THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 985
The Operation of the International Commercial and Financial
Legal Order: The Lex Mercatoria and its Application ­ Moving
from the Theories of Legal Positivism and Formalism to the
Practicalities of Legal Pluralism and Dynamism
JAN H DALHUISEN1
This article grew out of a presentation first made at Duke University School of Law
in the Spring of 2003 and is the extended text of the Annual Lecture of the Society
of Comparative Legislation given on May 27 2004 at the British Institute of International
and Comparative Law. An earlier text was published in 24 Berkeley Journal
of International Law 129 (2006) under the title: `Legal orders and their
Manifestation: The Operation of the International and Financial Legal Order and
its Lex Mercatoria'. The Journal has consented to this amended republication.
I. Introduction
In this Article I maintain that, whatever we may think of globalization, it has, at
least in commerce and finance, lent fundamental support to the identification and
recognition of an autonomous international legal order between professional participants
which order I call here the `international commercial and financial legal
order'.
Legal orders are in this connection understood as participatory social structures
or communities that produce their own laws. Of these, I consider states to be only
one type albeit the most important one. When and how social structures or communities
other than states become operative as law creating legal orders will be an
important issue in this Article. When they do, it follows that their own laws in principle
prevail in all matters properly belonging to their order.
It means that in the new international commercial and financial legal order once
it is so identified, a new transnational law ­ now often called the new law merchant
or lex mercatoria ­ may be expected to operate as the prevailing law. At the
practical level, this law then covers all international business transactions and
supersedes, in principle, all national or domestic laws.
1
Dr. Juris Amsterdam, LLM UC Berkeley, Professor of Law King's College London, Visiting
Professor of Law UC Berkeley, Corresponding Member Royal Netherlands Academy of Arts and
Sciences, Fellow Chartered Institute of Arbitrators London, Member NY Bar.
985
JAN H DALHUISEN986
This new law is likely to be of a dynamic nature, often expressed in practices
that may change overnight if business logic or market forces so require. The search
is therefore on for a forward moving set of internationalised principles and rules
that may be largely articulated by participants themselves and draws widely from
their practical needs, established ways of dealing, best practices, trade organisation
rules, the innate rationality of their (international) dealings, and from general or
fundamental legal principle.
This approach goes against present day perceptions in which, at least in private
law, the statist view of law creation or legal nationalism remains dominant and
against the connected view that domestic laws cover all international dealings and
can provide proper solutions to all problems that may arise in international transactions
even if these domestic laws were never written or developed to cover them.
In this established view, international business must inescapably live with a fractured
system of laws and with the uncertainty and inequality in result (and inefficiencies)
this necessarily presents. Private international law, pointing to the most
appropriate domestic legal regime to apply on the assumption that all legal relationships
have an origin in such a regime, is the expression of this approach which
is here fundamentally challenged.
Often there is a close connection with legal formalism, perceived as the expression
of law as a system of essentially hard and fast black letter rules meant to automatically
apply and considered sufficiently complete and self-sufficient to be able
to resolve all outstanding issues in whatever situation or transaction. There is usually
little room in this view for the idea that the applicable law itself is not an absolute
pre-existing given. It is inimical to the notion that law unavoidably changes
when applied and to the idea that modern law, at least in commerce and finance,
must develop more naturally in response to the environment in which it operates
and to the problems it must face, not merely as a matter of theory but as a practical
requirement for it to remain relevant, responsive and credible. Clearly in the
traditional view and in the legal nationalism it represents, there is little place for a
trans-nationalised more dynamic law. To the extent uniform law is accepted, it is
formed by treaties which ultimately remain products of national laws and whose
effect does not extend further than the territories of the contracting states.
The challenge to this traditional approach can be cast in terms of an end to legal
nationalism and legal formalism (often called together legal positivism)2
, hampered
2
It is of interest in this connection to note the evolution of the term `positivism' in legal terminology.
The term came into common use in the 19th
Century following A Comte, Cours de philosophie
positive (1830­1842). In it origin, it denotes the scientific study of human behaviour and the identification
of rules or regularities in it as the basis of the studies of the social sciences. Thus the study of
the law became a study of natural phenomena based on the observation of human (or states') behaviour
in an inductive process. As such it could be seen as the opposite of natural law, which adhered to
a more theoretical deductive logical process of rule formulation, and an acceptance of Hume's scepticism
in this respect.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 987
as they are by the glaring inadequacies they present in the practice of international
dealings and by the dogmatic rejection of dynamism as a self-creating legal force.
This end may be seen as inescapable, forced as it is by the dramatic multiplication
of international transactions which the globalisation of the modern flows in goods,
services and money has fostered as a consequence of which the total of these international
flows are now far larger than any domestic ones.
This must, it is submitted, by itself have an effect on the applicable law at least
if it wishes to remain relevant in the distribution of risks and tasks between participants
and in the resolution of their disputes either in the ordinary courts or ever
more often through international commercial arbitrations or other forms of ADR
that even now are forced increasingly to ignore a more formal and purely domestic
concept of law. In this connection, it should not be forgotten that the law only
provides one way of determining behaviour and of avoiding or solving disputes
and can only effectively continue to do so if it remains convincing in its responses
at the level of practicalities, remains efficient, and credible.
Clearly, there are here substantial jurisprudential issues to consider but this study
aims to be at the same time highly practical in its conclusions in terms of what the
new lex mercatoria is, how it can be identified, and how it operates and must be
applied. The simple formula this study presents is a hierarchy of norms, which, it
is submitted, characterises for the time being the operation of the modern lex mer-
catoria.
In this hierarchy, domestic laws continue to play an important residual role so
that there is always a full system of law, but their application is progressively preceded
by transnational fundamental legal principles, international custom or practices
including trade organisation rules and standards, uniform treaty law, expressions
of party autonomy, and general principles in the manner discussed in greater detail
below. Importantly, where domestic laws still residually apply in international dealings
in this way, they become part of the new transnational law operating in the
international commercial and financial legal order and may therefore no longer
function in a purely domestic manner.
This simple scheme may be of great importance for international commercial
arbitrators but also for state courts that are increasingly becoming familiar with and
In public international law, positivism retains this inductive meaning, although it started to emphasise
in particular sovereignty and sovereign behaviour, equality of sovereigns, and their unquestioned
and unfettered authority domestically, eventually resulting in a sharp distinction between the external
and internal status of states, although this strong emphasis on sovereignty ultimately also undermined
the authority of public international law.
The consequence became that the term `positivism' now usually stands domestically (at least in private
law) for (a) a state's central role in all law formation, for (b) a dependence on black letter law, often
for (c) a connected formal approach to the interpretation of legal texts, and ultimately for (d) the application
of domestic law in this sense to all international dealings (through a system of conflict rules or
rules of private international law, itself considered part of the domestic law). In private law, positivism
thus stands for nationalism, a statist legal culture, and legal formalism. It remains as such the opposite
of naturalistic, universal, transnational or informal or diverse law creation.
JAN H DALHUISEN988
more confident in the application of foreign and international or transnational laws.
It leaves open one important point being the effect on regulatory or other mandatory
domestic law in international transaction. Depending on conduct and effect, a
system of balance like the one of Sections 402 and 403 Restatement (Third) Foreign
Relations in the USA.is here an obvious answer.
To make my point, I shall discuss in Part II first the law, private law in particular,
as a purely nationalist or statist phenomenon and how it came to be so because
it used to be quite different and it is largely a nineteenth century development. In
Part III, I shall discuss the phenomenon of legal orders and their manifestation more
generally, including their operation as statist or as non-statist or immanent legal
orders and take the international commercial and financial legal order as a prime
example of the latter. Its evolution and identification may in commerce and finance
more properly be understood from the perspective of normative sociology or economics
as legal scholarship in this area is beginning to show. The law that is in
this manner autonomously and spontaneously produced may at least to some extent
be a matter of development psychology, building on and supported by more traditional
natural law or more universal notions of legal rationality. But as already mentioned,
there is also an important evolutionary aspect to be considered in which the
law simply changes under pressure of outside forces and the circumstances ­ here
the internationalisation of the commercial and financial flows ­ in which it must
operate. In business, this may by itself contribute to its transnationalisation.
In Part IV, I shall be concerned with the overlap, competition or conflict between
the international and statist or other legal orders and their laws particularly where
states exert justified public policy preferences, at least in everything happening on
their territories, therefore also in respect of international transactions that are conducted
in or are having an effect on such territories. The international commercial
and financial legal order cannot, it is submitted, ignore public policy preferences
of states that can claim a legitimate interest. In American terms this is the issue of
the jurisdiction to prescribe, especially relevant with respect to the impact of domestic
mandatory and regulatory laws.
In Part V, I shall attempt to deal with the law produced by the new legal order,
therefore with the question how we can know and apply the positive modern lex
mercatoria. As already mentioned, I shall introduce here a hierarchy between the
different sources of law that may claim application and argue that in this hierarchy,
domestic laws found through the more traditional rules of private international
law retain for the time being a fall back position, even if such law enters thereby
the international legal order and may no longer function in a purely domestic man-
ner.
Such domestic law may remain especially important in proprietary matters
where, because of third party effect and mandatory concepts, transnationalisation
is more difficult to achieve, although it must be admitted at the same time that precisely
in modern financial products (which themselves are increasingly internationalised
and in any event often difficult to locate) and in the determination of their
bankruptcy-resistency, traditional domestic proprietary concepts may no longer be
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 989
very helpful whilst transnationalised concepts emerge as equitable proprietary
rights in an open system supporting party autonomy, such proprietary rights to be
cut off at the level of bona fide purchasers for value. It is a highly important subject
that can only be mentioned here but not be developed any further.3
Especially
in this area there may also be room for supporting uniform treaty law as the 2001
UNIDROIT Cape Town Convention on International Interests in Mobile Equipment
and the 2001 UNCITRAL Convention on the Assignment of Receivables in
International Trade are trying to do.4
To continue to use domestic laws as the residual rule in this manner counters
an important and well known argument against the notion of transnationalisation
and the new lex mercatoria. This argument centres on the incompleteness of the
transnationalisation process for the time being and therefore on the potential limited
nature and inadequacy of the transnational law as a legal system that may so
result. Even though no system of law is ever complete, especially in a fast moving
environment, it may nevertheless be realistic to accept that in the formative era of
the new lex mercatoria, application of domestic laws of countries most closely connected
with an international transaction remains important as long as it is understood
that application of these laws is increasingly preceded by other (higher
ranking) sources of law like international practices and perceptions and is itself
increasingly modified or superseded thereby.
To give a poignant example: it may mean that the application of English law in
a domestic English case is not necessarily the same any longer as its application in
an international case, not even where parties have selected that law, unless they
make it clear at the same time that they wish to disregard the internationality of
their transaction and its dynamics altogether. For common law applied in international
transactions this could mean that in contract the traditional contractual notion
of consideration no longer plays a role, a situation borne out by the 1980 Vienna
Convention on the International Sale of Goods that is often considered standard
and that does no longer operate with notions of consideration or bargain.5
Often it is said that the need for legal certainty excludes the operation of a more
dynamic notion of the law and its transnationalisation in the manner as here
described. It is then argued that domestic laws connected with greater legal formal-
3
Jan H Dalhuisen, Dalhuisen On Transnational and Comparative Commercial, Financial And Trade
Law (3rd. ed. 2007), chapter 4.
4
The text of the UNIDROIT Cape Town Convention may be found at http://www.UNIDROIT.
org/english/presentation/main.htm#NR10. See for a comment Roy Goode, Official Commentary (2002).
The text of the UNCITRAL Receivable Financing Convention may be found in the Appendix to the
Report of UNCITRAL on its 34th
Session (2001), GAOR supp. No17 (A/56/17), see also http://www.
UNCITRAL.org. See for a comment HC Sigman and EE Smith, `Towards Facilitating Cross-Border
Secured Financing and Securitization: An Analysis of the United Nations Convention on the Assignment
of Receivables in International Trade' (2002) 57 The Business Lawyer 27.
5
See in this vein also O Lando, `The Lex Mercatoria in International Commercial Arbitration'
(1985) 34 Inťl & Comp. L.Q. 747. This is also borne out by the UNIDROIT and European Contract
Principles.
JAN H DALHUISEN990
ism provide such certainty, but this has in itself become highly debatable in international
transactions. It would in any event be a certainty of an ever lower quality
and because of the parochial and atavistic flavour of much existing domestic law,
it may be cogently argued that local laws increasingly produce a certainty that has
a transaction-destabilising effect and represents therefore an internally contradictory
perspective, only bearable because of the facility of transaction lawyers to
structure around it as good as they can ­ which only serves to highlight further the
inadequacy of such laws. In the new world of commerce and finance, finality in
commoditised transactions may be enhanced in other ways and be much better supported
by transnational principle.6
Legal certainty in a broader sense can only come
from the insights, good sense, behaviour and self-restraint of the participants ­ it
was never otherwise.
I shall conclude with a brief perspective of what lies ahead.
From the outset it can be said that interest in the revival of the international law
merchant as non-statist trans-national law is itself no longer new and a great deal
has been written on it especially in Europe,7
but to relate the emergence, develop-
6
That concerns especially payments and other financial transactions where notions of abstraction
of title transfer, protection of bona fide purchasers or purchasers in the ordinary course of business, and
principles of reliance may combine to support the transaction, JH Dalhuisen, supra n 2, 475, 858­59,
1030­33.
7
The most important early advocate was B Goldman. See B. Goldman, `La lex mercatoria dans
les contrats et arbitrage internationaux: realite et perspectives'(1979) 106 J. Droit Internationale 475;
B Goldman, `Lex Mercatoria' (1983) 3 Forum Internationale; B. Goldman, `The Applicable Law:
General Principles of Law-Lex Mercatoria' in J. Lew ed, Contemporary Problems in International
Arbitration 113 (1986); B. Goldman, `Lex Mercatoria and Arbitration: Discussion of the New Law
Merchanť in TE Carbonneau ed. (Transnational Juris Publications Inc 1990); B. Goldman, `Nouvelles
reflexions sur la Lex Mercatoria' in Etudes de droit international en 1'honneur de Pierre Lalive 241
(1993).
The long standing relative popularity of the lex mercatoria in France may be seen in the light of the
earlier development in that country of the notion of the `international contracť operating under its own
internationalised rules. It was particularly relevant for the validity of gold clauses that were upheld in
these international contracts (but not in domestic French contracts) in the 1930s. See G.R. Delaume,
Transnational Contracts (1989) p 119.
See for the early interest in notion of the new lex mercatoria in England, C Schmitthoff, `International
Business Law: A New Law Merchanť (1961) Current Law and Social Problems 129; `International
Trade Law and Private International Law' in Vom deutschen zum europaischen Recht, 2 Festschrift
Hans Doelle 261 (1963); C. Schmitthoff, `The Unification of the Law of International Trade' (1968) J
Bus Law 109. See for a compilation of his most important writings on the subject, C Schmitthoff, in
Chia-Jui Cheng ed, Select Essays on International Trade Law (1988).
In the UK, Mustill LJ has been particularly critical of the lex mercatoria as a trans-national legal system
and wonders where this new law could come from. See LJ Mustill, `The New Lex Mercatoria', in
M Bos and Ian Brownlie eds., Liber Amicorum Lord Wilberforce (1987) at 149; `Contemporary Problems
in International Commercial Arbitration' (1989) 17 Int. Bus. L 161.
The lex mercatoria found early support in Germany. See N Horn, Das Recht der internationalen
Anleihen (1972); `A Uniform Approach to Eurobond Agreements' (1977) 9 L. & Poľy Inťl Bus. 753;
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 991
ment and application of this law intimately to the operation of a new autonomous
and independent legal order is, I believe, more unusual. I hope that it clarifies a
number of issues and embeds the emergence and development of this new law in
a clearer ­ although informal ­ institutional framework. In fact, the intimate relationship
between law formation and legal orders is not a true new insight either,8
but it is rare and in the perception of those who see this connection again many
consider these orders as being always of a statist or at least national character;
states, therefore, having become the proxy in modern times for the whole concept
of legal orders.
N. Horn, `Uniformity and Diversity in the Law of International Commercial Contracts' in N Horn & C
Schmitthoff eds., The Transnational Law of International Commercial Transactions (1982) at 3.
In Denmark, see O Lando, supra note 4.
There is a fair amount of other early literature reflecting on the topic. See E Langen, Studien zum
internationalen Wirtschaftsrecht (1963); P Kahn, La Vente Commerciale Internationale (1961); `Lex
Mercatoria et Euro-Obligation', in F Fabritius ed., Law and International Trade (1973) at 215.
See, more recently, AF Lowenfeld, `Lex Mercatoria: an Arbitrator's View' (1990) 6 Arb. Inťl
133. See also R Goode, `Usage and its Reception in Transnational Commercial Law' (1997) 46 Inťl
& Comp. L. Q. 1; LY Fortier, `The New, New Lex Mercatoria, or, Back to the Future' (2001) 17 Arb.
Inťl 121; ME Basile et al., Lex Mercatoria and Legal Pluralism: A Late Thirteenth Century Treatise
and its Afterlife, (1998); H Mertens, `Lex Mercatoria: A Self-applying System Beyond National Law?'
in G. Teubner ed., Global Law Without a State 31 (1997); Emmanuel Gaillard, `Transnational Law: A
Legal System or a Method of Decision Making?' (2001) 17 Arb. Inťl 59. But cf. Pierre Mayer, `Reflections
on the International Arbitrator's Duty to Apply the Law' (2001) 17 Arb. Inťl 235.
For a more comprehensive recent elaboration in France, see the work of P Fouchard, in particular
P Fouchard et al., Traite de ľArbitrage Commercial International (1996). See also P Fouchard,
ľArbitrage Commercial International (1965); Gaillard & Savage, Fouchard, Gaillard and Goldman on
International Commercial Arbitration (1999). For a recent overview also, see KP Berger, The Creeping
Codification of the Lex Mercatoria (1999). For an earlier sceptical analysis, see F De Ly, International
Business Law and Lex Mercatoria (1992).
For a fuller elaboration and academic discussion of the subject and in particular of the development
of a hierarchy of sources of law within the modern lex mercatoria, see JH Dalhuisen, supra n 2, at 157
and 211, and for a more sociological approach, see G Teubner, ``Global Bukowina': Legal Pluralism
in the World Society' in G. Teubner ed., Global Law Without a State (1997) at 3. See also G Teubner,
`Breaking Frames: The Golden Interplay of Legal and Social Systems' (1997) 45 Am. J. Comp. L. 149;
Autopoietic Law: A New Approach to Law and Society (1988).
The matter has received relatively little attention in the US. But see F.K. Juenger, `Private International
Law or International Private Law?'(1994­5) 5 King's College L.J.; F.K. Juenger, `The UNIDROIT
Principles of Commercial Contracts and Inter-American Contract Choice of Law' Universidad Nacional
Autonoma de Mexico ­ Universidad Panamericana 229­236 (1998); F.K. Juenger, `Conflict of Laws,
Comparative Law and Civil Law: The Lex Mercatoria and Private International Law' (2000) 60 La.
L. Rev. 1133. It is also largely neglected in the more functional approaches to the law. But see Robert
Cooter, `Structural Adjudication and the New Law Merchant: A Model for Decentralisation' (1994) 14
Int. Rev. of L. & Econ. 215; Robert Cooter, `Decentralized Law for a Complex economy: The Structural
Approach to Adjudicating the New Law Merchanť (1996) 144 U. Pa. L. Rev. 1643. See further also
JE Rauch, `Business and Social Networks in International Trade Law' (2001) 34 J. Econ. Lit. 1177;
Y Dezalay & B Garth, `Merchants of Law as Moral Entrepreneurs: Constructing International Justice
from the Competition for Transnational Business Disputes' (1995) 29 Law & Soc'y Rev. 27.
8
See also infra note 54. See further Neil MacCormick, Questioning Sovereignty (1999).
JAN H DALHUISEN992
It is submitted that this view does not accord with present day realities. However,
it is accepted that law cannot be created at random and needs some (social)
framework in which it can be articulated and operated, but this framework need
not be a state. This suggests at the same time a shift away from a territorial approach
to law in favour of a more functional one.
The discussion which now follows will be largely an exercise in political and
socio-economic thinking in terms of legal pluralism and dynamism. It is mostly
abstract and not empirical. Although the possibility of reflecting on the new rules
may itself be an important indication of their existence, empiricism is here important
but not the immediate purpose of this paper as it remains severely hampered by
present day perceptions but perhaps also by an insufficient intellectual framework
which should precede it.
Undoubtedly, even at this stage, something can already be said from a more
empirical perspective on the functioning, acceptance or internalisation of
transnational norms and their application, either voluntarily or involuntarily. Much
of the present American legal scholarship revolves around these notions of
internalisation and voluntarism9
and it may well be exactly the operation of the new
law merchant internationally that may prove many of the basic contentions of this
new American approach.
Empirically, it might thus help to sample how international arbitrators perceive
the situation, or what they do in practice, or to look at how domestic case law
reacts. This is quite doable but in both cases the sample remains limited and the
reasoning often unclear. Nevertheless, such investigations to the extent they have
been undertaken have been able to produce some important, even if limited, insights
into the existence and operation of the new international commercial and financial
legal order and its new law merchant.10
9
See RD Cooter, `Three Effects of Social Norms on Law: Expression, Deterrence, and Internalisation'
(2000) 79 Or. L. Rev. 1; see also text following note 57, infra.
10
For a rare, more empirical research effort into the trans-nationalisation of private law, see Y
Dezallay and B Garth, Dealing in Virtue: International Commercial Arbitration and the Construction
of a Transnational Legal Order (1996). These authors take the perspective of the international arbitrators
and interestingly note a greater resistance to the lex mercatoria in the academic community than
amongst practicing lawyers.
We already know from modern international arbitration practices that arbitrators are considered
to be autonomous in determining the applicable rules of procedure, evidence and conflicts of laws. In
the merits they may now also rely on general principles. Thus the LCIA and ICC Arbitration Rules in
their newest form give arbitrators great freedom in the application of laws and in the use of transnational
principle and practice. See ICC Rules of International Arbitration art 17 (1998) at http://www.
iccwbo.org/court/english/arbitration/rules.asp; LCIA Arbitration Rules art 14(2) (1998) at http://www.
lcia-arbitration.com/lcia/arb/. French law, Code Civil Procedure art 1496 (Fr.), and Dutch law, Code
Civil Procedure art 1054(2) (Neth.), accept the application of the international lex mercatoria in international
cases. The English Arbitration Act § 46(3) (1996) does not yet do so and follows here the
UNCITRAL Model Law and UNCITRAL Arbitration Rules, which refer to conflict of laws' rules. See
UNCITRAL Model Law on International Commercial Arbitration Art. 28 (1985), reprinted in 24 I.L.M.
1302 (1985); UNCITRAL Arbitration Rules Art 33 (1976), available at http://www.UNCITRAL.org/
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 993
The reaction of the participants themselves and their lawyers is of importance
also and empirically measurable. Yet so far the first ­ therefore the international
business community ­ have been less likely to opine meaningfully on the origin
and nature of the rules that embed their activities. Generally more concerned with
english/texts/arbitration/adrindex.htm. Nevertheless even English courts now uphold the application by
arbitrators of `internationally accepted principles of law governing contractual relations, at least they
did so in respect of an award rendered pursuant to an arbitration governed by Swiss arbitration law.
See Deutsche Schachtbau- und Tiefbohrgesellschaft GmbH v Ras al-Kaimah National Oil Co., [1987]
3 W.L.R 1023. Earlier, the English courts, after having consistently rejected awards based on equity,
had already changed that attitude. See Eagle Star v Yuval, [1978] 1 Lloyďs Rep. 357.
In the Deutsche Schachtbau case, there was no contractual choice of law clause and Art. 13(3) of
the old ICC Rules, which still referred to settlement of disputes through conflict of laws rules, applied.
