Lex to rely on state institutions for enforcement

Lex Mercatoria (LM) is
often discredited: too vague in its approach, too confusing in content, under
appreciated by arbitrators and practitioners, and even doubted in its very
existence. This arguments will show a broad approach to defining LM complements
the critical business of codifying the LM, to make it a more practical avenue
of law that is more definite and provable.

Distilling Lex Mercatoria
– A Narrow Approach or a Wider Approach?

Conceptions of Lex
Mercatoria have transitioned from an ancient LM, situated in the Middle Ages to
a “transnational set of norms and procedural principles, established by and for
commercial transactions, in (relative autonomy to states”1  This conceives the LM as an informal and
flexible system of rules and “soft law”2. However, a third stage
has seen this system move towards increased codification, through for example
the UNIDROIT Principles of International and Commercial Law and a “strongly
institutionalised court like international arbitration.”3

Scholars also dispute
whether LM can be called law at all. Theories of LM based on contract without a
legal system, ignore the difficulties of enforcing a contract. Opponents of law
without a state, overlook the increasingly globalized marketplace. Systems
theory can be utilised to show LM should “transcend state and non-state
boundaries.”4
Increasingly, parties utilise LM, UNIDROIT Principles and choose arbitration,
but also continue to rely on state institutions for enforcement (e.g. “British
reinsurers are reported to prefer courts over arbitration, and Japanese
fishermen at the harbor of Tokyo prefer the state-sponsored Tuna Court over
private arbitration”5). Concluding this leaves
us to allow LM to run on considerations regarding freedom of contract, while
realising it can draw some of its formulation from state actors, and does not
need to draw legitimacy from within itself only, thus producing a more
realistic definition.6

Scholars have debated the
sources of LM at great length. Goldman views7, general principles of law
and general usages of international trade as the key sources for LM. General
principles includes both Article 38(1) of the Statute of the International
Court of Justice, but also established by customary and repeated usage in
international trade. Thus, the transnational nature of transactions LM rules
over, and its customary origin, gives LM a “spontaneous character” which is
open to the intervention of inter-state or state authorities in their
elaboration or implementation”.8

This is a narrowed view
of LM’s sources: laws of in state and inter-state origin cannot automatically
form the content of Goldman’s LM unless they are integrated through
international custom or general principles of law, in which case it is
irrelevant who is the author of such law. Goldman has found support in
Professor Goode who also makes the distinction between LM, which “that part of
transnational commercial law which is uncodified and consists of customary
commercial law, customary rules of evidence and procedure and general
principles of commercial law, including international public policy.”9 Thus, he clarifies his
position is not rooted at all in the positivist view which may attribute
elements of LM to existing parts of transnational commercial law. This view
narrows the breadth of sources that can be relied on, but the sources he relies
upon potentially makes LM more confusing.

Lando and Mustil cite the
following, “(a) public international law, (b) uniform laws, (c) the general
principles of law, (d) the rules of international organizations, (e) customs
and usages, (f) standard form contracts,” (g) reporting of arbitral
awards, as LM’s “elements” 10 of LM. This is
characteristic of widening of LM from a “restricted list of commonly understood
principles”11.
It nearly covers the entirety of “modern transnational law or the law of
international business transactions”12.

This definition may complicate
the business of calling LM law, or even useful law. Highnet argues, the mere
existence of LM as a theoretically available source of “interpretation of
amplification of contractual clauses”, does not make it law. In his opinions, Principia
Mercatoria more accurately reflects the “nature application and content”13 of these principles,
rather than any insistence that the content of LM forms an undiscovered legal
system, without national jurisdiction.

 Due LM’s creation out of inequalities and
differences between states in multinational and developmental state contracts,
LM is inherently denationalized. Due to the apprehension that application of
local law in nationalised contracts, being used to benefit the host country,
unfairly. What is required in these sorts of transactions then, is a system of
rules and principles capable of being “sufficiently well identified and
considered as composing the functional equivalent of a miniature and
voluntarist legal system”14 Conversely, LM is
commonly critiqued as “a sort of shadowy, optional, aleatory”15 alternative. The
substance of LM’s widening scope and flexibility, become its Achilles’ heel as
the substance of LM is commonly critiqued as inherently “ambiguous and
indefinite.” Situating the particulars of LM can only be clarified on a case by
case basis, thus complicating the process of distilling a definition for LM
further.

