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Transnational Commercial Law - Texts, Cases and Materials, 2nd Edition by Goode, Roy; Kronke, Herbert; McKendrick, Ewan (24th September 2015)

Part I General Principles, 1 The Nature, History, and Sources of Commercial Law

Edited By: Roy Goode, Herbert Kronke, Ewan McKendrick

From: Transnational Commercial Law: Texts, Cases and Materials (2nd Edition)

Roy Goode, Herbert Kronke, Ewan McKendrick

Subject(s):
Authority of agent — Regulation of carriage of goods — Construction of contract — Formation of contract — Interpretation of contract

(p. 3) The Nature, History, and Sources of Commercial Law

A.  The Nature of Commercial Law

Three definitions

1.01  We shall begin by defining three terms: commercial law, transnational commercial law, and lex mercatoria. These are not terms of art, and different writers use them in different senses. But for our purposes, they denote the following:

Commercial law

1.02  The totality of the law’s response to mercantile disputes, encompassing ‘all those principles, rules and statutory provisions, of whatever kind and from whatever source, which bear on (p. 4) the private law rights and obligations of parties to commercial transactions’.1 In this conception, commercial law is concerned with transactions between professionals, whether they are merchants, financiers, or intermediaries. This definition thus excludes: (1) institutional law, such as the law of corporations and partnerships and the law governing the establishment and capital adequacy of financial enterprises; (2) consumer law (since one party is not a professional); and (3) public law, even if affecting the enforceability of agreements, for example, competition (antitrust) law.

Transnational commercial law

1.03  We use this phrase to denote that set of private law principles and rules, from whatever source, which governs international commercial transactions and is common to legal systems generally or to a significant number of legal systems. Again, the focus is on private law and on transactions, particularly cross-border transactions. Our subject is thus to be distinguished from international economic law, which is a branch of public international law and is concerned primarily with dealings between states and resolution of inter-state disputes by organs of the World Trade Organization.

Norbert Horn, ‘Uniformity and Diversity in the Law of International Commercial Contracts’ in Norbert Horn and Clive M Schmitthoff (eds), The Transnational Law of International Commercial Transactions (Kluwer, Boston, 1982) 4 and 12

B. THREE CONCEPTS OF TRANSNATIONAL LAW

Despite the usual connection between a private contract and its applicable national contract law, the transnational (i.e. cross-border) character of a commercial transaction entails specific legal problems and consequences. The most suitable way to describe them is to adopt the modern term ‘transnational law’. This term in fact points to a variety of interrelated and complex problems which are of daily concern for the international business lawyer. In order to avoid confusion, however, we must strictly distinguish three separate usages of the term ‘transnational law’:

  1. (1)  as a general description of the legal regime of an international commercial transaction;

  2. (2)  as a label for the factual uniformity or similarity in contract laws applicable to or contractual patterns used in international commercial transactions; and, finally,

  3. (3)  as a term to denote international sources of commercial law, i.e. internationally uniform law in the proper sense.

Each of these different concepts of transnational law is relevant to understanding the legal regime of international commerce and requires some further explanation. In addition, we should bear in mind that the term ‘law’ is sometimes used not only to denote the objective norms created by the legislative power of a state or states but also to describe the contracts concluded by the parties which are legally binding between them; in this respect, individual contracts as well as typical and widely used contractual patterns may be termed ‘contract law’ (lex contractus).

1. All Law Pertaining to Transnational Transactions

‘Transnational law’ in the broadest sense has been defined by Jessup as ‘all law which regulates actions or events that transcend national frontiers’. This is just a label for all legal norms governing international business contracts and might serve as a mere description of the complex legal circumstances surrounding international transactions. It is common that a variety of norms outside the lex contractus, from at least two and often more national legal systems, have an impact on the contract. These may be laws on exchange controls, taxation, safety rules, etc. This is in addition to the strict rules of national contract, business or company law which must be respected.

(p. 5) The drafters of international commercial contracts have to take into account the various legal environments and complex legal situations, which might be relevant not only when drafting clauses on choice of law and forum, but also when deciding on the time and manner of delivery and payment (including the role of banks and the use of specific sureties), and clauses on specific dispute settlement procedures. These contractual provisions dealing with the transnational situation might equally be labelled ‘transnational law’ in so far as they constitute legally binding lex contractus.

2. De facto Uniform Law and Contractual Patterns

But we can go one step further and single out those legal rules, principles and contractual patterns which are internationally used or recognised in a uniform or similar way although they may stem partly from different national laws. Here, ‘transnational law’ describes an actual uniformity or similarity of rules and patterns. In fact, international commerce is, to a growing extent, guided and co-ordinated by such uniform rules and patterns. This phenomenon of uniform rules serving uniform needs of international business and economic co-operation is today commonly labelled lex mercatoria.

3. International Sources of Law; Uniform Law

Finally, the term transnational law can also be used as a label for internationally uniform law in the proper sense, based on international sources of law, i.e., either on conventions (‘international legislation’) or on customary law. In addition, we should note commercial custom which, though not a legal source in a technical sense, has some important functions similar to those of a true legal source.

Examples of international conventions can be found in the law of international transportation of goods by sea, air and land. … Such conventions, once signed by the signatory states and embodied in their national legal systems, will be an important international source of uniform commercial law. This source has the great advantage of clarity and is a suitable vehicle for imposing mandatory rules of law on the persons to whom it is addressed. For example, the Hague-Visby Rules on Bills of Lading cannot be contracted out. On the other hand, the drafting, negotiating and ratification procedures necessary to bring such conventions to life (often followed by procedures to transform them into municipal law as prescribed by the national constitution) are time-consuming and difficult. International legislation, therefore, can be confined only to select and particularly important legal issues.

International customary law, on the other hand, is only of limited assistance in solving legal problems of international commerce. There are few legal principles, such as pacta sunt servanda, which are generally recognised and can be termed international customary law. It is true that the general principles of customary law provide common ground for lawyers from civil law and common law countries. But these principles are difficult to apply in specific cases, and courts in various countries have been extremely reluctant to resort to rules of international customary law when deciding issues involving private contracts.

Lex mercatoria

1.04  Some writers equate this with transnational commercial law. Thus, the Danish scholar Professor Ole Lando, in a much-cited article,2 lists the following elements of the law merchant (which he describes as non-exhaustive): public international law, uniform laws, general principles of law, rules of international organizations, customs and usages, standard form contracts, and reporting of arbitral awards. But we prefer to confine the lex mercatoria, or law of merchants, to what Roman lawyers described as ius non scriptum, and thus to define it as that part of transnational commercial law which consists of the unwritten customs and usages of merchants, so far as these satisfy certain externally set criteria for validation. That is certainly how it was seen by the anonymous author of the thirteenth century Lex Mercatoria, (p. 6) the earliest known English treatise on the law merchant and the practice of the mercantile courts in England.3 It is also traditional to include general principles of law as an aspect of the lex mercatoria, but there is a strong argument in favour of excluding such principles in that they are not specific to international transactions or even to commercial dealings, and thus can scarcely be regarded as a manifestation of the creative power of trade usage.4

What drives commercial law?

1.05  In order to understand commercial law in general and transnational commercial law in particular, it is important to realize that commercial law is not devised in the abstract but is a response to the practices and legitimate needs of merchants. It is mercantile practice that fashions commercial law;5 and mercantile practice evolves as a response to impediments to trade, whether legal or practical, that has to be surmounted and to the driving force of competition as each enterprise strives to attract increased business by developing new products in goods and services. Three examples will help to make the point.

A medieval example

1.06  The transportation of money to pay for goods was a hazardous enterprise. The vessel on which the money was carried might sink or be seized by pirates and other untoward events might prevent the seller from receiving payment. Moreover, physically counting large sums of money was time-consuming and therefore expensive. Building on similar instruments from centuries before, Italian professional money-changers, who were familiar with exchange rates and could thus provide a currency clearing house, devised arrangements by which, say, an Italian buyer from a French exporter, instead of shipping gold as payment of the purchase price, would arrange for his Italian bank (with which he had funds or a line of credit) to draw a bill of exchange (payment instruction) on one of its French correspondents in favour of the seller, to whom the draft would be delivered and who would present it for payment to the French bank and collect payment in France or, if credit was to be given, obtain acceptance of the bill, that is, an undertaking to pay at a fixed future time. The two banks, between whom there might be many mutual dealings, would typically settle their accounts at one of the great international fairs or at a commercial centre.6 In this way payment was localized and the risks attendant on physical transportation avoided. At a later stage the bill of exchange became negotiable by delivery with any necessary indorsement, so that the person whom the drawee is to pay is not necessarily the named payee but whoever is the current holder of the bill and presents it for payment.

A later example

1.07  Once merchants ceased to travel on a ship with their goods exporters and importers of goods by sea were anxious to have a mechanism by which the goods could be sold or pledged in transit. This led to the creation in the seventeenth century of the quasi-negotiable bill of lading, a document of title issued by the carrier who undertook that on arrival of the goods at (p. 7) the end of the sea transit, the carrier would deliver them to whoever was the current holder of the bill of lading and presented it at the port of arrival. The bill of lading thus gave control of the goods to the holder of the document, who could transfer that control by delivery of the bill of lading with any necessary endorsement. This neat technique enabled the buyer of the goods to resell them in transit or to borrow against them by delivering the bill of lading to the buyer or lender in exchange for the price or loan, which itself might be paid by a bill of exchange.

A modern example

1.08  A creditor holding a portfolio of mortgage receivables would like to have this taken off its balance sheet in order, for example, to reduce its capital adequacy requirements, which are geared to its risk-weighted assets, and to use the receivables to raise money from the securities market. Both these objectives can be achieved by a technique known as securitization. This may take different forms, but a common one is for the creditor (known as the originator) to sell the receivables to a special-purpose vehicle (SPV) which will then issue notes to investors, the proceeds of the issue being used to pay the originator the purchase price. The receivables are then charged by the SPV to trustees for the investors to secure the issuer’s obligations under the notes.

1.09  Of course, all these techniques rely on the willingness of courts, in case of a dispute, to uphold the validity of the transaction and to give it the effect intended by the parties. Experience has shown that, in most developed countries, the courts are sensitive to the need to avoid damaging commercial instruments that are fulfilling a useful and legitimate purpose, if only because of the potentially adverse effects this could have on the stability of the industry and on the attractiveness of the jurisdiction to foreigners wishing to deal with its traders. The more widespread the market practice, and the more damaging the effects of invalidating it, the more likely it is to be upheld by the courts. Even so, there are occasional upsets which either force the modification or abandonment of the practice or lead to corrective legislation. Such was the case in England in the 1990s, when the House of Lords held that swaps transactions entered into by local authorities were ultra vires and wholly invalid,7 a decision that caused widespread consternation among financial institutions, particularly foreign banks, and for a while, did some damage to London’s reputation as a world financial centre.8

1.10  The role of the practice of merchants in shaping commercial law was not always accepted. In nineteenth-century Germany, for example, under the influence of the Pandectists, commercial law was conceived as based on rigorous logic derived from the principles of Roman law—Professor Heinrich Thöl being one of the leading exponents of this dogmatic approach. But the great German jurist Levin Goldschmidt, who possessed a vast and profound knowledge of commercial law and its history, demonstrated the importance of looking at what commercial men were actually doing, at their conceptions of what was fair, rather than treating (p. 8) commercial law as a set of abstruse principles grounded in legal science. His works9 profoundly influenced Karl Llewellyn, the architect of the American Uniform Commercial Code. The point is well put by a leading American commercial law scholar.

Boris Kozolchyk, Comparative Commercial Contracts: Law, Culture and Economic Development (West Academic Publishing, St Paul, 2014) 3

The law of commercial contracts is about merchants, how they compete and cooperate with each other, strangers or third parties. That is why commercial values, attitudes, courses of dealing, practices and usages of trade require greater attention than legal pedagogy and jurisprudence presently offer them. An important contribution of the peopled nature of commercial contract law is the understanding that those legal institutions that most accurately reflect commercial man’s best practices are the most supportive of society’s economic development.10

Commercial law and civil law

1.11  Whether commercial law should be formally distinguished from the general civil law is a question that has exercised both legislators and scholars over the years, and approaches vary widely from jurisdiction to jurisdiction. Many legal systems have a commercial code, many others do not. In some, the applicability of the code is used as the determinant of the commercial nature of the transaction, in others, the function of the code is simply to provide rules governing some of the more important types of commercial transaction without thereby implying that other transactions are necessarily non-commercial. In those legal systems that treat commercial law separately from civil law, the character of the transaction may be determined subjectively by the status of the parties as carrying on a business (commerçants, Kaufleute) or objectively by reference to the type of transaction or activity (actes de commerce, Handelsgeschäfte) or by a combination of the two. Whatever the legal system involved, it is clear that commercial law and commercial transactions cannot be isolated as self-contained compartments of contract or of commercial law.

Boris Kozolchyk, ‘The Commercialization of Civil Law and the Civilization of Commercial Law’ 40 La L Rev 3, 3–5 (1979–80)

This topic requires that one first clarify what is meant by civil law and by commercial law. One might be tempted to assert positivistically that civil law is the law found in civil codes and commercial law is the law found in commercial codes. Yet, legal history proves that it has been very difficult, if not impossible, to draft a code that applies exclusively to civil or commercial transactions. Even where the draftsmen of separate civil and commercial codes adopted what they thought to be neat lines of differentiation or scope criteria, it was clear, almost before the ink had dried, that they had failed in their attempts at separation.

The first to try separation was Napoleonic France with its so-called objective criterion, a criterion followed by the majority of other civil law countries. The scope of the French Commercial Code of 1807 was determined by inquiring whether the parties had entered into ‘an act of commerce’, such as, a purchase and sale of goods or merchandise for their resale, enterprises of manufacture, commission agency, transportation, public spectacles, exchange, banking and brokerage, construction, or maritime commerce, or whether the parties had signed or endorsed a promissory note or a bill of exchange. By contrast, the subjective criterion defined the scope of a commercial code on the basis of the merchant’s professional affiliation. A subjective commercial code applied only to (p. 9) those who qualified as habitual and professional merchants. This approach, which was implicit in the eighteenth century Prussian Allgemeine Landrecht, was expressly adopted by some of Germany’s nineteenth century commercial codes and prevails in the German Commercial Code of 1900. The professionals chosen under the subjective criterion included predominantly bankers and traders. Primary producers were not included because they treasured their monopolistic status, inconsistent as it was with the competition principles of the commercial codes. Agricultural business was similarly uninterested in the competitive capitalism of the commercial code. Also exempted from the commercial characterization were those who thought better of themselves, such as members of the liberal professions, including physicians (however enterprising), actors, attorneys, authors, composers and teachers.

By defining the commercial code as objective, the French codifiers attempted to avoid the stigma of conferring a privileged status to a class of citizens, anathema as privileges were to the revolutionary principle of equality before the law. Thus, in principle, the French Commercial Code applied to acts of commerce by merchants, as well as to those acts of commerce entered into by non-merchants, such as law professors, opera singers, or priests.

On the other hand, the French Civil Code dealt with matters such as a person’s legal status, regulating that status from birth until death. Included in the regulation of a person’s status were such aspects as: his domestic and family relations; his obligations, both contractual and extra-contractual; his non-profit associations; and his acquisition, use, and disposition, both inter vivos and mortis causa, of personal and real property. In addition, it provided principles of general application to transactions both within and beyond its confines, such as:

Laws relating to public order and morals cannot be derogated from by private agreement. Contracts lawfully entered into have the force of law for those who have made them. They can only be cancelled by mutual consent or by causes allowed by law. They must be carried out in good faith. Possession is the equivalent of title with respect to personal property. Any human act which causes damage to another obligates the person through whose fault damage occurred to make reparation for the damage. The generality of these and other principles contributed to the civil code’s status as the unofficial constitution of France’s private law.

The problem with the objective–subjective dichotomy is that the life of the law in general, and of commercial life in particular, is not, as Justice Holmes continually reminds us, quite that syllogistic. One who disagrees with Holmes should try to define an act of commerce, such as ‘brokerage’, without referring to the activity of the broker. To make sense you would have to define brokerage by describing brokers and vice versa; if you wish to define a broker, you must describe what he, as a broker, does. Moreover, consider the case of the so-called ‘mixed act’, the act which is commercial for one of the parties, say the seller, and civil i.e., not profit making … for the consuming buyer. Additionally, consider the act which starts out as a civil act on the part of the buyer, but becomes profit-making once the buyer realizes that he can profit by reselling that which he bought with the initial purpose of only consuming.

The difficulty of drawing a neat line between that which is civil and that which is commercial in everyday legal affairs does not mean that there are no significant differences between the rules, concepts, and principles of interpretation that characterize each of these major branches of private law. The differences emerge once one examines how civil and commercial law treat a simple, everyday transaction such as a sale or conveyance of valuable property.