Even so, this requirement seemed no longer to exclude the application of general principles or the
trans-national law merchant or lex mercatoria. One of the first awards making a direct reference to
the lex mercatoria under Art. 13(3) of the old ICC Rules was Norsolor (Pabalk Ticaret Sirketi (Turkey)
v Ugilor/Norsolor SA, I.C.C. Case 3131 (1979), which was upheld by both Austrian and French
Courts. See Decision of Austrian Supreme Court,8 Nov. 1982, reprinted in 34 Inťl and Comp. L.Q
727 (1985); Decision of French Cour de Cassation, reprinted in XXIV I.L.O.M. 360 (1984). See also
Primary Coal Incorporated v Compania Valenciana de Cementos Portland, CA, Paris, (1 Sep 1988),
No 5953, reprinted in Revue de ľArbirtage 701­12 (1990); cf. DW Rivkin, `Enforceability of Arbitral
Awards Based on Lex Mercatoria' (1993) 9 Arb. Inťl 67.
Importantly, the 1965 Washington Convention on the Settlement of Investment Disputes between
States and Nationals of other States (in respect of foreign investments), also called the ICSID Convention,
allows in Art. 42 the application of transnational law in disputes between foreign investors and
states in which their investments are made and this transnational law is often preferred to the application
of domestic laws, Emilio Augustin Maffezini v Kingdom of Spain, ICSID Case NOARB/97/7, (25
Jan 2000), 16 ICSID Review ­ Foreign Investment Law Journal (2001) at 212.
Because of the greater freedom in respect of the applicable law, of which the ICC and LCIA rules
now testify, the selection of a non-state law is now generally considered less of a problem in international
commercial arbitrations. The 1980 Rome Convention on the Law Applicable to Contractual
Obligations is sometimes thought not to allow it. In truth, this issue of a contractual choice in favour
of transnational law was never considered at the time of the drafting of this Convention and it can easily
be interpreted otherwise, see also Dalhuisen, supra note 2, at 204. In any event, the Convention is
addressed to State Courts and does not apply in arbitrations, see Dalhuisen, supra note 2, at 419. Yet a
different attitude as to a contractual choice in favour of the lex mercatoria in state courts as compared
to arbitrations would seem undesirable.
See infra note 95 for the lex mercatoria references in the European and UNIDROIT Contract Principles
and for the freedom of parties to choose this law according to these Principles.
More startling, and perhaps more embarrassing, is the modern view in a lower court in England that
even a contractual choice of law in favour of Sha'ria law as a non-national law does not stick in the
English courts (replacing it with English law) on dogmatic grounds very similar to those inimical to the
lex mercatoria and a choice of law in its favour, see Summary Judgment Islamic Investment Co of the
Gulf (Bahamas) Ltd v Symphony Gems NV& ORS (2002), LTL, 17 Oct 2002 (unreported elsewhere).
An award that is altogether detached from a national arbitration law may still have greater difficulties
to be recognised under the New York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, 10 June 1958, 330 U.N.T.S. 3, although upheld in the US. Ministry of Defense of the
Islamic Republic v Gould, Inc, 887 F 2d 1357 (9th Cir. 1989). In any event, this does not affect awards
rendered on the basis of other than a national substantive law. See AJ vd Berg, The New York Arbitration
Convention of 1958: Towards a Uniform Interpretation (1981) p 33.
JAN H DALHUISEN994
projects and the division of tasks, risks, costs and benefits, these participants live
in the hope and expectation that the structuring by their transaction lawyers (if
necessary around atavistic or parochial laws), or otherwise the default rules of
whatever applicable law, will adequately protect them. Their lawyers, although
more prone to speak, remain on the other hand for the most part still wedded to
the more traditional, state-imbued, mantras. Transaction lawyers often continue to
believe themselves and their clients safe in domestic legal environments even if in
international transactions a better feel for reality, a clearer perspective, and a truer
understanding of what legal structuring really is, would dictate otherwise.
These more traditional perceptions remain an important constraint on meaningful
empirical research into the trans-national modern lex mercatoria and its operation.
In practice, questions on the operation of the international commercial and financial
legal order and its laws will often be presented only when disputes arise. These
questions have certainly become of increasing interest to international arbitrators
who have the advantage of being detached from the statist institutional scene where
regular courts operate. Indeed, state courts are likely to confine themselves longer
to localised legal thinking, although as we shall see this is not necessarily so for
the more enlightened ones.
From an academic point of view it is time to search first for a better, or at least
a more satisfactory intellectual framework and probe from a more theoretical
perspective whether and how the modern law merchant can function and claim its
place. For the lex mercatoria that work remains also in the US in its infancy. As
in all academic work, the search is therefore on first for a way of thinking that
corresponds better with present day realities and that may subsequently empirically
prove to have greater predictive value.
Those of us who are more familiar with international public law and its long
struggle with sovereignty claims (and whatever they represent as ideal or in practice)
are more likely to be familiar with the notion of supra-national legal orders and the
tension with national aims. They will also be more comfortable with legal
pluriformity and with a more searching and dynamic concept of the law, its
formation and application. They will therefore more readily recognise some of the
issues discussed below but they may be less aware and therefore more in particular
interested in how these issues play out in the trans-nationalisation of private law.
II. Law as a National or Statist Phenomenon
We often characterise the arrival of the new trans-national law merchant as a revival
of the much older lex mercatoria11
because the situation reminds us of the
11
It should of course be realised that the content of the new law merchant or lex mercatoria is very
different from the earlier one, see Dalhuisen, supra note 2, at 146. Although in the area of negotiable
instruments and bills of lading there is mainly progression, in other areas, especially in finance, there
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 995
one that existed before the time of the nineteenth century `nationalisation' of the
law, even in respect of international trade. On the European Continent, this nationalisation
of all law resulted for private law from the codification ethos in which
law creation, also in international commerce and finance, became territorial and a
state matter. But it developed just as strongly in England due to the nationalistic
undercurrent that became apparent in this country at virtually the same time even
if it did not lead to the primacy of legislation in private law, at least not in commerce
and finance. In fact, in England the law merchant (like the ecclesiastical
laws) had already been incorporated into local (common) law earlier, in the 18th
Century. Thus centralisation and nationalism in the law and its formation ended
everywhere the law merchant of those days that until that time had in many of its
aspects an important non-territorial and more universal application amongst the
international community of merchants. As a result, the state arose as the only remaining
legal order and law formation became considered its natural preserve. It
follows that in this environment the close connection between legal orders and law
could no longer be meaningfully explored in any other context and any concept of
a plurality of legal orders was lost.
Yet, there were always some important exceptions. Thus, it is well known that
in public law, we have an international legal order of sorts, therefore a legal order
between states, even if some legal thinkers of note have struggled to assign a place
to the law obtaining in that order.12
International (public) law, exactly because of
its de-nationalized status and the abandonment of the territoriality principle, but
sometimes also because of its ultimate dependence on state enforcement of international
norms, thus suffers in the opinion of some in terms of legitimacy, even if
the adjudication of this law may take place in international courts or tribunals such
as the ICJ and normally also in domestic (state) courts.
Since the 1960s, in the European Union (hereinafter the EU), we have also
become used to the emergence of a separate legal order in what could be called a
confederate environment. It is now well distinguished from the kind of international
legal order between states just mentioned. It was not expressly so ordained in the
founding treaties. Nevertheless, the European Court of Justice assumed it virtually
from the beginning.13
This order operates not only between the Member States but
are major new departures. In fact, it can be argued that this new law is no longer primarily driven by
commerce or mercantile considerations but rather by finance. It raises in particular the issue of the
bankruptcy resistency or proprietary status of new financial instruments in an international context
and moves property rather than contract law to the forefront as to some extent had already happened
when the bills of lading and bills of exchange were developed in the earlier law merchant as negotiable
documents of title or negotiable instruments.
12
Notably HLA Hart, The Concept of the Law (1994) at 227, 231, but not necessarily other modern
positivist writers. See H Kelsen, General Theory of Law and State (1945) p 385.
13
See Case 26/62, Van Gend & Loos v Nederlandse Administratie der Belastigen, 1963 ECR 1;
see also Case 6/64, Costa v ENEL, 1964 E.C.R. 1203; Case 14/68, Walt Wilhelm v Bundeskartellamt,
1969 E.C.R. 1.
JAN H DALHUISEN996
also in respect of their citizens14
and may therefore even produce trans-national
notions of private law in the limited areas of EU competency in this field.15
This
private law is in the case of conflict superior to state or other local laws, even if
its application and enforcement depends mostly on Member State courts and
enforcement mechanisms.
Important for our subject, this superior European legal order derives primarily
from and is largely dictated by the operation of the EU internal market with its
emphasis on the free flow of persons, goods, services, and money in the nature of
a common market and an economic and monetary union, which were the original
objectives of what became the present EU and to which (for many member countries)
the operation of a single currency (the Euro) is now added.16
In the US, there is at least some duality of legal orders. The Federal legal order
operates distinct from the States' legal order and could be seen in respect of the
States as an inter- or supra-state order. It is not normally explained in terms of the
free flow of persons, goods, services and money as from the beginning the US was
meant to be more than a common market and economic union. Rather it was to be
a federation aiming at a `more perfect union', whereas the EU, according to the
Preamble to the EC Treaty (in language later also used in the Preamble to the European
Union Treaty) only wants an `ever closer union' in which the (interim) goals
of a common market, along with economic and monetary union, were clearly
defined but not the end-aim, which remains unspecific.
The duality of legal orders in the US has relevance even in private law, which
remains in essence a state matter. Yet, whatever the original idea, at least the law
merchant also operates at federal level 17
and there are even limited pockets of spon-
14
The literature on this phenomenon is enormous and I may refer to any European law handbook.
See also G Slynn, Introducing a European Legal Order (1992). For a more recent account, see
Z Bankowski & A Scott eds., The European Union and its Legal Order (2000).
15
T Tridimas, The General Principles of EC Law (1999) at 313; see also infra text accompanying
note 78.
16
As restated in Article 2 of the European Union Treaty. See Consolidated Treaty on European
Union, 2 Oct 1997, 1997 O.J. (C 340) 145 [hereinafter EU Treaty]. In fact, it has often been commented
that the EU does not have any preconceived notion of European unity, federal structures or
something similar, but only considers in this connection the clearly laid down integration principles
themselves. See, e.g,. Judge T Koopmans, `Federalism: The Wrong Debate' (1992) 29 Common Mark.
L. Rep. 1051.
17
Clearfield Trust Co v United States, 318 U.S. 363 (1943). In marine insurance and the interpretation
of the relevant policies, the federal courts applied federal private law from early on, see Robinson
v Commonwealth Ins. Co, 20 Fed. Cas. 1002 (1838), followed later by the law concerning negotiable
instruments and interstate common carriers. Thus a diversity case involving a bill of exchange in
respect of the sale of land, title in which was subsequently disputed, relied on federal law for its decision.
Swift v Tyson, 41 U.S. 1 (1842) (holding that Section 34 of the 1789 Judiciary or Rules of Decision
Act generally upholding state law in these matters did not apply to questions of commercial law,
but was confined to the interpretation of local statutes and customs). Interestingly, with reference to Lord
Mansfield in Luke v Lyde, 2 Burr. R. 883, 887 (1759), it was explicitly stated that the law of negotiable
instruments was not the law of a single country. In Western Union Telegraph Co v Call Publishing
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 997
taneous federal common law.18
Constitutional notions of due process (and full faith
and credit) also contribute to this federalization as is well known from conflicts
law19
which tends in the US towards the development of a more substantive, interstate
approach to the applicable law. Thus, even in a fairly clearly defined constitutional
framework, the development of new law is not always limited to its
appointed legal order and can spontaneously occur in others. The law merchant
often sticks out in such cases and is likely to seek a broader environment.
Importantly, it is even argued that there is in the US effectively a national law
that transcends both the federal and state legal orders and finds its legal force in
the recognition and invocation of its rules by the American legal profession.20
Such
a transcendent law would suggest the existence of a national legal order in the US
with a momentum and inner structure of its own.
In the meantime, international human rights concepts like those articulated in
the European Convention on Human Rights and its Protocols may entail internationalized
concepts when enforced by the European Court of Human Rights (ECHR)
and by domestic courts wherever this Convention is incorporated in domestic laws.
Interestingly, these human rights may sometimes also concern private law notions
and include for example a trans-nationalised concept of possession and ownership
under Protocol 1 (Article 1), which is especially relevant in the context of the protection
against state induced property violations other than those in the public inter-
est.21
Here again we have some de-nationalized law, even private law, operating in
18
Typical federal matters are also lifted out of (private) state law like a claim in respect of injuries
caused to a federal soldier. United States v Standard Oil of California, 332 U.S. 301 (1947). The key is
here the protection of uniquely federal interests in situations where Congress has been given the power
to develop substantive law. See Texas Industries v Radcliff Materials Inc, 451 U.S. 630 (1981).
19
See, eg, Phillips Petroleum Co v Shutts, 472 U.S. 797 (1985); Allstate Ins. Co v Hague, 449
U.S. 302 (1981).
20
Melvin Eisenberg, `The Concept of National Law and the Rule of Recognition' (2002) 29 Fla.
St. U. L. Rev. 1229. In this view, an economic and convenience argument may be invoked but also
a common tradition fostered by national law schools and a large `nationaľ slice in the bar examinations
of each state. The informal creation of this law is stressed and its flexibility noted. The rules do
not then figure as black letter law and their binding force may depend on the situations in and the purposes
for which they are invoked. They may as such provide the framework for much legal argument
and the central core of much of the living (private law) in the US, much more and more fundamentally
than is normally acknowledged.
21
See Marckx v Belgium, 31 Eur. Ct. H.R. (ser. A) at §63 (1979); Gasus Dosier und Foerderintechnik
v Netherlands, 306 Eur. Ct. H.R. (ser. A) at §53 (1995). It can as such even cover security
interests of the tax authorities and others, reservation of title, and other conditional ownership interests
or limited proprietary rights. It also includes intellectual property rights and claims based on contract
and tort. This is clear from the reference to `valeur patrimoniale' or the notion of `assets,' which suggests
at the same time that the essence of ownership is here a right with a commercial value that can
be sufficiently ascertained. It may as such even cover goodwill or an existing clientele. See Van Marle
v Netherlands, 101 Eur. Ct. H.R. (ser. A) at §41 (1986); Iatridis v Greece, 1999­II Eur. Ct. H.R., app.
no. 31107/96 (1999), available at http://hudoc.echr.coe.int/. It may not, however, cover a mere expectancy
(of an inheritance) or a right to receive property. See Marckx, supra this note. Yet a right to an
inheritance of a deceased person (if interfered with by a state) may be claimable even if non-partitioned.
JAN H DALHUISEN998
an international legal order, in this case the one being upheld by the Council of
Europe, further reinforced in Europe through regular transcription of these rules
into EU law as general principles.22
In criminal law, we have had the Nuremberg trials, and in The Hague there are
now the ad hoc Criminal Tribunals for Former Yugoslavia (1993) and for Rwanda
(1994) and the permanent international criminal court (the International Court of
Criminal Justice), which also rely much on more universal, perhaps less westernised,
laws and notions in determining gross human rights and humanitarian
abuses.
It was thus never completely true that law, even private law, could develop only
within the context of a state, or as a national or territorial phenomenon only,
although it could still be argued in respect of public international law, the EU, the
ECHR, the ad hoc Criminal Tribunals and the International Court of Criminal Justice
that trans-national law only emerges and operates here by state fiat on the basis
of treaties. But this ignores first the important role of international customary law
and at least the EU in its various Pillars does not strictly speaking operate in this
manner. Its laws are in truth product of its own internal market and the momentum
it has generated.
There were, therefore, always important examples of (trans-national) law that
originate and operate independent from domestic legal orders even in the area of
private law. Also, like in the US, law may apparently permutate and escape its
appointed legal order. Clearly we have not lost all awareness of other legal orders
in which law emerges and functions more spontaneously. In private law, our reawakening
to this reality and increasing awareness of this state of affairs can be
credited to globalization. Indeed, it would confirm that the concept of law, and certainly
also of private law, does not require a state or nation per se for its functioning
and development. Only the concept of coercion on the basis of such law might
require a state much more. This problem of coercion and enforcement presents an
important but different issue that will be further explored in Part IV.
More generally, it may be usefully recalled that at least on the European Continent
before the nineteenth century, the law, even at domestic levels, was not priInze
v Austria, 126 Eur. Ct. H.R. (ser. A) (1987) at §38; Mazurek v France, 2000­II Eur. Ct. H.R., app.
no. 34406/97 (2000), available at http://hudoc.echr.coe.int/. A disputed claim is not sufficiently established,
however, but once adjudicated it is and a state against whom the claim was awarded can no
longer annul the claim through legislation. See Stran Greek Refineries v Greece, 301B Eur. Ct. H.R.
(ser. A) at §61 (1999). Even a claim in a prima facie case might be protected. See Pressos Compania
Naviera v Belgium, 332 Eur. Ct. H.R. (ser. A) (1995) at §31.
For a comment, see Jan-Peter Loof eds., The Right To Property. The Influence Of Article 1 Protocol
No1 ECHR For Several Fields Of Domestic Law (2000).
22
EU Treaty, supra note 15, art 6(2). See also Roper v Simmons, 125 S.Ct. 1183 (2005 and Lawrence
v Texas, 539 U.S. 558 (2003) (Justice Kennedy's references to international normativity of a human
rights nature in the US). Noteworthy is in this connection also the approach in Art. 42(1) of the ICSID
Convention, where, however, the application of transnational law is facilitated by treaty law, see also
note 9 supra.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 999
marily considered statist or even nationalist and territorial; this was certainly not
the case concerning private law. Much of the general law of those times was
directly based on Roman law which was never officially promulgated, whilst other
areas of law were personal (in tribes), group related (in guilds), or transactional (in
commerce).23
To repeat, the move towards an exclusively territorial and statist con-
23
The history of the law and of its development in Western Europe is a long one and can hardly be
summarized in a nutshell. First, in its evolution, one has to accept a split from the beginning, around the
twelfth century, between the English law development and that on the European Continent. The English
law evolved eventually into what we now call the common law and the Continental European law into
what is now called the civil law. Both developments were quite different and complex. In either system,
it is nevertheless possible to identify a number of salient features that are relevant in the present context.
Again we are concerned here with the development mostly of private law, which on the European
Continent did not clearly separate from public law - not in the civil law tradition either - until the nineteenth
century era of nationalism. In fact, even after the Peace of Westphalia (1648), often marked as
the moment from which states in the modern sense emerged in Continental Europe, it was thought for
a long time that the law that obtained between private citizens was per definition the law that obtained
for all (therefore also between states amongst themselves and between states and its citizens).
As is well known, Grotius in particular propounded this view in 2 De Iure Belli ac Pacis (1625)
(F.W. Kelsey trans., 1995). It was preceded by his more detailed Inleidinge tot de Romeins-Hollandse
Regtsgeleerdheit [Introduction to Roman Dutch Law] (1621) (RW Lee transl., 1953). For important
essays on the modern relevance of Grotius work in the areas of contract, negligence and unjust enrichment
especially, see generally R Feenstra, Legal Scholarship and Doctrines of Private Law, 13th-18th
Centuries, VIII & IX (1996). See also R Feenstra, `Grotius' Doctrine of Liability For Negligence', in
EJH Schrage ed., Negligence, The Comparative Legal History of the Law of Torts (2001) at 197.
In this universalist view, there was no place nor indeed much need for the concept of legal orders
(or states). It had been fed by a long tradition in which the Roman law of Justinian was received on the
European Continent as universal law. This happened as early as the twelfth century without any form
of promulgation or similar official backing, at a time when, in the late Middle Ages, the need for better
laws became apparent. In the fourteenth century writings of Bartolus and Baldus and their successors,
there started a search for a more substantive rather than procedural law that had in essence been the
Roman law approach. See JE Scholtens, `Bartolus and his Doctrine of Subjective Rights', Acta Juridica
(1958) at 163. This law was subsequently increasingly explained as the law of reason, supporting the
universalist view in which the Roman law became to be referred to as the Ius Commune.
To fill the gaps and meet more up to date requirements, there also emerged, however, local laws
especially of commerce, like in the cities of Northern Italy, in the Hanseatic towns in the North of Germany,
in the fair towns of Eastern France, especially Champagne and Brie, in the French and Belgian
towns trading with England, in Flanders and later in the Dutch Provinces. We are then in the sixteenth
and seventeenth centuries. It should be noted in this connection that even though we speak here of local
laws, they were not necessarily territorial but were often geared to particular activities or classes of participants
in guilds or particular markets and then indeed confined to commercial activities only.
More territorially inspired were the more official compilations of customary law in Northern France,
especially the early Coutumes of Beauvais and later the famous ones of Paris (1510), but these laws still
competed with the revived universalist Roman law `or Ius Commune. It posed, however, the question
of precedence, which was not uniformly decided in favour of the Roman texts. The complicated arguments
need not be related here; I have summarized them elsewhere. See Dalhuisen, supra note 2, at 28;
see also Jacques Krynen, `The Absolute Monarchy and the French Unification of Private Rights', in
J Kirshner & L Mayali eds., Priviliges and Rights of Citizenship Law and the Juridical Construction of
Civil Society (2002) at 27. The result was that in France (as elsewhere) several sources of law either of
a territorial or more personal or transactional nature started to operate side-by-side or competed, both
JAN H DALHUISEN1000
cept of the law was on the European Continent a typical nineteenth century development
resulting in a statutory approach, which, at least in civil law, became
intolerant of plurality and was no longer primarily functional or activity driven.24
being supported by very diverse court systems. The result was no unity in the law and its enforcement.
Whether the law was Roman or local, it hardly presented a coherent system, but at least the Roman law
continued, as it developed as the rational law, to have a universal, non-territorial, pretence.
In this environment, the notion that law could only figure in a cultural and economic order that was
state related was unknown, states and nations admittedly not yet having fully developed in a modern
sense. Even in a country like France, which was in this respect more centralist at least from the seventeenth
century onward, there were thus still very different laws per region, a situation that royal ordinances
only partly redressed. Roman law remained particularly dominant south of the Loire River but
even north of it, in the Paris region, it also retained an important impact through the coutumes especially
in the law of chattels.
Another development that took place at the same time was that of the canon law, which was from
the beginning more principled and value based, more coherent (but also more limited) and emanating
from authority in a particular legal order (that of the Roman Catholic Church). It was first to introduce
a concept of natural law, which was thought to be a reflection and elaboration of the divine law, both
well distinguished from the human law which was all the rest of the canon law and also the Roman
and domestic laws.
The secularized version of this natural law school started with Grotius (1585-1645) and was first in
striving for and presenting a more fully coherent view of the substantive law that was based on both
Roman, Canon and local laws and presented an updated model for all. This scheme was developed in
De Iure Belli ac Pacis supra this note. Book 2 of that work gives a detailed view of this system, based
on private law concepts that were believed to prevail also in all other types of relationships, therefore
even in those between states (to which area of the law this work is now often relegated). This law was
considered driven, no longer by religion or its values, but rather by an innate sense in all people of what
was good and bad and by the need for them to live and work together in peace (appetitus societatis).
It had as such no statist flavour and was not considered territorial. Indeed the more powerful message
was that this law was in essence universal (as Roman law had been in much of Continental Europe), not
therefore confined by time or space or even by the type of parties or their type of interaction. So there
was no difference between public and private laws or domestic and international laws.
This law was in essence considered rational (although no longer as Roman law), an approach supported
by the philosophy of the Stoa which was the popular direction of seventeenth and eighteenth
century thought. It obtained a broad following, later especially articulated by Pufendorf and Wolff in
Germany, and remained very influential on the European Continent until the time of the great codifications
in the early 19th
Century. It made the drafting of these codes possible even if they relied for their
force on national cultures subsequently identified with the modern state.
24
The different private law regimes concerning non-merchants and merchants in Germany and
France, even after the codification, is the remnant of the older approach. In these countries as in
many other countries of the civil law, the distinction became incidental (commercial law becoming lex
specialis to the general body of private law contained in the codes which were primarily applicable also
in commerce) and lost much of its meaning, as it has in common law, where, however, it had remained
more separate and self-contained. See Dalhuisen, supra note 2, at 20. That is not, however, necessarily
so for modern international transactions, as the new international law merchant shows.
