Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume 1 Volume 1: The Transnationalisation of Commercial and Financial Law. The New Lex Mercatoria and its Sources 9781509949182, 9781509949212, 9781509949205

Volume 1 of this new edition covers the roots and foundations of private law, the different origins, structure, and orie

175 82 5MB

English Pages [465] Year 2022

Table of contents :
Preface
Contents
Table of Cases
Table of Legislation and Related Documents
Part I: The Emergence of the Modern Lex Mercatoria, its Method, Structure and Antecedents. Civil or Common Law Thinking?
1.1. Introduction
1.2. The Origin of Civil Law. Its Traditional Approach to Law Formation and to the Operation of Private Law. Effect on Commercial and Financial Law
1.3. The Origin and Evolution of the Common Law. Its Approach to Law, Private Law Formation and Operation
1.4. The Sources of Law in the Civil and Common Law Tradition. The Approach in Transnational Private Law and the Hierarchy of Sources of Law and their Norms in the Modern Lex Mercatoria
1.5. Different Legal Orders, their Manifestation, and the Competition between them. Cultural, Sociological and Economic Undercurrents in the Formation of Transnational Commercial and Financial Law (Modern Lex Mercatoria)
Part II: The Nature, Status and Function of Private International Law
2.1. Modern Private International Law
2.2. The Modern European and US Approaches to Conflicts of Law
2.3. Interaction of Private International Law and Uniform Law
Part III: The Substance and Operation of Transnational Commercial and Financial Law or the Modern Lex Mercatoria
3.1. The Lex Mercatoria, Interrelation with Private International Law, Legitimation
3.2. The Hierarchy of Norms from Different Legal Sources in the Modern Lex Mercatoria: Elaboration in the Positive Law
3.3. Operation of the Lex Mercatoria. Objections
Index

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DALHUISEN ON TRANSNATIONAL AND COMPARATIVE COMMERCIAL, FINANCIAL AND TRADE LAW VOLUME 1 Volume 1 of this new edition covers the roots and foundations of private law, the different origins, structure, and orientation of civil and common law, and the social and cultural forces behind them. It analyses the practical needs and market forces behind the emergence of a new transnational commercial and financial legal order, its international finance-driven impulses, concepts, and operation; the theoretical basis of the transnationalisation of the law in the professional sphere in that order; the autonomous sources of the new law merchant or modern lex mercatoria derived from the method of public international law, as well as its relationship to domestic and transnational public policy and public order requirements. The complete set in this magisterial work is made up of 6 volumes. Used independently, each volume allows the reader to delve into a particular topic. Alternatively, all volumes can be read together for a comprehensive overview of transnational comparative commercial, financial and trade law.

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Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume 1 The Transnationalisation of Commercial and Financial Law. The New Lex Mercatoria and its Sources Eighth Edition

Jan H Dalhuisen Emeritus Professor of Law King’s College London Chair in Transnational Financial Law Catholic University Lisbon Visiting Professor UC Berkeley Corresponding Member Royal Netherlands Academy of Arts and Sciences Member New York Bar Former ICSID Arbitrator and FCIArb

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2022 Copyright © Jan H Dalhuisen, 2022 Jan H Dalhuisen has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2022. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Library of Congress Control Number: 2021952798 ISBN: HB: 978-1-50994-918-2 ePDF: 978-1-50994-920-5 ePub: 978-1-50994-919-9 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

To my Teachers and my Students

vi

PREFACE This is the first Volume in the eighth edition of this work, first published in 2000. I am grateful to the Publishers for having allowed the split into six Volumes better to separate the areas of major interest. The series starts with this Volume on the transnationalisation of the law covering the international commercial and financial flows, which are now far larger than any local ones. It considers the transactions therein in their legal unity rather than being dispersed under an amalgam of local laws that were never made for them and are increasingly hard to find. In method and sources, although hardly in substance, it means a return to the operation of the earlier lex mercatoria and to pre-19th Century perceptions, re-establishing the similarity in public and private law formation and application. The law of nations, which retained the older approach, is then the model. This approach is demonstrated and followed in the next Volumes, respectively on international arbitration, the law of contract, movable property law, modern financial products and services, and their regulation. The book is written for graduate students and for practitioners and scholars who may take an interest. The narrative reflects the author’s experience over many years in senior positions in commerce, finance, and international arbitration, and his academic endeavour at UC Berkeley and King’s College London and his experience of teaching the subject from a global perspective. The present Volume also attempts to show how in international business we arrived where we are and how we move forward. Common law and civil law experiences are the main starting points in this discussion and from where the choices are to be made in this regard. The true challenge is perceived to be in identifying the transnational minimum standards of behaviour to balance the international market place. Whilst finishing this manuscript, I wish to record my sincere gratitude to Dr Stefan Mandelbaum, Senior Lecturer at the Anglia Ruskin University Law School for taking the time to go through it and identify mistakes. I am building a team for the next edition and other, younger scholars who can contribute are invited to join and write to me. Melides, Portugal, December 2021 Jan H Dalhuisen [email protected]

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CONTENTS Prefacevii Table of Cases xv Table of Legislation and Related Documents xxi Part I The Emergence of the Modern Lex Mercatoria, its Method, Structure and Antecedents. Civil or Common Law Thinking? 1.1. Introduction 1.1.1. The Place and Evolution of Modern Commercial and Financial Law in Civil and Common Law. The Concept of Transnationalisation 1.1.2. Civil Law in Commerce and Finance 1.1.3. The Common Law in Commerce and Finance 1.1.4. The Transnationalisation of Commercial and Financial Law: Common or Civil Law Approach? Methodology and Definition. The Spokesperson Function and the Question of the Public Interest and its Representation at the Transnational Level 1.1.5. The Coverage of Domestic and Transnational Commercial and Financial Law 1.1.6. Legal Dynamism as a Key Notion in Transnational Commercial and Financial Law. Law Among Professionals in Modern Contract and Movable Property. Issues of Liquidity, Finality, and Risk Management 1.1.7. Legal Pragmatism at the Transnational Level. Notions of Certainty, Finality and Predictability. The Need to Find Structure, Not System 1.1.8. Social, Economic, Intellectual, or Democratic Legitimacy 1.1.9. The Traditional Civil and Common Law Notions of Commercial Law. The Notion of Commerciality 1.1.10. Old and New Commercial and Financial Law. Internationality and a Transnational Notion of Professionality. A Separate Legal Order for Professional Dealings? 1.1.11. The Role and Status of International Commercial Arbitration. The Notions of Internationality and Commerciality Revisited 1.1.12. International Arbitration and the Role of Ordinary Commercial Courts Compared. Need for an International Commercial Court? 1.1.13. Structure of this Volume 1.2. The Origin of Civil Law. Its Traditional Approach to Law Formation and to the Operation of Private Law. Effect on Commercial and Financial Law 1.2.1. Introduction 1.2.2. The Early Developments of Private Law on the European Continent. Roman Law

1 1 6 20

25 32 35 49 56 59 65 70 75 80 82 82 83

x Contents 1.2.3. Classical Roman Law and the Corpus Iuris Civilis 86 1.2.4. The Revival of Roman Law in Western Europe: The Ius Commune 90 1.2.5. The Ius Commune and its Relationship to Local Laws Including Newer Commercial Law 93 1.2.6. The Early Notion of Natural Law in Europe 97 1.2.7. The Emergence of the Secular Natural Law School: Grotius’s De Iure Belli ac Pacis, its Approach and Impact 100 1.2.8. The Status of State Law in the Philosophies of Grotius, Hobbes, Pufendorf, Locke, Kant and Hegel. The Impact of the Age of Enlightenment and the Road to Codification of Private Law in France 104 1.2.9. The German Pandectists and the Historical School. German Idealism and the Road to Private Law Codification in Germany 110 1.2.10. The Civil Law National Codifications and their Coverage 119 1.2.11. Nationalism and System Thinking. The Question of the Continued Relevance of the Civil Law Codification Idea 123 1.2.12. Modern Policy Arguments in Favour of a Statist and Static Attitude Towards the Formation of Private Law. System Thinking and its Deficiency. Misunderstandings Concerning Democratic Legitimacy and Certainty 128 1.2.13. Interpretation and System Thinking in Civil Law: Begriffs- and Interessenjurisprudenz, Freirechtslehre and Wertungsjurisprudenz in Germany. Modern Hermeneutics and the Role of Case Law and Precedent in Civil Law 131 1.2.14. The Decline of Private Law in Civil Law Countries? The Codification Idea and Business Law in Europe after Brexit 140 1.3. The Origin and Evolution of the Common Law. Its Approach to Law, Private Law Formation and Operation 143 1.3.1. Common Law and Equity 143 1.3.2. The Common Law Approach to Scholarship 148 1.3.3. The Common Law Approach to Precedent, Legislation or Codification, and Statutory Interpretation 150 1.3.4. Intellectualisation and Conceptualisation in Common Law. Modern American Academic Attitudes Towards the Law and its Development: Legal Formalism and Realism 157 1.3.5. Post-realism or Legal Functionalism in the US: The ‘Law and …’ Movements163 1.3.6. The Progress So Far. Legislature, Judiciary and Legal Practice. The Autonomy and Independence of Legal Scholarship in the US. Doctrinal Scepticism 167 1.3.7. The Quest for Modernity, the Problems in the Post-modern Era. The Attitude to and Effects on Law Formation and Operation 177 1.4. The Sources of Law in the Civil and Common Law Tradition. The Approach in Transnational Private Law and the Hierarchy of Sources of Law and their Norms in the Modern Lex Mercatoria 186 1.4.1. Statutory and Other Sources of Law. Nationalism and System Thinking in Civil and Common Law 186 1.4.2. Fact and Law Finding in Civil and Common Law 190

Contents xi 1.4.3. The Revival of the Traditional Sources of Law through Liberal Interpretation Techniques in Civil Law. The Changing Status and Role of Legal Reasoning and Precedent 194 1.4.4. Survival of Transnational Legal Sources in Commercial Law. EU and Public International Law Attitudes 199 1.4.5. The Method of Public International Law and its Meaning and Importance for the Development of the Modern Lex Mercatoria 203 1.4.6. Autonomous Legal Sources: Fundamental Principle 206 1.4.7. Autonomous Legal Sources: General Principles 214 1.4.8. Autonomous Legal Sources: Custom and Practices 216 1.4.9. The Competition between Custom and Statutory or Treaty Law. The Issue of Desuetude and the Relevance of the Good Faith Notion 226 1.4.10. Autonomous Legal Sources: Party Autonomy 227 1.4.11. Autonomous Legal Sources: Treaty Law 229 1.4.12. Uniform (Treaty) Law and Private International Law 232 1.4.13. Domestic Laws as Autonomous Residual Source of Transnational Law 234 1.4.14. The Hierarchy of the Sources of Law in Transnational Commercial and Financial Law or the Modern Lex Mercatoria. The Meaning of the Choice of a Domestic Law by the Parties 235 1.4.15. Treaty Law and its Own Concept of its Place Among the Other Sources of Private Law 241 1.4.16. The Concept of Natural Law and the Legal Status and Force of Fundamental and General Principle in the Modern Lex Mercatoria 243 1.4.17. An End to the Confining Views of Legal Positivism, Formalism, and Nationalism in the Professional Sphere? 247 1.4.18. Dispute Prevention or Dispute Resolution? Law in Action or Law in Litigation 253 1.4.19. The Development of the Modern Lex Mercatoria and Role of National Courts and International Commercial Arbitration 255 1.4.20. Agents of International Convergence and Harmonisation: The Role of UNIDROIT, UNCITRAL, the ICC, The Hague Conference, and the American Law Institute and Commissioners on Uniform State Laws in the US 259 1.4.21. EU Attempts at Harmonising Private Law 262 1.5. Different Legal Orders, their Manifestation, and the Competition between them. Cultural, Sociological and Economic Undercurrents in the Formation of Transnational Commercial and Financial Law (Modern Lex Mercatoria)273 1.5.1. The Concept of Legal Orders, their Manifestation 273 1.5.2. Law as Cultural Manifestation 276 1.5.3. Law as a Political Organisational Tool. The Importance of Diversity, Group Autonomy, Democracy, Rule of Law, and Human Rights 280 1.5.4. The American Experiences and the Effect on Law Formation 284 1.5.5. The Revival of Legal Universalism in Professional Private Law 287 1.5.6. Sociological and Economic Considerations in the Law 289 1.5.7. The Formation of Non-statist Law in Modern Social and Economic Thinking. The Promotion of Self-interest and its Limits and the Role of Game Theory 295

xii Contents 1.5.8. The Competition between Transnational Law and Mandatory State Laws or National Public Policies and Public Order Requirements. The Transnational Minimum Standards 1.5.9. The Operation of Different Legal Orders in Private Law: Evolution of a US Federal Commercial Law, of Transnational Private Law Concepts in the EU, and of International Human Rights Law in the Council of Europe (European Court of Human Rights) 1.5.10. The International Commercial and Financial Legal Order: The Role of Legal Theory, Legal History and Comparative Law

298

304 309

Part II The Nature, Status and Function of Private International Law 2.1. Modern Private International Law 2.1.1. The Underlying Concept of Modern Private International Law 2.1.2. Earlier Approaches 2.1.3. Drawbacks of the Modern Conflicts Rules 2.2. The Modern European and US Approaches to Conflicts of Law 2.2.1. Refinement of the European Model of Private International Law 2.2.2. Developments in the US 2.2.3. The Various Modern US Conflicts Theories 2.2.4. The European Approach: Exception Clauses, Reasonable and Fair Solutions in Dutch Proposals 2.2.5. The Role of Practitioners. Emphasis on Facts Rather than on Rules: The Nature of the Relationship of the Parties and the Nature of the Transaction Distinguished. The Effects of Transnationalisation 2.2.6. The Issue of Public Policy or Governmental Interests and its Impact. The Notion of Comity and its Application. The Development and Operation of International Minimum Standards 2.2.7. States as Counterparties de Iure Imperii 2.2.8. Practical Issues Concerning Conflicting Public Policies: Effect on the Lex Mercatoria and the Importance of the Notion of Forum non Conveniens 2.2.9. Party Autonomy and Contractual Choice of Law 2.3. Interaction of Private International Law and Uniform Law 2.3.1. Private International Law and the Application of Uniform Treaty Law 2.3.2. The Situation with Regard to EU Directives of a Private Law Nature

317 317 324 325 330 330 332 335 337 340 343 349 351 356 359 359 360

Part III The Substance and Operation of Transnational Commercial and Financial Law or the Modern Lex Mercatoria 3.1. The Lex Mercatoria, Interrelation with Private International Law, Legitimation 365 3.1.1. The Background to the Revival of the Lex Mercatoria 365 3.1.2. The Concept of the Modern Lex Mercatoria as a Hierarchy of Legal Sources 369 3.1.3. The Major Protagonists of the Lex Mercatoria and their Views: Legitimation377

