Volume 42 | Number 3 Summer 2007
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I. Globalisation
Globalisation is a slippery concept but encompasses objective developments in the economic, cultural, political, and technological spheres.12 People’s consciousness about the phenomenon is as important as these objective developments. That sometimes leads to resistance to what globalisation entails. In some contexts, globalisation is being used to describe a process of social change, a world being transformed so that there are greater contacts across national boundaries and growth or intensification of new networks and interdependencies. In other contexts it means the condition where geographical boundaries are rendered less relevant by the existence of these cross-border connections and arrangements. Globalisation gives rise to apparent paradoxes. The fact that globalisation is multidimensional makes it all the more difficult to analyze. Depending on how it is defined, the globalisation label may be applied to eras earlier than our own.13 Those dedicated to resisting globalisation often use its products, such as global communications and media outlets, to further their aims.
For the purposes of analysing the new transnational commercial law we can ignore the complexities and paradoxes of globalisation. Our focus is mainly its economic dimension. In this regard, globalisation is largely confined to international trade and financial markets and often does not implicate multinational institutions such as the North America Free Trade Area or the European Community. The global economic order we are interested in takes its form in the huge flows of goods, services, and capital around the world.14 The international nature of trade and the liberalisation of financial transactions have created an enhanced role for the international institutions identified earlier. These bodies have promoted the harmonized rules which constitute the new transnational commercial law to channel and govern international trade and financial transactions. As the World Bank has put it:
Beyond reducing transaction costs, adoption of international standards can also facilitate domestic policy reform when local interest groups have conflicting preferences. Adoption of international standards can also signal to firms, consumers, and other groups the application of high regulatory standards. The tensions between local customization and international harmonization play out in proposals to develop common international rules and standards on a wide range of issues relevant to the investment climate. Efforts to develop uniform standards to ease international commerce have long been a focus of private bodies such as the International Chamber of Commerce. Complementary efforts at the intergovernmental level include those of the United Nations Commission on International Trade Law (UNCITRAL) and a variety of other international agencies.15
So, in this analysis, globalisation means international commerce, which in turn demands facilitative law, and this, it is said, is best derived from the new transnational commercial law, itself a product of globalisation.
Those invoking globalisation as an explanation for the new transnational commercial law frequently draw inspiration from the medieval lex mercatoria, which evolved from the practices of the merchants as they traded at international trade fairs, held in the great medieval cities and ports of Europe. It was globalisation and globalised law, but in a different era. Berman provides an account of the development of what “came to be viewed as an integrated, developing system, a body of law.”16 In his analysis it was a consequence of the enormous social and economic transformation which Europe underwent from the late eleventh and twelfth centuries.17 Its principles began initially with the merchants themselves, in the mercantile courts they founded.18 Later, the principles spread.19 Some were compiled into codes of mercantile practice; in other instances, the mercantile courts themselves kept records of their decisions, which could be used in subsequent cases. Additionally, documents like bills of exchange and bills of lading, designed for particular transactions, circulated widely.20 Among the distinctive characteristics of European mercantile law which Berman identifies are: 1) the distinctions between real and personal property and between ownership and possession; 2) the creation of security interests in personal property; 3) the recognition of the rights of the good-faith purchaser of goods and bills of exchange; 4) the creation of documents, such as negotiable instruments and bills of lading, which embodied rights distinct from any underlying transaction; and 5) the development of new business forms such as partnership and the commenda (which he describes as a kind of joint stock company, with the liability of each investor limited).21 Ultimately this medieval lex mercatoria lost its international character as it was incorporated into domestic law. In English conventional wisdom, this was a happy process because of the role of Lord Mansfield.22
The notion of a medieval lex mercatoria—globalised, objective, and based on a reciprocity of rights between the parties—does not bear close scrutiny. One form of criticism is that the lex mercatoria was never completely divorced from state power. In theoretical terms, this was because whatever independent merchants might want in regulating the terms of trade, they needed the rule of law administered by a national legal system to protect the market from the local ruler’s whim. However desirable an independent mercantile law might be, merchants had to accept a second-best solution where mercantile and state law were fused in national courts.23 In historical terms, despite a widespread belief in its existence, a general lex mercatoria is not easy to uncover.24 There are examples of merchants winning some privileges from the exercise of state power. For example, in England there were separate procedures for mercantile disputes apart from the common law courts; thus, shipping cases were handled by the separate Admiralty Court.25 However, until the great constitutional struggles of the seventeenth century, the lex mercatoria as used in England was apparently not a term describing a body of substantive law; rather, it stood for the separate judicial procedure for settling mercantile disputes.26 The distinct principles of mercantile law which existed for shipping and trade were far from universal—the various maritime laws of Europe provided different solutions to the same problems. As Cordes argues, “Lord Mansfield’s ‘one and the same law’ that according to him existed in all countries and at all times in an identical form did not exist even in the field of the maritime law of freight,” which was quintessentially an area where it should have.27 The body of transnational rules of law as postulated in the lex mercatoria can be detected only by choosing to focus on overly general issues.28
