Lex Mercatoria Research Paper

1. Historical Development And Current Definitions

In Roman law, Lex Mercatoria was part of ius gentium, that is, a kind of international law more flexible than the Roman ius Civile (civil law). Lex Mercatoria comprised national customary law in international trade. Historically, it is the major root of the consensual contract (without special form). However, it is disputed whether Lex Mercatoria as part of ius gentium offers a precedent for Lex Mercatoria as a legal system apart from national legal systems (De Ly 1992).

The medieval ius commune had for centuries constituted a legal framework in Europe. Legal scholars cultivated a common understanding based on Justinian’s Corpus Iuris despite the division of medieval Europe into many more distinct political entities than today, all with their various local laws. Similarly, medieval Lex Mercatoria constituted a cosmopolitan mercantile law based upon transnational customs and deeds copied for similar transactions. Disputes were settled by market tribunals or special courts. The English Carta Mercatoria of 1303 provided certain foreign merchants with a fast dispute-settlement mechanism and application of the law merchant (as opposed to feudal law or city law) (De Ly 1992). The English admiralty courts relied on the best available sources, be they domestic or foreign, in elaborating a worldwide maritime law (Juenger 1995).

In the English common law tradition, common law courts in the seventeenth century started incorporating customary rules developed by traders and usually applied in arbitration or special courts. ‘Law Merchant’ was defined as

a number of usages, each of which exist among merchants and persons engaged in mercantile transactions, not only in one particular country, but throughout the civilized world, and each which has acquired notoriety, not only amongst those persons, but also in the mercantile world at large, that courts of this country will take judicial notice of it (Lethulier’s Case (1692) 2 Salk 443 (per Holt, CJ )).

This ‘Law Merchant’ was less rigid and formal than the common law. As the common law courts became the forum for commercial litigation, ‘Law Merchant’ lost its international character and became national commercial law. Later codifications of commercial law, as for instance the English Sale of Goods Act 1893 and the American Uniform Commercial Code (UCC), are to a large extent restatements of law merchant principles as represented in common law. Today, ‘Law Merchant’ is still used to refer to national common law relating to commercial transactions.

Modern usage understands Lex Mercatoria as systems of standardized clauses and general legal principles in international trade and commerce. In order to set it off from law merchant incorporated in national common law some authors prefer ‘New’ or ‘Modern Lex Mercatoria’ or ‘New Law Merchant’ and similar terminology when referring to modern (informal) codifications of transnational commercial law.

Systems of standardized clauses are developed by a number of intergovernmental and nongovernmental organizations through extensive comparative efforts. Such rules have often served as a model for national lawmaking or international conventions. An outstanding example of a formulating agency is the International Institute for the Unification of Private Law (Institut international pour l’unification du droit pri e, UNIDROIT), set up in 1926 as an auxiliary organ of the League of Nations. UNIDROIT is now an independent intergovernmental organization with 58 member states. Its purpose is to examine ways of harmonizing the private law of states, and to prepare gradually for the adoption by states of uniform rules of private law. Many of UNIDROIT’s drafts have resulted in international instruments and Conventions, like the Convention on a Uniform Law on the Formation of Contracts for the International Sale of Goods adopted at a diplomatic Conference of the member states in The Hague in 1964. The UN Commission on International Trade Law (UNCITRAL), formed by the United Nations General Assembly in 1966, has similar topics on its agenda. A well known example is the Vienna Convention on the International Sale of Goods (CISG). Another system of clauses referred to worldwide are the INCOTERMS, specific trade terms promulgated by the International Chamber of Commerce (ICC).