Contents xiii 3.2. The Hierarchy of Norms from Different Legal Sources in the Modern Lex Mercatoria: Elaboration in the Positive Law 382 3.2.1. Fundamental Legal Principle and Implementing Custom Support. Transnational Rules of Contract Formation and the Normative Interpretation Technique 382 3.2.2. Fundamental Principle and Implementing Custom Support. The Notion of Transnational Ownership. A Dynamic System of Modern Movable Proprietary Rights 386 3.2.3. Fundamental Principle and Implementing Custom Support: Eurobonds, Trade Receivables and Other Transnational Proprietary Structures390 3.2.4. Fundamental Principle and Implementing Custom Support in Procedural Matters 393 3.2.5. Mandatory Custom and Practices. The ISDA Swap and ICMA Global Repo Master Agreements 394 3.2.6. Mandatory Uniform Treaty Law, Mandatory General Principle, Party Autonomy, Directory Custom or Trade Practices, Directory Uniform Treaty Law and General Legal Principles 397 3.2.7. Domestic Laws, Private International Law: Mandatory Provisions and Public Policy or Regulatory Issues 401 3.3. Operation of the Lex Mercatoria. Objections 402 3.3.1. Operation of the Lex Mercatoria and Direct References to it 402 3.3.2. Objections to the Lex Mercatoria Approach 407 3.3.3. Application and Enforcement of the Lex Mercatoria 409 Index411

xiv

TABLE OF CASES Australia Esso/BHP v Plowman (1995) 11 Int’l Arb 235�� 399–400 IATA v Ansett [2005] VSC 113, [2006] VSCA 242, [2008] HCA38��38, 303 Austria Supreme Court ICC Case No 3131, (1984) IX Yearbook Commercial Arbitration 159��404, 406 Norsolor (18 Nov 1982, 34 ICLQ 727 (1984), IX YB Com Arb 159 (1984)��257, 406 Belgium Tribunal de Commerce of Brussels, 16 November 1978�� 202 European Court of Human Rights Gasus Dosier-und Fördertechnik v Netherlands (1995) Series A, vol 306B, para 53�� 309 Iatridis v Greece App no 31107/96, ECtHR, 25 March 1999�� 309 Inze v Austria ECHR 9 December 1987, Series A, vol 126, para 38�� 309 Marckx v Belgium (1979) Series A, vol 31, para 63�� 309 Mazurek v France, ECtHR, 1 February 2000�� 309 Pressos Compania Naviera v Belgium ECHR 20 November 1995, Series A, vol 332, para 31�� 309 Stran Greek Refineries v Greece ECHR 9 December 1994, Series A, vol 301B, para 61�� 309 Van Marle v Netherlands ECHR 26 June 1986, Series A, vol 101, para 41�� 309 European Court of Justice Case 26/62, Van Gend & Loos [1963] ECR 3��313, 362 Case 6/64 Costa v ENEL [1964] ECR 1203��313, 362 Case 14/68 13 February 1969 Walt Wilhelm [1969] ECR 1��313, 362 Case 36/74 Walrave v Wielerbonden [1974] ECR 1405, 12 December 1974�� 210

xvi Table of Cases Case 43/75 Defrenne v Sabena I [1976] ECR 547�� 209 Case 12/76 Tessili v Dunlop AG 1976 ECR 1473�� 202 Case 13/76 Dona v Mantero [1976] ECR 1333, 14 July 1976�� 210 Case 33/76 Rewe v Landswirtschaftskammer fur das Saarland [1976] ECR 1989�� 210 Joined Cases 83/76 and 94/76, 4/77, 15/77 and 40/77 HNL and Others v Council and Commission [1978] ECR 1209�� 215 Case 14/83 Von Colson and Kamann [1984] ECR 1891, 10 April 1984�� 362 Case 222/84 Johnson v Chief Constable of the Royal Ulster Constabulary [1986] ECR 1651�� 213 Case 89/85 Alstrom v Commission (Woodpulp case) [1988] ECR 5193�� 348 Case C-361/89 De Pinto [1991] ECR I-1189��68, 264 Joined Cases C-6/90 and C-9/90 Francovich and Others [1991] ECR I-5357�� 213, 215, 363 Case C-30/90 The Commission v The UK [1992] ECR I-858�� 390 Case C-47/90 Delhaize v Promalvin and AGE [1992] ECR I-3669�� 356 Case C-91/92 Faccini Dor [1994] ECR I-3325�� 362 Joined Cases C-430/93 and C-431/93 Van Schijndel [1995] ECR I-4705�� 363 Case C-261/95 Palmisani [1997] ECR I-4025�� 362 Case C-126/97 Eco Swiss v Benetton [1998] ECR I-3055��355, 363 Case C-281/98 Angonese v Cassa di Ripsparmio di Bolzano, 6 June 2000�� 210 Case C-464/01Gruber [2005] ECR I-439��69, 264 Case C-144/04 Mangold [2005] ECR I-19981�� 212 Joined Cases C-295/04–298/04 Manfredi/Lloyd/Adriatico�� 209 Case C-47/07 Masdar v Commission [2008] ECR I-9761�� 213 Case C-94/07 Raccanelli v Max Planck Gesellschaft [2008] ECR I-5939�� 210 Case C-205/07 Gijsbrecht/Santurel [2008] Jur I-9947��264, 267 Case C-550/07 Kukukdeveci v Swedex GmbH & Co KG ECR I-365 (2010)�� 213 Case C-555/07 Seda Kucukdeveci/Swedex [2010] IRLR 346�� 212 Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA a.o [2009] ECR I-9823�� 212 Case C-115/08 Land Oberoesterreich v Cez [2009] ECR I-10265�� 212 Case C-282/10 Maribel Dominguez v Centre Informatique�� 209 Case C-171/11 Fra.bo v DVGW, 12 July 2012�� 210 Case C-426/11 Alemo-Heron v Parkwood ECJ 18 July 2013�� 209 Case C-470/12 Pohotovost v Vasuta, ECJ 27February 2014�� 209 France Cour de Cassation 28 Oct 1903, Req, DP 1.14 (1904)�� 63 14 October 1981, Semaine Juridique II 19815 (1982)�� 202 9 December1981, Fougerolle (France) v Banque de Proche Orient (Lebanon), Cour de Cass (1982) Revue de l’Arbitrage 183�� 405 1984, Norsolor (XXIV ILOM 360, 1984)�� 257 22 October 1991, Compania Valenciana de Cementos Portland SA v Primary Coal Inc Cass Civ (1) 1991 Bull Civil I, no 275�� 406 5 November 1991, Bull Civ IV, no 328 (1992)�� 202 29 June 2007, Ste PT Putrabali Adyamulia, Cour de Cass. Civ 1�� 18, 73–74, 228

Table of Cases xvii Paris Court of Appeal 29 March 1991, Ste Ganz, Revue de l’Arbitrage (1991) 478�� 304 18 November 2004, Case no 2002/60932 (Thalès) JCP G 2005 II 10038�� 355 Tribunal de Commerce de Paris, 8 March 1976�� 202 Versailles Court of Appeal, decision of 6 February 1991 [1991] Rev Crit de Dr Intern Privé 745�� 338 Germany BGH 22 February 1956, BGHZ 20, 88�� 36 International Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo), Nov 30 2010, ICJ Reports, 639 (2010)�� 206 Aroa Mines (Ltd) case on merits, 9 RIAA, 402 (1903)�� 255 Barcelona Traction Case (1970) ICJ Rep 3�� 346 BP Exploration Company (Libya) Ltd v Government of the Libyan Arab Republic [1979] 53 ILR 297 (Trib Arb)�� 225 Government of Kuwait v American Independent Oil Company (Aminoil) [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976�� 215 Gulf of Maine, ICJ Reports 246, 288 (1984)�� 206 Lena Goldfields v USSR 1930�� 202 Norsolor (Pabalk Ticaret Sirketi (Turkey) v Ugilor/Norsolor SA, ICC Case 3131 26 October 1979(1984) IX Yearbook Commercial Arbitration 109�� 257, 404, 406 Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi (Award in the Matter of an Arbitration between) (1952) 1 Int’l & Comp LQ 247, 18 ILR 144 (1951)�� 214 SGS v Pakistan (2003) 42 ILM 1290�� 351 SGS v Philippines, ICSID Case No ARB/02/6, IIC 224 (2004)�� 351 South West Africa, ICJ Reports, 6, 34 (1966)�� 206 SPP (Middle East Ltd) and South Pacific Projects v Egypt and EGOTRH [1988] LAR 309�� 358 Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v The Governmentt of the Libyan Arab Republic (1979) 4 YB Com Arb 177�� 215 Netherlands HR 22 May 1984 (1985) NJ 607�� 202 HR 1 February 1985, (1985) NJ 698�� 340 HR 25 September 1992 [1992] NJ 750�� 338 Switzerland GSA v SpA 118 Arrêts du Tribunal Federal [AFT] II, 193 (28 April 1992)�� 355

xviii Table of Cases United Kingdom Amin Rasheed Shipping Corporation v Kuwait Insurance Company [1983] 1 WLR 228, [1984] AC 50�� 76–78, 256 Bank of Baroda v Vysya Bank [1994] 2 Lloyd’s Rep 87�� 337 BCCI v Ali [2001] 2 WLR 735��45, 156 Bechuanaland Exploration Co v London Trading Bank [1898] 2 QBD 658��201, 391 British Airways Board v Laker Airways Ltd [1985] 3 WLR 413, [1985] AC 58 (HL)�� 352 British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390��39, 303 Bulmer v Bollinger [1974] Ch 401��45, 155 Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334�� 215 Compania de Neviera Nedelka SA v Tradex Internacional SA, The Tres Flores [1974] QB 264�� 53 Dearle v Hall (1828) 3 Russ 1��37, 146 Denis v Johnson [1979] AC 264�� 155 Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v Ras al-Khaimah National Oil Co [1987] 3 WLR 1023��77, 257, 406 Dolling-Baker v Merret [1990] 1 WLR 1205�� 399 Donoghue v Stevenson [1932] AC 562�� 149 Dr Bonham’s Case (1610) 77 ER 646�� 155 Eagle Star v Yuval [1978] 1 Lloyd’s Rep 357�� 406 EI du Pont de Nemours v Agnew [1987] 2 Lloyd’s Rep 585�� 77 Eves v Eves [1975] 1 WLR 1338�� 146 Gallie v Lee [1969] 1 All ER 1072�� 152 General Insurance Corp v Forsakringaktiebolaget Fennia Patria [1983] QB 856�� 220 Goodwin v Roberts [1876] 1 AC 476��201, 386 Government Stock v Manila Rail Co [1897] AC 81�� 146 Harlow and Jones Ltd v American Express Ban Ltd & Creditanstalt-Bankverein [1990] 2 Lloyd’s Rep 343�� 202 Hassneh Insurance v Mew [1993] 2 Lloyds Rep 243�� 399 Hazell v London Borough of Hammersmith and Fulham and Others[1991] 1 All ER 545��217, 395 Hill v Tupper [1863] 2 Hurlst 7 C 121�� 145 Holman v Johnson (1775) 98 ER 1120�� 352 Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2003] 1 Lloyd’s Rep 571�� 53 ICS Ltd v West Bromwich BS [1998] 1 WLR 896�� 45 Illingworth v Houldsworth [1904] AC 355�� 146 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433�� 45, 131, 146, 370 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896�� 156 JD v East Berkshire Community Health NHS Trust [2005] UKHL 23�� 286 Keppell v Bailey [1834] ER 1042�� 145 Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349�� 218 Kum v Wah Tat Bank Ltd [1971] 1 Lloyd’s Rep 439 (PC)��218, 223 Kuwait Airways Corp v Iraqi Airways Co [2001] 3 WLR 1117�� 77

Table of Cases xix Lister and Others v Forth Dry Dock and Engineering Co Ltd and Another [1989] 1 All ER 1134�� 362 Liverpool City Council v Irwin [1977] AC 239�� 218 London Tramways v LCC [1898] AC 375�� 150 Luke v Lyde 2 Burr R 883�� 306 Magor & St Mellons RDC v Newport Corp [1952] AC 189�� 156 Mareva Compania Naviera SA v International Bulk Carriers SA [1975] 2 Lloyds Rep 509��146, 197 Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 [1935] 52 L1 LR 16�� 406 Occidental Exploration and Production Co v Republic of Ecuador [2005] EWCA Civ 1116, [2005] 2 Lloyd’s Rep 707��257, 350 Orion v Belfort [1962] 2 Lloyd’s Rep 251 (QB Com Ct)�� 406 Oxford Shipping Co v Nippon Yusen Kaisha [1984] 3 All ER 835�� 399 Pepper v Hart [1993] 1 All ER 42�� 155 Perpetual Trustee Co Ltd, Belmont Park Investments PTY Ltd v BNY Corporate Trustee Services Ltd, Lehman Brothers Special Financing Inc [2009] EWCA Civ 1160�� 303 Picker v London and County Banking Co [1887] 18 QBD 512 (CA)��201, 386 Pillans v Van Mierop [1765] 97 ER 1035, [1765] 3 Burr 1663�� 21 Power Curber International Ltd v National Bank of Kuwait SAK [1981] 2 Lloyds Rep 394, [1981] 3 All ER 607��202, 240 Product Brokers Co Ltd v Olympia Oil & Cake Co Ltd [1916] 1 AC 314, 2 KB296�� 220 Regazzione v KC Sethia (1944) Ltd [1958] AC 301�� 352 Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703�� 37 Salomon v A Salomon & Co Ltd [1897] AC 22�� 146 Sheldon v Hently [1681] 2 Show 160�� 22 Teheran-Europe Co Ltd v St Belton (Tractors) Ltd [1968] 2QB 545�� 218 Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209�� 45 Unterweser Reederei GmbH v Zapata Off-shore Company [1968] 2 Lloyd’s Rep 158 (CA)�� 354 Vallejo v Wheeler [1774] 1 Cowp 143 (KB)�� 53 Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277�� 356 Walford v Miles [1992] 2 WLR 174��42, 384 Werner v Graham 183 P 945 (1919)�� 145 Yorkshire Woolcombers Associations Ltd, Re [1903] 2 Chap 284�� 146 United States Asahi Metal Industry Co Ltd v Superior Court (1987) 480 US 102�� 347 Babcock v Jackson 240 NYS 2d 743 (1963)�� 353 Banco do Brazil, SA v AC Israel Commodity Comp Inc 12 NY 2d 371 239 (1963)�� 352 Bonny v Lloyd’s of London 3 F3d 156 (7th Circ 1993)�� 354 Bremen (The) et al v Zapata Off-shore Co 407 US 1 (1972)�� 354 BulovaWatch Co Inc v K Hattori & Co Ltd (1981) 508 F Supp 1322�� 347 Chromalloy Airoservices Inc v Arab Republic of Egypt, 937 FSupp 907 (DDC 1996)�� 73 Clearfield Trust Co v US 318 US 363 (1943)�� 307 Davila v SS Verchanarian 247 F Supp 617 (ED Va 1965)�� 305

xx Table of Cases Delagi v Volkswagenwerk AG of Wolfsburg 29 NY 2d 426 (1972)�� 347 Deutsch v West Coast Machinery Co 80 Wash 2d 707 (1972)�� 347 Erie v Tompkins 304 US 64 (1938)��306–7 F Hoffman-La Roche Ltd v Empagran SA, 542 US 155 (2004)�� 302 Filartiga v Pena-Irala 630 F2d 876 (Second Circuit)�� 226 Guinness v Miller 291 Fed 768 (SDNY 1923)�� 335 Hartford Fire Insurance Co v California 509 US 764 (1993)��76, 346 Helicopteros Nacionales de Colombia, SA v Hall 446 US 408 (1984)�� 347 International Shoe Co v Washington 326 US 310 (1945)�� 347 Johnson v Whiton 34 NE 543 (1893)�� 145 Kioble v Royal Dutch Petroleum Co 133 SCt 1659 (2013)�� 226 Laker Airways Ltd v Sabena Belgian World Airlines 731 F2d 909 (DC Circuit 1984)�� 76 Landoil Resources Corp v Alexander & Alexander Services Inc (1990) 918 NYS 2d 739�� 348 Lauritzen v Larsen 345 US 571 (1953)�� 305 Lawrence v Texas 539 US 588 (2003)��162, 165 Leasco Data Processing Equipment Corp v Maxwell (1972) 468 F2d 1326�� 352 Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Ltd Case no 09-01242 (Bankr. SDNY) 25 January 2010�� 303 McCarthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988)�� 53 Mannington Mills Inc v Congoleum Corp (1979) 595 F2d 1287��346, 348 Marbury v Madison 5 US (1 Cranch) 137 (1803)��155, 160 Ministry of Defense of the Islamic Republic v Gould, Inc 887 F 2d 1357 (9th Cir, 1989)�� 257 Missouri v Holland 252 US 416 (1920)�� 160 Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc 473 US 614 (1985)�� 354 Oriental Pac (USA) Inc v Toronto Dominion Bank 357 NYS 2d 957 (NY 1974)�� 202 Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002)�� 53 Petition Marina Mercantile Nicaraguense, SA 248 F Supp 15, 25 n 21 (SDNY 1965)�� 305 Poe v Ulman 367 US 497 (1960)�� 226 Pritchard v Norton 106 US 124, 131 (1881)�� 318 Robinson v Commonwealth Ins Co (1838) 20 Fed Cas 1002�� 306 Roper v Simmons 125 S Ct 1183 (2005)��162, 165 Scherk v Alberto-Culver Co 417 US 506 (1974)�� 354 Sharon v Sharon (1888) 75 Cal 1�� 154 Simula, Inc v Autoliv 175 F3d 716 (9th Circ 1999)�� 354 Sosa v Alvarez-Machain 542 US 692 (2004)�� 226 Southern Pacific Transportation Co v Commercial Metals Co 456 US 336 (1982)�� 307 Swift v Tyson (1842) 41 US 1�� 306 Teacher’s Ins & Annuity Ass’n v Butler 626 F Supp 1229 (SDNY 1986)�� 46 Texas Industries v Radcliff Materials Inc (1981) 451 US 630�� 307 Timberlane Lumber Co v Bank of America (1976) 549 F 2d 597�� 346 Tooker v Lopez 301 NYS 2d 519 (1969)�� 353 United States and Guarantee Company v Guenther 281 US 34 (1929)�� 277 United States v Aluminium Company of America (Alcoa) 148 Fed 2d 416 (1945)�� 346 United States v Imperial Chemical Industries (ICI) (1952) 105 F Supp 215�� 346 United States v Standard Oil of California (1947) 332 US 301�� 307 Volkswagenwerk AG v Klippan, GmbH 611 P2d 498 (1980)�� 347 Western Union Telegraph Co v Call Publishing Co (1901) 181 US 92�� 306

