Lex Mercatoria and Codification of International Trade Law

Introduction:

Lex Mercatoria, a Latin expression, implies a body of trading principles employed by merchants throughout medieval Europe. It translates to ‘merchant law.’ Its evolution as a custom and practice system went along through merchant courts and along main trade routes. It emphasizes entering into contracts, alienating property, shunning legal complexities, and deciding cases ex aequo et bono and thus functions as the international law of commerce.

It later developed into an integrated body of law produced intentionally or voluntarily and adjudicated and enforced voluntarily. This assuages the intensity of the frequent friction, given the diverse backgrounds and local traditions of the merchant. The international background rendered the state laws inapplicable at times, and the merchant law did not always provide a leveled framework. The almost non-existent trading and commercial activities in Europe after the end of the Roman Empire were revitalized.[1]

The search for a third legal order arises from several jurists’ perception that neither municipal law nor international law is sufficient or adequate for dealing with international commercial disputes where parties from various countries are engaged. In their opinion, the national legal system may not be receptive to a contested party’s expectations with a different national legal context, and international law may not be sufficient to deal with cross-border commercial transactions. The third legal order, popularly known as the Lex Mercatoria, which is neither national nor international law, but a combination of both attributes is, therefore, an appealing prospect. Although the Lex Mercatoria had its presence at the beginning of human civilization and was commonly practiced in the Middle Ages, it remained buried until recently, when some global importance scholars began to recommend its suitability for modem international commercial relations.

History of Lex Mercatoria

The principle of lex mercatoria is not recent. Some claim that it has its forerunner in the Roman ius gentium, a law governing economic relations between foreigners and Roman citizens. Others go back in time and trace the origins of the lex mercatoria in ancient Egypt or the Greek and Phoenician sea trade of the Old Century. In either case, in the Law of the Middle Ages, the historical origins of the lex mercatoria can be identified. The emergence of foreign economic ties in Western Europe at the beginning of the 11th century led to the establishment of the Law Merchant, a cosmopolitan commercial law centered on customs and implemented to cross-border disputes by the business courts of the various European commercial centers.[2]

This law resulted from the efforts of the medieval trade community to transcend the outdated laws of colonial and Roman law, which could not meet the requirements of modern foreign trade. Merchants established a superior statute, which established a strong legal foundation for the great development of trade in the Middle Ages. For almost 800 years, standardized codes of law have applied to traders throughout Western Europe.

Almost all of the laws of lex mercatoria have been developed to bypass the cumbersome rules of the common law. An example of this situation is that a person could not offer what they did not have. In other words, a person who has no title to products cannot offer a title. Therefore, when a person buys an item, to make sure that they are the legitimate owner of the title, they had to ask their remote owners for the title of that product to make sure that no one in the chain of title had acquired it through fraud. However, according to the laws of lex mercatoria, commercial activity “cannot be carried on if we have to inquire into the title of anyone who comes to us with the title records.”[3]

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. When the states took over International trade, the new mercantile laws were applied to regulate international relations.

However, the growth of international trade since the Second World War has revealed some of the shortcomings in international contracts’ conventional conduct. These shortcomings have not been corrected by the complexities of private international law and domestic law’s outdated existence. The dominance of domestic law in international economic affairs has started to be challenged. Through regular clauses, self-regulation contracts, trading practices, and access to international commercial arbitration, traders have developed their independent regulatory system outside of national law, labeled the modern lex mercatoria.[4]

Sources of Lex Mercatoria

There are various contestations amongst the proponents of the lex mercatoria that concern the sources from which it is derived and the relative significance of the sources that are admissible. Professor Lando has listed several ‘elements’ rather than ‘sources’ of the lex mercatoria as follows: 

1. public international law, 
2. uniform laws, 
3. the general principles of law, 
4. the rules of international organizations, 
5. customs and usages, 
6. standard form contracts,
7. reporting of arbitral awards.

Professor Goldman’s views lex mercatoria as a principle that needs to be derived from the customary and spontaneous principles, while the breadth of the sources will be restricted. Dasser states that only trade usages and general principles of law may be considered as genuine sources of the lex mercatoria.[5] Likewise, in Professor Goode’s opinion, “only general principles and uncodified usages constitute the lex mercatoria.”[6]

Lex Mercatoria and The Codification of International Trade Law

Trade lawyers have the option of choosing something similar to domestic contract law, rather than national law, to regulate their relationship. They may do so, in part, to protect their contract and conflicts that may emerge from the jurisdiction of national judges. The significance of lex mercatoria as a system of governance is partly made possible by the creeping codification of this law. Of course, the more traders and conflict resolutions currently use this rule, the more their autonomy – from national sources of law – is strengthened. Projects to consolidate and codify transnational contract law have propagated over recent years. The most significant of these are autonomous institutes of researchers and academics, which have developed draught commercial codes of national and global scope. In the 1970s, for example, the International Center for the Integration of Private Law started work on what is now the UNIDROIT Standards of International Commercial Contracts, which aspires to be a systematic code for international trade. Research is also underway to achieve a standardized and harmonious internationalized sales regulation.[7]

