Theory of the Lex Mercatoria

Lex mercatoria is the Latin expression for a body of trading principles used by merchants throughout Europe in the medieval. Literally, it means “merchant law”. It evolved as a system of custom and practice, which was enforced through a system of merchant courts along the main trade routes. It functioned as the international law of commerce. It emphasized contractual freedom, alienability of property, while shunning legal technicalities and deciding cases ex aequo et bono.

History of Lex Mercatoria

The notion of lex mercatoria is not new. Some say that it has its precursor in the Roman ius gentium, the body of law that regulated the economic relations between foreigners and Roman citizens. Others go further back in time and trace the origins of the lex mercatoria in the Ancient Egypt or in the Greek and Phoenician sea trade of the Old Ages. In any case, it is in the Law Merchant of the Middle Ages where the historical roots of the lex mercatoria can truly be found. The flourishing of international economic relations in Western Europe at the beginning of the 11th century caused the formation of the ‘Law Merchant’, a cosmopolitan mercantile law based upon customs and applied to cross-border disputes by the market tribunals of the various European trade centers. This law resulted from the effort of the medieval trade community to overcome the obsolete rules of feudal and Roman law which could not respond to the needs of the new international commerce. Merchants created a superior law, which constituted a solid legal basis for the great expansion of commerce in the Middle Ages. For almost 800 years, uniform rules of law, those of the law merchant were applied throughout Western Europe among traders.

Many of the laws of the lex mercatoria were established to evade inconvenient rules of common law. An example in this regard is that a man could not give what he himself has not. In other words, a man who has no title to goods cannot give title. Hence, when a person buys an object, for him to be sure that he is the rightful owner of the title, he had to enquire into the title of that thing back to its remote possessors, to make sure that no one in the chain of title had obtained it by fraud. However, as per the laws of lex mercatoria, commercial business “cannot be carried on if we have to enquire into the title of everybody who comes to us with the documents of title.” The Law merchant established certain documents or choses in action which were transferable by delivery and endorsement or by delivery so that the holder could sue in his own name and which passed good title to the transferee who took them in good faith, notwithstanding the transferor had no title. They could be sued on by their holder in his own name and were not affected by previous lack of title. This instrument was the original negotiable instrument. Hence, it can be rightly said that the law of negotiable instruments is founded mostly upon the laws of lex mercatoria.

With the rise of nationalism and the codification period of the 19th century the ‘law merchant’ was incorporated into the municipal laws of each country. These laws blended with the national laws and thus lost its uniform character. When the states took over International trade, the new mercantile laws were applied to regulate international relations.

However, the development of international trade after World War II showed some of the defects of the traditional regulation of international contracts. The complexity of the private international law and obsolete character of domestic laws did not rectify these flaws. The supremacy of national law in international economic relations began to be questioned. It was then the present traders started adopting alternative solutions to avoid the application of national law to their transactions. By means of standard clauses, self-regulatory contracts, trade usages and by recourse to international commercial arbitration, traders were creating their own regulatory framework independently from national law, which can be called the new lex mercatoria.

Sources of the Lex Mercatoria

The lex mercatoria can be defined as a body of principles which is different in its origin and content, created by traders to serve the requisites of international trade. There are many concepts of lex mercatoria as it has been discussed by many thinkers dealing with the subject.

When relating lex mercatoria with national law, there are 2 views that are prevalent, i.e., the autonomist and positivist concepts. As per the autonomous concept, lex mercatoria is having an autonomous character, independent from any national system of law. Hence, it can be rightly said that it is a set of general principles, and customary rules spontaneously referred to or elaborated in the framework of international trade, without reference to any particular national system of law. The positivist concept regards lex mercatoria as a body of rules, transnational in their origin, but which exists by virtue of state laws, which give them effect. For the supporters of this view, lex mercatoria is ultimately founded on national law.

With regard to its substantive quality, there are three main concepts of lex mercatoria. The first one views lex mercatoria as an autonomous legal order. The second one conceives it as a body of rules capable of operating as an alternative to an otherwise applicable national law. The last concept characterizes lex mercatoria as a conglomerate of usages and expectations in international trade, which may complement the otherwise applicable law.

The concept of lex mercatoria is usually linked with other concepts, which may be similar or alternative. Some thinkers refer to transnational law as a synonym of the lex mercatoria. Transnational law, however, is a very wide subject which is composed of all law regulating transboundaries actions or events, including private and public international law and other rules not fitting into those categories. The lex mercatoria is a much narrower concept which is used to indicate that part of transnational law which is unwritten.