TABLE OF LEGISLATION AND RELATED DOCUMENTS Austria Allgemeines Bürgerliches Gesetzbuch (ABGB), 1811�� 103, 120–21, 123, 125, 194, 365 Art 7�� 123 Brazil Civil Code 2002�� 129 European Union Amsterdam Treaty, 1998�� 13, 230, 262, 266 Brussels Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters, 1968�� 202, 230, 258, 262, 304, 338–39, 370 Art 5(1)�� 338 Directive 68/151/EEC on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second para of Art 58 of the Treaty�� 265 Directive 76/207/EEC on the implementation of the principle of equal treatment for men and women as regards access to employment, vocational training and promotion, and working conditions�� 265 Directive 77/91/EEC on coordination of safeguards�� 265 Directive 78/660/EEC on the annual accounts of certain types of companies�� 265 Directive 78/855/EEC concerning mergers of public limited liability companies�� 265 Directive 82/891/EEC on the division of public limited liability companies�� 265 Directive 83/349/EEC on consolidated accounts�� 265 Directive 84/253/EEC on the approval of persons responsible for carrying out the statutory audits of accounting documents�� 265 Directive 85/374/EEC on the approximation of the law of the Member States concerning liability for defective products�� 264 Directive 85/577/EEC to protect the consumer in respect of contracts negotiated away from business premises�� 264 Directive 86/653/EEC on the co-ordination of the Member States relating to self-employed commercial agents�� 265

xxii Table of Legislation and Related Documents Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit�� 264 Directive 89/666/EEC concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State�� 265 Directive 89/667/EEC on single-member private limited-liability companies�� 265 Directive 90/314/EEC on package travel, package holidays and package tours�� 264 Directive 93/13/EEC on unfair terms in consumer contracts��209, 264 Directive 97/5/EC on cross-border credit transfers�� 264 Directive 97/7/EC on the protection of consumers in respect of distance contracts�� 264 Directive 97/9/EC on the protection of purchasers in respect of certain aspects of contracts relating to the purchase on a time share basis�� 264 Directive 98/26/EC concerning settlement finality�� 55, 230, 236, 263, 265, 267, 390 Directive 98/27/EC on injunctions for the protection of consumers’ interests�� 264 Directive 2000/31/EC on Certain Legal Aspects of Electronic Commerce in the Internal Market�� 264 Directive 2000/35/EC on combating late payment in commercial transactions�� 265 Directive 2000/78/EC establishing a general framework for equal treatment in employment and occupation��209, 265 Directive 2001/86/EC on employee participation�� 265 Directive 2002/47/EC on financial collateral arrangements��40, 49, 55, 79, 230, 236, 263, 265, 267, 269, 363, 390 Directive 2002/65/EC concerning the distance marketing of consumer financial services�� 264 Directive 2002/87/EC on e-commerce, Art 3(4)�� 264 Directive 2003/58/EC amending Directive 68/151/ EEC as regards disclosure requirements in respect of certain types of companies�� 265 Directive 2003/6/EC on market abuse�� 265 Directive 2003/71/EC as regards information contained in prospectuses��231, 265 Directive 2003/72/EC on employee participation�� 265 Directive 2004/25/EC on takeover bids�� 265 Directive 2004/39/EC on Markets in Financial Instruments (MiFID I)�� 231, 263, 265, 363 Directive 2004/109/EC on the harmonisation of transparency requirements�� 265 Directive 2005/56/EC on cross-border mergers of limited liability companies�� 265 Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies�� 265 Directive 2008/48/EC on credit agreements for consumers�� 264 Directive 2011/83/EU on consumer rights�� 264 Directive 2014/65/EU on Markets in Financial Instruments (MiFID II)��209, 230–31, 236, 263, 265, 363 Draft Common Frame of Reference (DCFR)�� 7–9, 15, 26, 29–30, 36, 38, 40, 42, 44–46, 48, 70, 79, 124–25, 129, 137, 176, 180, 184, 200, 211–14, 216–17, 222, 230–31, 245–47, 266–70, 274, 281, 308, 313, 323, 362, 366, 371, 373, 384–85, 390, 407–8 Art I-1:102��211–12

Table of Legislation and Related Documents xxiii Art I-1:102 (b)�� 211 Art II-1:102�� 228 Art II-1:103�� 222 Art II-1:104�� 222 Arts II-2:101ff�� 211 Arts II-7:301ff��212, 216 Art II-7:302�� 212 Art II-8:102(1)(c)�� 222 Art II-8:102(1)(f)�� 222 Art II-9:101(1)�� 222 Art III-1:110�� 44 Art III-5:121(1)�� 38 EC Treaty, Art 81�� 355 EU Treaty, Preamble�� 288 Human Rights Charter�� 209 Art 16�� 209 Art 21(1)�� 212 Art 38�� 209 Art 47�� 209 Art 47(1)�� 213 Art 52�� 209 Art 52(5)�� 209 Lugano Convention on Jurisdiction and Enforcement of Judgments��258, 339 Maastricht Treaty, 1992��28, 267 Proposal for a Regulation concerning a Common European Sales Law (CESL)��15–16, 26, 29, 67–68, 70, 79, 129, 142, 213, 231, 268, 270–72, 274, 307, 359, 361 Regulation (EEC) 2137/85 on the European Economic Interest Grouping (EEIG)�� 265 Regulation (EEC) 295/91 establishing common rules for a denied-boarding compensation system in scheduled air transport�� 264 Regulation (EC) 2027/97 on air carrier liability in the case of accidents�� 264 Regulation (EC) 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I)��230, 258, 262–63, 339, 405, 409 Art 5�� 348 Art 5(1)�� 338 Art 5(1)(b)�� 338 Art 6�� 338 Art 8�� 338 Regulation (EC) 2157/2001 on the Statute for a European Company (SE)�� 265 Regulation (EC) 1435/2003 on the statute for a European co-operative society (SCE)�� 265 Regulation (EC) 2201/2003 on the Recognition and Enforcement of Judgments in Civil and Commercial matters, 2008 (Brussels II)�� 405 Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I)��25, 27, 37, 53, 230, 234, 239, 262–63, 302, 327, 329, 331–32, 334, 337, 339, 356–58, 361, 408 Preamble��78, 356

xxiv Table of Legislation and Related Documents Preamble 6�� 53 Preamble 13��25, 234, 238, 331, 358 Preamble 16�� 53 Art 3�� 302, 331, 339 Art 4�� 331 Art 4(1)�� 329 Art 4(2)�� 329 Art 4(3)�� 329, 331, 337 Art 6��329, 331, 338–39 Art 6(2)�� 357 Art 8�� 329, 331, 339 Art 9�� 27, 302, 327, 331, 346, 353, 357, 408 Art 13�� 329 Art 14(1) and (2)�� 37 Art 23�� 361 Rome Convention on the Law Applicable to Contractual Obligations, 1980��37, 230, 233, 238, 262, 302, 331–32, 334, 337, 346, 356, 358 Art 1�� 358 Art 2��302, 356 Art 3�� 358 Art 4�� 337 Art 4(2)�� 329 Art 4(5)�� 329 Art 5��78, 329 Arts 5, 6 and 7�� 78 Art 6��78, 329 Art 7��78, 346, 358 Art 12(1) and (2)�� 37 Treaty of Rome, 1957, Art 222�� 390 Treaty on the Functioning of the European Union (TFEU)�� 263, 267–68 Art 19�� 212 Art 34�� 210 Art 81�� 266 Art 101��209, 215 Art 114�� 230, 263, 266–68, 271, 305, 307–8, 360 Art 169(2)��266–67 Art 267��79, 361 Art 340(2)�� 215 Art 352�� 266 France Bankruptcy Act�� 39 CCP, Arbitration Law�� 74 Art 1496 (old)��257, 358 Art 1504�� 74 Art 1511��257, 358

Table of Legislation and Related Documents xxv Code Civil�� 19, 39, 96, 103, 110, 118, 120–23, 194, 218, 365 Art 1�� 97 Art 5��97, 155 Art 1102�� 228 Art 1134 (old)�� 211 Art 1135 (old)�� 211 Art 1341�� 62 Art 1354 (old)�� 228 Arts 2011-2031�� 40 Arts 2333-2366�� 40 Arts 2367–2372�� 39 Arts 2372-1–2372-6�� 40 Art 2372-3�� 40 Arts 2488-1–2488-6�� 40 Code de Commerce 1807�� 59, 64, 121–22 Art 631�� 63 Books I and II�� 64 2000�� 59, 62–64, 198 Art L 110-1�� 62 Art L 121-1�� 62 Code Monetaire et Financier, 1999��39–40 Arts L 214-43–L 214-49�� 40 Arts L 313-23–L 313-35�� 40 Arts L 432-12–L 432-19�� 40 Constitution, 1791�� 120 Coutumes de Beauvais�� 91 Coutumes de Paris�� 91 Déclaration des droits de l’homme�� 117 Art 8�� 120 Decree No 80-345�� 71 Decree No 81-500�� 71 Decree No 2007-404 concerning some aspects of real estate mortgages�� 40 Decree No 2011-48�� 71 Law of 13 June 1866 concerning commercial usages�� 219 Law of 19 July 1928 concerning the relevance of usages in the settlement of employment disputes�� 219 Law of 2 July 1966 on the credit-bail�� 40 Ordonnance de Commerce de Terre, 1673�� 64 Ordonnance no 2006-346 relative aux Sûretés of 23 March 2006�� 40 Ordonnance sur la Marine, 1681�� 64 Germany Civil Code (Bürgerliches Gesetzbuch/BGB), 1900�� 30, 36, 48, 63, 65–66, 88, 103, 117–18, 120, 138, 196, 219, 247 s 157��66, 211, 219 s 241(2)�� 48

xxvi Table of Legislation and Related Documents s 242��48, 66, 211 s 280�� 48 s 311(3)�� 48 Gerichtsverfassungsgesetz, 1877�� 65 Handelsgesetzbuch (HGB), 1900�� 59, 63, 65, 119, 219 s 25�� 63 s 346�� 219 s 354�� 63 Private International Law Statute, 1986�� 339 Prussian Criminal Code, 1851�� 117 Prussian Landrecht, 1794�� 120–21, 194 International Aminoil Concession Agreement, 1979�� 215 Andean Investment Code 1969�� 396 Basel Accords on Capital Adequacy��18, 201, 250, 261, 396 Benelux Convention on Private International Law, 1951�� 328 BIS Code of Conduct on Large Risks�� 261 BIS Declaration of Principle on Money Laundering�� 261 BIS Recommendations for Public Disclosure of Trading and Derivatives Activities of Banks and Securities Firms�� 261 Brussels Convention (Hague Rules), 1924��305, 370 Canada-EU Comprehensive Economic (CETA)�� 80 Cape Town Convention on International Interests in Mobile Equipment 2001�� 30, 49, 79, 237, 242, 260, 397 Preamble�� 242 Art 5�� 242 Aircraft Protocol�� 237 European Convention on Human Rights, 1950�� 308 Art 6�� 373 First Protocol, Art 1��308, 372 General Agreement on Tariffs and Trade (GATT)�� 292 Geneva Conventions, 1927, 1930 and 1932�� 73–74, 370 Hague Convention of 1955 on the Law governing the International Sale of Goods�� 233–34, 328 1986 revision, Art 8�� 329 Hague Convention on Choice of Court Agreements, 2005�� 76, 78, 255, 409 Hague Convention on Maintenance Obligations��331, 338 Art 5�� 330 Art 6�� 330 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary, 2002�� 391 Hague Convention on the Law Applicable to Dispositions of Securities held through Indirect Holding Systems�� 262 Hague Conventions concerning the Uniform Laws on the International Sale of Goods of 1964�� 234, 260, 262, 328 Art 17�� 234

