Where the law is concerned, Does it really make a difference if you form an offshore entity that is domiciled in Panama vs. The Bahamas?

Common Law, or more correctly English Common Law, is used in practically every country that was a former colony of England.  Common law, in a simplified explanation, really means a set of rules or laws based upon what has been socially acceptable or generally agreed upon in the past.  That is what laws really are.  A set of rules for living, or a framework for society to function.  One aspect of common law is that it is inter-twined with democratic traditions.  Meaning the idea that government framework should be adaptable to social change or new interpretations – Even if that social change or new interpretation is a negative one.  This concept is very important, because I believe it is the heart of what sets apart a common law jurisdiction, such as the United States, from a civil law jurisdiction, such as Panama – and also explains why many people are frustrated with the US courts. 

We can then make the generalization, if the language of the country is English, it is a common law jurisdiction.  While each English speaking country may have a system or model slightly different than the American legal system, some of the basic workings or certainly the culture will be something that each has in common.  In my opinion, the most important point about Common Law, is the fact that judges often decide if a law is applicable or even valid.  This, in my option is the most dangerous aspect of the common law system.  Allow me to explain further. 

Many of you are probably aware of laws that were written or "codified" over 100 years ago.  Society was different then.  Standards of behavior, social issues, and other factors that existed when a certain law was written, no longer applies today.  In many cases,  it is the judge hearing a case that makes such a determination.  Such laws are never formally changed by the legislature, they are merely "interpreted" away as meaningless, or are interpreted certainly differently than what would be the apparent "intent".  In some respect, this is part of the democratic tradition, and also the reason why (especially in the US) the Supreme Court often hears cases on the merit of social relevance, not law.  But as such, it means that the power to in effect nullify a law, or change the law's "meaning",  is left in the hands of one individual, or the hands of very select few.    

Some people may think that such a system is good.  Certainly a law considered to be "foolish" or  
no longer applicable to society perhaps should be "done away with".  But remember who is making such a determination.  One man or woman, with their own prejudices and personal opinions, or a group of such individuals (in the case of the supreme court).   What we can highlight about this "legal tradition" is, the democratically elected legislature creates or passes a law,  while the power to in effect disregard the law is possibly left to one person - the judge.  Not a very equal or fair "balance of power" in my opinion.  In addition, it is interesting to note in the case of the US Supreme Court, that the judges presiding on the court have the right to pick and choose which cases they will hear.  There is no strict, "I was here first, or next in line" process with individuals wishing to bring their case.  If the topic of the month is abortion, perhaps the court will decide to hear an abortion related case that just came up one month ago.  Your particular case can remain unattended to, for years, if the court decides it is not something they wish to address.   

You are probably thinking, this is all very interesting, but how does it apply to me?  Well, let us look at some laws that exist on the books which were designed to protect the individual (and still exist on the books), yet have been interpreted to be something else.  Why not start with contract law.  Two people make an agreement, and formalize that agreement by signing their name to it.  Five years later, one of the parties wishes to sue the other for money (money is always what they are after, never justice, just money).  The judge agrees with the plaintiff and awards the plaintiff half of the net worth of the defendant.  I am of course referring to a pre-marital agreement, which is a contract that should be honored and protected under law like any other contract.  But in reality, such a scenario can apply to any contract, and should make any businessman or individual very nervous about the rights they think they have. 

How about a US domestic Trust, Family Limited Partnership, and similar types of structures which are supposed to be protected under US law.   Often enough, judges have ordered that "Trusts", and other entities, be invaded to settle claims for divorce or civil suits (someone suing you because they fell over the garbage can in front of your home or store).  Judges have often said that the law governing such structures were not "intended" to make assets impenetrable to monetary claims against the grantor or beneficiary (the person initially contributing assets to the trust, or the person receiving income from the trust).  That's funny - I thought that part of the whole point behind setting up an irrevocable trust (and separating one's assets from the original owner) was asset protection.  What then does such a structure protect against?  Acid Rain? Jock Itch? What?  In all honesty, you cannot blame the attorney that set up such a structure in accordance with the law written on the books.  It is a judge that is in essence changing what is written, often with his or her own personal opinion or prejudice as the basis. 

Let us take this idea one step forward and discuss such a Trust Structure that is domiciled in say the Bahamas, Belize, Cayman Islands, Turks & Caicos, and so on.  Often it is the case that individuals will go to these jurisdictions because the feeling is that the law is "stronger" in such places.  Perhaps, there is "banking secrecy" and similar confidentiality laws in such places, where as such statues do not exist in the US.  Perhaps also, as a banking center and "tax haven", it is in that jurisdictions best interest to truly be strict about what the law does in fact say in writing with regards to such structures.  However, keep in mind that this is also a English speaking country (common language) that shares a legal tradition in common with the US or Canada. 

It has come to pass, especially with regards to the Bahamas, whereby plaintiffs have filed suit first in US courts and then followed up with similar actions in the local jurisdiction of the Trust.  Even though local law was meant to strictly protect the individual, and strictly honor the laws regarding Trusts and similar structures, local judges in such jurisdictions have sided with the US court and ruled that such a structure can be invaded.  One prominent case in point involved a American real estate developer that had established a trust in the Bahamas.  Previous buyers of the homes had filed suit against the construction company, the real estate development company, and personally against the individual that owned the stock of or that controlled such companies.  The complaint was that the homes were poorly built, and that the buyers wished to recover not only monetary damages for the repair, but also for "emotional" and "psychological" damages as well.  What happened? 

