Principles of Contract Law: A Compilation of Law Mercatoria?

In the Middle Ages a new set of rules, based on usages and customs, was developed by merchants with the intention of settling disputes arising between them through an a-national body of rules. This system, named Lex mercatoria, allowed merchants to conclude transactions with different peoples without fear of being subjected to foreign rules in the event of a dispute. This note draws a parallel between Lex mercatoria and the need for a unification of Private Contract Law in the European Union, based on the assumption that both sets of rules are designed with the same aim in mind: the good functioning of cross-border commercial relations between different peoples.

I. Lex mercatoria: origins, content and codification

The historical background of Lex mercatoria is controversial. Some authors suggest that Lex mercatoria is based on Ius gentium, the body of Roman law that regulated economic relations between Roman citizens and foreigners . It is accepted that Roman citizens entered into cross-border commercial relationships and that those transactions were governed by certain rules. However, the hypothesis according to which Ius genitum is the precursor to today’s Lex mercatoria has been severely criticized . Some authors question Ius gentium’s independent status vis-à-vis Roman Ius civile and state that, since Ius gentium was part of Roman law rather than an autonomous body of law, it cannot be conceived as the precursor of today’s Lex mercatoria.

Other authors claim that the origins of Lex mercatoria can be traced back even further, to before the Roman Empire, in Ancient Egypt, or even back to Greek and Phoenician trade . This theory is plausible since Lex mercatoria is used by merchants in international trade, and commercial exchanges in the Antiquity are considered to have been governed by customary commercial rules.

The debate about the origins of Lex mercatoria is far from over, although the majority of authors suggest that Lex mercatoria has its origins in the merchant law of the Middle Ages . Often qualified as trans-national law, Lex mercatoria is considered to be both a rebirth of medieval merchant law and a new understanding of the concept.

Even though the origins of Lex mercatoria are vague, for the aim of this paper it is important to note that the need to unify the law governing international private relations has existed since the first commercial transactions.

It has been said that there are as many definitions of Lex mercatoria as there are authors writing about it. However, when it comes to explaining the concept of Lex mercatoria, it is essential to highlight the importance of two authors: SCHMITTHOFF who developed the theory of the new merchant law, and GOLDMAN, who developed the theory on Lex mercatoria itself.

SCHMITTHOFF wrote that Lex mercatoria is the “expression of both spontaneous and official unification by means of general conditions, trade usages, customs and international conventions” . This new merchant law theory combines two inter-related elements: the importance of the international origin of rules and the uniformity of rules at an international level. However his vision of Lex mercatoria remains attached to national systems.

GOLDMAN’s approach to the definition of Lex mercatoria is revolutionary. He states that in International Commercial Arbitration, “arbitrators and parties could detach legal relationships from applicable national legal rules and submit these relationships to the Lex mercatoria”. Like SCHMITTHOFF, GOLDMAN also considered this body of law to be composed of general conditions, usages, customs and international conventions, but he added a new component: the general principles of law . Indeed, GOLDMAN does not consider Lex mercatoria to be dependent upon national legal orders. This autonomous approach claims that Lex mercatoria is a self-governing set of rules in an international trade framework, without reference to any particular national system.

As the different definitions demonstrate, not only is the concept of Lex mercatoria controversial but so is its content. In order to determine the real basis of Lex mercatoria, LANDO’s opinion is instructive. Far from distinguishing between sources and content –a pure theoretical issue-, LANDO proposes a list of “existing elements”. In fact, even if LANDO declares that it is not possible to compile an exhaustive list of elements forming Lex mercatoria, he gives a fairly complete list of elements constituting this set of trans-national rules. The elements are: public international law, uniform law, general principles of law, the rules of international organisations, customs and usages, standard form contracts and the reports of arbitral tribunal awards. Although there is no need to explain the content of this list, it is essential to remember that, even if arbitral awards are confidential in nature, there has been a tendency to publish them, investing this source of Lex mercatoria with a greater importance over time.

 This body of rules is still not concrete and, as a consequence, is both controversial and unclear. It has no evident limits and its parameters, despite academic efforts, are not clearly defined. As a result, it is unsurprising that some authors suggest that Lex mercatoria is a “myth” or even an “enigma” . However, it is clear that its importance has grown with the unification of rules at an international level. And even though its opponents claim that it lacks sufficient solidity and substantive force to govern a contract, it is increasingly applied, especially in international commercial arbitration, where parties choose it as the law applicable to their dispute.

International institutions and scholars have reacted to the above criticism regarding the lack of clarity in this body of Law. In the past three decades, international institutions have taken on a role of unifying and standardising the general principles of this “a-national” law and have created model contracts that are increasingly used in the international trade community due to their flexibility and simplicity . International organisations such as the International Chamber of Commerce (ICC), and the United Nations Commission for International Trade Law (UNCITRAL) have played a key role in this harmonisation of international trade rules.

