk/. [/ref] in consumer finance, have an important role to play. So too do effective complaints systems, administrative appeals and reviews, and a variety of dedicated ombudspersons in disputes involving the state and public services.

The key question with all of these (often publicly funded) systems – as well as the courts themselves – is whether they are fast, fair and predictable. It would today be hard to answer positively. For example, when it comes to civil claims in the courts, aside from the very smallest, the average time from a claim to a hearing is now 77 weeks,[ref] Ministry of Justice. 2024. Accredited official statistics – Civil Justice Statistics Quarterly: July to September 2024. Available from: https://www.gov.uk/government/statistics/civil-justice-statistics-quarterly-july-to-september-2024/civil-justice-statistics-quarterly-july-to-september-2024. [/ref] more than ample time for a small business or start-up to go under while trying to reclaim a debt. Not only is this a long wait but is it one that has been getting longer. A decade ago, it was only 56 weeks. Go back another five years to just before austerity bites, and the wait was only around 48 weeks[ref] UK Government. No date. Court Statistics, Quarter 4, 2009. Available from: https://assets.publishing.service.gov.uk/media/5a7c361140f0b67d0b11f9b2/court-stats-q4-2009.xls. [/ref] – appreciably under a year, as opposed to around a year-and-a-half today.

There will be plenty of businesses that have bitten the dust while waiting for settlements they needed. There will likewise be some unknown amount of investment that was not made because the companies reasoned that if they ran into difficulties in being paid what they were due they could not count on the courts to adjudicate in a timely fashion.

The position in the tribunals is not much better, with clear signs of relatively more cases dragging on unresolved. According to the latest MoJ statistics, the backlog of open tribunal cases rose by 4% overall in the quarter to June 2024, to 668,000.[ref] Ministry of Justice. 2024. Official Statistics – Tribunal Statistics Quarterly: April to June 2024. Available from: https://www.gov.uk/government/statistics/tribunals-statistics-quarterly-april-to-june-2024/tribunal-statistics-quarterly-april-to-june-2024. [/ref] There was a 17% jump in Employment Tribunal open cases, and a huge surge in appeals to the Special Educational Needs and Disability (SEND) Tribunal. Even though a record number of cases (4,500) were dealt with during the quarter in the SEND Tribunal, another 5,800 appeals were lodged taking the backlog up 61% to 9,200.

While employment rulings are of obvious and immediate economic import, something like special educational needs may appear less so, but that will not necessarily be true. Some of the parents stuck in this backlog, very likely with inadequate support and perhaps no realistic schooling for their children, may have to give up work to care for them during the long delay. All of these backlogs imply lengthy hold-ups for claimants or appellants, many months of waiting for resolution regarding issues central to their lives or livelihoods.

Another example is the 79,000 appeals outstanding at the Social Security and Child Support (SSCS) Tribunal, where much of the action is concerned with determining eligibility for Personal Independence Payments for disabled people. This was up 12% on the year in mid-2024; to the extent that it represents a large group of mostly hard-up people waiting longer than they should have to for the money they are due, it will exert a drain on spending power in the very local economies most in need of it.

In combination, all such tribunal delays are affecting hundreds of thousands of people, a non-trivial chunk of the workforce. Why has justice in England and Wales got so sclerotic? Ongoing under-resourcing, underequipping and understaffing are part of the issue, but so is historic underinvestment and ongoing mismanagement of change. According to the National Audit Office, the MoJ and the courts that it runs have a “significant technical debt”[ref] National Audit Office. 2024. Departmental Overview 2022-23 – MoJ, p.27. Available from: https://www.nao.org.uk/wp-content/uploads/2024/02/ministry-of-justice-departmental-overview-2022-23.pdf. [/ref] – in other words, out of date and non-functional IT – but the process of implementing new digital systems is not creating the expected operational efficiencies.

So much for speed. What about whether businesses and individuals can rely on justice that is fair and predictable? Unfortunately, the tribunal statistics themselves contain worrying signs that this is not reliably happening. For instance, with the SSCS Tribunal, three fifths of hearings resulted in administrative decisions being overturned in favour of the claimant. Such figures imply plenty of need for formal justice, but inadequate capacity. While it is not easy to come up with an analogous measure of the need for courts to secure just dealings between private individuals and businesses, it would be complacent to assume they are any less necessary. But a lack of both fairness and predictability is surely indicated by the fact that only in just under half (49%) of all civil claims defended do both sides of the argument enjoy legal representation.[ref] Ministry of Justice. 2024. Accredited official statistics – Civil Justice Statistics Quarterly: July to September 2024. Available from: https://www.gov.uk/government/statistics/civil-justice-statistics-quarterly-july-to-september-2024/civil-justice-statistics-quarterly-july-to-september-2024. [/ref]

The costs of a fracturing system

The economic impact of such generalised fraying of civil justice is hard to discern, as the academic and policy literature alike tend to focus on the high-profile areas of law that affect corporations, such as property and contract disputes. Yet there are assuredly costs across the system: employers unable to recruit staff until a tribunal case is settled; employees who can’t find a new job meanwhile; small businesses unable to get bills paid even for large amounts well in excess of what their cashflow can sustain.

