Lex to rely on state institutions for enforcement

Lex Mercatoria (LM) isoften discredited: too vague in its approach, too confusing in content, underappreciated by arbitrators and practitioners, and even doubted in its veryexistence.

This arguments will show a broad approach to defining LM complementsthe critical business of codifying the LM, to make it a more practical avenueof law that is more definite and provable. Distilling Lex Mercatoria– A Narrow Approach or a Wider Approach?Conceptions of LexMercatoria have transitioned from an ancient LM, situated in the Middle Ages toa “transnational set of norms and procedural principles, established by and forcommercial transactions, in (relative autonomy to states”1  This conceives the LM as an informal andflexible system of rules and “soft law”2. However, a third stagehas seen this system move towards increased codification, through for examplethe UNIDROIT Principles of International and Commercial Law and a “stronglyinstitutionalised court like international arbitration.

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“3 Scholars also disputewhether LM can be called law at all. Theories of LM based on contract without alegal system, ignore the difficulties of enforcing a contract. Opponents of lawwithout a state, overlook the increasingly globalized marketplace. Systemstheory can be utilised to show LM should “transcend state and non-stateboundaries.”4Increasingly, parties utilise LM, UNIDROIT Principles and choose arbitration,but also continue to rely on state institutions for enforcement (e.g. “Britishreinsurers are reported to prefer courts over arbitration, and Japanesefishermen at the harbor of Tokyo prefer the state-sponsored Tuna Court overprivate arbitration”5). Concluding this leavesus to allow LM to run on considerations regarding freedom of contract, whilerealising it can draw some of its formulation from state actors, and does notneed to draw legitimacy from within itself only, thus producing a morerealistic definition.

6 Scholars have debated thesources of LM at great length. Goldman views7, general principles of lawand general usages of international trade as the key sources for LM. Generalprinciples includes both Article 38(1) of the Statute of the InternationalCourt of Justice, but also established by customary and repeated usage ininternational trade. Thus, the transnational nature of transactions LM rulesover, and its customary origin, gives LM a “spontaneous character” which isopen to the intervention of inter-state or state authorities in theirelaboration or implementation”.8 This is a narrowed viewof LM’s sources: laws of in state and inter-state origin cannot automaticallyform the content of Goldman’s LM unless they are integrated throughinternational custom or general principles of law, in which case it isirrelevant who is the author of such law. Goldman has found support inProfessor Goode who also makes the distinction between LM, which “that part oftransnational commercial law which is uncodified and consists of customarycommercial law, customary rules of evidence and procedure and generalprinciples of commercial law, including international public policy.”9 Thus, he clarifies hisposition is not rooted at all in the positivist view which may attributeelements of LM to existing parts of transnational commercial law.

This viewnarrows the breadth of sources that can be relied on, but the sources he reliesupon potentially makes LM more confusing. Lando and Mustil cite thefollowing, “(a) public international law, (b) uniform laws, (c) the generalprinciples of law, (d) the rules of international organizations, (e) customsand usages, (f) standard form contracts,” (g) reporting of arbitralawards, as LM’s “elements” 10 of LM. This ischaracteristic of widening of LM from a “restricted list of commonly understoodprinciples”11.It nearly covers the entirety of “modern transnational law or the law ofinternational business transactions”12.This definition may complicatethe business of calling LM law, or even useful law.

Highnet argues, the mereexistence of LM as a theoretically available source of “interpretation ofamplification of contractual clauses”, does not make it law. In his opinions, PrincipiaMercatoria more accurately reflects the “nature application and content”13 of these principles,rather than any insistence that the content of LM forms an undiscovered legalsystem, without national jurisdiction. Due LM’s creation out of inequalities anddifferences between states in multinational and developmental state contracts,LM is inherently denationalized. Due to the apprehension that application oflocal law in nationalised contracts, being used to benefit the host country,unfairly. What is required in these sorts of transactions then, is a system ofrules and principles capable of being “sufficiently well identified andconsidered as composing the functional equivalent of a miniature andvoluntarist legal system”14 Conversely, LM iscommonly critiqued as “a sort of shadowy, optional, aleatory”15 alternative. Thesubstance of LM’s widening scope and flexibility, become its Achilles’ heel asthe substance of LM is commonly critiqued as inherently “ambiguous andindefinite.” Situating the particulars of LM can only be clarified on a case bycase basis, thus complicating the process of distilling a definition for LMfurther.

