Applicable Choice of Law – Lex Mercatoria or Vienna Convention

The ‘Law Merchant’ or lex mercatoria as known in the earliest times and its applicability in the legal sphere represents a topic of great interest among the academics in this specific area. The scope here is to answer the question whether lex mercatoria can be an applicable choice of law and bring it into contrast with the Vienna Convention. The concept of lex mercatoria goes back to the very first trade deals that humans made. ‘In the history of English law there have been a few developments that have captured the imagination as strongly as the medieval law merchant, which for hundreds of years subsisted as a distinct source of rights, administered by courts in which the merchants themselves were judges, before ultimately becoming redundant because of the adoption of the common law itself to commercial needs and usages.’[1] Unlike other bodies of law, the lex mercatoria was not born of statutory or ‘natural’ law but from practical, day-to-day commercial usage.[2] Although this set of general principles of law has no universal definition and it is uncodified, it proves to be the most important legal instrument in the process of trade law development. It has been said that, ‘lex mercatoria is that part of transnational commercial law which consists of the unwritten customs and practice of merchants, so far as satisfying externally set criteria for validation.’[3] Roy Goode defines it as ‘the totality of the law’s response to mercantile disputes, encompassing all those principles, rules and statutory provisions, of whatever kind and from whatever source, which bear on the private law rights and obligations of parties to commercial transactions.’[4] Danish scholar Professor Ole Lando lists the following elements of the law merchant (which he describes as non-exhaustive): public international law, uniform laws, general principles of law, rules of international organizations, customs and usages, standard form contracts, and reporting of arbitral awards.[5]

Although the old law merchant lost its initial character of international legal instrument when faced with the newly developed national systems of law, there has been an increasing call for a modern law merchant. ‘Non-governmental institutions like the International Chamber of Commerce (ICC) started in the 1920’s to foster international trade law by developing uniform standard rules and procedures. There emerged a trend of rediscovering the international character of the commercial law and to move away from the restrictions of national law to a universal, international conception of international trade law.’[6] The modern age witnesses a continuous development of the global market place, society and a decreasing sovereignty of the national state which favours a common international law merchant. ‘It is not surprising that the idea of the lex mercatoria has been revitalized: businessmen involved in cross-border transactions were increasingly and still are dissatisfied with the unsuitability of some national laws for international commerce and with the results of the conflict of law rules which often appear arbitrary and impractical.’[7] However, lex mercatoria has always been a subject of dispute caused by different views which will be analysed later in this essay.

The ICC Rules provide in the case of Deutsche Schachtbau-und Tiefbohrgessellschaft mbH v The R’As Al Khaimah National Oil Co & Shell International Petroleum Co Ltd[8] that ‘the parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate.’[9] The decision in the case above states a very straight forward statement concerning the freedom of choice in terms of the law applicable to a sales contract. ‘Rome I[10], like the Rome Convention, gives effect to the principle of party autonomy. It provides in art.3 that the parties’ contract shall be governed by their choice of law. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. Selection need not be express as long as it is clear from the contract terms or circumstances. However, it should not be assumed the use of a trade term such as INCOTERMS 2010 will imply a choice of law.’[11] The party autonomy is a basic principle of arbitration. Therefore, ‘the arbitrator’s revision of the parties’ contract by substituting the applicable law, however equitable, should be prohibited in principle for the sake of the sanctity of the contract. Thus, the lex mercatoria should not oppose the well-established principle of party autonomy, as it is one of the general principles of private international law.’[12]

As mentioned earlier, there are different views whether lex mercatoria qualifies as a law, a legal order, or a legal system. ‘Many authors doubt that there is such a new lex mercatoria in the sense of an international commercial law autonomous from any state law. At least, they deny that it exists in any useful sense and that it is beneficial for solving commercial disputes.’[13] The main argument against lex mercatoria refers to its lack of methodological base as ‘law’. Moreover, being independent from any national system it does not have authority which weakens its binding force. It is considered that lex mercatoria is unable to govern a contract between two private parties outside a national state. Hence, a contract under lex mercatoria is stateless and therefore invalid.[14] ‘It is also argued – standard form contracts cannot create any legal rules of law and can therefore not be any source of law. Usages of international trade only acquire the character of law to the extent that they are incorporated into a national legal system, either expressly or tacitly. Just because they are available as a source for interpretation or amplification of contractual clauses does not make them law.’[15] Probably the strongest argument against lex mercatoria is its incompleteness. It cannot be defined or found anywhere, therefore, it is considered as being vague and incoherent. The general principles of law which are considered to be the core of lex mercatoria should be recognised by all trading nations.[16] But it is very difficult to harmonise this set of principles for a diversity of national legal systems (common law, civil law, Islamic law) which may ascertain different principles applicable to different states.

