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Reproduced with the permission of Justita and the author

The Lex Mercatoria in Transnational Arbitration: An Analytical
Survey of the 2001 Kluwer International Arbitration Database

Matthew T. Davidson [*]
8 May 2002

- Introduction
- When will the lex mercatoria be applied?
- What about the lex mercatoria as a conceptual entity?
- Does the lex mercatoria have any procedural content?
- Conclusion

Introduction [1]

The lex mercatoria, or "law merchant," first emerged as a concept during the late medieval period,[2] as trade once again expanded across the territories of the former Western empire, now divided into a mélange of "empires," principalities, city-states, and a few nascent national states (primarily France, Spain, and England). In function, this "international" (really, trans-sovereign) commercial law served to reconstruct something like the unity of law that existed (at least in cultural memory) in the Mediterranean empire centered on Rome during the first centuries A.D.[3] This unity was achieved through a syncretic appropriation of elements from the many existing legal systems - in particular, those of the Italian city-states and the canon law of the Catholic church - as well as by sui generis innovations to meet the needs of the evolving commercial culture.[4]

As the national state extended its reach both ideologically and territorially, the lex mercatoria faded from view. While many of its principles were integrated into the common law doctrines and civil law codes of modern Europe, these principles no longer developed autonomously, outside the national legal systems. The twentieth century, though, saw the re-emergence of merchants' law, in theory and in practice. This has been preeminently the case in the context of transnational commercial arbitration.[5] While hard numbers are simply impossible to come by, there is a consensus among those in the field, both academics and practitioners, that the "new" lex mercatoria (often identified under the rubric of "generally accepted principles" of commercial law or international trade) is increasingly serving as the foundation for arbitral awards.

In arbitrations, the chief purported functional advantage to the lex mercatoria is that it spares arbitrators and parties the time and expense of complicated choice of law analyses where the parties have not and cannot agree on the applicable law, and the underlying transaction is arguably substantially connected to more than one jurisdiction. From a doctrinal standpoint, it has also been suggested that "generally accepted principles" are ipso facto more "neutral" (that is, less biased) and more "flexible" (that is, more equitable) than any particular national law. This consideration has been of particular importance in disputes in which one of the parties is a State enterprise. Of course, there are reasons to question whether any of these assertions are true.[6]

Whatever the case may be, the issue cannot be analyzed without some understanding of just what the content of the new lex mercatoria actually is. While there is no single "right answer" to this question, it is possible to identify a group of sources that inform contemporary discussions of the lex mercatoria. A commonly cited source is the 1980 United Nations Convention on the International Sale of Goods ("CISG").[7] One published award goes to so far as to identify the CISG as "essentially" the lex mercatoria, at least insofar as the sale of goods is concerned.[8] More typical is the award in an arbitration between a Danish principal and a Spanish agent, which views the CISG as representing "principles" that form (part of) the lex mercatoria.[9] Similarly, in an arbitration before the International Court of Commercial Arbitration of the International Chamber of Commerce ("ICCA"), the tribunal declared that the CISG was the best source for determining "trade usages" in sales contracts (in this case, with regard to non-conformities) and so would be consulted even where it had not been invoked by either party and neither party was located in a Contracting State.[10]

The use of the CISG to give concrete content to the lex mercatoria, which by definition should manifest a consensus, is perhaps problematic, given the status of the Convention as national legislation in Contracting States. Is it really reasonable to say that parties from non-Contracting States have consented to the application of the CISG, even where there is no express manifestation of such intent? This problem is avoided (or at least elided), however, by turning to non-legislated syntheses of transnational practice for information about the content of the lex mercatoria. Chief among these "restatements" are the UNIDROIT Principles on International Commercial Contracts. Interestingly, the CISG itself, in Article 7(2), calls for the resolution of matters governed by, but not decided by, its own text according to the principles underlying it. One arbitral decision has identified the UNIDROIT principles as precisely those referenced by this article of the Convention.[11] And apart from their relevance to the CISG, the UNIDROIT principles are widely admired by the academic proponents of the lex mercatoria, and seem to be largely acceptable to the business community as well.[12] Other restatement-type efforts that have been integrated into the new lex mercatoria include the Principles of European Contract Law[13] ("PECL") and the Restatement (Second) of Contracts.[14] Finally, elements of the lex mercatoria can be found in items like the Incoterms[15], which define trade usages (at least according to the International Chamber of Commerce), and the decisional law of common law systems.[16]

In the remainder of this essay, we will take up three questions with regard to the new lex mercatoria. Firstly, when will international arbitrators apply the lex mercatoria in preference to some national system of law? Secondly, what do these applications of "generally accepted principles" tell us about the nature of the lex mercatoria as a conceptual entity? And lastly, whatever its status as a body of substantive law, does the lex mercatoria include any procedural content?

When will the lex mercatoria be applied?

The obvious instance for the application of the lex mercatoria is when the parties have identified it as the law governing their contract. But among the documented cases, virtually none indicate that this was the case. The sole exception in the Kluwer materials is an arbitration deriving from the Anglo-French "Chunnel" project.[17] In the course of its decision declining to issue an injunction pending a foreign (Brussels) arbitration,[18] the Court of Appeal noted that "the proper law of the contract" as specified therein was "the principles common to both English law and French law, and in the absence of such common principles by such general principles of international trade law as have been applied by national and international tribunals."[19]

If the lex mercatoria possesses the advantages claimed for it, particularly with regards to neutrality and flexibility, we must ask why more contracts don't specify its application.[20] One factor is undoubtedly inertia - the lawyers who draft contracts are used to doing things in a certain way, and are reluctant to change absent some compelling reason to do so. Such a compelling reason is likely only to be perceived after the fact, and we are still in a period during which arbitrations from the eighties and nineties (the second and third decades of "modern" international arbitrations) are being decided.

