The Concept of Lex Mercatoria in Internation Law

Lex Mercatoria being the Latin term for ‘merchant law’ is the term used to describe the body of commercial laws that the merchants of Europe used during the medieval times. It is the body of law that will stand as the foundation in understand certain important international trade instruments. As it stands today, Lex Mercatoria is said to be vague, and not specific. This is due to the range of laws that are said to be contained within it which in following from the English common law system is made up of a system of customs and best trade practices. Thus there have been certain instruments introduced to fill the doubt and give more life to the body known as Lex Mercatoria. This has come in the form of the UNIDROIT principles of International Commercial Contracts and the Principles of European Contract Law (PECL). However, the United Nations Convention on Contracts for the Sale of Goods (CISG) seems to have more legal weight than the UNIDROIT Principles or PECL which come in the form of soft law. However, in order to really understand analysis of the application of these important international instruments with regard to contract law is imperative. First, in addressing the CISG and its applicability it is important to understand the background as to how the CISG came to being. The CISG was a result of the limited success that was met by the Hague Convention and required several years of discussions between various states across the globe. The United Kingdom, however, is not a signatory to the CISG and this seems to be due to the insufficiency in public resources, fear or losing the edge that London holds in international litigation and arbitration and most importantly due to the fact that a number of influential organisations have been opposed to the UK being a signatory to the CISG. The application of the CISG is triggered by the requirement for diversifying international places of business for both buyers and sellers. Thus, to countries where the convention applies the place of incorporation is deemed irrelevant and will be governed by the CISG. The field of application of the CISG being in Article 1 which states that it “applies to contracts for sale of goods between parties whose place of business are in different states[1]” either due to states being contracting states[2] or by way of the fact that the rules of private international law lead them to the application of the law of a contracting state[3]. However, the second part of Article 1 has caused a bit of controversy due to the fact that as per Article 95 a state at time of ratification may declare that it will not be bound by Article 1(1)(b). This causes a difficult situation due to the fact that when one party has its place of business in a contracting state and the other party’s place of business is in a non-contracting state the rule of private international law may cause the domestic law of one country to apply on one hand and on the other the CISG instead of the domestic law of the other party. The essence of this Article is however to give significance to the CISG over domestic laws. Moreover, it is important to note that this issue will prevail only as long as there are a limited number of signatories to the CISG. With time and the extended harmonisation of the law by more members following the CISG, this problem will soon be a thing of the past. Article 10 of the CISG provides for multinational enterprises that have more than one place of business. As such either the place of business that has the closest relationship to the contract and its performance[4] or in an instance where a party does not have a place of business, a party’s habitual residence[5] may be taken into consideration. Furthermore, despite Article 1 dealing with fact that the CISG applies to the international sale of ‘goods’; the convention fails to define the term ‘good’; instead Article 2 lists out goods that are excluded from the scope of the CISG. Moreover, the convention does not define the terms ‘buyer’ or ‘seller’ either. That being said about the CISG, the application of the UNIDROIT principles and PECL also needs to be taken into account. The UNIDROIT principles were produced by a group of international scholars under the guidance of Professor Joachim Bonell and saw the first part of the UNIDROIT principles being published in 1994. The objective of the UNIDROIT principles was to summarize rule and practices relating to contracts that are common amongst the majority of legal systems across the globe in order to achieve harmonization. In this process, it has given more body to the Lex Mercatoria which throughout time has been criticized for being too vague and never giving a clear indication as to its contents. The UNIDROIT principles have also in the process proposed innovative solutions to satisfy the requirements of modern international trade. As such, the UNIDROIT Principles act as the framework or guideline within whose ambit international commercial contracts should be governed. Therefore, the UNIDROIT Principle will apply both in situations where parties have agreed to be governed by them as terms of their contract or in instances where parties agree for the contract to be governed by the general principles of the Lex Mercatoria. The PECL too has a similar history to that of the UNIDROIT principles and was first published in 1995. The PECL was published with the primary objective of making all EU public contracts bound by the PECL. It further provided for private parties also to expressly refer to and be bound by the PECL when entering into contracts. The application of the two principles is very similar in nature, despite the fact that the UNIDROIT principles apply international commercial contracts whereas the PECL applies to all types of contracts within the European Community. One other significant difference between the two is that the