Lex Mercatoria in Arbitration

Chapter 8
Lex Mercatoria in Arbitration

Lex Mercatoria: The Concept and its Historical Development

The discussion of specific interpretative repertory in ICA would definitely be incomplete without an analysis of the role of the new lex mercatoria in arbitral decision-making (and, arguably even more significantly, the critical impact of arbitral case law on the formulation, consolidation and – as some authors would assert – creation of the rules of the New Law Merchant). The relationship between those two spheres has been differently characterized by the commentators – from a perception of their link as necessary and inevitable, through its conceptualization as a pragmatic bond, reinstated if appropriate on an a casu ad casum basis, to scepticism in regard to the practical significance of the New Law Merchant.

Application of the lex mercatoria principles in arbitral decision-making, seen from the historical perspective, demonstrates how both spheres have been affected by the interaction. The body of the New Law Merchant has been substantially unfolded and expanded by arbitral case law. At the same time, the recurring recourse to lex mercatoria influenced interpretive canons in ICA and their formal framework, expressed in the rules of procedure of particular centres. This unique link, while certainly not omnipresent in the arbitral practice, is nevertheless significant and its evolution marks the growing autonomy of both spheres of transnational regulation of modern commerce: the substantive and the procedural.

Lex mercatoria, described as a global law without a State¹ is a set of rules, created by private participants in the cross-border commercial exchange, governing their transactions on a general or specialized (specific to a branch of commerce) level, and observed in a uniform way on a global, or at least regional scale. Whereas the modern lex mercatoria can be characterized as the most mature and solidified area of transnational rules, which has also become an inspiration for other fields, such as lex sportiva,² its status as an independent legal system has been disputed, predominantly from the positions of legal positivism and the traditional theory of the sources of law.³ The key component and necessary condition of legitimacy of legal rules according to those approaches – the official origin of the law, which is seen as a direct expression of the sovereign will of the State4– is missing or, at best, blurred, if the recourse to international customs is adopted as a legitimizing strategy. Lex mercatoria is a transnational construct of private origin. As a result, the dispute about the autonomous status of the New Law Merchant, particularly vivid in the legal doctrine of the late 1980s and 1990s, is still far from being resolved.⁵ Its acknowledgement is, however, increasingly frequently advocated from the positions detaching the concept of the law from the sphere of sovereign authority of a State, and encompassing instead a plurality of coexisting orders, functioning rather as normative networks than homogenous, exhaustive and hierarchically complete systems.⁶

As a consequence, the application of lex mercatoria principles to the merits of a dispute in arbitral decision-making had been originally least controversial when it resulted from the explicit will of the parties and could have been treated as a specific exercise of the freedom of contract. The selection of such rules, even if their status as law was uncertain, could still have been recognized as a manifestation of the parties’ contractual freedom. An often-indicated reason for such choice has been the intent of the parties to minimize the risk of legal uncertainty, resulting from the selection of the domestic law, not fully known to at least one of the contractors, or, even more so, its determination by the arbitral tribunal in the absence of a relevant indication by the parties.

Another ground for selection of uniform transnational rules instead of national law is a possible inadequacy of the latter and its primarily domestic orientation, undesirable in relation to fundamentally international transactions. As Ana M. López Rodríguez remarks, those two aspects reappear in different theories of lex mercatoria as their common denominator, which is:

the affirmation that traditional private international law techniques provide an uncertain legal framework for international transactions, that domestic law does not respond to the changing needs of international contract law and that, in consequence, substantive law solutions that emerge from the practice and respond to the interests of businessmen are preferable.⁷

Such justification mirrors the rationales frequently offered for selection of arbitration instead of litigation before domestic courts by parties to international contracts (see Chapter 1). As in the case of arbitration clauses, a preference is given to a system perceived as more neutral (as it is not directly connected with any given State) and more specialized (thus better befitting the particularities of cross-border contracting). This analogy requires, however, a careful delineation of the borders between those two phenomena. The difference is, as Albert van den Berg observes,

one of procedure versus substance: the ‘anational’ award (and hence the ‘denationalized’ arbitration) concerns the procedural framework of international arbitration; in contrast, concepts such as Lex mercatoria relate to the substance of what is to be decided by the arbitral tribunal.⁸

