The Relevance of the Academic Model for the Modern Lex Mercatoria

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.

The Codification idea, the DCFR as the EU attempt at codification, the EU jurisdiction in the area of private law formation, and especially the force and meaning of the academic model in the law need to be further considered if we are to acquire a better perspective on the formation of private law at the transnational level and therefore on the modern lex mercatoria.

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.

Again, the dominance of national states since the early 19th Century changed all that. The right insight was here that law moved with society and its values. The latter had already been accepted in the natural law school which philosophy was now, however, rejected because of its universalist claims.  Instead the law was nationalized everywhere.  Moving with society soon meant on the European Continent a monopoly for national legislators. Overriding principles were out, custom was suspect.  Party autonomy depended on the license of the state. Even in England, the law was henceforth thought to issue from the sovereign (Austin), albeit still mainly through the courts. Other sources of law, custom in particular became here also of dubious value. Only in commerce its value was still acknowledged but the status in particular of international custom became unclear.

In this atmosphere, it became also axiomatic that property law operated per country.  If one bicycled from Basel to Strasbourg, the bicycle went through three different legal regimes of ownership. The law of assignment was no less seen as an expression of a national culture. It seemed unnecessary if not bizarre in economic systems that were largely the same.  The codes underscored this but it is important to understand that the codification movement had two different prongs. The early codification in France (1804) was product of Enlightenment and largely a cleaning out exercise which was found to be best conducted at the level of the state. It was a question of greater transparency and efficiency and lesser transaction costs. Nationalism was not a key element and this allowed the French code to spread fast through neighbouring countries. The fact that other sources of law were eliminated was foremost pragmatic. The German Code which came about hundred years later was conceptually very different and the product of German nationalism and idealism. It claimed for the state the deeper insights in the human condition and the ability through its academies to best regulate human behaviour. Codification is here an academic model and its system acquired a mystical and irrational element.  The claim was that the result was complete, represented the reality of human relationships and had the answer in it to all questions present, past and future.  It could as such not be questioned because it was the law imposed by the state. All other sources of law were subjugated to it. They had no independent status because they were not considered legitimate without governmental recognition.

In modern times, this type of codification is discredited. This derives from its practical insufficiency. It is not possible in a modern environment for the state to foresee all or for academia to conceptualise and balance all social and economic relationships. But it is also connected with the deep decline in private law scholarship itself, to start with Germany that used to be at its pinnacle. Interest in public law took over. The Dutch civil code of 1992 and the Brazilian one of 2002 show the poverty of legal thought and the total unawareness of the commercial and financial surroundings in which these codes now operate. So does the Draft Common Frame of Reference in the EU. It cannot place the modern financial products either and in commerce it is wedded to the insights of the Vienna Convention which have been rejected by the trading community for reasons which were already mentioned. These codifications have become consumer driven texts which are unaware or suspicious of other law formation forces, continue to adhere to a nationalistic statist top-down philosophy that monopolises the law formation process, rejects fundamental principle as overriding, reduces custom and party autonomy to state licensed concepts, and eschews diversity. They are wholly unsuitable for a modern economy to prosper.

Of the major codification countries, only France has extensively legislated per financial product to stay up to date, at least in finance. In doing so, it has in fact ignored all systematic considerations and also introduced notions of trust and floating charges, even if they still lack sophistication. On the other hand, it is exactly the belief in the system that has left countries like Germany in the cold, whilst international finance concentrates on common law centres even if it cannot ignore the location of assets elsewhere if part of asset backed financing.

The codification that is now promoted at EU level on the basis of the DCFR continues in this German mould and model. I leave for the moment aside the slender claims to EU jurisdiction in the matter. More important is its hostility to other sources of law including fundamental principle. It was already mentioned before that it is here hardly aware of the ECJ’s own jurisprudence.  It remains statist and system controlled, now at EU level. There is nothing bottom up or immanent in it.  There are no other law making forces.  There is only the academic model sanctioned by the state. Indeed the project is largely propelled by academics. Practical needs are irrelevant or there is ignorance: for example it was already said that it talks about certainty but has no idea of the more important subject of finality. Diversity in terms of fundamentally different treatment for consumer and business dealings is rejected. The unitary model is right per definition.