The Theory of Lex mercatoria

It could be said that the theory of lex mercatoria is highly controversial. Some authors even deny its existence. Those who are against the concept of lex mercatoria are of the view that it lacks generality and predictability and that it is vague and incomplete. According to them, lex mercatoria lacks generality due to the existing diversity of standard contracts and trade usages. Therefore, each standard contract and trade usages reflects the sense of justice of the different trades or professions, being too diverse to constitute a homogeneous legal source.

Similarly, the solutions reached by arbitrators in the application and possibly, in the creation of lex mercatoria only concern the current dispute, not being extrapolable to the generality of international trade. Few awards are published, making the outcome of future disputes difficult to predict. Hence, businessmen and arbitrators are not able to refer precedents for guidance, and arbitrators cannot be expected to apply customary law principles consistently. The lex mercatoria is furthermore accused of being vague and incomplete. Claims have been made that there are very few general principles of trade law that can be universally recognized; those very few are so basic and fundamental as to be useless. Even the proponents of the concept of lex mercatoria have agreed that it is incomplete. Lex mercatoria does not provide an answer for legal issues such as validity, capacity, or contract form. Anyway, the major obstacle to the theory of the lex mercatoria is its lack of binding force. It falls within the traditional definition of law. It does not result from the command of the sovereign as it has not been enacted by a parliament or endorsed in an international convention. However, many have argued from the point of legal pluralism that the lex mercatoria belongs to the domain of law. The concept of law largely departs from the notion of sanction and social organizations and is capable of producing its own rules. Some have objected to this position claiming that legal rules have an obligatory nature. The rules enacted by the legislator have an intrinsic binding force, whereas customary rules require opinio iuris, the feeling to be bound. This does not happen in the case of the purported rules of the lex mercatoria. Trade usages are a product of party autonomy; they are contractual practices generally observed and used as a proof of the will of the parties. The latter may therefore exclude their application by an express stipulation of the contract. Those in support of lex mercatoria have counter-attacked such a statement by noting that societas mercatorium has mechanisms of coercion to obtain compliance with its rules such as black lists, damage to commercial reputation or withdrawal from trade associations’ members’ rights. This result in the merchants actually feeling bound to observe the rules of the lex mercatoria.

Finally, it has to be noted that even if some of the elements may be described as legal rules, the lex mercatoria does not have the quality of a legal system. The societas mercatorium cannot present its convictions and notions in a systematic order, as there is not a single international community of merchants but a plurality instead. At the most, there are only principia mercatoria.

Application of Lex mercatoria in the Field of International Commercial Arbitration

As mentioned earlier, there has always been disagreement surrounding the application of national laws, primarily directed at domestic transactions to transnational contracts. It is highly desirable to apply international commercial laws to govern the international trade. On its application, not only would an appropriate body of law developed for international transactions be applied but the complicated process of selecting laws such as through conflict of laws would disappear. However, this argument can be valid only when one presupposes that there is a body of international commercial law, that there is lex mercatoria, which is developed and capable of being applied to international trade transactions.

However, it has to be said that there is no legislature which drafts international commercial laws and there is not an international commercial court which is capable of developing a precedent for international commercial transactions. The opponents of the concept of lex mercatoria is of the view that lex mercatoria is not law in this regard. However, the proponents argue that it is law and can provide legal principles to govern international commercial transactions. They point to some international legislation in the form of conventions and model laws drafted by bodies such as United Nations Commission on International Trade Law. Moreover, while there is no international commercial court, there has developed an extensive system of international commercial arbitration and a number of arbitral awards are now published. Let us examine whether these can form a sufficient basis of a lex mercatoria.

Arbitration is the preferred method of dispute resolution in international transactions. A set of rules is always necessary to govern the resolution of a conflict. The parties’ national laws will not always serve the individual interests and needs of that particular contract well. Hence, it would be a whole lot easier to apply international rules that can be applied for both the nations, namely the general principles of international trade law or the general usages of a particular trade. These internationally accepted principles of law governing contractual relations are called lex mercatoria.

Applying lex mercatoria to settle international trade disputes has a lot of advantages. By applying lex mercatoria, the parties avoid rules which are unfit for international contracts such as peculiar formalities, brief cut-off periods and special difficulties created by national laws. In addition to that, neither of the parties will have the advantage of having the dispute governed by his own law. Moreover, since one of the major rules is the principle of good faith, lex mercatoria neither leads to arbitrary results nor does it favor the wealthy.

