View source for Lex Mercatoria

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by ''[[Phillip Hellwege]]''

== 1. The problem ==

The existence of international trade usages is unquestionable. What is a matter of controversy is their legal nature. Are they part of a ''lex mercatoria'' as an autonomous legal order? Are parties able to choose the ''lex mercatoria'' as applicable law? Do courts have to apply it even in the absence of such choice? Or do phenomena such as this only have a bearing within an applicable national law? Do they count as contract terms if they are recognized as such by the applicable national law? Are they trade practices which will be observed if the applicable national law calls for their observation? Are they customary law if the applicable national law holds them to be so? These questions have been discussed for decades. The body of literature which this controversy has provoked is immense. It examines the ''lex mercatoria'' from different perspectives—practical and academic—and analyses it in different contexts such as law and economics, conflict of laws, arbitration, legal sociology, legal theory, the denationalization of law and private rule-making. Finally, the discussion also has an historical dimension.

== 2. The medieval law merchant ==

The proponents of a modern ''lex mercatoria'' claim that a ''lex mercatoria'' already existed during the Middle Ages. With respect to this historical predecessor the English literature speaks of a ‘law merchant’. Supporters of the modern ''lex mercatoria'' aver that it, too, was an autonomous legal order, the source of which were trade customs. It is said to have had a procedural side: the proceedings were tailored to the needs of the merchants; litigation before commercial courts was quicker compared to that before state courts; cases were heard by both local and foreign merchants; and the law of evidence was adapted. In addition, there is said to have been a substantive side to the law merchant: maritime law, for example, is said to be a product of this substantive strand. Modern historical research, however, is critical. If the law merchant was based on privileges granted to merchants then one can hardly call it an autonomous legal order. And today’s dichotomy of state law and law independent of the state is inappropriate for the plurality of legal sources during the Middle Ages. All in all, modern historical research stresses that much work still needs to be done: the history of most areas of commercial law is as yet unexplored.

== 3. The modern ''lex mercatoria'' ==

=== a) Arguments for the existence of an autonomous ''lex mercatoria'' ===

The proponents of a ''lex mercatoria'' argue that the application of national laws to international trade is unsuitable. The divergent national systems of conflict of laws create uncertainty: for those engaged in international trade it is hard to ascertain the applicable law. Furthermore, it is inappropriate to expose international trade to the substantive national laws as many of them include, for example, limits on [[Freedom of Contract|freedom of contract]] even for business-to-business (b2b) transactions. An autonomous ''lex mercatoria'' is better positioned to meet the desire of those involved in international trade for more private autonomy. The hopes that legal unification by legislative means could remedy these problems have not been fulfilled: it is time-intensive, it lags behind the requirements of trade, national interests play a bigger role than the needs of the business community in its creation, and its products are inflexible.

Those in favour of a ''lex mercatoria'' do not only analyse the problems arising from applying national laws to international trade, and from legal unification. They also observe the ever growing multitude of standard forms, standard contract terms, customs and usages of international trade. These phenomena, they say, may be looked upon as an expression of a ''lex mercatoria''. Those engaged in international trade thereby take it upon themselves to solve the problems they encounter. As a consequence the proponents of a ''lex mercatoria'' call for what they think to be an empirical approach: the existing practices need to be collected and systematized. Only then may one begin to assess whether it is justified to speak of a ''lex mercatoria'' as an autonomous legal order.

Moreover, law and economics asserts that self-regulation of international trade is more efficient than regulation by the state. Finally, those involved in international arbitration point to arbitral awards that are, already today, based on the ''lex mercatoria'': they refer to the possibilities of a-national arbitration, of arbitral awards ''ex aequo et bono'', and of an arbitrator deciding as ''amiable compositeur''. If an arbitrator can decide ''ex aequo et bono'', then he should also be able to rely on a ''lex mercatoria''.

