The Arbitrator, May, 1989 17

THE NEW LEX MERCATORIA

THE FIRST TWENTY-FIVE YEARS
PART I
by THE RIGHT HONOURABLE LORD JUSTICE MUSTILL

This is the first part of a two part article. The second and concluding
part will be published in the August 1989 issue of "The Arbitrator^,
Volume 8 Number 2.

Reprinted by consent, with minor amendments, from Liber Amicorum

for Lord Wilberforce, OUP(1987), and the London Court of International
Arbitration, publishers of "International Arbitration”. This article was
published in the April 1988 issue of "International Arbitration"}, Volume
4, Number 2.

Few readers are likely to welcome an article on the lex mercatoria by

an English lawyer. The common lawyer will not look kindly on an
addition to the extensive literature on what he may be tempted to regard
as a non-subject, having no contact with reality save through the medium
of a handful of awards which could well have been rationalised more
convincingly in terms of established legal principles. Conversely, a scholar
nurtured in other disciplines may well anticipate yet another reactionary
response to any doctrine lying outside the tradition of Anglo-Saxon
jurisprudence. Perhaps there is a middle course. The auspicious occasion
which this volume is designed to commemorate deserves better than a
reaction by rote or a routine polemic. The lex mercatoria has sufficient
intellectual credentials to merit serious study, and yet is not so generally
accepted as to escape the sceptical eye. It therefore seems appropriate
to try a fresh approach. Commercial arbitration exists for one purpose
only: to serve the commercial man. If it fails in this, it is unworthy of
serious study. The commercial man is a conspicuous absentee from the
writings on the lex mercatoria, and so indeed is his adviser. One may
therefore approach the subject from an angle rather different from the
one usually chosen. Imagine that a practical lawyer is retained to advise
a client who has become involved in a dispute which may lead to an
international arbitration. The lawyer knows enough about modern theory
to have heard of the lex mercatoria, and can envisage the possibility that
if the matter does come to arbitration, he may find that the arbitrators,
whose identities are at present unknown, may at least consider the
application of the lex. A conscientious practitioner, he recognises the
need to warn his client of this, and seeks to anticipate, and prepare himself
to answer, the questions likely to be asked by a businessman who
18 The Arbitrator, May, 1989
encounters the doctrine for the first time. These are likely to be on the
following lines. What is the lex mercatoria? What kind of law is it? When
does it apply? Does it enable the arbitrator to decide in equity, according
to his own inclinations? How does the lex mercatoria relate to national
law? What are its sources? How are its rules to be ascertained? What
are the rules, when so ascertained?
We may follow the adviser in his search for answers to these questions,
and conclude by asking—as he must surely ask himself—how the lex
mercatoria stands today, and what its prospects are for the future.
1. WHAT IS THE LEX MERCATORIA?
Although the concept of a new lex mercatoria had been foreshadowed
in earlier writings,1 systematic discussion of the concept first began to
flower in the early 1960s, under the stimulus of the London Conference
on the Sources of International Trade in 1962:2 hence the title of the
present essay. There followed several important treatises, including
influential discussions by Professor Berthold Goldman3 and Professor
C.M. Schmitthoff.4 The proposals have not by any means passed
unchallenged,5 and a lively debate has continued to the present day.
A useful starting-point would be a definition. Unfortunately, there
appears to be none which accommodates all opinions as to the nature
of the doctrine. The same turn of phrase means different things to different
scholars. The following may however serve to give the flavour;
A set of general principles, and customary rules spontaneously referred to or elaborated
in the framework of international trade, without reference to a particular national
system of law.6
A single autonomous body of law created by the international business community.7
This phenomenon of uniform rules serving uniform needs of international business
and economic co-operation is today commonly labelled lex mercatoria.6
The customs of the business community may combine all general principles of law
to create a system of commercial self-determination.9
. . . un droit ’transnational’, receptacle des principes communs aux droits nationaux,
mais creuset aussi des regies specifiques qu’appelle le commerce international. 10
Also, from a rather less enthusiastic hand:
... an anational lex mercatoria or ... a hybrid legal system finding its sources both
in national and international law and in the vaguely defined region of general principles
of law called ‘Transnational Law’.11
Notwithstanding the absence of any definition commanding general
acceptance which is at the same time sufficiently detailed to serve as the
focus of examination, it is possible to state certain propositions which
appear to reflect the majority of opinion.
In the first place, the lex mercatoria is "anational’.12 This concept has
two facets. First, the rules governing an international commercial contract
are not, at least in the absence of an express choice of law, directly derived
from any one national body of substantive law. Second, the rules of the
 The Arbitrator, May, 1989 19
lex mercatoria have a normative value which is independent of any one
national legal system.13 The lex mercatoria constitutes an autonomous
legal order.
A clear recognition of the anational character of the lex mercatoria
enables a number of misconceptions to be avoided. Thus, the fostering
of the lex mercatoria has nothing to do with the harmonisation of
international trade law. The aim of the latter is to minimise the differences
between the laws of individual nations, so as to provide a stable and
uniform basis for commerce. To the mercatorist the laws of individual
states are irrelevant, save as a quarry from which to draw the raw materials
for generalised rules.
Again, the lex mercatoria resembles in name alone the common body
of doctrine the reception of which into various national laws has ensured
that in matters of commerce there is a strong family resemblance between
laws of developed trading States. Cross-fertilisation between legal systems
has been a powerful instrument for more than two centuries in the
elaboration and refinement of national laws. So too has been the adoption
of propositions and concepts advanced by influential commentators who
command an international breadth of learning. Equally important has
been the recognition of trade practices acknowledged as binding, regardless
of national frontiers. But the national judge who draws upon this common
reservoir of rules and notions does so for the purpose of better fitting
his own law to the task in hand, not as a means of applying some other
body of rules in preference to the governing national law.14 Lord Mansfield,
whose memory is not infrequently summoned to provide common-law
credentials for the new doctrine,15 did undoubtedly speak of the lex
mercatoria, but I believe he would be astonished to learn that while availing
himself of the experience of his special jury and the wisdom of the learned
expositors, he was doing anything other than making sure that the English
law which he applied to the contract was serviceable, up to date and
intellectually sound. The idea that, sitting as he was in the court of King’s
Bench, it was his duty to set on one side the King’s law, and to apply
a law which was not the law of any nation, would have been quite foreign
to his mind.16
It is convenient at this stage to mention another misconception: namely
that the lex mercatoria is in some way connected with, or a reflection
of, the notion of transnational arbitration. The latter17 posits that there
exists a category of arbitration which is, or at least ought to be, detached
from the procedural laws of the country where the arbitration takes place,
or indeed of any other country, excepting only, in some limited degree,
the law of the country where the award is sought to be executed. The
subject-matter of the transnational doctrine in thus quite different from
that of the lex. So too are its theoretical foundations. Not even the most
enthusiastic transnationalist could claim that international commercial
arbitration is now wholly distinct from national arbitration laws, or that
20 The Arbitrator, May, 1989
it would be practical to sever all links with such laws, since the arbitral
process does from time to time need the help of the courts. The proponents
simply assert that the links should be no greater than are strictly necessary
to ensure that, through the coercive powers of the courts, a party who
wilfully fails to honour the letter and spirit of his agreement to arbitrate
can be brought into line. The theory of transnational arbitration is
essentially a statement of practical policy.
The concept of the lex mercatoria is quite different. It is not the positing
of an ideal which all concerned should unite to bring about. Of course
it is desirable that the lex mercatoria should be developed and promulgated.
Nevertheless, independently of any such endeavour, in the eyes of the
mercatorists the lex mercatoria simply exists. It springs up spontaneously,
in the soil of international trade. It is conceived to be a growth, not
a creation.
Thus the debate on transnationalism is about whether it can and should
be brought about. By contrast, the debate on the lex mercatoria is about
whether it can and does exist as a viable system. A mercatorist need not
be a transnationalist. There are, however, two possible points of contact.
In the first place, the premise of the transnationalist theory is that, although
an international commercial arbitration must in a physical sense take
place somewhere, in the legal sense it takes place nowhere. It therefore
cannot have a lex fori, and so cannot be the subject of any national
system of conflict of laws, such as would ordinarily be applied as part
of the lex fori. This is an interesting idea, which may be said to be reflected
in practice: for many practitioners would readily acknowledge that in
the small minority of cases where it makes the least difference what law
is applied to the substance of the dispute (for most disputes turn on
the facts and on the words of the contract), the arbitrators frequently
abstain from referring themselves explicity to the conflicts rules of the
country in which they happen to be sitting, but rather proceed to an
intuitive choice of the proper law. Whether this is because they are
transnationalists at heart, I venture to doubt. I think it more probable
that since the conflicts rules of most developed nations are much the
same, so far as concerns the choice of proper law, it is not usually worth
the trouble of deciding whether to follow one rather than the other.
A more testing question would be whether there is a body of
transnational conflicts law which governs matters such as status, capacity,
consent, and rights in rem. But about this, the mercatorists can have
nothing to say, since the function of the lex mercatoria is to expound
the content of the rights and duties of the parties under a contract which
is ex hypothesi valid as between them and them alone. Furthermore, in
the present context the debate is academic, since the purpose of the conflict
of laws is to enable the tribunal accurately to identify the national law
which governs the contract. This is precisely antithetical to the premise
of the lex mercatoria, which is that the arbitrator’s first step is to reject
 The Arbitrator, May, 1989 21