From a purely functional standpoint, another problem is that while the indeterminacy of the lex mercatoria may result in lower transaction costs during the negotiation phase of contracting (because there is less to disagree about), this reduction in cost is likely less than that accomplished by simply declining to identify the governing law altogether.[21] Furthermore, some choice of law regimes may render the nomination of the lex mercatoria as the law of the contract particularly unstable. This is arguably the case, for example, with the Rome Convention on the Law Applicable to Contractual Obligations, which applies to "contractual obligations in any situation involving a choice between the laws of different countries."[22] Does this mean, then, that the choice of the lex mercatoria as the lex contractus would have to be evaluated by the domestic choice of law provisions of the forum (which may be much less supportive of party autonomy, or at least less clearly so, than the Convention)?[23]

While the advantages of an explicit choice of lex mercatoria are somewhat nebulous, the costs are more easy to predict. Not least is the matter of having to argue about the concrete content of the law should a dispute arise. Nothing comes easier to opposing lawyers than disagreeing about which principles of international commercial society are or are not "generally accepted." Even if a lex mercatoria choice were made with greater specificity - say, by nominating the UNIDROIT Principles as the law of the contract - potential problems present themselves in the lack of precedential material. Indeed, the flip side of "flexibility" is uncertainty, the bane (warranted or not) of most contract-drafting attorneys.[24]

Another risk is that attempting to enforce, or challenge, a decision rendered according to the lex mercatoria would entail more complications than one based on some national law. From an enforcement perspective, the choice of lex mercatoria will likely entail some measure of additional litigation when presenting the award to a court. In the extensive litigation following the extensive arbitration between Pabalk Ticaret and Norsolor prompted by the breakdown of a delivery contract between Norsolor's predecessor in interest and another party, the question was raised and argued at every level - whether an award founded on an application of the lex mercatoria would be enforced by the French and Austrian courts.[25] The award was eventually enforced, but the process was held up while the Paris Cour d'appel waited for the outcome of the appeal of a partial annulment of the same award by the Austrian Court of Appeal (on the grounds that the arbitrators had applied the lex mercatoria, described by the Austrian court as "a world law of uncertain validity.") Full enforcement, including of the annulled portion, was eventually ordered by the Cour de Cassation [Supreme Court of France], once the Oberster Gerichtsof [Supreme Court] in Austria reversed the partial annulment. The process of enforcement took four years from the granting of the award! Even after this precedent, in Compania Valenciana de Cementos Portland S.A. v. Primary Coal Inc., three years elapsed between the partial award simply deciding to apply the lex mercatoria to an arbitration between the parties and the refusal of the Cour de Cassation to set aside that partial decision![26] The Italian courts interposed a three-year delay between the award and its enforcement in Societe Arabe des Engrais Phosphates et Azotes v. Gemanco S.r.l.[27]

Not all courts have been so dilatory to enforce lex mercatoria awards, of course. In the United States, the Southern District of California did not hesitate to give enforcement to an award rendered on the arbitrators' choice of the lex mercatoria, even though the underlying contract specified Iranian law.[28] And a German court refused to entertain a challenge to an award when the objection (that by applying the lex mercatoria, the arbitrators had exceeded their authority) had not been presented to the arbitrators during the original proceeding.[29]

The academic community has generally been more enthusiastic than the courts about "anational" awards - that is, awards which do not base themselves on the law of any state - but they are not without some support among the judiciary. Thilo Rensmann cites the example of the Swiss Federal Tribunal in Groupment d'Entreprises Fougerolle v. CERN,[30] in which the court, despite Switzerland's putatively mandatory application of Swiss lex arbitri to proceedings conducted there, denied its own jurisdiction to set aside an award inconsistent with those principles: "National jurisdiction to set aside the award being determined by the lex arbitri, the unequivocal denationalization of the arbitration [through the choice of lex mercatoria] must be regarded as equivalent to an 'express statement … [to] waive fully the action for annulment.'"[31]

Of course the costs must be discounted by the likelihood of a dispute, when assessing their weight in the decision whether or not to include an express choice of lex mercatoria as the law of the contract at the negotiation stage. But, then, so must the potential "benefits." On balance, if cases cataloged by Kluwer are at all representative, the former are still generally believed to outweigh the latter by the business community, or at least by business lawyers.

An explicit choice of law clause, though, is only one way for the lex mercatoria to find its way into an arbitral decision, and not the most common. Rather, it is when the parties have failed to conclude a choice of law, and the dispute does not overwhelmingly favor the application of one legal system over another, that arbitrators seem most likely to employ generally accepted principles to reach a result.

We see this, for instance, in the dispute settled by the ICCA award in Case No. 3540 (Oct. 3, 1980).[32] Where the parties had made no choice of law in their contract, the arbitrators determined that their decision should be based "uniquely on the contract and the general and common legal principles … that is, the application of the 'lex mercatoria.'"[33] The arbitrators were careful, however, to compare the outcome they arrived at under general principles with those that would have been reached had they applied national (French or Yugoslavian) law. They found that no substantial differences were identifiable.[34]

By adopting a lex mercatoria approach, arbitrators can avoid sticky conflict of law problems. This was the case in the Compania Valencia arbitration referred to above.[35] And they can avoid applying a law they do not favor, even if it seems logical to extend its reach to the case in question. Thus in the ICCA award in Case No. 9246 (March 8, 1996), the arbitrators applied the lex mercatoria to an agency contract despite their acknowledgement of the existence of the arguably more apropos Hague Convention on the Law Applicable to Agency.[36] Finally, the justification "lex mercatoria" is a handy way to import precedents from statutory instruments like the CISG. So the ICCA in its award in Case No. 5713 (1989) adopted the terms of the CISG relating to trade usages: "There is no better source to determine the prevailing trade usages than the terms of the [CISG] … This is true even though neither the [country of the Buyer] nor the [country of the Seller] are parties to that Convention."[37]

