The Modern Lex Mercatoria and its Legitimacy

[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.

What kind of legitimacy does the new lex mercatoria have? It is founded in fundamental principle, therefore in basic values, even in commerce very important, and otherwise in custom and practices themselves highly participatory, in party autonomy or in generally accepted principle of a more practical nature. It is not true that the law in commerce and finance is value-lite. Is that enough for its international legitimacy or should it go through some democratic process which suggests that even in international transactions there should be some scrutiny at state level or through parliaments? It is an argument that superficially appeals to many but is in error.

First, historically, private law was hardly the product of a democratic process, Roman law never was nor were hardly the great modern 19^th Century civil codes. More importantly, even now, the common law is formulated by the courts. We also accept in conflicts law the law of any country and do not commonly enquire into the democratic legitimacy of national laws either. The argument concerns in particular policy and values and many believe that they can only emerge at the level of a (democratic) legislator but it would be a sad day indeed if values, social values in particular, could only enter private law though statutory amendment.  This would mostly be a long wait. Rather, it is well known that courts and practitioners in the daily application of the law move the law forward all the time and follow evolving fundamental principle.

The European Court of Justice is particularly aware of it, see in particular its 2005 Mangold and 2009 Audiolux cases and there are many more and fundamental principle also underlies the formation and application of private law. It is curious that the draft common frame of reference (DCFR) that now figures in the EU as a model for full codification of private law at EU level remains entirely oblivious to principle and still follows the statist tradition in its rejection of any other sources of law, even if fundamental. In its last introduction it struggles mightily with this problem but does not understand it. The reason is that codification is basically value-lite and codes like the German and French ones have proven to serve any political regime that comes into power.

In truth, the transnational private law or modern lex mercatoria derives its legitimacy from the very legal order in which it operates. That is the essence of all law and its legitimacy. That legal order is within states the statist legal order;  it is between states the international legal order; it is for EU countries the special confederate legal order which operates between EU Members; and it is for international commerce and finance the transnational commercial and financial legal order or what the French Cour de Cassation since Putrabali calls the international arbitral order, which is the same but then directed more in particular towards its dispute resolution process. In the 2006 Berkeley International Law Journal, I set out this concept (“Legal Orders and Their Manifestation”).

Under a developed concept of the rule of law which values diversity and does not only believe in states, this is a natural evolution of our insights, although a similar insight operated everywhere before the 19^th Century, therefore before the emergence of the modern state at the level of popular consciousness and political philosophy. Once globalization takes over – and assuming that it is hardly reversible without very great cost – the international legal orders acquire much greater prominence and recognition, reason also why we teach these subjects now very differently. That also goes for the commercial order. If that may be accepted, it follows that, like every legal order, it will form its own laws which will be adjudicated principally in its own order, through international arbitration, whose awards sovereign states, which do retain the monopoly of enforcement power, will recognize and execute on their territories when needed, again as part of the overarching notion of the rule of law itself.  That is the essence, recognized in the 1958 New York Convention, but it would now be so even without it. In a modern world that is another expression of fundamental principle, but treaty law still helps to elucidate the details. As argued before, that is indeed its proper role.