The Elusive Spirit of the Law: Formalism and the Struggle for Legal Control
| Published date | 01 November 1991 |
| Author | Christopher Whelan,Doreen McBarnet |
| DOI | http://doi.org/10.1111/j.1468-2230.1991.tb01854.x |
| Date | 01 November 1991 |
The Elusive Spirit of the
Law:
Formalism
and
the
Struggle for Legal Control
Doreen McBarnet* and Christopher Whelan
**
The struggles for effective legal regulation and control have been charted in many
areas of law. Attention has been drawn
to
political power and compromised
legislation,
to
the issue
of
law being rendered merely symbolic whether by design
or default, and
to
problems
in
implementation and enforcement.
In
our own recent
work, we have emphasised the problem of 'creative compliance'
-
using the law
to
escape legal control without actually vio1,ating legal rules. This perspective'
focuses on
the
active response of those subject
to
the law, not just
in
political lobbying
over legislation but
in
post
hoc
manipulation of law
to
turn
it
-
no matter what
the intentions of legislators or enforcers
-
to
the service of
their
own interests and
to
avoid unwanted control.
It
emphasises the role of regulatees rather than regulators;
it
also emphasises the two-sided nature of law, as a means of controlling
and
a means
of
escaping control;
it
underlines both the structural manipulability of law and the
means by which
-
in
its many facets
-
it
is actively manipulated. Creative
compliance thrives on a narrow legalistic approach
to
rules and legal control, on
a formalistic conception of law. Of considerable interest then
to
the issue of legal
control, particularly
of
the powerful economic interests most frequently associated
with
such legalistic avoidance, is the regulatory strategy of 'anti-formalism' recently
adopted
in
both financial reporting and taxation
in
an explicit bid
to
restrain creative
compliance.
This article analyses the limits
of
formalism and the retreat from
it
in
current
strategies of control but
it
also shows how formalism is already being reasserted.
It
assesses how far anti-formalist strategies can be sustained, asks whether formalism
is inevitable
in
law, addresses the issue of legal indeterminacy and questions its
practical relevance.
At
root is the fundamental question of whether effective legal
control, particularly of those
with
resources
to
resist, is attainable.
Formalism and
the
Failure
of
Legal Control
Different approaches to law and control co-exist
in
legal policy and legal thinking,
but formalism is often presented as dominant.* Formalism implies a narrow
"Ccntrc
lor
Socio-Lcgal Studics. Wolfson Collcgc, Oxford.
**School
of Law, Warwick University.
This iirticlc is basctl
on
our
research
on
corporate finance
and
on
rcscarch by McBarnet
and
Mansficld
on
tax avoidance. Thcsc projccts wcrc fundcd by thc Coininissariat du Plan, the Europcan Coiiiniission
and
thc
ESKC,
to
all
of which wc arc cxtretiicly grateful. We would
also
likc
to
thank Joe McCahcry for
conitiiciits
on
carlicr drafts.
I
Sec McBurnct, 'Law and Ciipitcil: Thc Role of Lcgal
Forin
and
Legal Actors'
(1984)
12
hit
J
Sociology
of Law
233;
McBarnct, 'IAw, Policy and Lcgal Avoidance'
(1988)
J Law
&
Society
113;
McBarnet.
'It's
Not What You
Do
But
The Way That You
Do
It:
Tax Evasion, Tax Avoidance and thc Boundtiries
of Deviance'
in
Downes (cd),
Uiirmvlliitg
Crintirtnl
Jitsticc
(London: Mactnillan,
1991);
McBarnet
and
Whclan, 'Beyond Control: LiIW Managenicnt and Corporate Govcrnancc'
in
McCahery, Picciolto
and
Scott
(cds),
Corporntc
Coittrcil
ctrrd
Acc.cirrrttciBi/ify~
(1992);
McBarnct
and
Whclan. 'Crcative
Coiiipliance
;ind
thc Dcfeat of
Legal
Control:
A
Cnsc Study
in
International Corporatc Financc'
(iiiitiico,
submittcd for publication); McBarnct nnd Whclan,
Bc~y~oird
Coirtro/?
7ltc
Rcc.grr/eiricirr
ofFiricrircid
Risk,
Corp~ir~itc
Activity
mid
tlrc
Siitgle
Brropcoit
Muket
(forthcoming).
2
Kcliiian,
A
Grtirk.
to
Criticd
Lqcil
3lrdic.s
(Cntiibridge: Harvard Univcrsity Press,
1987).
848
77rc
Modcwr
Oriv
Rcvicw
54:6
Novcmbcr
199
I
0026-7961
November
199
I]
Fonrrtiliwr
cirrd
the
Striigglc.
jiw
Legcil
Cotrtrol
approach to legal control
-
the use of clearly defined, highly administrable rules,
an emphasis on uniformity, consistency and predictability, on the legal form of
transactions and relationships and on literal interpretation.
