INTERNATIONAL COMMERCIAL ARBITRATION - Essay Example

International Commercial Arbitration (Lex Mercatoria) Introduction Globalization has paved the way for complex commercial transactions to exist. There are spheres in trade and commerce that are not well-regulated by the “law of nations.” As such, more and more conflicts arise with regard to the system of exchanging goods and services. Property and civil rights are the two main subject matters involved in almost every dispute that calls for an impartial resolution. The rights and obligations of the contracting parties as expressed in a contract are always given the highest consideration in arriving at a fair judgment. Nonetheless, due to the clash of trading principles, it is often difficult to come up with an equitable decision which is favoured by the parties. In view of that, business-minded individuals (merchants) have led the call for an international tribunal who will decide on conflicting claims pertaining to international commercial dealings. Thus, the phrase “international commercial arbitration” has been formulated and put into issue. International commercial tribunals have been created—settling disputes by integrating the different principles in trade and commerce—mostly applying the “lex mercatoria” (law of merchants). In this sense, it can be stated that “the lex mercatoria is indeed a live subject: more so today than at almost any time over the last generation” (Fortier, 2001). Arbitration “Disputes are inevitable occurrences” in international relations especially in commercial transactions—failure or refusal to pay in accordance with the stipulations provided in a contract is one of the main causes of conflict (Lew, et al., 2003). To settle the differences of the contracting parties, alternative dispute resolution mechanisms are made available. Arbitration is actually one of the non-judicial methods of settling commercial disputes which has been exhaustively applied by some states and entities. In fact, some of the countries in the world have included arbitration as part of their law on civil procedure like Germany and France. Arbitration is a procedure by which conflicting claims of two or more individuals or entities with regard to their shared rights and obligations is heard and resolved by an arbitrator—the agreement reached by the parties has a binding effect (Halsburys Laws of England, as cited in Lew, et al., 2003, p. 3). As such, it has four fundamental features which include the following: an alternative to judicial proceeding, a private way of resolving disputes, parties can select and control the process, and final resolution of parties rights and liabilities (Lew, et al., 2003). Moreover, arbitration is a dynamic process which varies accordingly—depending on “law and international practice” (Lew, et al., 2003). It is “not a national court procedure,” “not an expert determination” and above of all it is not mediation or any of the other means of dispute resolution (Lew, et al., 2003). One of its obvious advantages “over litigation is party autonomy”—the parties to a particular case submitting their conflict to an arbitration proceeding can actually expect the whole process “to be private, expeditious and final” (Cobb, 2001). Since 1960’s—the period when the world started to expand in different horizons dramatically, arbitration became international in scope and application. Needless to state, trade and industry have made contractual relations complicated—the reason why the governments of the world felt the need to put up an international tribunal which will decide cases involving international commercial transactions—realization of the necessity to have a “global set of standards and rules to harmonize and modernize the assortment of national and regional regulations which will regulate international trade” (UNCITRAL, n.d.). Hence, an “international commercial tribunal” was developed—an independent and impartial decision-maker which “produces a legally binding and enforceable ruling” (Born, 2001). History and Concept of Lex Mercatoria Lex Mercatoria or commonly referred to as “mercantile law” can be traced back during the middle ages—the period when cross border economic relations have flourished in Western Europe (Rodriguez, 2002). The merchants then were solving international disputes basing upon customs and traditions developed by them in commercial transactions—market tribunals were set up by the different trade centers in Europe (Rodriguez, 2002). The creation of this law spurred from the effort of the European traders at that time to replace the fragmented and outdated rules of the feudal lords which were no longer applicable to local and international trade. This commercial law reigned for eight hundred years in the entire Western Europe (Rodriguez, 2002). During the 19nth century, European states