The operation of law as `personaľ rather than `territoriaľ in this manner, on the other hand, reminds
one of tribal laws but was also the approach in Rome where the ius civile was for Roman citizens
and the ius gentium for foreigners, until the latter become the generally recognized private law when
after 212 AD the distinction between Romans and foreigners was abandoned (earlier the ius gentium
had supplemented the ius civile also for the citizens). In the early Middle Ages, the operation of tribal
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1001
From early on this caused some stress in the newly codified systems, evident especially
in the role of custom (and any other source of law), the status of which
became unsettled but tended to be increasingly ignored. There was also a question
mark in respect of the use of more fundamental or general legal principles to fill
the gaps in the codified system ­ with its preference for systematic reasoning.25
This could not last and more flexibility was needed if only to preserve the pretence
that these codes were complete and covered everything. Thus in the twentieth century,
in what in the US is broadly called `legal realism' and in civil law normative
interpretation (Interessenjurisprudenz),26
first some increasing sensitivity was shown
laws besides the Roman law became again apparent. Nothing of the sort is suggested here in respect
of the new law merchant, except to note that, upon the analogy of the difference between public and
private law and commercial and other private law, the application of different laws to different types of
dealings between different types of participants or within different communities, groups or partnerships
or for different types of transactions within one territory has always subsisted, even in civil law. The
operation of a separate law between professionals in the international commercial and financial sphere
is therefore hardly a new idea.
In common law, the development of the law merchant can more readily be explained by putting
emphasis on the type of actors rather than on their acts. This has often been thought to be a special
feature of the common law approach. See Interfoto Picture Library Ltd v Stiletto Visual Programmes
Ltd, [1989] 1 Q.B. 433, 439 (Opinion of Bingham LJ). As a consequence, common law may be better
able to distinguish between professional dealings and others, dealings with local authorities and others,
and dealings within families and others. Civil law, which in its codifications started to de-emphasise
this approach was therefore perhaps in need of a more formal distinction between public and private
law and, within the latter, between various types of contracts, while only within the more modern
concept of good faith other relational differences can now more easily be taken into account. See also
Dalhuisen, supra note 2, at 245.
25
For the place of custom and for fundamental or general principle in a codified system of private
law, see Dalhuisen, supra note 2, at 96, 148. For custom see also infra note 60.
26
For the many different strands of legal realism in the US, see MJ Horwitz, The Transformation of
American Law 1870­1960; The Crisis of Legal Orthodoxy (1992) at 171. Since Karl Llewellyn, `Some
Realism about Realism' (1931) 44 Harv. L.R. 1222, the basic idea is to look at the law as it functions
in society and at its operational sufficiency. It follows that social considerations and policy issues may
become more prominent in the formulation and especially interpretation of the law by the courts. It still
assumed, however, some coherent view of what was ethically, socially, and perhaps even from the perspective
of utility and efficiency more desirable; of course, such coherence may not always exist. This
has become clearer in the later functional approaches which investigate in particular the impact of ethics,
sociology, economics, aesthetics, psychology, or culture on the law.
Many have opined that as a consequence the law lost its autonomous character. See, e.g, Richard
Posner, `The Decline of Law as an Autonomous Discipline: 1962­1987' (1987) 100 Harv. L Rev. 761.
It remains true, however, that most, whilst talking about ethical or social and other norms, really refer
to legally enforceable norms and therefore to (in origin) extra-legal norms that are brought into the
legal sphere as source of legally enforceable rights and duties if pressing with sufficient strength. This
could in turn be seen as reconfirmation of the law's autonomy regardless of where the legal norms originate
­ from ethics, sociology, economics, aesthetics, psychology, and so on. In fact, Posner accepted
that `disinterested legal-doctrinal analysis of the traditional kind remains the indispensable core of
legal thoughť Id at 777. Thus a more dynamic view of the law's development does not need to mean
a denial per se of its intellectual and practical autonomy, although it usually goes together. Indeed in
Posner's view, at least academically thinking in terms of the law's autonomy is no longer the normal
way of thinking about the law.
JAN H DALHUISEN1002
to the extra-legal objectives and purposes of the law. In this way, a better eye was
also acquired for ethical, social, economic or other considerations not only in the
formulation of the law in statute, where as a political matter this was only natural,
but more importantly also in its day-to-day application by the courts. And although
in modern states, of course, legislation is now by far the more important source of
law everywhere, case law consequently regained special importance even in the
codification countries on the European Continent. Thus legal realism rediscovered
Formalism is the opposite of realism and rest on the idea of the self-sufficiency of the legal system
as a set of pre-existing often hard and fast black letter rules, that can be more or less mechanically
applied and is considered to produce acceptable results in what is thus considered a more objective manner.
In doing so, legal formalism is inclined to disregard the background reasons that a particular norm
was meant to serve and considers the norm therefore as being self-contained and self-sufficient. See L
Alexander, `With Me, Iťs All er Nuthin Formalism in Law and Morality' (1999) 66 U. Chi. L. Rev.
530, 531. Thus the essence of legal formalism becomes the systematic application of a rational system
leading to mechanical decision taking and autonomous reasoning, B Leitner, `Positivism, Formalism,
Realism' (1999) 99 Colum. L. Rev. 1138, 1145; see also B Neuborne, `Of Sausage Factories and Syllogism
Machines: Formalism, Realism, and Exclusionary Selection Techniques' (1992) 67 N.Y.U. L.
Rev. 419, 421 (claiming that `pure formalists view the judicial process as if it were a giant syllogism
machine...'); see further N Duxbury, Patterns of American Jurisprudence (1995) at 10, placing emphasis
in this connection on `the endeavour to treat particular fields of knowledge as if governed by interrelated,
fundamental and logical demonstrable principles of science'.
Legal formalism may in this manner also stand for the acceptance of the law's immanent moral
rationality. Thus saying that the `law features as a mode of rationality that is different in kind from the
less determinate rationality of political and ideological contexť and that law is `a distinctive rationality'
comes close to assuming its formalism. For this view, see EJ Weinrib, `Legal Formalism: On the
Immanent Rationality of Law' (1988) 97 Yale L.J. 949, 951 and EJ Weinrib, `The Jurisprudence of
Legal Formalism' (1993) 16 Harv.J.L.& Pub.Poľy, 583, who supports this kind of formalism, see for
this type of definition of formalism also R Unger, `The Critical Studies Movemenť (1983) 96 Harv. L.
Rev. 561, 571, who, however, objects to it as a pretentious and self-centred method of legal justification
in dispute resolution concerning matters that are in truth social and therefore ideological, philosophical
or visionary in nature. Here the critique concerns allegedly unjustified claims (of legal formalism) to
impersonal purposes, policies, and principles as tools of legal reasoning. Its claims to objectivity and
rationality is here denied.
Legal formalism would seem to require that an immanent legal order and its law, like the international
commercial and financial legal order and its lex mercatoria, as any statist legal order, must at least be
substantially self-contained, systematically complete and exhaustive in order to count. Yet legal realism
in the sense that it is willing to draw extra-legal considerations into the law to achieve substantive
justice and continues to search for coherence is not necessarily incompatible with such views nor is the
fact that it gave interdisciplinary enquiry greater legitimacy and opened the way for the functional movements
and empiricism. The true difference between legal formalism and legal realism would appear to
be in the former's inability to accommodate a more dynamic concept of law formation and application.
It seems to have a more perfectionist view of law as it operates, a more optimistic view of the certainties
it can provide, but also a more limited understanding of the type of discretion that is often assumed
in order to reach acceptable results both in legal structuring and in legal adjudications.
Note the close connection between legal formalism and legal positivism. Although the first is primarily
concerned with the law's application and the latter with the law's validity or legitimacy, to the
extent both believe in the autonomy and self- sufficiency of legal system as sets of pre-existing rules,
there is obviously a close relationship.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1003
at least some diversity in the sources of the law in the codification countries, therefore
in civil law, and also allowed for a renewed influx of fundamental and more
general legal principle. Most importantly, it could increasingly accept and handle
law as a dynamic concept (as `law in action').
Subsequently it led at least in civil law to some greater appreciation of the different
legal needs of different groups of social participants, like consumers, workers
and now also professionals, something in which common law had perhaps
always been better. 27
The result was a more facilitating or responsive approach of
the law, certainly also in private law like that of commerce and finance.28
In civil
law, this response was particularly demonstrated by the operation of the notion of
good faith (although mostly limited to contract law), now also increasingly invoked
in the US,29
as demonstrated by the UCC (sections 1­201(20) and 2­103(1)(b)) and
the Restatement Second of Contracts (section 205) (1981).30
Of particular importance in the context of this discussion is that these extra-legal
objectives and considerations are by their very nature often not clearly expressed
in black letter law and are therefore not statist per se. They may indeed represent
much broader values. These could, however, still be considered of a national character,
therefore emerging only in a national legal order with its territorial limitations.
Art. 3.12 of the new Dutch Civil Code31
would suggest as much. But where
27
See note 23 in fine.
28
For a broader analysis of this trend, see P Nonet & P Selznick, Law and Society in Transition
(2d ed. 2001).The early development of the lex mercatoria through the Middle Ages and later will not
be discussed here in any detail. But see Dalhuisen, supra note 2, at 8. Its early absorption in the common
law in England in the 18th
Century was part of the same nationalisation process as here discussed.
See infra note 33
29
See Dalhuisen, supra note 2 at 284; see also Melvin Eisenberg, `The Emergence of Dynamic
Contract Law' (2000) 88 Cal. L. Rev. 1743 (showing a significant approximation in modern American
thought to more advanced Continental legal thinking in the area of contract law).
30
This is not to suggest that in international business transactions a more flexible application of
the law is always appropriate and called for, see for the notion of internationality itself infra note 44.
Greater legal formalism may have been the parties' intent and is in any event normally exercised in
respect of negotiable instruments, documents of title and letters of credit, all of which depend greatly
on appearances of regularity and do not often allow judges to go beyond it. Similar lack of judicial
flexibility may exist in payments and their finality. See Dalhuisen, supra note 2, see also infra note 42.
For a more general critique of the modem liberal interpretation techniques, see M Stone, `Focussing the
Law: What Legal Interpretation is Noť, in A Marmor ed., Law and Interpretation (1995) at 31. Naturally
where the law is absolutely settled and the fact situation clearly covered, there is little room for the
thought that `....The rules change as the rules are applieď as maintained by Eh Levi, An Introduction to
Legal Reasoning (1949) at 1, 3­4. But there is some considerable truth in this statement as it has to be
accepted that in a rapidly changing society the rules as they are may become seriously antiquated whilst
those that may become applicable to differing configurations of the facts may not be clear. Whether it
likes it or not the law must evolve and that development is now often fast and informal, that is through
the interpretational techniques in the adjudicatory process or through legal structuring.
31
In defining the fundamental concept of good faith, Art. 3.12 refers for its interpretation to generally
recognized legal principles, the convictions living in the population at large, and the social and
personal interests involved.
JAN H DALHUISEN1004
we admit that the law and its functioning are intrinsically connected with social
and economic realities and value systems which invade the law and its operation
at all times, at the same time justifying it and in specific cases imposing extra
demands or giving extra rights to participants, it is only normal to consider also
whether the expansion of the law in this manner remains always purely national
and territorial in nature. To repeat, the appeal could be to much broader and much
more general values, of which human rights or human rights related considerations
may be the most obvious examples. But also appeals to rationality, reason or efficiency
especially in commerce and finance would in this connection neither be state
specific nor imply a narrow national cultural bias.
At least in the communitarian view, under which, in the opinion of some,32
the
notion of communities may claim moral primacy over (the notion of) states, it is
only logical to question whether the state or nation, and therefore the community
at national level, can remain the only true source of law and its values. No less
important is the conception in modern `Law and Economics' which posits that the
decentralisation of the law is a modern necessity.33
Here the idea is that when economies
become more complex and information and incentive constraints increasingly
frustrate public policy, efficiency demands decentralized non-statist law
making. I shall come back to how in this approach the process of private law making
is perceived to function in practice ­ which is then connected with the already
mentioned psychological process of internalisation.
It may perhaps also be observed that the law, any law, must have a self-propelling
force to maintain itself, evolve further, and retain its meaning. It is in this connection
only too obvious that states in their intervention in the law through statute
or otherwise often get it wrong or produce for political reasons something that is
innately unworkable, obscure, ad hoc, unstable or experienced as fundamentally
unfair (and therefore subject to strong erosive pressures), never mind the democratic
process, so that the law with the help of practices and the adjudicatory process
must continuously correct and purify itself if only to retain its credibility and
move forward.
Legal nationalism remains, however the traditional view on the European Continent
but no less in England.34
In this country, nationalism found early support in
32
See P Selznick, The Communitarian Persuasion (2002) at 64. Some French legal scholarship
insisted on the internal sovereignty of all social groupings much earlier. See G Gurvitch, ĽIdee du Droit
Social (1932) at 84; Sociology of the Law (1942). They were even within nations considered to create
their own law, which limited that of states and was, in principle, superior to it. For a similar approach
in The Netherlands, see HJ van Eikema Hommes, Hoofdlijnen Der Rechtssociologie En De Materiele
Indeling Van Publiek- En Privaatrecht [Main Themes of Legal Sociology and the Material Distinction
between Public and Private Law] (1975).
33
See Cooter, supra note 6.
34
The earlier development of the law in England was very different from that on the Continent,
see supra note 22. In England, after the Norman Conquest, the law developed through the evolution of
a set of writs in a centralized court system in the context of an approach that at first put emphasis on
procedural relief in certain cases. By the seventeenth century, the writs had been substantially expanded
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1005
the quite virulent statist positivism of J Austin (even if not relying on statutory law
per se), who perceived all law making whether or not statutory, as dependent on
the sovereign's command.35
The modern English theorist, Professor Hart, also finds
that law remains in essence statist or at least nationalistic in nature.36
Somewhat more surprising perhaps because of its openly `realisť and functional
approach, nationalism remains a strong sentiment also in modern American legal
thought, where it tends to be closely related to American democratic identity and
American values. However, there is here no extreme positivism and, in the `realisť
sense, the law may certainly be validated in other ways than by state command
or legislation alone. This structure permits of a strong secular natural law streak, 37
well know from the work of Lon Fuller but also recognizable in that of Rawls and
whilst the central court system had absorbed all competition, notably also that of the commercial and
ecclesiastical courts, and started to absorb the commercial and ecclesiastical law itself into its writs and
subpoenas. Although it was not meant to be a nationalistic system per se, in the absence of competition,
it became so early and largely by default, see further Dalhuisen, supra note 2, at 8, 76.
35
The nationalistic or perhaps more cultural historical element was first articulated by E Burke,
Reflections on the Revolution in France (Oxford Univ. Press, 1993) (1790). Subsequently J Bentham,
Codification Proposals, Complete Works IV (1854) and `Legislator of the Worlď: Writings on
Codification, Law and Education' in P Schofield & J Harris eds (1998) at 5, asked for codification on
the basis of his utilitarian views, which could have led to a rational, objective, and more coherent universal
legal system except for his simultaneous insistence on national codification. Burke and Bentham
thus came together in this nationalistic element, which in the teachings of J Austin culminated in the
view that all law depended on the command of the sovereign. See J Austin, 2 Lectures on Jurisprudence
(1875) at ch. 37. In this approach, even business custom was considered domestic in nature and was also
caught in the system of precedents, but could at least in the US (like law and equity) still survive statutory
law if not meant to overrule it. Cf U.C.C. § 1­103 (a)(2)-(b) (2001 revisions) (Articles 1­102(2)
(b) & 1­103 (old)); see also infra note 60.
36
It is in the nature of his ultimate rule of recognition which is identified by the de facto operation
of the state apparatus of legislature, courts, governmental agencies, police and the like. See Hart supra
note 11, at 106. In this view, custom arises and is not law proper, which is made. Custom is here seen
as static, primitive, and inefficient. See id. at 45, 91­98. For a sharp criticism of this view and an emphasis
on the dynamic nature of custom and its importance in modem society, see Cooter, supra note 6. For
the dynamic notion of custom and its evolution, see also Dalhuisen, supra note 2, at 148.
For the effects of this statist approach and the resulting present day differences between the American
and English approaches, see PS Atiyah & RS Summers, Form and Substance in Anglo-American
Law; A Comparative Study of Legal Reasoning, Legal Theory, and Legal Institutions (1987).
37
Natural law has had many different meanings and explanations. For its earlier secular development,
see supra note 22. They have all in common that it is a law that for its force is not, or at least
not entirely, dependent on human intervention as positive law is. It is not believed therefore to need for
its validity or recognition the support of any authority, whether of a national/statist or supra- national
character, or the support of an ultimate rule of recognition in the sense of Hart, or apex norm or Grundnorm
in the sense of Kelsen. In its secular form, it became in its method closely related to rationality
and in its value system to human rights considerations which both claim a more universal reach. It is
not necessarily to be equated with the demands of morality although there is often a close affinity. See
for an important reflection on natural law, positive law and historicity, J Berman, `Faith And Order',
in Emory University Studies In Law And Religion (1993) at 289.
JAN H DALHUISEN1006
Dworkin38
and for which there is much backing in American idealism and constitutional
principle.
By this very token, it is a naturalism that is not primarily based on universal
notions or rationality, but rather on an intrinsic public morality or on notions of
fairness that could still be considered nationally confined and therefore largely historical
or cultural. This insight is sometimes even seen as a major achievement of
legal realism in the US.39
In this, Americans are and need be less aware of the modern
interaction between nations and cultures than the Europeans may be.
On the European Continent, on the other hand, the eventual supremacy of state
law is more in particular associated with the evolution of the idea of the modern
state itself and the functioning of a policy oriented infrastructure and bureaucra-
cy.40
In Germany, legal nationalism found its philosophical anchor early, in the
38
L Fuller, The Law in Quest of Itself (1940); J Rawls, A Theory of Justice (1971), Political
Liberalism (1996); R Dworkin, Taking Rights Seriously (1977). On Fuller, see WJ Witteveen & W van
der Burg eds., Rediscovering Fuller (1999).
39
Robert Post, `The Challenge of Globalization to American Public Law Scholarship' (2001) 2
Theoretical Inquiries in Law 323.
40
Regardless of his universal views in terms of natural law, already in the views of Grotius, see
supra note 22, the positive law could be more confined. This issue arose in connection with the status
of local law and particularly in connection with the relationship between the natural law and the modern
state and its law formation powers. It concerned foremost the impact of public policy or the raison ďetat
on the law, its formation and its application. There arose here considerable tension in Grotius' approach
and it is less clearcut in this aspect. This tension became ever stronger in later writers and had to do with
the evolution of society into a phase in which the position of the state was clarified and the notion of
sovereignty further developed. It is an important development that started in Europe in the seventeenth
century, although it leaves open the question whether as part of a more determinist evolution, the nineteenth
century `nationalisation' of the law by states was unavoidable. For the (further) development of
private law in these circumstances, see J Habermas, The Structural Transformation of the Public Sphere
(Thomas Burger trans., 1991) at 73 and Max Weber, Rechtssoziologie (reprint 1967) at 329.
In fact, any restraining influence of universal natural law concepts on states increasingly disappeared
after Grotius. This is obvious in the work of Thomas Hobbes (1588-1679) in England, but also in that
of Grotius' successor in the natural law school in Germany: Samuel Pufendorf (1632-1694). See Samuel
Pufendorf, De lure Naturae et Gentium, Libro V11.9.5 (1672). As is well known, in Hobbes' view,
rather than there being a natural instinct of people wherever they were or came from to live together in
peace and harmony (appetitus societatis) in the style of Grotius, the human condition was considered
to be one of all against all (bellum omnium in omnes), Thomas Hobbes, De Cive 1. (1651) at 12, with
the accent on each person being allowed to use his power at will to preserve himself. See also Thomas
Hobbes, Leviathan (1660) at ch 14. To constrain the right of the strongest, people had to impose laws
upon themselves. These were the sole sources of justice that could only operate within a state (after the
natural condition had been abandoned). Thomas Hobbes, De Homine X (1658) at 5. There follows no
less the construct of a social contract under which individuals in order to live in peace abandon their
personal rights (except those to life and limb).
Thus the accent shifts to the modern state which in this view became eventually the source of all
law, including even customary law (by way of state recognition) and then also the law merchant. In this
approach, international law, as the law between states, has no autonomous place either and the sovereign
does not owe obedience to its own laws whilst natural law constraints are at best a matter of conscience
for the sovereign. Thus natural law had a meaning only if it became positive law upon the order
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1007
nineteenth century romanticism as well as in the historical school of von Savigny
and Puchta, with their reliance on a germanic Volksgeist as unifying spirit, followed
by the (Hegelian) demand that all law be systematic and therefore statutory and
statist per se.41
Hence, in private law, we see the development of the great German
Civil Code or BGB. It could also be considered a prime expression of the notion
that law is a cultural phenomenon, as long as it is understood that in this manner
of the sovereign and had no normative character of its own. On the other hand, it would follow that
the State's reach could not go beyond its borders. At the end of the seventeenth century, in England
through John Locke, Two Treaties of Civil Government (1690), the concept of more universal inalienable
rights re-emerged as a protection against the all-powerful sovereign under the social contract. At
that stage of jurisprudential thought, the effect was, however, mainly in private and criminal law and
centred on notions of freedom or autonomy, equality and ownership.
Even in Locke's case, this was all seen within the context of the modern state, which, on the basis
of the public good, through legislation, could even affect the inalienable rights, although ultimately
the people retained the supreme power to remove the legislature. Only in the teachings of Rousseau
(1712-1778) did these inalienable rights acquire a human rights' flavour and internationalist or universal
status, although in his view these rights were no less given back to the state so as to re-emerge as
state protected private right. See Du Contrat Social (1762) at 3:1. They would not seem to have force
and effect outside that context.
Kant insisted on rational legal principles but did not give them autonomous legal status either. All
depended on their incorporation in positive law by a state that could ignore them. Immanuel Kant,
Grundlegung zur Metaphysik der Sitten (1785/1797) at 320; Immanuel Kant, Metaphysical Elements
of Justice (LW Beck trans., 1965) at 317, 372; Immanuel Kant, Foundation of Metaphysics of Morals
(LW Beck trans., 1965) at 424; cf. AD Rosen, Kanťs Theory of Justice (1993) at 112. The rational
legal principles (as distinguished from moral principles) were thus no more than guidelines and had no
legal force of their own.
The other dominant early nineteenth century German philosopher, Hegel, confirmed this view in
which law could be no more than positive law and had a local character since it depended for its force
and effect on a system that could only be produced by the legislator and for its contents on the historical
will of a people of which the state became (in this view) the expression (of the objective will) as
only legitimate actor in the march of history. See Hegel, Grundlinien der Philosophie des Rechts [The
Philosophy of Right] (1821), reprinted in 46 Great Books of the Western World (1952) at Par. 211ff,
see also the translation by Allen W. Wood (Cambridge University Press 1991).
Here enters an irrational element and pure nationalism, which was territorial but not necessarily cultural
in a national sense as it seemed to represent the sentiment of only some parts of the population.
Where a Volksgeist was invoked, see I Savigny, System Des Heutigen Roemischen Rechts, (1840) at 22,
24, it tended to be notoriously anti-big city and anti-industrial. See also H Klenner, `Savigny's Research
Program of the Historical School of Law and its Impact on the 19th Century Berlin' (1989) 37 Amer.
J. Comp. L. 67, 77 (referring, however, also to Hegeľs rejection of the atavistic unworldly undercurrent
in the Volksgeist notion). At least on the European Continent, ultimately it left little room for the
contemplation of any other legal order and for the validity of any other law (even directory as against
mandatory law) outside this statutory system. Human rights, although in principle granted in the Constitutions
of those days, were in this approach also purely national and could be overruled by any statute,
which in the prevailing consensus could not be tested on its constitutionality in this regard.