Table of Legislation and Related Documents xxvii Hague Conventions of 1964�� 370 Hague Principles on Choice of Law in International Commercial Contracts, 2015�� 234 Art 3��234, 238 Hague-Visby Rules for bills of lading�� 370 IAIS Model Principles for Insurance Supervision, 1997�� 261 IAIS Recommendation Concerning Mutual Assistance, Cooperation and Sharing Information, 1995�� 261 ICC Arbitration Rules�� 238, 257, 358, 372 Art 13(3) (old)�� 257 Art 17(1)�� 358 ICC Incoterms�� 25, 31, 202, 224–25, 238, 250, 260, 369, 398–99, 401 ICC Rules��237–38, 257, 372 ICC Uniform Rules for Collection (URC)��202, 260, 398–99, 401 ICC Uniform Rules for Contract Guarantees (URCG), 1978�� 260 ICC Uniform Rules for Demand Guarantees (URDG), 1992�� 260 ILC Articles on Responsibility of States for Internationally Wrongful Acts, Art 48�� 204 IOSCO Principles and Objectives of Securities Regulation, 1998�� 261 ISDA Swap Master Agreements, 1987/1992/2002��25, 34, 174, 201, 223–24, 236–37, 297, 369, 375, 389, 394–95 ISLA,Global Master Securities Lending Agreement�� 224 LCIA Arbitration Rules��72, 237, 257 Art 14(5)�� 257 Art 22(3)�� 358 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958��39, 71, 73, 76–77, 79–80, 226, 229, 255–57, 303, 349, 354–55, 409–10 Art I(3)�� 74 North American Free Trade Agreement (NAFTA)�� 350 OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions�� 348 Principles of European Contract Law (PECL), 1998��42, 46, 48, 68, 200, 263, 268, 270, 313, 323, 356, 384–85, 400, 405 Principles of Trust Law�� 263 PSA/ISMA (now ICMA/SIFMA) Global Master Repurchase Agreement, 1992/1995�� 174, 201, 224, 237, 389, 394–95 Statute of the International Court of Justice�� 3, 16, 26, 82, 190, 203, 214, 368 Art 38(1)��3, 16, 26, 32, 79, 82, 105, 203, 205, 214, 235, 368, 374 Art 59��150, 205 UNCITRAL Convention for International Bills of Exchange, 1988��259, 370 UNCITRAL Convention on Independent Guarantees and Standby Letters of Credit�� 259 UNCITRAL Convention on the Assignment of Receivables in International Trade, 2001��31, 38, 201, 232, 397, 400 Art 7�� 242 UNCITRAL Convention on the Carriage of Goods by Sea�� 259 UNCITRAL Hamburg Rules, 1974��370, 395 UNCITRAL Model Law on Cross-border Insolvency, 1997�� 31

xxviii Table of Legislation and Related Documents UNCITRAL Model Law on Electronic Commerce�� 259 UNCITRAL Model Law on International Commercial Arbitration, 1985�� 31, 71, 154, 156, 250, 257, 259, 404, 406 Art 1(1)�� 71 Art 1(3)�� 71 Art 28�� 406 Art 28(1)�� 358 Art 28(2)��257, 404 Art 28(4)�� 404 UNCITRAL Model Law on the Procurement of Goods and International Credit Transfers�� 259 UNCITRAL Rotterdam Rules��370, 395 UNCITRAL Rules Art 33�� 257 Art 35�� 257 UNICTRAL Convention on the Limitation Periods in the International Sale of Goods�� 259 UNIDROIT Convention on Agency in the International Sale of Goods�� 260 UNIDROIT Convention on International Factoring�� 260 Art 4�� 242 UNIDROIT Convention on International Financial Leasing�� 260 Art 6�� 242 UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects�� 260 UNIDROIT Convention on Substantive Rules for Intermediated Securities 2009��30, 242, 260 UNIDROIT Convention on the Assignment of Receivables in International Trade�� 259 Art 8�� 38 Arts 22 and 30�� 38 Art 27�� 38 Art 42�� 38 Ann Arts 1 ff�� 38 Arts 6 ff�� 38 Arts 9 ff�� 38 UNIDROIT Principles for International Commercial Contracts, 1995�� 42, 68, 263, 313, 323, 384–85, 400, 405 Art 1.6�� 385 Art 1.7�� 385 Art 1.7(2)�� 385 Art 1.8�� 385 Art 2.14�� 385 Art 2.19�� 44 Art 3.2�� 385 Arts 3.4ff�� 385 Art 3.17�� 385 Arts 4.1ff�� 385 Art 5.2�� 385

Table of Legislation and Related Documents xxix Art 5.3�� 385 Art 5.5�� 385 Art 6.2��44, 385 Art 7.1.6�� 44 Art 7.1.7�� 385 Art 7.4.13�� 44 UNIDROIT Uniform Sales Laws 1964�� 230 Uniform Customs and Practice for Documentary Credits (UCP)��25, 31, 202, 224–25, 238, 240, 250, 260, 369, 398–99, 401 Art 1�� 398 Vienna Convention on the International Sale of Goods (ICSG/CISG), 1980��26, 30, 34, 42, 48, 67, 217, 230–34, 236, 238, 242, 259–60, 270–71, 323, 351, 359–60, 370, 382, 397, 399–400, 404 Art 1(1)(a)�� 359 Art 2��67, 358 Art 3(2)�� 358 Art 4��67, 221–22, 234, 242 Art 7��26, 67, 230, 242, 383, 404 Art 7(1)��234, 399 Art 7(2)��234, 399 Art 9�� 26, 67, 218, 230, 242 Art 9(1)�� 221 Art 9(2)�� 221 Art 12�� 236, 376, 397 Art 17�� 234 Art 25�� 67 Art 28�� 400 Art 50�� 67 Art 79��42, 67 Arts 85ff�� 68 Vienna Convention on the Law of Treaties 1969 Art 31�� 242 Art 53��4, 26, 79, 190, 203–5, 235, 368, 373–74 Washington (ICSID) Convention of 1965 in respect of foreign investments disputes and awards��349, 396 Art 42(1)�� 358 Art 54�� 349 World Bank (IBRD) Guidelines on the Treatment of Foreign Direct Investment, 1992�� 396 Italy Civil Code�� 120 Private International Law Statute, 1995�� 339

xxx Table of Legislation and Related Documents Netherlands CCP Art 8(1)�� 340 Art 429�� 339 Art 1054��257, 404 Civil Code��122, 129, 193, 196, 408 Art 3 (old)�� 219 Art 3(12)�� 211 Art 6.2�� 219 Art 6.2(2)��338–39 Commercial Code�� 122 draft Introduction Statute to Private International Law, 1992, Art 8�� 331, 338, 340 Instruction Court of Holland, 20 August 1531, GPB II, 703, Art 81�� 95 Poland Private International Law, 1965, Art 31(2)�� 338 Portugal General Private International Law Statute, 1965, Art 45(3)�� 338 Spain Siete Partidas�� 96 Switzerland Civil Code�� 125 Art 1�� 123 Private International Law Statute, 1987 Art 15�� 339 Art 15(1)�� 338 Art 132�� 339 Art 133(2)�� 338 United Kingdom Act of Union�� 89 Arbitration Act 1996�� 71, 154, 156, 257 s 46�� 404 s 46(1)(b)�� 257

Table of Legislation and Related Documents xxxi Bankruptcy or (now) Insolvency Acts 1824, 1849, 1861, 1869, 1883, 1914, 1985 and 1986,1994, and 2000�� 154 Bills of Exchange Act 1882��154, 390 s 83�� 390 Bills of Lading Act 1855�� 154 Bills of Sales Acts 1854, 1866, 1882, 1890 and 1891�� 154 Bribery Act 2010�� 348 Carriage of Goods by Sea Act (Cogsa) 1971 and 1992�� 154 Carta Mercatoria of 1303�� 21 Civil Procedure (Amendment) Rules 2000 r 6�� 348 Common Law Procedure Act 1854�� 153 Companies Acts 1844, 1856, 1862, 1948, 1967, 1986, 1989, 2004 and 2006�� 154 Enterprise Act 2002�� 154 Factors Acts 1823, 1842, 1877 and 1889�� 154 Interpretation Act 1889�� 156 Interpretation Act 1978�� 156 Judicature Acts,1871, 1873 and 1875��21, 147 s 25(11)�� 153 Law of Property Act 1925�� 154 Magna Carta, 1215��144, 148 Maritime Insurance Act 1906�� 154 Partnership Act 1890�� 154 Sale of Goods Act 1893�� 154, 367, 377 Sale of Goods Act 1979�� 154 Second Statute of Westminster, 1285�� 144 Statute of Merchants (Acton Burnell) of 1283�� 21 United States Alien Tort Statute 1789�� 226 Bankruptcy Code�� 152, 172, 334 COGSA, 1936�� 305 Constitution��159, 258, 284, 306, 333 Art II, s 8�� 305 Art III s 1�� 306 s 2�� 305 Federal Rules Enabling Act, 1934�� 306 Federal Rules of Civil Procedure�� 306 Foreign Corrupt Practices Act 1977�� 348 Foreign Sovereign Immunity Statute�� 349 Judiciary or Rules of Decision Act 1789, s 34�� 306 Pomerene Act for bills of lading issued for transportation between the various states of the US, to foreign countries, US territories or the district of Columbia�� 305 Restatement (Second) Conflict of Laws, 1971��27, 302, 333–34, 336–37, 353 s 6�� 27, 302, 327, 333–34, 353

xxxii Table of Legislation and Related Documents s 145��334, 353 s 188��334, 353 Restatement (Second) of Contracts, 1981, s 205�� 46 Restatement (Third) of the Foreign Relations Law of the United States, 1987�� 27, 76, 302, 327, 337, 353, 408 s 402��27, 302, 327, 346, 353, 408 s 403�� 27, 76, 302, 327, 346, 353, 408 Uniform Commercial Code (UCC)��24, 30–31, 38–39, 46, 59–61, 120, 125, 129, 154–56, 160, 162, 172, 197, 220–21, 231, 253, 262, 271, 281, 304, 307, 332, 367, 394, 398, 406–7 Art 1��61, 272 Art 2��24, 60–61, 67–68, 202, 272, 393 Art 2A�� 24, 61, 68, 262, 393 Art 3�� 61 Art 4�� 61 Art 4A�� 61, 68, 262, 393 Art 5�� 61, 68, 202, 398 Art 6�� 61 Art 7�� 61 Art 8�� 24, 61, 68, 393 Art 9��24, 61, 68, 145, 262, 334, 337, 393, 408 s 1-103�� 7, 24, 157, 220, 231, 245, 272, 307, 367, 377, 406 s 1-103(a)�� 160 s 1-103(a)(2)��62, 191, 305 s 1-103(b)�� 191 s 1-131�� 306 s 1-201(19) old�� 46 s 1-201(a)(20)�� 46 s 1-201(b)(20)�� 46 s 1-301��337, 360 s 1-301(f) and (g)�� 337 s 1-302�� 211, 269, 385 s 1-304�� 46 s 2-103(1)(b)�� 46 s 2-103(1)(j)�� 46 s 2-104��60–61 s 2-110�� 38 s 2-202(a)�� 220 s 2-208�� 220 s 2-210��201, 392 s 2-302�� 46 s 2-402�� 337 s 2-603�� 46 s 2-615�� 46 ss 2A-105 and 2A-106�� 337 s 3-103(a) (4)�� 46

Table of Legislation and Related Documents xxxiii s 3-103(a) (6)�� 46 s 4-102�� 337 s 4A-108�� 68 s 4A-507�� 337 s 5�� 154 s 5-102(9)(b)�� 68 s 5-102(a)(7)�� 46 s 5-116�� 337 s 5-116(c)�� 398 s 8-102�� 46 s 8-110�� 337 s 9-102 (a) (43)�� 46 s 9-109(d)(13)�� 68 ss 9-301-9-307�� 337 s 9-404�� 201 s 9-406(d)�� 392

xxxiv

Part I The Emergence of the Modern Lex Mercatoria, its Method, Structure and Antecedents. Civil or Common Law Thinking? 1.1. Introduction 1.1.1. The Place and Evolution of Modern Commercial and Financial Law in Civil and Common Law. The Concept of Transnationalisation Commercial law, including financial law, has a long tradition with a somewhat different status in civil and common law. This has, first, to do with different attitudes concerning the role of legislation and particularly systematic legal thinking, but it is also a matter of coverage and ultimately concerns the recognition (or not) of the special place that commercial and financial law may have in either legal system. This discussion has acquired renewed relevance in modern times and is increasingly influenced or matched by the idea or realisation that, at least in international dealings or professional cross-border activities, however defined, the relevant commercial and financial law might not or no longer be national in either the civil or common law tradition, but rather emanates from a legal order of its own and may then be considered transnationalised. The driving force behind this development is the globalisation of the commercial and financial flows, their volume, the organising talent of the international marketplace, but also the changing nature of these flows, which hardly allow them still to be meaningfully split up and allocated, in their different parts, to particular countries or territories and their legal systems in the hope that these parts together add up to adequate legal support for the activity as a whole. In the meantime, much of it is becoming virtual or in flux and in transformation to allow us credibly to determine relevant territorial contact and legal connection, but it still leaves us with the questions of how this new transnationalised and unified law operates and can be known and should be applied and whether we must perceive it along civil or common law lines, or as something different altogether. In approach (although not in substance), this legal transnationalisation goes back to an era before the nineteenth century when commercial law was indeed not national and did not belong to any particular legal order or system except its own. These issues will be substantially the subject of this first Volume, followed by dispute resolution in Volume 2. In Volumes 3 and 4, the discussion will be narrowed to contract and movable property law as it is developing in the transnationalised professional sphere or global (commercial and financial) legal order. In Volumes 5 and 6, the discussion will be extended to international financial dealings in their private law and regulatory aspects. In this discussion, international finance is considered often to be the more immediate focus of present-day international commercial activity rather than the more traditional mercantile aspects often associated with the sale of goods, their transportation and

2 Volume 1: The Emergence of the Modern Lex Mercatoria insurance, bills of lading, bills of exchange or promissory notes, and letters of credit, important as they may remain. To demonstrate what is at issue, an example, more directly related to modern commerce, may suffice: Assume that a car manufacturing company buys iron plates from Sweden, tyres from France, starts part assembling in Spain, adds electronic parts bought from Germany, and further equipment coming from the US, and then assembles the final product in Italy. Subsequently, these cars are distributed in virtually every country in Europe. Upon a sale there will be a receivable and upon payment a bank balance for the seller in whatever country of payment. Simultaneously or consecutively, this process repeats itself all the time. It is marked by a flow of assets in constant transformation from commodity to end product to receivables, sales proceeds, and bank balances, joined by services, often delivered on the web, or types of technology and information supply or instructions that are also increasingly virtual. Until sold as end product, these assets are no longer individualised but appear and are transferred in bulk and are, when traded, often future or prospective. Through derivatives, they may be separated from risk. Much is located nowhere in particular or not for long. The key is the economic unity of the cycle. The value is then exactly in these flows, their composite nature, and their constant transformation to higher quality products. Once the asset comes to rest with a consumer, is individualised and unpacked in a particular place, it is second hand and substantially loses its value; indeed, there is no greater value destruction than unwrapping under the Christmas tree. This is of legal significance as, with the loss of value, the asset is likely to become legally unimportant even if it may still have sentimental value. The exception are objects of art and real estate, which, by their very nature, are individualised and remain outside these flows; art and similar objects of value may then be treated in much the same way as land. It is submitted that in order for us to remain legally relevant in our legal assessments in commerce and finance, we must now place ourselves firmly in these international flows and respect their integrity and state of transformation and movement, often between countries. This has not been the legal attitude since the nineteenth century. First the assumption here is that all law is national and thus also governs international transactions assessed or allocated per country as there is no other. In this view, the international flows must and can still be satisfactorily cut up into domestic pieces under the prevailing rules of private international law (different even for contract, property and enforcement), which provide in this approach the conduit to finding the most appropriate national legal system to apply to each part. Second, at least in civil law, these national systems commonly concern themselves only with situations at rest, while the proprietary system, in particular, is perceived as physical and based on the idea of individualisation, identification and location of existing finalised assets (the Bestimmtheitsprinzip in German) under national laws only. Third, the expectation is then that all these local laws, applied to parts of the flows so identified, still add up legally to cover and guide the international transaction chain in an adequate and efficient manner even if nothing of this was ever written or conceived for international transactions. This was perhaps worked in a fashion when international transactions were few and concentrated on finished physical products but now that the total value of the international flows far exceeds the GDP of even the largest countries,1 whilst constant transformation in international production, supply and distribution chains is the essence of these flows which can hardly any 1 To give some figures: the sum total of the cross-border trade in goods was in 2019 put at about US$ (equivalent) 19 trillion; in services at about US$ (equivalent) 6 trillion. Compare this to the GDP of the US at about US$21 trillion, of the EU at US$14 trillion, total world GDP being in the region of US$87 trillion. It illustrates the scale of the international flows that are now larger than the GDP of any country or grouping of states such as the EU.