All of these factors may be implicated as well in the special case where arbitrators have been asked to act as amiables compositeurs.[38] For example, in Mechema Ltd. v. S.A. Mines, Minerais et Metaux[39] the parties chose English law. In the same contract, they provided that the arbitrators would be amiables compositeurs. Unfortunately, English arbitration law at that time did not allow for amiable composition. The arbitrators decided that in light of the clear wish of the parties for such amiable composition, and the international character of the arbitration, they would apply the lex mercatoria to the substantive aspects of the case.[40] In the decision reached by the Arbitral Tribunal of the Netherlands Oils, Fats and Oilseeds Trade Association[41] the arbitrators faced a similar problem, having been asked to act as geode mannen naar billijkheid[42] and to apply German law, which "[did] not know" such arbitrations. The panel determined that it could resolve the matter before it based solely on customs and trade usages, and so need not reach the matter of which national law applied to the contract. In a dispute between a Mexican construction company and a Belgian enterprise, the amiables compositeurs used the lex mercatoria as an index of the fairness of the decision they reached using their equitable powers.[43]

Some arbitrators are more reluctant than others to embrace the lex mercatoria. In many cases, the failure of the parties to specifically provide for the use of generally accepted principles, or to authorize the arbitrators to act as amiables compositeurs, has influenced the panels to engage in a traditional choice of law analysis. For example, the arbitrator in ICCA Case No. 4237[44] decided:

"It is argued in the literature that international arbitrators should, to the extent possible, apply the lex mercatoria. Leaving aside that its contents are not easy to determine, neither party has argued that a lex mercatoria should be applied. Rather, each party strenuously argued on the basis of a national law …. Accordingly, the arbitrator shall follow the implied desire of the parties to apply a national law."[45]

In the event, the arbitrator chose English law as identical to Ghanian law, Ghana being the country in which the performance characteristic of the contract was to be carried out.[46]

Another panel was of the opinion that "[i]n the absence of any evidence regarding an actual agreement or concurrent intentions of the parties … one cannot consider that the parties had chosen … the lex mercatoria. It would seem to the arbitral tribunal that the choice of such a law would require an agreement between the parties which in the present case was not reached."[47] It chose to undertake a choice of national law even though one of the parties had argued for the lex mercatoria and the other had argued for the law of Saudi Arabia, which the tribunal also did not apply.[48] Similar reasoning can be found in the partial award in ICCA Case No. 7319 (1992).[49] While the claimant argued that the absence of an express choice of law indicated that the lex mercatoria should be employed,

"the sole arbitrator considers that the parties, rather than eliminating by mutual agreement the Irish and French national law, were unable to agree on a particular national law, which is something different… Furthermore, the failure of the parties to agree cannot … be interpreted as an implied reference to some vague international legal or trade principles. Such reference must be made expressly … [or] in an implied manner which gives reasonable certainty to the arbitrators … particularly considering the fact that such anational laws and principles … are difficult if not impossible to assess."[50]

Where neither party argues for the lex mercatoria, and the contract is silent, arbitrators have not hesitated to apply national law. Thus a Swedish arbitration panel applied Chinese law to a case where the "center of gravity" was clearly in China,[51] and French panel applied French law when France had the "closest connection" to the contract in question.[52]

But even where the lex mercatoria is not deemed to be the substantive law of the contract, it may be employed as a gap-filler. We already remarked on this with regard to cases decided under the CISG.[53] It is true also, though, of cases decided according to national law. One ICCA panel held that the lex mercatoria supplements national law where appropriate, particularly with regard to trade usages.[54] Another utilized the UNIDROIT principles to guide its application of Dutch law to an international transaction.[55]

What about the lex mercatoria as a conceptual entity?

Having seen the circumstances under which the lex mercatoria is employed in commercial arbitrations, what can we discover about the law merchant as a concept? One way to approach this question is to ask how the concept extends across various domains. By "crossing" over domain boundaries, the lex mercatoria is revealed as a differentiated unity - one which we can expect to possess certain characteristics when approached from one perspective that are invisible or irrelevant when approached from another. Here, I would like to consider two domains: the topical, and the geographical.[56]

Topically, it is clear that the lex mercatoria finds its original home and enduring seat in the realm of contract, and particularly, perhaps, in contracts for the sale of goods. Absent mandatory law provisions which might prevent a particular contractual issue from being decided other than by the lex fori arbitri of the situs, any contractual matter is at least potentially grist for the lex mercatoria mill.

Less clear, however, is the reach of the lex mercatoria into the realm considered "tort" or delict. Some of these obligations extra-contractuelle would seem to be addressed by the generally accepted principles of "good faith and fair dealing." Hence, the lex mercatoria likely provides a cause and a remedy in the case of fraud or malicious breach.[57] Other "contract dependent torts" would probably be addressable as well.[58] Contrastingly, unfair competition is such a creature of statute that it is difficult to imagine a lex mercatoria that could encompass this within any meaningful consensual understanding of transnational practices.[59] For whatever it's worth, Mustill notes, without citation, that "there appears to be no instance in which the lex [mercatoria] has been invoked in a case of pure delict."[60] But this in itself is not so surprising, since "pure" delicts are unlikely to end up in arbitration!

Geographically, the question of the lex mercatoria has three elements: (1) trans-Atlantic trade, (2) North-South trade, and (3) East-West trade. The first of these is characterized by strong, sophisticated parties on both sides of transactions. The second geographical domain is characterized by a relatively skewed distribution of power, and a similar, if less marked, distribution of sophistication in the ways of the international marketplace. The last domain contains strong and less strong actors on both sides, who are significantly differentiated from those on the other side by the commercial culture in which they live. All of these domains have particular implications for the content and development of the lex mercatoria within their particular realms.

It is the trans-Atlantic trade that provides the paradigm Western business people and academics have in mind when they think of the lex mercatoria and commercial arbitration. The supreme principle is party autonomy, implicit in which is the idea of party consent to a diminution of its rights. This is tied to the crucial issue of enforcement of awards. Hence we have the decision of the Corte di Cassazione [Supreme Court of Italy] of February 8, 1982[61] in which the lex mercatoria was held to demand the extension of the "reasoned award" requirement of the European Convention on International Commercial Arbitration[62] to parties whose countries acceded to the Convention, even if the situs and the lex fori arbitri were both of a place that had not acceded.[63] Also, the arbitration agreement is disengaged from the contract as a whole, so that even if the latter is found null and void, the former survives and is enforceable. Efforts are made to ameliorate the "disproportionate" impact state actors may have on a dispute resolution process in which they participate by contextualizing their national law within "such rules of international law as may apply."[64]