In the absence of relevant indication by the parties themselves, lex mercatoria has also been increasingly invoked as rules of law applicable to the merits of the dispute, on the ground of its determination as such, exercised by an arbitral tribunal or a domestic court.⁹

The legitimacy of lex mercatoria as a set of rules lacking the official State endorsement has been sought in its functioning as customs observed by the international community of commercial actors. Instead of States, the subjects involved in creating its body are merchants, or, rather, a number of different ‘merchant communities’, engaged in international transactions. Taken together, they act as a global societas mercatorum – a society of merchants – which is an operative legal fiction, comparable to such notions as ‘a lawmaker’ or ‘an international community of states’. Even though the concept of societas mercatorum denotes in fact a set of different groups without a uniform, formal bond, it has been argued that its internal heterogeneity is not that distant from an organization of a society within a nation State, which also encloses diversified social groups.¹⁰

This bottom-up, self-regulatory activity¹¹ of the international business community has been characterized by Teubner as ‘double taboo-breaking’. It undermines the nation-States’ law-making monopoly, outside the traditional mechanisms of State control and endorsement. It also successfully functions and is being applied without an official authorization by the States concerned.12 Filip De Ly shares this stance, stating, in reference to empirical data offered by Freyhold and Gessner, that

[i]nternational business law traditionally was based on a paradigm of control by government regulation consisting of national rules. In an international setting, conflict rules had to determine which national rules had to be applied. These conflict rules are also to a large extent of national origin … This whole process of national rules of jurisdiction, national conflict rules and national substantive rules nationalises international adjudication … [I]n practice one notes that often and in many countries a homeward trend may be noticed in the adjudication of international business disputes.¹³

De Ly presents a nuanced view in regard to the status of harmonized instruments of international business law in this context.¹⁴ The outcomes of unification efforts by intergovernmental or transnational bodies (such as UNIDROIT and UNCITRAL) are, as he observes, diversified, and do not necessarily subvert the traditional doctrine of States’ control.

There are both ‘hard law’ instruments, such as international conventions, as well as ‘soft’ ones, such as model laws, which acquire binding force through the mechanisms of States’ authorization (ratification, implementation into the domestic order). There is, however, a plethora of forms of regulatory harmonization, such as model contracts and contractual clauses, private codifications and guidelines, the proliferation of which has been indicated as a symptom of loss of the monopoly of the States in this sphere. De Ly also notes instances of a more subtle, indirect influence of harmonized instruments beyond the States’ control, in cases in which their provisions are applied not due to their formal binding force, but because of sheer persuasive authority.

In regard to lex mercatoria, this specific origin – private, but frequently official, institutionalized, and not befitting the traditional mechanisms of States-endorsed law-making, is expressed in its common characterization as transnational law. As opposed to international law, created between the nations, the prefix ‘trans-’, as Gralf-Peter Calliess remarks, indicates an activity reaching ‘across, beyond, through’ boundaries of the States.¹⁵ The modern Law Merchant, as an outcome of concerted endeavours and practices adopted voluntarily by private participants to international commerce, has also been described as a revival of former, similar concepts, such as the Phoenician, Egyptian and Greek trade customs,16 Roman ius gentium,¹⁷ and particularly the medieval European lex mercatoria.¹⁸

This last set of rules, recognized uniformly across Europe in major market cities, was adopted by merchants and applied by their own, specialized commercial tribunals, which allowed them to avoid legal uncertainty resulting from fragmentation of laws in feudal Europe, as well as to overcome limitations on transfers of capital and transmissibility of property, and escape the arbitrariness of decisions of local lords.¹⁹ A. Claire Cutler observes that

[w]hat is distinctive about medieval law merchant order is the essential self-regulatory nature of the merchant community in both law-creation (subjects and sources) and dispute resolution. This in turn reflects the more general autonomy of the merchant class from the feudal class system: the law merchant order occupied a space external to the local political economy and feudal mode of production. Even more importantly, the law merchant created property rights and entitlements that were more consistent with property relations that would later be associated with capitalism.²⁰