showed an immense nationalism and codified their respective laws (Rodriguez, 2002). Since then, the “law of the merchants” has lost its uniform character and disputes were solved by having private international law or otherwise “conflict of laws” as a reference (Rodriguez, 2002). However, after World War II, the international community became aware of the consequences of a system of trade which is divided by various legal frameworks—so, states conducted several conferences aiming for the adoption of model laws in the field of arbitration, leasing and sales—this resulted to a partial harmonization of trading principles (Rodriguez, 2002). In 1960’s, the traders questioned the use of national laws in solving conflicting commercial claims and searched for other ways to settle commercial disputes like considering an international commercial arbitration—making a rebirth of the lex mercatoria—the “new lex mercatoria” (Rodriguez, 2002). At one hand, there is no settled definition of the term but it can be generally defined as the set of rules which is “different in origin and content” created for the sole purpose of serving “the needs of international trade” (Rodriguez, 2002). It is considered as the most important development in international or transnational law—a kind of law that is applicable to different states. In contrast with national law, lex mercatoria is regarded by autonomists as having an independent character, autonomous from any other national system—hence, it is to be applied and elaborated in accordance with the legal structure of international trade (Rodriguez, 2002). Positivists on the other side characterized the law as having a transnational origin existing only by virtue of state laws—it is ultimately based on national law (Rodriguez, 2002). Basically, the Latin phrase can be described as autonomous, an alternative, a conglomerate, synonymous to transnational law but narrower in concept, customary and spontaneous by nature (Murcia, 2006). Furthermore, lex mercatoria is regarded by many critics “as a third legal system together with domestic law and public international law” (Pryles, n.d.). Professor Berger defined it as “the combined perspective of comparative law, usages, customs, and practices of international commerce and trade leading to the evolution of transnational legal principles, rules and standards which are applied in practice in order to arrive at economically sensible solutions to transnational commercial disputes” (Pryles, n.d.). The “supposed sources of lex mercatoria” are the following: “public international law, uniform laws, general principles of law, the rules of international organizations, customs and usages, standard form contracts, and reporting of arbitral awards” (Pryles, n.d.). Theoretically, lex mercatoria or the general principles of international commercial law “lacks generality and predictability,” vague and incomplete, and is not binding in any case according to some authors who have refused to recognized its existence and usage as one of the basis in solving international commercial disputes (Rodriguez, 2002). First, it lacks generality—the diversity of standards and usages in a contract makes it hard for the arbitration tribunal to create “a homogenous legal source” (Rodriguez, 2002). Also, the confidentiality nature of the arbitral decisions has made it impossible for the lex mercatoria principles to become precedents—only few arbitral awards are published by the international arbitration tribunals. Second, the principles of lex mercatoria are so broad that there is always a room for different interpretation and application—making the law complex as ever. Third, the mercantile law does not have a binding force since it is only formulated by the business sector of the community basing on customs and traditions known to them—so, it does not have a legal effect that actually puts an end to an issue (Rodriguez, 2002). Lex Mercatoria (As a Live Subject) The application of national laws at domestic transactions, “to trans-national contracts has always been uncomfortable”—what is better and more appropriate “is to apply international commercial laws to international commercial transactions” (Pryles, n.d.). This is the rationale of establishing an international commercial arbitration tribunal which formulates the rules to be observed and complied with in cases parties to a dispute decide to solve their conflicting contractual claims by submitting to an international arbitration proceeding—lex mercatoria is one of the legal basis applied by this tribunal. As commercial transactions become more and more complicated, international arbitration tribunals find it practical to base their decision on the principles underlying the lex mercatoria—it is rather a more live subject at the present than before. Yves Fortier (2001, p. 121) has cited that lex mercatoria