What do we mean by the Transnationalization of Private Law?

by Jan Dalhuisen

[Jan H. Dalhuisen is Professor at King’s College in London, the Miranda Chair of Transnational Financial Law at the Catholic University in Lisbon, and is Visiting Professor at UC Berkeley]

Professor Dalhuisen is guest-blogging with us this week on the transnationalization of private law. Links to his other posts can be found under “Related Posts” below.

Opinio Juris has not so far dealt with matters of private law and its transnationalization, harmonization or unification, especially important at the operational level in international commerce and finance.  If it is true that the international flows in goods, services and money now far exceed the GDP of even the largest countries, then the question must be asked why it is that in the orthodox view, these international flows must still be controlled and covered by a national law, which is then found under the canons of what is called private international law or conflicts of law.

It is not logical but it is the consequence of the 19th Century view that all law was the product of a national culture and that there was no law beyond it. Even common law countries fell for this. In civil law countries this led to the further idea that this law, even private law, would issue from government, hence the codifications. It allowed at the same time an academic systematic approach to dominate and led on the whole to a severe form of legal formalism based on a systemic interpretation of these texts which were considered to be complete by themselves and covering all eventualities. In particular, codification of this nature was suspicious of and left not much room for other sources of law, like custom and practices, general principles (except if underlying these codes) or even party autonomy.  They could only operate by license of these codes. Even fundamental principle or newly established social values were no source of law except when these codes referred to them or expressed them. There were no values or rationality beyond them. This also captured commerce, even when international, and it had to conform to these national legal systems. It followed that international transactions were legally pulled apart.

In Europe, the earlier tradition had been quite different. The old lex mercatoria or law merchant was transnational even though not necessarily universal. It would often operate regionally but could be trans-border, so e.g. on either side of the English Channel for shipping between England and France or on either side of the French Alps for transport on land between France and Italy.  However, there was also true universal law, especially on the European Continent. That was the Roman law, which had never been promulgated but operated as a superior customary law for all even if there was some strive with local laws, especially in newer forms of commerce for which it had never been made and also in what now would be called regulation or tariff laws, which necessarily acquired a domestic flavour but they were limited and exceptional.

Even after the codification, in the international market place, there was still some room for some international custom, but they became pockets and even then there was a domestic overhang. Nevertheless, bills of lading, bills of exchange, letters of credit, international (euro-) bonds all retained some international flavour, yet the idea that in commerce and finance the law went with the business was lost.  Law was national and within nations the commercial law was also national and made to fit into the nationally codified systems and became only lex specialis to it.  It basically ignored international transactions, their special nature and needs.  Hence the conflicts rules which were themselves increasingly considered domestic as well and there was nothing international about private international law either.

In this view, all assets and their legal status are also domestic.  Even today this means that if we want to use a portfolio of receivables to back up an international financing or funding operation we must assign each of them according to the place of their location if at all ascertainable (which itself is a considerable problem for claims).  Assets can thus only be used for international financing according to the legal regime of their location. Thus a national law must be found in respect of each asset under which a security or other transfer is effectuated and it determines subsequently its proprietary effects. Bulk transfers (or assignments) of assets, including claims located in different countries are here impossible. Floating charges, which affect whole classes of assets, cannot then cover assets in different countries under one regime.  Formal, resulting or constructive trusts and notions of tracing may not then reach assets in such countries either. The additional problem here is that most civil law countries do not even accept these structures in their own laws.

It follows that in the case of finance leases in airplanes that fly around the world, in this approach, the legal regime changes every time they cross a border whilst in respect of goods that travel and need to be delivered abroad, the question presents itself whether the law of the place of origin or destination determines the transfer of title or the security interest that is created.  If the former, there may still be adjustment when the goods arrive in the latter. Even letters of credit are not safe and may have to conform to different legal regimes depending on which bank in the system owes payment. The UCP (a set of rules emanating from the International Chamber of Commerce in Paris) solve these problems only in part.

The international market place suffers from this state of affairs. One can also say that legal risk is increased in international transactions. Parties may hardly know where they stand. In any event, transaction costs increase and inefficiency results. More importantly, it does simply not make much sense to have several different national laws impinging on even one transaction, which is economically similar everywhere. There must be better and more rational ways.

That is the challenge of the transnationalization of private law, especially relevant in commerce and finance, therefore the challenge of the modern lex mercatoria as a substantive non-statist law for international commerce and finance.  What is the new method and what would that law look like? The approach is, in my view, very similar to what we see in public international law under Art. 38(1) of the Statute of the International Court of Justice.  There we accept for the law between states the operation of different non-national sources of law operating side by side: fundamental principles, customs, treaties, general principles, and party autonomy. It is clear that in the legal order between states, we acknowledge immanent or informal law formation along these lines even if treaties may often be preferred and the other sources have suffered here also because of 19th Century exalted sovereignty ideas.  But treaties are there foremost to clarify, be more specific or remedy as indeed bilateral investment treaties (BITs) for the protection of foreign investment normally do. More importantly, at least in public international law, they have never been able to kill the other sources of law.

This diversity in the sources of law was the Grotian system which before the time of the great codifications in Europe also prevailed in private law. So what we see now is the re-emergence of the older universal system of law formation which is in method the same for public and private law. Of course the substance of this law is quite different from what went before. How such law is handled, one probably sees best at the moment in foreign investment law, although again the type of issues is likely to be mostly quite different in international commerce and finance.  It is the method that counts and it is the same. In the last few years, I have devoted much of my time to describe that phenomenon and that law, culminating in my book on Transnational and Comparative Commercial, Financial and Trade Law, now in its 4th edition in three volumes, next year going into its 5th, and I will come back to these issues shortly.

http://opiniojuris.org/2012/04/02/what-do-we-mean-by-the-transnationalization-of-private-law/

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  1. […] It was already said that private law including commercial law had been thought of as being transnational until the 19th Century especially on the European Continent.  This was confirmed by the general acceptance of the Roman law as superior customary law even though in commerce there was local law but it was not nationalistic, it was often regional or municipal and could operate cross border. The laws in the Channel ports between France and England and across the Alps between France and Italy were already mentioned. […]

  2. […] April 2, 2012 — What do we mean by the Transnationalization of Private Law? […]