Volume 1: The Emergence of the Modern Lex Mercatoria 3 longer be localised or at least not for long, this approach is artificial and likely to be insufficient. It is also irrational. In any event, it may be cogently argued that in the law we are only concerned with rights and obligations, there was never anything physical about them, not in property law either, while in international transactions rights and obligations were always difficult to locate and are ever more difficult to situate now. In fact, the idea of localisation had already broken down where assets were not physical like claims, but they are now joined by services, technology, and other information when there may be no obvious connection with any particular territory, situs, or state law.2 One sees the problem arising in particular when financing is needed for this type of international manufacturing and distribution activity which needs to be funded and here the financial aspect comes in its support function which is crucial to this entire cycle. Can a flow of assets in transformation be given as security for working capital? Not easily in an approach which sees all law as territorial by definition and all assets as physical and individualised unless perhaps one puts the location of all assets in the place of the owner. That would be no less contentious and still raises enforcement issues when assets are dispersed. Rather transnationalisation and the rediscovery of more universal laws help us and that is the challenge that is addressed in this book. This challenge operates at the level of methodology but no less at that of the positive law including public policy, not in the future but now. There are two prongs to the argument. The first one is historical and philosophical. This suggests that the paradigm shift on the European Continent at the beginning of the nineteenth century which led to the nationalisation of all law formation and operation at the level of the state was an aberration in need of correction, at least in private law in commerce and finance. The other consideration is practical and goes to show that following the globalisation of the commercial and financial flows, legally still splitting them up in domestic parts, becomes irrational while no proper policy reason can be given except merely reaffirming the established nationalistic order. Legal transnationalisation is not here perceived as an option any longer but is considered the result of globalisation on the scale we now expect and need to keep up our welfare. It becomes an issue of efficiency. It poses the question how and by whom this new transnational law is formed, how it operates, and how it can be known. It is submitted that on the private law side, in commerce and finance, this concerns the re-emergence of the lex mercatoria in a new transnational legal order which is not national or territorial and results in immanent or spontaneous bottom-up law formation in that order in which (a) fundamental principle, (b) custom and practices, (c) treaty law, (d) general principle, and (e) party autonomy play the defining roles. This is reminiscent of a similar approach to law formation in public international law, see Article 38(1) of the Statute of

2 The problem finds an acute present-day expression in taxation, now that the location of activities, added value, and profits becomes increasingly obscure and can be switched in these international flows where states also compete in giving tax benefits, which a proper international management is bound to maximise. Hence tax arbitrage. It unnerves politicians forgetting why this exists and it agitates the public but has become an important by-product of globalisation and of the size and nature of the international commercial and financial flows confronted with our continuing thinking in terms of territories and states. Tax treaties can hardly solve the conundrum and adequately divide and allocate the spoils as there is no clear intellectual framework and whatever these texts may say and try to solve, the ambiguities return in interpretation. But it is only illustration of a more deep-seated problem that affects the law applicable to all of these flows and the activities in them, including regulation. Many national laws found to be applicable may not even have a proper answer in respect of the parts allocated to them. In the following, the problems with creating under these circumstances a floating charge to support the funding of working capital for an entire international manufacturing, sales and payment process will repeatedly be used as a most obvious example of the problems that may be encountered in this connection, for only nationalistic reasons.

4 Volume 1: The Emergence of the Modern Lex Mercatoria the International Court of Justice together with the notion of peremptory law of Article 53 of the Vienna Convention on the Law of Treaties, and reintroduces the unity in law formation and application in both areas that obtained, as we shall see, until the nineteenth century. As will be argued in section 1.1.6 below and throughout Volumes 3 and 4, at the practical level, this new law introduces and supports the idea that professional dealings are to be distinguished, see also section 1.1.10 below, and that in these dealings the law of contract and movable property acquires a different meaning and model altogether. They both become dynamic concepts (better) able to deal with constant change and movement and are then principally risk management tools in which intent in the case of contract and individualisation of assets in movable property law become secondary considerations. It will be shown that this is closer to common law than to civil law perceptions and that the latter was always more anthropomorphic, geared to private individuals or natural persons, and their needs for protection in what we now call consumer law, whilst the common law of contract and movable property came from commerce and is therefore more business oriented, more comfortable with party autonomy even in the creation of proprietary rights (in equity), as we shall see, and probably also more creditor than debtor friendly. More uncertain may be the identification of the public interest, now often expressed in regulation, as a motivating and correcting force in the international marketplace and the formulation of transnational minimum standards, for example in competition, environmental, public health, and financial stability matters.3 Here the absence of institutions such as states (or their courts) to stabilise this law and push it forward, as they may do domestically, is more problematic. Of course, the formulation of these standards can still be the subject of treaty law assuming there is a broad international consensus, but there may not be or it may be long in coming. It may be poorly expressed (a result of trade-offs or compromises and different authorised languages) and is difficult to adjust. It must then essentially be left to the public debate in civil society what the minimum standards are (the EU for its Member States becoming here an exception but only in the areas where it has jurisdiction). Only when international transactions come demonstrably on shore and can still be so verified in conduct or effect, remains local public policy relevant but that might not be satisfactory for the international transaction as a whole. The role and formulation of public policy at the transnational level, particularly transnational minimum standards of behaviour to balance the international marketplace, are perceived in this book as the greatest challenge in transnational law formation and operation. What balances the international marketplace and how? We may see it even now best in the operation of international social networks. Environmental and public health standards may not be far behind. It will be argued that in pressing cases these considerations might also be joined by extralegal (transnational) demands of justice, social peace and efficiency. The idea is here that law imposes order in an often irrational environment with many opposing interests, that its formation and application is internationally in essence a bottom-up process even if it may be stabilised by public authority and courts, and perhaps now also in international arbitration (the subject of the next Volume), not different in commerce and finances, but strives in civil society also for

3 By way of example, the public interest operates at different levels in finance, first in private law in property rights in asset-backed financing that affects others. It also covers the notion of preferences (eg in set-off), and the concept of transnational and payment finality, as we shall see. But it operates all the more in public law at the level of financial stability or systemic risk, the protection of market participants (notably the smaller borrowers, depositors and investors), and at the level of the protection of the integrity of the marketplace itself against market abuse, anti-competitive behaviour, money laundering, insider dealing, tax evasion, and forms of corruption.

Volume 1: The Emergence of the Modern Lex Mercatoria 5 greater justice, social peace and efficiency, in commerce especially the latter which may conflict with the former when a proper balance must be found and the public at large may intervene, for example in competition cases. That is another aspect of the public good and the challenge is how this must be perceived and works out in a globalising environment, assuming always that globalisation will continue. In practice, in dispute resolution, international arbitrators might here increasingly be asked to function as major spokespersons for this new order, but they are not law makers proper, a function which cannot truly be privatised in this manner. Such a role is thus limited and increasingly contested especially in foreign investment, as we shall see,4 but it raises an issue whenever the public interest is at stake. It might also be an issue when third-party rights, like in the assessment of proprietary rights, need to be determined especially relevant in terms of ranking and preferences amongst creditors—in civil law itself often considered a public policy matter. Much work in this regard may be done in the large in-house law departments of international companies that manage legal risk on a daily basis, see for the law in action also section 1.4.18 below. They must make the business work from a legal point of view and then also consider the public interest in its international ramifications as it evolves in the international flows and concerns, as just mentioned, foremost the world of emerging transnational minimum standards. Again, to the extent international transactions come demonstrably onshore, assuming this can still be identified in conduct and effect, local regulatory laws and values remain important (or within the European Union its public policy standards in areas of its competency). It was already noted that they may conflict, not in the least also with emerging transnational standards and may as such inhibit the international transactions in contradictory manners. As will be explained throughout, participation in globalisation and its benefits is not a one-way street and will require states who want the benefits for their subjects to adapt increasingly to these international minimum standards and support them, assuming they can be sufficiently identified. Whatever these complications and challenges, to the extent that commercial and financial law is still considered in essence national, therefore in particular in domestic transactions or in international transactions when still considered from domestic perspectives, which remains the starting point for many, the evolution of the civil and common law, their origins and their differences remain relevant first in discussing the nature and application of the applicable national law especially where they are likely to create problems if applied to international transactions. But also if we now put ourselves in the transnational flows of goods, services, money, information and technology, thus leaving the national perspective behind, and accept that commercial and financial law is to become fully transnationalised and autonomously operates as such, consideration may still have to be given to whether the common law or civil law approach and methodology (especially the civil law codification model and its systemic thinking and anthropomorphic perspective) is followed or favoured, or whether a different approach may have to be considered altogether. To this end, the differences between these two approaches will be discussed in greater detail below in sections 1.2 and 1.3, but since they condition so much thinking in these matters, they will be briefly introduced and summarised in sections 1.1.2 and 1.1.3 below in the context of their operation in commerce and finance.

4 This raises the important question of their powers, especially whether in these matters they may go beyond the representations of the parties and raise legal issues autonomously and clarify them, see the discussion below in s 1.1.11 and in Vol 2, ss 1.1.10 and 2.1.15.

6 Volume 1: The Emergence of the Modern Lex Mercatoria

1.1.2. Civil Law in Commerce and Finance For the moment, it is sufficient to note that in civil law countries5 the codification ethos looks primarily for legislation, therefore to the state and its legal texts, and (often) assumes in that connection that private law, including commercial and financial law, is one intellectually coherent national system that is essentially statutory or codified.6 This suggests that private law is imposed from above as an internally consistent intellectual framework that is complete, explainable from within, and capable of finding morally, socially, and economically satisfactory solutions for all eventualities, present, past and future, on the basis of the proper application of its rules or otherwise its system or the principles underlying it.7 This attitude is essentially rule-oriented and formal. Even in private law, in principle, it waits for the relevant state to formulate the rules and effectuate change through legislation when there is a need to adapt the law, which is thus national in its formation, states making here the necessary choices and, more dramatically and contentiously, ultimately also determining the relevant values. In this approach, other sources of law, notably custom and practices, but also party autonomy, are subservient to this law and even values depend on government recognition, thus also fundamental principles. It follows that this law is territorial in nature. Since the system and its coherence are considered of primary importance, this law becomes intellectual and professorial, states then being likely to rely in their codification efforts on academic advice to preserve rigour and consistency—at least that is the idea. A sharp distinction between law and fact is the consequence. The system is everything, facts follow and must conform. The application of this law is subsequently seen mainly as a technique, a ticking-off exercise, which has logic as its core. A particular feature is that it allocates to judges considerable power of intervention in the

5 As far as civil law is concerned (as will be discussed in greater detail in s 1.2 below), its history is largely Roman; its method is largely that of the natural law school of Grotius and his followers; and the nationalistic statutory approach is largely due to nineteenth-century political imperatives and developments. It will be argued in this connection that Roman law and the common law are the only truly original Western legal systems of private law. The natural law school may suggest a third development in Western Europe, but it is usually associated with the development of the Roman law into the modern civil law, as such highly important for a proper understanding of the civil law as we know it today. For valuable discussions of this development see the classic treatises of Paul Koschaker, Europa und das römische Recht (Berlin, 1947, reprinted 1953) and of Franz Wieacker, Privatrechtsgeschichte der Neuzeit, 2nd edn (Göttingen, 1967, reprinted 1996). 6 As we shall see below in s 1.2.9 this was particularly a German intellectual ideal, which, combined with the early nineteenth-century romantic emphasis on national culture and the subsequent notion of the creation of society according to preconceived intellectual or academic models (but always by country), also began to dominate civil law thinking outside Germany during the nineteenth and twentieth centuries. For German orthodoxy in this respect, see K Larenz, Methodenlehre der Rechtswissenschaft, 6th edn (Berlin, 1991) 6, 437 and the student version, revised by CW Canaris, 3rd edn (Berlin, 1995) 263. 7 From the outset, it may be useful to note that the issue of systemic thinking was important in the writings of the legal sociologist Max Weber (1864–1920), who distinguished the common law tradition. His general proposition was that in support of a modern capitalist system, the law needed to be rationally systematic to make its greatest contribution. In this view, formal legal rationality is maximised through legal systematisation and the work of the German Pandectists was explained in this way, see further the comments at n 240 below and Max Weber, Economy and Society (Wirtschaft und Gesellschaft 1922, transl Fischoff et al 1978), 810–11, 883. The English common law was identified on the other hand as not being systematic as it grew in a haphazard fashion. Nevertheless, it had allowed market capitalism to make even greater advances in England, at least in the early days. This puzzled Weber who noted, however, the formal nature of much of this law which was therefore knowable, and its close association with business practices based on recurrent situations, see Economy and Society, 787. The emphasis then is on predictability which is deemed enhanced the closer the law is (in this case not to a system but) to practical needs and realities. It sets out two different approaches although in both predictability ultimately takes centre stage, see also s 1.1.7 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 7 application which is considered clarification of the system, especially upon appeals, and it considers it their task in which facts may become similarly secondary. In that context, the judge will place the case from the beginning in this framework and will seek evidence in principle on the basis of this characterisation only.8 This is quite different from judges in common law countries who want to get all facts on the table first and then seek the nearest applicable rule in statutory texts and precedent where they are in essence guided by the parties and maintain a more passive role. As we shall see, there is no need felt for system building, the common law moves from case to case on the basis of the facts and coherence on the norm side is secondary. It is not intellectual and does not believe in superior abstract insights and is wary of generalisation. It is pragmatic as to the sources of the law and does not have logic at the core of its application. In the US, there is a stronger policy orientation but it is also not academic even if there is more respect for it. In the civil law, on the other hand, its statutory texts are meant to control all private law in the areas covered, including in contract potentially the contractual content and in property the way it is used even in dealings between professionals. There are no other considerations and even party autonomy operates here only by licence of the state.9 So does customary law and indeed fundamental principle. Private law is nationalised at the level of each state and even treaty law is in this view no more than national law adopted by the Contracting States. This system is then perceived as closed, extraneous sources of law are irrelevant, especially fundamental and general principles (unless underlying the system) but also custom or practice and party autonomy can 8 This is what in Germany is called Relationstechnik, often thought to be a form of intellectual prejudice, see also s 1.4.2 below, but it makes litigation shorter and cheaper. 9 A dynamic forward-moving force in the law is not denied, but it is not autonomous and depends on a liberal interpretation technique within this more static, abstract system, cf n 282 below for other (minority) views in Germany. This situation is very different from the one in the US under the Uniform Commercial Code (UCC), which encourages the common law, equity and custom or the law merchant to operate besides it (s 1-103), accepts and favours bottom-up law formation and is in that sense not a European-style codification at all. See for England also text at n 40 below. It is further imbued with realism as the Americans perceive it, see ss 1.3.4/5 below, which is guided by practical need and a continuous search for operational sufficiency which requires and allows constant adaptation in the practice of the law, here commercial law in particular, and permits its continued expansion ‘through custom, usage and the agreement between the parties’. There is true party autonomy and respect for the contract and its content as such, conceivably even operating in the proprietary consequences as we shall see, subject only to public order and policy requirements, as indeed there was on the European continent before the nineteenth century. This is also reminiscent of the older common-law tradition, although the English may now be somewhere in the middle. See again text at n 40 below. They do not require legislative texts and a top-down approach to pervade all law formation although legislation became increasingly important in private law as well and notably started to replace the equitable jurisdiction of the Chancery court. The Law Commission in particular favours texts of this nature. However, the English courts so far remain pragmatic, have always dealt with fragmented legal sources, and are comfortable with them. They are in particular more fact than system oriented, but some closing of the gap between continental and English legal thinking has been noticed and at least English academia often favours forms of system thinking and does not necessarily follow in the American more policy-oriented footsteps: see especially PS Atiyah and RS Summers, Form and Substance in Anglo-American Law: A Comparative Study of Legal Reasoning, Legal Theory, and Legal Institutions (Oxford, 1987) but cf in the US also GJ Postema, ‘Law’s System: The Necessity of System in Common Law’, ssrn.com, but note that a different notion of system may be here maintained, see for the views of Weber, n 7 above. No doubt there is also Scottish comfort with civil law thinking, which trickled through in particular into the Draft Common Frame of Reference (DCFR) as a model for EU codification, where Scottish academics have been more active, but, as will be discussed in greater detail below in ss 1.4.1 and 1.4.2, the tolerance for other sources of law and especially the respect for party autonomy, the lack of systemic thinking, and the absence of a belief in the sufficiency of the academic model and fact orientation remain the key distinguishing elements between common and civil law (of the German variety in particular). The legal certainty codified systems crave for and expect to result from them is not then similarly anticipated., although in England legal certainty is also often invoked to justify greater formalism but may then be more demonstrative of a business mentality.