41
See note 39, supra. It is true that the earlier French Civil Code of 1804 and the Austrian one of
1811 preceded this nationalism and were perhaps more product of rational enlightenment thinking, but
they were no less national laws, did not claim any other remit, and fitted the subsequent emergence of
nationalism in these countries also.
JAN H DALHUISEN1008
it was virtually immediately connected with nationality rather than with different
social groups or cultures.
Yet it has often been pointed out that there was here always a dichotomy: was
it the national spirit or was it the modern state ordering technique itself that determined
the meaning and shape of this law? Was it therefore custom oriented or was
it state action driven? In other words, are we talking here of an immanent law or
about strategy and policy? Is this law embedded in social cultures or values and
economic realities or propelled by the raison ďetat, therefore by state policy? Is
there an appeal here to community spirit and its natural justice or is it an imposition
of state order? If culture and historicity were the point, how could it be that
not the Ius Commune, meaning the then prevailing and widely applied variant of
Roman law, was chosen as the point of departure but rather the classical Roman
law which had been completely forgotten and after 1500 years was just being rediscovered.
It had nothing to do with the Germanic culture. Or was it therefore mainly
an intellectual exercise ­ private law as icon of German legal thought and intellectual
culture ­ or all of this and more?
Whatever the view, the modern German attitude, even if allowing for a large
intake of good faith notions, remains in essence dependent on statutory law which
is statist, systematic and formalistic in concept. It follows that it relates all statutory
and case law, even that which reflects good faith notions, to a system that is
(supposed to be) national, coherent, and substantially the subject of formal interpretation
techniques intent on maintaining and elaborating this system. That at least
would seem the method of modern German legal scholarship,42
even if case law
may show some freer spirit. Certainly, the whole evolution of the good faith concept
in Germany since the 1960s was the result of this greater freedom in judicial
decision-making, much less of an academic or intellectual concern. In fact, academia
in Germany appears to this day more interested in systems and system building
than in a more functional approach, an attitude for which the now mildly
pejorative term Begriffsjurisprudenz is commonly used.
Be this as it may, rather than seeing the state as proxy for legal orders, the reliance
on law as a cultural phenomenon, product of a particular moral, social and
economic environment, which in civil societies many people now accept, would
suggest that law is not entirely state dependent and it would be hard to deny that
42
See K. Larenz, Methodenlehre der Rechtswissenschaft (5th ed. 1991) at 5. But cf. J Koendgen,
Selbstbindung ohne Vertrag (1981); J Esser, Vorverstandnis und Methodenwahlin der Rechtsfindung
(1970). The situation in France is not much different. But cf. Laurent Cohen-Tanugi, La metamorphose
de la democratie (1989); Laurent Cohen-Tanugi, Le droit dans ľetat (1985). The same formalism
revived in the Netherlands after the enactment of its new Civil Code of 1993. But cf. MW Hesselink,
The New European Legal Culture (2001). For Europe, legal formalism has sometimes been seen as
protecting against political influences and arbitrariness. See Duncan Kennedy, A Critique of Adjudication
(1997) at 73, but in the absence of a strong value base in the codes themselves, code interpretation has
always been at the whim of the prevailing regime, of which exactly the BGB has provided the clearest
example.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1009
these basic values which underpin and expand the law could also present a more
internationalist picture or anchor, expressed at the public law level in more universal
human rights and at the private law level in trade, commerce and finance law.
In private law, this new picture could lead to more fundamental or broader, rational
and universal or trans-national principles of contract, property and negligence,
as we shall see. It then reflects a group normative identity which need not be that
of a state and is not nationalistic per se.
More in particular it may be argued that where in commerce and finance the
underlying economic aims lead to (internationalised) commercial and financial
structures that have some innate logic, they would give rise to similar expression
in whatever legal system that means to support them. That would in itself suggest
a drive towards uniformity in their legal characterisation unless (domestic) systematic
thinking of the legal system concerned would prevent it in which case the validity
and usefulness of that system itself would soon become questionable.
It could in this connection even be observed that the modern state and its environment,
as well as the law it creates, are themselves products of a much broader,
modern, Western culture, based on the particular political orientation of modern
democracy, and are not truly dependent on a narrower national, territorial, ethnic,
religious or linguistic notion of culture at all. In this political orientation, modern
states are further subject to an internal rotation of political power between different
groups or persons. This constant turnover implies even at the national level a
rejection of monolithic values or cultural notions, also in national law formation.
A related facet of this orientation is acceptance of diversity coupled with a high
degree of individualism, albeit subject to a strong organisational framework led by
a bureaucracy largely intent on efficiency considerations under shifting political
controls in terms of its objectives and the distribution of the burdens.
It would follow that law or large parts of it, even if seen as a typical cultural
phenomenon, is not necessarily statist and even domestically a constant. Law as
such may therefore not only have a broader, trans-national or Western flavour, but
also a less than national flavour, as expressed in the internal rules of smaller
(regional) communities, or more in particular of families, churches and similar
institutions, domestic types of market organizations (in commodities, for example),
other associations or (self regulatory) organizations and professions, partnerships
and companies, or even in the rules that contracting parties agree amongst themselves.
In fact, rules that are considered binding emerge quite naturally all the time
wherever people interact in order to achieve some moral, social, economic or other
end and require a sense of order and predictability. This in itself would confirm
that legal orders and their laws, and certainly private laws, are foremost participants
and purpose driven and not primarily or solely nation or state related and
territorially determined.
It should also be borne in mind that much law is merely technical, and therefore
not cultural in any sense at all, like in public law budgetary and taxation laws,
or, in private law, the law concerning the transfer of chattels and intangibles. Thus
in public law, budgetary and tax laws allow for a number of alternatives which
JAN H DALHUISEN1010
would not seem particularly driven by culture but rather by expediency and practicalities.
If there is still a cultural flavour, it is Western rather than national. In private
law, whenever still considered cultural, it must be admitted that it is often of
an uncertain and in any event foreign pedigree. Thus, in civil law we still see strong
Roman and Byzantine roots and in common law some strong feudal and Saxon features.
In this vein, whole legal systems are commonly transferred to other countries,
as the common law was throughout the English speaking world and the French
and later German civil codes through much of the rest.
It is the perception or axiomatic view of law as state law that needs to be broken
because it does not correspond with reality and has no longer a sufficiently
reliable force and predictive value. In the diverse environment of a civil society
such an outlook is in any event not desirable, and also does not meet modern economic
(efficiency and distribution) requirements, especially in international commerce
and finance. If law, also private law as a cultural and social event ­ were in
this manner at the same time merely seen as a statist or national condition, it would
reveal an inner contradiction in the cultural and communitarian or sociological
approach to the law, which on the one hand would promote diversity and on the
other only favour national cultures and statist laws.
If not so much the defence of national cultures but rather certainty in the law
and its clarity are here the overriding concern, and considerations of efficiency are
invoked in this manner leading to a preference for domestic laws as presenting the
more elaborate systems, considered therefore to be the more certain, as is still a
connected commonly held view, it should be realised and follows that application
of domestic state laws in international transactions may present a certainty and clarity
of such a low quality that it may easily destabilise commerce and finance. In
fact, less certainty and predictability could be the result of this attitude,43
and prob-
43
Certainty is traditionally stressed in English case law ever since Lord Mansfield, especially in
mercantile transactions. Vallejo v Wheeler, [1774] 1 Cowp. 143, 153; see also Homburg Houtimport
BV v Agrosin Private Ltd., The Starsin, [2003] 1 Lloyďs Rep., 571, 577 (opinion of Lord Bingham
of Cornhill); Compania de Naviera Nedelka SA v Tradex Internacional SA, The Tres Flores, [1974]
Q.B. 264, 278 (opinion of Roskill LJ). In the U.S, see McCarthy, Kenney & Reidy, PC v First National
Bank of Boston, 524 N.E. 2d 390 (Mass. 1988). But it is to be noted that it concerns here often negotiable
instruments and letters of credit, all related to payments, therefore to a narrower strand of commercial
law where finality is of special importance. See also Pero's Steak and Spaghetti House v Lee,
90 S.W. 2d (Tenn. 2002).
In other areas, for example where good faith notions are now commonly used, see supra note 28,
the emphasis may more properly be on common sense solutions or even on extra rights and duties,
although it can also be argued that especially in commerce and finance, it is the intention of the parties
that pre- and post-contractual rights and duties (eg disclosure duties prior to contract and renegotiation
duties in the case of hardship) are to be more narrowly construed than in consumer law. See
infra text accompanying note 90.
In England, Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, [1989]
1 Q.B. 433, 439, while holding that particularly onerous or unusual conditions had to be brought to the
special attention of the counter-party and that the conventional analysis of offer and acceptance was
not followed in that case, considered in this connection that the English authorities look at the nature
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1011
ably also extra cost. In any event, certainty and clarity are often illusions that cannot
be achieved in domestic private laws either, all the less in a rapidly changing
world where also national laws are under great stress and show ever greater inadequacies
in their purely domestic applications.
That is not to say that the new international commercial and financial laws are
necessarily easy to find, although, as I shall attempt to show in Part V, the problems
are often exaggerated. It is true, however, that the search for this new law
requires restraint, discipline and a profound knowledge of how and in what setting
the law develops and works, what its basic concepts are likely to be, and how and
to what extent they may be transplanted or borrowed from state laws, while demonstrating
at the same time how these concepts may be transformed by the dynamics
of another, new, legal order in which they are asked to operate.
III. The Concept of Legal Orders
Whether law derives from states or from other cultures or communities, it is posited
here that law, and certainly also private law, always operates in some legal
framework or order, even if it originates spontaneously (say through custom or
practices). It suggests some organisational structure that effectively amounts to an
institutional framework for law formation even if it may remain itself entirely informal.
If this were correct, it would be for us to say what a legal order is and to
find in each instance the relevant legal order whose normativity could then acquire
the full status of law if it was meant to function as such. Whatever law results, it
would then have to be pleaded and applied as the living law in any court (including
state courts and international arbitrations) to any issues properly arising in that legal
order. The laws so identified would therefore in principle have to be accepted in
respect of such issues by other legal orders and their institutions, including their
courts.
It follows that in respect of issues properly arising in the international commercial
and financial legal order, it would be the law of that order, namely the international
law merchant or modern lex mercatoria, which would then have to be
applied by state courts and international arbitrators alike. Decisions properly coming
from this legal order like international arbitral awards would subsequently
become entitled to the coercive powers of states in enforcement as long as states
largely remain the repositories of enforcement power. In this sense the New York
Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral
Awards is only the confirmation of this state of affairs not its originator.
of the transaction and the character of the parties to it to consider what was necessary to conclude to a
binding contract. See also supra note 23
It is on the whole best to distinguish between legal certainty and finality of transactions, see also
supra note 5 and accompanying text, and supra note 29.
JAN H DALHUISEN1012
This requires a clearer view of which orders and rules or laws so qualify. That
is all the more necessary if the law of other orders, in particular of a state legal
order, would be set aside (at least in principle). Even if in international transactions
state law would still prevail, there would then have to be a clear justification for
this preference that most likely would derive from overriding public policy objectives
(embodied in mandatory or regulatory rules) of the state concerned in respect
of any effects of international transactions on its territory.44
This would assume at
the same time the existence of some norms of an external or higher order to decide
on the relative existence and competencies of each legal order and on any conflicts
or competition between them. I shall come back to this aspect in Part IV.
As noted before, these concerns apply not only to the status of the rules in the
international commercial and financial legal order which transgress states, but also
to the status, intra-state, of the rules of smaller communities, like families, churches
and similar groupings, associations or (self regulatory) organizations and professions,
partnerships and companies, or perhaps even the rules that contracting parties
agree amongst themselves.
It could be intellectually attractive to attribute autonomy to them all, and therefore
to any grouping no matter how ephemeral or transient, at least to the extent
their rules have been consented to. It is not that simple, however,45
not merely
because it would make the setting aside, or at least the challenging of state rules a
seemingly casual affair; but more basically, not every association or commune is
a legal order.
An important, although more technical argument, is here that such a notion of
participation or consensus itself presupposes more objective rules that determine
when it counts. Such rules would not be of a consensual nature but would concern
the whole group and the way it functions. These rules are therefore of an higher
more objective nature. For instance, even simple contracts are embedded in and
depend for their binding force on a broader legal framework that is not necessarily
voluntary in all its aspects or depends on consent and participation alone.46
44
See infra text accompanying note 82.
45
It might thus be thought that an important distinction between state and other legal orders is that
the latter are voluntary, the former not. It may be doubted whether that is really so, even in the sense that
a participant can always opt out. Her activity or position may prevent it (unless she quits the particular
activity or position entirely). In any event, much of (private) state law can also be opted out off; on the
other hand, once operating in a legal order, some more fundamental rules cannot be avoided through
party autonomy and would not allow for contractual variation, like the rules concerning contractual
validity or enforceability itself and the parties' capacity to contract (quite apart from their inability
to create proprietary structures at will and to evade public policy considerations through alternative
contractual stipulation).
46
Thus there would be a problem with third party effect, therefore in all proprietary matters. More
objective community rules that present established practices would be necessary in this area for new
proprietary interests to arise. It is not impossible that within the group or order some rules even acquire
an (immanent) public order element and become absolutely mandatory in the order concerned. Such
rules might include, for example, elementary rules of justice or acceptable behaviour are at stake. Not
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1013
Therefore, participation and consent in this sense would appear to presume themselves
a legal order of some sort and do not seem to be able to create them at the
same time. They cannot be the sole determining factors for the autonomy of these
legal orders and the law that results in them. Other more objective criteria must be
found to delineate them and mark out the positive law that arises in them.
It was already said before that if we think of law as a cultural phenomenon or
social event, the discussion of all legal orders in terms of their autonomy must start
with a notion of social groupings or, in public international law, with a notion of
a community of nations or of smaller groupings of states like the EU that may be
more particularly concerned with economic flows or the operation of a single
currency. The discussion of legal orders would subsequently seem to require an
idea of societal patterns that confirm a rule creating function, therefore a notion of
how these orders are formed and the law as rules with binding effect emerges in
them.
This discussion requires therefore first the identification of the relevant circle of
participants in a given range of activities. In international commerce and finance,
they are likely to be the professionals in their trade. It suggests separateness,
sustainability and prospectiveness as a group. Secondly, a rule producing willingness
and capacity must be identified, and a capability to hold the group as group together
and to make it function better on the basis of these rules. Thus mere communion
is not enough; some (incipient) organisational structure however informal would
be required, or at least some sense of community that functions under its own rules
and understandings.
Third and most importantly, there would likely also be some sustaining economic
motive, force, or momentum. For the international commercial and financial legal
order this is likely to be the societal energy now created by the force of the modern
international flows in professionals, goods, services and money. Indeed, this freeing
of the flows or globalisation may be the true reason for the recent re-emergence of
the international commercial and financial legal order as a law creating institution
and for the consequent revival of the lex mercatoria.
Closely connected is an identifiable interest in need of encouragement, in
commerce and finance obviously an economic interest. This suggests in turn a
search for some protection leading to some reliance on (realistic) expectations in
this regard. Certainly, in international business, one would further expect some
ordering component in terms of efficiency, rationality, consistency and predictability.
In fact, decreasing transaction costs and facilitating exchange may become other
important motivators in the process of trans-nationalisation of commercial and
financial law and support the law creating prowess of the international business
community.
only stately orders have public policies! This is obvious where we now often speak of the international
public order. See also infra note 79.
JAN H DALHUISEN1014
Some consensus will be necessary also on a basic economic system that, even
though internationally in essence relying on a market approach, still will have to
accept states as important balancing actors, at least in respect of public interest sensitive
transactions in, or with an effect on their territories. This concerns regulatory
issues. Finally and perhaps somewhat surprisingly to the outsider, another important
sustaining factor may have to be found in public morality, that is, in a search for
at least some honesty, transparency and accountability, all vital preconditions for
the sustainability of international business.
As just mentioned, the relevant circle of participants in a given range of activities
in international commerce and finance are likely to be the professionals in their
international trades 47
united in the modern free flow of professionals, goods,
47
Thus the Vienna Convention on the International Sale of Goods, (11 Apr 1980), 1489 U.N.T.S.
3, in Art. 1, whilst excluding consumer sales, clearly limits its scope to professional dealings. The
UNIDROIT Principles of International Commercial Contracts (1995), available at http://www.
UNIDROIT.org/english/principles/contents.htm, target such dealings for professionals more generally.
In France, already in the 1930 the notion of `international contracť was more specifically developed
in this connection, for which gold (payment) clauses would be accepted and were upheld even though
generally forbidden under domestic law. See Delaume, supra note 6, at 119.
An argument can be made that `
internationality' and `professionality' have become inextricably
linked in the sense that all professional dealings will come to conform to international standards even
if they have in a particular case no international aspects. See Dalhuisen, supra note 1, at 28; infra text
accompanying note 84. The distinction is then between the international legal order which is professional
and the domestic legal order, which is for consumers.
The notions of `professionality' and `internationality' have been explored more in particular in
connection with international arbitrations. They arise when parties come from different countries, when
the subject matter is of an international nature, or when the arbitration takes place in an unrelated
country. See French Decree No 80­345 of 14 May 1980, Journal Officiel, 18 May 1980 reprinted in
Semaine Juridique III 49887 (1980); UNCITRAL Model Arbitration Law, supra note 9, Art 1(3).
The UCC in the US, although not written for international sales, defines the notion of merchants and
dealings between merchants in Sec. 2­104, but only in the context of the domestic law of the sale of
goods (and not as a broader concept) and has some special rules for them. A merchant is here a person
who normally deals in goods of the kind or otherwise holds himself out by his occupation as having
knowledge or skills peculiar to the practices or goods involved in the transaction or to whom such
knowledge or skill may be attributed by his employment of an agent or broker or other intermediary
who by his occupation holds himself out as having such knowledge or skill. Dealings between merchants
are transactions with respect to which both parties are chargeable with the knowledge and skills of
merchants.
It may be of interest in this connection, however, that Article 2 UCC became less professionally oriented
than was originally planned. See ZB Wiseman, `The Limits of Vision: Karl Llewellyn and the
Merchant Rules' (1983) 100 Harv. L. Rev. 465. Note, however also, that Article 2A (on leases), Article
8 (on trading and holding of modern investment securities entitlements), Article 4A (on payment systems),
Article 5 (on letters of credit) and even Article 9 (secured transactions) are substantially geared
to professional transactions. See, eg, U.C.C. §§ 4A-108, 5­102(a)(9), 9­109(d)(13) (2001 revision).
In terms of internationality and commerciality, there is significant case law from the US Supreme
Court that carves out all types of international contracts between professionals as representing a special
area where at least forum selection and arbitration clauses are upheld also in respect of statutory (antitrust
and securities) claims. See Mitshubishi Motors Corp. v Soler Chrysler-Plymouth, Inc., 473 U.S.
614 (1985); Scherk v Alberto-Culver Co, 417 U.S. 506 (1974); The Bremen et al. v Zapata Off-shore
Co., 407 U.S. 1 (1972).
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1015
services, capital and payments.48
Indeed, at the more practical level these flows may
themselves suggest a connected way of dealing or operating and an own pattern of
legal rules that has no origin in domestic laws, can often not be satisfactorily
explained or covered by them but must be attributed to the operation of the
international commercial and financial community itself (as in other times a
Volksgeist or national spirit may have done to unite the law in all of Germany).49
Clearly, in these international flows, the dynamics are likely to be quite different
from the local ones. Local law is unlikely to have been developed for them and
may be deficient or make no sense in international commercial transactions at all,
for example, in its limitations on the protection of bona fide purchasers or in the
type of proprietary rights (and trust structures or agency relationships) it allows to
operate against third parties,50
two issues which are of particular relevance in
modern finance.
In this regard, the view has authoritatively been expressed 51
that new law is
constantly formed through the sectarian separation of communities. In this view,
each legal order perceives itself as emerging out of something that itself is unlawful.
Separateness and separation are here identified as crucial constitutive elements of
new legal orders which may require in each case a normative mitosis or radical
transformation of the perspective of a group or a new total life experience to emerge
and qualify. Sustainability and prospectiveness are closely connected. The emphasis
moves here to struggle and triumph, to a revolutionary element in the creation of
new legal orders that essentially compete with the older ones. In terms of this
approach, in commerce and finance, the modern freeing of the international
48
See supra text accompanying note 15.
49
See supra text accompanying note 40. In commerce, the undercurrent of international practices
has always remained more obvious regardless of 19th
century nationalism. That is clear especially in the
nature of bearer instruments or instruments to order, the way in which they are transferred and bona fide
purchasers of them are protected. The basic patterns continued to derive here from what made sense in
the international community, even if these traditional instruments (in terms of bills of exchange, bills
of lading and bonds or shares) are now of much less importance then they even recently were because
of the dematerialisation drive, which applies more in particular to shares and bonds. See U.C.C. Art. 8
(2001 revision) (setting out the replacement notion of `security entitlemenť). The result is, however, a
further reduction in the international flavour of these originally international instruments.
In this connection, it may be also of interest to quote Lauritzen v Larsen, 345 U.S. 571, 577 (1953),
in which the US Supreme Court, per Justice Jackson, famously held for maritime law that
`[C]ourts of this and other commercial nations have generally deferred to a non-national or international
maritime law of impressive maturity and universality. It has the force of law, not from
extraterritorial reach of national laws, nor from abdication of its sovereign powers by any nation,
but from acceptance by common consent of civilised communities of rules designed to foster amicable
and workable commercial relations.'
50
Jan Dalhuisen, `European Private Law: Moving from a Closed to an Open System of Proprietary
Rights' (2001) Edinburgh L. Rev. 1; cf. also TW Merril & HE Smith, `Optimal Standardization in the
Law of Property: The Numerus Clausus Principle' (2000) 110 Yale L.J. 1. See also Dalhuisen, supra
note 2, at 583, 727.
51
See R Cover, `Nomos and Narrative' (1980) 97 Harv L. Rev. 4, 31.
JAN H DALHUISEN1016
commercial and financial flows could be seen as the fuse for the change of
perspective in the participants and the establishment and operation of a new
international commercial and financial legal order between them. 52
Others 53
put emphasis rather on how the new law can be identified. This is
typical for a quite different and more reflective and fact finding approach connected
with Law and Economics. Its supporters suggest that for international commercial
law to arise and to count legally in the sense that states must accept its legal status
and back it up by coercive power, (a) the norms that arise in the specialised business
communities must be empirically identifiable, (b) the incentive structure that
produces or internalises the norms should be analysed (by using game theory and
the notion of equilibrium) in order to determine whether the norms empirically
found are more than social convention or moral dictates and are being experienced
as legally binding, and (c) the efficiency (or public good effect) of the incentive
structure should be evaluated using analytical tools from economics to avoid
harmful laws, like monopolistic practices, which should therefore not be enforced.
Here, the emphasis shifts to empiricism, efficiency consideration, rationality,
consistency and predictability.
It may in this connection perhaps also be posited that `modernity' and the
`advanceď nature of the new norms themselves could even become an affirmation
of their force in the context of their international validity.54
52
There has only been limited comment in recent American legal literature on the globalization
process itself and the creation of international legal norms and the relationship to national orders. See John
Yoo, `Globalism and the Constitution: Treaties, Non-self-execution, and the Original Understanding'
(1999) 99 Colum. L. Rev. 1955; P. Tangney, `The New Internationalism: Ceding Sovereign Competences
to Supranational Organizations and Constitutional Change in the United States and Germany'
(1996) 21 Yale J. Inťl L. 395, Harold Koh, `Transnational Legal Process' (1996) 75 Neb. L. Rev.
181.
53
Cooter, supra note 6, at 217, 226.