any national law as the governing law.18 Admittedly, it would be possible

to have a specialist conflicts system with only one rule—namely, that
all disputes concerning international trade should, when referred to
arbitration, be regulated by the lex mercatoria. But this is not, I believe,
the drift of the extensive literature on the topic.19
Another possible point of contact between the two theories lies in the
fact that transnational law seeks to release the substantive content of an
award from the control of a local court. If put into practice, this will,
it is said, enable the arbitrator to make a free choice of norms, unfettered
by any national law, and it will thus facilitate the development of the
lex mercatoria. This scarcely seems a convincing ground for assimilating
the doctrines. Absence of any method of demonstrating that the arbitator
has done wrong does not justify the inference that he has done right,
and the release of judicial control is at least as likely to encourage the
arbitrator to apply no law at all,20 as to apply the lex mercatoria.21
One final misconception is that the application of the lex mercatoria
is equivalent to a decision in 'equity’ according to the arbitrator’s own
personal ideas of justice. This understanding of the doctrine may be at
the root of the dismay with which it is still greeted in many circles not
only in common law countries. It does, however seem clear from the
writings that the classical mercatorist position is to regard the lex
mercatoria as a system of law, and not as an expedient for deciding
according to ‘non-law'. I will return to this point later.
I now turn to the second of the general propositions which emerge
from the literature: namely, that the prime sources of the lex mercatoria
are the principles of law common to trading nations and the usages of
international trade. These merit separate consideration.
Although the essence of the lex mercatoria is its detachment from
national legal systems, it is quite clear from the literature that some,
at least, of its rules are to be ascertained by a process of distilling several
national laws. The intellectual justification for this process is nowhere
clearly described, but it must, I believe, be found in the idea that the
rules of the lex mercatoria exist in gremio legis as a complete, albeit
inexplicit, and evolving whole; that they are received, at least in part,
into individual national laws or are reflected by them; and that by careful
analysis the dross of the rigidities, impracticabilities, and distinctions
imposed by each individual national law can be purged away, leaving
behind the pure gold of the underlying international legal order. This
rationale seems neither more or less convincing than an English
jurisprudential theory to which it bears some resemblance: that the
common law is revealed to and by the courts, rather than developed by
them.22 Quite apart from this, the concept of the lex mercatoria as being
in part a distillation of national laws soon runs into serious practical
difficulties. The proponents of the lex mercatoria claim it to be the law
of the international business community: which must mean the law
22 The Arbitrator, May, 1989