For example, commentatorsfind LM contains only “the most general and inoffensive principles of law suchas “pacta sunt servanda” and “bona fides” and as “”rules of law which arecommon to all or most of the States engaged in international trade . . . andwhere such common rules are not ascertainable,..

. the rule … which appears tothe arbitrator to be the most appropriate and equitable considering the lawsof several legal systems. “”16 However, it is difficultto boil down an overarching, good will concept such as ‘good faith’ can beboiled down to a singular rule, as ironically this can produce an unfairresult, in its inability to be flexible and adapt to any given situation. Gaillard has offered theopinion, in response to these critiques, that LM may be better understood as amethod of decision making rather than a set of rules.

This does little toimprove notions precision and certainty, due to the great discretion andflexibility it leaves to adjudicators.17 Perhaps the best way ofviewing LM, is offered by Frischkorn. Arguably, his theory of LM accounts forthe history of LM, and its undeniable importance in trade practise, and the needto create a manageable form of LM which is usable and accessible. His third andbroadest definition of LM as a ‘pool’. He focuses on its transnationalcharacter and its lack of the need to be promulgated as an independent legalsystem. Such definition encompass all the elements of Mustill and Lando, butposits their widening scope as a benefit to parties, who can adjust theavailable sources to suit their needs. However, it also, in its determinationto produce positive outcomes for parties favours codification, as this canclarify the specifics of this law, while remaining flexible enough to adapt tothe commercial market.18USABILITY IN PRACTISEThe usage of LM inarbitration clause has led to the assertion that LM is largely a creation ofarbitrators.

However, even Oduntan states mostly, LM is under appreciated inthe formation of contracts.19 Assessing data andscholarship on the extent of usage in contracts, demonstrates the currentusefulness of LM as a concept.In practise, according toa survey where lawyers were asked to report their advice to clients in choosingLM in solving a dispute, they reported LM could not be justified as providing asecure contractual choice. Lawyers prefer to recommend “definitive”20 and “provable”21 law, with “definitive” referringto a specific set of rules, and “provable” referring to rules in a fixed formand can be taken to a dispute resolution forum as undisputable law22. LM is inherentlyproblematic in its provability: the difficulty in finding a comprehensive setof rules, its scattered sources in ancient practise, and aged academicscholarship.

Prior to codification at least, it was difficult to place thecontent of LM in any single place.23 Accessible empirical datafrom 1999 through to 2012, from the ICC, sheds light on parties’ choice of lawdemonstrates the relevance of LM to parties choosing forums of law forresolving contractual disputes. In fourteen years, across 8,911 requests forarbitration, 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 thedata shows only those contracts which gave rise to a dispute.

But, this is datafrom the most powerful arbitral body in the world, and the data could be usedto reasonably argue that the “solutions offered by LM are far less precise andcertain than the solutions offered by national law”25. Proponents of the LM,base their arguments in its “universal character, 2) flexibility and dynamicability to grow, 3) informality and speed and 4) reliance on commercial customand practice.”26 However, the data hasshown in practise it is difficult to reconcile these benefits, and the need forcertainty in transnational contracting.

However, although thesedevelopments take a step in the right direction, their practicability islimited in usefulness if parties do not elect to use them. Even with LM’salleged “superior efficiency” with regard to economic considerations, has notencouraged parties to favour LM as a choice of law. The Preamble to thePrinciples suggests they may be useful in several situations: “(1) when chosenby the parties to a contract; (2) when the parties have referred to lexmercatoria or general principles of law to govern their contract; (3) tosupplement or replace domestic law which does not provide a clear rule for theissue at hand; (4) to interpret or supplement international conventions onuniform commercial law; and (5) as a model for domestic legislation.”27 Basedow points outalthough this generates party autonomy, (in the sense parties are free to agreeon contract law fair to them by choosing denationalized law if they wish, andgetting ahead of institutional competition). Lando states choosing LM helpsparties to avoid “peculiar formalities, short periods of limitation, and someof the difficulties created by domestic laws which are unknown in othercountries, for example, the common law rules on consideration and privity ofcontract”28.LM, levels the playing field by balancing the advantage conferred by settlingone’s case in his own law, or vice versa.29  However, other concerns can be shown tounderpin commercial transactions more significantly.