This last matter is an example of a "generally accepted" arbitral practice (often undertaken without reference to the Washington Convention, if one of the parties is a state enterprise) that creates tension between North and South. A concise and cogent summary of "Third World" criticisms of commercial arbitration is provided by Amr A. Shalakany.[65] Not least importantly, "[a]s far as Third World countries are concerned, arbitration continues to be an esoteric project for which expert lawyers are imported from the law firms of London and New York."[66] The doctrine of severability of the arbitration agreement may continue to deny a State relieved of contractual obligations due to fraud or duress access to its national justice system to seek redress, an effect Shalakany colorfully represents with the metaphor of "a dead dog with an active tail that survives its demise."[67] The paramount examples of the nefarious consequences arbitration has entailed for some Southern countries is the Libyan arbitrations relating to concession agreements signed prior to Quadafi's rise to power and the subsequent nationalization of the oil industry. Typical is the decision in British Petrol. Co. (Libya) Ltd. v. Government of the Libyan Arab Rep.[68], in which "general principles of law" were found to trump "inconsistent" Libyan domestic law, resulting in a hefty bill for Libya. Reasoning along the same lines, the tribunal in a case involving a Syrian state enterprise and an Italian enterprise[69] held that a contract specifying Syrian law as the law of the contract, and (in an entirely separate clause) requiring Swiss arbitrators to "judge according to the general principles of law and justice," only implicated Syrian law to the extent that it was compatible with the arbitrators' conception of the lex mercatoria. The latter would prevail over the former in the event of a conflict.[70]

These decisions are all the more aggravating to the Southern parties because it seems reasonably clear from the scholarly literature that the references to "general principles" were intended to invoke procedural safeguards rather than substantive norms.[71] And the lex mercatoria, rather than becoming a breeding ground for new norms to protect weaker parties involved in transactions with multinational corporations, instead entrenches the existing imbalances.[72]

In an East-West context, some of the same issues arise (after all, the categories East-West and North-South inevitably overlap in many instances). But the issues specific to the lex mercatoria in East-West trade are less "political" and more "cultural." Philip J. McConnaughay reports that legal doctrine has outpaced actual commercial practice in most Asian economies.[73] Western emphasis on values like certainty and consistency may have little relevance to business partners who privilege notions of confidentiality, consensuality, and "face." An emergent lex mercatoria specific to East-West relationships can and should develop, McConnaughay suggests, blending notions traditionally considered "equitable" in the West with consensus-building ADR procedures that focus more on the preservation of the relationship than the "right" result, and the publication of new principles in a way that promotes a perspective of openness and flexibility, rather than codification and an aversion to future variation.

Does the lex mercatoria have any procedural content?

This, the last section of the essay, is also the most murky. In part, the "cloudiness" results from the imperfect and inconsistent distinctions between the "procedural" and "substantive" aspects of national laws. This sort of imprecision is all the more likely when exploring a legal regime that by its very nature cannot be completely or consistently codified. Nonetheless, there are some "procedural" aspects of arbitration that are sufficiently widespread to be considered "generally accepted," whether they are located in any of the codified sources of the lex mercatoria or not.

Most simply, a consensus has developed that some measure of what American lawyers would call "due process" is a necessary part of arbitral proceedings. But we can say more than that. Even a skeptic like Lord Mustill has identified twenty "rules" in the lex mercatoria, among which several are clearly procedural. For example, "a tribunal is not bound by the characterization of a contract ascribed to it by the parties," cross claims are allowed in certain circumstances, damages for breach are limited to the foreseeable consequences of that breach, and a failure to assert one's rights diligently may result in loss of those rights by waiver or default.[74]

As regards due process as such, all the major institutional arbitration organizations have published protocols spelling out the rights of the parties, typically including the right to be represented by counsel, to introduce evidence on their own behalf, and to challenge in some fashion evidence introduced by the opposing party. Among U.S. organizations, these protocols have been worked out in concert, as a sharing of best practices and minimum protections. In the world at large, the "adversarial" model of common-law trial practice may be becoming generalized in international arbitrations.[75] Those parts of the process that are left entirely to the parties' discretion (which can include almost everything, but typically do not) are being defined with increasing specificity in international contracts, generating new "boilerplate" that will eventually become part of common and "generally accepted" arbitral procedures.[76]

If the South gets its way, we're likely to see the increasing use of "adjustment" as a remedy in commercial disputes. Similarly, an "Eastern" perspective is likely to add some weight to the requirement of ongoing (re)negotiation in good faith over the course of performance.[77]

On the enforcement side of awards, Article V of the New York Convention seems to be gaining in its reputation as a maximal list of reasons to refuse enforcement, and a list tempered by a "more favorable treatment" requirement developed in Article VII.[78] If some have their way, there will be even less "backside" review of awards, making all the more significant any increased "frontside" adjustments or renegotiations.

Conclusion

In this essay we have undertaken three main tasks. First, we sought to identify when arbitral tribunals will utilize the lex mercatoria to reach a decision. We made the somewhat surprising discovery that the circumstance in which it is most likely to be used - when it is expressly selected by the parties - is the one we encounter least frequently (indeed, hardly at all) in the case reports. To understand this phenomenon, we explored the purported benefits and possible costs of such a choice of law. In light of the uncertain content of the lex mercatoria and the related cost of establishing that content in the event of a dispute, the likelihood of litigation upon the attempt to enforce an award grounded in the lex mercatoria, and the fact that the benefits of such a choice are at least reasonably likely to be available for "free" simply by not choosing any law to govern a contract during the negotiation phase, we concluded that at the current stage of development, an explicit choice of lex mercatoria may reasonably be believed to cost more than its worth.

We then turned to those instances in which the lex mercatoria has been more frequently employed - where the parties have failed to make any choice of law in their contract or their Terms of Submission to arbitration, or where their choice is inherently problematic. Thus we see a resort to the lex mercatoria (usually in the guise of "generally accepted principles") where the parties' choice of law would invalidate their choice of amiable composition by the arbitrators. References to the lex mercatoria are also a handy way of importing CISG precedents into non-CISG cases, or even using the CISG itself to resolve disputes where private choice of law rules do not point to the law of a Contracting State.