The importance of this for present purposes is that, as with commercial law in medieval times, globalisation may not provide a complete explanation of the new transnational commercial law. Certainly advocates of a modern lex mercatoria see a definite continuity with the medieval law merchant or at least an inspiration to be derived from it.29 One of the most effective English proponents of the new lex mercatoria was Professor Clive Schmitthoff. Schmitthoff argued that international trade law developed in three stages – the medieval lex mercatoria, the period of its incorporation into national legal systems, and the modern period. He saw the third phase as a conscious and deliberate return to the international spirit of the medieval lex mercatoria. In this view the new lex mercatoria is global. Schmitthoff rejects the second, national phase of international trade law where the lawyer must resort to national rules in the conflict of laws to discover the law that is governing the contract. That was an attempt at localising an international relationship in a national legal setting, an approach modern thinking rejected. In Schmitthoff’s view modern trade demanded an autonomous international trade law, founded on uniform rules accepted in all countries, making the localisation of a transaction in a national jurisdiction superfluous. This would be “a new lex mercatoria.”30 While Schmitthoff’s views had been anticipated by others such as Berthold Goldman,31 it was he who gave academic respectability to the idea in the English speaking world.32
A variety of scholars have taken up the cudgels for the new lex mercatoria. Perhaps the most active proponent today of a new lex mercatoria is Dr. Peter Berger of the Center for Transnational Law (CENTRAL) at the University of Cologne. In his book The Creeping Codification of the Lex Mercatoria, Berger argues that the concepts of transnational commercial law already used in contract drafting and dispute resolution are now being transformed into concrete principles.33 The UNIDROIT Principles of International Commercial Contracts are an example.34 Berger argues that the process is gradual—the lex mercatoria is living law—and that the result comes not from above through formal codification but from below through the private work of academics and practitioners.35 Thus, the new lex mercatoria is a response to the commercial demands of globalisation. Based on Professor Berger’s discussion in Creeping Codification, CENTRAL now has an impressive collection of lex mercatoria principles, rules, and standards.36 These are divided into fifteen chapters, including chapters on good faith, reasonableness, the duty to negotiate, damages for breach of contract, set-off, unjust enrichment, and the duty to compensate on expropriation. Each principle is supported by detailed references to scholarly writings, court decisions, arbitration awards, international conventions, and national laws.37
International commercial arbitration has been seen by some as the key avenue for the enunciation of the substantive rules of the new lex mercatoria.38 Its growth is partly a product of globalised trade and financial transactions. The work of the Iran-United States Claims Tribunal in applying general principles such as force majeure is also said to have contributed considerably.39 Some critics raise both theoretical and practical objections to the use of the lex mercatoria as a choice of law for international contracts.40 There is no need to enter that debate since the empirical evidence suggests that parties do not specifically apply the general principles of the lex mercatoria as the proper law in their arbitration agreements or, if so, do it to supplement rather than displace national law.41 Thus, only one to two percent of clauses giving rise to ICC arbitration between 2000-2003 provided for transnational or other non-national law as the governing law.42 As indicated, however, international arbitrators seem to use the principles of the new lex mercatoria increasingly in resolving difficult points arising in the course of disputes, although there is no systematic evidence of the extent to which this occurs.43
At this point, a definitional issue arises: is the new lex mercatoria to be equated with the principles, rules, and standards such as those developed by Berger? At the outset, is Lord Mustill’s critique, that such principles, rules, and standards may be too vague for legal analysis in the practical world of dispute resolution for the global commercial activity?44 Then there are arguments that the Berger approach is both too wide and too narrow. As to the first, some would confine the term lex mercatoria to international trade practice which arises through transnational commercial usage. The issue then becomes one of identifying usage or practice which is spontaneously generated in global commercial transactions. The doyen of academic commercial lawyers in England, Professor Sir Roy Goode, argues that the main focus of inquiry should not be the Berger-type principles, but rather the practices surrounding typical international commercial transactions.45
Though it is common to treat the lex mercatoria as including general principles of law, and I myself used to follow this approach, it seems to me on further reflection that these principles – for example pacta sunt servanda, the nemo dat rule and the duty to mitigate loss suffered from a breach of contract – are not particular to international trade or even to commercial contracts, are qualified by numerous exceptions and tell us nothing about the process of spontaneous lawmaking which is said to be the hallmark of the lex mercatoria. If we look at the lists of rules of the lex mercatoria propounded by modern scholars and remove from it general principles of law, we find that almost nothing is left, while on the other hand there is a conspicuous absence of references to important modern usages in relation to documentary credits, demand guarantees, and clearing and settlement systems for the transfer of funds and investment securities.46
Either way—the Berger principles or the Goode trade usage—the lex mercatoria is only a small aspect of the new transnational commercial law, which extends to the uniform principles, model laws, and international conventions already outlined. These are neither confined to custom and practice in global transactions nor the type of principles incorporated in the UNIDROIT Principles of International Commercial Contracts.