54
Thus, in oil concessions references to the law of all civilised nations etc. used not to be uncommon,
although now probably considered offensive to the oil producing country in question. See the
Iranian Petroleum Agreement of 1954 (referring to `principles of law common to Iran and to the various
countries to which the other parties belong and, failing that, by principles of law generally recognized
by civilized nations, including such principles applied by international tribunals'). Under ad hoc
exploration agreements with Libya, the arbitrations that eventually also decided on the nationalization
issues were to be governed by the `principles of law of Libya common to the principles of international
law and, in the absence of such common principles ... then by and in accordance with the general
principles of law, including such of these principles as may have been applied by international
tribunals.' Texaco Overseas Petroleum and California Asiatic Oil Company v The Government of the
Lybian Arab Republic, 4 Y.B. Com. Arb. 177, 181 (1979). Especially in the oil and gas industry there
were many similar clauses. Thus the Aminoil Concession Agreement of 1979 made reference to `the
law of the Parties ... determined by the Tribunal, having regard to the quality of the Parties, the transnational
character of their relations and the principles of law and practice prevailing in the modern
world.' Kuwait v AMINOIL (ICSID), reprinted in 21 I.L.M. 976, 977 (1982). Where such a choice of
law is made, one must assume the fuller set of lex mercatoria norms and their hierarchy to apply, see
more in particular infra Part V.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1017
As a minimum, these differing views would combine in the conclusion that if
culture, sociology or efficiency considerations have so much to do with the
formation and implementation of modern business law, legal pluralism would be
indicated where the close connection between law and communities is confirmed.
Defining and finding these communities in terms of legal orders, that is as law
producing entities, and to be delineated as such is ultimately a question of criteria
and therefore of normative sociology, or, in business, perhaps also of normative
economics, of identifying therefore more precisely the relevant circles of participants
in a given range of activities that may qualify as law creators. 55
The manner in
It follows that the chosen law could itself point in the direction of the lex mercatoria. In this vein,
the construction contract of the Channel Tunnel provided that it was to be governed by `the common
principles of English and French Law, and in the absence of such common principles by such principles
of international trade law as have been applied by national and international tribunals'. Channel
Tunnel Group v Balfour Beatty Construction Ltd, [1995] A.C. 334, 347. In the international commercial
and financial legal order as a newly emerging order, one would expect, however, an attitude to problem
solving that is less encumbered by the past even where concepts are borrowed from domestic law
in a comparative law search for better solutions.
55
If one takes for the moment the perspective of what law itself is, no more than a working
hypothesis may be necessary. In the traditional view, law is mostly thought to embody the rules for
the guidance of human conduct that are imposed on or enforced among the members of a given state.
That always begged the question whether there was any more in it than state power. In any event, it
posits the notion of legal order (if only that of a state) immediately. Broader is the definition that sees
law as `the rules of action or conduct duly prescribed by controlling authority and having binding
legal force.' United States Fidelity and Guaranty Co v Guenther, 281 U.S. 34 (1929). It still begs the
question what controlling authority is and when binding force emerges. Another way of defining law is
as `a body of social rules prescribing external conduct and considered justiciable.' See H Kantorowicz,
The Definition of Law (Ed. Campbell trans., 1958) at 79. This definition still poses the question what is
`justiciable' (as distinguished from moral dictates or social conventions) and how the law of the various
groupings evolves and can be backed up by (state) coercive power if not voluntarily complied with. For
the important role of this voluntarism, its key function in each legal system, and the over-emphasis on
state coercive power in this connection, see infra note 74.
Some see the issue of justiciability mainly in terms of the prevailing rule of law and its social prerequisites.
See R. Post, supra note 36, at 365, 334. This is what the European Court of Justice in its Les
Verts judgment of 1983 may also have had in mind when it referred to the European Community being
a community based on the rule of law, European Court Case 294/83, E.C.R. 1365 (1986). More importantly,
the functioning of this community and its relationship to `law' is in truth only broadly studied,
if at all, in terms of legal orders, even in more modern rational schools like the one of Law and Economics.
But see Cooter, supra note 6.
I ignore here the fact that `law' may still offer different perspectives depending on whether one takes
the perspective of legislators, judges, subjects or legal advisors and `no doubt others too.' See Julius
Stone, Legal System and Lawyers' Reasoning (1964) at 172. In modern times, Stone, supra this note,
at 185, probably paid most attention to legal orders in this connection but thought that as law could not
be defined, legal orders could not either. However, they could be described to some extent in which
connection it was believed that in the description of the law the emphasis unavoidably shifted from
the operation of individual rules to the functioning of legal orders as such. Hart rather used the term
`legal system' in connection with accepted criteria for testing and certifying the authority by which the
law in such a system functions, but it subsequently transpired that only statist legal orders qualified.
See Hart, supra note 11. Kelsen used the term `legal order' regularly and recognized also an international
legal order. See Kelsen supra note 11; infra text accompanying note 80. P Nonet and P Selznick
JAN H DALHUISEN1018
which the law develops in such orders and is instilled in its members may then
become a matter of development psychology.
It confirms the need for a broader view and some pre-existing more universal
ideas, external or higher notions or principles to identify these legal orders as noted
also by Dworkin.56
In a merely descriptive manner, therefore in merely empirical
research, we are not likely to make here decisive progress, even if some considerable
importance must be attached to their de facto existence and therefore to the apparent
actual operation of legal orders.
That poses the question whether perhaps internal and especially external
recognition might be the key and what criteria are used in that connection.
Acceptance of the group rules as legally binding by the participants would certainly
always be a first requirement, while the recognition of this law by international
arbitrators or by other legal orders, like its application in state courts, or the
recognition and enforcement of decisions rendered on the basis of that law (for
example by international arbitrators, as results in most countries from the New
York Convention of 1958) would obviously also be of great significance.57
Since
emphasize the aspect of authority that backs up any legal system and the law in it. Nonet & Selznick,
supra note 26, at 12. They do not uniquely associate it with a state or with other clearly organised
political communities.
It is perhaps noteworthy that in international trade negotiations, a pragmatic view of law and its
use and formation is normally taken. See, eg, John H. Jackson, `International Economic Law: Reflections
on the `Boiler Room' of International Relations' (1995) 10 Am. U.J. Inťl L. & Poľy, 595; Duncan
Kennedy, `The International Style in Postwar Law and Policy' (1995) 10 Am. U.J. Inťl L.& Poľy
671. They focus mainly on the removal of tariffs and quantitative restrictions without a cost analysis
per se and thus present in essence a pragmatic rather than a theoretical approach to the formulation of
new international rules, especially in the issue of re-regulation at international level (primarily in WTO/
GATT/GATS) through treaty law.
This approach is thus not concerned with methodology or deeper theoretical insights in what international
or transnational law is. See JP Trachtman, `John Jackson and the Founding of the World Trade
Organisation: Empiricism, Theory and Institutional Imagination' (1999) 20 Mich. J. Inťl L. 175; Richard
Posner, `The Decline of Law as an Autonomous Discipline: 1962­1987' (1987) 100 Harv. L. Rev.
761 (touching on the lack of interdisciplinary work in the area of international economic law and on
the dominance of positivism and utopian ideals in this area). For a more recent comment on this discussion,
see M Koskennieni, `Letter to the Editors of the Symposium' (1999) 93 Am. J. Inťl L. 351
noting that lawyers employ the tools of any method they find useful in a particular case and should not
be guided by any one in particular.
56
Dworkin, supra note 37, at 48. The study of legal orders in the sense as here proposed requires
therefore a more than purely national view of what the constitutive elements of legal orders are and
presupposes a broader perspective or framework of what law is and how it operates. Whatever the
pretences of natural law, more fundamental legal notions and principles that go beyond pure national
laws will (implicitly) have to be used in this connection or at least some more universal concepts
which find their origin in (i) an idea of how communities work and exert themselves, in (ii) a historical
framework concerning such communities, in (iii) a much longer view of their evolution, and in (iv) an
idea of their energies and realistic expectations.
57
The application of the lex mercatoria has found such recognition pursuant to the NY Convention
on the Recognition and Enforcement of Foreign Arbitral Awards, (10 June 1958), 330 U.N.T.S. 3; see
supra note 9.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1019
published cases remain few and far between, it may well be that in more immanent
legal orders therefore in the non-statist ones, where there is no clear strategic
operator like a state, we may indeed have to rely more on internal and external
signs of their existence and operation.
The same may go for the identification of the law in such orders. This raises
first the question of who would have the power or authority to find, activate and
formulate these rules and principles. In the international commercial and financial
legal order, the participants themselves and again international arbitrators must
figure large,58
as the International Court of Justice does in the international legal
order between states and the European Court of Justice in the EU legal order. Here
again, it is also conceivable that the rules may be considered to exist merely because
they work and are accepted.59
It poses, however, still the problem that in that case
there would be no material criterion to distinguish between non-obligatory social
conventions and legally enforceable rules. Like in the case of identifying legal
orders themselves, we would then move merely from an elusive material criterion
or principle to a de facto or empirical analysis. But for their relevance and force,
we would ideally still require some broader idea of how such practices came about
and became legally normative and binding.
Where law, sociology, economic theory and development psychology come
together, one important strand of opinion depends here on the already mentioned
notion of internalization, a facility connected with game theory and an environment
of many participants. It may produce an equilibrium between the co-operating
participants and others not immediately so inclined. Those that are willing to
invest in a public good (here likely to be the furtherance of their business in a most
effective manner), will adjust their behaviour and countenance rules to guide future
behaviour. On the other hand the so-called appropriators, who are those who wish
to obtain more immediate short term advantages may not want to commit their
future actions. By showing that the longer term view produces greater benefits for
all, even the appropriators may, in this theory, wish to signal a spirit of co-operation
leading to a substantial consensus which in international commerce and finance
at least would favour the internalization process (and move the equilibrium towards
the co-operators).60
58
But there would appear to be a difference. Whilst the participants `make' the law, international
arbitrators are left to find and formulate it. Their role is necessarily more passive, even allowing for
the fact that stating and restating the law is itself a law creating activity, but it would appear an exaggeration
to claim that it is possible for international courts (of this and other types) to create by themselves
`global communities of law' as suggested by L Helfer and A-M Slaughter, `Towards a Theory
of Effective Supranational Adjudication' (1997) 107 Yale L.J. 387, 391, although they could more solidly
bind legal orders together and are as such important actors in the international commercial and
financial legal order.
59
That was Harťs view on international law, see Hart, supra note 11, at 231, which, it would seem,
could then also be so domestically, at least in respect of custom. But see supra note 35 (noting Harťs
deprecating view of custom and its formation and recognition).
60
To give an example: in an environment of many participants it will soon become clear that in
JAN H DALHUISEN1020
It could even be argued that in such an environment the most productive rule
automatically wins as long as people are willing to take a longer term perspective
of the benefits. Thus it has been argued that the legal norms (customs and practices)61
terms of safety and efficiency it will be widely beneficial to all that roads should be divided into two,
with those going one way congregating on the one side and those going the other way on the other.
Whether one should move on the right or the left is here a detail that will be determined by historical
or coincidental factors. Presently there will be more precise rules on how to overtake and on the precedence
of traffic on main thoroughfares, etc. The development of bills of exchange and bills of lading
testifies to a similar forward moving process. See S Rogers, The Early History of the Law of Bills
and Notes (1995). It shows the very close connection between factual behaviour and the rules of law
that so come to prevail as even the instinctive non-co-operators will soon see that this is the way to go
forward. Further detail on this approach in terms of the type and conditions of cooperation or coordination
that is required may be found in the work of R Ellickson. See R. Ellickson, Order without Law:
How Neighbours Settle Disputes (1991); R Ellickson, `Bringing Culture and Human Frailty to Rational
Actors: A Critique of Classical Law and Economics' (1989) 65 Ch.- Kent L. Rev. 23. There is here a
normative progression, not oscillation nor a going backwards and forwards between law and non-law,
although there may be between order and disorder as a normal human condition. Cf Eric Posner, `Law,
Economics, and Inefficient Norms' (1996) 144 U. Pa. L. Rev. 1697; Law and Social Norms (2000) (arguing
that state norms can be more efficient than group norms, especially when groups are small). In the
international commercial and financial legal order, there is, however, no ready legislator.
This does not exclude the possibility that rules are internalized for other reasons than economic
benefit. Pressing moral demands or those imposed in the furtherance of social peace may equally present
themselves although it may be true that they cannot always be clearly separated from economic
benefit.
For a somewhat different slant on the positive lex mercatoria and its origin, see G Teubner, `Breaking
Frames' supra note 6, at 158, 163. Its origin is here seen `in the close structural coupling with nonlegal
rule production' (in terms of a paradox not of a dialectical process between fact and norm) in an
evolutionary progression that, in this view, seems in its origin to rely on an imaginary or fictitious legal
environment in which there is mostly a pretence of legal rights and obligations fed by expectation. This
ultimately is believed to lead to ready acceptance of the binding nature of the new law, even though
non-political and factual, but also to a concern about the (supposed) destructive role of (practising)
lawyers and their distortion of business realities in their (alleged) search for a static system of rights
and obligations. It suggests an enmity that would not appear necessarily to exist. If there is law here,
lawyers must and will learn to work with it and will (eventually) come to understand its dynamic
nature. I am more confident than this author that business can handle the fall-out and that international
arbitrators will do their educational job in this respect, but it may be a long process unless the business
community better grasps the nettle and simply insists that its lex mercatoria be applied and enforced
and that their lawyers behave accordingly.
61
It may also be of some interest to research how customs and practices are seen in modern positive
(domestic) laws. In civil law, it became normal only to take custom into account (except as implied
contractual term) if the codes specifically referred to it. It was largely considered an issue of contract
law and custom which normally figured besides good faith notions in interpretation. See Code Civil Art.
1135 (Fr.); Civil Code (BGB) § 157 (Ger.). As it is now mostly accepted that such good faith notions
may in pressing cases also be used to adapt the contract, it is conceivable that in the normative or teleological
interpretation method custom may sometimes play a similar corrective role as Section 157 BGB
in Germany clearly suggests, although parties may normally deviate from it when the clear provisions
of the agreement prevail. The new Dutch Civil Code in Article 6(2) always gives good faith a leading
role and allows it to overrule not only the wording of the contract but also the effect of custom and
equally of statutes impacting on the contract. This is a unique approach, so far not followed elsewhere.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1021
It suggests that notions of good faith can be absolutely mandatory. In the USA, U.C.C. § 1­302 (2001
revision) (§ 1­103(3) old) refers in this connection to parties still being able to set good faith standards
amongst themselves unless they are manifestly unreasonable.
A related question is whether custom may be subject to strong policy considerations when expressed
in statutes. On its face that would seem so, but if a practice or custom continues notwithstanding contrary
statutory law, it may be considered to have overturned it. There is much dead letter law, especially
in older statutes, even in those that may have been intended as mandatory. In fact, many mandatory
newer laws are constantly undermined through widespread continuing old practices, like in health and
safety standards. Their complexity may be another reason why established practices may survive and
eventually prevail. The fact that such new statutes are often not taken seriously and that local practices
continue may thus fatally affect the status of these laws even if invoked in the courts. These laws
may also lack the appropriate responsiveness to the ills they mean to cure or be so impractical that
they cannot function.
In the USA, the UCC avoids the term `custom' at least in the context of the sale of goods. It is
used, however, (but not defined) in the general part (as is the law merchant), see U.C.C. § 1­103(a)
(2) (2001 revision) (1­102(2)(b) (old)), where its overriding importance in commercial law is made
plain and accepted (unless specifically modified or abolished). That is very different from the European
approach, both in England and on the European Continent. The UCC otherwise refers to the course of
business or usage of trade, at least in the context of the interpretation and supplementation of agreements
for the sale of goods. Cf U.C.C. §§ 2­202(a), 2­208 (2001 revision). They may not be invoked
to contradict the express terms. U.C.C. section 1­303 (1­205 (old)) defines the usage of trade and also
contains a statement as to the role of the course of dealing.
Under U.C.C. section 1­303 (1­205 (old)), the usage of trade is `any practice or method of dealing
having such regularity of observance in a place, vocation or trade as to justify an expectation that it
will be observed with respect to the transaction in question.' A course of dealing `is a sequence of previous
conduct between parties to a particular transaction which is fairly regarded as establishing a common
basis of understanding for interpreting their expressions and other conducť' U.C.C. §1­303 (2001
revision) (1­205 (old) It is further stated that `a course of dealing between the parties and any usage of
trade in the vocation or trade in which they are engaged or of which they are or should be aware give
particular meaning to and supplement or qualify terms of an agreement.' Id.
In England, the emphasis remains in this connection often on the implied term and presumed consent.
As a consequence, custom may be considered subjective and has to be proven. It must then be
more than a course of action habitually followed, has to have consistency and regularity, and must be
recognised as binding by the parties. It shows sensitivity in English law to overruling the parties' stated
intentions, especially in the professional sphere. The subjective approach appears to limit the effect of
custom in proprietary matters. Yet in other contexts, objective custom is accepted. Thus the UCP and
URC have found a status in England on the basis of custom current amongst banks and not as implied
conditions between the parties. See infra note 62. See generally `Custom and Usage', in 12(1), Halsbury's
Laws of England at 601 (4th ed. 1973) [hereinafter HALSBURY].
Sensitivity to accepted practices and custom is particularly important in international trade. Yet the
Vienna Convention on the International Sale of Goods avoids any reference to custom and uses the
terms `usages' and `practices' instead. See Vienna Convention, supra note 44, arts. 4, 8, 9. According
to Article 9(1), the parties are bound by any usage to which they have agreed and by any practices
that they have established between themselves. This is simply an extension of the contract and intent
principles. It implies a subjective approach to custom. Article 9(2) tries to undo some of the impact by
accepting as an implied condition all usages of which the parties knew or ought to have known and
which in international trade are widely known to or regularly observed (but not merely widely operative)
between the parties to contracts of the type involved in the particular trade concerned. It is not,
strictly speaking, possible for the Convention to be conclusive in this matter as the force of international
usages and practices may derive from other sources or from custom itself, especially if they oper-
JAN H DALHUISEN1022
will derive in such an environment from the alignment of private incentives signaling
co-operation for a particular public good in a self-reinforcing process.62
However, open defectors could still destabilize such norms, which may then require
the back up of institutionalized (legislative) power if social opprobrium or other
peer group pressures fail. In the absence of an adequate institutional infrastructure,
this potential destabilization may motivate the international (commercial and financial)
community to ask states to intervene through facilitating treaty law. UNCITRAL
and UNIDROIT may be seen here as the facilitators of this approach. Such
a back-up in which states act as agents for the benefit of the international legal
order is, however, territorially limited to the participants or their transactions being
connected with the territories of co-operating states. So-called uniform treaty law,
for example the 1980 Vienna Convention on the International Sale of Goods, is
therefore always second best from the perspective of the international commercial
and financial legal order, although it may put more cooperation pressure also on
defectors in non-participating states.
Somewhat more curiously, those who argue here more directly on the basis of
efficiency sometimes still prefer a contractual choice between domestic laws and
see this as a useful competitive tool.63
There is here no concept of efficiency in an
ate generally, therefore also amongst other parties, as indeed the force of fundamental legal principle.
This seems accepted in Article 4 of the Convention.
On the other hand, there is a more recent view in the U.S. that the UCC was mistaken in its reliance
on custom, course of dealing, course of performance and trade usages and their unifying force. See
Lisa Bernstein, `Private Commercial Law in the Cotton Industry: Creating Cooperation through Rules,
Norms and Institutions' (2001) 99 Mich. L. Rev. 1724; Lisa Bernstein, `The Questionable Empirical
Basis of Article 2's Incorporation Strategy: A Preliminary Study' (1999) 66 U. Chi. L. Rev. 710; Lisa
Bernstein, `Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business
Norms' (1996) 144 U. Pa. L. Rev. 1765.
Here the view is presented that custom, course of dealing, trade usages and so on are often replaced
by trade organization rules that are more precise and dispute-avoiding and may play therefore a more
fundamental role than the UCC and its reference to customs when a dispute arises. But to obtain in this
manner greater legal clarity in certain areas of international business would not seem to condemn the
use of custom and similar practices in others where trade associations are not operative. In fact, it is
not clear why industry trade organisation rules and their status should be distinguished from industry
practice and custom.
In the modern literature notions of custom and industry practices and their meaning are receiving
renewed attention. See RA Epstein, `Confusion About Custom: Disentangling Informal Custom from
Standard Contractual Provisions' (1966) 66 U. Chi. L. Rev. 821; `The Path To The TJ Hooper: The
Theory of Custom in the Law of Torť (1992) 21 J. Legal Stud. 1 (1992); D Charney, `The New
Formalism in Contracť (1999) 66 U. Chi. L. Rev. 842.
62
See Robert Cooter, `Law and Unified Social Theory' (1995) 22 J. L. & Soc'y 50, 64.
63
See PB Stephan, `The Futility of Unification and Harmonization in International Commercial
Law' (1999) 39 Va. J. Inťl L. 743. Fear that private interests or private interests groups dominate any
formal unification process is here often at the heart of the concern. Others question more generally the
usefulness of commercial law unification, also within the US. See, eg, PA Alces & David Frisch, `On
the UCC Revision Process: A Reply to Dean Scotť (1996) 37 Wm & Mary L. Rev. 1217; A Schwartz
& RE Scott, `The Political Economy of Private Legislatures' (1995) 143 U. Pa. L. Rev. 595.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1023
international sense or of trans-nationalisation of the law and its cost benefits as
compared to the potential uncertainties, inequalities and disparate costs of domestic
law application in international transactions for which it was never made. Neither
is here much of an idea of the spontaneous nature of the new law that has
efficiency as a key root. As was pointed out before, decreasing transaction costs
and facilitating exchange are themselves important motivators of the new transnational
law and would stop the earlier situation in which the cost of a fractured legal
system were shifted to the weaker and less informed parties. Even though the benefit
of uniformity would not necessarily be the same for all, this does not justify
by itself different diversified menus. It is often overlooked in this connection that
party autonomy leading to a choice of domestic laws cannot deal with regulatory
or public policy issues and with other mandatory concepts such as the operation of
proprietary interests, their protection, ranking in bankruptcies and effect on third
parties.
At least in property, especially in respect of financial products and their bankruptcy
resistency, transnationalisation would appear the only solution (even if it
would mainly come from state intervention through treaty law or in the EU through
Directives and Regulations). In any event, the existence of trans-national law itself
would appear to increase the choice. Another cause of the confusion may be in a
continuing failure in US legal scholarship to properly distinguish between default
or directory rules on the one hand, which parties can always opt out of, and regulatory
law on the other which they cannot freely ignore. True, in regulatory matters,
a choice between state systems might be desirable from an efficiency point of
view for heterogeneous parties but such a choice is not normally given to them,64
64
See also notes 75­77 infra and accompanying text for the distinctions between public and private
law, mandatory and directory or default rules. In terms of choice, the applicable legal regime in
respect of prospectuses and the possibility to choose has been much debated in recent years in the US
but has not found a response from the SEC. On this regulatory competition and issuers' choice of regulatory
alternatives, see MH Wallman, `Competition, Innovation, and Regulation in the Securities Markets'
(1998) 53 Bus. Law. 341, R Romano, `Empowering Investors: A Market Approach to Securities
Regulation' (1998) 107 Yale L.J. 2359, and Stephen Choi & Andrew Guzman, `Portable Reciprocity:
Rethinking the International Reach of Securities Regulation' (1998) 71 S. Cal. L. Rev. 903. Earlier,
some authors had already expressed serious doubts on the fairness and efficiency of mandatory disclosure
systems. See F Easterbrook & O Fischel, `Mandatory Disclosure and the Protection of Investors'
(1984) 70 Va L. Rev. 669; John C Coffee, `Market Failure and the Economic Case for a Mandatory
Disclosure System' (1984) 70 Va L, Rev. 717 (replying to Easterbrook and Fischel, supra this note).
The true questioning of the traditional regulatory attitudes towards securities activities in the US goes
back to GJ Stigler, `Public Regulation of the Securities Markets' (1964) 37 J. Bus. 117.