1.12  Commercial codes in Europe tend to be rather fragmented in character and to embody only a small part of what is considered to constitute commercial law. The American Uniform Commercial Code, by contrast, adopts an integrated approach to the more important types of transaction—for example, sale, leasing, negotiable instruments, secured transactions—but does not seek either to insulate these from the general law or to characterize transactions outside the code as non-commercial. Systems such as English law that have no commercial code and no formal separation of commercial law from the general law nevertheless have a (p. 10) conception of commercial law as a distinct branch of law, though its scope and content are nowhere defined and are very much a matter of individual perception. As Professor Ernst von Caemmerer so elegantly put it:

The consequence of this [historical] development is that there is no special, separate commercial law in the Anglo-American systems. If the commercial or mercantile law has its own special literature even in the Anglo-American countries, that is only a result of selection and organization of materials, which lies in the discretion of the particular author.11

1.13  To this, one may add that in common law jurisdictions commercial law is conceived as essentially transactional in character, and thus distinct from company (or corporation) law, while civil law jurisdictions tend to treat company law as part of commercial law.

1.14  As a generalization, one can say that commercial contracts are governed by the general law, except so far as this is qualified by rules particular to commercial transactions. Such rules are designed to accommodate the need of the business community for informality, flexibility, and respect for commercial practice. So rules requiring writing for ordinary contracts, in particular contracts entered into by consumers, may dispense with this requirement in the case of commercial contracts. Those who deal in goods as merchants are generally expected to assume certain basic obligations—for example, that the goods are of proper quality and fit for their purpose—which are not required of a person selling as a consumer. Most jurisdictions recognize in different degrees the binding force of trade usage, whether as an implied term of a contract or as an independent legal norm. Traders frequently engage in repeat dealings among themselves, so that terms may be implied from a course of dealing that would not arise in one-shot consumer transactions. Persons engaged in commerce are generally held to a standard of commercially reasonable behaviour that is not necessarily expected of others. Consumers are in most countries protected by special legislation, which in large part does not apply to those entering into contracts in the way of business.

Jan H Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law (5th edn, Hart Publishing, Oxford, 2013) 41

Tying commercial law to acts of commerce (as enumerated) is often presented as the objective approach as distinguished from the subjective approach to commercial law, in France, droit réel versus droit personnel. This latter approach ties commercial law to the activities of merchants. France has opted for the objective approach (enumeration of the acts of commerce) … In Germany it was the reverse: all merchants are governed in principle by the commercial code, but only of course for the activities that it covers … So, even in Germany, a definition of commercial acts (Handelsgeschäfte) comes in, although some activity is considered commercial per se. On the other hand, some commercial activity may also be engaged in by non-merchants, such as the writing of cheques or the drawing of bills of exchange, which is now covered by a separate statute. Where non-merchants engage in commercial activity that activity may still be covered by the commercial code, but the activity is then considered commercial only in a more generic or wider sense. In fact, many provisions of the HGB [Handelsgesetzbuch, or Commercial Code] do not cover specific commercial matters at all and apply equally to non-merchants. The distinctions are therefore not so clean and clear in Germany either … The real problem in all this, in both France and Germany and in all countries that still maintain similar abstract criteria for the application of commercial law, is that merchants are not only engaging in commercial activity but also in non-commercial acts. The consequence is (p. 11) that neither the concept of merchant nor the concept of commercial activity can be defined exclusively in terms of the other. Hence the confusion.

The transition from planned economies to market economies

1.15  What has been described above is based on the concept of a market economy in which, within the constraints prescribed by law, parties are free to conclude bargains, to acquire property, to accumulate wealth, and to pursue the goals of a capitalist society. That was not, of course, the case in the communist countries in Central and Eastern Europe, where property was state-owned, private rights were subordinated to the collective interest and the state had a monopoly over foreign trade, which it exercised through a foreign trade organization. But with the collapse of communism in those countries, collective rights began to be replaced by private rights, and planned economies by market economies. It is only relatively recently that the former communist countries have been able to turn their efforts to restoring and modernizing their commercial laws. This has been done partly by dusting off old commercial codes and partly by introducing new codes or other legislation. The transition process has for many years been facilitated by the legal transition programme of the European Bank for Reconstruction and Development (EBRD), which has devoted particular attention to legal regimes for secured transactions and insolvency. The EBRD’s model law on secured transactions, published in 1994, was a pioneer in its field and was later supplemented by its set of core principles for a secured transactions law and its set of guiding principles for the development of a charges registry.12 The EBRD has done much to promote the cause of legal certainty in transition economies and is a strong supporter of the Cape Town Convention on International Interests in Mobile Equipment.13

B.  The History of Commercial Law

The early and medieval codes

1.16  Commercial law in one form or another is probably as old as trade itself. The Code of Hammurabi, believed to date back to 1900 bc, contained a number of rules of commercial law, and that code itself derived in no small measure from Sumerian laws made several centuries earlier. Much of the earlier content of commercial law remains shrouded in mystery. What we do know is that its history is a story of constant reinvention of the wheel. The Italians are generally credited with the creation of the bill of exchange in the Middle Ages, but instruments recognizable as bills of exchange are to be found in clay tablets from Karkhemish in Assyria as far back as the seventh century bc.14 English law is credited with the development of the floating charge in the nineteenth century, yet the hypotheca of Roman law was not so very different. From biblical times trade was both local and international and was conducted by land, along the great caravan routes linking West to East, including the elaborate network of roads constituting the famous Silk Road, which ran from the shores of the Mediterranean through Samarkand in Central Asia to Tunhwang and Changan (Xian) in China, and by sea from Greece to India. In international trade, commercial law was closely allied to maritime law, and it is in the field of maritime law that we see one of the (p. 12) great codifications of our ancestors: the Rhodian Maritime Code in the second or third century bc, which was accepted equally by Greeks and Romans and was the first known law to embody the principle of general average in maritime insurance. Remarkably, the Code lasted 1,000 years, being replaced in the seventh or eighth century ad by the Rhodian sea laws, an influential compilation of maritime customs. The connection between the law merchant and maritime law was noted long ago by Gerard Malynes in his famous seventeenth-century work Consuetudo, vel Lex Mercatoria: or, The Ancient Law-Merchant.15

Are not the Sea-Laws established to decide the controversies and differences happening between Merchants and Marriners? And is it not convenient for Merchants to know them? Considering that Merchants maintain the Fisher-men, and (by way of Trade) cause the Sea and Land Commodities to be dispersed every where? So that the prerogatives do also appertain to the Law-Merchant, as properly inherent unto commerce, and the observation of Merchants being of like condition to all People and nations.16

1.17  Between the eleventh and fifteenth centuries, there were several compilations of mercantile customs, mostly maritime. These included: the eleventh century Amalfitan Tables and the hugely influential Rolls of Oléron, which were largely, though not exclusively, concerned with maritime law; the British mid-thirteenth century Black Book of the Admiralty; the Laws of Wisby, a fourteenth century text heavily inspired by the Rolls of Oléron; and, the Consulate of the Sea, a massive codification from Barcelona in the fourteenth or fifteenth century consisting of some 334 articles and covering a wide diversity of subjects ranging from the procedures of consulate courts and the rights and obligations of investors in a ship construction project to the punishment of a seaman for undressing for the night when his vessel was still at sea.17

1.18  The medieval law merchant evolved because of urbanization and the consequent growth of the merchant class, the creation of merchant and consular courts, and the need for new commercial instruments in international trade. European rulers, anxious to attract international trade to their countries, enacted special laws for the protection of merchants, and recognition of their customs and the jurisdiction of their courts. Other factors were the opening up of caravan routes between East and West in the constant search for new markets, and the impact of the Crusades. But international trade could flourish only if underpinned by rules and practices which themselves enjoyed international recognition. The great fairs, such as those of Champagne and Flanders, were highly organized institutions. Granted numerous privileges, they had their own merchant courts, they were centres of banking and money exchange, and they even operated their own courier service. Their importance was well described by the eminent French legal historian, Professor Paul Huvelin.

P Huvelin, Essai historique sur le droit des marchés et des foires (Arthur Rousseau, Paris, 1897) 594–7

The influence of the fairs on our public law, on the movement towards freeing of the towns and enfranchisement of the third estate is undeniable. More striking still is the influence on relations (p. 13) with the law of nations; the term fair is the equivalent of the term peace. The reaction against the primitive instinct of hostility comes about under the influence of commercial needs. If it is, perhaps, inexact to say that hospitable relations, in which are to be found the germ of the institutions most characteristic of international law, derive solely from the needs of commerce, it must nevertheless be recognised that in this matter these needs have contributed powerfully to affinities between religions and between races. Little by little, thanks to the spread of peace and the management of the fairs, dealings between foreigners become more secure; international relations multiply; transactions are supported by guarantees; and there increasingly develop the ideas of good faith and loyalty which must govern commerce. At the same time there is an improvement in the means of transport … The peace of commerce conquers the world. And the fairs disappear only after they have accomplished their work.

Their role is no less remarkable in economic matters. They are the first centres in which the notions of value can develop; the law of supply and demand, the law of the balance of trade find their first application. It is at the fairs that merchandise and money cease to be mere objects of consumption and become capital. Thanks to the fairs, trade is regularised and submitted to the great law of competition.

At the same time, the law of the fairs, born of the peace of commerce, acts strongly on the institutions of the general law, which are still steeped in their old rigidity. Little by little the law of nations penetrates the civil law; in the Middle Ages it is commercial law, derived from Roman law and based on good faith, which reacts against the rigour and the materialism of German law and which, without destroying all traces, fashions this law and transforms it so as to accommodate it to the needs of the new world. A tendency to uniformity becomes stronger. In the midst of diversity of local laws, the law of the great fairs everywhere remains the same in its essential features. This law is universal, almost of the same status as the canon law. The courts of the fairs command obedience everywhere. And thus emerges the conception of the law merchant, which remains outside and above the civil ordinances and the local commercial usages. This conception is a reaction against the spirit of fragmentation and particularism which prevails in all the laws and in all the customs, and at the same time as it affirms the notion of the unity of commercial law it shows a distinct tendency to unify other laws. It is by this route that the principles of commerce enter into civilisation … 

So the fairs, the original form of terrestrial commerce, have been, in the history of civilisation, unrivalled instruments of rapprochement, of unification, of peace. Today they are disappearing. Little by little, periodic trade has become permanent. The tides of economic life are increasingly coming together. However, there still remains something of the old norm of periodicity; commerce remains generally subservient to the periodic return of days and of nights. Dealings which at one time were effected annually, monthly or weekly now take place every day. Meanwhile we can predict that soon, preceding as always the other functions of social life, commerce will no longer be subject to any interruption. And the circulation of capital, of credit, of work, will continue without respite, liberated at last from the bonds of periodicity, waiting for a new evolution to carry it towards destinies unknown.

1.19  To Italy, whose merchants were the dominant influence at the fairs of Champagne, belongs pride of place in the development of the medieval law merchant. Several factors contributed to this: the unifying force of the received Roman law (particularly its maritime law), which became a European ius commune; the presence of Italian merchants throughout Europe; and, the recognition by Italian cities that their prosperity depended upon the provision of institutions and procedures that met the needs of the mercantile community and on their willingness to recognize and uphold mercantile custom. Thus, it is in Italy that we see the development of the bill of exchange as a means of localizing payment obligations in international trade,18 the bill of lading as a vehicle to facilitate the sale or (p. 14) pledge of goods in sea transit, the adaptation of Roman law rules governing the distribution of maritime risks, the evolution of new forms of business association such as the joint venture (commenda) and the maritime partnership (societas maris), and the institution of bankruptcy. In Italy also there came into being mercantile courts possessed of the widest powers, of which the most famous was the Mercanzia in Florence, the court formed by the five Florentine guilds.

Frederic R Sanborn, Origins of the Early English Maritime and Commercial Law (The Century Co, London c1930: reprinted Professional Books, Abingdon, 1989) 143 and 145

[Despite its title, half this work is devoted to European medieval maritime and commercial law.]

The court of the Mercanzia had jurisdiction of all complaints directed against members, whether made by members or by non-members, the latter having complete liberty to sue in the ordinary courts, where, however, the canon law and procedure made cases complex and long drawn-out. On the contrary, justice was rapid and summary before the Mercanzia: ‘Quod procedatur sine strepitu et figura judicii’, reads the classical formula. Nor was this the only advantage, for the spirit of the regulations, the equity of each separate case, rather than the strict letter of the rule, was considered with scrupulous care. Because of these advantages the Florentine merchants who were not members of the guilds came to use the court of the Mercanzia more and more, although, as yet, there was nothing to compel them to do so. They were still quite free to go before the common law judges, but they did not do so, and the field of commercial jurisdiction was enlarged … It was left to the notary of the Mercanzia to settle all the little international difficulties which had previously caused so much trouble when settled by force, and the method was at once simple and expeditious. The notarius mercanzie proceeded upon a complaint against a debtor, compelling him to pay immediately, or to put up a guarantee if he claimed to be in the right, under pain of expulsion. The debtor’s associates, brothers, and dependent sons were summoned, too. These remedies were copied elsewhere, and brought in a better commercial security. The results following the intervention of the Mercanzia were so successful that it was decided to give this organization an official sanction, and on March 21, 1308, a Florentine law recognized it as a State court. Soon afterwards, there was conceded to this court an advantage which none of the others enjoyed—the long and inconvenient forms of procedure in use by the judicial authorities elsewhere were abolished, but the judgment retained the same validity as if they had been followed.

1.20  Periodically, the rules established by mercantile practice were codified in compilations such as the Rolls of Oléron (an island commune of Acquitaine off the west coast of France whose rules of maritime law were hugely influential throughout Europe), the Laws of Wisby and the Consulate of the Sea, a remarkably detailed and diverse collection of merchant and maritime practices emanating from Barcelona.

Characteristics of the medieval law merchant

1.21  The conventional view of the medieval law merchant as a transnational body of integrated rules based on the custom of merchants is that expressed by Professor Harold Berman, who has identified what he sees as six qualities of the medieval law merchant:

  1. (1)  Objectivity: ‘… a movement away from mere custom in the sense of usage (patterns of behaviour) to a more carefully defined customary law (norms of behaviour).’

  2. (2)  Universality: that is, the law merchant was cosmopolitan and transnational in character.

  3. (3)  Reciprocity of rights: procedural and substantive fairness in entry into an exchange.

  4. (p. 15) (4)  Participatory adjudication: the judges were elected from among the merchants themselves.

  5. (5)  Integration: a coherent and integrated body of rules governing the rights of parties to transactions, particularly after reduction to writing.

  6. (6)  Growth: the organic growth of commercial instruments and institutions.19

But more recent scholarship has challenged this view as unsupported by evidence.20

1.22  In the settlement of mercantile disputes in the Middle Ages, particular importance was attached to the flexibility of rules of evidence and proof, the speed of adjudication and the observance of good faith. But one has to be careful not to romanticize the medieval lex mercatoria. Apart from maritime codifications, it was not an organized body of law at all, but rather a disparate assortment of customary rules which varied from place to place and which, administered by merchant courts and also recognized and applied by central courts, fulfilled its allotted function of responding to commercial needs and practices. As important as the substantive rules were the procedures for dispute resolution by the merchant courts and commercial consuls.

Franz Wieacker, ‘On the History of Supranational Legal System of Commerce’ in Aarhus University Faculty of Social Sciences (eds), The Legal Organization of Commerce and its Relation to the Social Conditions (Aarhus University, Provinsbanken, 1979) 11–12

In a second snapshot I now come to the ‘international’ commercial law of the high and late Middle Ages. From the viewpoint of a legal historian, this was the golden age for a European lex mercatoria. The simple proof of this is that—with the exception of the great anonymous capital associations—the first pillar of the legal technical figures of the international exchange of goods, payments and services developed within this period: banking, securities and financial intercourse, mortgage and registration of land, maritime law, insurance, even protection of firms and trade marks, finally the legal organization of the commercial mining industry and the first forms of miners’ associations which have survived until today … 

  1. 1.  A negative condition was the weakness of the particular, i.e. national, territorial or local legislative powers of the epoch. When according to a quotation of Professor Schmitthoff, René David from this weakness deduces the necessity of a self-made commercial and business law, then this may be extended to mean that this law was first made possible through this weakness. Not only in the flourishing business areas of the Holy Roman Empire, such as Northern Italy and Southern and Northern Germany, but also in Scandinavia, England before the Tudor-epoch and even in France and the county of Flanders the royal central power was not yet strong enough or, at least not willing, to hamper this growth.