Going beyond borders or concerns is the key essence of the Transnational Political Economy, and it does so by undertaking a system of harmonization between the three levels that compose such an economy: person, state/systemic, and structural. Private merchants, trade coalitions, and alliances of individuals transcending national borders (such as the Foreign Chamber of Commerce and UNIDROIT) are at the individual stage. States and all embodiments of their authority, namely their systems of municipal, commercial law, and private international commercial law, occupy the structural stage. 

Transnational Political Economy believes that these stages are becoming more interconnected or harmonized, both horizontally in their own right and vertically, as the difference between these stages becomes unclear. Horizontal standardization refers to a mechanism that affects actors that are limited to a particular stage. For example, at the individual level, as the ICC enacts uniform procedures or standard contracts for the selling of a particular product. In this way, the actors participating in the group become more integrated into their work. Similarly, as States agree to more codes at the level of public international commercial law, their legislation is more harmonized.[8]

The concept of ‘vertical’ harmonization, in other words, includes the reciprocal harmonization of the private and public spheres. One of the fascinating things illustrated by the Transnational Political Economy is that this approach illustrates such developments taking place at various levels at the same time. For example, the ICC and the numerous product and professional organizations are establishing rules of conduct, uniform codes, and model laws regulating certain elements of international trade from the bottom up, while simultaneously, States are giving up control over the same issues in public international commercial issues from the top down. The Transnational Approach also seeks to integrate the process of rising globalization and to take into consideration the complexities of the global political economy in a multi-level context.[9]

In general, the harmonization and integration of private contract law is an unavoidable call as a consequence of the development of international trade. With the booming growth of foreign trade and investment, international transactions quickly became a big part of all economic activities. Consequently, the elimination of international transaction costs and other obstacles has become a key priority for both governments and the private parties, which is to facilitate international sales transactions by eliminating regulatory barriers and increasing legal certainty for international transactions. The development of a single private international law would offer several significant advantages in this respect.

Conclusion

On the European Continent, arbitrators are gradually applying to lex mercatoria to diplomatic disputes. Clauses to this effect are frequently introduced in contracts between, on the one hand, a government or a government company and, on the other, a private enterprise. The Government does not wish to comply with the rules of a foreign State. A private party would not wish to have a contract regulated by the rules of a foreign country, as it could be modified to its detriment after the contract has been concluded. Clauses relating to lex mercatoria are also included in contracts signed between private companies.[10]

By selecting lex mercatoria, the parties expel the minutiae of the national legal structures and escape the laws that are inappropriate for foreign contracts. They thus avoid peculiar procedures, limited time-limits, and some of the problems that can arise by domestic laws, which are uncommon in other countries, such as the rules of common law on contract consideration and privilege.[11] In addition, those involved in the proceedings – the parties, the lawyers, and the arbitrators – plead and argue on equal ground; no one has the privilege of getting the case pleaded and resolved by their own statute, and no one has the handicap of seeing it ruled by international law. On the Continent and in the countries of common law, it is still a matter of dispute whether the parties can consent to have their contract regulated by lex mercatoria.

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References:

[1] Sonakshi Verma, The Development of New lex mercatoria in the context of Liberalisation, Privatisation and Globalisation, ACADEMIKE, https://www.lawctopus.com/academike/lex-mercatoria/

[2] Theory of Lex Mercatoria, LAWTEACHER, https://www.lawteacher.net/free-law-essays/commercial-law/the-theory-of-the-lex-mercatoria-commercial-law-essay.php#:~:text=Lex%20mercatoria%20is%20the%20Latin,throughout%20Europe%20in%20the%20medieval.&text=It%20evolved%20as%20a%20system,the%20international%20law%20of%20commerce.

[3] Ibid.

[4] Id.

[5] Abul F.M. Maniruzzaman, The Lex Mercatoria and International Contracts: A Challenge for International Commercial Arbitration?, 14 AM. U. INT’L L. REV. 657, 672 (1992).

[6] Id. at 672.

[7] Supra note 1.

[8] Jarrod Wiener, The “Transnational” Political Economy:- A Framework for Analysis, lexmercatoria.org

[9] Ibid.

[10] Abul F.M. Maniruzzaman, The Lex Mercatoria and International Contracts: A Challenge for International Commercial Arbitration?, 14 AM. U. INT’L L. REV. 657, 672 (1992).

[11] Ole Lando, The Lex Mercatoria in International Commercial Arbitration, 34 INT. COMP. LAW Q. 747, 748 (1985).