For example, commentators
find LM contains only “the most general and inoffensive principles of law such
as “pacta sunt servanda” and “bona fides” and as “”rules of law which are
common to all or most of the States engaged in international trade . . . and
where such common rules are not ascertainable,… the rule … which appears to
the arbitrator to be the most appropriate and equitable considering the laws
of several legal systems. “”16 However, it is difficult
to boil down an overarching, good will concept such as ‘good faith’ can be
boiled down to a singular rule, as ironically this can produce an unfair
result, in its inability to be flexible and adapt to any given situation.

Gaillard has offered the
opinion, in response to these critiques, that LM may be better understood as a
method of decision making rather than a set of rules. This does little to
improve notions precision and certainty, due to the great discretion and
flexibility it leaves to adjudicators.17

Perhaps the best way of
viewing LM, is offered by Frischkorn. Arguably, his theory of LM accounts for
the history of LM, and its undeniable importance in trade practise, and the need
to create a manageable form of LM which is usable and accessible. His third and
broadest definition of LM as a ‘pool’. He focuses on its transnational
character and its lack of the need to be promulgated as an independent legal
system. Such definition encompass all the elements of Mustill and Lando, but
posits their widening scope as a benefit to parties, who can adjust the
available sources to suit their needs. However, it also, in its determination
to produce positive outcomes for parties favours codification, as this can
clarify the specifics of this law, while remaining flexible enough to adapt to
the commercial market.18

USABILITY IN PRACTISE

The usage of LM in
arbitration clause has led to the assertion that LM is largely a creation of
arbitrators. However, even Oduntan states mostly, LM is under appreciated in
the formation of contracts.19 Assessing data and
scholarship on the extent of usage in contracts, demonstrates the current
usefulness of LM as a concept.

In practise, according to
a survey where lawyers were asked to report their advice to clients in choosing
LM in solving a dispute, they reported LM could not be justified as providing a
secure contractual choice. Lawyers prefer to recommend “definitive”20 and “provable”21 law, with “definitive” referring
to a specific set of rules, and “provable” referring to rules in a fixed form
and can be taken to a dispute resolution forum as undisputable law22. LM is inherently
problematic in its provability: the difficulty in finding a comprehensive set
of rules, its scattered sources in ancient practise, and aged academic
scholarship. Prior to codification at least, it was difficult to place the
content of LM in any single place.23

Accessible empirical data
from 1999 through to 2012, from the ICC, sheds light on parties’ choice of law
demonstrates the relevance of LM to parties choosing forums of law for
resolving contractual disputes. In fourteen years, across 8,911 requests for
arbitration, the data showed in 80-85% of cases where parties chose their own law,
the data consistently showed non-national rules were chosen in 1.7% cases24. It must be noted the
data shows only those contracts which gave rise to a dispute. But, this is data
from the most powerful arbitral body in the world, and the data could be used
to reasonably argue that the “solutions offered by LM are far less precise and
certain than the solutions offered by national law”25.

Proponents of the LM,
base their arguments in its “universal character, 2) flexibility and dynamic
ability to grow, 3) informality and speed and 4) reliance on commercial custom
and practice.”26 However, the data has
shown in practise it is difficult to reconcile these benefits, and the need for
certainty in transnational contracting.

However, although these
developments take a step in the right direction, their practicability is
limited in usefulness if parties do not elect to use them. Even with LM’s
alleged “superior efficiency” with regard to economic considerations, has not
encouraged parties to favour LM as a choice of law. The Preamble to the
Principles suggests they may be useful in several situations: “(1) when chosen
by the parties to a contract; (2) when the parties have referred to lex
mercatoria or general principles of law to govern their contract; (3) to
supplement or replace domestic law which does not provide a clear rule for the
issue at hand; (4) to interpret or supplement international conventions on
uniform commercial law; and (5) as a model for domestic legislation.”27

Basedow points out
although this generates party autonomy, (in the sense parties are free to agree
on contract law fair to them by choosing denationalized law if they wish, and
getting ahead of institutional competition). Lando states choosing LM helps
parties to avoid “peculiar formalities, short periods of limitation, and some
of the difficulties created by domestic laws which are unknown in other
countries, for example, the common law rules on consideration and privity of
contract”28.
LM, levels the playing field by balancing the advantage conferred by settling
one’s case in his own law, or vice versa.29  However, other concerns can be shown to
underpin commercial transactions more significantly. The literature shows
consistently, parties generally favour capitalising on party autonomy, to impose
their own national law due to the transaction costs of examining various other
contract laws. Another rationale may lie in the principle agent relationship
between parties and their lawyers. Choice of law contracts are drafted by
self-interested counsel, whose concerns revolve around giving the most familiar
and secure law. The risk of losing business is too great when balanced against
the need to profit from legal advice and creating profitable contracts.30 Therefore, LM can only be
rendered as useful as the sum of its contents if chosen as a forum of law.