This set of trade customs and the accompanying functioning of independent merchants’ tribunals, started in the eleventh century, survived until the end of the Middle Ages and the start of the early modern era, and was suppressed by the consolidation of nation States, which assumed centralized control over law-making processes and commercial exchange. Its specific character as a private legal arrangement for commercial matters, surpassing the parochialisms of local laws, not only marks a period of an early, selective legal globalization (or, rather, regionalization) of trade regulations. It has also been described as a predecessor to contemporary processes of grass-root harmonization of rules governing international commercial exchange. Recurring contractual references to uniform customs of international trade after World War II, which was the first phase of the development of the New Law Merchant, were thus interpreted as a ‘resuscitation’ of ‘a venerable old lady’ – a revival of a specific concept of law-making well known to European practice.²¹

The renewed postwar interest in international trade customs which sought to bind participants to the cross-border exchange beyond the level of domestic laws was as much a result of commercial developments and progressing globalization of trade as it was an academic undertaking. In 1956 Berthold Goldman famously invoked an example of the Suez Canal Company as an intrinsically international undertaking, consciously planned as not belonging exclusively to either Egyptian, British or French legal domain. The rapidly increasing volume of global trade, the expanding number of participants and the new regional dynamics in the following decades affected the growing recourse to international trade customs in private transactions. The forms of such recourse are further discussed below.

In the discussion about the (medieval and modern) lex mercatoria, its origins as spontaneously emergent mercantile customs have been usually emphasized. The customary character of the New Law Merchant has also been frequently invoked as a key argument supporting the thesis about the autonomous character of this regulatory order.22 While application of lex mercatoria in arbitral decision-making has been indeed often legitimized in this way, starting from the 1950s,²³ the legal and commercial practice, as well as representations of the New Law Merchant formulated subsequently by legal theory, offer currently a more diversified conceptual repertoire.

Among the new sources of lex mercatoria (or, alternatively, sources of knowledge thereof – if a reductionist perspective, limiting it to international trade customs, was to be adopted), the key role of international commercial arbitration has been widely recognized. Horacio A. Grigera Naón, commenting on modern theories which advocate the New Law Merchant, points out that they

strongly express the place of international commercial arbitration as regards its inception, effectiveness and development. International arbitration becomes practically an independent source of law as autonomous arbitrators decide on the meaning and interpretation of contractual transactions submitted to them and on the existence, content, scope and application of usages, general legal principles and customs which might have a decisive impact on the final outcome of the dispute as they determine it. Through their action, a body of principles and rules belonging to an anational merchant community which claims a sociological and juridical existence independent from State communities establishes its existence, validity and effective application without State support as an unexpected derivation of the maxim ‘Qui eligit iud[i]cem, eligit ius’.24

While the critical influence of arbitral case law on the progress and expansion of the New Law Merchant certainly goes beyond the positivist law-making framework, possibly ‘saved’ through a stricter adherence to a legal fiction of uniformly acknowledged, global merchants’ customs, it also – perhaps paradoxically – refutes another traditional argument of the rules of the new lex mercatoria as being too vague and undetermined to be efficiently applied.²⁵

The increasingly definite and specific set of principles, characterized as the New Law Merchant, has influenced national legal systems: as De Ly remarks, in such areas as arbitration laws, the domestic regulatory regimes have been affected by the popularity of transnational sources of substantive rules.²⁶ For Gunther Teubner the actual significance of international commercial customs sensu stricto is secondary, as the spontaneous harmonization effect is achieved predominantly by the means of contractual practice (with repeated, standardized patterns) and arbitral case law.²⁷ However, a mediating view that general conditions, standard terms and model contracts can be at least to some extent a formal expression of international customs (and not merely their replacement or source) can also be put forward.

