Application of lex mercatoria in International Commercial Arbitration

The term ‘lex mercatoria’ derives its root from the body of trading principles used by merchants throughout Europe in the medieval times . In recent decades in has been regenerated as a sort of international commercial law which displaces the use of national law in international transactions. The idea of applying national laws to international commercial arbitrations has always been an uninvited idea as it denied the parties of the freedom of choice of law which is one of the basic tenants of a party going for arbitration.

The concept that the parties by agreement can authorise the arbitral tribunal under equity clauses to act as ‘amiable composituer’ and to decide as ‘aequo et bano’ instead of deciding in accordance with the traditional system of law, was named ‘lex mercatoria’ by late Professor Goldman .

The existence and impact of lex mercatoria is accepted in contemporary international commercial law, while modernised and revised national rules relating to international commercial law reemphasize the increasing use and influence of lex mercatoria in the international sphere.

Party autonomy rules: All modern arbitration laws recognize the principle of part autonomy; parties are free to determine the substantive law applicable to their disputes. It is an accepted fact. Article 28(3) of the UNCITRAL Model Law leaves the freedom to parties to authorise the arbitral tribunal to act as amiable compositeur and decide ex aequo et bano. This provision has been verbally adopted in Section 28(2) of the Arbitration and Conciliation Act, 1996. In order to provide consistency with the Model Law, Section 46(1) (b) of the English Arbitration Act 1996, provides that the arbitral tribunal shall decide the dispute ‘if the parties agree, in accordance with such considerations as are agreed by them or determined by the tribunal’.

in the ICC case 8385 the arbitral tribunal decided that it should apply 'the law that best accords with the need of the international commercial community, that is not in conflict with the reasonable expectations of the parties, that produces uniformity of results, and that provides for a reasonable solution of the issue'. Dealing more particularly with the problem of raising the corporate veil, the arbitral tribunal stated:

Application of international standards offers many advantages. They apply uniformly and are not dependent on the peculiarities of any particular national law. They take due account of the needs of international intercourse and permit cross-fertilization between systems that may be unduly wedded to conceptual distinctions and those that look for a pragmatic and fair resolution in the individual case. This area therefore offers an ideal opportunity for applying what is increasingly called lex mercatoria

Arbitrator’s choice: The traditional method of application of the conflict rules has also been set aside by the use of Lex Mercatoria. According to Article 17(1) of the ICC Arbitration Rules “In the absence of such agreement by the parties, the arbitral tribunal shall apply the rules of law which it determines appropriate”. Section 28(1)(b)(iii) of the Arbitration and Conciliation Act,1996 highlights the same principle.

The pros and cons: The application of non national rules of law that is lex mercatoria is not approved and adopted by all national arbitration laws. The view is supported by the fact that the UNCITRAL Model uses the term “law” instead of “rules of law”, which presents the view that the intent behind such usage is to ensure the application of national law. Lord Mustill said “The Lex mercatoria has sufficient intellectual credentials to merit serious study, and yet it is not so generally accepted as to escape the sceptical eyes”. The two immediate advantages of lex mercatoria is that they can be useful to suit real business needs and application and are uniform in application thus avoiding the vagaries of different national laws”.

In international Commercial Arbitration there is no need to localise the applicable law. The restriction on the usage of applicable law being confined to national law is not consistent with the nature and the advantages of international commercial arbitration, therefore the use of Lex mercotoria should be encouraged over the use of national laws in appropriate cases.

Endnotes:
* http://en.wikipedia.org/wiki/Law_Merchant
*Goldman, Lex Mercatoria Forum Internationale, No 3(Nov 1983) pp 03,21 cited in Redfern and Hunter, Law and Practice of International Commercial *Arbitration, 3rd edition, p118 , para 2-60
*Black’s Law Dictionary 8th Edition,2004 defines the term as ‘according to what is just and equitable’
*The Law and Practice of Arbitration and Conciliation by OP Malhotra, 1st edition at Page 659
(1997) 124 J.D.I. 1061 (Annot. Y. Derains) [in French].
*The Role of the UNIDROIT Principles in International Commercial Arbitration (1): A European Perspective by Yves Derains
*The Nex Lex Mercatoria: The First Twenty- Five Years (1988) 4 Arbitration International 86 cited in The law and Practice of Arbitration and Conciliation, OP Malhotra, 1st edition.

The  author can be reached at: soniasaini@legalserviceindia.com