Note, however, in the EU a recent incidental pro-choice provision in the Takeover Bid Directive of
16 Dec 2003, available at http://europa.eu.int/comm/internal_market/en/finances/actionplan/index.htm,
allowing parties a small margin for opting for a more neutral EU regime in respect of specific takeover
restrictions (rather than a whole regime) if Member States opted to retain their own defensive regime
in this respect. How well considered it was remains to be seen; it was introduced at the last moment
and may not be indicative of a new trend. In fact, in the financial services area there is ever less of a
choice in the EU and therefore less regulatory competition under the latest EU harmonization direc-
JAN H DALHUISEN1024
although legal structuring and the use of off-shore facilities might still help. In private
law matters such a choice only locks parties into atavistic and parochial domestic
laws and could in any event only be successful in contractual matters at the free
disposition of the parties.
Returning to the essence of what makes a legal order create its own law, it is in
my view foremost the energy in the relevant community, its sense of purpose, its
willingness to organise itself and produce and follow its own rules, its creative
force therefore but also its realistic expectations and discipline. These are preliminaries
for an effective and sufficiently strong communication within the group,
which is the key. Only thereafter is it useful to consider how the necessary consensus
is built and how rules are internalised. As for the internalisation process,
there may as yet be no complete understanding of it. It may be intimately connected
with or supported by a more innate knowledge of fundamental legal principle in a
natural law sense, principles of such a nature therefore that the knowledge of them
might be presumed in all participants, either as a matter or rationality or morality
or both.
This complex of questions can perhaps best be followed and studied in the international
commercial and financial legal order with its clear idea of its participants
and the forces that propel them. Its more positive rules are most likely to be found
in the continuous dialogue in this community and are ultimately articulated by those
who are appointed or acknowledged as the decision takers (ad hoc) within it. In
some important areas that has so far been the International Chamber of Commerce,
to which the UCP, URC, Incoterms and other sets of rules formulated by it testify.
Other trade associations and their rules are conceivable for other parts of the business:
they were often common in the commodity trades, insurance and now also in
international finance, or at least in the Eurobond market as the success of the International
Primary Association (IPMA) and the International Securities Association
(ISMA) suggests.
That may prove to be a sound model and way forward and it is no coincidence
that increasingly the rules formulated by the ICC have been recognised by state
courts as good law. The role of other trade associations might also have to be more
carefully considered in this context. 65
What these rules also show is that for their
tives, especially under the new Prospectus Directive of 4 Nov 2003, 2003/71/EC, 2003 O.J. (L 345)
(Dec. 31 2003), the Transparency Directive of 15 Dec 2004, 2004?109/EC, 2004 O.J.(L 390) (31 Dec
2004) and the amendments to the Investment Services Directive, now Markets in Financial Instruments
Directive of 21 Apr 2004, 2004/39/EC, 2004 O.J. (L145/1).
65
See for the role of trade associations also Lisa Bernstein, supra note 60.
The idea of the UCP being transnational law is associated with the views of the Austrian F Eisemann,
Director of the Legal Department of the ICC at the time, and was first proposed by him at a
1962 King's College London Colloquium. See Le Credit Documentaire dans le Droit et dans la Pratique
(Paris 1963) at 4. This approach was followed in England by C Schmitthoff, although in his views
always in the context of some national law. See C. Schmitthoff, The Source of the Law of International
Trade (London 1964) at 15. Eisemann's view was later also followed in France. See Y Loussouarn &
JD Bredin, Droit du Commerce International (Paris, 1969) at 48.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1025
force and effect they do not depend on longevity. Usage in this sense (which is
here not distinguished from custom) can change overnight if business starts requiring
it; as such, it is the epitome of legal dynamism66
which is in my view at the
heart of the international commercial and financial legal order and of its laws.
I should like to avoid here a discussion on an ultimate or apex norm (or Grundnorm)
or on rules of recognition. It is clear in my view that especially the development
of legal principles and rules in the immanent legal orders and of those
which determine the relationship between the laws of various legal orders when in
conflict shows the close relationship between fact and norm and that the higher up
we go the more likely it is that the ultimate justification for the system as it operates
becomes indeed purely fact (that means that it is what it is) and should (in
principle) be legally accepted as such.
Non-statist immanent legal orders and laws are likely to rely on common tradition
or natural law views in terms of fundamental principles (like notions of pacta
sunt servanda and a few others that underpin the entire system as we shall see in
Part V), on comparative law in terms of general principle, 67
on internalisation proIn
France, their status as international custom is now well established. See J Puech, `Modes de paiemenť
in Lamy, Transport Tôme II (2000) at No 324; see also B Goldman, `Lex Mercatoria' in Forum
Internationale (Nov. 1983) at No 3; Trib. de Commerce Paris, March 8 1976, 28 Droit Maritime Francais,
558 (1976) (Fr.); Cour de Cass, Oct 14 1981, Semaine Juridique II 19815 (1982), note Gavalda
& Stoufflet (Fr.); Cour de Cass., Nov. 5 1991, Bull Civ, IV, n 328 (1992) (Fr.). It means that no reference
to them is necessary in the documentation.
In Belgium their status as international custom was also accepted by the Tribunal de Commerce of
Brussels, Nov. 16 1978, reprinted in 44 Rev. de la Banque (1980) at 249. In Germany, see also N Horn,
`Die Entwicklung des internationalen Wirtschaftrechts durch Verhaltungsrichtlinie' (1980) 44 Rabels
Zeitschrift 423, but the German doctrine remains uncertain, especially because of the written nature of
the UCP and its regular adjustments which is seen there as contrary to the notion of custom. See CW
Canaris, Bankvertragsrecht Part I, (3rd ed. 1988) at 926.
In the Netherlands, the Supreme Court has not so far fully accepted the UCP as objective law. See
Hoge Raad, 26 April 1985, N.J. 607 (1985). The lower courts are divided. So are the writers with PL
Wery, De autonomie van het Eenvormig Privaatrecht, 11 (1971) and this author in favour. See Jan Dalhuisen,
`Bank Guarantees in International Trade (1992)' 6033 W.P.N.R. 52.
English law does not require any incorporation in the documentation. See Harlow and Jones Ltd.
v American Express Bank Ltd and Creditanstalt-Bankverein, [1990] 2 Lloyďs Rep., 343 (concerning
the applicability of the ICC Uniform Rules for Collection (URC) which are less well known, but nevertheless
subscribed to by all banks in England); Power Curber International Ltd. v National Bank of
Kuwait, [1981] 2 Lloyďs Rep., 394 (Denning, L) (considering UCP, also with reference to the fact that
all or practically all banks in the world subscribe to them, which seems the true criterion in the UK).
For the U.S., see Oriental Pacific (USA) Inc. v Toronto Dominion Bank, 357 N.Y. 2d. 957 (1974), in
which the force of law the UCP was accepted `to effect orderly and efficient banking procedures and
the international commerce amongst nations'.
66
This is not the more current view of custom, which continues to put emphasis on its longevity,
in England even on legal precedent. See HALSBURY, supra note 60.
67
Not much further attention can be given here to the aims of comparative law. Some look for a
common core while rejecting any mythical search, including RB Schlesinger, `The Common Core of
Legal Systems, An Emerging Subject of Comparative Law Study' in KA Nadelmann et al. eds., 20th
Century Comparative and Conflicts Laws: Legal Essays in Honor of Hessel E Yntema (1961) at 65.
JAN H DALHUISEN1026
cesses when it comes to customs and practices, on treaty law when states are asked
to help, and on the practical view that the law exists and operates in this order
because it works and is as such accepted. Again, the proper concern is not here to
find some super or world laws per se, but rather first to identify the competent or
pertinent legal orders in respect of the particular international actors or actions, the
law of which would then prevail in respect of their activities, and subsequently to
determine any competition between them.
Finally, it may be obvious that in the international commercial and financial
legal order, acceptance of the new principles and rules may be easier to consider
where international arbitrators are called to determine the issue than when the international
law merchant is invoked in state courts. But in a more enlightened environment,
state courts may equally function in the international legal order as
decision makers, an idea indeed not so long ago quite rationally accepted by the
English Court of Appeal (even though rejected at the time in the House of Lords).68
This interest in a common core leads to a search for universal, non-structural, fundamental principles
common to all legal systems. In Zweigert-Koetz, An Introduction to Comparative Law 40 (Tony Weir,
trans., 3rd ed. 1998), there is even a presumption of similarity, at least in the less politically driven
areas of private law, because the needs are very similar everywhere. However, it remains a fact that
even in commerce and finance there are great differences especially in important equity law concepts
like trusts, beneficial ownership interests, conditional ownership rights, or security interests and floating
charges where any common core becomes so general or superficial that it has hardly any distinctive
or guiding meaning.
See further J Esser, Grundsatz und Norm in der richterlichen Fortbildung des privatrechts.
Rechtsvergleichenden Beitraege zur Rechtsquellen- und Interpretationslehere, (4th ed. 1990) emphasizing
more in particular the role of fundamental principles common to all legal systems in the further
development of national laws; see also E Rabel, `International Tribunals for Private Matters' (1948)
The Arbitration Journal 209. It should be noted that much of the search for common principles by these
authors took place in a somewhat different context and tended to be directed towards showing that the
differences between common and civil law were not as great as sometimes assumed. They would not
appear to have searched for transnational normativity.
In the context of the lex mercatoria, the emphasis should foremost be on legal issues that commonly
arise in different legal systems, and therefore on an inventory of problems that normally surface
in more advanced economies in respect of certain structures (like security interest, conditional and
beneficial ownership, assignments, etc) rather than on common solutions as these solutions are more
likely to be dictated by the evolving needs of international commerce and finance itself than by examples
in existing national laws.
For the post-modern attitudes to comparative law, see Anne Peters & Heiner Schwenke, `Comparative
Law Beyond Post-Modernism' (2000) 49 Inťl & Comp. L.Q. 800.
68
See for the idea of local courts operating as international commercial courts, the English case of
Amin Rasheed Shipping Corporation v Kuwait Insurance Company, [1983] 1 W.L.R. 241. The case is
especially of interest in view of the important cast of judges expressing their (minority) views in the
lower courts with the House of Lords ultimately re-establishing orthodoxy. The facts in this case are
not of great import. There was an insurance contract concerning an insurer in Kuwait, drafted much
along the lines of the relevant standard English policy, yet without a choice of law and competent
forum clause. There thus arose concern about the applicable law and about the jurisdiction of the English
courts.
In the lower courts, Judge (as he then was) Bingham, [1982] 1 W.L.R. 961, thought that the con-
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1027
It is not dissimilar from state courts in the EU countries sitting as European courts
when deciding EU issues.
IV. Mutual Recognition and Enforcement of Laws between Legal Orders
and Competition between Legal Orders
If we now turn to the question of why and under what conditions modern courts
and their states must respect and back the new lex mercatoria and the decisions
based thereon regardless of its origin, we necessarily must confront the issue of
recognition. Recognition acquires a special aspect if the recognising legal order or
state also has an own interest in the solutions of a legal issue or problem arising
in the international commercial and financial legal order (therefore in international
transactions).
As a general proposition, in a civil society we must accept the law as presented,
and from whatever source, therefore whether national or international, in respect
of factual situations properly within its domain. But the acceptance and application
of law of competing orders does not by itself exclude threshold standards when
states are asked to respect such laws alien to them, including in appropriate cases
human rights and due process considerations, also the more so where state enforcement
or coercive power is ultimately asked to back up foreign decisions based
thereon.
tract could be covered by an international regime inspired along English lines (although not so in this
case), so that under the applicable English rules of international jurisdiction the competency of the English
courts could be established on the basis of the application of English law. In the Court of Appeal,
the Master of the Rolls Sir John Donaldson thought that English courts could have jurisdiction over
an unwilling defendant because the English courts could in cases like these function as international
commercial courts (emphasis added). In the House of Lords, Lord Diplock thought, however, that contracts
could not operate in a vacuum as they would then be only scraps of paper. [1984] 3 W.L.R. 241.
International law was clearly considered vacuus in this connection and the implication was that only
a domestic law could apply which in this case was eventually thought to be English law, a view supported
by Lord Wilberforce. Lord Diplock further thought that English courts could not operate as
international commercial courts and thus force themselves on unwilling defendants. Also for English
jurisdiction in cases like these, there would have to be a solid base, which could be, but needed not
be, and was in this case not found to be in the application of English law, especially since there was
a Kuwaiti court available.
Note in this connection also Judge Wilkey speaking for the majority in the Court of Appeals in the
American Laker case at the same time as the English judiciary in Amin Rasheed. Laker Airways Ltd v
Sabena, Belgian World Airlines, 731 F. 2d. 909 (DC Cir. 1984), The Court stated:
`Despite the real obligations of courts to apply international law and foster comity, domestic courts
do not sit as internationally constituted tribunals. Domestic courts are created by national constitutions
and statutes to enforce primarily national laws. The courts of most developed nations follow international
law to the extent it is not overridden by national law. Thus, courts inherently find it difficult neutrally
to balance competing foreign interests.'
Id at 951. It is submitted that these views are out of date.
JAN H DALHUISEN1028
As just mentioned, these standards are likely to vary when the state concerned
has or does not have an interest or policy implicated in the matter. In situations
where the conflicting interests are such that there is competition between the international
commercial and financial order and a state legal order, state courts in the
countries most directly concerned will be mindful of their state's position, but even
international arbitrators or state courts in other states may not be indifferent to this
competition, although the outcome may not be the same.
There are long-standing standards of precedent regarding recognition and execution
of judgements rendered in other states or of arbitral awards and the conditions
normally attached to such recognition. They show that when enforcement of
such decisions involving public policies is sought in other states state, it is not
impossible (and not necessarily unreasonable) that more stringent criteria may be
applied by that state and its courts before they lend their enforcement power to
such decisions especially if they went against that state's own interest. This problem
raises questions of public order or the spectre of international comity.
It is relevant in this connection to accept that these recognition standards themselves
are of a higher, more universal nature to be truly meaningful and not to
reduce the recognition process merely to the will or sufferance of states. These
higher rules determine the conflicts between the international law merchant and
state laws and are therefore not part of the new law merchant itself. The relevant
objective criteria may here foremost emerge from a rule of law test. It is possible
to refer in this connection to the rule of law both in an institutional (`law of rules')
and substantive (`set of values') sense. The rule of law, of course, is the common
yardstick by which in the modern world the exercise of power is more generally
channelled, constrained and informed, not only at the national level but, it is posited,
also internationally. As it mediates the relationship between states and society,
it also mediates that between states and other legal orders. 69
In doing so it may not only protect the weak but also promote the successful
settlement of disputes, facilitate economic transactions, create a framework for
enterprise nationally and internationally, and support an outward looking perspective.
As such, it may play a significant role in the allocation of competencies
between legal orders and when it comes to mutual recognition between them in the
setting of standards for the recognition of their laws and the decisions based there-
on.70
Again, the fact that there are here concepts at work that have to be more uni-
69
See M Krygier, `Rule of Law' in NJ Smelser & PB Bates eds., 20 Inťl Encyclopedia of the Soc.
& Behav. Sci. (2001) at 13403; P Selznick, `Legal Cultures and the Rule of Law', in M Krygier &
Adam Czarnota eds., The Rule of Law after Communism (1999) at 21, 26.
70
This is also the underlying theme in the 1958 New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, even if still wedded to the idea of national considerations
only, aligned in the meantime, however, to narrower notions of international public policy, see also
infra note 79.
To support the new transnational law in the professional sphere, it would not be a bad idea ­ or
too far-fetched a proposal, to set up an international court system for professional dealings operat-
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1029
versal does not need to mean that they are also static, immutably determined by
rationality, unchangeable values or meta-physical truths.
At least in international business, recognition is a mundane concept and may not
go as far as to require high minded moral standards for legal orders to operate and
be recognised even if in an ideal world this might be better. In particular, legal
orders need not be democratic or supported by more advanced values in order to
function; it has never been a precondition for their operating at national levels,71
but it is clear that these values (or the absence thereof) may play a role in the recognition
of the operation of other legal orders, their laws and the decisions based
on them, even if there is no competition with the own public order. 72
In other words, there may be limits to what may be recognised and accepted
elsewhere as law from whatever legal order, including that of states, although there
ing in a similar manner as the commercial courts once did in regionally divided countries. Their judgments
should be universally enforceable again much as international arbitration awards now are under
the New York Convention. Such a system, which could have some lay judges, should have a central
highest appeal court which might also supervise the recognition and execution of international arbitral
awards or of domestic court judgments in international business cases.
Besides the role of local courts acting as international commercial cases, as suggested in note 67,
supra, it could be an important aid in the development of trans-national commercial and financial law.
It is at this stage probably more important than codifying the trans-national law itself which, in the
absence of sufficient direction in theory and a sufficient platform amongst legal practitioners, must be
found in other ways as shown in Part V.
For a discussion of how such a court would operate as an appellate court in the supervision and
recognition of arbitral awards internationally, see Mauro Rubino-Sammartano, International Arbitration
Law and Practice (2001) at 980. See also H.M. Holtzmann, `A Task for the 21st
Century: Creating
a New International Court for resolving Disputes on the Enforceability of Arbitral Awards', in Martin
Hunter ed., The Internationalisation of International Arbitration, The LCIA Centenary Conference
(1995) at 109 [hereinafter LCIA CONFERENCE]; Martin Hunter, `The Impossible Dream', in LCIA Conference,
supra this note, at 157; S.M Schwebel, `The Creation and Operation of an International Court
of Arbitral Awards', in LCIA Conference, supra this note, at 115.
The prime concerns of these latter authors are the recognition of foreign awards under the New York
Convention of 1958 and the possible bias of local judges. The idea is to replace their involvement with
that of an international court, which would acquire exclusive jurisdiction in the matter. Enforcement of
recognition orders of such an international court would of course still remain a domestic affair. It would
be logical that such a court would also become solely competent in setting aside petitions, which are
now normally brought in the domestic courts of the place of the arbitration. Other forms of ancillary
proceedings could be added, like interim protection measures and compelling the attendance of witnesses.
See Hunter, supra this note, at 157. The proposal is important although more limited than what
is proposed here, but the international court should be the same.
71
J Habermas notes correctly that even the great codes in Europe were never democratically
sanctioned, they were subject to some participation process which might have made them substantially
reflective of their times. Habermas, supra note 39, at 76. This may or may not convince but it is true
that in the international commercial and financial legal order the resulting rules are the very result of
a participation process that may not be democratic in the formal sense but that could be seen as the
ultimum in participation in terms of consensus building and internalisation.
72
Again, it would suggest the existence of more universal values that have an effect in all legal
orders, their operation, the legal force of their rules (also internally), and that may be even more relevant
in connection with the respect for these rules by other legal orders.
JAN H DALHUISEN1030
will have to be a large margin for any legal order to operate in its own ways, if
only to give the concept of different legal orders any meaning. That has always
been clear when a foreign (national) private law is applied elsewhere as a matter
of conflict of laws. How such laws came about and what their contents are is not
then normally the issue. It is obvious, for example, that the recognition of rogue
states may ultimately also favour the acceptance externally of their internal domestic
legal order for matters properly arising in them, whatever its values and laws 73
unless matters get totally out of hand, and the same may go for other legal
orders.
For the present and in line with the foregoing, I use here as working hypothesis
that a modern society (also the international one) is based on a decentralization
of power, has institutionalized or internalised a constant shift in and redistribution
73
The operation of competing international orders is not a race to the bottom but may reinforce
standards and be instrumental, at least on occasion, in containing local cabals even in democracies
and expose them to more openness and better practices or in an economic sense to more rational
decentralized approaches or privatisation. Globalisation thus contributed to the demise of many inefficient
state controls, to more choice, lower cost, perhaps lower inflation, more openness and diversity, a better
informed public, less jingoism, more cooperation (whether in G-7, IMF or WTO). Nobody claims
perfection, but what may be a-statist or a-nationalistic in the international order is not per definition
anti-democratic or devoid of modern values at the same time.
In the meantime, much has been written on the democratic deficit of these latter organizations and
also of the EU, both in Europe and the US. However the fundamentally participatory nature of (private)
law formation in the international commercial and financial legal order remains. See supra note
70. The traditional view is that (in international policy issues) democratic control is best exercised at
the level of the participating governments, therefore nationally. That was also the EU's original stance
and is still the reason for the limited powers of the European Parliament.
There is a special problem here. The highly technical nature of much of the parliamentary discussions
at the international level escapes the public and it is difficult therefore for an international parliament,
even at the EU level, to profile itself, acquire credibility, and inspire the masses. For the WTO
similar arrangements are sometimes suggested but unlikely to work better for similar reasons. The alternative
is greater openness in the negotiation processes and more reliance on public opinion and input
of non-governmental organizations besides that of local politicians. This raises the question of who
may legitimately talk in the various international legal orders whilst it is not clear whether the results
would be any better.
In many of the international organisations there seems to be a bureaucratic phase that precedes further
democratization and appears to be necessary to get things of the ground. The EU is the best example
but it is not different in WTO. Of course if the international community was truly serious and willing
in the matter, the democratization process could easily be taken a step further. It is not beyond present
day technical means to call international `constituantes' in the election of which all participants in
a particular community could participate and which would device a framework that at an institutional
level could deal with, for example, globalization issues more democratically. But it would be a further
serious inroad into the remit of the nation state and also mean the de iure end to the influence of
NGO's, reasons why this option may not gain much ground.
In the international commercial and financial legal order, the participatory process is likely to be of
a distinctly different nature in the absence of a formal legislature. That does not make it less participatory,
however. In fact, the essence of immanent legal orders is the participation of all participants in the
law creating process. As such it could be argued that its nature is more fundamentally democratic.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1031
of that power, accepts the help of an open market mechanism (as may even be demonstrated
by the ballot box) in this re-distribution process, and has a notion of the
rule of law and its broader values under which power of all kind must operate and
is distributed. Naturally, it is only to be expected that in the recognition process
there may be a preference for legal orders that recognise similar values, notions
and ideas as prevailing in the recognising legal order.
In this acceptance or recognition of the law of other (immanent) orders, therefore
also of that of the international commercial and financial legal order, the minimum
requirement could be the free interaction of participants in the formation of
their laws (customs and practices) and an active pursuit of above board commerce,
responsible corporate governance, transparency, no anti-competitive behaviour or
other market abuse.
I take this foremost as a working hypothesis to avoid a broader discussion on
the values of the commercial and financial legal order or the absence thereof, on
the redistributive powers or the unfairness of its system (as may be compounded
by globalization), and on any rightful or erroneous claims of the international commercial
and financial law to (some) objectivity and formal effectiveness in supporting
international trade, commerce and finance.74
Such a discussion is not in the least
irrelevant, but is besides the point in as far as demonstrating the very idea of the
operation and recognition elsewhere of an international and commercial legal order
and its laws are concerned.
In subscribing to this working hypothesis, we are helped by the fact that, at least
for the economic benefits it brings, our present decentralized, more or less democratic,
market supported socio-economic system finds some broad support worldwide,
or at least in the developed world. As for the international commercial and
financial order, we should also be helped by the fact that the daily business of trade,
commerce and finance is in any event not so politically and culturally sensitive, at
least much less than, for example, larger labour and environmental issues or the
much broader (macro) commercial and financial stability issues with which G-7,
WTO and IMF must grapple. These issues, when dealt with at those levels, might
then also have an effect in the international commercial and financial legal order
itself, assuming some legal form and expression can be found for such an intervention
in that order.
Barring such intervention, it should perhaps be accepted that the international
commercial and financial legal order operates at a lower level of political consciousness,
as in fact trade and commerce also do domestically.
The minimum communality of values this hypothesis assumes acquires a more
material meaning when decisions reached in one legal order are asked to be enforced
in another legal order (or state) that wishes its own policies also to be considered.
74
Critical Legal Studies in particular have always been sceptical of the objectivity and effectiveness
of black letter law in pursuing social ordering. See AC Hutchinson, Critical Legal Studies (1989) and
also the reference to the work of R Unger, supra note 25.
JAN H DALHUISEN1032
It raises more in particular the issue of competition between legal orders. It concerns
states especially when conduct or effect of international transactions result
on their territories. I leave alone here the important issue of voluntarism,75
as, voluntarism
or not, we must in such cases unavoidably deal with the practical side of
the interaction or competition between the law in the international commercial and
financial legal order and that of others, especially that of states, if only to determine
how the relevant parties must act in a particular situation (therefore regardless
of any litigation).