8 Volume 1: The Emergence of the Modern Lex Mercatoria only operate to the extent the statutory texts specifically refer to them and allow them to do so. There is no other source of law. Justice, social peace and efficiency are deemed to follow automatically from its proper application. It can as such not be questioned. Even if modern more liberal interpretation may have weakened the original resolve, as we shall see, and reintroduced in fact at the level of application these other sources of law, which had been removed from law formation, this approach remains in essence in place and it may be considered the basic attitude in codification countries. It was the consequence of a significant nineteenth-century paradigm shift that did do away with the law’s universalism and bottom-up formation and changed the private law on the European Continent completely which subsequently also affected commercial and financial law. The result was the modern civil law, which became territorial and hardly remained one family except in its codification ethos, differentiating it henceforth fundamentally from the earlier universal Roman law (and ius commune), which had often been perceived as superior custom, the product of innate rationality, and also from the approach of the common law, which considered itself of similar immemorial usage. The idea is here that (a) all law, including private law, is national; (b) it issues from states, hence the dominance of legislative texts; (c) these texts present or aspire to present an intellectual framework or system which is internally coherent and complete; (d) this law is supposed to reflect per definition the reality of human relationships; (e) it is product of and subject to national public policies; (f) it can be logically applied and produces per definition justice, social peace and efficiency; (g) it is geared to natural persons and anthropomorphic but is applied similarly to professional dealings or what became the corporate sphere unless specific exceptions are made and they are few. This attitude continues in more modern codifications like the one in the Netherlands in 1992, the one in Brazil in 2002 and in the present Belgian proposal. As we shall see, in the EU projects for private law unification, like the Principles of European Contract Law (PECL) and the Draft Common Frame of Reference (DCFR), there is an unarticulated combination of these various notions, as there also is in the United Nations Commission on International Trade Law (UNCITRAL) and in the International Institute for the Unification of Private Law (UNIDROIT) projects. The sum total is the continuation of a top-down statist approach to private law formation, with its rigidity and lack of dynamism and innovative power, but also a strong consumer law inhibition, ethos and origin, because that was the only concern there was in the nineteenth century, when on the European Continent, unlike in England, commerce was not to the same extent prioritised. Rather, this anthropomorphic attitude wafted over to the professional (corporate) sphere when it started to emerge in earnest later. In common law, on the other hand, the contract and movable property law issued from commerce (whilst land law was feudal). The civil law till today, unlike the common law especially in equity, claims here a unitary approach for all relationships and transactions and exclusivity. This may have further consequences. These may probably best be demonstrated in showing that a pint of milk is in the civil law idea bought to be drunk, in common law to produce other goods for a profit. That may have far going consequences for the law of contract and movable property as we shall see and becomes self-evident. It cannot be repeated often enough that all of this is paradigm, as reversible as was its adoption, till this day largely of nineteenth-century vintage. Certainty is often emphasised in this connection but can be of such a low quality that it destroys everything and, in any event, can hardly keep up with events in the professional transnationalised sphere, see further the discussion in section 1.1.7 below. It remains nevertheless the basic approach of most in formal private law unification, which remains top down and to which the Draft Common Frame of Reference (DCFR) and its progeny as early models for codification at the level of the EU continue to testify

Volume 1: The Emergence of the Modern Lex Mercatoria 9 in the EU.10 It may be seen as some form of mini-globalisation, but remains statist, territorial, top-down, and consumer-oriented, very unlike the operation of the modern lex mercatoria and its different sources as we shall see. It follows that there is no real need felt for empirical research, interdisciplinary thinking and legal globalisation or transnationalisation.11 Again, this law and its approach and method are not fundamentally questioned, for example, as to their continuing fairness or morality, efficiency or responsiveness to (changing) social or economic needs.12 They are assumed to result from the system itself and the choices that have been made through it. Again, law application is technique and because it is the law, the outcome must as such be accepted as correct, never mind how far from practical realities it may be, and whatever unexpected and undesirable side-effects it may produce, or indeed how poor the intellectual back-up may prove to be or to have become in reality, especially in a transnational environment of business dealings for which nothing of this was ever made. It is the civil law expression of legal positivism (and formalism) and is still the mainstream of its thinking,13 even if in interpretation there may now be some flexibility at the edges, in contract notably under good faith cover, while the other sources of law return, it is submitted, through this back door, potentially also allowing in pressing cases for different treatment of professional dealings and amplifications and corrections on the basis of justice, the need for social peace, or efficiency or utility considerations including, conceivably, the need for growth. But the basic attitude remains to fit all developments into the system as it is perceived to exist and not to change it. The question then is how the practical needs of professionals and globalisation could find here accommodation. It was already said that the size of their operations may become an extraneous force supplementing or overriding the national systems, even if still corrected by public policy considerations notably expressed in regulation when international transactions come demonstrably on shore or transnationally conceivably by the operation of transnational minimum standards, although the facade of interpretation could still suggest that they are no more than an expansion of the positive law at the local level, so that the attitude can remain legalistic, doctrinal, formal, and nationalistic. This may well demonstrate in particular the present attitudes in Germany, which legally remains international business unfriendly. It may be severely tested if after Brexit business is to move to Germany, for finance especially to Frankfurt.14 In this approach, it is explicit that commercial (and financial) law remains an inextricable part of the national codification (whether or not contained in a separate statute) and subject to its method and way of thinking and application. Commercial and financial law thus continues to be perceived as national and intellectual, and must be made to fit into a pre-ordained anthropomorphic domestic legal system which we now identify with consumer law. It is not independent, but merely lex specialis or refinement. Even international commercial transactions are then so covered, and must find a solution for their problems in national laws. They are cut up accordingly—it was already mentioned, for there is no other law, the proper one per piece of the action then being found through conflicts rules or rules of private international law. They could be different even for contractual, proprietary and enforcement aspects, as already noted also, 10 See s 1.4.21 below. 11 Even in Germany increasingly questioned, see n 56 below. 12 Although the question whether morality in particular would be automatically served in this manner remained an important issue in nineteenth-century German philosophical thinking: see Roscoe Pound, Jurisprudence, vol II (St Paul, MN, 1959) 223, it became much less of an issue in the run up to the German Codification in 1900 and in subsequent philosophical discourse in Germany, see further again n 56 below and accompanying text. 13 For the modern form of legal positivism in private law formation and application, see s 1.4.17 below. 14 JH Dalhuisen, ‘Business Law in Europe after Brexit. The Need for Legal Transnationalisation in the International Market Place. The Example of International Assignments’ SSRN Working Paper Series (2021).

10 Volume 1: The Emergence of the Modern Lex Mercatoria based on the idea that for each part of an international transaction the approximate local contact and local law can still be found. In this mindset, legally an international transaction cannot exist as such, nor is there a different place for professional dealings or for the realisation that these national laws were never made for that newer world. There then follows the need still to chop up the international professional flows into domestic pieces, never mind efficiency and rationality in the hope that the different legal pieces together form a satisfactory legal regime for any transaction in these flows. The conduit is thus still provided by the rules of private international law which are not themselves transnational either—in fact there is nothing international about them—they have become merely national rules of the forum (although there is some unification through treaty law mainly promoted by the Hague Conference as we shall see in section 1.4.20 below) through which the most appropriate proper (national) law is perceived to be found in international cases, again also as technique. It may be the law of another state but only by licence of the forum state’s rules. Thus the following picture arises in civil law countries: (a) The further development of the law, even private law, is perceived primarily as an activity of states and as such it is centralised and monopolised at state level. Law, even commercial and financial law, is thus deemed to be made and imposed, not found, even if it may be based on an intellectual analysis of prior experiences. In particular, it denies the autonomous law creation impulses that may emanate from other groupings, especially commercial and financial practices or custom unless admitted by the state system, which always has the last word. (b) This law, even if commercial and financial, is academic or professorial and maintains in civil law countries an aura of self-evidence that derives from the pretence of intellectual consistency and completeness of the system as a whole. Its true legitimacy is not then found in the democratic process, which in any event was often wanting when this law was first enacted, or in business even in economic rationality, efficiency, or market acceptance, nor in its search for justice, social peace and efficiency either, but in its systemic consistency and conceptual unity, which claims by definition to be close enough to reality—even commercial and financial reality—to guide it and, if necessary, to redirect and control it for the greater benefit of all participants and the public at large. It is truth. Again, justice, social peace and efficiency automatically follow and the result cannot be questioned. It is the law. (c) In the German perception in particular, it follows that all of society is so ordered or should be so. Anything that is beyond is has the aura of illegitimacy. Freedom is suspect and in essence a licensed concept. Society is rule based and then operates only by virtue of the state. This is not democracy, it could be any state, but it is autocratic in nature. Though it has worked well for Germany and then also became a guiding principle in the EU, it was never accepted in the UK where all is free unless regulated, here regulation is suspect. It was always the true issue behind Brexit and a dilemma the EU could not internally resolve. (d) In practice, the further consequence was a sharp distinction between norm and fact, or legal system and its application, the former dominates, facts must follow or become irrelevant. In the application, this system and the knowledge thereof allow for a mapping out of the applicable law on a cursory consideration of the facts. In a dispute, it leads to an early determination of which facts in each situation are legally relevant and must be proven. Again, the system is all, facts must conform. This is in Germany called Relationstechnik as we have seen and may suggest considerable intellectual prejudice in the formulation and application of the law and in the solution of a case.15

15 See

n 8 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 11 (e) Whilst in codification countries, at least the national private law regime is perceived as one intellectual statist system that monopolises the field, it followed that commercial and financial law is also considered part of, and captured in that system, its methodology, and dispute resolution approach. It is not perceived to be independent from it but is merely lex specialis. These specialised areas have, therefore, no separate place in the law and cannot evolve independently. Commercial and financial law must fit the (national) system and is then confined in its evolution to what that system recognises and allows. Worse, in this approach the anthropomorphic nineteenth-century consumer focus of private law also applied to the corporate sphere and in business dealings whilst proper distinctions were nor made. The system was unitary, in principle the same for all. (f) This type of monopolisation of the law formation function at the level of the state also confirms that there is little room for the operation of other sources of law, such as commercial and financial practice and custom, or for general principles (other than those underlying the codes), whether or not commercial, national or transnational or for efficiency considerations or considerations of economic growth or even for any cost-benefit analysis, unless expressly admitted or tolerated by the codes or their systems themselves. Even fundamental principle is state dependent, our values depend on state recognition, a particular challenge in democracies. (g) It has already been noted that in this approach, party autonomy setting forth the terms of a deal in contract also only operates by government licence and is therefore constrained to what the codified system will allow and it is not respected per se.16 This confining approach to party autonomy goes far beyond the ordinary constraints derived from public order and public policy considerations which parties must respect and accept as overriding. It concerns here the validity of their agreement itself, which thus depends on statist fiat. There is in fact no party autonomy as an autonomous source of law. (h) The result is that this law is perceived as static and without a dynamic forward-moving force except through legislation, which raises the important question of interpretational powers and freedom in the state courts. It long remained secondary as the legislative approach supported by system thinking and a nationalistic outlook remained the focus, assuming for its further development government insight (through its academies) into what was necessary in terms of updating and adaptation. Commercial and financial law shows, however, that such insight may not be forthcoming and that autonomous law-creating forces therefore remained necessary to keep private law functional and living. At the more personal level, this was also obvious in family and employment law. (i) Thus, fundamental and general principle, custom and practices, and party autonomy came back, although not openly but rather hidden in a liberal interpretation technique of a domestic nature, in contract in modern times often operating behind the notion of good faith, although that still did not mean that the unitary approach was abandoned and proper distinctions were made. In particular. relationship thinking and the necessary distinction between consumer and business dealings remained an important issue. 16 Note that in pre-codification times, this autonomy was subject only to public policy constraints which were at first expressed mainly in the notion of a just cause (iusta causa), see Vol 3, s 1.2.6. The approach in modern codification is quite different: party autonomy itself is licensed and not merely made subject to public policy and public order limitations. Nothing can be done without a state’s fiat. All that is outside the system is potentially illegal. This suggests a form of state absolutism. It denies in particular room for autonomous community law formation in a diversified society, see also the comments at nn 623 and 641 below, which means that even in a democracy there must be room for others than the state. One can also say that there are ways of law formation that are much more participarty than formal democracy can ever be, especially demonstrated in custom and practice burt also in the progression of our social values.

12 Volume 1: The Emergence of the Modern Lex Mercatoria (j) Indeed in the case of doubt or when situations were not explicitly covered or were new, and thus where the formal law lagged behind, even in civil law, from early on, there had been some greater interpretational flexibility, but it was based on an extrapolation of rules from existing legislation and its system or implementing case law which was in its origin and remained in its elaboration basically anthropomorphic. This could also mean inductive or otherwise analogical reasoning, even purposive or teleological interpretation,17 but, although in this approach in modern times this more liberal interpretation technique was thus allowed to provide greater flexibility, while even pressing ethical, social and efficiency considerations might creep into the interpretation process (in contract through the good faith notion), this was still mainly allowed to support and complete the national system, its tenets and especially its credibility and limitations. In essence, this method of interpretation continued to be subservient to the system rather than to society or to the community this law served, which system was still perceived as decisive, formal. and closed in principle.18 (k) The assumption remained that this consumer-based nationalised system had the answers also for international commerce and finance even after the degree of globalisation as we now have it and also covered professional commercial and financial activity regardless of its emphasis on intent, individualisation of assets, their use and disappearance as consumer product rather than as building blocks in the production chain and enhancement of their value. (l) This formal nationalistic attitude thus affected international transactions also, even those in commerce and finance. Although these transactions were likely to be outside the immediate scope and concern of local codifications, which were seldom written for them, they had to fit into national laws as there was (in this way of thinking) no other. As we have seen, international transactions were then cut up per country in the hope that the totality of the domestic laws applicable to the parts would add up to some sensible legal coverage overall and that indeed in each part the applicable local law would have some answer that per definition also reflected broader needs in a larger world. (m) It thus became necessary to search for the appropriate, but always national laws in the above sense in respect of each aspect of an international transaction under applicable conflict of laws (or private international law) rules in international cases. It led to the application of the domestic law considered the most closely connected (for the time being) with the relevant aspect of the transaction in question, even if it became increasingly difficult and artificial to define or identify the connection, whilst the outcome in terms of the applicable law could still be different in contract, property, and enforcement aspects. This became all the more problematic now that many of the international flows are in constant movement and transformation, often intangible (services or even receivables or information and technology) or virtual as we have seen while through derivatives, risks can be separated from assets and may be located elsewhere. (n) All the same, and alternatively, a more liberal interpretation technique creating some flexibility at the edges could have led to the extrapolation and expansion of the lex fori into

17 These techniques go back to the analysis of FC von Savigny, see 1 System des heutigen römischen Rechts, 222 (1840). 18 It posed at the same time the question of the relevance and status of case law, the law creating the function of judges, and the importance of precedent—issues, which, as we shall see in s 1.2.13 below, also acquired increasing importance in civil law in the latter part of the twentieth century when older codes and newer fact situations demanded greater flexibility to preserve the relevance of these pre-existing texts.