The literature showsconsistently, parties generally favour capitalising on party autonomy, to imposetheir own national law due to the transaction costs of examining various othercontract laws. Another rationale may lie in the principle agent relationshipbetween parties and their lawyers. Choice of law contracts are drafted byself-interested counsel, whose concerns revolve around giving the most familiarand secure law. The risk of losing business is too great when balanced againstthe need to profit from legal advice and creating profitable contracts.30 Therefore, LM can only berendered as useful as the sum of its contents if chosen as a forum of law.

Conwayasserted “this lex mercatoria or common law of merchants is of more universalauthority than the common law of England.”31 Oduntan demonstrates Courtscompletely recognise the legitimacy of LM and the enforcement of arbitralawards, across a number of legal systems.32 The English ArbitrationAct (1996), makes express provision for party autonomy by stating “an arbitraltribunal shall decide the dispute “in accordance with the law chosen by theparties…or, if the parties so agree, in accordance with such otherconsiderations as are agreed by them or determined by the tribunal.

“3334In state to statetransactions 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 FrenchConstruction Companies. Civil and Common law legal systems may have littlecommon ground upon which to form a comprehensive understanding of rules35. At its core, Westerncontracting is modelled on the common law, and English law favourspredictability, while in Civil Law justice generally, to varying extents,prevails36.Thus a tension arises in how law should be drafted in contracts between suchsystems, if these rules are not “mandatory”37, how the judge canapproach the parties contract to incorporate principles of “good faith and fairdealing”, where otherwise there seems to be a “strict allocation” 38of risk between parties.

The Codification of LexMercatoriaResponding to critiquesof LM, scholars and practitioners have attempted to tame the system, shaping itfor actual use in the international commercial realm. The end of 1994introduced a mode of increasing specificity in LM’s ill- defined principles,while acknowledging LM’s long history, through the UNIDROIT Principles ofInternational Commercial Contract and United Nations Convention on Contractsfor The International Sale of Goods (CISG)39. In CISG for example,Article 79, defines force majeure: non-performance resulting from circumstancesbeyond his control, and that which he could not reasonably be expected toforesee, or taken measures to have avoided, at the time the contract wascreated, will not make him liable. The concept is also extended to covernon-performance caused by third party failures and the requirement for a partyto give notice under a reasonable period of time for the intention to rely on Article79, if they are entitled to do so.40The UNIDRIOT Principles makeefforts towards the “harmonization” and “restatement” of LM. Although this maydetract from an accurate reflection of current trading practises, it goes along way towards giving LM a more “definite and provable” character. Thepractical use of them is to provide a physical marker which can be referred tocourt, and parties under its control can refer to them with little difficulty41. Furthermore, thePrinciples add substance to elusive concepts such as “good faith, forcemajeure, and the right to termination.

” Acting in good faith is a pillar of LM,which article 2.15 helpfully defines.42 Force majeure at Article7.17 roughly follows the definition in CISG, and extends its value by defining”hardship” and its implications. This goes even further than the UniformCommercial Code’s “references to “commercial impracticability””43 The right to terminationis also well developed: Article 7.3.

1 defines termination as possible underfundamental non-performance, if this has “substantially deprived the aggrievedparty of what it was entitled to expect under the contract”44, if strict compliancewith the terms goes to the root of the contract. Concepts “anticipatory breach,procedural requirements regarding notice and provisions concerning the effectsof termination”45are also expanded upon.If we are to view LM, asdiscussed 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 pointsout that the construction of the Principles is supple enough to be responsiveto international commercial requirements. Article 1 of the Principles stronglypromulgate the notion of freedom of contract and leaves the Principles to beinterpreted on a case by case basis.47Codification, in itsmixture of structure and flexibility, and the provision of a physical method ofreferencing arguments, is a desirable development which creates a more helpfuldefinition of LM, while allowing its responsive character to exist.ConclusionsLM, we must accept hasutility in international commercial contracts as a method of equallingbargaining power between transnational commercial contracts.

This isparticularly important in the instance of state to state actors, who mayrequire an outside law to reconcile different conception of law, or where amore powerful nation’s laws may prove an unfair advantage. Its recognition inthe courts and its continued use in some contracts, notably state to statedealings, immediately dispels those who doubt its very existence. However, ifLM is to move forward as a concept that must balance its (justified) characteras flexible and adaptive to commercial markets, with the need to make itaccessible so it is more definitive and provable. CISG and the Principles areindicative of this trend: they have demonstrated new LM, still left much to bedesired in terms of expanding vague commonly acknowledged principles of law. Takinga broad and pragmatic view to LM demonstrates the ‘new’ new LM must continue todraw legitimacy from continued targeted codification, so that it remains arelevant mode of rules in practise. 1 Michaels Ralf, ‘The True LexMercatoria: Law Beyond the State’ 2007 14(2) Indiana Journalof Global Legal Studies 4482 Ibid3 Ibid4 Ibid 4595Ibid 6 Ibid 4507 Abul ManriruzzamanF.