Although the term formalism has been used in divergent ways, at its heart ‘lies
the concept of decision making according to
rule,”
rule implying here that the
language
of
a rule’s formulation
-
its literal mandate
-
be followed, even when
this
ill
serves its purpose. Thus,
‘to
be formalistic
.
. . is to be governed by the
rigidity of a rule’s formulation.’4
A
formalist approach also assumes that law is
‘intelligible as an internally coherent phenomen~n,’~ that there is consistency,
predictability, logical coherence and ultimately autonomy and ‘closure’: a systemic
isolation of the legal system from such things as politics and culture. This isolation
will
be reinforced
if
lawyers are ‘legalistic’: ‘rule-preferrers’ and ‘rule-followers,’
interested
in
relationships, rights
in
something and against somebody,
in
relation
to
others. Legalism as an ethical attitude has been described as the operative outlook
of the legal profession: moral conduct is a matter of rule following, and moral
relationships consist of duties and rights determined by rules. As a social outlook,
legalism has been described as ‘The dislike of vague generalities, the preference
for case-by-case treatment of all social issues, the structuring of all possible human
relations into the form of claims and counter-claims under established rules, and
the belief that
the
rules are
Creative compliance uses formalism to avoid legal control, whether a tax liability
or some regulatory obstacle to raising finance, effecting a controversial takeover
or securing other corporate, or management, objectives. The conibination of specific
rules and an emphasis on legal form and literalism can be used artificially,
in
a
manipulative way to circumvent or undermine the purpose of regulation. Using this
approach, transactions, relationships or legal forms are constructed
in
order to avoid
the apparent bounds of specific legal rules.
In
this sense, the detailed rules contribute
to the defeat of legal policy. Though creative compliance is not limited to law and
accounting, accountants are particularly conscious of its potential to reduce the
effectiveness of regulations7 and to avoid tax.8 Much of the current impetus for a
broad, open approach to professional standard setting stems from concern that a
‘mechanistic “cookbook” approach
. . .
[which] is very precisely drafted
.
.
.
will
be relatively easy to av~id.’~
3
Schaucr, ‘Formalism’
(1989) 97
Ydc
hiit
Joiirrrd
509.
5
10.
4
ibid
p
535.
5
Weinrib, ‘Legal Fornialisni:
On
the Inimancnt Rationality
of
~AW’
(
19x8)
Ydc
kiiv
JoiirrrciI
949.
6
Shklar,
Legcilisrrr
(Canibridgc: Harvard University Press,
1964)
p
I.
7
Griffiths,
Creative
Accoirritiiig:
How
to
Mcikc
Yorrr
ProJits
Whit
Yori
Wcsit
Tlrerrr
To
Be
(London:
Sidgwick
&
Jackson,
1986);
Rcport of thc Rcvicw Committcc undcr the chairnianship of Sir Ronald
Dearing CBN,
771e
Mcikirig
of
Accortririrrg
Stnrrclnrds
(London: ICAEW,
1988)
p
13
(The
Decirirrg
Report).
8
Law Socicty Revenue Law Conimittee,
Ttrs
Liiv
iri
the
Melrirrg
Pot
(London: Law Socicty,
1985)
(hcrcinaftcr L SOC Rcv Co)
p
4,
‘The introduction
of
capital gains tax
in
1965.
with its detailed and
intricate codc of statutory provisions, cncourctgcd taxpayers and their advisers
to
tliscovcr
illid
apply
avoidance techniqucs tailored to the new tax.’ Shortly bcfore his iippointment as the first chiiirman
of the Accounting Standards Board, David Tweedic statcd that he rcgardcd dctailcd prcscription
iis
‘undesirable as
it
can lcad
to
inflcxibility and
to
inccntivcs
to
conduct
an
accountancy standards avoidance
game analogous to tax avoidance’: Twccdie and Whittington, ‘Financial Reporting: Currcnt Problems
and their Implications for Systematic Reform’
(
1990)
2
I
Accoriirtirrg
cord
Bfrsilress
Rrsecirclr
87, 97.
9
Institute
of
Chartcred Accountants of Scotland, Coiiinients on
ED
49,
on
filc at thc ICAEW Library,
London.
See
also Ernst
&
Young. Coiiinients
on
ED
49,
I/
10190:
The danger ofiiny detailed guidance
such
as
this [ED
49
application notes] is that
it
niay encourage the tlevelopmcnt of avoidance scheincs
(there is evidence that financial institutions are already thinking
in
these
ternis)’;
ICAEW, Coiiinicnts
on ED
49,
‘If
a strict rulcbook approach is cncouragcd wc ilrc unlikcly
to
see
in
practicc situiitions
849
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