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The Lex Mercatoria & its application in international arbitration

Introduction

The lex mercatoria has been defined as a body of rules not derived from the will of sovereign states, but mainly from international trade practices. In that sense, the lex mercatoria could be viewed as a category of international law, separate from national legislation, which applies to international commercial transactions.

It has been said that there are as many definitions of the lex mercatoria as there are authors writing about it. However, even though the notion of the lex mercatoria lacks a universal definition, it still seems to be accepted in the practice of international commercial arbitration. This paper intends to analyze the lex mercatoria as a concept and its application in international arbitration.

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Brief historical background of the Lex mercatoria

The historical background of the lex mercatoria is controversial. Some authors claim that the lex mercatoria has its precursor in the ius gentium, the body of Roman law that regulated economic relations between foreigners and Roman citizens.[1] Others claim that the origins of the lex mercatoria can be traced back even further, all the way back to the dawn of human civilization.[2] Either way, it is in the Law Merchant of the Middle Ages where its historical roots truly could be found. During the 11th century, international economic relations in Western Europe were flourishing and the continent experienced a great growth of commerce which, in turn, led to the formation of a new social class; the merchants.[3]

During this time, sovereign states did not intervene in the merchants’ self-regulation of their own affairs. States welcomed the growth of trade because it meant tax revenues, employment and access of foreign goods.[4] Thereby, the merchants were free to set their own rules, responding directly to their needs and desires. In following centuries, the lex mercatoria slowly started to become a part of national law. In civil law countries, it was incorporated into commercial codes whereas in common law countries it became a part of customary international commercial law.[5] Meaning; the lex mercatoria became blended with the individualities of national law and, thereby, lost much of its independent character. As sovereign states took control over international trade, the laws regulating economic relations and international disputes were solved by referring to private international law.

These national laws would soon prove to be inadequate to regulate international commercial contracts. The private international rules were considered complex and the domestic laws obsolete; they simply did not satisfy the simplicity and certainty required by the international business community.[6] In the early 1960s, legal scholars started to question the supremacy of national law in international relations. At the same time, a new lex mercatoria began to emerge. Traders from all over the world started to adopt alternative solutions in order to avoid the application of national law on their transactions.[7] By using standard clauses, self-regulatory contracts and by recourse to international commercial arbitration, traders once again were creating their own regulatory framework, independent from national laws.

The concept of the Lex mercatoria

When discussing the concept of the lex mercatoria it is important to do a distinction between the two most common approaches; the positivist approach and the autonomous approach. The positivist approach, mainly influenced by Clive Macmillan Schmitthoff, stresses the importance of international and self-regulatory rules in international commercial law. According to Schmitthoff, the modern lex mercatoria is a combination of two interrelated elements; the importance of international origin of rules and the uniformity of rules at an international level.[8] On the whole, the positivist approach highly concentrates on the harmonization of international trade law and is firmly based on national jurisdiction.[9] As a result, the lex mercatoria only exists by virtue of national law, giving it effect.

The second approach is perhaps even more controversial. According to the autonomous approach, advocated by Berthold Goldman, international trade is independent of national legislation and that the majority of international business is not regulated by national law at all.[10] Meaning that the lex mercatoria is a set of general principles and customary rules spontaneously referred to within the framework of international trade, without referring to a particular national law.[11] In that sense, the lex mercatoria should be seen as a separate legal system, continuously developing independent of national law.

Depending on the approach chosen, the sources of the lex mercatoria are various. From a positivist standpoint, trade customs formulated by international bodies and institutions such as the International Chamber of Commerce and international legislation are main sources of the lex mercatoria.[12] While from an autonomist viewpoint, the usages of international trade and general law are perceived as its actual sources.[13] From what has now been said, it is clear that the concept of the lex mercatoria is very much open to argument.

In order to determine the real basis of the lex mercatoria, Ole Lando’s approach could be informative. Instead of distinguishing from content and sources, Lando proposes a list of what he calls existing elements constituting the lex mercatoria. These elements are public international law, uniform law, general principles of law, rules of international organizations, standard form contracts and reported arbitral awards.[14] This list of elements has been widely accepted by authors and scholars.[15]

The Lex mercatoria in International Commercial Arbitration

In the field of international commercial arbitration, disputes are usually solved by the application of so called non-national rules alone or in combination with municipal law. In most cases, arbitrators’ jurisdictions is based on the will of the parties, whereby they are allowed to apply non-national law if the parties so choose.[16] In situations where the parties have not made any choice of law, the arbitrators are also allowed to determine the law applicable to the merits of the dispute, without previous recourse to private international law.[17]

As far as party autonomy is concerned, it is clear that the parties are fully entitled to choose what law to apply to a dispute. However, the question arises as to whether the lex mercatoria can be chosen as the law to be applied. The short answer to that question is undoubtedly ‘yes’. There are, in fact, numerous arbitral awards where the lex mercatoria, or a version of it, has been applied.[18] In the following, I will briefly describe and discuss two of the more recent cases.

In ICC Case no. 9875 an arbitral tribunal decided to apply the lex mercatoria.[19] The claimant was a French company who had been given an exclusive license to manufacture and distribute the respondent’s products in Europe. The respondent was a Japanese enterprise. In 1996, after the first license agreement, the respondent entered into another license agreement with a third party, covering the distribution in Asia. The claimant contended that this agreement infringed its exclusivity in Europe. The arbitration agreement between the parties did not contain a choice of law clause and the tribunal decided that no national law should be applied since ‘that the difficulties to find decisive factors qualifying either Japanese or French law as applicable to the contract reveal the inadequacy of the choice of a domestic legal system to govern a case like this’.[20] Instead, the tribunal decided to apply the lex mercatoria, arguing that it was the most appropriate ‘rules of law’ to be applied to the merits of this case.

