An exploration of the cause consequences and solution of regulatory fragmentation.

Introduction

Digitalisation has brought forth an age of increased efficiency and collaboration across the globe. This has been accepted by most within the commercial landscape, as businesses and firms can access markets around the world more easily. However, from the 2010s to the present day, imposed trade regulations have restricted cross-border deals, hindering firms’ attempts to enter new markets worldwide. Countries wish firms entering their markets to follow their local laws and so impose regulations to ensure compliance. This has led to the development of complex, independent regulations isolated to a single nation, causing a distinct regulatory gap between nations in how they deal with cross-border contracts leading to inefficiency, higher costs, and legal disputes. This is largely due to their established sovereignty as the highest authority in their jurisdictions, which they use to dictate the laws governing incoming firms. This essay will argue that regulatory fragmentation is detrimental to the global economy and has formed because of individual nations’ pursuit of improving their own position globally, instead of working collaboratively. It will first outline the legal principles depended on by firms before regulations complicated matters, before outlining the main regulatory bodies and their effects on businesses before looking to the future and the new global initiative to help reduce regulatory fragmentation.

What did cross-border contracts previously rely on?

Regulation has not always been a large hurdle for innovative firms searching for new opportunities. Before this widespread trend by governments to tie regulations to their nations, firms relied on several principles. These are: freedom of contract, choice of law, and jurisdiction clauses.

The freedom of contract doctrine means that the terms and contents of a contract will ultimately be decided by the parties involved, it is not up to the court to intervene. Both parties have autonomy in this matter. This was further expressed by Sir George Jessel in Printing and Numerical Registering Co V Sampson who stated “If there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of Justice” This means that businesses have the right to determine the contents of the contract, including the jurisdiction where it applies to (thus what laws it operates under.) Tedoradze Irakli outlined in “The principle of Freedom of Contract, Pre-Contractual Obligations Legal Review English, EU and US Law” that the EU’s acknowledgment of this principle is to support an open and free market “to support and facilitate market transactions” whilst also being a moral principle as it supports free will in the commercial landscape. This doctrine was considered a “general principle of civil law’ by the European Court of Justice. This shows the importance of it as a principle within cross-border transactions.

The second key legal principle is jurisdiction clauses. These dictate which countries’ courts will listen to a dispute if one arises. These are essential for cross-border transactions as approaches to key disputes vary globally. One traditional dispute that reflects this is the “Battle of Forms” debate. Within UK Law, Ben-Shahar stated that the “battle of the forms” is one of the oldest problems in contract law and is widely recognised to be among the most difficult problems for contracts doctrine to resolve. Murray labelled “battle of the forms” as ‘chaos’ coming to the conclusion that over time this problem will only be exacerbated. This debate occurs when the parties sign each other’s contracts. This effectively creates two contracts, if there is a dispute for example in liability for damages, which contract should be honoured is the question for the courts to determine. The UK Courts opted for the Orthodox Last Shot Rule. Lord Denning stated the winner of the debate is “the man who puts forward the latest terms and conditions: and if they are not objected to by the other party, he may be taken to have agreed to them.”

This deviates from other developed nations. To name a few, the “knock-out rule” distinguishes between agreed and conflicting terms. If both parties do not have a similar clause, then it is scrapped. This has been adopted by the United States of America in Section 2-207 of the Uniform Commercial Code, and the Federal Supreme Court of Germany in 1985 adopted it as well. Most recently, the rule gained international acceptance due to its application by the UNIDROIT Principles of International Commercial Contracts and the Principles of European Contract Law. Therefore, when countries are considering international contracts, the courts that will oversee them are essential to the contract.

Expanding on jurisdiction clauses, there are three main types: exclusive, non-exclusive, and asymmetric. These are also known as being one-sided or unilateral. If a contract has an exclusive jurisdiction clause, it means that only the courts within the specified country can deal with the dispute. In non-exclusive clauses, although it does outline a specific jurisdiction, it does recognise and accept that other courts may have jurisdiction over the case. Asymmetric clauses typically occur when one party has more bargaining power and so has a greater choice of where to begin proceedings compared to the other party. By controlling the jurisdiction it can position companies for greater success when facing disputes. This is vital in cross-border interactions.

What are the regulators, and how do they assert their authority

The shift to larger regulations by countries can be a response to the increasing market complexities aided by technologies. Law firms have seen a significant increase in ESG (environmental, social and governance) factors requested to be implemented into a contract, these added complexities create more room for exploitation of the nuances. Companies may use this to escape contractual obligations. Therefore, countries have set up large governing bodies to regulate market transactions. There are three main Western bodies that will be discussed. These are: the European Securities and Markets Authority (ESMA), the United Kingdom’s Financial Conduct Authority (FCA) and Competition and Markets Authority (CMA), and finally the United States Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission.