M. “The Lex Mercatoria and International Contracts: A Challenge forInternational Commercial Arbitration?” 1999 14(3) American UniversityInternational Law Review 657, 6648Ibid 6659 Ibid 66610 Abul ManriruzzamanF.M. “The Lex Mercatoria and International Contracts: A Challenge forInternational Commercial Arbitration?” 1999 14(3) American UniversityInternational Law Review 657, 67211 Oduntan, Gbenga ‘Is the Lex Mercatoria still applicable to 21st centurycommercial contract?’ 2015 International Company and Commercial Law

co.uk/Catalogue/ProductDetails.aspx?recordid=423>accessed: 27th December 2017.12 Ibid13 HighetKeith, “Enigma of the Lex Mercatoria”, 1988-1989 63 Tul. L. Rev.

613, 61613 Ibid 62514 Ibid15 Ibid16 Selden,Barton S. “Lex Mercatoria in European and U.S.

Trade Practice: Time toTake a Closer Look,” 1995 Vol. 2(1) Annual Survey of International &Comparative Law 111 11517 Cuniberti Gilles’Three Theories of Lex Mercatoria’ Colum. J.Transnat’l L.

370, 39118 FrischkornMichael, ‘Definitions of the Lex Mercatoria and the Effects of Codifications onthe Lex Mercatoria’s Flexibility’, 2005 7 Eur. J.L. Reform 331, 33519 Oduntan, Gbenga ‘Is the LexMercatoria still applicable to 21st century commercial contract?’ 2015 InternationalCompany and Commercial Law Review 

aspx?recordid=423>accessed: 27th December 2017.20 SeldenBarton S. “Lex Mercatoria in European and U.S.

Trade Practice: Time toTake a Closer Look,” 1995 Vol. 2(1) Annual Survey of International &Comparative Law 111 11521 Ibid22 Ibid23 Ibid24Cuniberti Gilles ‘Three Theories of Lex Mercatoria’ Colum. J.Transnat’l L.

370, 39825 Ibid39926 Benson B,’The Spontaneous Evolution of Commercial Law’ 1989 Southern Economic Journal644, 65427 Ibid 12228 Oduntan, Gbenga ‘The ‘Reimaginarium’ of Lex Mercatoria:Critique of the Geocentric Theory about the Origins and Episteme of the LexMercatoria’ 2016 Manchester Journal of InternationalEconomic Law, 13 (1) 6329Ibid30Basedow Jürgen, ‘Lex Mercatoriaand the Private International Law of Contracts in Economic Perspective2007 12(4), Unif. L. Rev. pp697,  70931 Bankof Conway v. Stary, 51 N.D.

399 (1924), 40832 Oduntan, Gbenga ‘Is the Lex Mercatoria still applicable to 21st centurycommercial contract?’ 2015 International Company and Commercial LawReview accessed: 27th December201733 TheEnglish Arbitration Act (1996)34 Cf.

Connerty Anthony, ‘Lex Mercatoria: Is It Relevant to International CommercialArbitration’ 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

trans-lex.org/bibliopdfs/anthony_connerty.pdf>accessed: 27th December2017.35 Selden,Barton S. “Lex Mercatoria in European and U.S.

Trade Practice: Time toTake a Closer Look,” 1995 Vol. 2(1) Annual Survey of International &Comparative Law 111, 11636 Cf. CorderoMoss Giuditta, “International Contracts between Common Law and Civil Law: IsNon-state Law to Be Preferred? The Difficulty of Interpreting Legal StandardsSuch as Good Faith” 2007 Vol. 7(1) Global Jurist37 Ibid 2038 Ibid39Selden, 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 12040Ibid 12141Ibid 12242Ibid 43Ibid 12344Ibid45Ibid46Frischkorn Michael, ‘Definitions of the Lex Mercatoria and the Effects ofCodifications on the Lex Mercatoria’s Flexibility’, 2005 7 Eur. J.L. Reform331, 33547Ibid 345