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Lex Mercatoria In International Arbitration

Lex Mercatoria is a latin word which was used by the merchants in the medieval times. The term Lex Mercatoria means that there is a body of trading principles used by the merchants which were used by these merchants all over Europe. Lex Mercatoria basically means Merchant Law. It became a custom as well as a practice which was later enforced as a law through the merchant courts across the major trade routes. It was treated and given importance equal to of an International Law of Commerce. It highlighted the transfer of property, contractual freedom, while avoiding legal technicalities and deciding cases with the arbitration process.

Theories Relating To Lex Mercatoria

Many critics share the view that Lex Mercatoria does not exist, making this concept a highly controversial one in the modern era. The section of people who believe that Lex Mercatoria does not exist believes that, this term lacks generality and predictability. This section also believes that this term is uncertain and is not complete.[1]

There is a basic lack of generality because there is a diversity in the standard contracts and the trade usages as each of the standard contract and trade usage gives the meaning of justice to different types of trades and profession which is too diverse for a homogeneous legal source to be constituted.

The people who were in the support of Lex Mercatoria gave their own statement that the Societas Mercatorium[2] has a system by which the following can be done:
  • obtain the compliance with its rules such as black lists by coercion,
  • any damage can be done to the commercial reputation or;
  • they can even withdraw oneself from the trade associations’ members’ rights.
All these things led the merchants to observe and be bound to these rules of Lex Mercatoria.

It was observed that not all the rules and regulations can be described as legal rules, hence, the doctrine of Lex Mercatoria cannot be given a status of a legal system. However, the application of Lex Mercatoria was allowed in International Commercial Arbitration.

Applicability Of Lex Mercatoria In International Arbitration

The Lex Mercatoria is not a legal system, but it will act as a binding law as there is no legislature which can draft International Commercial Laws; there is also no International Commercial Court which can give or develop any precedent for any dispute relating to trade or commercial laws. The Lex Mercatoria may not work as a fully functional legal system but it can give the principles on which a dispute can be resolved as there are no principles in any other law which deal with this particular merchant law.

Arbitration is the most preferred way of dealing with disputes relating to international transactions because it is cheap, quicker and easier as compared to the normal court disputes. It has gained popularity among the whole world. For an Arbitration, a particular set of rules are required for governing the resolution, these set of rules can be taken from Lex Mercatoria which are there since the medieval time.

By using these rules, it may become beneficial to merchant trade as it has become a custom of the merchants to abide by the rules laid down under the Lex Mercatoria. The rules that are used to solve a dispute in an arbitration are also taken by Lex Mercatoria as it will be very difficult to apply different state laws to the parties. Instead of applying different state laws, they can take a common set of rules which will be applied to all the parties irrespective of their state or even their nation.

Through the usage of these rules in dealing with the disputes, the future disputing parties may try to avoid any unfit actions due to which some kind of dispute could arise. One major rule of this doctrine is: principle of good faith, this doctrine neither gives a favorable result nor does it favour any rich or a wealthy party.

Lex Mercatoria cannot be chosen at any time; it can only be chosen when there is no applicability of a national law or the parties deny to choose the national law of their nation or if the parties are of different nations. Lex Mercatoria will only act as a substitute law which will give them the general principles of a merchant law.[3]

Case Laws Relating To International Arbitration

  1. Petroleum Development (Trucial Coast) Ltd. v. Sheikh of Abu Dhabi [4]
    In this case, there was no national law mentioned by the parties in the arbitration clause but the general principles of the Lex Mercatoria were applied in the arbitration. Not happy with the principles applied, the opponents argued that there was no clause in which it was mentioned that the principles of Lex Mercatoria will be applied. They also argued that they should have their own explicit choice of law in the contract.

  2. Italian enterprise v. Syrian enterprise[5]
    In this case, there was a contract between the parties, they chose the governing law to be the state law to the extent where the law was in accordance with the general principles of law. The parties additionally chose the general principles of law which were applied by the international arbitral tribunals and not by the other international courts. In this case, the arbitrators applied the doctrine of Lex Mercatoria to give the arbitral award.

Conclusion
The merchant law derived from the doctrine of Lex Mercatoria is now becoming more practical as it deals with the cases which were, earlier, very hard to deal with. Lex Mercatoria’s general principles of law has made it easier to resolve the various disputes arising between the parties due to any transactional dispute. The arbitrators are applying these rules given under this doctrine as they are predictable and easily adapt to the need of the International Commerce. The rules which are laid under this doctrine are flexible and are regularly updated in accordance with the need.

At present, there is no national arbitration, meaning no arbitral courts are available that can deal with the arbitration of cases dealing with parties belonging to different nations. An arbitrator too cannot force his own national laws on the parties; therefore, he uses this doctrine of Lex Mercatoria as the rules and principles of this doctrine are equal for everyone.

The doctrine is also preferred because it follows the principle of good faith so that every merchant can be treated equally and there is no scope of partiality between the disputed parties. Lex Mercatoria is a very old custom, yet, it is still providing us with all the essential principles which are needed in order to pass an arbitral award in the case of an International Arbitration.

One can finally say that Lex Mercatoria has done a very good job in providing the rules and principles in the field of International Arbitration and we can hope that this custom which has been followed since the medieval times will be used in order to make International Arbitration Law or even in the Merchant Law that will be implemented in the future.

End-Notes:
  1. See, Theory of the Lex Mercatoria, theory of the Lex Mercatoria by A Law Student, Para 1, available at https://www.lawteacher.net/free-law-essays/commercial-law/the-theory-of-the-lex-mercatoria-commercial-law-essay.php (last visited on 10th April, 2020).
  2. See, THE NEW LEX MERCATORIA by Francesco Galgano who talks about Societas Meratoria in his article, available at, https://digitalcommons.law.ggu.edu/cgi/viewcontent.cgi?article=1014&context=annlsurvey (last visited on 10th April, 2020).
  3. See, Theory of the Lex Mercatoria by A Law Student, application of Lex Mercatoria in the field of International Commercial Arbitration, Para 5, available at https://www.lawteacher.net/free-law-essays/commercial-law/the-theory-of-the-lex-mercatoria-commercial-law-essay.php (last visited on 10th April, 2020).
  4. (1951) 18 I.L.R. 144, available at https://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e84 (last visited on 10th April, 2020).
  5. Case no. 3380 of 1980, Yearbook VII (1982) p. 116

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