=== b) What is part of an autonomous ''lex mercatoria''? What are its sources? ===

The reasons for accepting an autonomous ''lex mercatoria'' are manifold. Equally diverse are the opinions on what counts as ''lex mercatoria'' and what its sources are. If one looks upon it as a product of self-regulation, then it would ''prima facie'' be customary law. Its sources would be practices, standard forms and standard terms. Empirical studies, as advocated by many, could only capture the ''lex mercatoria ''by way of example and as a static snap-shot: it would be sectoral and locally divergent, and it would change over time. One would need to work out internationally accepted requirements for such international customary law coming into existence. Certainly not every practice, standard form or standard term could count as customary law. Yet, one rule of the ''lex mercatoria'' seems to be that parties are bound by trade usages ([[Sale of Goods, International (Uniform Law)|sale of goods, international (uniform law)]], [[Principles of European Contract Law (PECL)]], [[UNIDROIT]] Principles of International Commercial Contracts (PICC)). A ''lex mercatoria'' as customary law could thus function as a framework for applying those practices which do not yet qualify as customary law but which count already as trade usage. And practices, forms and terms which have neither culminated in customary law nor in trade usages could accordingly be effective, within this framework, as contractual terms.

Many proponents of a ''lex mercatoria'', however, go beyond such an approach. They call usages, standard forms and standard terms sources of a ''lex mercatoria'' without distinguishing between customary law, trade usages and contract terms. Moreover, many also name [[Uniform Law|uniform law]] as a source of a ''lex mercatoria''. Uniform law, however, is not the product of a self-regulation of international trade. It is state law enacted for international trade. One would need to prove that the uniform law drew from trade usages in order for it to count as an expression of them. Or one would need to show that trade usages have absorbed uniform law. Such proof will only be successful for some sectors. The CISG, for example, does not play the same role in all branches of trade.

The [[Principles of European Contract Law (PECL)|PECL]] and [[UNIDROIT Principles of International Commercial Contracts (PICC)|UNIDROIT PICC]] are also looked upon as being part of the ''lex mercatoria''. And both call for their application ‘when the parties […] have agreed that their contract is to be governed by […] the “lex mercatoria”’ (PECL). However, the authors of the PECL and UNIDROIT PICC did not draw from trade usages. They adopted instead a comparative approach. They did not want to restate trade customs but rather state an ideal legal order for international trade. Again, this does not mean that some rules of the PECL and UNIDROIT PICC, on the one hand, and the ''lex mercatoria'', on the other do not correspond with each other or that the former may not in the future shape the latter. However, once more there will be sectoral differences.

Arbitral awards are regarded as another source of the ''lex mercatoria''. The ''trans-lex'' database of the Center for Transnational Law (Central) in Cologne is largely based on such awards. Central holds ''trans-lex'' out as a [[Codification|codification]] of the ''lex mercatoria''. If one understands the ''lex mercatoria'' as a product of the trade’s self-regulation, it is of no concern that such awards are not decreed by the trade but by arbitrators and, thus, often by lawyers. This merely points to the insight that ‘alles “Gewohnheitsrecht” in Wahrheit Juristenrecht … ist’ (all customary law is in truth made by lawyers: Max Weber). Yet again, arbitral awards and the ''trans-lex'' database only give evidence of a corresponding rule of the ''lex mercatoria''. And they do not provide information about sectoral or local differences.

Furthermore, those [[General Principles of Law|general principles of law]] which are common to all legal systems or to the legal systems of those countries with which a contract is connected are also taken to belong to the ''lex mercatoria''. Once again, such principles are not the product of the trade’s self-regulation. And even within individual sectors the relevant general principles of law and, hence, the ''lex mercatoria'' would differ depending on the countries with which a given contract is connected.

It is uncontested among its proponents that the ''lex mercatoria'' not only comprises substantive law but also procedural rules such as those relating to arbitration. The latter are called ''lex mercatoria arbitralis'', the former ''lex mercatoria materialis''.

Finally, some authors believe that the ''lex mercatoria'' is not a single ascertainable set of rules, but rather a method. An arbitral award that is based on such a method can count as an expression of the ''lex mercatoria''. If the parties have decided that their contract should be governed by international trade customs or by general principles of law and if such customs or principles cannot be ascertained, then the arbitrator may choose a solution that is just and equitable: ‘This judicial process, which is partly an application of legal rules and partly a selective and creative process, is … called application of the ''lex mercatoria''’ (Ole Lando).