The question remains when lex mercatoria can be applied in a dispute. The parties’ autonomy plays a very important role in international commercial arbitration. They are free to decide which national law should be applied, to exclude all national laws and to authorize the arbitrators to base their decision on lex mercatoria. It is possible for the arbitrators to apply lex mercatoria when no law has been chosen by the parties. The failure on the part of the parties in indicating a choice would mean that they did not wish to have their contract governed by any of their national law. However, it cannot be said deduced from the absence of such a choice that the parties have impliedly chosen lex mercatoria to be the law governing the dispute. It has to be noted that lex mercatoria is applicable only as a subsidiary law in cases where no national law has been chosen and seems apt.

In most cases where no national law has been mentioned by the parties in the arbitration clause, they rarely mention lex mercatoria. They usually refer to the general principles of law, the usages of international trade, transnational law and the like. By wording their contract this way, they authorize the arbitral tribunal to apply lex mercatoria. This can be seen in the decision in Petroleum Development Ltd. v. Sheik of Abu Dhabi [1] . The opponents of lex mercatoria argue that if the parties wish to have their contract governed by lex mercatoria, they should have an explicit choice of law clause in the contract.

At this point, let us look into the differences between lex mercatoria and amiable compositeur. By choosing lex mercatoria to be the law governing the conflict, the arbitrator is obliged to observe the mandatory rules. By choosing amiable compositeur, the arbitrator can base his decision on equitable principles and is freed from any law. This distinction has to be clarified because there have been many arbitral awards in which the arbitrators who are called on to act as amiables compositeurs apply the lex mercatoria. This is because the amiable composition clause has been given a very wide interpretation so as to include lex mercatoria. The insertion of an amiable composition clause into a contract gives the arbitrator great freedom. He can base his decision on his personal convictions. Consequently, if he considers transnational law or lex mercatoria to be applicable to the dispute or to serve the parties’ interests, he is free to apply it. Hence, it can be rightly said that the insertion of an amiable composition clause into a contract logically empowers the arbitrator to apply lex mercatoria. If, on the other hand, the parties have explicitly chosen lex mercatoria to be the law governing the conflict, the arbitrator is not free to act as amiable compositeur.

It is quite common for the parties to a trade contract to omit to indicate the law governing the settlement of dispute. It is not necessary that lex mercatoria should be applied in such situations. Opponents of the concept of lex mercatoria are of the opinion that in such cases, the arbitral tribunal should determine an applicable national law consistent with the rules of conflict. But, in such cases, the arbitrator will be driven to give an award that is enforceable and recognizable. They will be influenced by some considerations when basing their award on general principles of law or usages of international trade as their colleagues who apply national law, and attempt to render a reasonable award. Moreover, if no choice has been made by the parties, it might lead to arbitrary and unpredictable results to oblige the arbitrators not to apply lex mercatoria but to choose one of the national laws connected with the contract. Therefore, it cannot be deduced from the absence of such a clause that the parties have agreed to settle the dispute as per the rules of lex mercatoria.

Both opponents and proponents of lex mercatoria have their own arguments to support their contentions. To conclude, lex mercatoria should only be applied as a law governing the conflict if it has been explicitly chosen by the parties. One cannot automatically conclude the choice of lex mercatoria from the mere fact that the parties did not designate a national law to govern the conflict.

There can also arise cases where the parties have explicitly chosen a national law and excluded the application of transnational law. It is not admissible to allow the application of lex mercatoria in such cases as it will go against the autonomy of the parties and the award would surely not be enforced by the national courts or respected by the parties. However, there is one exception to that principle. In cases where the designation of a national law or application of such a rule is absolutely impossible or contradicts a mandatory rule of international law, the application of transnational law is justified in order to settle the dispute.

Arbitrators would disregard the parties’ autonomy and abuse the power granted to them if they applied lex mercatoria against the expressed will. An arbitrator cannot substitute his personal prefernces for the law chosen by the parties, as it would clearly contradict the principle of party autonomy and the mandatory rules of most national laws on arbitration.