Volume 1: The Emergence of the Modern Lex Mercatoria 13

(o)

(p)

(q)

(r)

international cases, especially taking into account the foreign elements of the case and its professional nature, and then increasingly also other more transnational sources of law so that a form of transnationalisation would result in the interpretation of domestic laws. This is an approach that gained some ground in the US especially in interstate dealings, as we shall see,19 but not so far in Europe. The problem is that each national legal system then creates its own form of transnationalisation, in which the internationality of the transaction itself remains under-emphasised or is even denied. There is no unity or uniformity in interpretation and no way of coordination. Quite apart from the problems of identifying the closest connection, particularly in factual situations with many (shifting) contacts or where in a virtual world contacts could hardly be established, there naturally arose, in this approach, ever greater problems when considerations (or values) surpassed national concerns, it being implicit in the codification approach that all moral, social and economic ordering, as well as an adequate level of legal certainty, had to be provided by a national legislator, also in international cases. This was hardly any longer feasible in an ever more globalising world and economy, nor was it rational to continue to expect it. Environmental and public health issues may provide the most obvious example as they do not stop at borders. Rather the international marketplace has or should find its own value constraints expressed in transnational minimum standards or otherwise treaty law assuming a sufficient international consensus. Regulation, which remained also mostly domestic, increasingly became a legal problem in international transactions as well, as in international transactions it often had to be established which governmental interests prevailed in this connection and in what aspects of the transaction if they were conflicting. A doubling up of standards could also result (from home and host country). This raised, first, the issue of the proper jurisdiction to prescribe— as the Americans call it20—as well as the question of the operation of international minimum standards which could replace national (regulatory) laws in this regard. Although private law terminology is often still used in terms of defining the closer contact, the real issue is thus the proper allocation of jurisdiction between the states most directly concerned with the transaction (or situation) in matters of public policy or otherwise to find a transnational policy standard either in private or regulatory law. It assumes a higher rule, which conceivably could then also transnationalise the applicable regulatory laws. In the EU, this may happen at the level of its Founding Treaties, notably since the EU Treaty of Amsterdam of 1998 in the area of private international law. The key issue becomes here, as we shall see, who is the proper spokesperson for this higher order (or the public interest) if not embodied in treaty law (or in the EU in its founding principles), and more particularly who speaks for the public interest as correcting force when (private and regulatory) law is transnationalising without treaty law or for the EU area with EU law support which remains limited in scope in terms of authority and competency.

Returning to our above example of an international car manufacturing company that needs financing for which its international business operations are the natural security, why must they be broken up into domestic parts so that financing must be obtained for each separate piece assuming they can still be identified, remain in place, and not further transformed? As submitted, 19 See s 2.2.3 below. Even in the traditional conflicts of law approach, this may well reflect what actually happens in practice. See for the traditional European statist approach, H-P Mansel, ‘Private Law Doctrine and Private International Law’ (2019) Chinese Yearbook of Private International Law 2017 21. 20 See s 2.2.6 below.

14 Volume 1: The Emergence of the Modern Lex Mercatoria it was never more than the result of the nineteenth-century paradigm that all law is national and emanates from states; only 50 years earlier people had held exactly the opposite view and considered the law universal in principle, personified on the European Continent by the Roman law that had nowhere been promulgated but was generally accepted as superior non-territorial higher customary law. Modern globalisation drives us back into the direction of universality in the commercial and financial sphere. To repeat, it is hardly any longer a matter of dogma or philosophical thought, but simply one of efficiency, greater rationality, and better sense. But there is more. At the intellectual level, the civil law approach in particular assumes that at least in matters of private law we live with an account of human behaviour that can be clarified scientifically and is orderly, in essence based on repetition and past experiences. That is the neoclassical view in macroeconomics, which is often believed to have failed us, but we struggle with the same problem in the law. Since the codification approach in its purest form does not consider that the future is much different from the past and that all can be systematically captured in rational national systems, it has particular difficulty in explaining why in a globalised professional environment much of it is still national, anthropomorphic (the same in personal dealings and in business), and cultural, therefore territorially different, even in commerce and finance. This remains nevertheless the underlying assumption but why is the law of assignment or set-off, for example, culturally determined in commerce and finance? And if it nevertheless is, then at least it could be asked why international transactions could not have a culture or rationality of their own and acquire their own transnationalised legal regime that might operate quite differently. This means that exclusively applying national legal systems to them, which requires the international flows to be broken up along artificial lines as we have seen, implies a contradiction if we put rationality or even culture at the centre. Rather, it would lead to acceptance of the transnational commercial and financial legal order to operate besides those of states, if necessary, in coexistence with them in the same territory, see section 1.5 below. The consequence is nevertheless that in considering better (private) law, even in international commerce and finance, the inclination is still mostly to remedy the shortcomings in a national context, the idea being that new or ever evolving patterns, even if transnational, can still be satisfactorily covered in this manner. Proper and ever better analysis of past national experiences then remains the ultimate guide in law formation, completed by intellectual extrapolation and systematisation in law formation and logic in its application. The idea is that ‘truth’ in human relations and how these relationships work can still be established in this manner, and reality can be discovered and expanded in national academic models, and can still be correctly guided, for which, in that view, the nation state with its power of rule imposition and enforcement continues to be the superior channel even if in its codifications international transactions and its special features were never considered and nothing was written for them. For those who still think this way, the only alternative to national codification for international dealings is treaty law, which is in this view upon ratification still considered the expression of national law, retains its territorial character, and always remains a superimposed statist formal legal facility.21 The other alternative 21 This attitude is not limited to civil law, as we shall see. Thus Roy Goode, ‘Rule, Practice, and Pragmatism in International Commercial Law’ (2005) 54 ICLQ 539, 549 limits uniform law in this sense to treaty law. That seems extreme precisely because of treaty law’s territorial aspects, although it is admitted that transnational commercial law also covers other sources of law, like model laws, contractually incorporated uniform rules, international restatements, and conscious or unconscious legislative or judicial parallelism, but it is less clear how autonomous these sources are—they are called soft law, no more, on p 541, see for this concept also n 560 below. Its status is unclear and there is no attempt at ranking. More importantly, the transnational status of the modern lex mercatoria, seen mainly as (contractual) practice, is doubted and would still appear dependent on a national law for its recognition while the international commercial and financial legal order is not identified as autonomous. Note that

Volume 1: The Emergence of the Modern Lex Mercatoria 15 is acceptance of some form of ‘soft’ laws which remains a vague concept, often associated with a liberal interpretation technique of domestic laws. However, in the application of national codified law or also of treaty law of this nature, inconsistencies and inadequacies could not be avoided, even purely nationally, and this is only too obvious when we start considering incongruous facts or newer situations never contemplated even domestically. The subsequent need for a liberal interpretation technique meant, as we have seen, that other sources of law—which in a globalising world were not necessarily territorial— revived at the national level, not least therefore also in international professional dealings. Thus, fundamental and general principle, custom or industry practices, as well as expanded notions of party autonomy, resumed their traditional roles to sort out these contradictions and inadequacies and to make better sense, although in civil law academia this development remains in essence largely ignored and hidden behind (national) system thinking, even for international dealings. Again, where they become visible, they are usually explained away as national system supporting. Domestic statutory texts and their logical coherence thus remain the centre of attention, even if some uniform transnational law may now be considered, at least in so far as it is expressed in treaty texts, while liberal interpretation is further admitted in order to save the national system and its credibility. All the rest is only considered to confuse and to deviate from the proper stateordained path or order. It is not law.22 In the EU, the DCFR, already mentioned, which since 2008/2009 has been presented as a model for European codification even though it has as yet no official status except for its sale carve-out in the 2011 EU Commission’s proposal for a Regulation concerning a Common European Sales Law (CESL), already withdrawn in 2014, is the latest expression of this thinking. In that sense, the DCFR and CESL were concerned mainly with remaking the past in a territorial manner, now at the level of the EU (see further section 1.4.21 below and more particularly Volume 3, section 1.6 and Volume 4, section 1.11). Thus, the approach remains academic, systematic, legislative and nationalistic, albeit at the expanded EU level but in the traditional civil law, mainly German, codification manner. In fact the codification methodology was never reconsidered but accepted as dogma. To repeat: in civil law orthodoxy, there is little room for autonomous commercial and financial law at the national level, let alone transnationally, the emphasis and perspective remain consumer law. Newer globalising tendencies and needs thus continue to be ignored, even in commerce and finance. Only treaty law of the modest quality of the CISG is perceived as escape and then still considered national and territorial in its application. The DCFR as a kind of model civil code

usages are here distinguished and seem not to be part of the modern lex mercatoria at all, although their true status remains also less than clear. It would seem that the true impulse is merely some coming together of national laws. There is no fundamentally new methodology or approach. 22 Younger scholars operating with the lex mercatoria and in principle accepting its existence may still struggle with its status also, cf. eg B Muscat, Insolvency Close Out Netting: A comparative study of English, French and US laws in a global perspective (PhD Thesis Leyden EM Meijers Institute 2021), 13, and tend then also to see it more like guidance for local laws, depending on recognition nationally. The perspective of this book is different: the international legal order and its laws speak for themselves, not different from public international law, the sources are the same, it is not a question of prior national recognition, but states may in their territories use the public policy bar to curtail its force, which derives in commerce and finance from the international marketplace itself. In this vein, I Meworach, The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps (Oxford, 2018), 259, acknowledging that universalism can crystalise into binding law in the form of international customary law when there is a belief that a practice conforms to international law. The view in this book is that where states still systematically try to curtail it or do not want to fit it in their bankruptcy laws (especially relevant in matters of set-off and netting, and in the transfer or bulk assignment of monetary claims with debtors in different countries), they risk placing themselves outside the international legal order and deprive themselves from its benefits.

16 Volume 1: The Emergence of the Modern Lex Mercatoria for the EU and its progeny, was in fact product not of transnationalisation but rather of national codification thinking, now at EU level, along the nineteenth-century anthropomorphic/consumer and top-down model. Whether it ever made sense for business was never considered, in fact little of its methodology was ever explained and proper thinking was automatically presumed to result from a continuation of the nineteenth century codification ethos. It follows that there is little or no understanding of the emergence of a transnational commercial and financial legal order with its own perceptions of law and its own public order requirements, the result of which is now usually referred to as the new or modern lex mercatoria or international law merchant accompanied or corrected by international minimum standards and aiming at justice, social peace and efficiency in its own world.23 It will be posited throughout that this new law merchant is not based on, and does not adhere to, the civil law codification idea but allows various sources of law to operate and establishes a hierarchy between them. It is law in that order and not merely something ‘soft’. As we shall see, this suggests at least in part a bottom-up, dynamic process of law formation and application and goes back in method to pre-codification days and reminds, as was already mentioned, in more modern times of the law finding and law application activity in public international law or the law of nations. In its details, it is more akin to that of the fact-oriented common law, although it might allow for more academic thought in its formulation. It is then also less anthropomorphic, potentially more comfortable with a corporate environment of legal rather than natural persons, in which as we have already seen, intent or will in contract and physicality and identification of individual existing assets in movable property law are less pivotal, see section 1.1.6 below. Most importantly, where an anthropomorphic attitude to law formation and operation suggests in modern times a consumer ethos and protection facility, in civil law wafting soon over to professional dealings, this is coming to an end and was always less likely in a common law approach and henceforth in the modern lex mercatoria. As already mentioned, the EU is not much wiser and often poorly informed. Lack of newer thinking was reflected in the Common European Sales Law (CESL, now withdrawn, see for a critique Volume 3, section 1.6.13)24 which covered in a draft Regulation a subject (sale of goods) that in common law traditionally belongs to the area of commercial law. There was no whiff of a transnational approach. Again, the methodology was never properly considered; the civil law codification idea was assumed to be natural and uncontentious. Although limited to crossborder dealings within the EU, the operation of the modern lex mercatoria was ignored; as an opt-in instrument, the only alternative remained here implicitly national law. There were still no other legal sources admissible in international professional dealings, although it could be very much questioned whether there was sufficient EU authority to exclude them. As a minimum, this should have been part of the discussion. The idea that there might be a separate legal order for professional dealings altogether, which develops a law that is not primarily state controlled, is dynamic, not territorial, and also applies within the EU, may remain inconceivable here, but 23 In the following, the word ‘international’ will be reserved largely for trans-border public law and ‘transnational’ for trans-border private law. As we shall see, recognition of other sources of law, especially customary law, general principle and party autonomy as original sources of law, was never as problematic in public international law as was expressed in Art 38(1) of the Statute of the International Court of Justice. This reflects the older Grotian approach, which, until the nineteenth century, also prevailed in private law and of which there may remain more in the common law approach. The revival of the same approach for transnational private law formation is the preferred one in this book, see also JH Dalhuisen, ‘Legal Orders and their Manifestation: The Operation of the International Commercial and Financial Legal Order and its Lex Mercatoria’ (2006) 24 Berkeley Journal of International Law 129. 24 See further JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299; see also SSRN Working Paper Series.

Volume 1: The Emergence of the Modern Lex Mercatoria 17 it was always the real issue. In the meantime, the DCFR did not convince and the project has receded into the background, in any event, there was never EU jurisdiction for a full codification of this nature, see again section 1.4.21 below. Quite apart from its other defects and pretentions, nationalistic system thinking of this nature, even at EU level, around pre-existing hard and fast local rules applied also in international transactions, however cut up, or even covered in treaty (or comparable EU) law, has a tendency to stultify the law whatever the reach of more liberal interpretation techniques may be. In fact, this static statist civil law approach to law formation has a problem with all innovation and societal contingency, even domestically, thus not only in international commercial and financial dealings. In more modern language, it has particular difficulty with the legal response to a globalising world and cannot cope with its dynamism (see also section 1.1.6 below). It cannot support it for what are in truth no more than theoretical reasons and faded nineteenth-century paradigms. The rationale of globalisation is simple and the need for the law to support it is clear, at least, it would appear, if we want to retain our present lifestyle and welfare and even progress: in this manner better products are more cheaply obtained, better services become available, and economic activity is enhanced. It supports the old argument (Ricardo) that even unilateral opening of borders is beneficial so that these better and cheaper goods and services can come in: we want the best car worldwide, not what our own industry can produce, which especially in small countries may be very basic or very little, or as in the old Soviet Union of low (but sturdy) quality. It makes us better off and capable of producing better products or services to exchange or export. Of course, the local industries could obtain technology licences and other help from abroad to produce more locally—and this was a common feature before globalisation took hold—but it may still not be the same and more expensive for lack of scale. Rather, it may be better to concentrate on what we can do best, organise our workforce and other resources accordingly, and exploit that advantage internationally in a free exchange worldwide for the greater benefit of all, and make the law follow. If in a more populist environment, globalisation must now go more underground, as it had to in the 1930s with disastrous results, it is likely to re-emerge eventually, at least if in the West we want to hold on to our current prosperity. It requires continuing re-education of the work force and other participant. Clearly, for the workforce, competition with sharply lower hourly labour cost elsewhere can have considerable short-term disadvantages and social costs. But it is exactly the resulting greater efficiencies that supports this process meaning that the work force in more prosperous countries must concentrate on what they can do better in a more sophisticated environment, which must focus on producing or on the rendering of more sophisticated and higher value products and services in an international trading environment that is as free as possible. Further education thus becomes the key. If one considers the other threat posed to the workforce, being robotisation, which is probably the bigger hazard, this becomes all the more essential. Importantly, in this world, finance or liquidity with the attendant services must become accessible beyond what domestic markets might be able to provide in domestic savings and the inflow of foreign capital may then be considered a necessity too. This was very much behind the total reinvention of finance in the 1980s, see Volume 5, which became substantially transnationalised and was notably able to do away with local foreign exchange, interest rate, and other controls, first in the Eurobond markets (and its repos, custodial and clearing and settlement facilities) and later more broadly in the swap markets. In any event, investment securities can now be traded anywhere in the form of security entitlements in book-entry systems. This indeed proved an autonomous process of transnationalisation25 that is feeding on itself and allowed the offshore

25 See

s 3.2.3 below.