unanimously adopted by all countries engaged upon international

commerce.23 Such a claim would have been sustainable two centuries
ago. But the international business community is now immeasurably
enlarged. What principles of trade law, apart from those which are so
general as to be useless, are common to the legal systems of the members
of such a community? How could the arbitrators or the advocates who
appear before them, amass the necessary materials on the laws of, say,
Brazil, China, the Soviet Union, Australia, Nigeria and Iraq? How could
any tribunal, however cosmopolitan and polyglot, hope to understand
the nuances of the multifarious legal systems?24 In published awards the
arbitrators occasionally make large claims about the universality of
principles, but these are rarely if ever substantiated by citation of sources.
Equally if not more important is the question: How could any adviser
hope to predict what a tribunal not yet constituted might make of such
a task in the future?
Evidently oppressed by these difficulties, some proponents of the
doctrine have somewhat drawn back from the concept of what may be
termed a 'macro’ lex mercatoria, and have suggested that the law may
be one which is common to all or most of the states engaged in
international trade’.25 To some readers it may seem that this solution
gets the worst of all worlds. It fatally compromises the appeal of the
lex mercatoria as a lex universalis. It undermines the intellectual basis
of the doctrine, so far at least as this is understood to lie in the presumed
intent of the parties to the individual contract, for how can it plausibly
be asserted that a party of nationality X has tacitly agreed to submit
his relationship with a co-contractor to a generalised law which is
inconsistent with the national law of state X? In practice, moreover, the
idea seems quite unworkable. If there are two intellectually respectable
and firmly established doctrines on a particular issue, one adopted by
one group of legal systems and one by another—as does of course, quite
often occur, even within the modest horizons of the Western European
and common-law systems—how is the arbitrator to know which is adopted
by the majority of States? Surely not by arithmetic. When the generality
of trading nations enters into the calculation, it may verge on the absurd.
There may be instances in which, if the data were meticulously examined,
a number of solutions would be disclosed, all sustainable and none
commanding a majority. True it is that one or two of the very few reported
awards have claimed to apply rules of law adopted by the majority of
States; but I suggest that in reality this meant the majority of states with
whose laws the tribunal was familiar. This cannot be the basis of a
workman-like framework for the conduct of business relations.
Perhaps in response to these pressures, another concept has evolved.
By contrast with the world-wide horizons of the orthodox doctrine, there
has emerged the idea of what may be called a 'micro’ lex mercatoria.
This is a law merchant generated with specific reference to the individual
 The Arbitrator, May, 1989 23
contract. On this basis, the lex mercatoria need not be the same all over
the world. The arbitrator will tend to confine his investigations to those
legal systems which are connected with the subject matter of the dispute.26
Thus, the arbitrator will seek our ‘au sein d’un petit groupe de systems
juridiques’, an individual solution to the problem under scrutiny thereby
arriving at a partial internationalisation of private law.27 Looked at in
terms of the individual dispute, this does provide the arbitrator and the
adviser with a task which is more practicable to fulful. But what precisely
is the nature of this variety of lex? Is it to be supposed that there exists
a constellation of para-laws, Franco-Belgian, Anglo-Dutch, Italo-
Hispano-Korean, and so on, from which the arbitrator chooses the one
most appropriate to the individual dispute? The idea is surely fanciful.
The only alternative28 is that a law is newly minted by the arbitrator
on each occasion, with every contract the subject of its own individual
proper law. Whatever the merits of this concept, it appears to have no
point of contact with the classical lex mercatoria, conceived as a universal
and pervasive ‘arrire-plan‘29 underlying every arbitral decision in the
field of international commerce.
We may now turn to the second of the primary sources: namely,
international trade usage. Here again, there is a risk of imprecision through
the use of the same label to denote different concepts. At its widest, usage
is simply a practice which is generally followed. So understood it cannot
be a source of law or of individual legal rights. It can be such only if
the practice is generally followed because commercial men regard
themselves as bound to follow it in the absence of express stipulation
to the contrary. Nobody could deny that usage in this sense can be an
important element in the assessment by a tribunal of the rights and duties
created by the contract, either because in a codified30 or inexplicit form
it is tacitly incorporated into the contract, or because it has been received
into the relevant national law. But there is nothing special about
international trade in this respect, nor anything special about arbitration.31
Any worthwhile national court ought to be capable of taking usage into
account, without the need to accord to usage the status of a prime element
in self-contained system of law.
There is, however, a different form of usage to which some of the
proponents have had recourse, namely, the practice of contracting within
various trades, on standard forms of contract.32 The mechanism whereby
these terms become part of a standing body of law is rarely spelt out.
One suggestion is that they express the sense of justice of those who
draft and enter into them.33 I confess to some reservations about this
proposition. Often, one party to a standard form contract adopts it because
the other party gives him no choice. More important, the form does not,
it seems to me, reflect the ideas of anybody as to the justice of the
transaction, if indeed this concept has any meaning in the field of
commercial transactions negotiated between parties on an equal footing.
24 The Arbitrator, May, 1989
Rather, the form is designed to serve as a convenient peg on which the
parties can hang the specifically negotiated terms, without having to work
out all the details of the transaction from scratch. Experienced traders
are aware of the general financial balance of the transaction contemplated
by the standard form, and know the way in which it distributes the
commercial risks between the parties. With this in mind they can negotiate
towards agreement on matters such as price, delivery date, insurance,
demurrage, and so on. If the standard form is altered so as to throw
more obligations or risks on to one of the parties, the negotiated terms
will have to be adjusted to restore the balance. The second form will
be neither more nor less "just’ than the first.34 It simply calls for a different
assessment of the price in the widest sense of the term.35
Furthermore, there are serious practical objections to the use of standard
forms as a source of law. Quite apart from the fact that a single institution
within a single trade may publish a repertoire of different and mutually
inconsistent documents from which the contracting parties may choose
the most suitable to reflect the balance of their bargain, there coexist
in many trades a number of institutions, each offering its own standard
form; and it is, of course, a commonplace that parties alter the standard
forms to suit their own purposes. There is thus no guarantee of
homogeneity even within a single trade. Moreover it may legitimately
be asked by a participant in one trade should be supposed to have consented
to have his contract governed by rules drawn from contract forms current
in a quite different trade.36
Finally, it must be confessed that the mechanism whereby the use of
standard forms becomes a source of law is nowhere clearly explained.
The simple repetition of contracts on the same terms is an consistent
with the exercise of freedom of contract as with subordination to a system
of binding norms; indeed, far more so, since if the parties to a commodity
transaction do not wish to bind themselves to, say, the GAFTA37 Contract
Form No. 100, there is no legal or other institution which can compel
them to do so. Moreover, the repetition of transactions in the same form
could at most create a group of norms peculiar to the individual trade,
thereby creating a network of para-legal systems. This is inconsistent
with the theoretical premises of the lex mercatoria, which is that it springs
spontaneously from the structure of international commerce—and this
is plainly regarded as an indivisible whole.

