What is “lex mercatoria”? How can it be used in the settlement of international commercial disputes? What are its strengths and weaknesses in this role?

The term lex mercatoria is derived from the Latin to mean “merchants’ law”.[1] From a historical perspective, the lex mercatoria was established in order to regulate the business dealings of merchants in particular places, such as markets, fairs, and sea ports.[2] The distinguishing factors of the lex mercatoria from standard local and international laws are fundamental. Firstly, the rules were and remain transnational, meaning that they are not limited by the boundaries sketched out by geographical maps and legal jurisdictions.[3] However, like the codification of the common law in England which continued to pick up pace after the Norman Conquest and the Battle of Hastings and was derived by a collection of the local laws,[4] the lex mercatoria was derived by considering the established rules through which merchants operated.[5] A further difference from the national and local laws is the fact that these rules were derived out of equitable fairness as opposed to principle.[6] The advantage of such a process in business transactions being the comparative rapid speed with which these laws were administered.[7]

It is argued that the need for the lex mercatoria has grown with globalisation as countries are no longer as discrete as they once were.[8] It is now very common for business transactions to involve parties from different countries, and when there are parties from different countries the disputes that can often arise can lead to an internal dispute as to which of the respective countries’ laws should apply. The use of the lex mercatoria can be a good way of circumventing the possibility of such disputes and can also remove concerns of not knowing and understanding the intricacies of the laws of the other jurisdictions. The other advantage of the lex mercatoria is that it can work well to remove undesirable elements of different national laws which some transactions many find unattractive – therefore the use of the lex mercatoria can make a business transaction more attractive.[9] Equally, the business will find arbitration using the lex mercatoria more attractive as it is generally cheaper than standard litigation.

But is the lex mercatoria enforceable in a national court? The New York Convention on Arbitration allows national courts to review decisions to turn to arbitration and there is a discretion to not allow them to be enforced. This adds a level of uncertainty as parties may fear that their arbitration decision may be reviewed and this can make the use of the lex mercatoria somewhat less attractive.

However, there is a final advantage to mention. As mentioned, the use of equity and fairness as opposed to precedent in relation the lex mercatoria means that the arbitrators are not confined to the contours of precedent which can hinder needed business development within the law. However, given the above concern in relation to the New York Convention, one can be forgiven for questing just how flexible arbitration really is.

In sum, the flexibility and ease of the lex mercatoria is attractive to businesses, but enforcement in national courts needs strengthening.

[1] Mads Henry Andenæs and Camilla Baasch Andersen, Theory and Practice of Harmonisation, (Edward Elgar Publishing, 2012), 394.
[2] Harold Berman and Colin Kaufman, ‘The Law of International Commercial Transactions (Lex mercatoria)’ (1978) 19(1) Harvard International Law Journal 221, 225.
[3] Ibid.
[4] Richard Schaffer, et al. International Business Law and Its Environment, (Cengage Learning, 2009), 76.
[5] Berman, H. and Colin, K. fn.2, 225.
[6] Ibid.
[7] Ibid.
[8] Fn.1, 393.
[9] Ole Lando, ‘The Lex mercatoria in International Commercial Arbitration’ (1985) 34(4) I.C.L.Q. 747, 748.