The possibility that state legal orders may object to the actions agreed between
international counterparties under the new lex mercatoria or to decisions reached
on the basis thereof, and claim a competing interest in the conduct or outcome,
poses the question how, in the international commercial and financial legal order
with its own needs and dynamics (and own imperatives and with what G-7, WTO
or the IMF or perhaps even the UN may attempt to impose in this connection),
expression can or must be given to state imposed public order imperatives when
this would be justified at least in international transactions with effect on the territory
of such a state. It poses the further question whether, if this is not done to its
satisfaction, the relevant state (and its courts) may intervene or withhold coercive
force from decisions reached in this connection on the basis of the lex mercatoria
elsewhere.
75
Voluntary compliance is a substantial element of the operation of any law that would collapse if
its enforcement would depend on coercion or state power alone. It is therefore not true that the essence
of the legal norm is its enforceability by state power. For the survival and operation of the living law, a
high voluntary compliance rate is necessary for which the innate quality of the norms, their persuasive
force and internalisation by large parts of the participants are vital factors. In the case of unresolved
conflict, it would of course still require some adjudicatory process, either in state or other panels
like that of arbitrators. But even most of their decisions still require voluntary compliance for such a
dispute resolution system to be viable, so that state coercive power would always be a last resort. In
this connection, the possibility of ostracism, ejection from new deals, loss of respect and reputation are
important internal group sanctions, see also text following note 59. For the importance of voluntary
compliance and its mechanics in a modern business environment, see R Cooter, supra note 8.
Somewhat different is the view that commercial relationships are dispute-avoiding for relational
reasons and that participants accept the inherent possibility of a loss in the expectation of future benefits
from a particular relationship for themselves directly or from the undisturbed continuation of their
trading environment more generally. It would suggest that they may accept as a consequence the rough
justice meted out by more (formal) clear cut legal answer when disputes arise. In such cases the accent
would be on predictability whilst avoiding judicial discretion. Bernstein, supra note 60. This is no doubt
true in matters concerning negotiable instruments, bills of lading and letters of credit and perhaps even
in certain parts of the commodity trade and in shipping matters (for example, in terms of the `expected
readiness' of the ship, demurrage claims etc.) more generally, see supra note 43, but is as a general
proposition for all of commercial and financial law probably overstated. See infra text accompanying
note 90. It may still be true, however, that in commerce and finance predictability is more important than
fairness, which could be associated more in particular with consumer transactions. Yet it could still be
argued that what makes sense rather than what is fair drives dispute resolution in business transactions,
which would no less suggest a measure of discretion for arbitrators or the courts whilst reaching their
decisions on the basis of the law merchant.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1033
Here enters a strong public order element in the application of private law, which
commercial and financial law normally is.76
This public order element will normally
present itself domestically through forms of regulation, for example, in consumer
protection, products liability, and the like. In respect of foreign relations, it
presents itself quite naturally in import- and export restrictions and foreign exchange
restrictions, but it may also present itself in an attempt at the application of domestic
laws, like anti-trust and securities laws in trans-border transactions. 77
It should be repeated, however, first that even where states formulate the private
law through legislation like they do in codification countries, it is not all public
policy. 78
Where statutory private law is merely facilitating or directory, therefore
76
In civil law, the distinction between public and private law is traditionally more fundamental than
in common law. Private law is the law between non-governmental entities and may even be the law of
the dealings with and between them when no public policy issue is involved. This law is often thought
of as merely directory and not injunctive or mandatory or public policy oriented. Parties could set it
aside. That is only partly true, however, and not really the distinguishing feature of private law.
In the first place, as just mentioned, in private law there may be own imperatives or (inherent)
mandatory rules, whether obligatory or prohibitory, governing the relations of private people which
cannot be set aside. In modern times, in private law, public policy driven mandatory or regulatory rules
arise domestically especially in consumer transactions, but may also be important in civil procedure
and company law. They express an overriding public interests, domestically normally resulting from
statutory intervention. Earlier property law was mentioned as another part of private law where parties
have little choice because of the effect of their property dealings on others (who must respect the
results).
77
For the special status of US federal statutory (anti-trust and securities) claims in international
cases in connection with forum selection and arbitrability issues, see the discussion regarding the US
Supreme Court, supra note 46. The fact that these claims are now arbitrable in international arbitrations
acknowledges the special status of international professional dealings also in the US. The European
Court of Justice case law has followed a similar vein. See Case C-126/97, Eco Swiss China Time Ltd.
v Beneton International, 1999 E.C.R. I-3055.
78
Civil law is comfortable with the operation of mandatory rules in private law in this manner
(leading in the case of breach to private law remedies), although most private law rules remain of course
merely directory. In codes or similar statutes, these directory rules will figure as default rules even if
there developed the approach in practice making them applicable per se if not expressly set aside by
contract. It does not truly follow and these rules could in my view be more easily tested on their making
sense in the circumstances of the case. Of course that applies to all legal rules, but more and openly so
here, as these directory rules of private law are meant to be facilitating norms first.
Perhaps more important is in this connection that there may be some greater myopia in American
legal writing and thought, in which there is a strong assumption that all rules are policy driven and therefore
public or semi-public in character. From this, it is then readily believed to follow that they must
all in essence be statist or at least nationalist in nature. See Post, supra note 41, at 324. This seems to
have a long tradition in the US, even if as such hardly discussed but it has not remained unnoticed and
unchallenged. See, eg, A Katz, `Taking Private Ordering Seriously' (1996) 144 U. Pa. L. Rev. 1745. It
does not do justice to most of private law. This view nevertheless early started to dominate the interstate
conflict of laws theories (at least as from the 1950's), which increasingly talked of governmental
interests only. For a recent discussion, see David Currie et al., Conflict of Laws (6th ed. 2001) at 132.
It is indeed obvious that in the relevant case law public policy questions are often the major issues, but
that is not always so and it would seem strained to reduce all conflicts of (private) laws to those situations.
Any temptation to do so in the US may be more in particular connected with the fact that, out-
JAN H DALHUISEN1034
functioning as the default rule, it does not have any special status merely because
it happened to be formulated by states rather than in case law or in local practices.
This is clear even in codification states when state law gets out of date and case
law or practices must take over if no updating is attempted. Statutory private law
is therefore not public policy per se and does not on that score automatically prevail
over the international legal order and its laws in situations properly governed
by them.
It should in this connection also be realised that public order or similar mandatory
requirements could equally emerge ­ in that case spontaneously ­ in international
legal orders (or in smaller legal orders within a particular state), even if it
may be somewhat more difficult to articulate. We may think here of the infrastructure
of the law of contract in the modern lex mercatoria or of the notions of ownership
and possession 79
or of procedural and other safeguards, especially those that
side these policy conflicts, the private (state) laws are mostly in harmony because of their origin in the
common law and of the existence of a multitude of uniform laws, even if eg within the UCC there is
still a conflicts rule for differences in implementation at the state level. See U.C.C. § 1­301 (2001 revision)
(§ 1­105 (old)).
This (public) policy attitude even towards private law has a sequence in the `Law and Economics'
school. In fact, in the US, in most of the `law and...'movements, there is little attention for private law
issues in terms of custom, practices, party autonomy and beyond. It depends of course on how public
policy is defined but it remains true that much of private law has in essence a facilitating function and
is, whether derived from statutory or case law, in business foremost meant to enforce some rationality,
common sense, efficiency, consistency and predictability. Also in the US, much of it can be set aside by
party autonomy. It may well be that for the validation, effectiveness or binding force of legal rules in
each order some general interest in that order must be served, but that is not necessarily a governmental
interest or political issue and could more properly be the well being of the particular parties in their own
orbit or particular trade. See supra text accompanying note 59; see also I Ayres & R Gertner, `Filling
Gaps in Incomplete Contracts: An Economic Theory of Default Rules' (1989) 99 Yale L.J. 87.
Why should, for example, the protection of the bona fide purchaser of bills of exchange or
promissory notes be seen as a public policy issue or a politically driven redistribution issue? It has
made the development of these negotiable instrument possible, but it was a market development and
presents a facilitating legal support function, not the pursuit of a governmental or public interest. The
same can be said for so much else in trade and finance. What public policy could be involved in the
development of order paper besides bearer paper in negotiable instruments, except the demands of
the trade? So it was with the development of the CIF trade term after the FOB trade term. The same
may be said for the development of the notion of independence in letters of credit and in all forms of
payment (as a finality issue). The set-off principle and contractual netting devices are in finance risk
limitation facilities without which much financial business could not be done very well, but does that
make them public policy driven? Is there really a great public interest involved in the development
of indirect agency besides direct agency except in the more remote sense of facilitating commercial
intercourse that always used both?
79
Above it was already noted that where in the new legal order trans-nationalised ownership and
possession notions start to operate, we have to accept in principle that they are not merely directory, even
if private and not immediately public policy related either. They cannot be freely varied by contract or
party autonomy. The same is true for the contractual infrastructure, for example, questions of contractual
validity and the extent of the binding force of agreements. These matters can per definition not be settled
by agreements alone or by the parties themselves.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1035
counter anti-competitive behaviour or market abuse.80
These notions, when they
develop, are likely to be related to fundamental principle. So not only may a state
want its own policy to prevail but other legal orders, including the international
commercial and financial legal order itself, may have similar or conflicting public
order or policy requirements or may simply insist on non-interference (especially
where there is too little contact with states) as a public policy issue of it own.
Where tort rules emerge in that order, standards may be set and liability may be curtailed but may
not altogether be avoided by contract either, not even between consenting parties. It is here of interest
also that the EU uses an own concept of tort in connection with Member State liability for the nonimplementation
or late or partial implementation of Directives to the detriment of individuals. See Case
6/90 & 9/90, Francovich v Italy, 1991 ECR I-5357.
Good faith may acquire a similar trans-national flavour where it is referred to in EU Directives. It
may contain mandatory aspects also, especially when in extreme cases it may overrule the contractual
content. See Dalhuisen, supra note 2, at 298.
Perhaps there is also a mandatory concept of unjust enrichment in the new legal order, at least in the
EU the European Court of Justice operates a trans-nationalised (or at least an EU) concept when using
this notion from time to time in tax and other restitution cases. This issue tends to arise when under
local law payments are made in respect of certain charges (perhaps health inspection charges in respect
of imports) that are illegal under community law but cannot be reclaimed under domestic law. See Case
199/82, Amministrazione delle Finanze dello Stato v SpA San Giorgio, 1983 E.C.R. 3595.
From the EU Collateral Directive, there emerges even a trans-national concept of security interest
that is also underlying the UNIDROIT Mobile Equipment Convention. See Collateral Directive of
the European Parliament and of the Council on Financial Collateral Arrangements of 6 June 2002,
JO L168/43 (2002). From the Cape Town Convention on International Interests in Mobile Equipment
and the Protocol to the Convention on Matters Specific to Aircraft Equipment (2001), at http://www.
UNIDROIT.org/ english/conventions/c-main.htm, there derive similar transnational principles for
security interests in mobile equipment. Both have strong proprietary and therefore mandatory elements
as has the UNCITRAL Receivable Financing Convention. See UNCITRAL Convention on Assignment
of Receivables in International Trade, U.N. Doc. A/RES/56/81, available at http://www.UNCITRAL.
org.
80
International public order requirements proper are well known from the international arbitration
practice in the context of determining arbitrability issues. For US and EU cases, see supra notes 44
and 74. In connection with the recognition and enforcement of arbitral awards under the New York
Convention, The Paris Court of Appeal dealt with the issue of arbitrability of public policy related issues
(which are normally not considered arbitrable) in a judgment of Ste Ganz, 29 Mar 1991, (1991) Rev.
Arb. 478, 480 and held that, while international arbitrators determine their own jurisdiction including
the matter of arbitrability, they could use an internationalised concept of public order. See J-P Ancel,
`French Judical Attitudes Toward International Arbitration' (1993) 9 Arb. Inťl 121; see also V Lazic,
Insolvency Proceedings and Commercial Arbitration (1998) at 149, 278.
For a discussion of the public policy bar to recognition of arbitral awards under the New York Convention,
see P Lalive, `Transnational (or Truly International) Public Policy and International Arbitration'
in P Sanders ed., Comparative Arbitration Practice and Public Policy in Arbitration (1987) at 257.
These are only two instances in which public policy plays a role at the international level. It may
also in other instances and it would appear that there are also mandatory trans-national competition rules
operating that may void contracts directly in that order. Jan Dalhuisen, `The Arbitrability of Competition
Issues' (1995) 11 Arb. Inťl 151.
For a more recent study on the issue of international public policy in arbitrations, see also RH
Kreindler, `Approaches to the Application of Transnational Public Policy by Arbitrators' (2003) 4 The
Journal of World Investment 239.
JAN H DALHUISEN1036
Thus mandatory state law, even within its own territory, may still have competition
from the laws of other organizations or groupings which may be just as competent
to set their own rules, even if having an effect on that state's territory, and
which the relevant state may have to respect and apply to the members of the organisations
or groupings in question. It means that in the competition of public policies,
local governmental interests will have to be weighed against each other and
against policy interests that in the international legal order may be at least as legally
relevant and even prevail.
One could even argue in this connection that also a hippy community will have
its own rules recognised in state courts unless they conflict with overriding state
laws which may objectively be considered to prevail over them. But if it has its
own ways of contracting and its own proprietary arrangements, eg in respect of
who shall have its stall where,, it should not be affected by state laws unless there
was major discrimination, race, gender or other abuse or a serious infringement of
property rights of others including the use of public property.
In international cases, a higher rank for the international or trans-national law
would be supported by the status of international public law and EU law, which is
normally considered to prevail over domestic laws. Here the true issue may rather
be one of first determining to which order the activity properly belongs and subsequently
what to do with the interests of other orders, especially of state legal orders
on whose territory there is sufficient effect. Thus, in a conflict of public policy
between legal orders there is not necessarily a higher or lower order. The key is
that if an activity properly belongs to one legal order, it is not for other legal orders
to dictate the outcome unless they have an objectively prevailing interest.
Thus it should at least be accepted that in a world in which law means anything
at all, national (statist) legal orders, however powerful, are not to dictate to the
other legal orders unless they can show a legitimate public policy interest protected
under what would indeed be a higher norm,. which interest can be independently
evaluated, identified as such, and deemed to prevail in the circumstances.81
It follows that a principal first question is to determine the proper legal order in
which a particular activity takes place. Traditional conflict rules may be of some
help here in determining centers of gravity, closest connection or place (or legal
81
It should perhaps be noted that in Kelsen's approach this type of conflict cannot truly arise.
See Kelsen, supra note 11. Legal normativity is here firmly distinguished on the one hand from the
will of some authority or other force that may be at its origin, which is factual, and on the other hand
from moral normativity. In this view, the legal norm derives its legitimacy not from some authority or
from the moral order but from higher legal norms that confer it and which themselves are ultimately
derived from a theoretical apex norm (Grundnorm). This apex norm may be found in a national or in
the international legal order depending on one's political preference or instinct. Wherever it is put, it
creates the dominance of that order so that there could not truly be a conflict between them. Because
there is only one (theoretical) Grundnorm, legal orders are always connected but cannot compete. It does
not explain very well the unavoidable strife between domestic legal orders, particularly when domestic
public policies come into conflict in international cases.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1037
order) of the most characteristic performance.82
A more advanced view is that all
professional business dealings are increasingly likely to operate in the international
legal order even if they have no international connection on occasion, as it is ultimately
unlikely that they retain different dynamics locally.83
Much more could be
said on this issue, but to make the basic point, it may not be necessary to further
elaborate for the purposes of this Article.
The crux in a clash of public policies, assuming that the relevant legal orders
can be found, would subsequently be the attribution of competences between the
various legal orders. In trade and commerce, article 7 of the 1980 EU Rome Convention
on the Law Applicable to Contractual Obligations may at least for that type
of obligations be of some guide even if it remains rule rather than interest orient-
ed.84
More instructive are sections 402 and 403 of the Restatement (Third) of Foreign
Relations Law in the US. 85
Again, much more could be said on this and there
82
See Dalhuisen, supra note 2, at 168. There was probably never much wrong with the basic conflict
of laws' notion that all legal relationships have a seat in a legal order as long as that could also be the
international legal order or others that are not territorially defined or confined. See for the notion of
`internationality' also supra note 46.
83
In other words, all professional dealings, whether local or international, will increasingly aspire to
similar legal standards. Such an evolution in thought would simplify the issue of finding the appropriate
legal order for them and their dealings greatly. Of course, if all the contacts were local, the impact of
the pertinent national or statist public order requirements in respect of the transaction would have to be
accepted and there would remain an important difference in that respect. That idea is clearly expressed
in Article 2 of the Rome Convention on the Law Applicable to Contractual Obligations, 19 I.L.M. 1492
(1980) [hereinafter Rome Convention].
84
The problem is in Europe usually identified as one of rgles ďapplication immediate. See
Dalhuisen, supra note 2, at 179, 190. It is true that the notion of balancing public policy interests in
the context of determining the extraterritorial reach of policy directives or prescriptive jurisdiction is a
more typical American approach, not followed by the ECJ in the Woodpulp case. Case 89/85, Ahlström
Osakeyhtiö et al. v Commission of the European Communities, 1988 E.C.R. 5193. The notion was even
in the US not without its early critics. See Laker Airways Ltd. v Sabena, Belgian World Airlines, 731
F. 2d 909 (D.C. Cir. 1984) (criticizing the idea of balancing interest mostly on utilitarian grounds in
the sense that courts are ill equipped to do so). The more modern American view is, nevertheless, that
when there is in the home state a direct, substantial and foreseeable effect of action taken in another
legal order, the home state may have a justified interest in pursuing its own policies but they will still
have to be balanced against those of the other legal order in terms of the closer link, the importance of
the relevant public policy to the competing orders, the justification of the domestic policy in the light
of international standards and convictions, justified protection expectations, and so on. See Hartford
Fire. Ins. Co. v California, 509 U.S. 764 (1993) (Scalia, J., dissenting in part); Restatement (Third) of
Foreign Relations §§ 402­03 (1987).
85
In this approach, if a domestic law is chosen by the parties as applicable to an international
transaction, even such a choice cannot go beyond what makes sense in the international legal order and
is always subject to the higher fundamental or other mandatory principles in that order preceding party
autonomy. See infra text accompanying note 87. It does in any event not normally mean to include a
preference for the public policy rules of the domestic law so chosen. It cannot opt out of public order
requirements of the international legal order either. Also it cannot be meant to undermine the essentials
of the deal itself, except if there are very good reasons. See in the US the clear reference to this issue
in Mitshubishi Motors Corp. v Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), in which it was
JAN H DALHUISEN1038
is a substantial body of case law especially in the US, but further elaboration may
also not be necessary to make this basic point.86
Finally, this decentralist approach steers particularly clear of the idea, even
domestically, that modern wealth and well being is largely due to a socio-economic
infrastructure in which only the contribution of states count. Under this framework,
states would therefore be entitled to dominate all, at least within their own territories,
or to as much as they think they are entitled to domestically or can get away
with elsewhere. In other words, in the views here represented states are only one
type of actors that must, in international cases and relationships, respect other, subnational,
actors as well. Again, this is thought to be a rule of law requirement.
V. The Legal Norms of the International Commercial and Financial Legal
Order. Their Articulation and Ranking. The Effect of the Absence of
Legislative Power
Our last task is to identify the lex mercatoria itself. Its assumed vagueness has
often been used as an argument against its validity87
but it is in truth an issue not
all that difficult to resolve. In my recent book on International Commercial Financial
and Trade Law (2nd
ed 2004), I mention the sources of law in the international
commercial and financial legal order, therefore of this lex mercatoria, and
give their hierarchy as follows:
(a) fundamental legal principle; 88
(b) mandatory custom;
(c) mandatory uniform treaty law (to the extent applicable under its own
scope definition and in its own territory);
(d) the contract (or party autonomy in matters at the free disposition of the
parties);
(e) directory custom;
assumed that the contractually selected Swiss law would not cover the American anti-trust claims.
Arbitrators may indeed be presumed to engage here in a balancing of governmental interests and policies
in international cases between professional participants and may be better able to do so than nonAmerican
domestic courts. See for the problems in this connection in the English courts, British Nylon
Spinners, Ltd. v Imperial Chemical Industries Ltd. [1953] 1 Ch. 19.
86
The applicable law can in these cases only be established on a case-by-case basis. Examples are
the effect of domestic import/export and foreign exchange restrictions, although these are generally
of less importance today and substantially lifted in most modern countries. The reach of other policyoriented
domestic rules may simply be excessive in international terms or in a given situation and they
may in such cases not be considered at all.
87
See in particular Mustill, `The New Lex Mercatoria', supra note 6, at 149.
88
No fundamental distinction is here made between principles and rules. At least in the `realisť
schools, it is thought that even rules are in practice never more than guidelines, at least if they cannot
be literally applied through syllogism. See Llewellyn, supra note 25. I follow that lead for which there
are many other reasons not here directly relevant. It is not to say of course that the fundamental and
general principles may not benefit from more precise formulation in contract, custom and practices.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1039
(f) directory uniform treaty law (to the extent applicable under its own scope
definition and in its own territory);
(g) general principles largely derived from comparative law, uniform treaty
law (even where not directly applicable or not sufficiently ratified), ICC
Rules and the like, and
(h) residually, domestic laws found through conflict of laws' rules.
This hierarchy should be strictly applied in the order in which it is given. Thus
only if there are no higher rules or principles, the lower should be applied.
As to the fundamental legal notions or principles, which come first and form the
basis of the whole system, they are particularly:
(a) the principle of pacta sunt servanda as the essence of all contract law;
(b) the principle of ownership including the transferability of assets as the
essence of all property law.89
In international business and finance, we
are here concerned mainly with chattels and intangible assets like receivables
and similar claims;
(c) the liability for own actions, especially (i) if wrongful (certainly if the
wrong is of a major nature) as the essence of tort law, (ii) if leading to
detrimental reliance on such action by others as another fundamental
principal of contract law, (iii) if resulting in principals creating the
appearance of authority in others as an essential of the law of agency,
or (iv) if resulting in owners creating an appearance of ownership of
their assets in others as an additional fundamental principal in the law
of ownership and the heart of the protection of the bona fide pur-
chaser.
There are other fundamental principles in terms of:
(d) fiduciary duties in contract and in agency leading to special protections
of counterparties, notably if weaker or in a position of dependence
(including consumers against wholesales, workers against employers,
individuals against the state, smaller investors against brokers), and to
duties of disclosure and faithful implementation of one's commit-
ments;
(e) the notion that one should give back what is owned by others leading to
notions of unjust enrichment and restitution;
(f) respect for acquired or similar rights, traditionally particularly relevant
to outlaw retroactive government action, but also used to support owners
of proprietary rights in assets that move to other countries;
(g) equality of treatment between creditors, shareholders and other classes
of interested parties with similar rights unless they have postponed themselves
or acquired (better) proprietary assets in the debtor's assets;
89
It was not considered fundamental in the natural law school but is increasingly considered a
human rights' related notion. See Protocol One to Convention for the Protection of Human rights and
Fundamental Freedoms, (4 Nov 1950), Art. 1, Eur. T.S. No 5, available at http://www.echr.coe.int/Eng/
BasicTexts.htm; see also supra text accompanying note 17.
JAN H DALHUISEN1040
Then there are also the:
(h) fundamental procedural protections in terms of impartiality, proper jurisdiction,
proper hearings and the possibility to mount an adequate defense,
now often related to the more recent (and also internationalised) standards
of human rights and basic protections (in Europe Article 6 of the
1950 European Convention on Human Rights);
(i) fundamental protections against fraud, sharp practices, excessive power,
cartels, bribery and insider dealing or other forms of manipulation in
market-related assets (also in their civil and commercial aspects) and
against money laundering;
Finally there may also be fundamental principles of
(j) environmental protection developing, and perhaps of
(k) labour law protections
There may be other fundamental principles, and the above list is not meant to be
conclusive, 90
but in commercial and financial law there are not many. The purpose
here is only to show that fundamental legal principles are likely to be at the heart
of all civilized modern legal systems, also in matters of commerce and finance. In
domestic laws, especially of the codified variety, they are often hidden, but they
come into their own again in the international sphere.