  2. 2.  A positive condition for the filling of this vacuum was that the city community internally had autonomy to develop a mediaeval municipal law adapted to their social and economic needs, and externally was free to make agreements with other cities and states also concerning the regulation of the law to be used and its adjudication, i.e. as to the two most important conditions for a supraregional lex mercatoria. Only to mention Central Europe: no doubt the (relatively loose) relations between the Hanseatic towns has been the first condition of the spread of the Lübeck Law beyond this circle and of the acquisition of judgements at foreign ‘Oberhöfe’ and ‘Schöffenstühles’.

  3. (p. 16) 3.  Another favourable condition was the legal conception of the late Middle Ages. In the cities, law is not yet understood as a compulsory law nor as a codification made by a particular legislator with legislative monopoly and not any more as old custom (which had only little importance for the new forms of the local economic production and the business life and for the supralocal commercial law), but, on the contrary, as Ebel has demonstrated, it is understood as a contractual law, ‘Verwillkürungs’, i.e. as an agreement between the citizens of the community. This also implied—a long time before the justification according to natural law of the private autonomy and freedom of contract—the recognition of the lex contractus agreed upon by the parties (and consequently also of the typical content of the contract) as objective law.

1.23  In England, there were statutes making express provision for the law merchant, yet English law made relatively little contribution to the development of substantive law rules and concerned itself mainly with procedure, constituting ‘the factual matrix within which certain types of contract are made’.21 Yet, the concept of the law merchant has long exercised a powerful hold on the imagination of those writing about it, in whose hands what were essentially practical rules devised by hardheaded businessmen to address day-to-day issues became elevated into some supra-national—indeed, one might almost say supernatural—law akin to the Roman ius gentium. Typical of the genre is the following passage from Malynes, Lex Mercatoria:

This Law of merchants, or Lex Mercatoria, in the fundamentals of it, is nothing else but (as Cicero defineth true and just Law) Recta Ratio, natura congruens, diffusa in omnes; Constans sempiterna. True Law is right Reason, agreeable to Nature in all points; diffused and spread in all Nations, consisting perpetually without abrogation: howbeit some do attribute this definition unto jus gentium, or the Law of Nations, which consisteth of Customs, Manners and Prescriptions of all Nations, being of like conditions to all People, and observed by them as a Law: But the matter being truly examined, we shall find it more naturally and properly belongeth to the Law-Merchant.22

1.24  Legal historians have shown that these rather grandiose descriptions of the law merchant have little factual basis.23 Professor Emily Kadens has convincingly demonstrated that the most widespread aspects of commercial law arose from contract and statute rather than custom and that while commercial custom did exist it was primarily local.24 In similar vein Professor (now Sir) Ross Cranston has rejected the traditional conception of the medieval lex mercatoria.

The notion of a medieval lex mercatoria-globalised, objective, and based on a reciprocity of rights between the parties-does not bear close scrutiny. One form of criticism is that the lex mercatoria was never completely divorced from state power. In theoretical terms, this was because whatever independent merchants might want in regulating the terms of trade, they needed the rule of law administered by a national legal system to protect the market from the local ruler’s whim. However desirable an independent mercantile law might be, merchants had to accept a second-best solution where mercantile and state law were fused in national (p. 17) courts. In historical terms, despite a widespread belief in its existence, a general lex mercatoria is not easy to uncover.25

The nationalization of commercial law

1.25  The international character of the medieval lex mercatoria was eventually eroded—in England—through the desire of the central courts to expand their jurisdiction and—in continental Europe—through the rise of the nation state and the elaboration of civil and commercial codes which, in producing integrated national laws,26 fragmented European law and substantially reduced the influence of the ius commune. The consequences were fourfold: the narrowing of university legal education; the development of separate national laws for international trade; the decline of the law merchant; and the growth of private international law as a branch of national law to determine, in cases involving a foreign element, questions of jurisdiction, the applicable law and the recognition and enforcement of foreign judgments. So by the end of the eighteenth century, commercial law had lost much of its international character and coherence.

Reinhard Zimmermann, ‘Civil Code and Civil Law: “The Europeanization” of Private Law within the European Community and the Re-emergence of a European Legal Science’ 1 CJEL 63, 65 (1995)

The history of the European codifications is inextricably linked with the rise of the modern nation state. The law of a country came to be regarded as a characteristic expression of its national spirit. This view was bound to lead to the particularization of legal science that is still with us today, and it has set legal science apart from almost all the other sciences taught at a modern university. There is no such subject as German chemistry or French medicine. But for the past hundred years or so there have been, in principle, as many legal systems (and, consequently, legal sciences) in Europe as there are nation states. This is reflected in our modern law curricula and examination requirements, which are oriented almost exclusively toward the law of the respective countries for which they have been devised.

The return to internationalism and the growth of transnational commercial law

1.26  The second half of the nineteenth century saw the beginnings of a return to internationalism and the development of transnational commercial law, though in the form of exploration rather than achievement,27 which had to wait till well into the twentieth century. There came a growing recognition that an international commercial transaction cannot be treated in the same way as a domestic one. Typically, the parties come from different jurisdictions with different laws and commercial practices, and they may have different expectations. Laws fashioned for a purely domestic transaction are not necessarily well adapted to a cross-border transaction. Moreover, the choice of law rules vary according to the place where proceedings are brought, encouraging forum shopping. This last problem can largely be resolved by uniform conflict of laws rules, and a number of private international law conventions have been concluded under the auspices of the Hague Conference on Private International Law. But this does not address the (p. 18) problem of differences in national laws and, in certain fields, uncertainty as to whether a legal right or property interest created under the law of one state will be recognized and enforceable in another. Indeed, though private international law remains indispensable for the foreseeable future, it is inherently inimical to substantive uniformity and its effect is to apply a national law which may not be well suited to an international transaction. Moreover, resort to the conflict of laws frequently involves the court of one jurisdiction adjudicating on the laws of another with which the court is not familiar, making it dependent on what may be conflicting expert evidence and adding to both the cost of the proceedings and to the risk of legal error. Hence, the drive towards the harmonization of commercial law and, more generally, of private law, particularly in relation to cross-border transactions.

The perceived benefits of harmonization

1.27  One of the world’s greatest comparative lawyers, the French scholar René David, put the matter with customary elegance in his superb essay on unification.

René David, ‘The International Unification of Private Law’ in the International Encyclopaedia of Comparative Law II (JCB Mohr, Tübingen, 1971) ch 5 [33]

The international unification of law is of the greatest practical interest in the field of international legal relations. These are at present subject to a system, the application of one or more national laws being independently chosen by the various national courts, which creates a situation bordering on chaos, unfavourable to the development of international contracts, and without compensating advantages. The certainty of international commercial relations requires that the situation be clarified: there must be agreement on the national law to be applied, in any country, to a particular transaction, or a system of law governing this transaction in every country must be set up. Intrinsically, the second solution is to be preferred.

On the other hand, the complete independence of the national systems from one another can be recognized, in principle, when the legal relations in question are not of an international character. In this way, legal relations will be free from uncertainty despite the diversity of the systems.

If every country retires behind its frontiers and cuts itself off from neighbouring legal systems, the development and the progress of the law are likely to suffer. In the world today, studies in comparative law are necessary for many reasons. Many reforms in the various national systems of law profit from experiments made abroad. It can be asked whether the various legal systems would not, in many circumstances, benefit from a more systematic harmonization. Better statutes could be enacted, and better tools created for legal theory, if states confronted with similar problems or sharing a common cultural tradition were to work together.

The example of the jus commune, which existed in Europe before the days of codification without in any way derogating from national sovereignty, ought in our times to be the inspiration for a regrouping which would cure the weakness due to the excessive fragmentation of the law among too many sovereign states.

1.28  In the middle of the nineteenth century Leone Levi, a remarkable Italian from Ancona, emigrated to England, settled in Liverpool and, though a statistician by training and retaining a keen interest in that field, became an eminent English jurist who developed a passion for the modernization of English commercial law and, more broadly, the internationalization of commercial law. Founder of the Liverpool Chamber of Commerce, and later appointed to the first Chair of commercial law in England, at King’s College London, he established relations with leading parliamentary figures and successfully prepared and procured the passing of several enactments for the improvement of certain aspects of commercial law and dispute resolution procedure. Meanwhile, he played a leading role in urging the improvement of (p. 19) statistical systems both nationally and internationally. But his most ambitious project was a remarkable comparative study of the commercial laws of the world covering 59 different countries and widely welcomed as of international significance. He included in this work an address to Prince Albert, Prince Consort to Queen Victoria, proposing an international code of commerce.

Leone Levi, Commercial Law, its Principles and Administration (W Benning and Co, London, 1850–52) xv–xvi

TO HIS ROYAL HIGHNESS PRINCE ALBERT

… Jurisprudence has made rapid advancement in every country—an advancement directed everywhere in conformity with the established laws of other nations. Commercial legislation, in its onward course, has manifested in especial degree a tendency to an equalization of general principles. To foster such a development, and to lay the basis for the universal adoption of those great fundamental laws which regulate commercial intercourse, deserve the most strenuous efforts.

To your Royal Highness, who has conceived the noble idea of centralising mind and matter from all countries, that the riches of nature may be displayed, the skill of art appreciated, and the depth of intellect developed, I venture to propose the formation of what, it is generally acknowledged, would be an invaluable benefit to this and to all nations—

A NATIONAL AND INTERNATIONAL CODE OF COMMERCE AMONG ALL CIVILIZED COUNTRIES …

An inspection of the present work will strikingly demonstrate the similarity of principles laid down by each country, although clothed in different expressions and detailed in a different order. The references in italics from the Code of one country to that of others will show that many articles are verbatim reciprocally adopted; and if to these be added those differing merely in the mode of explaining them, we shall see a very considerable portion of the law to be identical in every country.

1.29  Leone Levi’s grand design of an international commercial code was never to be realized; indeed, with different countries at so many different stages of development it is hard to see that it could be. Nevertheless, his writings and energetic canvassing of support triggered a great interest in the promotion of greater convergence of national commercial laws, and a century later a number of distinguished scholars were to carry the torch for the internationalization of commercial law, among them a German émigré to Britain who was to become one of the foremost champions of a modern lex mercatoria.

Clive M Schmitthoff, ‘Nature and Evolution of the Transnational Law of Commercial Transactions’ in Norbert Horn and Clive M Schmitthoff (eds), The Transnational Law of International Commercial Transactions (Kluwer, Boston, 1982) 19, at 21–22

We have so far ascertained that the area of contract law is, subject to exceptions and restrictions, governed by optional law, founded on the principle of the autonomy of the parties’ will. This is the area in which a transnational law of international trade has developed and can be further evolved. This law is essentially founded on a parallelism of action in the various national legal systems, in an area in which, as we have seen, the sovereign national state is not essentially interested. The aim of this parallelism of action is to facilitate the conduct of international trade by establishing uniform rules of law for it. In some international activities the need for such rules is stronger than in others. International transportation by sea, air and road, for instance, can hardly be conducted without established uniform rules. The parallelism of action in the various national laws, which is really the essence of transnational law as the term is understood here, serves, however, another aim, which is of great importance to international trade, namely a far-reaching reduction of the national rules of (p. 20) conflict of laws and their substitution by a uniform, worldwide legal system of international trade regulation. The apotheosis of private international law is a side-effect of an exaggerated notion of the national state. It is an attempt at localising an international legal relationship in a national legal system. As such, it runs counter to the object and purpose of the international relationship.

1.30  More recently the benefits of harmonization of commercial law have been well set out by another scholar.

Loukas A Mistelis, ‘Is Harmonisation a Necessary Evil? The Future of Harmonisation and New Sources of International Trade Law’ in Ian F Fletcher, Loukas A Mistelis, and Marise Cremona (eds), Foundations and Perspectives of International Trade Law (Sweet & Maxwell, London, 2001) 20–21

It is essential to restate some of the advantages of harmonisation:

  • •  First, it facilitates commerce with the lifting of barriers resulting from the complexities of different legal regimes.

  • •  Secondly, harmonisation of international commercial law creates a legal framework tailor-made for international transactions, disregarding differences in the regulation of domestic transactions.

  • •  Thirdly, harmonisation normally produces neutral law, e.g. the CISG is a system of international sales law which is compatible with both civil and common law.

  • •  Fourthly, harmonisation often fills a legal vacuum by providing rules in a field where national law was previously non-existent, e.g. UNCITRAL Model Law on Electronic Commerce, or obscure, e.g. the draft UNIDROIT Convention of Security Rights in Mobile Equipment.

  • •  Fifthly, effective harmonisation substitutes a single law for a proliferation of national laws and thus within the given field dispenses with the need to resort to conflict of laws rules and the opportunity these give for forum shopping. Ineffective harmonisation, on the other hand, results in increased conflict of laws and wider possibilities for forum shopping.

  • •  Sixthly, harmonisation of law with the collateral reduced conflict of laws results in significant reduction of transactional costs.

  • •  Seventhly, in a field of law where conflict of laws has little or no role to play, there is increased predictability and legal certainty and consequent reduction of legal risk.

  • •  Finally, for a number of legal systems harmonisation of law bears fruits of law reform. While in some countries law reform is a complicated and thorny issue, reforms can more easily be achieved once a provision has been adopted at international level.

1.31  Nevertheless the view that uniform law is always better than the conflict of laws has not passed unchallenged. In particular it has been argued that most international private law conventions have not been successful, whereas the system of private international law is potentially able to choose a law out of all the laws in the world; that in any event there is merit in diversity; and that costs should be weighed against benefits.28

1.32  A powerful impetus has been given to transnational commercial law by the huge growth in international commercial arbitration. In various respects, arbitrators have wider powers than courts—for example, in rules of evidence and procedure, in determination of the applicable law where not chosen by the parties, and in the nature of the materials of which they can take cognizance—and the effect of the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards,29 and the UNCITRAL Model Law on International Commercial Arbitration30 in limiting the grounds on which an arbitral (p. 21) award may be set aside by the courts, has resulted in arbitrators having a much greater freedom from the constraints of national law than was formerly the case and an enhanced ability to look to international rather than national solutions. Scholars of international repute have also been very influential in developing the concept of transnational commercial law, among them Professors Ernst Rabel of Austria, René David and Berthold Goldman of France, Clive Schmitthoff, who settled in England, and Alekšander Goldštajn of the former Yugoslavia.

Alekšandar Goldštajn, ‘The New Law Merchant Reconsidered’ [1961] JBL 12

NOTWITHSTANDING the differences in the political, economic and legal systems of the world a new law merchant is rapidly developing in the world of international trade. It is time that recognition be given to the existence of an autonomous commercial law that has grown independent of the national systems of law … Two legal factors have made this development possible in the laws of Western countries: the optional character of the law relating to the sale and purchase of goods, and the ever-growing use of arbitration in commercial disputes. The optional nature of commercial law is due to the fact that that branch of law is founded on the autonomy of the parties’ will—freedom of contracting enables those engaged in international trade to overcome the historical peculiarities of the various national systems of law and to adopt a national legal regulation which accords with the requirements of international commerce. In this way, a new, autonomous law is being developed in practice, expressed in model contracts, standard clauses, general terms of delivery, commercial customs and trade usage. Moreover, to the extent that the settlement of disputes is referred to arbitration, a uniform legal order is being created. Arbitration tribunals often apply criteria other than those applied in courts. Arbitrators appear more ready to interpret rules freely, taking into account customs, usage and business practices. Further, the fact that the enforcement of foreign arbitral awards is generally more easy than the enforcement of foreign court decisions is conducive to a preference for arbitration.

The causes for the emergence of an autonomous international commercial law seem to lie in the diversity and inadequacy of many traditional national systems of law in the changed circumstances of modern international trade on a world market.

1.33  What has given rise to much debate is the concept of what Professor Goldštajn referred to, in the passage quoted above, as ‘an autonomous international commercial law’. We will return to this a little later.

The growth of regionalism

1.34  We cannot leave this section of the discussion without reference to the major effect of regional laws, powered by the desire to establish a framework for the development of regional markets. By far the most important in terms of legal development is the European Union, a group of 28 states which conducts much of its business in 24 official and working languages.31 But there has been a considerable volume of regional harmonization outside the EU, occasioning much debate as to whether this is beneficial as bringing together laws of countries linked by geography for the mutual advantage of all members of the region or whether its effect is to weaken the process of harmonization at international level. We will address this important subject in Chapter 6.

(p. 22) C.  The Sources of National Commercial Law

1.35  The sources of commercial law may vary from state to state but the principal sources are the following:

Contract

1.36  At the heart of commercial law in every developed legal system is contract. The law of contract underpins all commercial transactions, and in most systems, a core principle is party autonomy, the freedom of parties to ‘make their own law’ in the relations between themselves, though as we shall see a contract cannot speak to its own validity, and is thus not law in the full sense. Contractual terms may be express or implied. In some legal systems, the concept of the implied term covers not only terms implied from the express terms, from the surrounding circumstances or from a prior course of dealing but also terms implied by usage or by law. In other legal systems, usage is treated as an independent source of commercial law, while what common lawyers are accustomed to describe as the implication of terms by law is more accurately conceived by civil law systems as having nothing to do with the terms of the contract as such, but is simply the conferment of rights and the imposition of duties by law on parties to a particular kind of contractual relationship.