In summary, the proponents of a ''lex mercatoria'' as an autonomous legal order follow very different concepts. The controversy surrounding the existence of the ''lex mercatoria'' would gain clarity if the proponents of a ''lex mercatoria'' spelt out more clearly which concept they follow and why they do so.

=== c) Arguments against the existence of an autonomous ''lex mercatoria'' ===

The critics of a ''lex mercatoria'' do not deny the existence of standard forms and terms, usages, customs and principles of international trade. They dispute, however, that these are an expression of ''lex mercatoria'' as an autonomous legal order. They question the analysis of the problems involving the application of national laws as it is developed by the proponents of the ''lex mercatoria'': if the parties think it hard to ascertain the applicable law, they may choose it themselves; that many national laws entail limits on [[Freedom of Contract|freedom of contract]] also for b2b transactions is not a problem specific to international trade. And the critics doubt that only the application of an autonomous ''lex mercatoria'' can provide efficient solutions. Moreover, they argue that the observation of the ever growing multitude of standard forms and terms, customs and usages is of little value. Further empirical studies will not help to clarify the legal nature of these phenomena of international trade. The fact that arbitrators do, already today, base their awards on the ''lex mercatoria'' may simply be an expression of mistaken reasoning.

The critics also point to defects in the quality of what is called ''lex mercatoria''. The concept is too vague with the result that a respective choice of law would be invalid. Equally, the [[General Principles of Law|general principles of law]] that are supposedly part of the ''lex mercatoria'', such as the principle of ''pacta sunt servanda'', are too vague. The uncertainty that is said to be created by the application of the different national systems of private international law will only be exchanged for the uncertainty in the application of a ''lex mercatoria''. Furthermore, the ''lex mercatoria'' is lacking a systematic order, and its incompleteness will make it necessary to fall back onto some national law. However, this last point might be outdated: if one looks upon the UNIDROIT PICC and the PECL as belonging to the ''lex mercatoria'', then they could function as a legal framework which makes it unnecessary to fall back onto any national law. Yet what remains is the problem of legitimacy: how is it possible to classify products of private rule-making such as the PECL and the UNIDROIT PICC as sources of law? With regard to the customs, standard forms and standard terms of international trade, there is in addition a problem of justice: these sources of a ''lex mercatoria'' may be based on an inequality of bargaining power. The proponents of an autonomous ''lex mercatoria'' have not as yet formulated a principle that is able to disregard rules which are based on such an abuse of bargaining power.

As a consequence the critics contend that a ''lex mercatoria'' as autonomous legal order does not exist. At most it is possible to speak of law in a sociological sense.

=== d) The practical importance of the controversy ===

The practical importance of ''lex mercatoria''’s legal classification varies across the different legal systems. According to the Rome&nbsp;I Regulation (Reg 593/2008) parties to a contract cannot choose a non-state body of law as the applicable law since the regulation did not ultimately adopt Art&nbsp;3(2) of the proposal as presented by the Commission (COM(2005) 650 final). According to this proposal the parties were able to ‘choose as the applicable law the principles and rules of the substantive law of contract recognised internationally or in the Community’. This primarily aimed at the PECL and the UNIDROIT PICC. However, even under this proposal the parties would not have been able to choose the ''lex mercatoria'' as the applicable law. Nevertheless, a German court will not disregard the phenomena of international trade which according to many are part of a ''lex mercatoria''. It would qualify them as contract terms, trade usages or, in rare cases, even as customary law. And it would apply them as such within the framework of the national legal system. If they were to qualify as [[Standard Contract Terms|standard contract terms]], the court would subject them to a fairness control. And it would disregard them if they contradict mandatory rules of the forum ([[Mandatory Law (Fundamental Regulatory Principles)|mandatory law]]). If, however, a choice of a ''lex mercatoria'' as the applicable law were possible, a German court would only apply mandatory state-law provisions when the requirements of Art&nbsp;3(3), (4) or Art&nbsp;9 Rome&nbsp;I Regulation were met.