Putting aside these definitional issues and taking a broad view of the new transnational commercial law, how is all this activity explained in theoretical terms? As far as the lex mercatoria is concerned, its advocates have as a prime contention that it is autonomous and transnational. Not only is it free from the conflicting principles of national law, but as a corollary, through the complexities of private international law, it avoids the problems of choosing between those principles. Berger argues that it has grown up in this way because of the trend towards a “global civil society,” in which there is an erosion of national boundaries in markets and a relative decline of state power to steer national or international economic factors.47 The upshot is the growth of party autonomy and the privatisation of international commercial law-making, notably through arbitration. So the modern lex mercatoria, in this view, is a spillover of the complex institutional processes connected with the phenomenon of globalisation.48 The codification of the lex mercatoria, as incorporated into uniform principles such as the UNIDROIT commercial contract principles, can therefore be regarded as responding to the demand believed to exist amongst the business community working in this globalised environment.
Apart from the lex mercatoria, there is the wider field of transnational commercial law promulgated under the auspices of bodies such as UNCITRAL, UNIDROIT, and the ICC. Here, harmonisation has been a typical goal, with the rules of different legal systems being replaced by a uniform law, which can either be incorporated in international contracts or adopted by national legal systems (either through adoption of a model law or adherence to an international convention). In recent times, the aim has been not only harmonization, but also to improve rules in situations where the national legal rules are non-existent, underdeveloped, or unsuitable to international transactions.49 A good illustration of the latter is the Cape Town Convention on International Interests in Mobile Equipment, which is designed to overcome the problems of financiers obtaining a secured interest over what could be categorized as global assets—aircraft, railway rolling stock, and space assets that by their nature regularly move across national borders. The Convention and its attendant protocols create an international interest, recognised in all contracting states and registerable in a public international register, which neatly side-steps the diversity of national laws on secured transactions and confers on financiers an enforceable priority in the event of the debtor’s insolvency.50
Outsiders to the process of formulating the new transnational commercial law have sometimes had a more jaded view of its application and development. For example, Dezalay and Garth see the lex mercatoria not so much as a response to globalisation but in terms of the rent-seeking, material interests of international arbitrators and their clients.51 In their analysis of the evolution of modern international commercial arbitration, they identified two main areas of tension. First, there was a struggle between those offering arbitration services – on the one hand was an older cadre of mainly continental academics, adherents of the lex mercatoria, and on the other, increasingly, Anglo-American legal practitioners, adherents to the doctrines and techniques of the common law. Secondly, there was a north-south tension: foreign investors did not want resort to local courts and law if disputes arose over construction and other projects but had to accommodate the objection of developing countries to the use of western law and courts. International arbitration using the lex mercatoria became the way through for both the European pioneers of international arbitration and for foreign investors. So the lex mercatoria not only permitted foreign investors to win time when confronted with the escalation of demands of developing countries, but also allowed its investors to preserve their position for a period vis-à-vis the challenge provided by Anglo-American law firms.52 In this account the time of the lex mercatoria is coming to an end as the “European pioneers” are being replaced by the Anglo-American law firms.53
Similarly, the forces behind the cluster of international conventions, model rules, and principles can be seen in a more materialistic light. Thus, the “political economy” of the Cape Town Convention on International Interests in Mobile Equipment includes the privatisation of many national airlines, and some railways, with finance increasingly from private rather than state sources and the consequent demand by global financial institutions for recognition and protection of their secured interests in such high value assets. It is said that in the process leading to the Convention, interest groups representing industry, especially the aviation industry, were particularly active.54 In this account, their involvement led to “bright line” rules in the Aircraft Protocol protective of secured interests. The danger is said to be a perception that the rules fit the preferences of the more powerful nations likely to be host to the banks providing secured finance.55
While there is an element of truth in this type of analysis, it certainly does not stand up in its entirety. In relation to the lex mercatoria, there is a plausibility to the argument that those practicing as international commercial arbitrators need to attract work. Whether expertise in the lex mercatoria was ever the way of doing this is open to argument unless it is seen as just one part of the arbitrator’s reputation. Moreover, any argument that the lex mercatoria was used as the way of meeting developing-country demands does not fit some important facts, such as the regular appearance of English and New York law as the governing law of investment and finance contracts involving those countries. As to the forces behind international conventions, model laws, and statements of principle, there is certainly a case for closer inquiry of the process in this important area of law-making. This paper is one attempt at doing that. But if, say, the aviation industry had a heavy input into the Aviation Protocol of the Cape Town Convention, that should not be a surprise nor necessarily a cause for condemnation. If a commercial instrument is to meet its professed aim, then those most affected by its operation need to be part of the process of formulating it. What is necessary is that the process must be transparent and must accord all interests an opportunity to have an influence. With international commercial lawmaking, the input of developing counties is especially important, not least if an instrument is to have legitimacy and be widely adopted.