Conway
asserted “this lex mercatoria or common law of merchants is of more universal
authority than the common law of England.”31 Oduntan demonstrates Courts
completely recognise the legitimacy of LM and the enforcement of arbitral
awards, across a number of legal systems.32 The English Arbitration
Act (1996), makes express provision for party autonomy by stating “an arbitral
tribunal shall decide the dispute “in accordance with the law chosen by the
parties…or, if the parties so agree, in accordance with such other
considerations as are agreed by them or determined by the tribunal.”3334

In state to state
transactions LM may prove particularly useful in reconciling different legal systems.
For example, reliance on LM can be found in the agreement between Euro Tunnel
(owner and operator) and Transmanche Link (group of English and French
Construction Companies. Civil and Common law legal systems may have little
common ground upon which to form a comprehensive understanding of rules35. At its core, Western
contracting is modelled on the common law, and English law favours
predictability, while in Civil Law justice generally, to varying extents,
prevails36.
Thus a tension arises in how law should be drafted in contracts between such
systems, if these rules are not “mandatory”37, how the judge can
approach the parties contract to incorporate principles of “good faith and fair
dealing”, where otherwise there seems to be a “strict allocation” 38of risk between parties.

The Codification of Lex
Mercatoria

Responding to critiques
of LM, scholars and practitioners have attempted to tame the system, shaping it
for actual use in the international commercial realm. The end of 1994
introduced a mode of increasing specificity in LM’s ill- defined principles,
while acknowledging LM’s long history, through the UNIDROIT Principles of
International Commercial Contract and United Nations Convention on Contracts
for The International Sale of Goods (CISG)39. In CISG for example,
Article 79, defines force majeure: non-performance resulting from circumstances
beyond his control, and that which he could not reasonably be expected to
foresee, or taken measures to have avoided, at the time the contract was
created, will not make him liable. The concept is also extended to cover
non-performance caused by third party failures and the requirement for a party
to give notice under a reasonable period of time for the intention to rely on Article
79, if they are entitled to do so.40

The UNIDRIOT Principles make
efforts towards the “harmonization” and “restatement” of LM. Although this may
detract from an accurate reflection of current trading practises, it goes a
long way towards giving LM a more “definite and provable” character. The
practical use of them is to provide a physical marker which can be referred to
court, and parties under its control can refer to them with little difficulty41. Furthermore, the
Principles add substance to elusive concepts such as “good faith, force
majeure, and the right to termination.” Acting in good faith is a pillar of LM,
which article 2.15 helpfully defines.42 Force majeure at Article
7.17 roughly follows the definition in CISG, and extends its value by defining
“hardship” and its implications. This goes even further than the Uniform
Commercial Code’s “references to “commercial impracticability””43 The right to termination
is also well developed: Article 7.3.1 defines termination as possible under
fundamental non-performance, if this has “substantially deprived the aggrieved
party of what it was entitled to expect under the contract”44, if strict compliance
with the terms goes to the root of the contract. Concepts “anticipatory breach,
procedural requirements regarding notice and provisions concerning the effects
of termination”45
are also expanded upon.

If we are to view LM, as
discussed in its widest definition, in a “board and pragmatic sense”
codification would only enhance the usefulness of its rules and principles,
ready to be adapted to fit the needs of commercial actors.46 Frischkorn also points
out that the construction of the Principles is supple enough to be responsive
to international commercial requirements. Article 1 of the Principles strongly
promulgate the notion of freedom of contract and leaves the Principles to be
interpreted on a case by case basis.47

Codification, in its
mixture of structure and flexibility, and the provision of a physical method of
referencing arguments, is a desirable development which creates a more helpful
definition of LM, while allowing its responsive character to exist.

Conclusions

LM, we must accept has
utility in international commercial contracts as a method of equalling
bargaining power between transnational commercial contracts. This is
particularly important in the instance of state to state actors, who may
require an outside law to reconcile different conception of law, or where a
more powerful nation’s laws may prove an unfair advantage. Its recognition in
the courts and its continued use in some contracts, notably state to state
dealings, immediately dispels those who doubt its very existence. However, if
LM is to move forward as a concept that must balance its (justified) character
as flexible and adaptive to commercial markets, with the need to make it
accessible so it is more definitive and provable. CISG and the Principles are
indicative of this trend: they have demonstrated new LM, still left much to be
desired in terms of expanding vague commonly acknowledged principles of law. Taking
a broad and pragmatic view to LM demonstrates the ‘new’ new LM must continue to
draw legitimacy from continued targeted codification, so that it remains a
relevant mode of rules in practise.