In contrast, in arbitration the choice of the ''lex mercatoria'' as the applicable law will in many jurisdictions be recognized (Art&nbsp;28 UNCITRAL Model Law on International Commercial Arbitration; §&nbsp;1051 ZPO). The only matter of controversy is whether an arbitrator may apply the ''lex mercatoria'' even if an explicit choice is lacking.

=== e) A way out? ===

A settlement of the controversy between the proponents and opponents of the ''lex mercatoria'' as an autonomous legal order is not in sight. Law and economics is not in agreement about the most efficient solution. Legal pluralism has raised more questions than it has answered. Legal history has not yet produced any reliable findings. Those following a traditional theory of legal sources will reject empirical and socio-economic insights, the findings of legal sociology, and the pragmatism of those who simply collect the rules and principles of the ''lex mercatoria'', as unfit for providing an answer to the question of the legal nature of what is called a ''lex mercatoria''. However, those who argue on the basis of the traditional theory of legal sources have not yet explained why it is appropriate to apply this theory to genuine international phenomena given that there is not one internationally accepted theory of legal sources and that the prevailing theories are, moreover, moulded by national legal thinking. And those who argue that the traditional (national) theories of legal sources have become less important in a globalized world have not yet offered anything in their stead.

Since the 1990s the discussion has been put into two broader contexts, that of a denationalization of law as a consequence of globalization, and that of private rule-making. Examples of private rule-making can also be found in sports law with the rules of international sport associations (''lex sportiva''), in corporate law with its codes of [[Corporate Governance|corporate governance]], and in the context of the internet. Whether these broadened perspectives will help to answer the question at the heart of the controversy—is the ''lex mercatoria'' an autonomous legal order?—is not yet possible to say.

Recently, Nils Jansen and Ralf Michaels gave the discussion a promising new impulse. They worked out a number of problems which underlie the controversy. The questions of whether the ''lex mercatoria'' is law can only be answered if one is in agreement about the concepts of state and of law. However, the proponents and opponents in the debate are using, as Jansen and Michaels have pointed out, quite different concepts which are moulded by their (national) backgrounds. The question of whether the ''lex mercatoria'' is autonomous law can only be answered after one has clarified the concept of state and the consequences of the different (national) concepts for the relationship between the state and the law. Finally, the concept of autonomy has not yet been adequately illuminated from a comparative perspective.

==Literature==
Ursula Stein, ''Lex Mercatoria'' (1995); Gunther Teubner (ed), ''Global Law Without a State'' (1997); Klaus Peter Berger, ''The Creeping Codification of the Lex Mercatoria'' (1999); Klaus Peter Berger (ed), ''The Practice of Transnational Law'' (2001); ‘The Empirical and Theoretical Underpinnings of the Law Merchant’ (2004) 5 Chicago Journal of International Law'' ''1–190 with contributions by Richard A Epstein, Charles Donahue Jr, Emily Kadens, Celia Wasserstein Fassberg, Mark D Rosen, Roger B Myerson, Avner Greif, Avinash Dixit, Clayton P Gillette and Avery Wiener Katz; Vito Piergiovanni (ed), ''From Lex Mercatoria to Commercial Law'' (2005); Ralf Michaels and Nils Jansen, ‘Private Law Beyond the State?’ (2006) 54 Am&nbsp;J&nbsp;Comp&nbsp;Law 843; Jürgen Basedow, ‘Lex Mercatoria and the Private International Law of Contracts in Economic Perspective’ [2007] Uniform Law Review 697; Karsten Schmidt, ‘Lex mercatoria: Allheilmittel? Rätsel? Chimäre?’ in Junichi Murakami, Hans-Peter Marutschke and Karl Riesenhuber (eds), ''Globalisierung und Recht'' (2007) 153; Roy Goode, Herbert Kronke, Ewan McKendrick and Jeffrey Wool, ''Transnational Commercial Law'' (2007) 3&nbsp;ff; Reinhard Zimmermann (ed), ''Nichtstaatliches Privatrecht'' (2008); Nils Jansen and Ralf Michaels (eds), ''Beyond the State—Rethinking Private Law'' (2008).</div>


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