UNIDROIT Principles are applicable only for business to business (B2B) transactions whereas the PECL is applicable to business to consumer (B2C) transactions as well. Thus, as stated at the inception, unlike the CISG the UNIDROIT principles and the PECL are not legally operative instruments. Meaning they function more as soft law in comparison to the CISG which functions as hard law. As such, the PECL and UNIDROIT principles cannot be considered to be the governing laws of a contract, but rather can be incorporated into the terms of a contract. Moreover, when it comes to arbitration proceedings which function lex arbitri and parties are given the choice of selecting ‘rules of law’ which do not necessarily form part of a national legal system an arbitration tribunal will be allowed to surpass domestic mandatory rules. However, it should be noted that rules applicable regardless of the governing law will continue to be in force. Both the UNIDROIT principles and the PECL as mentioned before have a lot in common. First and foremost these principles can be used to fill in lacunas that exist in the national law of countries. Moreover, it also acts as a guideline for national courts and legislature in performing their duties. An important feature of the UNIDROIT principles is that due to its international applicability it also acts as a guide to supplement and fill gaps in international conventions such as the CISG. One of the main objectives of the PECL was to strengthen the single European Market while providing a singular law to govern contracts. This was done with the view of facilitating cross-border transactions within Europe with less complication. Another important reason for designing the PECL was to bridge the gap between civil law and common law systems especially with regard to contract law. Thus, it seems clear that both the UNIDROIT principles and the PECL have been heavily influenced by the CISG. These Principles covers the entire gamut of contract law, from the start i.e. formation to performance including remedies for non performance as well. A common element that holds all three of these instruments together is the concept of good faith and each instrument describes and deals with it in its own way. Article 1:201 of the PECL requires that parties act in accordance with good faith and fair dealing. Thus fraud and taking of unfair advantage have been stated as grounds for voiding a contract in order to ensure that parties act in good faith both prior to entering into the contract and throughout the performance up until the conclusion of the contract. This includes good faith during negotiations and even goes to the extent of not disclosing confidential information. Good faith in the PECL is considered a mandatory rule and goes a step further to qualify termination of a contract for trivial breach as contrary to good faith even though in reality it could be considered technically as non performance. However, the PECL does not specifically define the term “good faith’. The inclusion of the words ‘fair dealing’ in the PECL indicates that an objective test needs to be applied, and that will undoubtedly bring up in the least, some kind of honest but unreasonable behaviour. However, that does not mean that every failure to act in a reasonable manner would constitute a breach of the duty of good faith and fair dealing. The UNIDROIT Principles cover the requirement of good faith under Article 1.7 and while including the term fair dealings, goes a step further and maintains a broader aspect by adding the words ‘in international trade’. This is done in order to emphasise that the standards that are to be adhered to and applied are those that are followed internationally. The UNIDROIT principles also give the concept of good faith a relatively broad interpretation. An important thing to note in this instance is the once again both soft law principles being the PECL and the UNIDROIT principles deal with good faith similarly except for the fact that the PECL is limited to the European Community whereas the UNIDROIT Principles apply internationally. The CISG also deals with the principle of good faith in Article 7(1)[6]. This specifically deals with the CISG being interpreted as a uniform international law text. Thus, as per Article 7(1), the CISG should be interpreted and applied in such a way that good faith is observed in international trade and that the spirit of it is promoted throughout the globe. The difference between good faith being applied in the CISG as opposed to the UNIDROIT Principles and the PECL is that the CISG does not contain an express requirement that an individual contract should abide by the maxim of good faith whereas the other principles do. BIBLIOGRAPHY LEGISLATION: EU Principles of European Contract Law 1999 and 2002 INTERNATIONAL AGREEMENTS UN Convention on Contracts for the International Sale of Goods 1980 UNIDROIT Principles of International Commercial Contracts 2010 TEXTBOOKS Adams N.J, Atiyah P.S., Macqueen H, Atiyah’s Sale of Goods (12th Edition, Pearson Longman, 2010) Bradgate R, Commercial Law (3rd Ed, Oxford University Press, 2005) Goode R, Kronke H, McKendrick E, Wool J: Transnational Commercial Law (Part I, 2nd edn, OUP 2012) Richards P, Law of Contract (9th Ed, Pearson Longman, 2009) 1

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[1] UN Convention on Contracts for the International Sale of Goods 1980, Article 1(1) [2]UN Convention on Contracts for the International Sale of Goods 1980, Article 1(1)(a) [3] UN Convention on Contracts for the International Sale of Goods 1980, Article 1(1)(b) [4] UN Convention on Contracts for the International Sale of Goods 1980, Article 10(a) [5] UN Convention on Contracts for the International Sale of Goods 1980, Article 10(b) [6] UN Convention on Contracts for the International Sale of Goods 1980, Article 7(1)

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