Lex Mercatoria also refers to unwritten or, at least, not systematically collected principles and clauses which are considered international trade law, usage or custom (Goode 1997). Such rules are invoked in arbitration and applied by arbitration tribunals, for example, the ICC. This kind of Lex Mercatoria is compiled and discussed in legal literature. UNIDROIT prepared a well researched collection of contract law used in international trade, the ‘UNIDROIT Principles of International Commercial Contracts’ first published in 1994. These principles are intended to enunciate rules which are common to many existing legal systems and are selected to accommodate the special requirements of international trade. The UNIDROIT principles do not claim binding force; they are not intended as uniform law or for an international convention and will be applied in practice by reason of their persuasive value only. In many other fields of law, general principles, guidelines, or best practices are set forth by professional bodies, trade associations, interest groups, legal scholars, governmental, or intergovernmental agencies. In some instances, like the UNIDROIT project, the objective is to establish an unbiased and well-balanced restatement; in other instances, a political or policing impact is intended.

2. Main Characteristics And Practical Impact

Based on the historic development and present day definitions, Lex Mercatoria can be characterized as transnational and a-national. In the absence of a ‘world legislator,’ international trade and commerce have developed very functional and sophisticated rules based on practice and persuasive value. Parties to transnational contracts tend to avoid recourse to domestic law. Relying on well established Lex Mercatoria-clauses, contracting parties have a chance to overcome language barriers and all kinds of biases. Furthermore, they can draw from the condensed experience in their special field of business. When writing a transnational contract, parties or their counsel rarely invoke Lex Mercatoria explicitly. Rather they make use of specific clauses and principles. Therefore, Lex Mercatoria is not as well established in the terminology of international trade as in its practices.

Usually, substantive references to Lex Mercatoria occur in agreements of arbitration or other means of alternative dispute resolution that avoid state courts. Arbitration rules are often part of Lex Mercatoria, too, like UNCITRAL’s, ICSID’s (World Bank International Center for the Settlement of Investment Disputes), or ICC’s rules on international commercial arbitration. In the case of Scherk vs. Alberto Culver Co (417 US 506), the US Supreme Court pointed out the purpose of such arbitration agreements:

A contractual provision specifying in advance the form in which disputes shall be litigated and the law to be applied is … an almost indispensable pre-condition to achievement of the orderliness and predictability essential to any International transaction. Furthermore, such a provision obviates the danger that a dispute under the agreement might be submitted to a forum hostile to the interests of one of the parties or unfamiliar with the problem area involved.

This case from 1974 is in line with the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has been ratified by over 50 countries.

3. Theoretical Analysis

In legal theory, it is disputed whether Lex Mercatoria is ‘law.’ As law, it would form a third category between national and international law. Proponents of the theory of Lex Mercatoria as an independent body of law (mainly French, English, Dutch, and German scholars and practitioners experienced in arbitration) argue on the basis of a functional or sociological concept of law. This view acknowledges the existence of an autonomous body of law governing international commerce without a source in state power: ll existe un droit dont la source est ailleurs que dans l’Etat (Kahn 1961).

On the other hand, theorists, especially legal positivists, who see all law based on the powers of the (nation) state, deny the existence of an autonomous Lex Mercatoria. They argue that the absence of jurisdiction cannot be offset by private agreement, for even contracts need national law in order to be enforceable. Constitutionalism, positivism, and the concept of the sovereign state are irreconcilable with rulemaking by private governance. A contract is only conceivable within a legal order; there is no ‘contrat sans loi’. Additionally, Lex Mercatoria is considered much too vague, difficult to ascertain, and incomplete to qualify as a legal system.

Practically, the dispute is of only limited impact. The theoretical question is resolved whenever model laws or other products of formulating agencies have been incorporated into national law. Then, we have state enacted law applicable in courts and suitable for choice of law clauses. In other cases, when the state is not a signatory state or the respective set of clauses is a private convention, courts can refer to Lex Mercatoria clauses only as incorporation of standard business conditions into the contract at hand and will test the validity of such clauses according to national law. A choice of law clause that calls for the application of Lex Mercatoria in general is certainly very rare. In such a case, the objection of vagueness would be well argued. However, the parties to a contract tend to be much more specific, and the research necessary to deal with a particular Lex Mercatoria clause does not seem more burdensome than the application of foreign law mandated by national conflict of law rules. As already mentioned, arbitration clauses are prevalent in international trade. An arbitration tribunal is free to apply Lex Mercatoria rules and reach its decision on the equities of the case. The validity of arbitration clauses is generally recognized by state courts, especially if the clause inserted is in accordance with the ‘Rules of Conciliation and Arbitration of the International Chamber of Commerce,’ the UNCITRAL rules on international commercial arbitration, or a similarly well-established procedure.