The ESMA is one of the most important supranational regulators. As described later, they did harmonise financial regulations dramatically within the EU, replacing fragmented national laws with a unanimous continent-wide framework to be applied. The European Union naturally wishes for its countries to abide by their laws and use their collective bargaining power to create stronger contracts. Therefore, when EU firms wish to engage with non-EU firms, the EU firm must ensure that their counterparts’ home countries’ regulations are equivalent to the EU standards. This allows access to the EU market. Several key legislations outline what “equivalent” regulation means. These are sector-dependent but include MiFID II (for investment services and trading ventures) and AIFMD (for alternative investment fund managers.) It is important to note that by following these, it is not the EU mutually recognising that countries’ legislation, they are merely deciding case-by-case if it aligns with their framework. Broadly speaking, their regulations aim to protect investors, markets, institutions and rule against market abuses. The EU’s rules isolate them, making all other countries abide by their rules and regulations regardless of the countries’ law-making process. Although they do support other regulations, they force these firms to use the guidelines of the EU, effectively aligning themselves with them.

Another important regulator is the UK’s FCA and CMA. The UK has an interesting history with the EU. Prior to voting to leave, they abided by the rules of the EU. However, by deciding to leave, they were not asked to create their own regime to regulate commercial contracts. However, they only conducted a partial separation. Many EU laws are still applied and depended on by UK courts such as the Rome I Regulation (593/2008) which applies the principle of choice of law to commercial contracts. The UK’s new system of regulations operates similarly to the European Union’s, countries must abide by their regulations in order to gain access to their markets. They must reach “comparable outcomes.” Their regulations differ from the European Union. One example of this is in the 2020 policy statement, HM Treasury stated “the UK will assess outcomes, not identical rulebooks.” This highlights a distinction in their approach. Instead of ensuring the regulations are similar, the FCA and CMA will only look at results. If these results mimic those of UK firms then their regulations are applicable.

The United States has repeatedly through case law asserted its jurisdiction in commercial contracts but has recently extended this globally. This adds to the complexity of regulatory fragmentation. Countries’ regulations are isolated but some nations overlap their jurisdictional powers onto them. One case showing this in the United States is the Goldman Sachs 1MDB case (2020.) This case centred around 1Malaysia Development Bernard (Malaysia’s investment fund) which intended to create economic development. However, it was used maliciously to embezzle billions of dollars over 5 years (2009-2014.) Goldman Sachs was accused of helping 1MBD raise $6.5 billion in bond sales. Although most of the criminality was outside of the United States, its courts still held that Goldman Sachs’ global operation and the simple use of their financial systems allowed them to prosecute. This exemplifies the nuanced complexities of litigation in commercial contracts. Regulations within nations can overlap with each other. Although most regulations are isolated, certain nations apply their jurisdiction abroad in cases where they believe it applies.

What is the consequence of this for business + examples

Companies applying contracts in several different jurisdictions have the task of drafting separate contracts using different legislation. This is through a process called due diligence which takes up a significant amount of the matter’s time. This most explicitly causes bureaucracy in two ways. For the firm, it causes longer delays between drafting and legal action. For countries, it delays new business entering the country. Foreign direct investment drives growth with many countries depending on it for expansion. One of the most recent displays of this is Trump’s Tariffs which he stated was motivated by bringing investment back to the United States. Therefore, larger regulatory gaps create creates frustration and lengthens the delay between investment. These internal costs of firms navigating complex frameworks and governing bodies will be high, requiring high end legal counsel to assist them. Most firms will past these costs on to consumers which negatively impacts individual consumers and the global economy. It is counterintuitive to globalisation and market freedom.

The troubles of regulatory fragmentation has been showcased in the UK case of Dexia Crediop S.p.A v Comune di Prato [2017] EWHC 1556. Dexia Crediop SpA was an Italian bank in dispute with Comune di Prato, the local authority. Both sides had agreed and entered into multiple interest rate swap contracts in order to restructure the local authorities debt. This was governed by English Law, with exclusive jurisdiction in English Courts. However, Prato was questioned as to whether it had the legal capacity to enter into such contracts, arguing that it exceeded their powers (ultra vires). Prato eventually stopped making payments under the swaps causing Dexia to sue. The Court of Appeal ruled in favour of Dexia stating that the contract expressly stated it was governed under English Law. But, the courts also recognised Article 3(3) of the Rome Convention, mandatory rules of the country where performance occurs can intervene. So, the Italian ultra vires rule could be applied. This case highlights the deep complexities faced by companies engaging internationally. Even within this case, where they explicitly stated that English law applies, there was still a nuanced Italian argument at play. This illustrates the real life impact of regulatory fragmentation on trade deals.