is more controversial today “because it transcends the constraints of any given juridical tradition.” The principles underlying such body of law has been consistently applied by international commercial tribunals in deciding cases much more at the present legal setting—since there is really no unified and organized system of settling commercial disputes to govern the international community—“conflict of laws” always happen, whether to apply the national law or the international law. It is contended that if the commercial dispute could not be resolved by applying the national law—like for instance, the parties did not include “a choice of law clause” in the contract, then the international law will apply—an international commercial tribunal comes in. Relevantly, in solving disputes, parties are given the option of settling it through a court of justice or through an arbitration proceeding. In arbitration proceeding, there is an issue with regard to what law shall apply in interpreting the contract—what the courts have said is that the contract should be read in such a way that the original will and intention of the parties are given effect. However, despite the many cases wherein international tribunals have cited lex mercatoria in arriving at a decision, there is still a question of whether such is a law or not. Nonetheless, the principles underlying lex mercatoria has been widely recognized by the commercial laws of the various states in the world. It is one of the general principles of international law specifically tackling aspects regarding trade and commerce. In solving international commercial disputes, the international commercial arbitrators are not obliged to apply any of the “national private international law rules” because their authority and jurisdiction is founded on the will of the parties as expressed in the contract and not based on “the sovereignty of a state” (Rodriguez, 2002). These arbitrators in most cases are given the option “to apply non-national law if the parties” to the case consent “or in the absence of expressed choice of the applicable law” to be used (Rodriguez, 2002). The international tribunals can either apply the following international commercial laws: “article 17 ICC Arbitration Rules, article 28 of the UNCITRAL Model Law on Arbitration, or article 7 of the 1961 European Arbitration Rules” (Rodriguez, 2002).Considerably, other rules “allow the arbitrator to directly find the substantive law” appropriate to the commercial dispute “without previous recourse to private international law”—“example, article 1496 of the French New Code of Civil Procedure, article 1054 of the Dutch Arbitration Act” and Section 1051 of the German Arbitration Act (Rodriguez, 2002). In addition, the tribunal may also refer to the so-called “modern expression of lex mercatoria”—the UNIDROIT Principles of International Commercial Contracts of 1994 (Pryles, n.d.). The ICC Rules of Arbitration The International Chamber of Commerce (ICC), a world business organization has published its recent rules in international commercial arbitration—enforceable as of the first day of January 2008. Article 17 of this law provides: “(1)The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute (2) In all cases the tribunal shall take account of the provisions of the contract and the relevant trade usages” (International Chamber of Commerce, 1998). It is clear in the quoted provision that the world business community has recognized the validity of lex mercatoria as basis in arbitrating commercial disputes. This written evidence shows that lex mercatoria or the body of trade usages is very much alive today as it is being instituted in the amended ICC Rules of Arbitration. Nevertheless, the parties to this organization are given the option to settle commercial disputes by referring to other international arbitration tribunals. In the case of Norsolor (France) vs. Pabalk (Turkey) decided by the Court of Arbitration of the International Chamber of Commerce in 1984, the ICC arbitrators based their arbitral award on lex mercatoria—relying “on equity to decide on liability and to assess” the amount of damages (International Commercial Arbitration, 2008). The ICC tribunal contended that the principles of “good faith and commercial reasonableness were part of lex mercatoria” (International Commercial Arbitration, 2008). The tribunal further stated that it cannot be denied that in compliance “with the ICC Rules of Arbitration,” the arbitrators have adopted the law assigned “by the conflict of laws rule which they deemed appropriate”—“the general principles of obligations generally applicable to international commerce” (International Commercial Arbitration, 2008). In a 1999 case decided by the ICC international arbitration court—ICC Award No. 9875, the international tribunal concluded that the license