Of course, we had to note that many tribunals are reluctant to use the lex mercatoria even when it is advanced by one party, unless there is explicit or very clear implicit agreement between the parties that they wish that law to be applied. Absent that sort of consent, many arbitrators prefer to utilize choice of law rules (though these principles are, ironically, often described as "generally accepted" rather than identified with the choice of law rules of the lex fori arbitri or lex contractus) to determine a national law to apply.

Secondly, we sought to develop a bit the conceptual content of the lex mercatoria, by investigating its extension into various domains, topical and geographical. We determined that the lex mercatoria does reach out beyond "just" contract - there are some contract-related delicts that it can address. But there are limits both statutory (with regard, for example, to unfair competition law) and practical (the unlikelihood of an arbitral forum for the adjudication of "pure" delicts) that restrain its topical applications to an area centered on "typical" contractual disputes. Geographically, we looked at some of the criticisms of the idea of the lex mercatoria advanced by analysts of North-South and East-West relationships. We considered proposals that might mitigate some of those concerns by adding to the remedies available to tribunals and changing the process of arbitration to one more consensually oriented (pushing it in some sense in the direction of mediation).

Finally, and relatedly, we considered the procedural content of the lex mercatoria. Deciding that it did indeed have some procedural content - and noting that this aspect of the lex mercatoria was less controversial in the North-South context, but perhaps more controversial in the East-West context - we identified some common strands, including "due process," an adversarial trial-type mechanism, some issues relating to damages, and the always-shrinking grounds for denying enforcement of arbitral awards.

The most interesting question for the future of the lex mercatoria, but one that only history can answer, is whether it will develop in the direction of harmonization-unification (e.g., more CISG-type agreements) or, instead, diversification-fragmentation (as proposed by McConnaughay). Inasmuch as the "globalization" we hear so much about seems to include macro tendencies in both directions, it is impossible to predict what direction this part of the law will take. We can, however, rely on the resourcefulness of attorneys the world over to ensure that however things develop, we will find ourselves indispensable to the process, and so able to keep putting bread on the table.


FOOTNOTES

* Matthew T. Davidson is a graduate of the Duke University School of Law and a Foreign Law Associate with the Law Offices of Yanagida & Nomura in Tokyo, Japan.

1. The primary source material relied on for this essay is the 2001 compendium of arbitration-related case reports and other materials distributed on CD-ROM by Kluwer International. This has been supplemented by the relevant academic literature where it has proven particularly illuminating. My sources, and thus my conclusions, are limited by my inability to conduct research outside the English language. Nevertheless, inasmuch as English is the lingua franca of modern commercial society - and this is perhaps even more the case in an arbitral context - there is no reason to believe that the materials to which I have had access are not representative of the state of the field as a whole.

2. An excellent history of the development of the lex mercatoria, in the context of the rise of commercial capitalism during the late feudal period, can be found in Michael E. Tigar & Madeleine R. Levy, Law and the Rise of Capitalism (1977), especially Part II.

3. See Friedrich K. Juenger, The Lex Mercatoria and Private International Law, Louisiana L. Rev. 1133 (2000) (referring to the Mediterranean jus gentium of the Roman period).

4. A pre-eminent example of the latter being the development of techniques for handling negotiable instruments like bills of lading. See id. at 1134-35.

5. While it is important not to oversimplify or schematize, it is interesting to consider that in the medieval period the development of the lex mercatoria led to the creation of new venues for the resolution of commercial disputes. Sometimes these were special merchant tribunals, usually convened during trade fairs. More often, canonical courts (especially those attached to abbeys or bishoprics in commercial centers) or royal courts (as opposed to regional parlaments or courts run by the nobility) adjudicated cases according to the lex mercatoria. Conversely, it might be said that in the contemporary period, it is the existence of new tribunals - particularly, commercial arbitrations - that has encouraged the development of the "new" lex mercatoria.

6. As we shall see, infra. And indeed, the same could be argued with regard to the "advantages" of arbitration (as counterposed to litigation) generally. See, e.g., Amr A. Shalakany, Arbitration and the Third World: A Plea for Reassessing Bias under the Specter of Neoliberalism, 41 Harv. Int'l L.J. 419, 434-35 (2000).

7. The English version of the text is available online at <http://www.cisg.law.pace.edu/cisg/text/treaty.html>.

8. See [ICC] Interim Award in Case No. 6149 (1990) (also in Int'l Ct. of Comm. Arb. Yearbook (1995), 41-57; see also <http://cisgw3.law.pace.edu/cases/906149i1.html> (choosing not to apply the lex mercatoria, i.e., the CISG, but rather Korean substantive sales law). Citations to Kluwer sources will give the title and date, which should be sufficient to retrieve them from the database. Many of the decisions are also published in other sources, and where that information is available it will be provided.

9. See [ICC] Final Award in Case No. 8817 (1997) (also in Int'l Ct. of Comm. Arb. Yearbook (2000) 355-365; see also <http://cisgw3.law.pace.edu/cases/978817i1.html>). To the argument of the agent that the contract in question was a distributorship contract, and so outside the scope of the CISG, the arbitrator replied that "the sale contract prevails over the distributorship" when the agreement was analyzed in its entirety.

10. CLOUT Abstract No. 45 (ICCA Award in Case No. 5713) (1989), cited in Louis F. Del Duca & Patrick Del Duca, Selected Topics Under the Convention on [the] International Sale of Goods (CISG], 106 Dick. L. Rev. 205, 218 (2001); see also <http://cisgw3.law.pace.edu/cases/895713i1.html>.

11. Award in 8817, supra note 9. See also Final Award of 29 Dec. 1998, Rechtsprung Kaufmannischer Schiedsgerichte Vol. 6 (reported also in Int'l Ct. of Comm. Arb. Yearbook (1999) 13-22; see also <http://cisgw3.law.pace.edu/cases/981229g1.html>) (noting that Article 7(2) requires that CISG principles be preferred to national law for gap-filling purposes).