Proposed Solution

Countries have began to understand the complexities of these conflicting regulations for businesses. Therefore, an effort has been made to harmonise these into one governing body. This is known as UNCITRAL (United Nations Commission on International Trade Law) Before discussing UNCITRAL and the hope it provides for companies, it is important to discuss the earlier harmonisation by the European Union in regards to contract law. The European Union had similar complexities, within multilevel governments and different legislative bodies. One of the main challenges faced by the European Union was harmonising the law which crosses over large national areas with different judges speaking different languages with different understandings of the law. This is the key problem which Matthias E. Storme discusses in “Freedom of Contract: Mandatory and Non-mandatory Rules in European Contract Law” is the in-transparent nature of contract law, it has unpredictable levels of diversity.  There are two forms of this. The first is in-transparencies due to differences in structure. This occurs as in each jurisdiction the rules limiting freedom of contract are different and may not be complied in a similar way to their counterparts. The second type is in-transparencies due to differences in interpretation. This is linked to the vague, but established, general norms like: good faith and fair dealing. This creates fake legal unity as people believe the rules are synonymous across jurisdictions but are not. These problems are still being tackled within the European Union with no clear method of complete harmonisation. It did help in reducing the number of complexities when completing cross-border transactions.

The issues faced by the EU are similar but on a larger scale for the UNCITRAL. Their origins stem from “the General Assembly recognis[ing] that disparities in national laws governing international trade created obstacles to the flow of trade, and it regarded the Commission as the vehicle by which the United Nations could play a more active role in reducing or removing these obstacles.” They are mandated to coordinate “the work of organisations active in this field and encourage corporation among them.” It currently has 60 states. Naturally, this means that not all UN recognised nations are involved, so perfect harmonisation cannot be achieved. This does slightly limit the reach of this solution. Their general solution is divided into getting companies to compromise or accept differences in “legislative, contractual and explanatory” issues.

There has been some contention with some countries joining this project. David W. Rivkin and Frances L. Kellner argued against U.S Adoption of the UNCITRAL Model Law, they state “adoption of the UNCITRAL Model Law is not only unnecessary to maintain the United States’ leading position in international arbitration, but would be detrimental to the effectiveness of internal arbitration in the United States.” This raises a key point about international involvement and global harmonisation. As seen recently, countries have begun to adopt more protectionist measures to become more self-sufficient. This has been seen through the Ukraine-Russia conflict raising oil prices to Trumps tariffs to support domestic industries. Harmonisation comes at a cost of a countries independent adjudication and legal system. For developed nations, this is an excessive cost to pay. Countries like the United States and the United Kingdom place great emphasis on their independence and control. Within the United Kingdom specifically, parliamentary sovereignty empowers Parliament as the ultimate source of legal power and political power. Although both nations did end up joining, with global tensions rising, countries may become less willing to begin merging regulations.

Conclusion

Overall, regulatory fragmentation is a net negative globally for both consumers and firms. It creates unnecessary complexities within the global market. This marks a distinct shift away from the key legal principles relied on by firms to freely choose how they engage with international business. It exposes the selfishness of the developed world, instead of working collaboratively to encourage investment and development, they prioritise their own standards instead of creating cross-border regulations. This does paint a bleak picture for commercial contracts. However, even historically through the harmonisation of the EU, we can see that processes and regulations can be synthesised to produce effective results. They aren’t always perfect, but its better than the web of bureaucracy faced by businesses. The presence of UNCITRAL indicates a key global effort to tackle this global problem.

Reference(S):

Columbia.edu. (2025). In Support of the F.A.A.: An Argument Against U.S. Adoption of the UNCITRAL Model Law – Vol. 1 No. 4 – American Review of International Arbitration. [online] Available at: https://aria.law.columbia.edu/issues/1-4/in-support-of-the-f-a-a-an-argument-against-u-s-adoption-of-the-uncitral-model-law-vol-1-no-4/ [Accessed 5 Nov. 2025].

Irakli, T. (n.d.). The Principle of Freedom of Contract, Pre-Contractual Obligations Legal Review English, EU and US Law . [online] Available at: https://eujournal.org/index.php/esj/article/download/8836/8400.

library.croneri.co.uk. (n.d.). 37-040 Freedom of contract | Croner-i Tax and Accounting. [online] Available at: https://library.croneri.co.uk/cch_uk/csfb/37-040.

Mason Hayes Curran. (2024). The Importance of Jurisdiction Clauses in Commercial Contracts. [online] Available at: https://www.mhc.ie/latest/insights/the-importance-of-jurisdiction-clauses-in-commercial-contracts [Accessed 5 Nov. 2025].

Pinsent Masons (2022). Jurisdiction and choice of law clauses in international contracts. [online] Pinsent Masons. Available at: https://www.pinsentmasons.com/out-law/guides/jurisdiction-and-choice-of-law-clauses-in-international-contracts.

Storme, M.E. (2005). Freedom of Contract: Mandatory and Non-Mandatory Rules in European Contract Law. SSRN Electronic Journal. doi:https://doi.org/10.2139/ssrn.2672648.