Usage

1.37  Usage is the observance of a commercial practice from a sense of obligation, as opposed to mere courtesy, expediency, or convenience.32 Our focus is on unwritten usage. A usage may become enacted in a statute or embodied in a contract or set of trade rules incorporated by contract, but in all these cases its character changes.33 Formerly, writers distinguished usage from custom, but nowadays, at least in relation to commercial transactions, the terms tend to be used interchangeably and we shall use the term ‘usage’. A usage may be that of a particular trade or a particular locality such as a town or a port, and in the former case, may be national or international. The existence and content of usage, so far as not prescribed by legislation, are questions of fact to be determined by the court.

Suppletive rules of common law

1.38  Court decisions may supply default rules to deal with cases not covered by the parties’ agreement or by usage.

Domestic legislation

1.39  Finally, rules of commercial law may be prescribed by legislation.

D.  The Nature and Sources of Transnational Commercial Law

1.40  In traditional legal thinking, rights and obligations are to be determined by reference to a particular national legal system, the relevant system being identified by reference to the rules of private international law of the forum. But under the influence of scholars such as those (p. 23) mentioned above, it became recognized that this was too narrow an approach and that courts and arbitrators should be free to draw on a wider range of sources when determining issues arising in connection with cross-border transactions to which a given national law might not by itself be sufficiently responsive. Even so, there has been much controversy as to the nature of transnational commercial law and even as to its existence. It should be borne in mind that while we regard the lex mercatoria as a subset of transnational commercial law and as raising distinctive issues, a number of scholars equate the lex mercatoria with transnational commercial law, so that what is discussed in the ensuing paragraphs is examined in much of the literature under the label lex mercatoria, or the new law merchant.

Is there an autonomous transnational commercial law?

1.41  In essence, transnational commercial law is the product of the convergence of national legal systems, but this does not mean that it can be found only by reference to legislation and case law. It is now recognized that regard may be had to a variety of sources, including scholarly writings, international restatements, and contractually incorporated rules of international organizations. Yet the central question remains whether these sources can be drawn on as establishing an autonomous corpus of legal rules, or even a legal system which the parties can select as the applicable law, or whether they merely offer a means by which a rule of national law not previously formulated can be supplied. For example, where there is an undetermined question of, say, Dutch law in relation to which the tribunal finds that the question is answered by a rule common to a number of other legal systems, the tribunal might then apply it as a rule of Dutch law rather than as an independent, non-national legal norm. As we shall see, there are powerful proponents of the concept of a new autonomous lex mercatoria, but also serious objections to it.

The lex mercatoria‎ and the conflict of laws

1.42  Many years ago, Professor Friedrich Juenger, in supporting the idea of the new law merchant as a body of law not deriving from sovereign states, drew attention to the threat this posed to conflict of laws theories and hence to teachers of the subject.

Friederich K Juenger, ‘American Conflicts Scholarship and the New Law Merchant’ (1995) 28 Vanderbilt J of Transnational L 487, 498–9

VI. THE NEW LAW MERCHANT: THREAT AND PROMISE

There are, of course, good reasons for the conflicts teachers’ reluctance to discuss the topic. The emergence of a supranational law undermines the very foundations on which their doctrines rest—the positivist notions Beale and Currie shared with Justice Holmes. Preoccupied with the idea of sovereignty, U.S. traditionalists find it difficult enough to accept the principle of party autonomy, even though it is recognized by most advanced legal systems. Those who question the parties’ freedom to choose the law governing their contract are likely to feel even more uncomfortable about the emergence of rules that owe their existence to the realities of an international marketplace, rather than a sovereign’s fiat. Such a law is inexplicable in their terms of reference; its ‘brooding omnipresence’ must be anathema to those who believe that the raison d’état must control international as well as purely domestic transactions. Interest analysts in particular, ought to feel uneasy, for what interests are left to analyze if those that states and nations supposedly harbor do not matter?

Worse yet, the lex mercatoria threatens the very existence of the conflict of laws because once supranational norms emerge choice-of-law rules and principles become superfluous. In addition, the new law merchant poses a challenge by virtue of its qualitative superiority. Merchants are, of course, interested in the quality of the rules that govern their transactions, whereas unilateralists (p. 24) and multilateralists alike take the position that substantive considerations should play no role in the choice of the applicable law. Even if the emerging supranational rules were confined to commercial matters, the internationalization of this vitally important field should grieve those about whom René David said:

[T]‌hey have the greatest difficulty in conceiving that the theory of conflict of laws might not be the only suitable method of solving the problems posed by international legal relations. They cling to this method, seeking to perpetuate its use even in cases where it is manifestly bad: they are ‘conflictualists’ not true ‘internationalists’.

Yet, whether conflicts scholars like it or not, cases and statutory authority support the existence of such a law merchant … 

1.43  The ability to use rules of the lex mercatoria does not depend upon its being accorded the status of a legal system, since the rules in question may be sufficient to answer the question at issue and if they are not then resort can be had to an appropriately determined national law. On the other hand, the purported selection of the lex mercatoria as the applicable law will be ineffective as a choice of law in those jurisdictions whose conflict rules require the selection of the law of a legal system, a concept which embodies not only particular rules, but a comprehensive set of laws linked by an organized structure and supported by adjudication and enforcement mechanisms. Thus, within the European Union, choice of law is governed by the Rome Regulation on the law applicable to contractual obligations (Rome I),34 which plainly predicates the choice of a national law, so that a purported choice of transnational commercial law or of the lex mercatoria will at most amount to a contractual incorporation of such rules of transnational commercial law as can be identified, and these will enjoy contractual status only and therefore be subject to domestic mandatory rules of the applicable law. The European Commission at one time proposed that parties should be allowed to choose as the applicable law internationally accepted rules that did not constitute a legal system and did not in themselves have normative force, but this proposal encountered fierce criticism and was abandoned.

1.44  As a rule, arbitral tribunals are less constrained in their use of sources than national courts, which usually feel obliged to apply a rule of national law determined by their own conflict of laws rules, whereas in an international commercial arbitration the wide powers enjoyed by arbitral tribunals, coupled with relatively strict limits on the review of arbitral awards, give arbitral tribunals a much greater freedom to determine the rules they will apply in the absence of party choice. So a number of legal systems now allow arbitrators to select their own conflicts rule or to apply ‘rules of law’ or even non-law considerations where so empowered by the parties.

Ole Lando, ‘The Lex Mercatoria‎ in International Commercial Arbitration’ (1985) 34 ICLQ 747, 752–5

An arbitrator applying the lex mercatoria will act as an inventor more often than one who applies national law. Faced with the restricted legal material which the law merchant offers, he must often seek guidance elsewhere. His main source is the various legal systems. When they conflict he must make a choice or find a new solution. The lex mercatoria often becomes a creative process by this means.

(p. 25) Arbitrators of different nationalities who have applied the lex mercatoria in collegiate arbitral tribunals have not experienced great difficulties in reaching consensus. When the law merchant has been silent and the national laws connected with the subject-matter have not led to the same result, few arbitrators have insisted on the solution provided by their own legal systems. They have sought the most appropriate and equitable solution for the case.

Applying the lex mercatoria, arbitrators may take advantage of their freedom to select the better rule of law which courts sometimes miss. For instance, the Scandinavian Sale of Goods Act provides that the buyer who wished to invoke a late delivery of the goods must give notice immediately upon delivery. This rule is not fit for international sales. Non-Scandinavian buyers do not know of it, and for them it may be a trap. The rule in Article 49(2) of the Convention on the International Sale of Goods, under which notice must be given within a reasonable time, offers a better solution … 

In many situations national law will give the parties greater certainty than the lex mercatoria, especially where the parties have agreed to have the contract governed by a national law system and the arbitrator is familiar with the law chosen. In many cases, however, the parties have not chosen the law applicable to the contract. Then it is often doubtful which law applies. Although the choice-of-law rules for contracts are becoming more uniform, they still create problems. One arises where the arbitrator has to apply the rules of a system which is alien to him. The cases show that his difficulties may be considerable, and that mistakes are not infrequent. The lex mercatoria has the advantage that it does away with the choice-of-law process which many lawyers abhor.

Even when applying a national law well known to him, the arbitrator may run into difficulties which make his decision less predictable. Several national law rules are made for domestic relationships only; they are not suitable for cases containing foreign elements. Faced with such rules, the arbitrator is sometimes in a dilemma between law and equity. In these cases the lex mercatoria may in fact provide more certainty.

Emmanuel Gaillard, ‘Transnational Law: A Legal System or a Method of Decision-Making?’ in Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer, The Hague, 2001) 55–6

The first area of controversy among the supporters of lex mercatoria has to do with the extent to which transnational rules are characterized by their purported specificity, from a substantive viewpoint, vis-à-vis rules found in national legal orders. From this viewpoint, international transactions require added flexibility, which the requirements found in national laws would seldom accommodate. This school of thought is related to the theory of ‘specific needs of international business’, which has subsequently been derided as a new form of the laissez-faire doctrine.

Another view, which we believe to be the better one, finds the specificity of transnational rules to lie in the fact that these rules are derived from various legal systems as opposed to a single one, and more generally from various sources, rather than in their allegedly differing content. In other words, their specificity is one of source, not of content. Indeed, there is no reason to believe that national legal orders are unable to accommodate adequately the specific needs of international situations, for example, by creating a separate set of substantive rules to govern international situations.

Admittedly, because they are chiefly derived from various national legal systems, transnational rules run a better chance not to reflect the outdated rules which may still be found in certain legal systems. In that, they may help to meet the concerns of modern business, but this is not to say that by nature, national laws cannot achieve the same result. On the contrary, it is because a sufficient number of legal systems have adopted modern rules that transnational rules will be able to follow them in embracing the most appropriate solution.

These two ideas of the specificity of content and the formation from comparative law sources were present, in the most intricate way, in the early writings on lex mercatoria, but they now merit to be segregated if one does not want to exacerbate an artificial distinction between national legal orders—which are not confined to domestic rules and do not necessarily contain outdated rules—and transnational rules. This is why, in our opinion, lex mercatoria should be defined today by its sources … as opposed to its content.

(p. 26) 1.45  In short, rules of transnational commercial law are not necessarily different in content from those of national law and should not be set up in opposition to national law rules but rather should be seen as drawing upon and as complementary to those rules.35

Klaus Peter Berger, ‘The New Law Merchant and the Global Market Place’ in Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer, The Hague, 2001) 17, 21

The states’ loss of their formerly dominant position in international policy and rule-making which goes along with this process, the decreased significance of sovereignty and the freedom of parties in international contract law have caused a reconsideration of the traditional theory of legal sources which has ‘moved beyond yesteryear’s narrow-minded positivism.’ A non-positivist notion of the law is beginning to emerge. Since this law has to take account of the complexities of society, it is not the public reason represented by the state or by inter-governmental organizations alone but also the power for self-regulation and coordination of the individual and of private organizations and federations which justifies normative force. The traditional theory of legal sources which was centered around the notion of sovereignty is being replaced by a legal pluralism which accepts that society’s ability for self-organization and coordination is more than a mere factual pattern without independent legal significance. Today, it assumes a normative quality of its own … 

… Raiser, even though being a proponent of the traditional positivist view of the theory of legal sources, has summarized these views in his famous studies on general contract conditions as follows:

‘Since it turns out to be impossible to quantify general contract conditions as parts of contracts or as parts of the traditional catalogue of the sources of objective law, the option remains to put into question the distinction between a legal norm and a legal transaction. Is the thinking correct that parties, in concluding a transaction, are merely setting a factual pattern to which the law attributes or denies legal effect at its will? Aren’t the parties themselves able to regulate their living conditions without the intermediation of the legal order of the state, thus creating law among themselves?’36

The principles and rules which make up the lex mercatoria are of a normative character, not because they are fair and reasonable from an objective viewpoint but because businessmen, arbitral tribunals and formulating agencies alike consider them to be fair and reasonable and act accordingly by way of self-regulation of international commerce and trade. The new law merchant applies due to its inherent rationality: ‘veritas non auctoritas facit legem’.

1.46  From these passages we see two distinct ideas which should not be elided. The first, articulated by Professor Gaillard, is that in relation to international commercial transactions rights and obligations need not necessarily derive from a particular national legal system but may be drawn from a variety of sources, using the comparative method. The second, expressed in the above passage by Professor Berger, is that as between the parties contract creates law. This, however, should not be misunderstood. If the legal force of a contract derives from its ‘inherent rationality’, a contract must be open to challenge as not inherently rational and, indeed, as oppressive or injurious to the wider public interest. Insofar as this conclusion requires further support, it is to be found in the concept of jus cogens in international law under which a treaty is void if at the time of its conclusion it conflicts with a peremptory norm of international commercial law.37 If this is true even of agreements between sovereign states, how much more so of agreements between private parties.

(p. 27) 1.47  Thus, there has to be a control mechanism by which a contractual provision can be validated and thus treated as legally operative as from the time it is agreed. This mechanism has two limbs, both of which involve the application of legal norms.

External validation by a court or tribunal

1.48  Whether a contract term is valid is, in case of a dispute concerning the contract, a matter to be determined by a court or other tribunal of competent jurisdiction. Judges are appointed by the state in accordance with the law, and it is the law which confers jurisdiction upon them. This is not to say that a contractual term is only binding once a court has so decided, merely that a contract cannot speak to its own validity and that one of the control factors is review by a court in order to ensure that a purported contract satisfies the criteria laid down by law for a valid contract. It has, indeed, been argued that the arbitral process surmounts the difficulty of a ‘contrat sans loi’.

Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’ in Gunther Teubner (ed), Global Law Without a State (Ashgate/Dartmouth, 1997) 15–17

In lex mercatoria it is the practice of contracting that transcends national boundaries and transforms a merely national law production into a global one—numerous international business transactions, standardized contracts of international professional associations, model contracts of international organizations and investment projects in developing countries. However, as soon as these contracts claim transnational validity, they cut off not only their national roots but their roots in any legal order. This may be fatal. It is not only lawyers who declare contracts without law unthinkable: the idea that any contract needs to be ‘rooted’ in a pre-existing legal order is not merely a legal axiom. Sociologists, too, will protest against contrat sans loi. From the work of Emile Durkheim onwards it has been the great sociological objection to any autonomous contractualism that the binding force of contract needs to be rooted in broader social contexts … Of a purported contractual lex mercatoria sociologists would ask the famous Durkheimian question: where are the non-contractual premises of global contracting?

Why not in the contracts themselves? Apparently this is a dead-end. Any self-validation of contracts leads directly into the paradox of self-reference, into the contractual version of the Cretan liar paradox … In the positive version (‘We agree that our agreement is valid’) it is a pure tautology. In the negative version (‘We agree that our agreement is not valid’) it is the typical self-referential paradox which leads to nothing but endless oscillation (‘valid-not valid-valid …’) and blockage. The result is undecidability. This underlying paradox is the principal reason why lawyers, as well as sociologists, declare self-validating contracts unthinkable and talk lex mercatoria out of existence.

Social practice, however, is more creative than legal doctrine and social theory. Kautelarjurisprudenz, the practice of international draftsmen, has found a way to conceal the practice of self-validation in such a way that global contracts have become capable of doing the apparently impossible. Global contracts are creating their non-contractual foundations themselves. They have found three ways of de-paradoxification—time, hierarchy and externalization—that mutually support each other and make it possible, without the help of the state, for a global law of the economic periphery to create its own legal centre.

Empirically, we find the most perfect ‘de-paradoxification’ in those commercial contracts that construct a so-called ‘closed circuit arbitration’ … This is a self-regulatory contract which goes far beyond one particular commercial transaction and establishes a whole private legal order with a claim to global validity. Apart from substantive rules it contains clauses that refer conflicts to an arbitration ‘court’ which is identical with the private institution that was responsible for ‘legislating’ the model contract. This is the ‘closed circuit’.

In the first place, these contracts establish an internal hierarchy of contractual rules. They contain not only ‘primary rules’ in the sense established by Hart … which regulate the future behaviour of the parties, but also ‘secondary rules’ which regulate the recognition of primary rules, their (p. 28) identification, their interpretation and the procedures for resolving conflicts. Thus, the paradox of self-validation still exists, but it is concealed in the separation of hierarchical levels, the levels of rules and meta-rules. Unlike the rules, the meta-rules are autonomous, although both have the same contractual origin. The hierarchy is ‘tangled’, but this does not hinder the higher echelons from regulating the lower ones … 

Second, these contracts temporalize the paradox and transform the circularity of contractual self-validation into an iterative process of legal acts, into a sequence of the recursive mutual constitution of legal acts and legal structures. The present contract extends into the past and into the future. It refers to a pre-existing standardization of rules and it refers to the future of conflict regulation and, thus, renders the contract into one element in an ongoing self-production process in which the network of elements creates the very elements of the system.