A third approach is the advancement of guidelines, recommendations, codes of conduct, best practices, etc. with the clear understanding that these instruments are not binding. Sometimes, such sets of rules are called ‘soft law.’ Nevertheless, the practical impact and even legal relevance of nonbinding principles can be considerable. The OECD Guidelines for Multinational Enterprises, for example, are recommendations addressed by governments to multinational enterprises; they provide voluntary principles and standards for responsible business conduct consistent with applicable laws (Horn 1980). Similarly, the OECD Principles of Corporate Governance are intended to assist member and nonmember governments in their efforts to evaluate and improve the legal, institutional, and regulatory framework for corporate governance in their countries, and to offer guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance.

Because ‘soft law’ is not binding, governments and international institutions discuss sensitive policy issues freely in an open manner and have fewer reservations to enter into agreements that are just recommendations (Dryden 1999). Seen from the perspective of the individual, guidelines, recommendations, and best practices leave private autonomy formally untouched. However, the deviation from widely recognized standards has an impact on the standing of the enterprise with respect to business partners or investors. The effect of accepted best practices is described as ‘comply or explain.’ The informal rule is honored by reasoned comment. Legally, noncompliance with informal standards does not lead to liability. However, the construction of technical legal concepts as, for instance, the business judgment rule, may very well draw upon best practices.

Another important effect of private governance is control of access to certain activities and ensuing ramifications. A stock exchange, organized in a private form (corporation), may require stock corporations to establish audit committees in order to have their stock listed. Then, audit committees will be established even if state corporation law does not require committees as an organizational structure of the board of directors. Legislative activities, as pointed out above, quite often follow suit when well established formulating agencies propose a systematic set of rules.

4. Perspectives

Globalization of commerce, information, and other areas of life brings about challenges similar to those ancient Roman merchants and English tradesmen faced and met with the creation of Lex Mercatoria. In global electronic commerce, the realities of the borderless world of cyberspace runs headlong into geographically delimited national jurisdictions of sovereign states. The attainments of constitutionalism, the nation state and the rule of law are finite in a global market. Private regimes are gaining ground much in the same way Lex Mercatoria established itself as reality, be it legal, commercial or sociological. Selfregulation is found in the Internet as ‘netiquette’ and other attempts to create an environment of trust and stability that are propitious for e-commerce. The question of global regulation is not moot, though. Few governments would consider self-regulation to be a suitable approach for taxation of electronic business. Given the extreme difficulties of global regulation, the OECD, based on a broad consensus among the member countries, wants to facilitate the development by the private sector of effective market-driven self-regulatory mechanisms. Regulation and self-regulation is not seen as a dichotomy anymore. Rather, a complementary or integrated approach is favored and the dominating issue is the right mix (Dryden 1999).

The historical experience of Lex Mercatoria shows that transnational, nongovernmental regimes can be efficient and productive. Modern Lex Mercatoria includes harmonization of specific fields of law, setting standards by codes of conduct, and developing self-regulation in the new communication environment. The basic structure of the phenomenon that in the absence of an international legislator the interested parties resort to self-regulation, assisted by specialists and transnational associations, is found in other areas, too. In sports, we are used to regulation by transnational nongovernmental associations. World championships and similar events follow elaborate procedures on the basis of rules which are not law in a formal sense that requires a national law maker. Nevertheless, the private governance of a worldwide network of sports associations exercises undisputed jurisdiction over the rules of the various games.

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