The Sources of the Modern Transnational Lex Mercatoria

[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.

In my last post I said something about the need for and re-emergence of transnational private law in international commerce and finance. This law is immanent in principle, created by the international market place and its participants itself, where necessary supported by treaty law (like the Vienna Convention on the International Sale of Goods), and in practice formed and operating much like public international law with its different sources, as may be shown particularly in its foreign investment law branch. That is the modern lex mercatoria. It is very different therefore from the law of the codification, but similar to what prevailed earlier. It is now in its formation and operation in fact closer to the common law which is not statist per se nor systematic and academic either and less averse to other sources of law. It is more pragmatic and moves from case to case on the basis of practical needs, even if there is now also much legislation and sometimes even a kind of code, especially the uniform commercial code or UCC in the US.

Whatever its name, the UCC is not, however, a codification in the European sense. It does not monopolise the field and does not push out other sources of law. Rather in its Section 1-103, the UCC makes it very clear that it promotes not only custom but also the common law, equity and the law merchant besides it. In England, the Sale of Goods Act until its reformulation in 1979 also still referred to the law merchant, even if in England its deletion in 1979 and also the narrowing approach to custom especially if international, shows that commercial law has become much more nationalistic, also in England, unwisely so in my view, but not quite as much as on the European Continent.

This difference plays out at the EU level and it is easy and most up to date to demonstrate the point in that context. The EU has got hold of the idea that its private laws might be codified at EU level. There is a text in what is now called the draft common frame of reference (DCFR) and its sales law section is since October 2011 embodied in a proposal for an EU Regulation. I leave its merits aside for the moment – the draft Regulation e.g. has all the flaws of the Vienna Convention on the International Sale of Goods, particularly in its notions of fundamental breach and force majeure, which are far too subjective for international commerce, and in the unilateral right of the buyer to reduce the price, also anathema to international business, which for these reasons normally excludes the application of the Convention and is unlikely to accept this new European sales law either. For the present discussion, the more important point is, however, that under these EU texts other sources of law are not permitted to operate independently so that the international practice and its customs must give way.  This is typical codification thinking, which monopolises the field in its top-down attitude to law formation. Party autonomy is then similarly confined and subject in particular to a nationalistic notion of good faith, even if now expressed at EU level. It cannot be excluded or modified. Not even standards can be set as at least the UCC in its section 1-301 allows (unless the result becomes manifestly unreasonable), which is in professional dealings the right approach. As the EU texts cover both consumers and business dealings, a uniform good faith interpretation of contract must further be feared with the obvious danger that good faith protections in the consumer sphere will spill over into professional dealings.  That was always the problem in a statist codification model that in truth distrusts diversity, has difficulty therefore in thinking in terms of different types of relationships and also commonly mistrusts markets for reasons that go far beyond public order and policy considerations. The EU is hooked on a continuation of this approach, which at least for commerce and finance would appear to be mistaken.

Indeed, in the world of the modern lex mercatoria things are quite different. Established principles and practices freely operate besides any statutory or treaty texts and may prevail over it in appropriate cases. As we shall see, there is a hierarchy of norms. Party autonomy is then also a separate source of law emerging from and supported by the transnational legal order itself, confirmed perhaps by but not founded in any statutory text. It would compete and a ranking of norms develops. As we shall see, a more dynamic concept, especially of contract and movable property law, is likely to result also. For its further evolution this law is not dependent on statutory amendment either, as codifications normally are. Especially differences in the relationship of the parties, most relevant for consumer and business dealings, are here a key perception. Good faith operates very differently in either sphere: for consumers probably more protection, for professionals perhaps less. The latter would more in particular be concerned about a stricter interpretation of their contract, especially if a road map and risk management tool as their contract is likely to be for them. In any event good faith is not always a preconceived abstract mandatory concept in business.  Rather, in business to business transactions,  it is susceptible to party autonomy and definition by the parties, who, like under the UCC in the US, as a minimum could set standards by common agreement. That may be different in the consumer sphere for reasons of public policy, but they do not obtain in business, where there is as a consequence more flexibility. It does of course not mean that bad faith can prevail in business dealings, but the standards of good faith and how they are enforced are left to the parties unless they become manifestly unreasonable.

These two spheres should therefore be treated very differently.  This is what the EU effort in its unitary approach principally denies. As was already said, this is a denial of societal diversity if not also a fundamental lack of understanding of how society works.