Third, and most importantly, the self-referential contract uses the de-paradoxification technique of externalization. It externalizes the fatal self-validation of contract by referring conditions of validity and future conflicts to external ‘non-contractual’ institutions which are nevertheless ‘contractual’, since they are a sheer internal product of the contract itself. The most prominent of these self-created external institutions is arbitration which has to judge the validity of the contracts, although its own validity is based on the very contract the validity of which it is supposed to be judging! Here, the vicious circle of contractual self-validation is transformed into the virtuous circle of two legal processes— contracting and arbitration … An additional externalization of this reference to quasi-courts is the reference to quasi-legislative institutions—to the International Chamber of Commerce in Paris, the International Law Association in London, the International Maritime Association in Antwerp … Thus transnational contracting has created ex nihilo an institutional triangle of private ‘adjudication’, ‘legislation’ and ‘contracting’.

1.49  Arbitration, by contrast with litigation, depends on agreement and arbitrators are appointed in accordance with that agreement. This consensual character of arbitration, which is emphasized in the arbitration laws of most countries, might lead one to suppose that the process by which an arbitral tribunal is set up and the jurisdiction of the arbitrator are not subject to legal norms at all. But that would be to commit the error of a ‘contrat sans loi’ in a disguised form. It is true that agreement lies at the heart of the arbitral process and that it is for the parties to appoint the arbitral tribunal. But we know that freedom of contract is not unlimited and that there are in every legal system grounds on which a purported contract may be impeached or an otherwise valid contract set aside, and arbitration agreements do not enjoy any special form of immunity from rules limiting contracts generally. Hence, the agreement to arbitrate and the jurisdiction of the arbitral tribunal, though in most cases not open to question, depend ultimately on meeting stated legal criteria. So the appointment of an arbitrator will be invalid if the arbitration agreement is invalid, and an arbitrator validly appointed may be removed for bias or other improper conduct.

Determination in accordance with law

1.50  In most systems, a court is not free to decide a contractual dispute on the basis of what it considers fair or reasonable but must apply certain legal norms, and it is widely accepted that even in international commercial arbitration, the tribunal has no power to decide ex aequo et bono unless so authorized by the parties.38 From this it must follow that even an (p. 29) arbitral tribunal must, if the parties do not agree otherwise, apply legal norms—though not necessarily the law of a particular national legal system unless designated by the parties as the applicable law—to determine the validity and effect of contractual provisions; the tribunal cannot give a decision simply on its personal view of what would be fair and reasonable. The point is well made by Berger in his analysis of the dogmatic foundations of the lex mercatoria doctrine:

A transnational understanding of modern commercial law has an important effect on the doctrine of private international law. Neither the parties’ agreement to have the NLM [new lex mercatoria] applied to their contract nor the application of this transnational law by international arbitrators in the absence of a choice of law by the parties lead to a ‘contrat sans loi’. International arbitrators who apply the NLM do not act in a legal vacuum, nor do they render a decision in equity. Instead, they apply the rules and principles of a transnational legal system, and their award will be respected by domestic courts.39

1.51  What, then, are we to make of the proposition that contract makes law and that commercial practice constitutes a legal norm? First, we can say that within the framework of external legal norms parties can make their own law; and since, for commercial transactions generally and cross-border transactions in particular, the principle of party autonomy is accorded pride of place, what the parties to a contract agree will usually be binding on them and respected by courts and arbitral tribunals. In practice, the validity of a contractual provision will not normally arise unless it is challenged by one of the parties or raises a question of international public policy which the tribunal should address of its own motion, so that the contractual terms will in most cases be applied without the need to refer to any legal norms at all. That does not mean that the contract is free from such norms—for it would be repugnant to public policy to allow contracts to be self-legitimating—merely that in the particular case they do not need to be examined. Second, commercial practice consistently adopted is a guide to what right-thinking members of the commercial community regard as a proper response to a particular fact situation and may therefore be indicative of a legal norm. For example, in international banking practice, a documentary credit is considered to become binding on the issuing bank from the time of issue, so that a purported revocation would be ineffective even if dispatched before the letter of credit was received or after receipt and before any act of reliance upon it; and courts responsive to legitimate commercial practice and understanding would be minded to treat the practice as establishing a legal norm even if this ran counter to general contract theory.

1.52  Is the same true of standard contractual terms? There is a tendency on the part of the more ardent proponents of the lex mercatoria to make rather extravagant claims for standard contract terms as a legal norm. Rarely do they lay down criteria to delineate the types of standard-term contract that should qualify for this elevated status. In particular, no distinction is drawn between standard terms drafted by one of the parties and standard terms or model contracts prepared by a neutral third party, or by two or more such parties representative of the competing interests, to reflect a fair balance of those interests. Moreover, the assumption is made that in any given field of trading activity there is a homogeneous set of standard terms, an analysis of which will reveal the golden rule, whereas in real life there are as many terms as there are term-providers and they vary widely in scope and content. Different professional bodies may produce standard-term (p. 30) contracts covering the same field and even a single body may have a variety of standard-term contracts.40

1.53  When the 1988 UNIDROIT convention on international financial leasing was in preparation, there was some complaint by leasing specialists that the rules governing the rights and duties of lessor and lessee did not correspond to the terms found in typical leasing contracts. But this was a misconception of the purpose of an international convention, which is not to follow contract terms that very often are prepared from the perspective of one of the parties but to lay down a set of neutral provisions and leave the parties to negotiate departures from them. There are many sales contracts which are designed primarily to protect the interests of sellers, but that does not mean that these should be reflected in sales legislation, nor are they. By contrast, standard-term contracts drawn up by trade or professional bodies which are designed to balance the competing interests may give a guide to the legitimate expectations of the market and can form the basis of a legal norm. Examples are the standard-term contracts produced by such bodies as FIDIC,41 for construction works and the International Chamber of Commerce for distributorship, agency, and international sales. Even so, a distinguished jurist has cautioned against the use of standard forms as indicative of a legal rule.

Rt Hon Lord Justice Mustill, ‘The New Lex Mercatoria‎: The First Twenty-five Years’ in Maarten Bos and Ian Brownlie (eds), Liber Amicorumfor Lord Wilberforce (OUP, Oxford, 1987) 158

There is, however, a different form of usage to which some of the proponents have had recourse, namely the practice of contracting within various trades, on standard terms of contract. The mechanism whereby these terms become part of a standing body of law is rarely spelt out. One suggestion is that they express the sense of justice of those who draft and enter into them. I confess to some reservations about this proposition. Often, one party to a standard form contract adopts it because the other gives him no choice. More important, the form does not, it seems to me, reflect the ideas of anybody as to the justice of the transaction, if indeed this concept has any meaning in the field of commercial transactions negotiated between parties on an equal footing. Rather, the form is designed to serve as a convenient peg on which the parties can hang the specifically negotiated terms, without having to work out all the details of the transaction from scratch. Experienced traders are aware of the general financial balance of the transaction contemplated by the standard form, and know the way in which it distributes the commercial risks between the parties. With this in mind they can negotiate towards agreement on matters such as price, delivery date, insurance, demurrage, and so on. If the standard form is altered so as to throw more obligations or risks on to one of the parties, the negotiated terms will have to be adjusted to restore the balance. The second form will be neither more nor less ‘just’ than the first. It simply calls for a different assessment of the price in the widest sense of the term.

Furthermore, there are serious practical objections to the use of standard forms as a source of law. Quite apart from the fact that a single institution within a single trade may publish a repertoire of mutually inconsistent documents from which contracting parties may choose the most suitable to reflect the balance of their bargain, there coexist in many trades a number of institutions, each offering its own standard form; and it is, of course, a commonplace that parties alter the standard forms to suit their own purposes. There is thus no guarantee of homogeneity even within a single trade. Moreover it may legitimately be asked why a participant in one trade (p. 31) should be supposed to have his contract governed by rules drawn from contract forms current in a quite different trade.

Finally, it must be confessed that the mechanism whereby the use of standard forms becomes a source of law is nowhere clearly explained. The simple repetition of contracts on the same terms is as consistent with the exercise of freedom of contract as with subordination to a system of binding norms; indeed, far more so, since if the parties to a commodity transaction do not wish to bind themselves to, say, the GAFTA Contract Form No. 100, there is no legal or other institution which can compel them to do so. Moreover, the repetition of transactions in the same form could at most create a group of norms peculiar to the individual trade, thereby creating a network of para-legal systems. This is quite inconsistent with the theoretical premises of the lex mercatoria, which is that it springs spontaneously from the structure of international commerce—which is quite plainly regarded as an indivisible whole.

1.54  We may conclude that international commercial practice does not of itself constitute an autonomous body of law, and that reliance on standard-term contracts as a source of law is fraught with difficulties, but that it is legitimate to speak of transnational commercial law as a set of legal norms not based on any one legal system but derived from a variety of sources, some of which—for example, international restatements by groups of scholars—may not be legal instruments but may nevertheless be resorted to as evidence of a consensus on an appropriate legal rule. This move from national laws determined by conflicts rules towards rules to be extracted from a variety of sources, including non-binding instruments, has been powered by international commercial arbitration, in which panels of arbitrators drawn from different jurisdictions strive to produce awards that, while conforming to legal norms, are fair and commercially acceptable. The wide degree of freedom conferred on arbitral tribunals by national legislation and international instruments, coupled with the restriction of judicial review in order to secure finality, means that arbitrators can be much more responsive than courts to non-national sources of law, and it is this that has provided the motive power for the development of what has become known as the new lex mercatoria, albeit ill-defined and not readily ascertainable. Yet it remains the case that the lex mercatoria can only supplement, but not displace, a national legal system determined under conflict of laws rules.

Jürgen Basedow, ‘Lex Mercatoria‎ and the Private International Law of Contracts in Economic Perspective’ (2014) 4 Unif L Rev 697, 706

If the present movement towards a private restatement of the lex mercatoria continues, it may still remain doubtful whether the lex mercatoria will be acknowledged as a true alternative to State law. For the time being, the prevailing view in private international law is prepared to respect the choice of lex mercatoria or of general principles of contract law only within a given legal system, but not as an alternative which would avoid national law altogether. The choice of the lex mercatoria is recognized within the framework of the substantive law that is applicable according to choice-of-law principles, but it is not considered to be a choice of law in itself. The practical difference is that the mandatory provisions of the national law that is applicable under private international law will be enforced against the lex mercatoria, while they would not if the choice of the lex mercatoria were classified as a choice of the applicable law. The prevailing view may be criticized. As long as it prevails, the need for conflict rules on cross-border contracts cannot be questioned.

The sources of transnational commercial law

1.55  Transnational law is drawn from many sources. Leaving aside individual contracts—for we have shown that a contract cannot speak to its own validity, so that the parties can make their (p. 32) own law only in conformity with certain externally set criteria—the sources of transnational commercial law may be broadly divided into seven groups:

Lex mercatoria

1.56  We examine this in some detail later in this chapter.42 Suffice it to note at this point that there are said to be two limbs to the lex mercatoria, namely international trade usage and general principles of law. Once a usage has acquired such general acceptance as to become independent of any particular form of international trading activity, it ceases to be usage and becomes elevated into a general principle which, it will be argued, is best regarded as a distinct source of transnational commercial law and does not form part of the lex mercatoria.43

International and regional instruments

1.57  These may in turn be divided into two sub-groups:

  1. (a)  Instruments intended to become legally binding. At the international level, these consist of multilateral conventions and uniform laws appended to such conventions. Such an instrument is not legally operative until ratified by the number of states specified in it and, within a contracting ctate, until completion of whatever constitutional process (for example, legislation) is required by the law of that state to give the instrument the force of law within the state and not merely at the international level. There is also a growing number of regional instruments, the most prominent being those produced by what is now the European Union (formerly the European Community), which is tasked with (among other things) the harmonization of law within the European Union, and achieves this through the various EC/EU treaties and through the issue of directives and regulations. Hitherto, EU law has been confined to rules of a mandatory character and rules which outlaw or restrict various kinds of activity, such as that which breaches the Union’s competition policy.

  2. (b)  Facultative instruments, namely model laws and model rules, which are not legally operative, are not, therefore, ratified and may be rejected, accepted wholly or in part or amended as a state considers fit. Such instruments, therefore, constitute a facility on which states may draw as they wish. Even where a state does not adopt the drafting it may find the model law or model rules a useful source of ideas for domestic legislation.

Conscious or unconscious judicial or legislative parallelism

1.58  A degree of harmonization may come about through conscious borrowing by the courts or legislatures of one state of ideas developed in other states. An example is the doctrine of state immunity, which in its origin gave sovereign States absolute immunity from suit but, as states began to enter the commercial arena through state trading enterprises, became limited to the acts of states in the exercise of sovereign power (acta jure imperii) and ceased to apply to state involvement in commercial transactions (acta jure gestionis). Alternatively, the courts and legislatures of different countries may arrive at broadly the same result independently of each other. Work on international and regional restatements of contract law44 has shown (p. 33) a surprisingly high degree of commonality of solutions to different problems even though this may be achieved by different legal routes.

Contractually incorporated rules and trade terms promulgated by international organizations

1.59  Pride of place belongs to the International Chamber of Commerce (the international non-governmental organization representing world business) which has produced numerous uniform rules that are given effect by incorporation into contracts. Of these, the most successful are the Uniform Customs and Practice for Documentary Credits (UCP 600), which are in use by bankers, and incorporated into documentary credits, all round the world. Another very popular publication of the ICC is Incoterms, which contains a set of the price and delivery terms most frequently used in international sales (for instance f.o.b., c.i.f., d.d.p.) and sets out in relation to each term the respective obligations of seller and buyer. These terms, too, take effect by incorporation into contracts. The result of these contractual incorporations into all relevant agreements is to produce through a series of bilateral transactions the effect of a multilateral contractual network and thereby facilitate not only uniformity of practice—which is the primary objective of ICC rules—but also a harmonization of contractual rights and obligations.

Resolution No 13 of the ICC Congress, Paris, 1920 (reproduced in Emanuel Jolivet, les Incoterms, Litec, Paris, 2003, 49–50)

The International Chamber of Commerce

Considering the inconvenience resulting for all parties from different interpretations of the terms F.O.B. and C.I.F.

Expresses the Wish

That the meaning of these terms and of all those relating to contracts of transport and international sale be codified and defined with precision in an international compendium, established by the good offices of the International Chamber of Commerce, which will ensure their extensive publicity

That the International Chamber of Commerce also take all appropriate steps to make the definitions contained in this compendium universally known and adopted.

Standard-term contracts

1.60  The limited significance of these has been discussed earlier.

Restatements of scholars

1.61  A more recent phenomenon, the restatement, has taken its inspiration from the American Restatements, produced by leading scholars under the aegis of the American Law Institute. Such restatements do not have the force of law, but they are extremely influential in the development of jurisprudence in their respective fields. They are not restatements in the strict sense (since obviously a single set of rules cannot be equally responsive to all the laws of the different states); their purpose is rather to identify and adapt to modern conditions the best rules from the different state systems and thereby to secure both the harmonization and the improvement of the law. In the field of contract law, two restatements have been produced by different groups of scholars from different countries, the Principles of International Commercial Contracts,45 designed for use in international commercial transactions, and the (p. 34) Principles of European Contract Law,46 which is concerned with contracts between nationals of member states of what was then the European Community. An altogether more ambitious regional project is the Draft Common Frame of Reference (DCFR), a project undertaken by scholars from all over Europe under the direction of the European Commission and designed to lay the basis for a ‘political’ CFR designed as a legislative guide or toolbox and possible evolving into a European civil code. An outline edition of the DCFR was followed by a full edition47 divided into ten books, with a commentary on each article—an astonishing achievement. Currently, however, the focus has shifted to a proposed new EU regulation on a Common European Sales Law (CESL).48 The various restatements have much the same status as the American Restatements; they are not legally operative instruments but a form of ‘soft’ law. Nevertheless, they have already proved very influential both in international commercial arbitrations and in the preparation of legislation as indicative of an international consensus on a reasonable and neutral set of rules.49

General principles of international law

1.62  It may seem odd to relegate general principles of international law to the bottom of our list, but there is much uncertainty as to the meaning and content of this concept, which is rarely invoked explicitly by international tribunals.50 It is, therefore, mentioned only for completeness and has little significance as a source of transnational commercial law.