Although there are a significant number of instruments that have contributed to harmonizing international trade practice, this essay will focus on the UNIDROIT principles, because that is where we see, most clearly, a codification of Lex mercatoria.

The majority of commentators agree that, unlike international conventions or model law, such as UNCITRAL (that has to be used alongside national legal rules and serves to assist States in their legislative unification), UNIDROIT principles are trans-national in nature. The fact that those principles are a non-binding codification, is due to their drafters’ shared view that mandatory instruments often result in “dead letter” law.

The preamble to the UNIDROIT principles foresees the application of those principles when the parties have referred to Lex mercatoria but there is no express reference to the UNIDROIT principles or the general principles of law . In fact, when parties refer in their contract to Lex mercatoria or to general principles of law as the law applicable to that contract, it is automatically assumed by the arbitrators that the parties wish to incorporate these principles as the law applicable to the contract. Logically, this leads us to the conclusion that the UNIDROIT principles are a codification of Lex mercatoria.

We can assume that when arbitratrors act as amiable compositeur –and are, therefore, not constrained to solve the dispute by reference to a national law but according to the requirements of justice- the role of the UNIDROIT principles would be weakened. However, this is not the case: arbitrators also apply the UNIDROIT principles in these circumstances. An old case remains a good explanation of this phenomenon: a partial arbitral award issued by the International Chamber of Commerce of Paris in 1995 in which the parties had decided to submit their dispute to “natural justice” and the arbitrators decided to apply the UNIDROIT principles even though the contracts in dispute had being signed fifteen years before the completion of the Principles! There were three reasons given by the arbitrators to justify the application of the UNIDROIT principles. Firstly, the arbitral tribunal said that the Principles were a codification created by recognised, independent and neutral experts. Secondly, the arbitrators held that the Principles were inspired by the United Nations Convention on Contracts for the International Sale of Goods (CISG) and therefore were specially designed to deal with cases like the one under consideration and, finally, that the principles are not vague and unclear but concrete and simple to apply.

There is little doubt that those principles are seen in International Commercial Arbitration as a codification of the usages of trade law, and therefore, a codification of the new Lex mercatoria. However, the application of the UNIDROIT principles is not only a matter of arbitration; they are also increasingly applied by national courts.

 II. Towards a unification of European Private Law: Contract Law

It is unrealistic to imagine that the unification of private law can occur on a global scale, however, unification at a European level is far more likely. Indeed, until the eighteenth century there were no frontiers in the study of private law in Europe. Scholars all around Europe studied the same private laws, stemming from a common legal tradition: Roman law.

There are many different views concerning the form that a ‘real’ unification should take. Some commentators have argued that a legal dictionary giving definitions of civil terminology would be enough ; other authors are fervent advocates for a real codification and, finally, there are proponents of a Common Frame of Reference (CFR) . The possibility of enacting a European Civil Code and the concrete codification of European Principles on Contract Law were also options that have been considered at a European level.

However, the unification of laws and its codification is not without problems. Many questions and uncertainties arise when thinking about the unification of Private law by means of codification, for example: How does one define the content of “Private law”? What means of codification should be used? What is the real meaning of the word “Code”? What should be codified? How does one ensure a uniform interpretation of the code by national courts? This mass of questions suggests that Europe may not be prepared for a real codification replacing national private rules. Indeed, “such a major step requires more time and more detailed knowledge about each other’s systems than we possess today” .

In order to draw the parallel between the unification of European Private Law and Lex mercatoria, it is essential to understand that the major objective of the European Union is the achievement of a single market. For instance, we can imagine the difficulties for the participants in trans-national transactions due to the fact that there is no harmonised contract law in the common market and each contracting party has its own perception and interpretation of the contract. As a result, the conclusion of trans-national contracts could involve such high risk that entrepreneurs will keep out of foreign markets. Therefore, the harmonisation or unification of European Private Law is an essential component in achieving an effective internal market. The exact same conclusion can be transposed to a global context and to Lex mercatoria, since it applies to international commercial transactions.

European institutions –by way of Directives issued by the European Commission and European Parliament Resolutions– and scholars have attempted to codify and harmonise European Private Law. However, while the European Institutions’ role has been to highlight the need for further harmonisation of private law, it was under the auspices of academic comparative research that the main practical work was carried out. Groups of scholars have been identifying a common core of legal solutions in order to achieve the codification of private law . Some of the work of those groups, such as the Pavia Group, the Trento Common Core Approach to European Private Law, the Study Group on a European Civil Code and the Commission on European Contract Law, offered clear solutions for unifying private law.

A special mention should be made both of the Common Frame of Reference (CFR) and of the Draft Common Frame of Reference (DCFR) and to the Principles of European Contract Law (PECL), since these provide the clearest expression of codification of commercial principles and practices at a European level.