One obstacle in the way of a reckoning is that issues facing tribunals or ‘small’ civil claims come to public attention bit by bit, or even case by case, if at all. The creaking structure of everyday justice is rarely seen in the round. Yet for countries where slow and unpredictable justice has long been acknowledged as a problem, there is solid evidence of its detrimental effect on the economy. For example, Italian growth has been shown to be hampered by the uncertainty around civil law processes increasing the risks involved in business decisions.[ref] Lorizio, M, & Gurrieri, AR. 2014. Efficiency of Justice and Economic Systems. Procedia Economics and Finance 17. 104–112. Available from: https://doi.org/10.1016/S2212-5671(14)00884-3. [/ref]

A recent study of 169 countries over the period 2004–2019 finds strong evidence that slower enforcement of contracts through the justice system increases uncertainty and prompts opportunistic behaviour in business relationships,[ref] Djankov, S, et al. 2024. Timely Justice as a Determinant of Economic Growth. Available from: https://www.fmg.ac.uk/sites/default/files/2024-12/DP917.pdf. [/ref] while another concludes that across the EU an operationally inefficient justice system (measured by clearance rate and timeliness of decisions) undermines economic growth.[ref] Kapopoulos, P, & Rizos, A. 2024 Judicial efficiency and economic growth: Evidence based on European Union data. Scottish Journal of Political Economy 71. 101–131. Available from: https://doi.org/10.1111/sjpe.12357. [/ref]

The legal system is part of the national infrastructure, just as much as the rail, electricity or broadband networks, or other types of social infrastructure such as the health and education systems. And, just as there has been sustained underinvestment in most infrastructure, so too has there been in the justice system.

The concept of social infrastructure[ref] Bennett Institute for Public Policy. No date. Measuring social and cultural infrastructure. Available from: https://www.bennettinstitute.cam.ac.uk/research/research-projects/measuring-social-and-cultural-infrastructure/. [/ref] – and indeed infrastructure in general – has gained traction in academic and policy debates during the past few years. Originating in late 19th century engineering as a descriptor for the physical structures that literally underpin other activities, infrastructure, an apt metaphor for the role of the law in relation to the economy, refers to the systems and networks without which the economy cannot function.

Perhaps just because a post-war cycle of massive infrastructure investment has been followed by four or five decades of living off those assets without reinvesting enough, the importance of physical infrastructure is now coming back into sharp focus, and so too are aspects of social infrastructure, although not yet the justice system. This omission makes no sense. People do not want courts any more than they want cables for their own sake, but for all the indispensable activities they enable. So, the value of the courts is indirect but fundamental; if they crumble, the economic transactions and investment enabled by a predictable, rapid justice system are held back.

Justice front and centre

The justice system is arguably the top priority for public investment among all the categories of social infrastructure because it is – by definition – not something that individuals can provide for themselves. The legal system only functions if almost everybody recognises its legitimacy and effectiveness.

Increasingly, corporations are stepping in for the state. A dispute over an e-commerce transaction is more likely to be appealed to Amazon than to the courts. Unions and individuals concerned over employment conditions will likely negotiate directly with Deliveroo. Many digital platforms have set up rating and review systems to help build trust between suppliers and users.

But there are limits to this ‘private government’, which is inherently lacking in accountability and legitimacy, and in any case always limited in its reach – just like medieval guilds or traders’ networks. It cannot substitute for an efficient justice system.

That system is a collective arrangement of institutionalised trust. It is most effective when it is least used, because it gives clarity about the rules of the economic game and assurance that the rules will be enforced: the more trustworthy and effective the courts and tribunals, the less they will actually be called upon to settle cases, because of people’s confidence that the opportunistic behaviour they judge and sanction will be averted. Conversely, the less timely and predictable the legal system, the more people will behave in opportunistic ways.

As in any situation where the dynamics are self-fulfilling, the system can flip relatively quickly from good to bad outcomes. To date, the consequences of sustained underinvestment in the UK’s legal infrastructure have been counted in individual pain, of jobs lost or businesses gone bust. But there will eventually come a tipping point when the aggregate costs soar as trust in the system itself disappears – just as a bridge can suddenly collapse when it has not been adequately maintained – and the friction this adds to commercial relationships of all kinds limits everybody’s economic opportunities.

In justice, as in so many areas, the new government has a difficult inheritance. Nor does civil and administrative justice leap to mind when contemplating the demands of the growth mission: battery factories, graphene labs and building sites all provide ministers with more obvious photo-ops. But unless there is improvement in the timeliness of decisions by courts and tribunals, growth in the UK will be facing yet another powerful headwind. Without the confidence in a legal and administrative framework that is impartially and speedily administered, economic decisions are freighted with unpredictability. As Adam Smith put it, the “tolerable administration of justice” is essential not only to create an incentive for individual productive efforts and adjudicate disputes, but also to ensure the very integrity of society.

The Nuffield Foundation has commissioned this project, but the views expressed are those of the authors and not necessarily the Foundation.