11. WHAT KIND OF LAW IS THE LEX MERCATORIA?

This question cannot fruitfully be debated without some sort of common
ground about what is meant by a law, and what is meant by the lex
mercatoria. Since philosophers of law cannot agree about the one, and
 The Arbitrator, May, 1989 25
students of international law cannot agree about the other, the discussion
soon becomes clouded. Interesting as it is, the businessman would be
unlikely to linger over the question, and lack of space compels the present
author to follow suit.38 As Jenks pointed out, the question whether the
general principles of law, conceived as a system, can serve as the proper
law of a contract depends, not on any preconceived notion of what
constitutes a legal system, but on whether they can fulfil satisfactorily
in practice the function of a proper law, and are in fact used for that
purpose.39 To this the present author would add the rider that the
principles applied by the arbitrator must be such that they will be
recognised by courts as founding a valid award, for an unenforceable
award is not an instrument of law or of commerce. The reader must
form his own opinion on the question, but even the most ardent supporter
would hesitate to say that the lex mercatoria is yet ready to satisfy these
criteria in full.
One facet of the problem might however interest the businessman and
his adviser. If the transaction is governed by an international agreement
or a standard form of rules which require the arbitrator to choose the
daw’ which he deems applicable to the substance of the dispute, is he
thereby enabled to apply the lex mercatoria to the exclusion of any national
law? For example, is the lex a permissible choice under Article 33(1)
of the UNCITRAL Model Arbitation Rules or Article 13(3) of the ICC
Arbitration Rules of Article 42 of the World Bank Convention or Article
7 of the Geneva Convention or Article 28(2) of the UNCITRAL Model
Law? The point does not admit of much development, but I suggest
that the answer must surely be, no.40 Again, although there is room for
difference of opinion,41 the same answer suggests itself where there is
a reference to daw’ in the contract itself, or in the submission to arbitation.
The juridicial status of the lex mercatoria has another, more troubling
aspect. Let it be assumed that whether or not the lex qualifies as a law,
it has sufficient solidity to be capable in appropriate circumstances of
controlling the rights of the parties; then the question must be asked,
from where does its normative power arise? Here, I believe, there are
two deep-rooted divisions of opinion among the proponents, quite distinct
from the differences of emphasis already noted as to the respective weight
to be given to custom and the common core of national laws.
The first concerns the method by which the lex comes to govern an
individual transaction. One concept is that the lex is a standing body
of legal norms, which automatically applies ipso jure to every transaction
within its purview, unless expressly excluded. The other is that the lex
provides, so to speak, a repertoire of rules available to those parties who,
expressly or by implication, choose to incorporate them into their dealings,
and who, by the same token, choose to detach their contracts from the
national law to which they would otherwise be subject. There is really
no common ground between these two perceptions of the lex mercatoria^2
26 The Arbitrator, May, 1989
The second discontinuity in mercatorist theory concerns the role of
arbitration and the arbitrator. One view is that the lex is a constant
presence, applicable or not according to the circumstances of the individual
transaction. If it applies at all, it does so from the inception of the bargain,
and the sole function of the arbitrator is to uncover it and apply it to
the dispute in hand. The alternative opinion is that the lex mercatoria
reflects an economic order of which international arbitration is an
indispensable element. In making his award, the arbitrator does not simply
expound a lex mercatoria which is already there, albeit inchoate; but
rather creates new rules, which he then applies retrospectively to the
original bargain. Yet further away from the first concept is the notion
that, in the absence of established norms, the arbitrator exercises a creative
function, acting as a social engineer.43
It is plain that these appreciations of the lex mercatoria have little
in common. This may be illustrated by assuming that an international
arbitrator is faced with a previous award which is decided precisely the
question of law which brought before him. If the arbitrator’s function
is simply that of an exponent, then the second arbitrator need do no
more than pay appropriate respect to the reasons of his colleague, without
being obliged to arrive at the same decision. If he thinks fit, he is at
liberty to hold that his predecessor misunderstood the lex mercatoria.
Again, at the other extreme, if the first arbitrator has exercised a creative
function as a social engineer, his successor can fairly regard him as no
more than a part of the self-regulating mechanism of the contract under
which he acted, and can thus feel free to exercise the same function,
in a different sense, under his own contract. But if the intermediate theory
is correct, an award which enunciates a new rule thereby adds to the
corpus; and since the lex is conceived to be a binding law, the subsequent
arbitrator must apply it whether he agrees with the conclusion or not.
These examples may serve to explain why the present author has been
driven to the conclusion, after a study of the literature, that the theoretical
foundation of the doctrine has not yet been made explicit. Thus far, the
number of awards in which the arbitrator has set out to apply the lex
mercatoria has been so small that the theoretical problems have been
of little practical significance. But if the lex mercatoria is to assume the
role in a world which its proponents claim for it, there must be a clear
consensus about what the label actually means; for otherwise there will
be a risk of that inconsistency and uncertainty which is fatal to the efficient
conduct of commerce.
III. WHEN DOES THE LEX MERCATORIA APPLY?
Given the weight of analysis to which the lex mercatoria has been subjected,
it is surprising how little has been done to identify the criteria which
distinguish those transactions which are governed by it from those which
are not.
 The Arbitrator, May, 1989 27