Whether or not these fundamental principles may be considered innate in all
human endeavour or themselves result from a process of internalization, they are
fundamental and legally the basis of the whole system and as such likely to be mandatory
or matters of public order in the international commercial and financial legal
order (ius cogens). They might, in international commercial transactions, even
adjust the balance between the parties on the basis of fundamental (often social or
public policy) considerations, although in the commercial sphere it is less likely
that there are often such considerations. Nevertheless, they may be incorporated in
an international concept of good faith (in that case mandatory) or public order when
called upon to adjust major imbalances or prevent abuse.
More important is the realization that the fundamental principles of protection
in this manner are not static and, even if mandatory in principle, they may not result
90
One may see here some symmetry with Article 38(1) of the Statute of the International Court of
Justice, which enumerates the basic sources of international public law. cf. Goode, supra note 6. It is
clear that in public international law the problems concerning the sources of the law discussed here play
a much smaller role than in private law. The text of Article 38(1) is as follows:
`The Court, whose function is to decide in accordance with international law such disputes as are
submitted to it, shall apply:
a. international conventions, whether general or particular, establishing rules expressly
recognized by the contesting states;
b. international custom, as evidence of a general practice accepted as law;
c. the general principles of law recognized by civilized nations;
d. subject to the provisions of Article 59, judicial decisions and the teachings of the most
highly qualified publicists of the various nations, as subsidiary means for the determination
of rules of law.''
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1041
in the same protection between different parties, even in the same or similar types
of deals. Thus, lesser refinement of the law may result between professionals in
commercial matters, and even greater legal formalism may result as an overriding
requirement connected with the continuation of the normal commercial flows and
the imperatives imposed on all participants.
In the traditional subjects of mercantile law, like negotiable instruments, bills of
lading, letters of credit and the traditional transportation insurance policies, there
is also likely to be a restrictive approach in interpretation. The idea of certainty is
here sufficiently developed in an international sense to generally prevail. 91
This
may also apply to international payments and their finality which may mean a substantial
limitation of defenses in respect of them once they are completed.
It is natural and necessary for the law to be sensitive to these various requirements
and practicalities that may also emerge in the form of implied conditions
rather than as industry custom or norms. As a consequence, the impact of overriding
fundamental principle will quite naturally still vary depending on the type of
relationship and nature of the transaction and will in any event only give the basic
legal structures in terms of rights and obligations.
Indeed, fundamental principle must be supported and further directed by established
practices or custom, which in their supporting role could then also become
mandatory. Where these practices or customs are property-connected, it is possible
that they will prevail over contractual arrangements or a contractual choice of
law, as they are for example in the proprietary aspects of international negotiable
instruments like eurobonds.92
The same may be true in cases where an automatic
return of title upon default is demanded in the contract; such an arrangement may
not always prevail internationally for commercial reasons.
Also, specific performance of sales agreements normally available in civil law
might be deemed against the commercial practice or realities, and common sense
may thus rule out the possibility. For foreign direct investments, codes of conduct
are increasingly formulated on the basis of established practices and some may
even acquire a mandatory flavor. Wherever (international) practice or custom
acquire such a mandatory aspect, it is in fact likely that there is a close connection
with fundamental legal principle. These internationalized practices in any event
have supplementary force even if not mandatory in themselves.
International conventions with uniform law further supplement the fundamental
principles and international custom, like those on sales, transportation and payment
methods. These Conventions contain so far only occasionally mandatory law, for
example, that contained Article 12 of the Vienna Convention. If the UNCITRAL
Receivable Financing Convention (2001) or the UNIDROIT Mobile Equipment
Convention (2001) became law, there would be much more mandatory treaty law.
Even then, however, it is unlikely that it would prevail over fundamental legal prin-
91
See generally Post, supra note 38.
92
See Dalhuisen, supra note 2, at 222.
JAN H DALHUISEN1042
ciple or mandatory custom in the international legal order. It is no wonder that proprietary
law concerning chattels and intangible assets in a financial context is
moving here to the forefront. That is where the greatest differences and the greatest
needs are, connected as they are with the bankruptcy resistency or the proprietary
status of modern financial products internationally.
As already mentioned before, this treaty law has a peculiar aspect in the international
commercial and financial legal order because it is in truth normally only
binding on participants from (or transactions having an effect in) ratifying states,
is therefore territorial and always limited to its scope, and not truly transnational.
Treaty creation is an instance where states assert legislative power in the international
commercial and financial legal order. It is incidental and its force could only
extend to the international order more generally if general principle were involved
that could, as such, have standing throughout that order. It was already pointed out
before that uniform treaty law of this nature should only be entered into at the
request of the international legal order itself. Without such a request, it is unlikely
to succeed; this is the reason why so many UNCITRAL projects are not adopted
while even participants ignore the widely ratified Vienna Convention.93
It means
that the search for projects in UNCITRAL and UNIDROIT is misguided. It is for
the international business community to ask for such projects.
In all this, there are in contractual matters of course the wording of the contract
and the intrinsic logic of the transaction itself to be considered, if necessary under
standards of good faith, which, as just mentioned, may sometimes appeal to higher
principle. Indeed, fundamental legal principle, and mandatory international custom
or mandatory uniform treaty law would prevail over the structure of a contract.
Common legal principles will have a further effect in defining international legal
relationships where the contractual terms, fundamental principles, custom and
treaty law fail or need further elaboration. These principles may be deduced from
national laws if there is a wide consensus between them. Here comparative law
may aid the inquiry, but its remit would appear to be limited as it is not similarity
at the domestic level that is key, but normativity in an international sense. 94
The search for general principles of contract law derived from national insights
may therefore not be all that relevant. The substantial compilations that are appearing
in Europe, within UNIDROIT and within the EU, must from that point of view
be considered with skepticism.95
Yet they do provide some list from which it may
be possible to select the most responsive norm.
93
The lack of success may at the level of detail also be due to an attitude of trading mere domestic
concepts in the relevant conferences, a serious impediment compounded by the lack of interest of the
international community. See J Basedow, `The Renascence of Uniform Law: European Contract Law
and Its Components' (1998) 18 Legal Stud. 121.
94
See supra text accompanying note 66.
95
See Dalhuisen, supra note 2, at 339, for a more detailed critique also as to the confusion in these
compilations on the notion of and dynamics behind the modern lex mercatoria and on the relative status
of public policy, mandatory laws, customs, general principles, private international law and other sources
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1043
If the applicable law were still not sufficiently established under the above layers
of principles and rules, domestic laws could remain relevant as a matter of private
international law. Even where a domestic private law would thus obtain, there
would still be a discretionary element, however, to allow for different dynamics
and needs in the international legal order. Another important insight is that the
applicable domestic laws lose here their purely domestic character and become law
in the international legal order. This is in fact the underlying reason and justification
for the discretionary element.
The transplantation of domestic laws into the international legal order may
remain very relevant as long as legal concepts are not yet sufficiently tested and
elaborated in that order. This may particularly be the case in the area of proprietary
law in respect of chattels and intangibles, although conflicts of laws' rules are
traditionally insufficiently developed exactly to deal with moving assets or assets
that have no proper location like intangible claims.
In any event, one would expect domestic law concepts, including those of property
law in movable and intangible assets, increasingly to loose their normativity
in the international legal order when it develops further. It shows nevertheless that
there need not be any enmity between the lex mercatoria and domestic laws. The
former still depends on the latter. What is happening is that in international transactions
many more rules of the various kinds need to be tested before domestic
laws enter and that, even if such law does enter, it becomes part of the transnational
law itself.
The result is thus a layering of norms and their hierarchy, which, it is posited,
is the essence of the modern lex mercatoria. No set of black letter rules exists here
per se nor would that seem to be necessary. The new law needs to be analyzed and
discovered in each situation and must be pleaded in litigation. In fact, it is upon
proper analysis not different in domestic laws.
This per case analysis leaves the matter of domestic public policies, which in
their allotted territories may compete with the law of the international legal order
and introduces the element of balancing of the various interests per case as explained
in Part IV above. It cuts through the hierarchy of norms of the lex mercatoria and
requires no less an ad hoc or per case approach, here in the nature of the application
of international comity.
Much more can be said on the development and application of the new international
law merchant or lex mercatoria and on the legal concepts that it can even
now readily use or that it is developing.96
Yet, for our purposes, the key insight is
of law. Another serious criticism concerns the consumer protection ethos in these Principles which nevertheless
pretend to also cover international commerce and finance, therefore professional dealings.
96
See generally Dalhuisen, supra note 2, chapter 1. I first raised these issues in my inaugural address
at Utrecht in 1991. See JH Dalhuisen, Wat is vreemd recht [What is foreign law] (1991).
Many of the concepts discussed here in terms of fundamental principles (in which connection good
faith is sometimes seen as mandatory especially in the UNIDROIT and EUROPEAN Contract Principles,
see below), customary law and practices (whether of the mandatory or directory type), uniform
JAN H DALHUISEN1044
treaty law (whether mandatory or directive), party autonomy, general principles and private international
law rules pointing to domestic laws, are also used in one form or another in the 1980 Vienna
Convention on the International Sales of Goods (Articles 7 and 9), and in the UNIDROIT and European
Contract Principles, but there is no sense of order or hierarchy so that the relative priorities and
relationships between these concepts remain unclear.
Thus Article 7(1) of the Vienna Convention in the International; Sale of Goods (CISG) in dealing
with the interpretation of the Convention requests that regard must be had to its international character,
the need to promote uniformity and the observance of good faith in international dealings. In Article
7(2) on the supplementation of the Convention in matters not expressly settled thereby, it relies on
general principles (but only those that can be deduced from the Convention) or otherwise on rules of
private international law. Whatever there may be of the distinction between interpretation and supplementation
in this connection, which in itself may be severely criticised, it is not clear why different criteria
apply to interpretation and supplementation, what internationality and uniformity may mean in this
connection, why good faith in particular applies only to interpretation (in this case of a Convention),
why interpretation and supplementation of the sales contracts concluded under the Convention are not
considered whilst (international) custom and practices are not even mentioned but are made applicable
to the sales contract in Article.9. See also Dalhuisen, supra note 2, 411 ff. There is here no clear view
either of the rank of mandatory rules of a national character in terms of public policy. Property issues
are excluded (Article 4) and any mandatory rules them concerning no further considered.
Article 7 CISG maintains here a muddled approach, unfortunately copied in all other UNCITRAL
Conventions and even in some UNIDROIT Conventions but interestingly not in the UNIDROIT Contract
Principles (unlike the EUROPEAN Contract Principles). On then other hand, the Vienna Convention
cannot determine what other sources may additionally apply and it must be assumed therefore
that it takes in place in fact as directory uniform treaty law in the hierarchy of lex mercatoria as here
explained whilst the references to customs, general principles, and private international law (therefore
domestic laws) in Article 7 and Article 9 can best be understood and should find their place in that hierarchy.
In a proper internationalist approach, the appropriate references for both interpretation and supplementation
of the Convention itself or more appropriately the sales agreements operating thereunder
should have been to the text of the Convention itself, its international character, its own general principles
and those operating in international sales, the need for uniformity in its application and to international
practices and customs and then residually to private international law (it being understood that
national law so becoming applicable would still be functioning in an international not a domestic manner,
so that the reference to internationality qualifies it). The observance of good faith could have been
added but again rather as matter of the interpretation and supplementation of the sales contracts not of
the Convention (which is a document between states to which the 1961 Vienna Convention on the Law
of Treaties and its interpretation clause (Article 31) more properly applies.
The UNIDROIT (hereinafter UP) and European Contract Principles (hereinafter EP) although nonbinding
and having at best the status of restatements, present an even muddier approach. The UP are
meant to only cover professional dealings, the EP all dealings including consumer dealings which in
itself presents important problems as in this manner consumer principles may start to operate in the professional
sphere. There are also possibilities of conflicts (where both sets of Principles may differ, the
EP only applying in the European Communities, Article 1:101 (1)) Both sets allow for their Principles
as well as the lex mercatoria to be chosen by the parties (Third Preamble UP; Article 1:101 (3)(a) EP);
in fact they each consider references to the lex mercatoria and general principles to include these Principles
or in the case of the EP also when no law is mad applicable by the parties. So far so good.
Problems arise first when both sets subsequently start to talk about mandatory rules. Both sets suggest
that they can create or at least identify mandatory rules (Article 1.7 UP; Articles 1:102 (1) and
1:201(2) EP). It is submitted that this must imply a reference to the international legal order and its
practices rather than consumer law concern with practise and their fairness, but the Principles are not
clear in this aspect. A censorious approach is suggested. These mandatory rules may be overruled by
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1045
that the law in this order can be easily determined, also at the micro level, and can
therefore even now be readily applied.
VI. Conclusion
I believe that it is no exaggeration to say that there is a widespread feeling amongst
those who think about these matters97
that domestic laws can no longer adequately
deal with the immense increase in the international flow of goods, services, payments
and capital and that as a consequence, the conflict of laws' rules as we still
know them ­ oriented as they are towards finding always a domestic, national or
statist law to be applied ­ have run their course. In any event, they present at best
a fractured system of law if applied to international transactions creating uncertainty
and also inequality in result. That may have been acceptable when the international
flows of goods, services and money were modest but that is no longer the
case. In fact total value of these flows far supersedes the GDP of any individual
country.
contract unless the applicable private international law rules dictate otherwise (Articles 1.4 and1.5 UP;
Article 1:103(2) EP), but public policy evaluation and balancing is not properly an issue of private
international law. Good faith is in particular considered a mandatory concept (Article 1.7 UP; Article
1:201(2) EP). In interpretation and supplementation of the contract that is, however, by no means
always the case and parties can often exclude its functioning or at least set standards, cf. also Section
1­302(a) UCC). It also creates problems with respect to the many references in the Principles to reasonableness
and fairness or unreasonable behaviour, taking excessive advantage or existence of bad
faith, which may or may not be expressions of `good faith' and therefore mandatory (in the perception
of these sets of Principles), see further Dalhuisen, supra note 2, 340 and 350.
Both sets of Principles also contain and interpretation and supplementation clause concerning the
Principles themselves. The UP (Article 1.6) and make interpretation subject to the international character
and purposes of the Principles and the need to promote uniformity. Again this must be some oblique
reference to the international legal order and its practices without its meaning being explained. Supplementation
is done on the basis of the general principles of UP. Importantly, the CISG reference to
private international law is deleted in the UP, the UP clearly being considered to be sufficiently selfcontained.
The EP maintain this reference to private international law in Article 1:106 whilst deleting
the reference to internationality in interpretation. Transnationalism is here clearly further removed from
the drafters' thinking, the reason probably being that the EP also are meant to apply to consumer contracts.
Both sets refer to usages and practices (Article 1.6 UP and Article 1:105 EP) but (like Article 9
CISG) only in terms of contractual obligations.
In both sets, contract interpretation is a different issue and covered separately by Article 4.1ff UP
and Article 5:101ff EP in which connection in the UP good faith, fair dealing and reasonableness come
only in as supplying additional terms. Usages on the other hand are allowed in interpretation, not in supplementation.
The EP do not here distinguish and allows both good faith notions and custom to operate
in matters of interpretation and supplementation. In neither set, reference is made in this connection to
private international law or uniform treaty law.
Much more may be said on these Principles, see for a critique Dalhuisen, supra note 2, 339 ff. Here
the more important conclusion is that neither set has a concept of internationality, the sources of law
in this connection, and their ranking.
97
See supra note 6.
JAN H DALHUISEN1046
Thus increasingly, a whole range of other rules or principles are superseding the
application of domestic rules in international business cases. Even if in my construction
of the lex mercatoria, in international commerce and finance, domestic
law remains the residual rule, much may precede its application and it can even
then not apply without due regard to the solution making sense in an international
context. It means that the international dimension and dynamics of the case must
be taken into account. In fact, any domestic law still used as the residual rule in
this manner is then incorporated into the trans-national law or law merchant itself
and operates only in that context.
As already suggested in the introduction, it may mean for example English law
applicable in a domestic case may turn out quite differently from English law when
applied in an international case where it will meet other sources of law that move
prevail over it and in any event it may not be applied in a domestic manner. That
is a key realisation. That is also so when the applicable law is chosen by the parties
unless they make it clear at the same time that they want the internationality
of their transaction to be ignored. In any event, such a contractual choice of law
cannot prevail in proprietary and public policy matters as these are matters not at
the free disposition of the parties. Even in contract, rules concerning capacity and
validity cannot be chosen by the parties unless (perhaps) they opt for another contractual
regime altogether.
From a more academic perspective, the re-emergence of a new international law
merchant offers us the unique opportunity to observe the operation of a new immanent
legal order; as such it is an event of major consequence. The intellectual conceptualisation
of the new law and the identification of the legal framework in which
it operates may still leave something to be desired, but it is ­ as I hope I have
shown ­ not beyond our capabilities. This task is urgent and requires confidence
in the new international realities and acceptance that the evolution of new laws can
be a self-creating and self-validating social process. Respect for modern society's
plurality as well as efficiency demands lead quite naturally to the recognition of
different legal orders and their laws, and, at the international level, to the acceptance
of a new commercial and financial legal order. It may be seen as the precondition
for the understanding and evolution of the new law merchant that international
business now requires.
Indeed this law, as any other, needs a framework or context within which it can
operate and develop. I have attempted to describe this context. To give this order
and its law more stature and to help its development, the articulation or spokesman
function ­ meaning the institutional framework of the international commercial and
financial legal order itself ­ needs to be further explored and reinforced. Organizations
like the International Chamber of Commerce (ICC) have so far done important
work but only in special aspects, whilst in whole other areas like international
finance, a similar effort needs to be made. Other trade associations, like the IPMA
and ISMA already do in the euro-markets, may here be of further help and their
role in the process needs more study. Also, international arbitrators and enlightened
state courts may play an important role, whilst the desirability of a highest
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1047
international commercial appeals court becomes clear in the light of the multitude
of possible actors in this process.
It was further noted that we are not here talking of an emerging world law per
se, which could by definition be considered higher than domestic laws. Rather we
are here concerned first with the proper operation of parallel legal orders that possess
disparate competencies in governing relationships or transactions within their
reach. Our belief in pluralism finds here its normal sequence in the formation, recognition
and operation of all living law. Only when the issue of conflict and competition,
therefore the issue of precedence must be determined, need we defer to a
higher law which I found in the rule of law itself.
That new legal orders may not immediately emerge as fully-fledged legal systems
can be no surprise. Their law as living law will in any event always be in full
evolution. It is no different in domestic laws, and the greater certainty those laws
are frequently thought to give has proved only too ephemeral in international dealings,
as it often is even in domestic dealings. International business is likely to be
better served by the appropriate trans-national law even if less detailed than by the
wrong (domestic) law even if that domestic law is thought to bring greater certainty
within its own territory. I believe that international business can better live with
that risk than with the risk of having an altogether improper and unresponsive law
applied. It is hard to see what could be objectively against the search for better
laws and why it would make a difference if the better laws were trans-national.
As was already pointed out before, in truth the legal certainty of which we often
speak in this connection and which is, as an objective of the law, of course greatly
desirable can only result from the behaviour and restraint of the participants themselves,
therefore from the legal order itself in which they operate. In the international
commercial and financial legal order, therefore, this certainty may only be
provided by the international business community.
Naturally at the practical level the professional international commercial and
financial legal order faces evolutionary problems in the further elaboration of its
laws, but so do statist legal orders and laws. Although in maritime law and in the
areas of negotiable instruments and documents of title, the new lex mercatoria may
easily recover its old balance and dispense with the hierarchy of norms in favour
of a unitary trans-national substantive law, and may also be able to deal quite effortlessly
in this manner with modern letters of credit or similar guarantees and perhaps
with international payments more generally, there are other major parts of
private law where this is more difficult, not in the least because domestic laws are
equally unsettled in those areas. But reliance on domestic laws, although always in
the context of the lex mercatoria, may not then be satisfactory either, even if it
would allow for adjustment to cater for the international element. Trans-nationalisation
into a unitary substantive law regime must then be promoted and will ­ it is
submitted ­ ultimately have its way.
I already took the law of chattels and intangible assets as a major example, in
particular with reference to problems of possessory protections, assignments, con-
JAN H DALHUISEN1048
ditional or temporary sales and ownership rights, collateralised transactions, shifting
liens or floating charges, trusts and constructive trust or tracing facilities,
agency, fiduciary duties and transfer facilities, and restitution notions, but no less
with reference to the modern ways of payment, modern book-entry entitlements for
transferable securities and modern netting facilities, issues with which I have tried
to deal extensively and in a more conceptual manner elsewhere.98
Especially in
financial law these present major problem areas, also domestically, where common
law has, however, long had some advantage.
Indeed from a comparative law perspective, it is clear that in all of these areas
the more modern solutions are mainly found in the equity concepts (contractually
and especially proprietarily) of the common law, deriving therefore from a legal
intervention facility (originally through the Lord Chancellor) that civil law never
had. It is no wonder that in private law we find exactly the greatest practical differences
between civil and common law in these areas and therefore the greatest
historical divides to bridge in the new law merchant. On the other hand, from a
common law perspective the problem is here that equity became formalized and
lost its dynamic impulse half way through. One sees this in the need for modern
statutory elaboration of many of these notions, especially in modern trust, corporation
and securities statutes, but no less in the various chapters (or Articles) of the
UCC in the US.
From this perspective, it could be argued perhaps that the international law merchant
is much like a new law of equity (in a common law sense) that has rediscovered
the basic dynamics of reform and can in the process also deal with efficiency
considerations and values as a matter of conscience and objective needs of the participants
that formulate the new law and of those that must find and adjudicate it
in the light of their business or judicial experience and skills of communication
with the international business community as a whole.
This brings us ultimately not only to the role of international arbitrators but also
of national judges when called upon to adjudicate cases under the rules of non-state
legal orders, particularly that of the international commercial and financial legal
order. We saw that international arbitrators have great freedom in these matters,
but they are by no means free in identifying the applicable rules. Domestic judges
are here likely to be more uncertain and inhibited at first. Yet they should not be
and if uncertain as to the prevailing business practices should aggressively ask for
expert witnesses, as Lord Mansfield once did and international arbitrators do also.
This being said, in my view, there will always remain an important difference
between international arbitrations and (state) court proceedings. Although in both
cases the issues presented have to be decided on the basis of the applicable law
(here the international law merchant), the attitude is still likely to be quite differ-
ent.
To make a generalization, arbitrators are more interested in the facts, judges in
the law, not only those in the civil law tradition. There is nothing wrong with this
98
See Dalhuisen, supra note 2.
THE LEX MERCATORIA AND ITS APPLICATION [2008] EBLR 1049
as long as we understand that arbitrators in trying to identify the legally relevant
facts, impliedly interpret the applicable law while judges trying to formulate the
applicable rules do so against the background of what they impliedly see as the
legally relevant facts. It shows another facet of the close relationship between (the
legally relevant) facts and (the relevant legal) norms; the results should not be different
although the argumentation will be.
What binds them together is that in professional business disputes, both arbitrators
and judges must in their judicial activity be aware of the facilitating nature of
the law merchant and of the need for solutions that make commercial sense and
serve the business community, absent overriding policy issues arising from the
international commercial legal order itself or from statist legal orders to the extent
governmental interest may be deemed to be objectively justified.
In terms of the international commercial and financial legal order and its law
merchant, there is little doubt in my mind that we are talking here about an evolution
that has long been underway and that will manifest itself ever more prominently
in the years to come. The international flows themselves will require it. It
takes the legal community usually a long time to identify and become comfortable
with new ways. It is not different in this case and it is a matter of education either
in our universities or in the school of life. The first alternative is on offer for our
students. Ever more take advantage of that opportunity. The sooner they realise
what is going on the better. Much work remains to be done but I am confident that
at least the groundwork has by now firmly been laid.
JAN H DALHUISEN1050