Model clauses and standard contracts as tools of legal convergence for international business transactions have also been undervalued by the proponents of positivist approaches, as purely private endeavours. They have been treated as individual (even if to some extent concerted) exercises of party autonomy – based on isolated, pragmatic, a casu ad casum decisions of the parties, and not as contributions to the emergence of some regulatory order.²⁸ The limitations of this way of proliferation of contractual standards have also been indicated by the promoters of harmonization. As Michael Joachim Bonell points out when discussing the origins of the UNIDROIT project of comparative restatement of contract law (the three editions of which he coordinated), model contracts and clauses endorsed by private enterprises and trade associations suffer from a ‘legitimacy deficit’

in the sense that, even where they do succeed in becoming generally accepted within the respective trade sectors, they may come into conflict with the basic principles and values adopted by domestic legislators and anyhow fail to meet the ‘democracy’ test, i.e. are not the result of a balancing of conflicting interests typical of legislative process.²⁹

Bonell further argues that even those model clauses and contracts which are an outcome of works by truly transnational non-governmental organizations, such as the ICC’s INCOTERMS and Uniform Customs and Practice for Documentary Credit (UCP), do not fully escape criticism based on legitimacy grounds and require a validating recourse to some external regulatory order:

[i]ndeed, these instruments, though on account of their origin more balanced in content, still presuppose a more general regulatory system to refer to for the purpose of settling the questions they do not expressly address and to establish the conditions and limits of their validity.³⁰

These issues, as well as the still-existing indeterminacy of some areas of the lex mercatoria, accompanied by the pressing needs of commercial practice, were subsequently addressed by a number of codifying initiatives. The advancing expression and systematization of the New Law Merchant principles in arbitral case law have been gradually supplemented by a wave of transnational, non-legislative, soft, restatement-type codifications, initiated since the 1980s. Two of them can be characterized as particularly prominent. Publication of the first edition of the UNIDROIT Principles of International Commercial Contracts in 1994 was perceived as a turning point in the process of consolidation of the body of lex mercatoria.³¹ In 1995, this initiative was followed by an issuance of a regional instrument – the first part of the Principles of European Contract Law (PECL), drafted by the Commission on European Contract Law (with the second part published in 1999 and the third in 2002).

The UNIDROIT drafters were aware of the challenges of proposing a soft instrument, drafted outside the sphere of control, but also outside the authorization of States. As the Governing Council of UNIDROIT noted in the Introduction to the 1994 edition, it was ‘fully conscious of the fact that the Principles, which do not involve the endorsement of Governments, are not a binding instrument and that in consequence their acceptance will depend upon their persuasive authority.’³²

While not formally subscribing to the New Law Merchant doctrine (and, as seen above, expressing their reservations in this regard), the authors of the UNIDROIT Principles, as well as those of PECL, nevertheless provided that these instruments may be applied when the parties agree that their contract shall be governed by ‘general principles of law’, ‘the lex mercatoria’ or the like.33 For Joseph Lookofsky this lack of explicit reference to the role of this instrument as a persuasive source of internationally accepted principles of contract law (which he sees as its essential function) is notable.³⁴

According to Berger, while both those restatements adopt a deliberately cautious stance and

intentionally refrain from any statement concerning the existence of a transnational economic law as an independent legal order, both projects have at least indirect connection with the lex mercatoria doctrine. They furnish proof that transnational contract law is open to a new and innovative method of codification.³⁵

Berger further suggests that the New Law Merchant (sensu largo) is a field in which two significant, contradictory tendencies can be observed. On one side, the criticism of the lex mercatoria’s nebulous constitution and insufficiently certain content can be seen as the driving force of the transnational codification undertakings. On the other, it is often the relative openness and flexibility of the New Law Merchant principles which can be perceived as its major advantage. The quickly changing demands of international commerce do not necessarily call for precise, detailed and closed rules, but rather for general and adaptive ones, which can be further developed and explicated in adjudication.