One matter is treated by commentators as axiomatic: namely, that an

express agreement to apply the lex mercatoria will and must be honoured
by the tribunal, as well as the parties, and that such an agreement may
take the form of a reference to, say, the general principles of law recognised
by civilised nations or to the usages of international commerce.44
In the absence of express consent, it is generally held45 that the arbitrator
should proceed by three stages, asking himself first whether the application
in any national system is appropriate; then, if not, whether he should
proceed amiable composition or by the application of anational rules;
and finally, if the latter, what anational rules exist and are relevant to
the dispute. Various groups of factors have been regarded as relevant
to this process.
The first group concerns the parties themselves. Clearly, the fact of
their having different nationalities is important, and perhaps
indispensable. Their character is also material, since it is easier to hold
that the lex mercatoria, or that variant of it known as ‘the general principles
of law’, is relevant if one of the parties is a sovereign State or an entity
under immediate State control, especially in those cases where the proper
law of the contract, according to the orthodox conflicts rules, would be
the law of the State.46 It is also said to be significant if one of the parties
has a ‘transnational’ character, apparently because such parties are to
be regarded as existing in free space, detached from national allegiances,
and hence especially apt for subjection to a system of law which is similarly
detached.47
Other indicators relate to the nature of the transactions .It is said to
be significant, and perhaps conclusive, if the transaction has an
‘international character’. Apart from the obvious case where the parties
are of different nationalities, it is not clear what this expression implies.48
Is a contract between private parties of the same nationality for the carriage
of goods from one country to another or for the performance of services
abroad of an international character sufficient to make the lex mercatoria
applicable in a case where, according to ordinary principles, the law of
one of the two countries would be the governing law? The literature
does not develop the question.
The subject-matter of the transaction may also be relevant. It is plain
that many authors instinctively picture international arbitration as
concerned with disputes under complex contracts, negotiated ad hoc, for
the execution of major engineering or similar projects over a substantial
period of time. This is perhaps natural, since the attention of mercatorists
has tended to focus on awards springing from ICC arbitrations or from
ad hoc arbitrations, of considerable size and duration. These arbitrations,
which are not typical of international commercial arbitration as a whole,
are more readily accommodated within the concept of an isolated
autonomous legal system than the far more numerous arbitrations arising
from everyday informal commercial transactions. Yet it seems that even
28 The Arbitrator, May, 1989
the latter are regarded as being subject to the lex; for although the much
discussed ICC Award No. 2291,49 which concerned just such a transaction,
has been described as particularly ambitious as regards the manner of
reasoning,50 there is no suggestion by the commentators that the tribunal
should never have been thinking in terms of the lex mercatoria at all.
This seems far removed from practical reality. Disputes concerning sale
and transportation are being arbitrated by the thousand every year, and
the present author has never heard of any instance in which it has even
been suggested, let alone decided, in any such arbitration held in the
common-law world that in the absence of express provision the dispute
should be referred to an anational system of law.
Another group of indicators relates to the terms of a contract. This
is certainly understandable in so far as the application of the lex mercatoria
is taken to rest on express or implied consent; but it is less easy to
comprehend when the law is said to apply because the transaction is
effected within the matrix of the legal order constituted by international
commerce, for the transaction either is, or is not, of a type falling into
this category, and its terms as to jurisdiction and so on should be
immaterial. Be that as it may, the presence of a clause of amiable
composition is conceived to be material, for reasons which will be
mentioned below; it has also been suggested in the literature that the
inclusion of an arbitration clause or the choice of an international
tribunal51 or of a clause referring disputes to an international arbitration
centre52 are pointers towards the lex mercatoria. If this is right, then
international arbitrators have been mistaking their functions, day in, day
out, for many years.
Again, it has been suggested53 that the absence of a choice of law clause
is an indication that the parties wish to apply an anational system,
apparently because it shows that the parties could not agree about which
systems should govern. This striking proposition ignores the possibility
that the choice of a national law was so obvious as not to be worth
mentioning, or that the parties never thought about the matter at all.
Moreover, even if the parties had in fact disagreed, there seems no warrant
for inferring unanimity in favour of ruling out all potentially relevant
national systems and substituting an anational system of which only the
smallest minority of businessmen can ever have heard.
These are the factors which are said to be material to an arbitrator’s
decision to set aside national law, to direct himself towards a system
of law rather than a free equity, and to find that system in the lex
mercatoria. Unfortunately, it is not explained in the literature how he
is to perform this operation, and in particular, how much weight is to
be attached to the individual factors. The mercatorists can fairly respond
that there is no mechanical process for arriving, by way of the conventional
conflicts of laws, at a choice of the governing law; and that indubitably
a decision on this issue may be finely balanced and susceptible to differing
 The Arbitrator, May, 1989 29
conclusions. Nevertheless, the general nature of the exercise to be
performed is comprehended well enough. Looking for the 'closest
connection’, or some local variant, may be difficult to perform; but it
is not difficult to understand. By contrast, the process for deciding when
and when not to apply the lex mercatoria seems never to have been clearly
spelt out.
Two more points are important. The first concerns the application
of the lex mercatoria in cases where there is no arbitration clause and
the dispute necessarily falls to be decided by a national court. It appears
to be taken for granted that an express choice of the lex mercatoria would
be effective in such a case. This may be over-optimistic, for it cannot
be assumed that a national judge will be permitted by local law to enforce
such a choice, or will even know how to do so. There appears to be
little trace in the literature of attempts to apply the lex in national courts.
If this does, however, happen the question will arise whether the national
judge ought to apply the lex mercatoria to the exclusion of whatever
national law would otherwise be regarded as the proper law, even in
the absence of an express choice, in those instances where it would have
been applicable if the contract had contained an arbitration clause. (By
this I mean the lex mercatoria applied directly as a body of anational
law, rather than a series of trade customs carried into a contract via the
proper law.) It is disappointing that this problem has been so little
addressed for it discloses the existence of a fundamental uncertainty about
the theoretical underpinnings of the doctrine. If application of the lex
to the individual contract is seen as a matter of implied consent, then
the relative importance of the arbitration clause becomes crucial, for if
it is conclusive or near conclusive evidence of a wish to apply the lex,
then it might be said that its absence is equally significant; so that instances
in which a national court should give effect to the lex must be non­
existent or at best rare. Again, if the lex applies independently of consent
to all transactions falling within its purview, one must ask whether a
contract without an arbitration clause is within its purview. This in turn
raises the question whether the lex is generated by, and is an integral
and necessary part of, the societas mercatorium; or whether it is generated
by, and is an integral and necessary part of, international commercial
arbitration: two entirely different matters. These uncertainties will have
to be resolved before the lex can present itself convincingly to the business
community, which can hardly be expected to accept it as a substitute
for the existing regime in the absence of an explicit formulation of precisely
what it is.
Finally, it must be noted that the lex mercatoria has not yet laid claim
to the whole territory of potential disputes arising from international
commerce. Thus: (i) there appears to be no instance in which the lex
has been invoked in a case of pure delict; (ii) the lex has rarely been
applied where the issues are those of consent, fraud in the making of
30 The Arbitrator, May, 1989
a contract, and so on; (iii) the lex has not, as far as the present author
is aware, ever been credited in the literature with a power to create rights
in rem, valid as against third parties—for example, by way of a transfer
of title of corporeal assets, or pledge, or the creation of a monopoly such
as patent or copyright. This is explicable, and indeed inevitable, if the
lex is regarded as applicable only by express or implied consent, but
is harder to understand if it is merely a reflection of the international
commercial organism. Moreover, once it is accepted that the lex may
on occasion have to be applied to some aspects of a dispute, whereas
national law is applied to others, the practical attractions seem less
apparent.