Well, the Bahamian judge sided with the US court, and also said that even though the statue of limitation had expired in the Bahamas (the amount of time that the law says the trust is "open" for challenge or that the window of time whereby someone may challenge the trust assets to recover damages or liabilities of the grantor), the Trust could be violated.  The Bahamian judge said that the "intent" of the statues or laws governing trusts were not meant to protect Trust assets from attack in such a case.  What is also equally disturbing, is the fact that the judge also dismissed the statue of limitation that exists under Bahamian Law.  Once again, this is one example of a common law jurisdiction where the written law itself is not "bad", but the practice or the enforcement by the courts is.  This is not meant to be a slight on the Bahamas legal system, nor is it an assessment of if the developer was guilty or not of building poorly constructed homes.  The point is that if you say you believe in the law, the rights of the individual, democracy and fairness, you must accept both the aspects that you believe are positive (or that you agree with) and those aspects which are negative. 

Everything is a two way street, but the law that is written must stand for something.  If the law is not "good", then have the people (via the democratically elected legislature) change the law, or repeal it. To have aspects of the written law which can be picked or chosen to suit your own needs, at a particular point in time, really means that no law exists at all.  What good is the written law, if one man can change it or disregard it?  This, once again, is the problem with the "common law" legal system, and in effect, the perceived protection of structures from a "common law" jurisdiction. 
 

Civil law can be found in most non-English speaking countries, and in fact, many countries that do not have a history of democratic government.  That is to say that many of these countries currently are democracies, but this has not been their long term past history.  

Civil law, then, is a tradition of laws or rules set down formally on paper – and not necessarily by democratic proxy. France and Sweden are democracies, but use a legal system of civil law.  In many countries, such as the Dominican Republic, the civil law system is in fact based upon Napoleanic code, or the legal framework set up by Napolean Bonaparte (who was most certainly not a democratically elected official).    The traditions of civil law then, is a tradition of rules or regulations handed down by centralized government (in many cases a King, or other non-democratically elected government)~ which are to be obeyed as given, not interpreted by those charged with upholding the law. In modern day democracies that have a civil law system, it is of course the democratically elected legislators that write or amend laws, not a king.  Regardless, this role of upholding the law (not interpreting it) by judges and courts in civil law jurisdictions is very much in contrast to the their common law counterparts. It is for this reason, that I strongly believe that a civil law country offers far superior protection if the concern is about lawsuits and related matters.  

We can then say that in a Civil Law jurisdiction, which for the most part would be non English speaking jurisdictions, the culture or legal tradition is that of obedience to the written word.  Since most of these jurisdictions are in fact modern democracies, what you have then is a legal system that is charged with upholding the written law as it was handed down by a democratically elected legislature.  If the law no longer applies, or the public opinion feels that it must be changed, it must be formally done so by the legislature, not by a judge that does not like the law (or has his or her own opinions about things).  

Lets discuss this further using a very simple example of a hypothetical law – two different countries.  Hypothetical Law: Everyone must wear orange colored pants on Thursday.  In a common law jurisdiction, the legal system and specifically judges, have flexibility to “interpret” the law.  The US judge can say that the “intent” of the law is that citizens should not walk the streets naked.  The common law judge therefore may decide that the law means that people do not necessarily have a mandate to wear a certain style of clothing or color, just that they must wear clothing.  The civil law judge, on the other hand, knows the law strictly says you must wear orange colored pants on Thursday.  If you did not, you broke the law.  The law is specific and needs no interpretation.  It does not matter that the civil law judge disagrees with the law, that is not his or her job.  Their responsibility is to know what the law says, and to find our if the law has been broken or not. 

Another aspect of many jurisdictions governed by Civil Law is the absence of trial by jury.  Instead, as in the case of Swedish Law, a judge and two appointed or elected jurors have the responsibility of hearing a case.  It is a twist on the trial by jury idea, in having two individuals of the community work in concert with a judge to decide a case.  This is their full time job for two years.  They are not worried about being away from their normal job for an extended period of time on a lengthy trial, and they are paid a full time salary by the government.  Therefore, the motivation is not simply to vote one way or another so they can "get out of jury duty" quickly.          

To be sure, laws in all places are a reflection of attitudes held by local society.  I find that the attitudes of the peoples in civil law jurisdictions are very different from American attitudes – different to the tune of common sense.  Let us take the case of monetary payment for “emotional damages”. I have a client that was involved in a car accident.  The client was standing still at a stop light in a medium sized US city. One car hit another car, and a chain reaction occurred.  A vehicle that was pushed by yet another car hit my client from behind.  No physical damage to the client or his car – so far so good.  One of the parties involved decided to sue everyone else.  One of the complaints was that the husband of the woman driver (of one of the cars involved) could no longer enjoy sexual intercourse with him.  This was because she was so emotionally traumatized by the accident (I wish I could make this stuff up, but the sad part is its all true).  As a result, the husband was also a plaintiff seeking money damages.  The Judge actually heard the full argument.  The plaintiff wanted to take the matter to Jury trial.  The clients insurance company settled out of court for $25,000 out of fear for additional expense, and the possibility that a jury might award much more.  The client complained to the judge about how it could be possible for the judge to entertain a preposterous claim that was obviously about greed.  The client was threatened with jail time.  The next day he called me to find out about moving ~ permanently. 

What is my experience in a civil law jurisdiction with the same thing?  The judge will tell the husband to get a psychiatric exam for both him and his wife, and never return to the courtroom again with such nonsense. Case closed.  Remember that such lawsuits for "emotional" or "psychological" damages, in a civil law court, are considered to be frivolous.  The judge will not tolerate what is an obvious "scam", or what is in essence attempted extortion.  In fact, do not be surprised if the judge sends the plaintiff directly to the "pokey" for even trying such nonsense in his or her courtroom.  I have seen it happen.  When I do, I simply smile, and in that moment am grateful that places still exist in the world where common sense and sanity still prevails over greed. 

The point to this entire article is, deciding which jurisdiction to use, can be equally as important as deciding what type of entity is best.