The successful accomplishments and continued codification efforts certainly significantly contributed to transnational law reaching the mature stage, and facilitated the move of the gravity centre in the discussion on the New Law Merchant from ‘lex mercatoria: yes or no?’ to ‘lex mercatoria: when and how?’.³⁶ The growing significance of the UNIDROIT Principles (often cautiously referred to as a project not creating or introducing, but affirming ‘concepts already in the lex mercatoria’³⁷) in arbitration practice has also been acknowledged. This instrument, characterized by Yves Fortier as the ‘new new lex mercatoria’, has been praised as providing the much-needed practical certainty and order to this area, but has also been frequently criticized for being overly general and blurred.38 Along with PECL, the UNIDROIT Principles, which can be treated as a verifiable point of reference in cases requiring application of transnational rules, have also become increasingly referred to by the domestic courts. As Mads Bryde Andersen demonstrates on the example of Nordic countries, in some States a recourse to those instruments comes very naturally, being consistent with regional legal culture (such as the Scandinavian pragmatic approach to contract law).³⁹

However, in recognition of the variety of the lex mercatoria sources (supplemented with comparative legal analysis, separate from arbitral awards – which might lead to conceptual objections regarding the criteria of distinction), a method of codification alternative to that exercised by UNIDROIT drafters has also been proposed. Instead of a transnational restatement, heavily based on comparative analysis of contract law regimes, Klaus Peter Berger forwards a project of a looser, less integrated ‘creeping codification’.⁴⁰ The proposed outcome resembles rather a thesaurus-like set of principles than a homogenous, uniform legal instrument. Berger envisions this undertaking as an open-ended list of principles, extracted from diverse sources of the New Law Merchant and accompanied by relevant descriptive and explanatory notes. As opposed to instruments such as UNIDROIT Principles and PECL, ‘creeping codification’ is ‘intended to avoid the “static element” characteristic of other approaches and to provide the openness and flexibility required in order to take account of the rapid development of international trade and commerce.’⁴¹ The flexible, expanding character of this project will thus, Berger argues, make it less rigid than the methodologically strict, unifying codifications, and help to keep track of changing contractual and arbitral practice related to international commercial transactions.⁴² The ‘creeping codification’ method has been applied by Berger in the creation and operations of the CENTRAL Transnational Database, established to serve as a platform for the development of the growing list of the lex mercatoria principles.⁴³

The Role of Arbitration

The progressing consolidation of the new lex mercatoria has been largely achieved thanks to arbitral case law, through which the principles of the New Law Merchant have been explored, expressed and unfolded. This has been happening practically from the beginning of the lex mercatoria revival in the ‘oil cases’ in the 1950s and 1960s. The undisputed key role of arbitration in ascertaining and expanding the content of general commercial customs has led some commentators to proposing a theory that the New Law Merchant is not an autonomous order, consisting of substantive rules, but rather a method of adjudication, characteristic to arbitral decision-making.

According to this perspective, as Emmanuel Gaillard argues, what makes arbitral decision-making, invoking lex mercatoria, characteristic is the specific use of comparative method with a purposive orientation – so as to deduce what the most universally accepted rule, available as a ground for the decision, would be. Lex mercatoria, so approached, would then function as an outcome of distillation from relevant rules of all legal orders potentially involved in particular cases.44 This theory rejects the representations of lex mercatoria as a system of rules belonging neither to the domestic orders nor to the realm of public international law. It also in practice abandons the concept of societas mercatorum as the source of its legitimization.

This ‘functional approach’, as Gaillard remarks, enables arbitrators to always identify a rule applicable to any claim forwarded by the parties – which is its advantage in comparison with lists of principles.⁴⁵ It seems, however, that it also reduces the phenomenon of the New Law Merchant, to a large extent shaped by multiplicity and heterogeneity of its sources, to an operative ICA technique. It is also worth noticing, that the comparative analysis has been a cornerstone of the UNIDROIT Principles drafting process (and also a point of their – and other restatements’ – critique for offering merely ‘comparative snapshots’⁴⁶). As emphasized in the Introduction to the 1994 edition, in the intention of the authors:

[f]or the most part the UNIDROIT Principles reflect concepts to be found in many, if not all, legal systems. Since however the Principles are intended to provide a system of rules especially tailored to the needs of international commercial transactions, they also embody what are perceived to be the best solutions, even if still not yet generally adopted.⁴⁷

As already mentioned above, the usefulness of the UNIDROIT Principles in cases involving application of the new lex mercatoria has also already been recognized in the growing body of arbitral awards.⁴⁸

This multiplicity, heterogeneity and complex interconnections between different sources of lex mercatoria