1 eg Professor Jessup, Transnational Law (1956), in which the word ‘transnational’

appears first to have been put into circulation.
2 Proceedings collected and edited by C.M. Schmitthoff as Sources of International Trade
(London, 1964).
3 ‘Frontieres du droit et “lex mercatoria” 9 Archives de philosophic du droit (1964),
177. (hereafter Goldman ‘Frontiers’). The concepts and the problems to which it gives
rise are here exposed with such moderation and felicity of expression that this study
remains essential reading today, notwithstanding the wealth of writing which has
succeeded it.
4 Notably in Sources of International Trade, supra, no. 2, and ‘Das neue Recht des
Welthandels’, 28 Rabels Z. 47 (1964). Among other significant contributions, mention
must be made of Ph Fouchard, L’Arbitrage commercial international (Paris, 1965),
esp Articles 604 ff Ph Kahn, in Festschrift Schmitthoff (Frankfurt, 1973), echoing earlier
work in La Vente commerciale internationale (Paris, 1961); E. Loquin, L"Amiable
Composition en droit compare et international (1980); Goldman, ‘La Lex Mercatoria
dans les contrats et l’arbitrage internationaux: Realite et perspectives’, [1979]. Clunet
Journal du droit international, 475 (hereafter Goldman, Realite et Perspectives’), and
also in Contemporary Problems in International Arbitration (1983) (hereafter,
Contemporary Problems); a series of commentaries by Y. Derains on International
Chamber of Commerce arbitral awards, published in Clunet, from 1974 onwards, and
also ‘Le statut des usages du commerce international devant les juridictions arbitrates’,
[1973] Rev. Arb. 122; and interesting summary of unpublished awards in J. Lew,
Applicable Law in International Commercial Arbitrations (New York, 1978); a seminal
study of the topic in its relation to the conflicts of laws in P. Lalive, ‘Les Regies
de conflit de loi applicable au fond du litige', [1976] Rev. Arb. 155; Schmitthoff, in
Commercial Law in a Changing Economic Climate, 2nd edn., (1981), 18 ff; M. Bonnel,
in I UNIDROIT New Directions in International Trade Law (1977). More recently,
there have been studies of O. Lando, ‘the Lex Mercatoria in International Commercial
Arbitration’, 34 ICLQ 747; B. M. Cremades and S. L. Plehn, ‘The New Lex Mercatoria
and the Harmonization of the Laws of International Commercial Transactions’, [1984]
Boston Univ. IL] 317; W. Lorenz, Festschrift fur Karl H Neumeier (1986); E. Loquin,
Apport de la jurisprudence arbitrale: LfApplication de regies anationales (Paris, 1986);
(hereafter Loquin, Apport) P. Lalive, Transnational (or Truly International) Public
Policy and International Arbitration: Proceedings of the ICCA New York Conference
(1986) (hereafter Lalive, ICCA). Indispensable to the enthusiast is the collection of
essays in Le Droit des relations economiques internationales: Etudes offerts a Berthold
Goldman (Paris 1982) (hereafter Etudes Goldman).
5 Amongst the writers who have questioned the mercatorist position are F. A. Mann,
P. Schlosser, F. E. Klein, and P. Lange. Since the purpose of this essay is to examine
 The Arbitrator, May, 1989 31