E.  Lex Mercatoria

The sources of the lex mercatoria

1.63  We have said earlier that for our purposes the lex mercatoria is that part of transnational commercial law which consists of the unwritten customs and practice of merchants, so far as satisfying externally set criteria for validation. This definition excludes written codifications of customs and practice.51 Many types of documents may be resorted to as evidence of the unwritten rules, but they do not in our view constitute part of the lex mercatoria, for in stating usage they almost invariably change it. Moreover, to the extent that previously unwritten rules are given effect by contract or international convention, they change their character and thereafter derive their force from the contract or the convention (as incorporated into national law), not from the usage, so that criteria determining the legal validity of the usage—for example, consistency of adoption and reasonableness—cease to be relevant. Lex mercatoria is thus best seen as being, true to its origins, the product of spontaneous activity on the part of merchants. We shall, however, say something a little later about general principles of law as a possible source of the lex mercatoria.

(p. 35) The normative force of usage

1.64  A central question to be confronted is whether a usage is legally operative merely by virtue of its existence or whether it has to satisfy certain external criteria of validity. In other words, can merchants make their own law merely by adopting a particular usage, or is something more needed to give that usage legal effect? This question mirrors that previously posed in relation to the ability of parties to a particular contract to make their own law. It is obvious that a consistent course of practice cannot by itself suffice as a legal rule, for the practice may be observed purely as a matter of courtesy or convenience or from a desire to accommodate one’s customer. That is why it is often said that, to become a binding usage, a practice needs to be adopted from a sense of binding obligation. There are difficulties with this formulation,52 which finds its counterpart in international law,53 but at least it conveys the basic idea that practice must be distinguished from law:

There is, however, the world of difference between a course of conduct which is frequently, or even habitually, followed in a particular commercial community as a matter of grace and a course which is habitually followed, because it is considered that the parties concerned have a legally binding right to demand it.54

1.65  In Libyan Arab Foreign Bank v Bankers Trust Co,55 the plaintiffs claimed repayment of a Eurodollar deposit with the London branch of the defendant bank. The defendants disputed liability on the ground that they were precluded from paying because of an executive order of the President of the United States freezing all Libyan property in the possession or control of United States persons, including their overseas branches. The plaintiffs contended that they were entitled to repayment in cash in London or by any other means which did not involve an act in the United States contravening the Presidential order. The defendants asserted that it was a usage of the Eurodollar deposit market that deposits could be withdrawn only by a transfer effected through the clearing system of the country in whose currency the account was denominated—in the case in question, the New York CHIPS. Staughton J held that while this was the method by which withdrawals were commonly effected, the evidence did not show a binding usage to this effect. The plaintiffs’ claim to withdraw their deposit in London therefore succeeded.

1.66  Nevertheless, some authorities seem to regard international trade usage as self-validating. Once identified, it has force by reason of its very existence, without need of any external validating authority. But this cannot be right. Though it is in the nature of transnational commercial law that it need not be derived from any particular sovereign authority and may be established by reference to sources that are not in themselves legally operative instruments, yet external validation of some kind—whether by legislation, jurisprudence, or doctrine—is an essential prerequisite of a legal norm. As shown above, mere contracts cannot be law in the full sense, for they do not derive from authority and do not themselves possess limiting mandatory rules or lois de police, which are essential to a legal system in order to be able to invalidate unconscionable bargains or those which produce distortion of competition or (p. 36) are otherwise contrary to the public interest. So to allow merchants unfettered freedom to make their own law by usage would be to by-pass constraints which all legal systems impose on freedom of contract. And just as contracts are not law, but derive their force from external criteria for recognition, so also international trade usage cannot be self-validating but depends for its recognition on conformity with certain legal norms. Moreover, it does not suffice that such norms exist in the abstract; they must be capable of determination by a court or other tribunal of competent jurisdiction as being satisfied by the usage in question.

1.67  There is, of course, a dilemma: do judicial decisions make law, which is contrary to the orthodox view of the role of the judge and raises the question how a usage could affect rights under a contract concluded before the judicial decision, or do they merely declare law, in which case usage has force independently of the judicial decision? The answer to this conundrum is that there are two stages to the evolution of practice and its conversion into a legally binding usage. The first stage is the establishment of the practice by the mercantile community and its consistent observance as necessary for the fair and efficient conduct of business to the point where failure to observe the practice may be met not with legal but with commercial sanctions, such as opprobrium from the business community, the unwillingness of other members to enter into dealings with the culprit or, as a last resort, suspension or termination of the culprit’s membership of the relevant business association and his ability to trade on the market. These are powerful sanctions and will usually suffice to make recourse to law unnecessary. In this sense the practice, though not yet lex, is almost as powerful as if it were.56 In a practical sense, therefore, the business community is able in this way to make its own law. But if there is a dispute which remains unresolved then, as a second stage, it will be for the court or arbitral tribunal to decide whether the practice meets the criteria for a binding usage, in particular that it is reasonable, well known, consistently adopted, and lawful. If the court or tribunal considers these criteria to be met, it will recognize the practice as having the status of a legally binding usage.

Roy Goode, ‘Usage and Its Reception in Transnational Commercial Law’ (1997) 46 ICLQ 1, 7–18

II. THE NATURE, ELEMENTS AND SCOPE OF INTERNATIONAL TRADE USAGE57

A. The Nature of Unwritten International Trade Usage

Unwritten trade usage is a practice or pattern of behaviour among merchants established by repetition which has in some degree acquired normative force. There are two theories as to the nature of unwritten trade usage. One is that it is a particular form of international customary law. The other, adopted by (inter alia) English law and by Article 9(2) of the 1980 UN Convention on Contracts for the International Sale of Goods (the ‘Vienna Sales Convention’), is that it takes effect as an implied term of a contract. Though the contract theory has been criticised as artificial, in that it ascribes to the parties a knowledge of the usage which they may not possess, this is entirely consistent with the objective theory of contract by which terms are interpreted not according to the subjective intention of the parties but as a reasonable person would interpret them. Usages depend for their efficacy on the settled practices of parties to contracts; they are essentially contractual in nature. Proponents of the lex mercatoria tend to be hostile to the contract theory, seeing it as inconsistent with the status of (p. 37) international trade usage as ‘law’. But the practical effect of the distinction between the two theories appears to be slight.

B. The Normative Force of Unwritten International Trade Usage

Until relatively recently it has been widely accepted that for an international trade usage to have normative force it is not sufficient to establish a pattern of repetitive behaviour among merchants; it must also be shown that this pattern of behaviour is observed from a sense of legally binding obligation, not from mere courtesy, convenience or expediency … 

… This principle finds an exact parallel in international customary law, which requires a conjunction of usus and opinio juris sive necessitatis to establish a principle or rule of customary law. Thus Article 38(1) of the Statute of the International Court of Justice identifies as one of the sources of international law the Court is required to apply: ‘b. international custom, as evidence of a general practice accepted as law’. To much the same effect is the elegantly worded rule in the American Restatement (revised), Foreign Relations Law of the United States §102:

  1. (1)  A rule of international law is one that has been accepted as such by the international community of states

    1. (a)  in the form of customary law:

      … 

  2. (2)  Customary international law results from a general and consistent practice of states followed by them from a sense of legal obligation.

The problem with the requirement of observance of custom from a sense of legally binding obligation is that it is based either on circularity or on paradox, for it presupposes a belief in an existing legal duty which if correct would make the belief itself superfluous and if erroneous would convert non-law into law through error. It is interesting to note that §1–205 of the American Uniform Commercial Code and Article 9(2) of the Vienna Sales Convention have jettisoned the opinio juris element. Under §1–205(2): ‘A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.’ Article 9(2) of the Vienna Sales Convention (which as previously mentioned attributes, the binding force of usage to implied agreement) takes the same position, though in rather more prolix terms:

The parties are considered, unless otherwise agreed, to have impliedly made applicable to their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.

Yet these two formulations are not without their problems either, for they fail to distinguish usage observed as binding from usage followed purely as a matter of habit, courtesy or convenience or simply a desire to accommodate one’s business counterparty voluntarily where this is not detrimental to one’s own interests. Clearly there must be some perception of obligation, even if it is not obligation in the full legal sense of that which has been ordained by law. Perhaps the most satisfactory way of capturing the element of obligation without reference to law is to say that the usage relied on must be one which is considered by the relevant mercantile community to bear on the making, proof, interpretation, performance or enforcement of the parties’ commercial engagements towards each other … 

III. HOW UNCODIFIED USAGE IS ESTABLISHED

A. The Nature of the Problem

The difficulty with uncodified usage, as with any other customary law, is to establish its existence. Individual members of the commercial community may have, or believe that they have, a broad perception of what a given usage is or means, but typically the postulated usage will lack definition, its boundaries and qualifications will be hazy and even its central core may prove to be a matter of debate.

(p. 38) That this is so can readily be demonstrated by everyday experience and by the process of litigation, and it applies with equal force to asserted but previously unexplored rules of the common law. A young lawyer practising in England and not familiar with the workings of English bank settlement systems attends a gathering of experienced bankers who are discussing problems of daylight exposure arising from a multilateral settlement system which nets out obligations only at the end of the day. The young lawyer is curious to know whether a payment order given by a customer to his bank can be countermanded after it has gone into the bank clearing but before the conclusion of the daily settlement. He would like to ask about this but is reluctant to expose his ignorance on what must obviously be such an elementary matter. Eventually he plucks up courage and poses the question. He may then quite possibly find to his surprise that half the assembly replies yes and the other half no. He would almost certainly have had a similar experience if, before the decision in the Banque de l’Indochine case, he had enquired as to the meaning and effect of a payment ‘under reserve’ to the beneficiary of a documentary credit. One group of bankers would have said that the paying bank could recover the payment from the beneficiary if the account party could demonstrate that the documents were not in conformity with the credit, whilst the other half would have answered (correctly, as it would turn out) that the bank could recover if the account party declined to take the documents, even if the reason for his refusal to take them was not legitimate.

In fact, every case in which there is a dispute between expert witnesses as to the fact and content of an unwritten trade usage makes the point that, not being reduced to writing, the usage is exposed to challenge as to its meaning or even its very existence. Precisely the same situation obtains where there is a dispute as to whether a right or remedy is given by the common law on a point not previously the subject of a judicial decision or scholarly writing. It is worth emphasising this point because there are arbitrators who seem willing to infer international trade usage on the flimsiest of evidence or even on no evidence at all beyond their own personal experience … 

G. Is the Lex Mercatoria Anational?

Does this mean, then, that the lex mercatoria is truly anational and autonomous? Put in this way the question is ambiguous, as becomes apparent when one considers the diversity of ways in which objections to the whole concept of lex mercatoria have been expressed. The first objection is that the lex mercatoria, consisting of general principles of law and international trade usage, is not a complete legal system, so that it is futile for the parties to seek to designate it as the law applicable to their contract. It is certainly the case that the lex mercatoria is not a complete legal system. But that does not mean that to choose it as the applicable law is wholly ineffective, merely that so far as its principles do not cover the question in dispute it will be necessary to refer to some applicable national law. Whether they do cover the question is for the tribunal to decide, drawing on whatever materials are to hand. Second, it is objected that the lex mercatoria is not an autonomous body of principles, for it is controlled by rules of public policy and mandatory rules of national law. This also is true, but it does not follow that the lex mercatoria lacks normative force, merely that it is subordinate to higher norms, in much the same way as principles laid down by the courts may be affected by legislation. Third, it is contended that every international usage depends for its normative force on recognition by national law. To the extent that it consists of general principles of law common to States (or to relevant States, however these might be defined) this condition is met. More debatable is whether the usage has to be shown to have been received into national law. If by this is meant a particular national law then it necessarily predicates selection of a given legal system as the applicable law, for that is the national law that is relevant to the question. Since arbitrators do from time to time decide cases according to international trade usage without reference to a national law and have their awards upheld by courts it would be rather futile to deny the efficacy of awards made on this basis. Nor can we even say, conformably with arbitration practice, that international usage is necessarily to be found in a convergence of rules in different legal systems, for such usage can also be inferred from conventions which have not yet come into force or, if in force, have not yet been ratified by the relevant States.

(p. 39) It is everywhere admitted that the normative force of usage, whether domestic or international, depends on its satisfying certain essential criteria. But where do we look to find what these are? The usage itself cannot speak as to its own validity. There are no doubt some usages that are so broad in character and so universal of application that they would be recognised in any developed legal system, and would, indeed, be likely to have lost their distinctive status as trade usages and to have acquired the status of a general principle of law. But broad principles of this kind, such as pacta sunt servanda, are so hedged about with qualifications which vary from one legal system to another that they serve little purpose except as a device by which an arbitral tribunal can claim support for its conclusions without having to determine an applicable law. Outside these broad principles we cannot point to some universal law against which to measure the validity of a usage, for such a law does not exist; both the character of a trade usage and the conditions of its validity vary from jurisdiction to jurisdiction. How, then, can arbitral tribunals satisfy themselves that an international usage is valid without resorting to national law?

A short answer to this is that if the usage is truly international it cannot depend for its existence on any particular national law or decisions of any particular national court. That would be to localise and domesticate what is ex hypothesi international. But the admission of international usage as a determinant of rights is dependent on national law in a different sense in that (quite apart from mandatory rules and rules of public policy) the existence of international usage can be ruled upon only by a tribunal of competent jurisdiction—and in the case of an arbitral tribunal, jurisdiction is determined by the lex loci arbitri. It is everywhere the case that an award may be set aside where the arbitrators have exceeded their jurisdiction, and that is also a ground for refusing enforcement under the New York Convention. It is primarily the lex loci arbitri which controls the conditions in which arbitrators can make valid awards, within the limits set by those conditions, and in the absence of a choice of law by the parties, arbitrators can draw on whatever sources seem to them proper in order to determine the rights of the parties. Accordingly, the normative force of international trade usage depends not on what national law says about the usage but upon whether the power to decide on the existence and content of such usage has been exercised by a tribunal having competence under the lex loci arbitri and conforming with its procedural requirements. National laws, through their conferment of decision-making powers on arbitral tribunals, have delegated to them the power to decide whether the requisite criteria for recognising an international usage have been satisfied and for that purpose to draw on such materials as seem to them proper. As Professor Clive Schmitthtoff so perceptively observed many years ago: ‘… the new law merchant, as an autonomous legal regulation, is founded on the complementary interaction of party autonomy and arbitration’.

International conventions as evidence of usage

1.68  Arbitral tribunals sometimes look to international conventions as evidence of existing usage, a technique which enables them to give effect to a convention provision even when the convention as such is not applicable. The following extract examines the legitimacy of this approach.

Roy Goode, ‘Usage and Its Reception in Transnational Commercial Law’ (1997) 46 ICLQ 1, 7–18

The relationship of conventions to usages is as complex in transnational commercial law as it is in international law. A convention may be evidence of a usage, so as to allow its admission where the convention would not as such be applicable; it may operate concurrently with the usage; it may displace the usage; and it may create or evidence new usage through consistent adoption in cross-border commercial transactions or by non-contracting States. Further, if a convention is evidence of usage it may equally be the case that its non-adoption negates its significance as evidence of usage.

(p. 40) 1. International trade conventions as evidence of existing trade usage

An international trade convention may legitimately be relied on in given conditions as evidence of pre-existing usage, in the same way as an international treaty may be relied on as evidence of international customary law. It is a characteristic of conventions that they can never exhaustively determine the scope of their own application, which may be extended by contract, usage or acquiescence.

The crucial question is whether the convention does in fact reflect pre-existing usage or whether, on the contrary, it changes the usage. It has been pointed out by a number of writers that it is impossible for jus scriptum accurately to capture any unwritten law, if only because the scope of the latter is inherently uncertain and changeable and may also when reduced to writing, be found in some respects to be incomplete or unsatisfactory. The notion that ‘codifiers’ sit down faithfully to reproduce rules of customary law is pure mythology, particularly at the international level where there are likely to be significant differences between the rules of one legal system and those of another. When legal experts gather together to frame a convention or a set of uniform rules they will normally have the advantage of a report by the secretariat of the sponsoring international organisation setting out in broad terms the existing law and practice in selected jurisdictions. Each of the participating experts will bring to bear a knowledge of his or her own legal system and, understandably enough can be expected to test each proposed rule against the rules of that system to see whether it overlooks a problem or on the contrary, represents an improvement. But the drafters of the convention or uniform rules would make no progress at all if they conceived their task as being to assemble before them all the known rules and practices and strive to create an amalgam of them all. Even if such a task were feasible its product would negate any notion of mere reproduction of existing law, for necessarily the amalgam could be created only by changing in some degree the existing rules of its various constituents. In any event, that is simply not how the process of harmonisation works. What those involved in the project seek to achieve is best solutions to typical problems, being solutions which are not so far removed from existing practice as to make them unacceptable. Accordingly, change is inherent in any redaction of rules, whether written or unwritten. The resulting text will thus be a combination of rules that existed before, modifications of existing rules and entirely new rules.