Lex mercatoria has an impact on cases where national laws have been applied. In such cases, the arbitrator often has to take usage of international trade into account to find a solution to interpret the facts, the contract and the parties’ behavior. This can be seen in the decision in Liamco v. Libya [2] . In another case [3] , in a contract involving an Italian and a Syrian enterprise, the parties chose a state law as the law governing the contract but only insofar as this law was in accordance with the general principles of law. In addition the parties chose the general principles of law as applied by international arbitral tribunals and not by other international courts. Therefore, the arbitrators applied lex mercatoria. In the award Saudi Arabia v. Aramco [4] , the arbitrators referred to the lex mercatoria to remedy the gaps of Saudi Arabian law.

Another problem arises as a result of application of lex mercatoria by national courts. The main question regarding this is whether the national courts can apply it as law incompliance with the parties’ choice if no choice has been made. Opponents of this concept deny such a possibility even in cases where it was chosen by the parties as the law governing the contract. According to the supporters of lex mercatoria, it can be applied by virtue of a rule of conflict of the lex fori. The lex fori of the national court will thus define the extent and limits of the application of transnational law. This system of limited application of the lex mercatoria by national courts will not contribute uniformly to the law of international trade as it is not the same in every country.

However, the national court will not completely ignore the parties’ decision to be governed by lex mercatoria as the parties’ autonomy has to be repsected. But, even in cases where lex mercatoria was not chosen by the parties, a national court might be obliged to seek inspiration from it in order to overcome the gaps in its national law or to avoid rules unfit for international trade.

Enforcement of Awards Based on Lex mercatoria

One has to admit that the national courts have jurisdictional monopoly. Arbitral tribunals only exist and settle disputes because it is tolerated by the national courts. At this point, a question can arise as to whether an award based on lex mercatoria will be enforced by the national courts. According to the classical doctrine, only national law exists. More modern arbitration laws use the term ‘rules of law’ and not only ‘law’. This includes lex mercatoria. There is no clear consensus on the question as to whether or not state courts have the possibility or even the duty to apply the law merchant when faced with an international trade dispute.

It has also been argued that the application of the law merchant by national judges would not contribute to its growing popularity and use. National judges are bound by their own laws, and are not as free and inventive as arbitrators, and they lack experience in settling international trade issues. The lex mercatoria should therefore be developed and promulgated by arbitral tribunals only. If the parties to an international commercial dispute wish to have it governed by the lex mercatoria, they cannot be sure as to whether the national courts will enforce the agreement or the award based on it.

There seems to be no particular reason to set aside an award based on lex mercatoria if the parties have inserted this as applicable in their arbitration clause. The award is still valid even if it is based on usage without reference to national law. Arbitrators are not bound to apply any national law or even rules of conflict.

It has to be noted that there is no national law that denies enforcement of an arbitral award simply because it is based on lex mercatoria. Arbitration would be meaningless if national courts refused to enforce arbitral awards. Moreover, if a national law enables the parties to let an arbitrator act as amiable compositeur, then the courts of that nation cannot deny the enforcement of an award for the reason that it is based on a transnational law. Hence, national courts should enforce arbitral awards based on the lex mercatoria.

Conclusion

Lex mercatoria constitutes an effective system of law for dispute resolution in international trade. It is applied more and more by arbitrators, its rules are predictable and adapted to the needs of international commerce. It contains the usages of international merchant community and therefore, flexible and always up-to-date. Apart from customs, various other sources of lex mercatoria have been discovered, namely, public international law, international conventions, general principles of law, codes of conduct, standard form contracts, reporting of arbitral awards and compilations of the rules of lex mercatoria published by lawyers.

International merchants have the right to include an arbitral clause in their contract and to stipulate that lex mercatoria be the law governing the conflict. Arbitrators have to respect this choice and apply the law merchant to settle the dispute. Recourse to national laws is only necessary when the lex mercatoria cannot provide adequate answers.

Lex mercatoria does not lead to arbitrary results as alleged, for it is a law and the arbitrator cannot substitute his private preferences for the parties’ stipulations or the law merchant’s binding rules.

It can be rightly said that at present, a-national arbitration does exist, i.e. arbitral courts that are not especially linked to one nation but composed of arbitrators of different nationalities and settling international disputes. By applying lex mercatoria, the parties avoid the difficult choice of one of their national laws to be the law governing the conflict, for this leads to arbitrary results and privileges one party who is economically stronger.

In the years to come, lex mercatoria’s acceptance by the merchant community and its application by arbitral tribunals could be further promoted by a growing number of published awards. In the same manner, an increasing number of lists will also provide international traders and arbitrators with a useful survey of the law merchant’s contents and therefore contribute to its popularity. All these developments will contribute in dispelling the allegations put forward by the opponents of the concept of lex mercatoria.