12. See Monica Kilian, CISG and the Problem with Common Law Jurisdictions, 10 J. Transnat'l L. & Pol'y 217, 223-25 (2001) (comparing the CISG unfavorably with the UNIDROIT principles, noting that the former was "conceived as statute law from the start"). Kilian also criticizes efforts (e.g., Quebec's) to draft national contract legislation modeled on the UNIDROIT principles, since such efforts threaten to deprive those principles of the very flexibility that is among their chief advantages. See id. at 223-224.

13. See Kazuaki Sono, The Rise of Anational Contract Law in the Age of Globalization, 75 Tul. L. Rev. 1185, 1186 (2001). Sono points out that "the European Principles no longer distinguish, in their scope of application, between international and domestic contracts." Id. at 1190. The PECL are available online at <http://www.jus.uio.no/lm/eu.contract.principles.1998/doc.html>, which can be reached via the easily remembered Lex Mercatoria website at <http://www.lexmercatoria.org>.

14. Synthesizing United States law, but it should be remembered that this law, particularly as found in the various incarnations of the Universal Commercial Code, is the law governing (by choice or default) many "international" contracts. Cf. Benedicte Fauvarque-Cosson, Comparative Law and Conflict of Laws: Allies or Enemies? New Perspectives on an Old Couple, 49 Am. J. Comp. L. 407, 415-16 (2001) (comparing favorably the efforts at "harmonization," represented by the PECL and the Restatements, with those aiming for "unification," to wit, the CISG).

15. See <http://www.iccwbo.org/index_incoterms.asp>. Unfortunately, the text of the terms themselves is not available online.

16. Amazingly (to those of us who learned as a basic axiom in our first year of law school that there exists no federal common law after Erie), there is little doubt that a federal common law of contracts still persists, at least insofar as cases are governed by international agreements concerning arbitration, even outside the obvious admiralty context. See, e.g., Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 845 (2d Cir. 1987) (applying federal common law to a question of enforceability of an agreement to arbitrate where the federal court had original jurisdiction under Part II of the Federal Arbitration Act, 9 U.S.C. §§ 201 et seq.); Beromun Aktiengesellschaft v. Societa Industriale Agricola, 471 F. Supp. 1163 (S.D.N.Y. 1979) (same); Verolme Botlek B.V. v. Lee C. Moore Corp., No. 94-C-1084-BU at *2 n.3 (N.D. Okla. Sept. 7, 1995) (declining to apply federal common law, but noting that it might have done so, to the question of the enforceability of a Dutch award). We have not the space to take up here the even more fascinating question of whether a federal common law of contracts is necessitated by the United States' ratification of the CISG, in particular as regards the meaning of Article 7(1) (promoting uniformity of interpretation).

17. Channel Tunnel Group Ltd. v. Balfour Beatty Constr. Ltd., W.L.R. 741 (Jan. 22, 1992) (also reported in Int'l Ct. of Comm. Arb. Yearbook XVII at 599 (1992).

18. Like many British opinions, this one is procedurally rather opaque to the American reader. It appears that the case reported is an appeal (by the defendants) from the denial of a stay (sought by the defendants) in relation to a proceeding initiated (by the plaintiffs) to secure an injunction (against the defendants), which injunction in any event could not be granted under the applicable English law (making it difficult to fathom why the denial of a stay with regard to that proceeding was not moot).

19. Id. The judge went on to remark that "the hybrid system of law which they did choose has a superficial attraction, but I suspect that it will lead to a lengthy and expensive dispute. However, ours is not to reason why." Id.

20. See also Christopher R. Drahozal, Commercial Norms, Commercial Codes, and International Commercial Arbitration, 33 Vand. J. Transnat'l L. 79, 129 (2000) (citing a previous study by Stephen Bond that "found … only a handful of parties involved in ICC arbitrations" between 1987 and 1989 "selected 'general principles of law' to govern their dispute, and none specified the lex mercatoria").

21. Which elision often results, in the event of a dispute, in the application of the lex mercatoria anyway. See infra.

22. Article 1(1) (emphasis added); compare Article 16: "The application of a rule of the law of any country specified by this Convention …" (emphasis added). The Rome Convention is available online at <http://www.jus.uio.no/lm/ec.applicable.law.contracts.1980/doc.html>. See also Juenger, supra note 3, at 1142, 1145 & n.107 (suggesting hopefully that "[w]hether the European Courts will actually construe the Rome Convention in such a restrictive fashion is questionable," but admitting that it is unresolved in the case law and argued among the academic commentators).

23. This anticipates that arbitrators' choice of law analyses will track those of courts in the forum when the nominal lex contractus (e.g., "lex mercatoria") is unsatisfactory. While this may not be the case, the opposite presumption, that the arbitrators will do "something different," is too vague to be of any real use in preparing a contract. This would presumably not be a problem under a choice of law treaty that recognized a choice of non-national law (as is the case, it would seem, with the Inter-American Convention on the Law Applicable to International Contracts). See Articles 9 & 10. The Inter-American Convention is available online at <http://www.oas.org/juridico/english/Treaties/b-56.html>. Juenger agrees that these provisions create a leeway not found, at least on a facial level, in the Rome treaty, though he calls the wording "hardly ideal." Juenger, supra note 3, at 1147.

24. Thomas Lundmark suggests that the prodigious length of international contracts drafted by Anglo-American lawyers, in particular, is due at least in part to a "distrust of international arbitrators and their lex mercatoria." Thomas Lundmark, Verbose Contracts, 49 Am. J. Comp. L. 121 (2001).

25. See Jean Robert, Note accompanying the decision of the Cour de Cassation (1re Ch. Civ.) 3 October 1984, Dalloz 1985.101. Subsequently, the Court de Cassation further ordered that the Court of Appeal in Amiens (not, for some reason, Paris) should reconsider whether it was proper under French law to refuse or delay enforcement of an award that had been annulled elsewhere. See Pabalk Ticaret Ltd. v. Norsolor S.A, Cour de Cassation (First Civil Chamber) (Oct. 9, 1984) (published in English translation in 24 Internat'l Legal materials 360 (1985)).