How, then, is a court or arbitral tribunal to determine whether a convention or codification reproduces existing usage or changes it? If the usage has already been embodied in an earlier convention or codification the task is relatively easy, for all the tribunal has to do is to compare the two texts. But where the convention or codification is relied on as evidence of existing unwritten usage this resource is not available. If the alleged usage is disputed then unless it is of the near-universal kind of which judicial notice can be taken a national court is likely to require it to be established by evidence. Such evidence could take a variety of forms, of which the most compelling would be the travaux préparatoires and the rapporteur’s report. What is interesting is the readiness of some arbitral tribunals to assume, without any evidence whatsoever, that the best reflection of existing usage is the provisions of an international convention or codification.

A striking example of this is the award in an ICC arbitration, case no, 5713 of 1989.58 The seller of goods under a contract of sale made in 1979 brought arbitration proceedings to recover the balance of the price. The buyer claimed the right to set off loss suffered from the fact that the goods did not conform to the contract of sale. An issue arose as to whether the buyer had given notice of the lack of conformity in due time. The tribunal applied generally accepted conflict of laws rules to decide that the law governing the contract was that of the seller’s country. However, the applicable law as thus determined was considered by the tribunal to impose time requirements for the giving of notice of defects that were so short and specific as to run counter to generally accepted trade usages. The tribunal therefore declined to apply the law (p. 41) applicable under conflict of laws rules, and instead applied Articles 38 and 39 of the Vienna Sales Convention.

The Tribunal finds that there is no better source to determine the prevailing trade usages than the terms of the United Nations Convention on the International Sale of Goods of 11 April 1980; usually called ‘the Vienna Convention’. This is so even though neither [the country of the buyer] nor [the country of the seller] are parties to that Convention. If they were, the Convention might be applicable to this case as a matter of law and not only as reflecting the trade usages.

The Vienna Convention, which has been given effect to in 17 countries, may be fairly taken to reflect the generally recognized usages regarding the matter of the nonconformity of goods in international sales.

The tribunal went on to hold that the buyer had given notice of non-conformity within the time laid down by Articles 38 and 39, that in any event the seller was debarred by Article 40 from invoking the time limits laid down in those articles because he had known of the non-conformity and did not disclose it, and that accordingly the buyer was entitled to compensation which could be set off against the seller’s claim. It can reasonably be inferred from the rather truncated report of the award that under the applicable law the buyer would have been held to have given notice of non-conformity out of time.

What is surprising about the award is not that it extended the scope of the Convention beyond its own stated boundaries—for this can happen in a variety of ways, including treatment of the Convention as the embodiment of existing usage—but that it completely disregarded the applicable 1aw and, in doing so, assumed without discussion that the Vienna Sales Convention did in fact embody relevant trade usage. On the latter point there are at least four matters which should have given the tribunal pause for thought.

  1. (1)  When the contract was concluded (which is accepted as the point where rights and duties are established) the Vienna Convention not merely lacked the necessary number of ratifications to bring it into force, it had not even been made! All the more curious, then, that the tribunal indicated that the Convention could have applied directly if both parties had carried on business in contracting States.

  2. (2)  There was a convention in force at the time of the contract, namely, Vienna’s predecessor, the 1964 Uniform Law on International Sales. Why, then, did the tribunal not apply (or even refer to) ULIS? One can only speculate. Perhaps the tribunal considered that the ULIS rules on the time for examination were too rigid and would have left the buyer remediless. Another answer might be that by 1979, 15 years after it was made, ULIS had attracted only eight ratifications and one accession, compared with the 17 ratifications, etc, referred to in the award, and that a total of nine adopting States was not considered strong enough evidence of prevailing international trade usage. But if this is true of ULIS, then how much more so of a convention that was still only in draft at the time of the contract and might conceivably have proved as unsuccessful as ULIS.

  3. (3)  At the 1980 Diplomatic Conference there was protracted debate on what became Article 39 and was then Article 37, and two delegates on separate occasions made the point that the article in question was one of the most controversial in the entire Convention—hardly the strongest basis for treating the article as evidence of an internationally established usage! It is true that the UNCITRAL Commission text which came forward for consideration by the Diplomatic Conference and embodied what is now Article 39 could be given some weight as representing the views of the working group and the full UNCITRAL Commission, but why should it be accorded greater weight than the stricter provisions of a convention which had then already been in force for 14 years?

  4. (4)  International trade conventions are made by States, not by businessmen and accordingly are not formulated by the members of the community whose usages they are supposed to embody. Not uncommonly conventions fail to gain acceptance precisely because they do (p. 42) not reflect the practices or perceptions of the dominant commercial community. A good example is provided by the Hamburg Rules, which though technically operative have proved very much of a damp squib. Nowadays more determined efforts are made to consult business interests on a proposed international trade convention—indeed, their representative organisations may be involved in the preparatory work as observers—but the policy decisions and the drafting are undertaken almost entirely by lawyers, and it is primarily lawyers who will lead the representation of their governments at a diplomatic conference to conclude a convention.

Unfortunately there is no indication from the report of the award (which, as is customary, has been filleted to preserve the anonymity of the parties) as to whether any of the above arguments were placed before the tribunal or, indeed, whether there was any opportunity given, or any attempt made, to challenge the assumption that Article 39 of the Vienna Sales Convention reflected current usage at the time of the contract or, indeed, at the time of the making of the Convention.

There is a further problem to be considered. A purely dispositive provision of an international trade convention, even if accurately reflecting existing usage, may be displaced by subsequent usage. How can a tribunal be sure that the convention still reflects trade usage? No doubt there is a presumption in favour of continuing validity of a convention as evidence of usage but it should certainly be capable of being rebutted by evidence … 

Reliance on conventions as evidence of international trade usage is at once a virtue and a danger. As previously indicated, the effect may be to extend the scope of the convention well beyond its stated sphere of application. Reference has already been made to an arbitral award which applied Article 39 of the Vienna Sales Convention to a case where the Convention was not in existence at the time of the contract, and even at the time of the award many years later the Convention would not have been applicable on its own terms, since neither of the parties carried on business in a country that had become party to the Convention. Extensions of this kind may not trouble arbitrators; they are of much graver concern to national judges, for their effect may be to impose on a national court the duty to apply the provisions of a convention which its own State has declined to ratify. The same objection applies to the theory advanced by some scholars that parties may subject their contract to the terms of a convention not as a method of incorporation of contractual terms but as the choice of an applicable law under conflict of laws rules. There is no objection to the former, for the incorporated terms of the convention become subject to the mandatory rules of the applicable law in just the same way as any other contract terms, but strong objection to the latter, which if valid would give private parties the right to invoke the convention against the wishes of a non-ratifying State in which the dispute was tried. Again, however, it has been argued that while this is a valid argument as regards national judges it should have no application to arbitrators, who typically will not occupy any position of authority in or indeed have any connection with, the State where they sit.

Of course, it has to be recognised that courts and arbitral tribunals and the parties appearing before them are unlikely to have detailed knowledge of more than a very small number of legal systems and that they cannot be expected either to engage in a major comparative study or to expend huge effort in tracking the antecedents of conventions presented to them. In meeting the exigencies of dispute resolution they cannot be said to be acting unreasonably in assuming, in the absence of evidence or argument to the contrary, that a particular convention reflects pre-existing usage. But that is a matter of evidence and of onus of proof. The difficulty in using prior arbitral awards as precedents is that we know so little about the facts and arguments. Often the reports do not show even the date of the contract in dispute, though that may be highly relevant. The countries involved and the commercial background to the dispute will usually be omitted for reasons of confidentiality, and it can be difficult even to deduce the arguments advanced or to know to what extent the arbitral tribunal was relying on its own knowledge rather than on evidence.

(p. 43) General principles of law

1.69  Once a usage gains such general acceptance as to be applicable independently of a particular trade or locality, it becomes elevated into a general principle of law. Such principles can be identified without too much difficulty. In the same paper as that from which an extract was quoted earlier,59 Lord Justice Mustill identified 20 rules ‘as representing a tolerably complete account of the rules said to constitute the lex mercatoria’, including such general principles as pacta sunt servanda, rebus sic stantibus, performance of a contract in good faith, and the inability of a party to rely on failure of a condition precedent caused by its own non-performance. Since rules of this kind are to be found in most legal systems, it is usually unnecessary to invoke the lex mercatoria, as recourse to national law will suffice.

1.70  While general principles of law are undoubtedly a source of transnational commercial law, their relevance to the lex mercatoria as reflected in the usages of merchants is questionable. If there were such a thing as general principles of commercial law that would certainly qualify for inclusion in the lex mercatoria! But such principles are not to be found, which is why scholars almost invariably refer to general principles of law, not to general principles of commercial law. There is a strong argument for confining the lex mercatoria to international trade usage and treating general principles of law as a distinct source of law, in the same way that public international lawyers treat general principles of international law separately from customary international law. It is interesting to note that almost all the rules said to form part of the lex mercatoria are general principles of law common to most states and owe nothing to the spontaneous generation of rules and practices of the mercantile community, which are hardly to be found in the lists of lex mercatoria rules. Moreover, most such rules are not confined to international transactions but are equally applicable to domestic contracts, a number apply to contracts generally, not merely commercial contracts, and some are not dependent on a contractual relationship at all. One might add that attention has been devoted almost exclusively to trade transactions, whereas there is at least as much development in the world of international finance, through instruments such as the documentary credit, the standby credit, and the demand guarantee.

Berthold Goldman, ‘The Applicable Law: General Principles of Law—The Lex Mercatoria‎’ in Julian DM Lew (ed), Contemporary Problems in International Arbitration (Centre for Commercial Law Studies, Queen Mary College, London, 1986) 113–16*

There is a wide conception of the lex mercatoria, according to which it might be defined by the object of its constituent sources. Lex mercatoria would thus, irrespective of the origin and the nature of these sources, be the law proper to international economic relations. One would encompass not only transnational customary law, whether it is codified or not (and in the latter case revealed and clarified by arbitral awards), but also law of an interstate, or indeed state, which relates to international trade. Thus, for example, the successive Hague (1964) and Vienna (1980) Conventions (p. 44) Establishing Uniform Laws for the International Sale of Goods would be part of lex mercatoria. This would also be the case with respect to national legislation whose specific and exclusive object is international trade, such as that of the German Democratic Republic. The same applies to rules specific to international trade established by national case law, such as, for example, the French notions of the autonomy of the parties, the general validity of international arbitration agreements, and the capacity of the state and of public entities to bind themselves by such agreements. All this is considered as being well established by the 1981 French Law on International Arbitration, although the Law did not expressly incorporate these notions so as not to constrain the evolution of the case law.

This wide view has always been that of Clive Schmitthoff, and it may be compared to that of Philip Jessup in his classical work on ‘Transnational Law’. I will state at once that I do not share it. For it is obvious that the specific problems of transnational commercial custom (ie, is it a rule of law? does it constitute a transnational legal order, distinct from national legal systems as well as from the international legal order stricto sensu?), do not arise with respect to rules of inter-state or state origin. No one contests that the latter are rules of law, nor that they are part of the legal order of the states having adopted them. I note in this respect that this is clearly so even when the origin of these rules is solely to be found in case law, as is the case with the French rules I cited as examples. The criterion for determining the ambit of lex mercatoria that I would follow thus does not solely reside in the object of its constituent elements, but also in its origin and its customary, and thus spontaneous nature.

It should be noted, however, that like many boundaries, the one thus drawn does not escape controversy, or if I may say, ‘transboundary hypotheses’. Thus, the General Conditions of the United Nations Economic Commission for Europe (UNECE)—which are, in fact, Standard Contracts—have a transnational object, but were established under the auspices of an international organisation. Should they, for this latter reason, be eliminated from the domain of the lex mercatoria? One may oppose this, because they were prepared by the representatives of the concerned business sectors, whom the UNECE simply provided with logistical assistance and legal expertise, so that they are actually of professional and customary origin. Do they, however, have the status of customary law? It should be contended that the businessmen elevate them to this status only insofar as they refer to the standard contracts with such a degree of frequency that it might finally be concluded that such a reference is implicit. In fact, one meets this issue in more than one instance of the forming lex mercatoria.

A second ‘transboundary’, or at least open to discussion, hypothesis is the one where a specific rule of international trade, and in particular of international arbitration, is affirmed by a state court, without any reference to an international convention, or to a domestic statute, one may wonder whether such judicial decisions embody a rule pertaining merely to the legal system of the particular court, or rather a transnational unwritten principle or rule which the state court wishes to affirm and to apply.

At least provisionally, I would here conclude that the lex mercatoria comprises rules the object of which is mainly, if not exclusively, transnational, and the origin is customary and thus spontaneous, notwithstanding the possible intervention of interstate or state authorities in their elaboration and/or implementation.

Does the lex mercatoria, as tentatively defined according to its origin and nature, comprise both the usages of international trade which become customary rules, and general principles of transnational law? Furthermore, is it possible to draw a clear distinction between customary rules and general principles?

This is a difficult issue, if only because the general principles of law are themselves of double origin. There are, firstly, principles common to all, or to a large majority of national legal systems (such are the general principles mentioned as a source of international law by Article 36 of the Statute of the International Court of Justice); pacta sunt servanda is here the simplest, but not the only, example. Secondly, there are rules that are specific to international trade, insofar as they are not embodied in the majority of the national legal systems; an example could be here the obligation for the creditor (p. 45) to minimise the prejudice due to the non-performance by the debtor of his obligations. Indeed, while generally admitted in Common Law—as far as I know—such obligation is not clearly embodied in civil law (except, possibly, as implied in the general requirement of good faith).

Does this mean, at least, that the general principles of the first category are generated by the international societas mercatorum, or are specific to the international societas mercatorum? I do not think this first objection is decisive. Indeed (to take the example already mentioned), where a transnational contract is governed by the lex mercatoria, pacta sunt servanda is not referred to by the parties, nor by the arbitrators, as a principle taken from a particular national law, but as a principle dominating transnational law. The practical consequence is that the interpretation of this principle and its possible limitations (for instance, force majeure), which may differ from one national system to another, are themselves elaborated in the framework of the transnational law.

It might be more difficult to draw a clear distinction, in the framework of the lex mercatoria, between general principles and transnational customary rules. A good example is here the one of minimisation of damages: is the creditor’s obligation to minimise his loss based on a general principle of law, or on a transnational customary rule? I would personally be inclined to choose the second solution. Indeed, a general principle is not purported to govern just one particular situation; it is the source of more than one rule of law, applicable to several sets of facts. Thus, pacta sunt servanda generates not only the obligation of each party to a contract to fulfill its promises, but also the obligation to perform them in good faith, to compensate for the damage caused to the other party by their non-fulfillment, and not to terminate the contract unilaterally where such termination is not contractually or legally provided for. One could say that a general principle of law is engendering rules of law and dominates their interpretation, while a transnational customary rule (like any other rule of law) governs a specific situation of fact; and one could think that according to this distinction the obligation to minimise the prejudice is a customary rule, rather than a general principle.

It remains to be seen whether the distinction, if so drawn, is of some practical interest. The same could be found in the mandatory and even the public policy character of the general principles, or at least of some of them, as opposed to the ‘suppletory’ character of the customary rules (which would mean that the parties could depart from the latter, but not from the general principles). Such a distinction implies that there is a ‘public policy of the lex mercatoria’, which one author has recently denied, but which arbitral awards have effectively applied, in respect of the state’s capacity to conclude arbitral statements or in cases of bribery.

Whatever the case, the reading of court decisions or arbitral awards shows that when referring to transnational law, judges and arbitrators mention general principles as well as general usages of international trade, not taking very much care to distinguish clearly between them, as being two components of the lex mercatoria. Consequently, I shall here conclude that lex mercatoria is, at the least, a set of general principles and customary rules spontaneously referred to or elaborated in the framework of international trade, without reference to a particular national system of law.

Roy Goode, ‘Rule, Practice and Pragmatism in Transnational Commercial Law’ (2005) 54 ICLQ 539, 546–9

The idea of a new autonomous lex mercatoria, reviving the traditions of the mediaeval law merchant based on the practices of merchants and administered by powerful, largely independent, bodies such as the Italian Mercanzia, has gripped the imagination of modern scholars. It is not a new idea—the great Leone Levi published a draft international commercial law code as far back as 1863—but is much in vogue among scholars. Many years ago, at a conference on international commercial arbitration organised by the School of International Arbitration within the Centre for Commercial Law Studies at Queen Mary College, that remarkable French scholar Professor Berthold Goldman, sitting as a member of a distinguished group of panellists, commented: ‘I think that here, in London, it would not be prudent for me to speak of the lex mercatoria!’

Since Goldman was rightly considered one of the founding fathers of the subject, this was self-restraint of truly heroic proportions. Happily it did not last, and he went on to give a paper of crystal (p. 46) clarity on general principles of law and the lex mercatoria. The concept of the lex mercatoria, initially propounded by Fragistas, Goldstajn, Goldman and Schmitthoff, has been powerfully developed by modern scholars, in particular Filip De Ly, Ole Lando, Klaus Peter Berger and Emmanuel Gaillard, to name only a few. But what is the lex mercatoria? And is it truly autonomous?