In contrast, those in favour of lex mercatoria argue that the law can emerge independently from whatever organ that can formalize it and it can derive from the will of a sovereign state. Ole Lando stated that ‘the binding force of the lex mercatoria does not depend on the fact that it is made and promulgated by State authorities but that it is recognised as an autonomous norm system by the business community and by State authorities’. None of those supporting lex mercatoria claim that it constitutes a complete, precise and exhaustive set of rules. Yet, this is also true for the national legal systems. They, too, are incomplete and require gap-filling. Every decision based on a law bears therefore a certain degree of openness and unpredictability. As such, the lex mercatoria is very much in line with the national or international legal systems.[17]

An alternative to lex mercatoria as an applicable law is the Vienna Convention on CISG[18]. ‘The Vienna Convention represents a statutory framework of law created by states, whereas the lex mercatoria is a body of ‘spontaneous’ law – law created by standard commercial practices and arbitral decisions. Despite their differences, the Vienna Convention and the lex mercatoria do not compete for the status of being the exclusive source of law for international trade. Although the rules of the Convention are approved by states, they operate in conjunction with international trade usages and the principle of contractual autonomy.’[19] CISG is the international counterpart to the Uniform Commercial Code and generally applies to all sales transactions where the parties have their places of business in different Contracting States. To its credit, CISG is a flexible and modern sales law that promotes and respects the freedom of the parties to a sales contract to contractually deviate from its provisions, including the election to opt out of CISG and choose the application of an entirely different body of law.[20] ‘The Convention was drafted, not to meet the needs of courts and litigation, but to respond to the needs of businessmen and lawyers who have no special knowledge of the technicalities of international business law.’[21]

To sum up, it is fair to say that ‘CISG is fortunate to have a successful predecessor in lex mercatoria, the merchants’ law created by merchants and administered by special merchant courts.’[22] Although just as lex mercatoria, CISG is not a national system of law, it is nevertheless preferred as a choice of law. CISG has been a tremendous international success, achieving one of its main goals and objectives: the creation of a uniform body of international sales law with almost universal acceptance.[23] On the other side, lex mercatoria is seen with substantial scepticism.[24] ‘A worldwide survey among attorneys active in international commercial law conducted in 1995 revealed that most of them would strongly advise against including a provision in the contract of their client referring to the lex mercatoria as the lex contractus. In their opinion, “…the content of lex mercatoria has not been discoverable in any single place… Nor has lex mercatoria been ‘definitive’ in the sense of supplying a comprehensive set of decision-making rules which can be applied to resolve a dispute.”’[25]

 

 

Bibliography

[1] Royston Miles Goode and Ewan McKendrick, Goode On Commercial Law (4th edn, Penguin Books 2010) 3

[2] Dr Gemmell Arthur J. and Autumn Talbott, ‘The Law Merchant-Redux’ [2011] The Transnational Dispute Management Journal <https://works.bepress.com/art_gemmell/1/&gt; accessed 2 January 2017.

[3] Royston Miles Goode, Ewan McKendrick and Herbert Kronke, Transnational Commercial Law (2nd edn, Oxford University Press 2015) 1.63

[4] Ibid. 1.02

[5] Ibid. 1.04

[6] L. Trakman, ‘Do The UNIDROIT Principles Of International Commercial Contracts Form A New Lex Mercatoria’ (Cisg.law.pace.edu, 1998) <http://www.cisg.law.pace.edu/cisg/biblio/baron.html&gt; accessed 3 January 2017

[7] Ibid.

[8] Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v Ras Al-Khaimah National Oil Co (DST v Rakoil) [1987] 3 WLR. 1023

[9] ICC Rules of Arbitration 2012, art. 13.3

[10] Regulation (EC) No 593/2008 of the European Parliament and of the Council, art. 3.1

[11] Jason Chuah, Law Of International Trade (5th edn, Sweet & Maxwell 2013) 725

[12] Manriruzzaman, Abul F.M. ‘The Lex Mercatoria and International Contracts: A Challenge for International Commercial Arbitration?’ American University International Law Review 14, no. 3 (1999) 679

[13] L. Trakman, ‘Do The UNIDROIT Principles Of International Commercial Contracts Form A New Lex Mercatoria’ (Cisg.law.pace.edu, 1998) <http://www.cisg.law.pace.edu/cisg/biblio/baron.html&gt; accessed 3 January 2017

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] Ibid.

[18] United Nations Commission on International Trade Law., United Nations Convention On Contracts For The International Sale Of Goods (1st edn, United Nations 2010)

[19] Bernard Audit, ‘The Vienna Sales Convention And The Lex Mercatoria’ [1998] Lex Mercatoria and Arbitration 173

[20] V. Susanne Cook, ‘CISG: From The Perspective Of The Practitioner’ [1998] Journal of Law and Commerce 343-344

[21] Bernard Audit, ‘The Vienna Sales Convention And The Lex Mercatoria’ [1998] Lex Mercatoria and Arbitration 179

[22] V. Susanne Cook, ‘CISG: From The Perspective Of The Practitioner’ [1998] Journal of Law and Commerce 343-343

[23] Ibid. 349

[24] Klaus Peter Berger, ‘The New Law Merchant And The Global Market: A 21St Century View Of Transnational Commercial Law’ [2000] International Arbitration Law Review

[25] Ibid.

 

AUTHOR: M. Benec

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