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Wed, 27 Jul 2011 Kirthi Jayakumar

Lex Mercatoria, translating into ‘merchant law’1 , refers to a body of trading principles used by merchants throughout Europe in the medieval eras. The principles primarily juxtaposed freedom of contract and alienability of property, along with an aversion to legal technicalities and choices of going beyond the realm of law. The branch of law largely draws on the sources of law that include public international law and the general principles of law, as also from the UNIDROIT Principles of International Commercial Law, called the UNIDROIT Principles, and the 1998 Principles of European Contract Law.2 

The application of Lex Mercatoriato arbitration is itself an issue steeped in controversy. Staunch proponents of the theory purport that in truth Lex Mercatoria exists, and is capable of ascertainment.3  Arbitrators, though, are free to resolve disputes according to equity, and can also apply Lex Mercatoria as a set of international rules or standards that may just lead to a fair and equitable result. However, arbitrators that choose to decide according to Lex Mercatoria cannot act as amiable compositeurs.4 

Lex Mercatoria - The what, the how, the why and the when
Scholastic opinion5 suggests that Lex Mercatoria comprises a mix of public international law, uniform laws, general principles of law, the rules of international organizations, customs and usages, standard form contracts and reported arbitral awards. Plenty of arbitration statutes and laws dictate that conflict of laws be used in determining disputes, thereby putting a bar on an arbitrator’s pursuit of a means to quell the complications arising therefrom.

Classic examples of these forms of law would be Article VII of the European Convention on International Commercial Arbitration, 1961, and Article 33(1) of the 1976 UNCITRAL Arbitration Rules (both stipulating that failing the designation of the applicable law by the parties, the arbitral tribunal shall apply the law determined by the conflict of law rules, which it considers applicable). Therefore, an arbitrator bound by these rules, or any other species of a similar genus, would be obligated to ignore lex mercatoria and apply a conflict of law-based law, apt to the situation.

However, there also exists certain legal systems, such as the UNCITRAL Model Arbitral Law6,  which encourages an arbitrator or a tribunal to apply the rules of law that they consider appropriate, without so much as a reference to the conflict of laws as a basis for the law they need to choose.

Lex Mercatoria and Arbitration: A look at practice
In Pabalk Ticaret Limited Sirketi (Turkey) v. Norsolor SA (France)7,  the tribunal asserted that when faced with the difficulty of choosing one national law whose application to the dispute seemed compelling enough, the tribunal considered it appropriate, taking into consideration the international nature of the agreement itself, to set aside references to a specific legislation, whether Turkish or French, and to deploy Lex Mercatoria . It has served the purpose of reminding the parties and the tribunal, of the fact that they are operating at an international level, and totally different considerations come into play from those that apply in purely national and domestic arbitrations.8 An arbitral award based on the general principles of obligation, deemed generally applicable in international trade, was accepted and recognized by the French judiciary.9 The London Court of Appeals has also upheld the application of Lex Mercatoria as a choice of law by the arbitrators as the proper substantive law.10 

To what extent should a tribunal apply Lex Mercatoria?
Where there exists no agreement testifying to the need to deploy a certain law, it is generally held that the arbitrator needs to follow three stages in operation; primarily to introspect whether the application of a national system of law is apt, and if not, secondly, to see if proceeding towards amiable compositeur by applying national rules is the right way to go, and finally, studying these national rules, and thereby applying the most relevant ones and discarding those that have no value. In determining the perquisites to apply these criteria, the following factors should be considered:

Nature of the parties involved: Parties to an arbitration procedure are most concerned with weeding out impartiality at any cost. Different nationalities of the parties lead to the fear that the law of one may be unfriendly to the other. In this backdrop, it makes more sense to embrace Lex Mercatoria .
Nature of the transaction involved: A study of the transactions would help one determine the nature and scale of the effects that emanate from embarking upon the transactions itself. Therefore, it is significant to allow the application of Lex Mercatoria in the event that the transaction is of an international character. In the event that a controversy of such proportions does arise, the scale of the transaction is what matters.
The subject of the contract: Sometimes, the arbitrator needs to study the subject matter of the contract before determining which brand of law would apply. Consequentially, when the subject matter of the arbitration relates to those involving the rendering of services or the sale of goods across national frontiers, it would be far more sensible to have a transnational law governing the dispute, as opposed to one rooted in national ties.
The Terms of the contract between parties concerned: The terms of the contract dictate the law that should rightfully govern the arbitration proceedings between the parties. The application of Lex Mercatoria emanates from either an explicit mention to such effect, or an implicit mention emanating from the absence of another law to govern the dispute itself.

Conclusion
Lex Mercatoria holds an important position in functioning as a supplementary source of law, and also offers guiding principles, each useful to denationalize the dispute in international commercial arbitration.11 To what extent is an arbitral tribunal free to apply the Lex Mercatoria? Simply put, the answer is, to the extent to which it is permitted. How is this extent determined? Purely by way of analyzing the basis of the contract, and the basis upon which the arbitration itself is built, can one can arrive at the answer.

Notes:

  1. J.H. Baker, “The Law Merchant and the Common Law” (1979) 38 Cambridge Law Journal 295
  2. Alan Redfern, Law and practice of international commercial arbitration, (Sweet & Maxwell, 2004), p. 109 at 2-59
  3. Lalive “Transnational (or Truly International) Public Policy and International Arbitration”, ICC Congress Series (New York, 1986) No.3, 257.
  4. Antonieo Hierro and Miguel Angel Malo Cuatrecasas “Lex Mercatoria Revisited”, (2009) The European and Middle Eastern Arbitration Review 19
  5. Mustill, “The New Lex Mercatoria: the First Twenty-Five Years” (1988) 4 Arbitration International 86 at 109
  6. See Article 28
  7. ICC Arbitration Award dated 26 October 1979 (1984)
  8. Ibid.
  9. Fougerolle (France) v. Banque du Proche-Orient (Lebanon) 1982 Rev Arb 183 (Cour de Cassation, 9/12/1981) and Compania Valenciana de Cementos Portland SA v. Primary Coal Inc. Judgment of the Cour de Cassation, 22/10/1991
  10. Deutsche Schachtbau und Tiefbohrgesellschaft mbH (DST) v. Ras Al Khaimah National Oil Co. (Rakoil) (1987) 2 Lloyd’s Rep 246 (Eng CA)
  11. L. Craig, W. Park and J. Paulsson, International Chamber of Commerce Arbitration, (2nd Edition) p.115


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