In 2003, after several discussions at a European level, the Common Frame of Reference was the option finally chosen by the ‘Commission Action Plan on a more coherent European Contract Law’.

The European Commission’s Action Plan aimed to provide “fundamental principles, definitions and model rules that could assist in the improvement of the existing acquis communautaire” . The Commission not only insists on the CFR as an instrument to improve the acquis communautaire, but also as the basis of an optional instrument, that is to say an instrument that parties can use when entering into commercial transactions, but with no binding character. In order to do so, two groups contracted with the Commission’s Research Directorate General of the European Commission in order to produce the DCFR: an already-existing group directed by Professor C. von Bar – the ‘Study Group on a European Civil Code’ – and the ‘Research Group on Existing EC law’ or the ‘Acquis Group’ as it is known.

In 2008, the ‘Study Group’ and the ‘Acquis Group’ presented a draft edition of the DCFR that had been revised in order to take comments into account and to improve the text. This new edition was published in 2009. Both texts are basic editions in the sense that they are published without notes or comments. As is indicated in the introduction of the DCFR, we should distinguish between the DCFR and the CFR. The DCFR is a text that serves as a “draft for drawing up a ‘political’ Common Frame of Reference”, academic in nature while the CFR is more political, meaning that the CFR and DCFR are different in content and coverage. The DCFR was developed by academics and scholars and, as an academic text, has no political validity in the European Union.

One year after the publication of the UNIDROIT principles, in 1995, the Principles of European Contract Law (PECL), were published and later revised in 1999 . As with the American Restatement of the Law of contracts, the PECL are designed to provide legal solutions common to all Member States allowing the differences of national laws to converge and find common concepts and a common legal method. In the PECL, as in the American Restatement, the articles are complemented by commentary and explanations on practical examples. Compared to US contract law, the European Union contains a broad range of contract laws, owing their diversity to their different origins and to different legal traditions. The PECL take those different legal traditions into account and has become a codification with a mixture of influences. In order to do so, the Lando Commission applied a comparative method in order to establish the principles that best reflect the social and economic conditions prevailing in Europe and therefore attach varying weights of influence to the Member States’ laws.

As with the UNIDROIT principles, the European Principles were designed to be more than just a model or a checklist of principles. However, the application of both sets of principles differs because, contrary to the UNIDROIT principles, the PECL covers national commercial contracts as well as consumer agreements . Although the principles are also intended to serve other functions, it is true to say that the purpose of the PECL is to serve as the basis of a European Civil Code and, more concretely, of a European Code of Contracts that will replace national contract law in the Member States.

When it comes to solving a dispute, arbitrators often have to examine general principles of law that will allow them to solve the dispute without being bound by a specific set of national rules. In this sense, the PECL were also conceived to be used in arbitration . Indeed, when parties refer to Lex mercatoria as the law applicable to solve a dispute, arbitrators can and often do apply the PECL.

III. Conclusion

Lex mercatoria was born out of the need to codify the customs already in existence in international trade. On the other hand, European private law was created from different legal traditions with the objective of becoming, in the long term, the only law applicable to intra-EU and national transactions. Undoubtedly, both sets of rules contribute to the improvement of trade, but on a different level and for different reasons.

It is important to note that the European Union tries to protect the consumer, and above all, the European citizen. Without intending to be simplistic, Lex mercatoria is much more concerned with trade than it is about consumer protection.

However, in the field of contract law, Lex mercatoria and European contract law have many common features. The best way to illustrate this is by comparing the UNIDROIT principles and the PECL. International arbitrators as well as national courts have referred to both sets of principles when interpreting the contracts submitted to them for adjudication and in confirming their own legal solutions. Both works have a similar structure. However, the same cannot be said for the DCFR. Therefore, it is important to bear in mind that no real connection exists between Lex mercatoria and the acquis communautaire. The latter is based on enacted Directives and the European Court of Justice’s case law, while Lex mercatoria is a canon of practices and resolutions derived from international disputes panels and focusing on Contract law.

In conclusion, it could be said that, in the field of contracts, both the European private law and Lex mercatoria, aim to facilitate commercial trade at a European and global level. However, differences exist in the sources, content and legal traditions that make up these rival sets of trans-national legal principles.

Mariana Pendás Mariana Pendás is a Spanish qualified lawyer. She has worked in the Litigation and Arbitration department of an International Spanish law firm in Madrid since 2010. Prior to this, she worked as a trainee in the International Arbitration department of Shearman & Sterling in Paris and completed a traineeship with the European Commission. She holds a Masters of European Legal Studies form the College of Europe (Bruges) and completed her undergraduate law degree at the University of Fribourg (Switzerland).

This entry was written by Darius Chan , posted on Thursday November 22 2012at 07:11 am , filed under Uniform Law . Bookmark the permalink . Post a comment below or leave a trackback: Trackback URL.

Comments are closed.