that position, rather than attack it, I have not quoted extensively from the critics.
They do, however, seem to me to have landed some powerful blows.
6 Goldman, Contemporary Problems, 116.
7 Cremades and Plehn (supra, n. 4), 324.
8
N. Horn, Introduction to The Transnational Law of International Commercial
Transactions (1984).
9 W. L. Craig, W. W. Park, and J. Paulsson, International Chamber of Commerce
Arbitration (Paris 1984), Article 35.02.
10 Goldman, ‘Frontiers’, 1984.
11
H. A. Grigera Na6n, The Transnational Law of International Commercial Transactions
(supra, n. 8), 89.
12
The term ‘regies anationales’ was, it is believed, coined by P. Fouchard in L’Arbitrage
(supra, n. 4), passim.
13 This is a paraphrase of principles stated by several authors, and may not be entirely
accurate. Loquin Apport, expresses the second part of the principle by saying that
the rules of the lex mercatoria ‘echappent a 1’emprise de tout ordre juridique etatique’.
14 The point that when the old lex mercatoria was incorporated into the national laws
of Europe it ceased to exist as an international system of law is very clearly made
by C. M. Schmitthoff in Commercial Law in a Changing Economic Climate (supra,
n. 4), 18 ff.
15 As Holdsworth has pointed out (History of English Law, Vol. 5, p. 119), the manner
of development of English commercial law, and hence of the numerous common­
law systems which have sprung from it, differed substantially from the contemporaneous
evolution in the cities of Continental Europe. It is, I believe, unwise to found any
generalisation upon it or to draw any modern parallels.
16 The great contribution of Mansfield was to bring a new depth of learning to the
common law, which had hitherto been insular and uninformed.
17 Some reflections by the present author on transnational arbitration may be found in
Current Legal Problems (1984).
18 See Goldman, ‘Realite et Perspectives’ 492.
19 This is not intended to be dismissive of what is an interesting and difficult practical
problem. There is an extensive literature, led by Lalive, (Les Regies de conflit (supra,
n. 4). Some writers advocate a cumulative application of potentially relevant rules
of conflicts. This will usually yield the ‘closest connection’ test or something like
it. But the arbitrator may feel, when looking for the presumed intention of the parties,
that this is not enough—for example, where one party is a sovereign State, and where
the closest connection rule would yield the law of that State. The arbitrator might
conclude that one party could not have intended that the other should have the power
unilaterally to change the governing law. (See the arbitration Sapphire v. NIOC and
note J. F. Lalive (1984) 13 ICCJ 987, 1011). But there is nothing transnational or
mercatorist about this. A national judge might well take the same view. There are
several relevant awards, including some made under the auspices of national rather
than avowedly non-national institutions. These can be found in successive editions
of YBCA. Among the ICC awards are some in which the arbitrators proceeded directly
to a choice of law: eg 1717, Clunet (1974) 890; No. 2129, 2 YBCA 219 No. 2886, Clunet
(1978) 991; No. 3380, Clunet (1983) 897; and a number of unreported awards in Derains,
Clunet (1977) 949. In others, the arbitrators have gone through a more orthodox
procedure: eg ICC No. 2735, Clunet (1977) 947; No. 1455 3 YBCA 215; B. P. v. Libya
5 YBCA 143; No. 1593 3 YBCA 216; No. 2637 2 YBCA 153. Sometimes again the
arbitrators apply general principles, but check the results against the lex fori as in
No. 2583, Clunet (1975) 950. On other occasions the arbitrators have decided that since
the two competing laws are the same in all material respects, there is no need to
make a choice: eg No. 2272, 2 YBCA (1977) 151. I suggest that this is an example
of Occam’s razor, not the lex mercatoria.
32 The Arbitrator, May, 1989
20 Loquin has suggested that the absence of a general requirement of reasoned awards
in English law permits clandestine amiable composition (L’Amiable Composition,
cited by Cremades and Plehn, (supra, n. 4) 333). Experience suggests that this occasionally
happens, but it should not do so unless it accords with the wishes of the parties.
A theory cannot gain credence from the fact that arbitrators may be able to act contrary
to mandate without rebuke. (The question as to whether an award by an arbitrator
who has purported to act as an amiable compositeur or to apply the lex mercatoria
in the fact of an expresss or implied agreement to the contrary will be susceptible
to interference by the local court is a complex issue of municipal law beyond the
compass of this essay.)
21 See Cremades and Plehn (supra, n. 4), 85.
22 At first, it seems altogether more in accordance with real arbitral life to envisage the
arbitrator as proceeding directly and often tacitly against an assumed background of
general principles. See eg Goldman ‘Frontiers', 183. But in the end this surely means
no more than that the arbitrator is intuitively generalising from his own, possibly
imperfect, experience of the major systems of commercial law.
23 So stated, in relation to the principle in question, in ICCA Award No. 3844, Clunet
(1982) 978.
24 In the literature, the use of legal encyclopaedias is sometimes advocated. I suggest
that these are usually worse than useless for this particular purpose, unless the reader
is guided by someone with direct knowledge: a little learning is indeed a dangerous
thing. Anyone with practical experience of international disputes must acknowledge
the difficulty of making an accurate assessment of the law of only one unfamiliar
legal system, absent the kind of prolonged and expensive expert guidance which would
be quite out of the question if dozens of different laws had to be assimilated.
25 Lando, ‘The Lex Mercatoria', (supra, n. 4). So also ICC Award No. 2583, Clunet (1977)
950’ . . . Admis communement de la plupart des pays’.
26 Lando, 750 and also 766.
27 Fouchard, L"Arbitrage, (supra, n. 4), 424.
28 An intermediate solution has been proposed whereby the lex is derived from the national
laws for countries in various groupings, such as the EEC and Comecon: see Matrey,
Lib. Am. Sanders, 244. Unfortunately, one has only to look at the diversity of laws
within the EEC to see that even this is likely to be too ambitious—for the time being,
at least.
29 Goldman’s expression in Frontier, p. 183.
30 As eg in the case of INCOTERMS.
31 Article 7(1) of the European convention, Article 33(3) of the UNCITRAL Rules, Article
13(5) of the ICC Rules, among several others, require trade usages to be taken into
account. But the position would surely be just the same without them.
32 A reading of Prof. Goldman’s published works on the topic indicates that this scholar
would attach particular importance to standard-form contracts.
33 See eg. R. David, Arbitration International Trade (Deventur, 1985), 352.