to make products and sell them worldwide between the companies from Japan and France is not to be “governed by the national law” of either parties for failing to provide such agreement in the contract (Trans-Lex, n.d.). The applicable “rules of law to apply are those of the lex mercatoria”—“the rules of law and usages of international trade which have been” consistently discussed by the various “sources such as the operators of international trade themselves, their associations, the decisions of international arbitral tribunals and some institutions like UNIDROIT and its recently published Principles of International Commercial Contracts” (Trans-Lex, n.d.). Significantly, in a more recent case released by the ICC on 2003—ICC Arbitral Award No. 1211, the international commercial tribunal highlighted the subject stipulation in the contract stating that it shall be “governed by international law” (Trans-Lex, n.d.). Consequently, the arbitrator declared that the phrase “international law” “refers to lex mercatoria and the general principles of law applicable to international contractual obligations” (Trans-Lex, n.d.). UNCITRAL Model Law on Arbitration Same with the ICC Rules of Arbitration, the “UNCITRAL Model Law on Arbitration” also expressly contains a statement recognizing the application of lex mercatoria in settling international commercial disputes brought before it. Countries such as Great Britain, Japan, United States, France, Germany, Canada and New Zealand have actually adopted this law (Walker & Ellison, 2008). Take for instance, the German Arbitration Act which provides statements respecting the use of lex mercatoria as exemplified by UNCITRAL. Chapter VI, Section 1051, paragraph 1 and 4 of this law states that: (1) The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute / Any designation of the law or legal system of a given state shall be construed, unless otherwise expressed, as directly referring to the substantive law of that state and not to its conflict of laws rules (4) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. (German Arbitration Act, 1998) Conclusion In some instances, it is more practical to apply the general principles of commercial law as adopted by the international community rather than the national commercial laws of the parties in a commercial dispute. This is due to the fact that more often, conflict of laws arise—national or domestic law versus international law. An equitable decision can be had if an entity outside the jurisdiction of the parties is going to resolve the issue. However, since countries in the world have different legal frameworks, no uniform and organized body of rules in commercial law can be deducted despite several conventions—the reason why arbitrators apply trade customs and usages in resolving cross-border commercial disputes. Hence, lex mercatoria will always be applicable along with the rapid move for commercialization and globalization. References Born, G., 2001. International commercial arbitration. Hague, Netherlands: Kluwer Law International. Cobb, M., 2001. Domestic court’s obligation to refer parties to arbitration. Arbitration International, 17 (3), pp. 313-325. Fortier, Y., 2001. The new, new lex mercatoria, or, back to the future. Arbitration International, 17 (2), pp. 121-128. German Arbitration Act 1998. (c.6). [PDF file]. International Chamber of Commerce. Rules of Arbitration 1998. (Art.17). [PDF file]. International Commercial Arbitration, 2008. Norsolor v. Pabalk. International Arbitration Institute. [Online] (Updated 24 Nov 2008) Available at: http://arb.rucil.com.cn/enarticle/default.asp?id=196 [Accessed 21 April 2010]. Lew, J. Mistelis, L. & Kröll, S., 2003. Comparative international commercial arbitration. Hague, Netherlands: Kluwer Law International. Murcia, H. A., 2006. Legal nature of lex mercatoria. [Online] Available at: http://200.31.85.134/asociacion/newsdetail.asp?id=411&idcompany=15 [Accessed 21 April 2010]. Pryles, M., n.d. Application of the lex mercatoria in international commercial arbitration. [Online] Available at: http://www.arbitration-icca.org/media/0/12223880790810/ application_of_the_lex_mercatoria.pdf [Accessed 21 April 2010]. Rodriguez, A.M., 2002. Lex mercatoria. [Online] Available at: http://www.rettid.dk/artikler/20020046.pdf [Accessed 21 April 2010]. Trans-Lex, n.d. Examples. [Online] Available at: http://www.trans-lex.org/content.php?what=14 [Accessed 21 April 2010]. UNCITRAL, n.d. Facts about the united nations commission on international trade law. [Online]. Available at: http://www.uncitral.org/pdf/english/uncitral-leaflet-e.pdf [Accessed 21 April 2010]. Walker, I. & Ellison, M. 2008. Australia adopts UNCITRAL model law on cross-border insolvency. [Online] Available at: http://www.theworldlawgroup.com/docs%5CUNCITRAL%20Australia.pdf [Accessed 21 April 2010]. Read More