The City of London is aghast, but British academia, not only in Scotland, is not entirely unreceptive. In fact circles around the English Law Commission who believe in legislation should not be ignored. Needless to say there is here no transnationalization or room for the modern lex mercatoria nor for any more practical ideas. There is also no concept that at least in commerce and finance perhaps other nations or interest groups may also want to be part of the process. That would have to be quite different from the present approaches in UNIDROIT and UNCITRAL which have largely proved a failure, exactly because they represent also largely academic compromises and ignore the dynamics and needs of the legal practice in international commerce and finance themselves. They have no concept of transnationalization and believe that treaty law as expressions of statist intervention is the only answer. But it isn’t.  Rather, it was argued before that it is the recognition of a multitude of sources of law in which treaties figure but with present insights they have great disadvantages, mostly lack sophistication, have been proven to be barely responsive to practical needs, and are very difficult to adapt.

A final observation may be in order. In the codification countries, there is only one model of law: the codes. Academia produced the thinking behind it and subsequently becomes uncritical. Legal formalism prevails and an innovative mind set is eschewed. Legal teaching is about rules, rules and rules; in fact it is high school teaching of the most unimaginative sort. Policies and objectives are ignored. The law’s adequacy is assumed. New models as may be suggested in the modern functional approaches are deemed irrelevant. Empirical research is unnecessary.  There is no fundamental search for newer and better ways. Professors write practitioners’ handbooks and are proud of it. They follow and do not lead. It is very different in the top law schools in the US but they are too busy with themselves. It is one reason why the modernisation of private law along transnational lines is retarded or even rejected. In Europe in particular, there is little will and inspiration to move forward along newer models even if the paradigm has fundamentally shifted.  It is in this climate that projects like the Common Frame of Reference in the EU get their chance.

3 Responses

  1. Hello Jan,

    I have always found your insights substantial and penetrating. We agree on a great deal. As I continue to think about similar questions, I begin to entertain skepticisms. I would be interested in hearing more of your views on the interaction of mandatory public law with private law. In Europe, as you no doubt are aware, the question of how human rights law interacts with private law has become something of a subject. Of course, human rights may hold less relevance for the law governinig merchants and more, for example, for tort law. But still the systemic question seems to arise, whether non-state law in the form of a modern law merchant is really simply something that states accept because state based legal systems are open to the norms of other communities, so long as these norms do not violate the public policy of the state. And when we go back into the history of the lex mercatoria, it seems government has been involved in myriad ways. See Emily Kaden’s work, in particular ‘Merchants, Kings and the Codification of Common Law.’
    I would be interested in learning more about how mandatory custom trumps party autonomy, even when the parties choose state law. We might learn something if we could conduct a survey of commercial arbitrators, if they would be inclined to respond! 

    Very best,

  2. Response…


    Welcome on board!

    The horizontal effect of human rights is very important for the development of the modern lex mercatoria. It is also called the horizontalisation of private law, a strange term that really stands for a revival of natural law, see my Vol. 1 p 152.
    It is a strong modern trend to accept the operation of  these international principles above all positive law, see also ICJ in Diallo, ECJ in Mangold and Audiolux, and Justice Kennedy in Roper and Lawrence.
    Only the DCFR, that now parades as some draft for EU private law codification, is not aware of this. I explain it as a common myopia and fallacy in civil law codification thinking. Other countries might still use their own public policy to keep what they consider foreign influences of this nature out also, you mention that they have always done so, but it is not the modern trend.

    I put all of them in the bracket of fundamental principle on which the modern lex mercatoria floats and consider it the highest mandatory lawyer of its rules. The notion of ownership may be a good example. It is often considered a human right. But the principle of pacta sunt servanda is also in this bracket and there are others. Relevant are here also procedural protections in international arbitrations, due process, etc.

    You also asked about mandatory custom trumping party autonomy. The eurobond is the classic example, see my Vol. 1, p 303. Parties may have made English or NY law applicable but it has no effect on the negotiability of the instrument. Under English law, they would likely not be bearer paper as they are often too complicated or even conditional in their terms. The modern notion of book entry may also interfere, but international market practice has long declared them negotiable regardless. Indeed, it is generally understood that these property issues are not at the free disposition of the parties (except in equity where proprietary rights may be more freely created but always subject to the freedom of the commercial flows which may ignore them as the higher policy requirement, think of dispositions by trustees),
    If a transnational law of assignment were to develop, which is highly desirable, alternative choices of law by the parties would also not stick.  On the other hand, their choice of law would still be relevant in most contractual issues but even then not in matters of capacity and validity which again are not at their free disposition and  would be the subject of transnational law.

    Another area of mandatory law is of course regulation. It is normally still national and territorial and the lex mercatoria as private law  is differential to these rules in the territory of the relevant state but international arbitrators may still have to choose the more relevant governmental interest or policy in international transactions if there are several that compete. That is the issue of the jurisdiction to prescribe and perhaps  a matter for another day.

    All the very best, Jan

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