26. See Compania Valenciana de Cementos Portland S.A. v. Primary Coal Inc., Cour de Cassation (October 22, 1991) (also available in Revue de l'arbitrage 457 (1992); the lower court's decision (which the Supreme Court affirmed) can be found at Cour d' Appel, Paris (July 13, 1989) (also published in 79 Revue Critique de Droit internationale prive 305 (1990)).

27. Corte di Cassazione, No. 4342 (May 9, 1996). The underlying decision, Corte di Appello (Bari), No. 811 (Nov. 2, 1993) is reported in the same record in the Kluwer database. In a more positive move, the Court of First Instance of Milan recognized by the early eighties that the prohibition on informal or "free arbitration" (arbitrato irrituale) founding the Italian Civil Code did not apply to international arbitrations governed by the New York Convention, to which Italy acceded without reservation. I.B.A. v. Inhuma B.V., Tribunale Milan (June 18, 1983) ("The expansion of international commerce ... prompted the Italian legislators [by ratifying the Convention] to confer effectiveness on informal methods developed spontaneously by the lex mercatoria in force in the world of international commerce.").

28. See Ministry of Defense and Support for the Armed Forces of the Islamic Rep. of Iran v. Cubic Defense Sys., Inc., 29 F. Supp. 2d 1168 (S.D. Cal. 1998). The court ruled that despite the explicit choice of law, the arbitrators' references to the UNIDROIT principles as well as generally accepted principles such as good faith and fair dealing were not beyond the scope of the Terms of Reference by which the parties submitted to arbitration.

29. See Bank A v. Bank B., Landesgericht [Court of First Instance], Hamburg (Sept. 18, 1997).

30. BGE 1181 b, at 562 (Dec. 21, 1992), cited in Thilo Rensmann, Anational Arbitral Awards: Legal Phenomenon or Academic Phantom?, in the Kluwer database (2001).

31. Id. Nonetheless, Rensmann believes that "the likelihood of national courts recognizing the detachment of arbitrations from national law is decreasing." Id. Kenneth M. Curtin proposes that, following the Swiss example, courts "reviewing an international arbitration award based on the lex mercatoria should apply 'general principles of law without inquiring whether the dispute has any relationship to a particular state.' In this way, transnational public policy [review] is differentiated from international public policy, for which a reviewing court must consider the public policy of all interested states." Kenneth M. Curtin, An Examination of Contractual Expansion and Limitation of Judicial Review of Arbitral Awards, 15 Ohio St. J. on Disp. Resol. 337, 349 (2000) (quoting Andreas Bucher & Pierre-Yves Tschanz, International Arbitration in Switzerland (1989)). (Interestingly, Curtin republished this same article with an almost identical title a year later in the American Arbitration Association's journal. See idem., Judicial Review of Arbitral Awards, 55 Disp. Resol. J. 56 (Jan. 2001).) Kenneth R. Davis would go even further, suggesting that the New York Convention be amended to make explicit that "[i]f the parties choose no national law to govern their dispute, no country would have the authority to set aside the award." Kenneth R. Davis, Unconventional Wisdom: A New Look at Articles V and VII of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 37 Tex. Int'l L.J. 43, 47 (2002). The same recommendation is implicit in Tiffany J. Lanier's argument that only the courts whose lex arbitri governs the procedure should have the power to annul awards, regardless of the situs of the proceeding. Tiffany J. Lanier, Where on Earth Does Cyber-Arbitration Occur?: International Review of Arbitral Awards Rendered Online, 7 ILSA J. Int'l & Comp. L. 1 (2000). Of course, this ties in to some extent with whether the lex mercatoria has a procedural content, for discussion of which, see infra.

32. Also published in 4 Journal du droit international 914 (1980).

33. Id.

34. Some discussion was spent on the question of whether the principle of exceptio non adimpleti contractus was "general and common." Confirming the unspoken rule that any maxim reducible to Latin is, ipso facto, part of the lex mercatoria, the panel decided in the affirmative. Perhaps this is a legacy of the jus gentium of the Imperium Romanum?

35. See note 26, supra, and accompanying text.

36. Available online at the website of the Hague Conference on Private International Law, <http://www.hcch.net/e/conventions/menu27e.html>. Note that the Convention was not incorporated into the national law of either party (who hailed from Egypt and Austria). The disfavor in which this Convention is held is hardly unique to the arbitrators in this case. As of this writing, only four nations have ratified it, though it was first promulgated in 1978.

37. Cited in Del Duca & Del Duca, supra note 10.

38. Doctrinally, this is hardly an obvious result. "The essence of amiable composition is to dispense the arbitrator from they duty of enforcing any system of law. Yet the lex mercatoria is a system of law. Why should an agreement to amiable composition summon up a reference to lex mercatoria any more than to any other developed system of commercial law?" Lord Justice Mustill, The New Lex Mercatoria: The First Twenty-five Years (2001 [1987]) in Kluwer (also available in Liber Amicorum for Lord Wilberforce (Oxford U.P. 1987).

39. Award of Nov. 3, 1977 [ad hoc French arbitration].

40. Id. ("[I]t appears that the parties have clearly expressed as their intention, that they have indeed sought to give the amiable composition an extremely comprehensive meaning and sought to help possible litigations escape from any national law.")

41. Award of June 20, 1980.

42. Essentially amiables compositeurs.

43. [ICC] Final Award in Case No. 3267 (March 28, 1984).

44. Award of Feb. 17, 1984.

45. Id.

46. Id. Naturally, the arbitrator said he would give proper "regard" to trade usages, as well.

47. [ICC] Interim Award in Case No. 4650 (1985).

48. The panel finally decided to use the law of Georgia, in the United States, which neither party had requested.

49. Also reported in 5 ICC Int'l Ct. of Arb. Bull. 56 (No. 2 1992).

50. Id. Curiously, though, the arbitrator then turns to "generally recognized principles of conflict" as found in the Rome Convention to decide which law to apply (Irish), despite the fact that neither party belonged to a State which had ratified the Convention as of the time of contracting.

51. See Interim Award of 17 July 1992 and Final Award of 13 July 1993, in the Kluwer database (also excerpted in S. Harpole, Dispute Resolution in the PRC 151 (n.d.)).