Sometimes, the arbitration tribunal decides a case by reference to ‘general principles of law’ or ‘principles rooted in the good sense and common practice of the generality of civilized nations’. An example of this can be found in the ICC Case no. 7375, where the tribunal found that the failure to include a choice of law clause reflected an implicit intent to avoid the party’s national law. Therefore, the tribunal decided to apply the general principles of law applicable to international contractual obligations, since these principles have earned a wide international consensus, ‘including notions said to form part of the lex mercatoria as well as the UNIDROIT Principles.[21]

One cannot emphasize enough how important the UNIDROIT Principles have been on the development of the modern lex mercatoria. The Principles constitute a newer development in what can be argued to be a trend toward a more definitive lex mercatoria.[22] Some authors even claim that the Principles, in itself, constitutes a full-fledged codification of the lex mercatoria.[23] Regardless of position, it is a fact that in the Preamble of the UNIDROIT Principles it is stated that the Principles ‘may be applied when the parties have agreed that their contract be governed by general principles of law’, the ‘lex mercatoria or the like’.

The final question is whether counsel should begin recommending the selection of the lex mercatoria to govern international commercial contracts. The answer is probably still ‘no’. It is uncertain what practical effect such a choice will have. However, an increased use of the lex mercatoria is very likely, especially as it is reflected in the UNIDROIT Principles. Last but not least, the role of the arbitrator in developing the lex mercatoria cannot be overemphasized. In this role, the international arbitrators are deemed to be somewhat of social engineers, since the lex mercatoria still is not clear cut.[24].

Conclusion

The history of the lex mercatoria is an enigmatic affair and there still remains serious disagreement among authors as to its definition, sources and content. Regardless of the highly academic debate surrounding the lex mercatoria, fact still remains, it is applied by arbitrators and it does have a part to play in the international commercial trade of today. In terms of international commercial arbitration and the lex mercatoria, there should be little doubt that we are witnessing an evolution that has long been in motion. With further development, it can most certainly provide a set of rules to deal with international commercial disputes more effectively than national legal systems.

 

[1] Goldman, ‘Lex Mercatoria’, at 3.

[2] Juenger, ‘Choice of Law & Multistate Justice’, p. 6 and Trakman, ‘The Law Merchant: The Evolution of Commercial Law’, at 12.

[3] Postan, ‘Medieval Trade and Finance’, at 12.

[4] Cremades & Plehn, ‘The New Lex Mercatoria and the Harmonization of the Laws of International Commercial Transactions’, p. 318 and Trakman, ‘The evolution of The Law Merchant: Our Commercial Heritage’, at 6.

[5] Marella & Yoo, ‘Is Open Source Software the New Lex Mercatoria?’, at 812.

[6] Mercedes López Rodríguez, ‘Lex Mercatoria’, at 47.

[7] See eg. Schmitthoff, “Das neue Recht des Welthandels”, at 47–77; Goldman, “Frontières du droit et lex mercatoria”, at 89–90.; Goldstajn, “The New Law Merchant”, at 11; Kahn, “La vente commerciale international”; Fouchard, “L’arbitrage commercial international” and Stoufflet, “Le credit documentaire”.

[8] De Ly, “International Business Law and Lex Mercatoria”, at 209–210

[9] Schmitthoff, “The Unification of the Law of International Trade”, at 105–119.

[10] Goldman, ‘Frontières du Droit et Lex Mercatoria’, at 181.

[11] Goldman, ‘The Applicable Law: General Principles of Law – The Lex Mercatoria’, at 116.

[12] Schmitthoff, ‘Das neue Recht des Welthandels’, at 34.

[13] Goldman, ‘Contemporary Problems in International Commercial Arbitration’, at 114.

[14] Lando, ‘The lex mercatoria in International Commercial Arbitration’, at 748.

[15] Mustill, ‘The New Lex Mercatoria: The First Twenty-five Years’, at 109.

[16] See art. 3(1) of the Rome I Regulation, Art. VII of the 1961 European Convention on International Commercial Arbitration and art. 28(1) of the UNCITRAL Model Law.

[17] See eg. Art. 28(2) of the UNCITRAL Model Law, art. 22(1) of the Swedish Chamber of Commerce Rules, art. 1054 of the Dutch Arbitration Act and art. 1496 of the French New Code of Civil Procedure.

[18] See eg. Petroleum Development (Trucial Coast) Ltd v The Sheikh of Abu Dhabi, published in International and Comparative Law Quarterly (1952) 247, Sapphire International Petroleum Ltd v National Iranian Oil Company, reprinted in ILM (1967) 136, Government of the State of Kuwait v The American Independent Oil Company, reprinted in ILM (1982) 976 and Lena Goldfields Ltd v Union of Soviet Socialist Republics, reprinted in Cornell Law Quarterly (1950) 42.

[19] ICC International Court of Arbitration Bulletin, Vol. 12, No. 2, at 52.

[20] ICC International Court of Arbitration Bulletin, Vol. 12, No. 2, at 97.

[21] Redfern and Hunter, ‘Law and Practice of International Commercial Arbitration’, at 126–127.

[22] See generally, Selden, ’Lex Mercatoria in European and U.S. Trade Practice: Time to Take a Closer Look’.

[23] Baron, ‘Do the UNIDROIT Principles of International Commercial Contracts Form a New Lex Mercatoria?’, at 124–125.

[24] Cremades, ‘The Impact of International Arbitration on the Development of Business Law’, at 527–531 and Maniruzzaman, ‘The Lex Mercatoria and International Contracts: A Challenge for International Commercial Arbitration?’, at 711–717.

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