1 Michaels Ralf, ‘The True Lex
Mercatoria: Law Beyond the State’ 2007 14(2) Indiana Journal
of Global Legal Studies 448

2 Ibid

3 Ibid

4 Ibid 459

5
Ibid

6 Ibid 450

7 Abul Manriruzzaman
F.M. “The Lex Mercatoria and International Contracts: A Challenge for
International Commercial Arbitration?” 1999 14(3) American University
International Law Review 657, 664

8
Ibid 665

9 Ibid 666

10 Abul Manriruzzaman
F.M. “The Lex Mercatoria and International Contracts: A Challenge for
International Commercial Arbitration?” 1999 14(3) American University
International Law Review 657, 672

11 Oduntan, Gbenga ‘Is the Lex Mercatoria still applicable to 21st century
commercial contract?’ 2015 International Company and Commercial Law
accessed: 27th December 2017.

12 Ibid

13 Highet
Keith, “Enigma of the Lex Mercatoria”, 1988-1989 63 Tul. L. Rev. 613, 616

13 Ibid 625

14 Ibid

15 Ibid

16 Selden,
Barton S. “Lex Mercatoria in European and U.S. Trade Practice: Time to
Take a Closer Look,” 1995 Vol. 2(1) Annual Survey of International &
Comparative Law 111 115

17 Cuniberti Gilles
‘Three Theories of Lex Mercatoria’ Colum. J.
Transnat’l L. 370, 391

18 Frischkorn
Michael, ‘Definitions of the Lex Mercatoria and the Effects of Codifications on
the Lex Mercatoria’s Flexibility’, 2005 7 Eur. J.L. Reform 331, 335

19 Oduntan, Gbenga ‘Is the Lex
Mercatoria still applicable to 21st century commercial contract?’ 2015 International
Company and Commercial Law Review 
accessed: 27th December 2017.

20 Selden
Barton S. “Lex Mercatoria in European and U.S. Trade Practice: Time to
Take a Closer Look,” 1995 Vol. 2(1) Annual Survey of International &
Comparative Law 111 115

21 Ibid

22 Ibid

23 Ibid

24
Cuniberti Gilles ‘Three Theories of Lex Mercatoria’ Colum. J.
Transnat’l L. 370, 398

25 Ibid
399

26 Benson B,
‘The Spontaneous Evolution of Commercial Law’ 1989 Southern Economic Journal
644, 654

27 Ibid 122

28 Oduntan, Gbenga ‘The ‘Reimaginarium’ of Lex Mercatoria:
Critique of the Geocentric Theory about the Origins and Episteme of the Lex
Mercatoria’ 2016 Manchester Journal of International
Economic Law, 13 (1) 63

29
Ibid

30
Basedow Jürgen, ‘Lex Mercatoria
and the Private International Law of Contracts in Economic Perspective
2007 12(4), Unif. L. Rev. pp
697,  709

31 Bank
of Conway v. Stary, 51 N.D. 399 (1924), 408

32 Oduntan, Gbenga ‘Is the Lex Mercatoria still applicable to 21st century
commercial contract?’ 2015 International Company and Commercial Law
Review 
accessed: 27th December
2017

33 The
English Arbitration Act (1996)

34 Cf.
Connerty Anthony, ‘Lex Mercatoria: Is It Relevant to International Commercial
Arbitration’ 2013 Uluslararas? Ticari Tahkim ve Yeni Lex Mercatoria
(International Commercial Arbitration and the New Lex Mercatoria). ?stanbul: On
?ki Levha Yay?nc?l?k. 101-123
accessed: 27th December
2017.

35 Selden,
Barton S. “Lex Mercatoria in European and U.S. Trade Practice: Time to
Take a Closer Look,” 1995 Vol. 2(1) Annual Survey of International &
Comparative Law 111, 116

36 Cf. Cordero
Moss Giuditta, “International Contracts between Common Law and Civil Law: Is
Non-state Law to Be Preferred? The Difficulty of Interpreting Legal Standards
Such as Good Faith” 2007 Vol. 7(1) Global Jurist

37 Ibid 20

38 Ibid

39
Selden, Barton S. “Lex Mercatoria in European and U.S. Trade Practice:
Time to Take a Closer Look,” 1995 Vol. 2(1) Annual Survey of International
& Comparative Law 111 120

40
Ibid 121

41
Ibid 122

42
Ibid

43
Ibid 123

44
Ibid

45
Ibid

46
Frischkorn Michael, ‘Definitions of the Lex Mercatoria and the Effects of
Codifications on the Lex Mercatoria’s Flexibility’, 2005 7 Eur. J.L. Reform
331, 335

47
Ibid 345