52. See [ICC] Interim Award in Case No. 6560 (1990).

53. See supra, notes 9-11 and accompanying text.

54. See [ICC] Interim Award in Case No. 5314 (1988) (also reported in ICC Int'l Ct. of Arb. Bull. 70 (Oct. 1993)

55. See [ICC] Final Award in Case No. 8486 (1996).

56. This cursory treatment begs the question of whether the unity of the lex mercatoria is fundamentally theoretical or primarily practical. That in turn raises the question of the relationship between "unity" and "coherence" - which also alludes to an ongoing discussion about the functionality of (in)coherence in a legal context. None of those issues will be successfully addressed herein. A related discussion beyond the scope of this paper is the matter of the sectoral domains of the lex mercatoria. Even a cursory review of the cases and the literature reveals some sectoral distinction between the lex mercatoria as employed between "purely" private parties, and as applied to disputes in which one party is a state enterprise. This distinction overlaps with, but is separate from, sectoral differences between, say, the energy industry and the transport industry, both of which have elaborate customs and usages that make up a substantial portion of the lex mercatoria as applied to themselves, respectively, but have little or nothing to do with disputes arising in different sectors.

57. The Cour de Cassation has already recognized that an arbitral panel may rescind its own award in the case of fraud "based on the general principles of the law regarding fraud." Fougerolle S.A. v. Procofrance S.A., Court de Cassation (May 25, 1992). To the extent these are truly general principles, there seems to be no reason we cannot at least conceive of a lex mercatoria that deals with fraud in the commercial context.

58. Two that suggest themselves are recoupment and disgorgement in the case of what in the United States is called "unjust enrichment."

59. See, e.g., [ICC] Award in Case No. 1990 (1972], ruling that a question of whether a company's activities in Spain constituted the tort of unfair competition must be decided under Spanish competition law.

60. Mustill, supra note 38.

61. Fratelli Damiano s.n.c. v. August Tropfer & Co. (also reported in XVIII Rivista di diritto internazionale private e processuale 329 (1983)).

62. Available online at <http://www.jurisint.org/pub/01/en/doc/153_1.htm>. Of interest here is Article VIII.

63. Fratelli, supra note 61 (holding that an Italian defendant could invoke the Convention to defeat enforcement of an award to a German plaintiff, even if the award was rendered in United Kingdom, which had not ratified the Convention and which had its own arbitral law not requiring reasoned awards):

"[T]he European Convention of 1961, which regulates 'mercantile' arbitration insofar as from a subjective point of view international disputes are concerned, must be deemed to be implicitly incorporated into contracts concluded by merchants from Contracting States in which reference is made to permanent arbitral institutions (in Contracting or other States) for the resolution of disputes involving commercial matters governed by the lex mercatoria established between them."

64. See the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (1965) ("Washington Convention"), available online at <http://www.worldbank.org/icsid/basicdoc/9.htm>, particularly Article 42(1).

65. See Shalakany, supra note 6.

66. Id. at 435.

67. Id. at 439. "Kompetenz-Kompetenz and separability cannot be satisfactorily rationalized under the strict technical arguments of the leading treatises. Their role can better be appreciated in political terms as indispensable in empowering arbitration with the capacity to function effectively as a medium disempowering national laws to be displaced by alternative legal regimes." Id. at 440. Much of Shalakany's critique goes specifically to the reinterpretation of concession agreements as fundamentally contractual rather than political. This is beyond the scope of our treatment here. See Id. at 459-61.

68. Award on the Merits (Oct. 10, 1983) (also reported in 53 Int'l L. Reports 297 (1979)).

69. [ICC] Award in Case No. 3380 (Nov. 29, 1980) (also reported in 108 Journal du droit international 928 (Clunet, No. 4, 1981).

70. And, again, the same result was reached by the panel in SPP (Middle East) Ltd. v. Arab Rep. of Egypt, [ICC] Award in Case No. 3493 (Feb. 16, 1983), with regard to Egyptian law. Cf. Ministry of Defense, supra note 28 (Iranian law).

71. Compare, in this connection, M. Sornarajah, The UNCITRAL Model Law: A Third World Viewpoint, in Kluwer ("Many of the procedural rules in the Model Law are eminently acceptable, but many of the substantive principles stated in the Model Law are so completely based on existing traditions that their neutrality becomes suspect."). Joseph L. Daly remarks that "many developing nations seem to prefer UNCITRAL to the other western-situated arbitration institutions," but he too seems to be speaking about its procedural provisions. Joseph L. Daly, International Commercial Negotiation and Arbitration, 22 Hamline J. Pub. L. & Pol'y 217, 242 (2001).

72. Among the normative aspects of UNCITRAL that are troubling is its "position in favor of the lex mercatoria, about which controversy abounds…. The so-called lex mercatoria is a creation of a coterie of Western scholars and arbitrators who have loaded it with norms entirely favorable to international business." Id. Sornarajah notes that the Rome Convention does not allow mandatory law to be ousted by party autonomy, but such displacement is routine in decisions rendered under the lex mercatoria. Id.

73. Philip J. McConnaughay, Rethinking the Role of Law and Contracts in East-West Commercial Relationships, 41 Va. J. Int'l L. 427 (2001).

74. Mustill, supra note 38. In his dry fashion, Mustill opines that his list (not all of which consists of procedural rules) "seems rather a modest haul for twenty-five years of international arbitration." Id.

75. See Judd Epstein, The Use of Comparative Law in Commercial International Arbitration and Commercial Mediation, 75 Tul. L. Rev. 913, 917 (2001) ("It is said that an international composite is beginning to prevail that embraces party initiatives and an oral hearing with, at most, limited discovery and minimal evidentiary formality.")

76. See Lundmark, supra note 24, at 130.

77. In a sense this is the substantive counterpart to the remedy of adjustment. This just goes to show that these categories break down at the borders.

78. See Davis, supra note 31, at 63-69. He reports that France and Luxembourg have followed the U.S. in understanding Article V to allow, and Article VII perhaps to require, the enforcement of awards annulled at their situs.


Pace Law School Institute of International Commercial Law - Last updated June 19, 2003
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