A. The nature of the lex mercatoria

Unfortunately there is no agreement on what the lex mercatoria comprises. To some, it is merely another label for transnational commercial law and thus encompasses all kinds of harmonisation, formal and informal. To others, it is the product of so-called spontaneous international law-making through international trade usage as evidenced by rules of trade associations, standard-term contracts and general principles and rules and restatements formulated by international agencies. The lex mercatoria is propounded as a set of rules which can not only be applied by arbitrators after the event but selected as the applicable law in contracts.

My own preference is to confine the lex mercatoria to international trade practice. To equate the lex mercatoria with the entirety of transnational commercial law deprives us of a useful label to denote that part of transnational commercial law which derives from the international practice of merchants. To treat as part of the lex mercatoria standard-term contracts, codes of practice promulgated by international business organisations and even international conventions seems to me to confuse customary law, which is surely the essence of the lex mercatoria, with contract and treaty law, and to treat as a homogeneous mass things that are quite different in character. In a brilliant essay many years ago, Lord Justice Mustill (as he then was) pointed out that the lex mercatoria is not intentionally fashioned as an instrument of harmonisation; it simply exists as a product of spontaneous generation, whereas international conventions and standard-term international contracts have as their objective the harmonisation of rights, duties and practices. International conventions derive their force from the exercise of sovereign power through the process of ratification and thus form part of national law, not of some independent legal order. In principle, private law conventions, like private contracts, bind only those who become parties to them, in sharp contrast to customary law, which is more general in character. As to the utility of standard-term contracts as a source of law it would be helpful to be given some specifics of the rules to be extracted from such contracts so that we could form a judgment on whether they were sufficiently precise to be useful and how far they could be said to represent a generally adopted market approach.

Though a number of scholars claim that contracts create law, my view is that contracts cannot by themselves constitute a source of law; they have effect only by virtue of recognition by a national legal system. Clive Schmitthoff, who was one of the leading exponents of the modern lex mercatoria, is regularly invoked as a progenitor of the idea that there is an autonomous law of international trade created by spontaneous generation and owing nothing to national laws or sovereign powers, and that an important aspect of this was the international contract. What is often overlooked is that while Schmitthoff accepted that parties to international contracts were largely free to make their own law, his clearly stated view was that the parties enjoyed this power only by the will of sovereign states, alone or acting in concert, and was subject to important exceptions, for example, those based on public policy or overriding mandatory rules. It is true that Schmitthoff frequently referred to the autonomous law of international trade but it is clear that by that he meant only that, under the authority given by States, parties were free to subject themselves by contract to sources of law other than national laws and to organise their relations as they thought fit.

No contract can speak to its own validity and no legal system allows complete freedom to contracting parties, whose agreement is everywhere bounded by rules of public policy and mandatory rules. Accordingly, though a valid contract is undoubtedly a source of legal rights, every contract is required to satisfy certain external criteria of validity. Nor can the arbitration process elevate the status of contracts, as some have claimed, for it is everywhere accepted that unless otherwise agreed arbitrators must decide in accordance with legal rules. In Mann’s words, lex facit arbitrum.

What of general principles of law? Though it is common to treat the lex mercatoria as including general principles of law, and I myself used to follow this approach, it seems to me on further reflection that these principles—for example, pacta sunt servanda, the nemo dat rule and the duty to mitigate (p. 47) loss suffered from a breach of contract—are not particular to international trade or even to commercial contracts, are qualified by numerous exceptions and tell us nothing about the process of spontaneous lawmaking which is said to be the hallmark of the lex mercatoria. If we look at the lists of rules of the lex mercatoria propounded by modern scholars and remove from it general principles of law and we find that almost nothing is left, while on the other hand there is a conspicuous absence of references to important modern usages in relation to documentary credits, demand guarantees, and clearing and settlement systems for the transfer of funds and investment securities. Professor Jan Dalhuisen is one of the few scholars to draw attention to the fact that usages of the financial markets are every bit as important as usages of trade. It would be different if we had general principles of international trade law, but these are never mentioned, for what is to me the self-evident reason that they do not exist; we simply have usages of a particular trade or locality. So I would follow the international lawyers in treating general principles of law as a separate source, thus confining the lex mercatoria to international trade usage, which is surely the epitome of spontaneous law-creation.

B. Is the lex mercatoria autonomous?

The concept of autonomy means different things to different people. There is de facto autonomy in that for the most part the business community is left free to develop its own practices and give effect to them through its own rules, contracts and dispute resolution procedures. Since the legality of what is done and decided is not usually questioned we can say that as a practical matter the custom of merchants and the rules they formulate for the future conduct of transactions do operate as law within the business community, whether or not they have the force of law. I believe that the failure to distinguish lex mercatoria as law from its observance as a matter of practice accounts for much of the misunderstanding that exists between those who propound the existence of a lex mercatoria and those who deny it. As law the lex mercatoria consists of binding usage and depends in the last resort on recognition by national law. As observed practice the lex mercatoria is not dependent on external legal recognition at all, for it is not truly lex. It simply exists, and it is effective because business people in the relevant community perceive its observance as necessary to the fair and efficient conduct of business, so that the sanction for failure to follow the practice is not a legal sanction but opprobrium from fellow businessmen, their unwillingness to deal with the culprit and, in the last resort, expulsion from the relevant mercantile community. Lex mercatoria as practice is thus almost as potent as a true law, and this is why it has been described by some leading scholars as operating at the periphery of the legal process and as soft law but not weak law.

There is also de jure autonomy to the extent that merchants are left free by sovereign authority to make their own laws and settle their own disputes without regard to the ordinary laws of the land. But while the parties to a contract may to a large degree subject themselves to rules which do not depend on any particular national legal system, their autonomy is not absolute, since it is universally recognised that contracts must give way to internationally mandatory rules and lois de police. As Montesquieu pointed out long ago, in his great work De L’Esprit des Lois, it is necessary to distinguish freedom of contract from freedom of commerce:

The freedom of commerce is not power granted to the merchants to do what they please; this would be more properly its slavery. The constraint of the merchant is not the constraint of commerce … The English constrain the merchant, but it is in favour of commerce.

Questions

  1. 1.  What were the salient characteristics of the old law merchant and the methods and tribunals by which commercial disputes were resolved?

  2. 2.  Describe the typical commercial transactions and instruments developed by the old law merchant.

  3. 3.  What factors were responsible for the decline of the old law merchant?

  4. 4.  Why did states begin to develop rules for the conflict of laws (private international law)?

  5. 5.  ‘Contract is law.’ Discuss.

  6. (p. 48) 6.  How far is it true to say that rules of transnational commercial law can be identified by reference to sources that do not themselves constitute legally operative instruments?

  7. 7.  What is ‘the new law merchant’? In what sense can it be considered autonomous?

  8. 8.  The status of the lex mercatoria as an autonomous legal system appears to conflict with the principle that there cannot be a contract without law. Consider the passage from Professor Teubner’s paper,60 in which this dilemma is addressed. What is the external validating factor that, in Professor Teubner’s view, makes what would otherwise be a contrat sans loi binding? Do you consider this to be sufficient?

  9. 9.  Is usage law? How is usage established?

  10. 10.  What is the paradox in the concept of opinio juris? Can it be that the belief that something is legally binding is what makes it binding?

Further Reading

  • Basdow, Jürgen, ‘Uniform Private Law Conventions and the Private International Law of Contracts in Economic Perspective’ (2007) 12(4) Unif L Rev 697
  • Berger, Klaus Peter, The Creeping Codification of the New Lex Mercatoria (2nd edn, Kluwer, The Hague, 2010), 255 et seq.
  • Berger, Klaus Peter, Dubberstein, Holger, Lehmann, Sascha, and Petzold, Victoria, ‘The CENTRAL Enquiry on the Use of Transnational Law in International Contract Law and Arbitration—Background, Procedure and Selected Results’ in Berger, Klaus Peter (ed), The Practice of Transnational Law (Kluwer, The Hague, 2001) 91–113
  • Michaels, Ralf, ‘The True Lex Mercatoria: Law Beyond the State’ (2007) 14 Indiana Journal of Global Legal Studies 447
  • Procaccia, Uriel, ‘The Case Against lex mercatoria’ in Ziegel, Jacob S (ed), New Developments in International Commercial Law and Consumer Law: Proceedings of the 8th Biennial Conference of the International Academy of Commercial and Consumer Law (Hart Publishing, Oxford, 1998) 87–95

Footnotes:

1  Roy Goode, Commercial Law in the Next Millennium (Sweet & Maxwell, London, 1998) 8.

2  Ole Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747.

3  See: Mary Elizabeth Basile, Jane Fair Bestor, Daniel R Coquillette, and Charles Donahue Jr, Lex Mercatoria and Legal Pluralism: A Late Thirteenth-Century Treatise and Its Aftermath (The Ames Foundation, Cambridge (MA), 1998).

4  See below, paras 1.69–1.70.

5  It is also, of course, true that businessmen shape their contractual arrangements around the law in order to produce or avoid a particular legal result.

6  For a detailed account of the medieval bill of exchange see Benjamin Geva, The Payment Order of Antiquity and the Middle Ages: A Legal History (Hart Publishing, Oxford, 2011), ch 8.

7  Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1 (HL).

8  As was subsequently acknowledged by Lord Goff (who had not been a member of the panel hearing that case) in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL) 680. For a not unsympathetic approach to the decision, see: Ewan McKendrick, ‘Local Authorities and Swaps: Undermining the Market?’ in Ross Cranston (ed), Making Commercial Law: Essays in Honour of Roy Goode (Clarendon Press, Oxford, 1997) ch 8. The hardship imposed on third parties entering into an ultra vires transaction with a local authority in good faith was subsequently alleviated by the Local Government Act 1997 ss 5–7.

9  In particular Universalgeschichte des Handelsrecht and Handbuch des Handelrechts.

10  In the same work Professor Kozolchyk discusses in some detail (at 440 and following) the contrasting approaches of Thöl and Goldschmidt.

11  Ernst von Caemmerer, ‘The Influence of the Law of International Trade on the Development and Character of the Commercial Law in the Civil Law Countries’ in Clive M Schmitthoff (ed), The Sources of the Law of International Trade (Stevens, London, 1964) 90.

12  All of these are available on the EBRD’s website.

13  Discussed in Ch 14.

14  Wyndham A Bewes, Romance of the Law Merchant (Sweet & Maxwell, London, 1923) 50.

15  Commonly referred to in the abbreviated form Lex Mercatoria. A much fuller treatment of the law is to be found in the eighteenth century work by Wyndham Beawes, Lex Mercatoria Redivia: Or, The Merchant’s Directory (J Rivington, London, 1783).

16  Gerard Malynes, Consuetudo, vel Lex Mercatoria: or, The Ancient Law-Merchant (3rd edn printed by Thomas Basset et al, London, 1686, reprinted Professional Books, Abingdon, Oxon, 1981) Pt I, 2–3.

17  Which was to be tied and dunked in the ocean three times while held by a rope: Art 170.

18  For an example, see para 1.06.

19  Harold J Berman, Law and Revolution: the Formation of the Western Legal Tradition (Harvard U Press, Cambridge (MA), 1983) 341, 343.

20  See Emily Kadens, ‘The Myth of the Customary Law Merchant’, 90 Texas L Rev 1153 (2012) and literature there cited. See further below, paras 1.23–1.24.

21  John Baker, ‘The Law Merchant as a Source of English Law’ in William Swadling and Gareth Jones (eds), The Search for Principle: Essays in Honour of Lord Goff (OUP, Oxford, 1999) 79 at 96.

22  Malynes (n 16) Pt I, 2.

23  See Baker, above, n 21; Albrecht Cordes, ‘The Search for a Medieval Lex Mercatoria’, (2003) Oxford U Comp L Forum 5; Nicholas H D Foster, ‘Foundation Myth as Legal Formant: The Medieval Law Merchant and the New Lex Mercatoria’, Forum Historiae Iuris 2005, accessible at <http://www.forhistiur.de/zitat/0503foster.htm>.

24  Above, n 20.

25  ‘Theorizing Transnational Commercial Law’ (2006–2007) 42 Tex Int’l LJ 597, 602.

26  Professor Zimmermann records that ‘on the eve of the enactment of the BGB, the front page of the Deutsche Juristenzeitung was graced by a large heading “Ein Volk, Ein Reich, Ein Recht” (One People, One Empire, One Law)’. See: Reinhard Zimmermann, ‘Civil Code and Civil Law: The “Europeanization” of Private Law within the European Community and the Re-emergence of a European Legal Science’ (1995) 1 CJEL 63, 65.

27  HC Gutteridge, Comparative Law (2nd edn, CUP, Cambridge, 1949) 146.

28  Toshiyuki Kono and Kazuaki Kagami, ‘Is a Uniform Law Always Preferable to Private International Law?’ (2013) 56 Japanese Yearbook of International Law 314.

29  See paras 19.35 ff.

30  See para 19.34.

31  However, the translation costs are considerable and the European Commission is increasingly endeavouring to operate in the three core EU languages, English, French, and German.

32  We return to this rather complex topic later. See below, paras 1.64 ff.

33  See para 1.63.

34  See paras 2.28 et seq.

35  A thesis previously developed by Professor Gaillard in ‘Thirty Years of Lex Mercatoria: Towards the Selective Application of Transnational Rules’ (1995) 10 ICSID Review—FILJ 208.

36  Das Recht der Allgemeinen Geschäftsbedingungen (1935), 63 (transl Berger).

37  Vienna Convention on the Law of Treaties 1969 Art 53.

38  It does not, of course, follow that a tribunal empowered to decide ex aequo et bono is thereby precluded from reliance on legal norms; indeed, it may consider its role to be to take a legal rule as its starting point but temper its rigour by reference to considerations of equity and fairness as appropriate. See: Klaus Peter Berger, The Creeping Codification of the New Lex Mercatoria (2nd edn, Wolters Kluwer, The Hague, 2010) 76 et seq; Emmanuel Gaillard and John Savage (ed), Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer, The Hague, 1999) [1506].

39  Above, n 38 at 147.

40  A good example is the Grain and Feed Trade Association (GAFTA), which has issued some 80 standard forms of contract. See <http://www.gafta.com/index.php?page=contracts>.

41  The Fédération Internationale des Ingénieurs-Conseils.

42  Paras 1.63 ff.

43  See para 1.69.

44  Paras 1.61, 5.14, 16.04 ff.

45  Prepared by a UNIDROIT group under the chairmanship of Professor Joachim Bonell and issued with the imprimatur of UNIDROIT. See ch 16.

46  Produced by the Commission on European Contract Law chaired by Professor Ole Lando.

47  Principles, Definitions and Model Rules of European Private Law (ed Christian von Bar, Eric Clive, and Hans Schulte-Nölke, Sellier, Munich, 2009).

48  See para 8.13 and Gerhard Danneman and Stefan Vogenauer (eds), The Common European Sales Law in Context (OUP, Oxford, 2013).

49  See further ch 16.

50  Michael Byers, Custom, Power and the Power of Rules: International Relations and Customary International Law (CUP, Cambridge, 1999) 189.

51  For a detailed discussion of the various theories relating to the lex mercatoria, see Filip de Ly, International Business Law and Lex Mercatoria (TMC Asser Instituut, The Hague, 1992) ch 4.

52  See below.

53  See paras 3.23–3.24 and below, paras 1.65 ff, as to this parallelism and the extent to which literature on the relationship between customary international law and treaty law may be of assistance in analysing the relationship between international trade usage and conventions.

54  General Reinsurance Corp v Forsakringsaktiebolaget Fennia Patria [1983] QB 856 (CA) 874 (Slade LJ).

55  [1989] QB 728.

56  See also para 3.26.

57  The discussion that follows applies equally to the usages of the financial markets and ‘trade usage’ should be understood in this sense.

58  Summarized in (1990) XX ICC Yearbook of Commercial Arbitration (Kluwer, Deventer, 1990) 70; Sigvard Jarvin et al, Collection of ICC Arbitral Awards: 1991–1995 (Kluwer, Boston, 1990) vol II, 223.

59  ‘The New Lex Mercatoria’, above, para 1.53 at 174–7.

*  This paper was delivered at the 1985 inaugural conference of the School of International Arbitration, Centre for Commercial Law Studies, Queen Mary, University of London. It was originally published in Julian DM Lew (ed), Contemporary Problems in International Arbitration (jointly published by Centre for Commercial Law Studies, Queen Mary, University of London and Kluwer Law International, The Hague, 1986) pp 113–116. © 1986 Kluwer Law International/CCLS. Reprinted with kind permission. All Rights Reserved.

60  Above, para 1.48.