34 In the days when the shipping industry was more varied than at present, and the
standard forms were more numerous, some forms were regarded as owner’s forms,
others as charterer’s forms, to reflect the way in which the risks were distributed. They
simply called for different assessments of freight and other financial incidents. I doubt
whether it crossed anybody’s mind that one form was more ‘fair’ than another.
35 This point often escapes those who, under the auspices of international agencies, have
urged changes in international legislation to favour importing countries (or, sometimes,
exporting countries). They overlook the fact that in the commercial world something
is rarely had for nothing. For example, if carrier bears more of the risks, the freight
charges ultimately borne by the importer will have to be increased to reflect the extra
costs of the carrier’s liability insurance. One basis for the contract is no more fair
than the other.
 The Arbitrator, May, 1989 33
36 This point is clearly made by P. Lagarde in Etudes Goldman, 136.
37 The Grain and Feed Table Association Limited of London, the successor to the London
Corn Trade Association, whose standard forms have not infrequently been called up
in the literature as exemplars of this particular source of the lex mercatoria.
38 There is a wealth of literature on this subject. It was addressed at the very beginning
by Goldman, in ‘Frontiers’, with conspicuous moderation and realism. More recently,
there have been penetrating analyses by J. D. Bredin and P. Lagarde, in Etudes Goldman',
and the present author has nothing useful to add to these.
39 In the Proper Law of International Organisations (1962).
40 As to the Geneva Convention, see L. Kopelmanas, Revue trimestrielle de droit
commercial (1957), 895.
41 As demonstrated by Soc. Fougerolle v. Banque de Proche Orient [1982] Rev. Arb. 183,
the decision in which I would venture to question.
42 The dichotomy is clearly stated by Loquin, Apport, para. 20. The word ‘spontane’
is often used in relation to the first theory, e.g. Goldman ‘Realite et Perspectives’,
476, ed Contemporary Problems, 114.
43 The terminology is that of Lando (supra, n. 4), 110.
44 There seems to be no example of a reference to the lex mercatoria in so many words.
Examples of formulae employed in practice may be found in P. Weil, in Etudes Goldman,
p. 387 ff. Not all these formulas will serve to call up lex.
45 Loquin, Apport, Article 13, and Goldman, ‘Realite et Perspective’, 480 ff. Y. Derains
proceeds on the same assumption.
46 Otherwise there is a real risk that the state may change its law adversely to the other
party. Whether there is a real need for the lex mercatoria in such a case, or whether
sufficient protection can be obtained from the ordre public of the lex fori is, perhaps,
debatable. The mercatorists are certainly on their strongest ground here, but care must
be taken not to place too much weight on cases, interesting as they are, such as Sapphire
International Petroleum v. NIOC (1984) 12 ICLQ 987, note by J. F. Lalive, and also
at 1011; Liamco v. Government of Libya (1981) 6 YBCA 89; Government of Kuwait
v. Aminoil (1982). YBCA 71; and International Legal Materials (1982), 976-1053, for
the terms of the contracts or the submissions expressly opened up the possibility of
looking beyond the national law. Moreover, there scarcely seems enough consistency
of decision even within this small group of cases to create much confidence in the
existence of universally accepted principles. (Note also the refusal in the last-mentioned
case to apply a suggested "lex petrolea'.) The ‘Pyramids’ case, SPP (Middle East) v.
Arab Republic of Egypt, ICC no. 3493,9. YBCA 111, is however, close to the mercatorists’
point.
47 This is not the place to debate the concept that there exist types of corporation or
group which can properly be assigned to a separate category labelled ‘transnational’,
which deserve and automatically obtain the benefit of a special legal regime, more
flexible and practical than ordinary national laws.
48 Loquin, Apport, Article 5, quoting P. Kahn, speaks of relations ‘internationales par
nature, . . . parce que des leur origine, en fonction de leur objet, elles ne situent pas
dans un cadre etatique.
49 Clunet (1976) 989.
50 Goldman, ‘Realite et perspectives’. The attention given to this award does perhaps
suggest a certain shortage of raw material in the mercatorist terrain. The case is rather
economically reported, but it appears to be one which the arbitrators could have decided
by reference to the terms of the contract, the facts, and some commercial common
sense, without reference to any national law, still less the lex mercatoria.
51 Loquin, Apport, Article 19; Goldman, ‘Realite et perspectives’, 480 ff. Since few
arbitration clauses nominate the arbitrators or specify the latters’ nationality in advance,
it is evidently assumed that where the parties are of different nationalities and each
has the right to nominate an arbitrator, they will always choose someone of their
34 The Arbitrator, May, 1989
own nationality, thus making the tribunal multi-national. This assumption is not
justified, since the great majority of commodity and shipping arbitrations, including
those conducted ad hoc, the nominated arbitrators are of the same nationality as each
other.
52 Loquin, Apport, Article 27, citing unreported ICC award No. 1569. These criteria
are not, of course, the same. It is not clear when an arbitration centre ranks as
international for this purpose. Would the Society of Maritime Arbitrators or GAFTA,
whose clients are mostly foreign, come into this category?
53 Loquin, Apport, Article 19; Goldman, ‘Realite et perspectives’, 480 ff., citing ICC
Nos. 1641, 2291, and 2583.

ALTERNATIVE DISPUTE RESOLUTION CLAUSES

FOR
DOMESTIC CONTRACTS AND AGREEMENTS

The following Clauses are recommended by The Institute of

Arbitrators Australia for inclusion in domestic contracts and
agreements:

— Where ARBITRATION is the preferred method of settling

disputes

"Any dispute or difference whatsoever arising in connection

with this contract shall be submitted to arbitration in
accordance with and subject to The Institute of Arbitrators
Australia Rules for the Conduct of Commercial
Arbitrations.”

— Where EXPEDITED ARBITRATION is the preferred method

of settling disputes:

"Any dispute or difference whatsoever arising in connection

with this contract shall be submitted to arbitration in
accordance with and subject to The Institute of Arbitrators
Australia Expedited Commercial Arbitration Rules.”

— Where either CONCILIATION OR MEDIATION is the preferred

method of settling disputes:

"If any dispute or difference arises between the parties to

this contract they will consider resolving it in accordance
with The Institute of Arbitrators Australia Rules for the
Conduct of Commercial Conciliations.”

Copies of the Institute Rules referred to in the above Clauses and

Explanatory Notes are freely available from the Institute.