18 Volume 1: The Emergence of the Modern Lex Mercatoria Eurobond market (which has nothing to do with the euro currency) to become the largest capital market in the world, celebrating its sixtieth anniversary in 2023, see further Volume 6, section 2.1.2.26 In banking, whatever the pros and cons in terms of financial stability and the deregulatory ethos which became especially clear in the aggressive lowering of capital adequacy standards through the Basel I and Basel II Accords (only partly undone in Basel III, see Volume 6, section 2.5), the international flows of finance, financial instruments and related services were greatly encouraged and borders were opened, in the EU through so-called passporting to avoid double regulation, elsewhere this was sometimes done even unilaterally, see further section 3.2.3 below and Volume 6, section 2.1.2. This was of further consequence for the law applicable to these flows, which became increasingly transnationalised, clearest probably in the Eurobond and swap markets without much fanfare, see the discussion in sections 3.2.3 and 3.2.5 below. It may be posited in this connection that nationalistic system thinking in the above manner is the reason why modern civil law has been particularly wanting in this development in international commerce and finance, and this is bound to show up even more after Brexit if business, especially in finance, is drained from the UK. It always increased legal risk in these areas, and steadily drove vital markets away to London, New York, Hong Kong and Singapore, all common law jurisdictions.27 It is therefore a special issue now that after Brexit continental financial centres may be trying to retrieve business from London. As already mentioned, a more liberal transnational interpretation might be used to save the domestic civil law systems and their credibility in this regard but the techniques mostly remain national-system-bound and are in any event antiquated in contract and movable property law. This will be further discussed in Volumes 3 and 4. See more particularly the discussion in section 1.4 below for the reason why, at least in commerce and finance, this civil law approach as a national model or system must now be more fundamentally revisited.28 It was not always thus, and may no longer be the way of the future, but it is the nineteenthcentury inheritance, often closely associated with the emergence of the modern state in continental Europe which emerged after the Congress of Vienna in 1815. On the European Continent, this nationalistic and intellectualised approach, philosophically underpinned by romanticism and

26 The total dollar equivalent issued in this market in 2012 was US$ (equivalent) 4.5 trillion; the total outstanding amount is in the region of US$ (equivalent) 26 trillion, the repo market in Eurobonds being around US$ (equivalent) 7 trillion. Compare the second largest capital market: the (domestic) US treasury market, the total outstanding amount being about US$ 16 trillion. According to the Bank of International Settlement (BIS), the international swap market exceeded US$ (equivalent) 600 trillion (un-netted) in outstanding swaps by the end of 2012, a little lower than the year before. In 2020, the new issuing in this market was more like US$ 6 trillon (equivalent), the total outstanding asmount in the region of US$ 30 trillion (equivalent), the repo market US$ 7 trillion (equivalent), the US treasury market US$ 21 trillion, and the international swap market in the region of US$ 500 trillion (equivalent, unnetted). 27 See for the challenge to get it back, JH Dalhuisen, ‘Business Law in Europe after Brexit. The Need for Legal Transnationalisation in the International Market Place. The Example of International Assignments’ SSRN Working Paper Series (2021). We may see that increasingly there is a beginning of acceptance of a more transnational approach in countries like France where it is demonstrated in particular in the attitude to international arbitration, perhaps best represented before the Hague Academy by Emanuel Gaillard, ‘Aspects philosophiques du droit de l’arbitrage international’ (2008) 329 Receuil des Cours 49; see further Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia v Societe Rena Holding et Societe Mnugotia Est Epices, Arret n 1021, 207 Revue de l’Arbitrage, 507. 28 See for a summary of the methodological and practical approach presented here, JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers University Law Review 17 and BH Druzin, ‘Anarchy, Order, and Trade: A Structuralist Account of Why a Global Commercial Legal Order is Emerging’ (2014) 47 Vanderbilt Journal of Transnational Law 1049.

Volume 1: The Emergence of the Modern Lex Mercatoria 19 its nationalism and consumer mentality, superseded the received Roman law, which, as already mentioned, was never officially promulgated but had been customary, considered the expression of rationality, and was supported by the secular natural law of those days. It had not been statist or territorial and was universal,29 applying alike to relations with and between states, other entities and private individuals, although particularly in commerce and finance it was supplemented by a myriad of newer local laws and practices.30 In fact, there were multiple sources of law that could compete, though in most parts (except France) the Roman law was considered superior in the case of conflict as we shall see in section 1.2.5 below. It is also relevant that there was in those days a variety of judges,31 the judicial function often being private, and they would use their own knowledge of custom and practices to facilitate the proceedings, as specialised arbitrators might still do today.32 Enforcement was also often private

29 See s 1.2.4 below. This Roman law was still subject to competing local laws, see s 1.2.5 below. Fundamental and general principles, custom and industry practices supplemented it, especially since Grotius in the secular natural law schools, see s 1.2.7 below. Moreover, parties could freely legislate among themselves (subject to the requirement of a valid cause or similar public policy constraints which were then minor) and there was true party autonomy in the legal sense, contract being an original source of law. For the history and remnants in France and present day revival of party autonomy as a more autonomous source of law, see s 1.4.10 below. Civil law codification wiped them all out as independent sources of law, see also B Cremades and S Plehn, ‘The New Lex Mercatoria and the Harmonisation of the Laws of International Commercial Transactions’ (1984) 2 Boston University International Law Journal 324. At first, this was for obvious efficiency and transparency reasons— therefore as a product of enlightenment or rationalism, which also entailed the centralisation and nationalisation of the judicial function. It is substantially the background of the French Code Civil, as we shall see in s 1.2.8 below, but the codification drive was later joined and became dominated by forces of pure nationalism in the romantic Rousseauian and German (Hegelian) variant of the codification theme, in which the state became the expression of the general will—the secular messiah with the deeper insights—or even the true embodiment of the human condition—the individual and its law being considered nothing by themselves, see s 1.2.9 below. Subsequently, modernism conspired to see the state as the true motor of society and its continuous transformation, not only using but in fact monopolising in this connection the law making function, see s 1.3.7 below. Ultimately states of this nature took charge of what they then believed to be a society in which they saw themselves as the originator and enforcer of all rules per country. Commerce and finance were not excluded and their international reach was ignored. Legal orders different from states were denied existence. There is no place here for international law either, except as some ultimate, unreachable ideal (in terms of world nationality). Whether these state absolutist notions in law formation helped or distracted from modern capitalism, is less clear. The initial idea was in any event not to redirect and censure trade and commerce, but as we have seen the commercial law was henceforth lex specialis to the national, state-created, system of (anthropomorphic) private law as there was no longer anything else. Whatever international legal unity there still was depended in this approach on the old traditions being recognised in the new laws (although transformed to fit the general private law system per country) and otherwise on treaty law. 30 This is often referred to as the older lex mercatoria. It should be understood that its rules were not the same everywhere but developed in answer to practical needs, often of a local nature; see also Emily Kadens, ‘The Myth of the Customary Law Merchant’ (2012) 90 Texas Law Review 1153. Only to the extent that these needs were generally felt did the rules show some innate uniformity but there were still significant differences, see also FR Sanborn, Origins of the Early English Maritime and Commercial Laws (New York, 1930) 126. The laws of admiralty, for example, were not the same on the English Channel/French coast and offshore Italy (the Amalfian Table). The bankruptcy laws also varied widely. See JH Dalhuisen, Dalhuisen on International Insolvency and Bankruptcy (New York, 1986) 1–25ff. The importance of this discussion is therefore not in legal uniformity per se but in the bottom-up response in commerce to practical needs. Importantly, it should also be realised that when, in those days, the public interest became engaged, it was mostly expressed at the local level, often in city or regional ordinances (droit de police), eg in bankruptcy, and not at the level of the state. 31 See WC Jones, ‘An Inquiry into the History of the Adjudication of Mercantile Disputes in Great Britain and the United States’ (1958) 25 University of Chicago Law Review 445. 32 It is well understood that modern arbitrators find on the basis of laws and facts as pleaded by the parties and are not free to use or rely on their own knowledge, at least not without a proper hearing and argument, unless they

20 Volume 1: The Emergence of the Modern Lex Mercatoria and therefore conducted within the commercial communities themselves. The expulsion from the trade or guild was as effective as official enforcement tools. In fact, law formation and even enforcement were not the natural province of states, except perhaps in criminal cases. Law formation did not issue from above, at least not in commerce unless public order was engaged, as was considered the case in bankruptcy, but it was otherwise exceptional and even in bankruptcy mostly exercised at the level of cities or regions, not nation states. Where texts were produced, they were also normally city or regional compilations of existing customs gathered mainly to provide greater transparency in local marketplaces and to promote local trades more generally (in which local government often had a taxation interest, which also explains the eagerness to provide order in marketplaces and physically to protect trade routes as far as possible). Thus, the purpose was not to pre-empt or prevent further development by the commercial communities themselves (which were not united except by the needs of their various trades which could be very local) but to promote it.

1.1.3. The Common Law in Commerce and Finance In the common law, the situation was and still is different from the one we find in modern civil law countries. In its formation and further evolution, common law was often helped, sometimes corrected, but never monopolised, by legislation. The Crown in its enforcement function would accept and enforce this law however it formed itself. System thinking and the search for and application of one coherent framework of private law are here not major issues either, at least not traditionally. Generalisation and intellectualisation are suspect. By its very nature, the common law moves from case to case, is factual and results-oriented, and in principle leaves room for other sources of law in trade, commerce and finance, especially industry practices or customs, supported by party autonomy and therefore by the order that participants create among themselves. This should not be idealised, but it is clear that the common law has, at least in principle, the tools and willingness to be more responsive to practical needs, if not at law, then in equity. It solves problems and does not build systems. It means that it operates more on the fact than the rule side. It has avoided the grip of the academic model and its claim to rationality and exclusivity. One consequence was that commercial law was able to retain a more independent status and role in common law countries, although especially in England, nationalism and the tightening grip of the common law itself also impacted on a more decentralised approach to commercial law and on the reach of party autonomy, custom and commercial practices, as we shall see.33 This also affected the commercial law’s international status in England. It became there also substantially territorial but it retained a more autonomous status.

may state as amiable compositeurs or the arbitration is specialised and depends on peer knowledge in arbitrators, not unusual in quality issues, which are largely factual. It is a different type of dispute resolution, not arbitration proper, however, based not on law (as pleaded by the parties) but on expertise in arbitrators, and presents an older type of dispute resolution which left decisions to senior experts trusted in the particular trade, often not requiring any reasoning either. It is then purely contractual, also in its enforcement, see further Vol 2, s 1.1.4. 33 As to general principle as another source of law, the common law had always been wary of it, as on the whole the English dislike generalisation, see s 1.4.7 below. Worse, perhaps, was that even custom became subject to the law of precedent, depending as such on court recognition, see text at n 34 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 21 In fact, in England by the eighteenth century, commercial law had been incorporated into the common law and had lost its true independence34 although it was not completely subsumed and it retained some special place, in particular through the endeavours of Lord Mansfield.35 But as its courts were overtaken by the common law jurisdiction, this restricted the further independent

34 In England, there was some statutory law from early on like the Statute of Acton Burnell of 1283, amended as the Statute of Merchants two years later in an effort to attract foreign traders to England. It promoted the speedy settlement of disputes between all merchants, while another parliament in 1303 passed another Act (Carta Mercatoria) recognising the law merchant as an independent source of law among all traders, exempted foreign traders from local taxes, and gave them freedom to trade throughout England. The old commercial courts did the rest. Their laws were originally more particularly connected with fairs and the maritime activities in the Channel ports, therefore more local, where participants were peripatetic merchants or maritime transporters, including foreigners, which required prompt justice to be enforced either against the persons of the debtor, if still present at the fair, or, particularly in their absence, against their goods before they left the court’s jurisdiction. See F Pollock, ‘The Early History of the Law Merchant in England’ (1901) 67(3) LQR. The courts in the staple markets, which also attracted foreigners, were the Staple Courts which were permanent and statutory at least from 1354 onwards. They often consisted of the mayor and two constables or merchants, who could be foreign if a foreign merchant was involved. At more local fairs, on the other hand, there often operated Borough or Pie Powder Courts, used especially for civil and criminal litigation between the participants in these markets, who were then mostly locals. These courts had a more informal status and often only operated during the fairs with a process ‘from hour to hour and day to day’. In all these courts, judges and juries of merchants were used to discover the applicable customs, although there were some written sources of the applicable commercial law also, such as the Red Book in Bristol and the Black Book of Admiralty in London. There were others, mostly also in maritime law, notably the laws of Visby and the laws of Oleron, a small island off the French coast of Aquitaine. They were highly regarded and often consulted and copied elsewhere. Special maritime courts began to operate in England after 1360, at first competent mainly in criminal cases (piracy), later also in civil cases with the emphasis on charters, ship mortgages, maritime insurance, early forms of bills of lading and the earlier forms of negotiable instruments such as bills of exchange and cheques. To appear before these courts, the plaintiff had to prove that the defendant was a merchant and establish the applicability of commercial law or custom. The presence of the defendant was not strictly necessary as long as some of his goods were in the jurisdiction. Again, the law merchant of those early days was not a uniform law in any sense and its contents varied with the markets and products covered—and it could be very local—but the common outstanding feature was that both this law and the courts that administered it were autonomous. Others have noted as other common features the customary nature of these courts, their summary jurisdiction, and spirit of equity and common sense, which was not concerned with technicalities. See, eg, W Mitchell, An Essay on the Early History of the Law Merchant (Cambridge, 1904). Enforcement in particular seems not to have been an overriding concern, probably partly because it was not embedded in modern standards of due process. Jealousy eventually manifested itself in the common law courts, especially in the Court of Admiralty in London and the common law judges eventually took the view that the older commercial and admiralty courts only operated by franchise or licence and could therefore be controlled by the common law courts. Consequently, these older courts started to disappear, although they were never formally abolished; after the middle of the eighteenth century only the Court of Tolzey in Bristol survived (and still operates as county court under the Judicature Act with the special feature that there is no appeal). The overriding influence of Chief Justice Sir Edward Coke is often mentioned in this connection. Eventually the requirements that the defendant had to be a merchant and that commercial law or custom was applicable upon proper proof disappeared. After 1765, the common law courts considered that ‘the law of merchants and the law of the land are the same: a witness cannot be admitted to prove the law of merchants’. See Pillans v Van Mierop [1765] 97 ER 1035, [1765] 3 Burr 1663, 1669. This appears to have concluded the trend and meant the end of commercial law as an independent legal facility. 35 Although this integration of commercial law into the common law is generally considered to have been concluded under Chief Justice Coke, Lord Mansfield subsequently tried to develop commercial law alongside commercial practice although always within the confines of the common law and its courts. As we shall see, this left, however, room for commercial custom and practices as distinct sources of law but it did not re-establish independence. In Pillans v Van Mierop (n 34), Lord Mansfield clearly accepted that the rules of the law merchant had become part of the common law and were no longer autonomous custom. He extolled the jurisdiction of the common law courts but added that the common law and its courts had to recognise the dynamics of international business so that commercial law was henceforth to evolve alongside commercial practice although again always

22 Volume 1: The Emergence of the Modern Lex Mercatoria development of commercial law.36 Moreover, in the nineteenth century, the notion gained ground, in England too, that all law issued from a sovereign, although it did not depend on legislation. That is the school of Bentham and Austin, whose thinking became dominant, as we shall see in section 1.3.3 below. Nationalism thus entered and further eroded the support for other sources of private law, especially customary law, all the more so when international, although the common law itself was often still considered of ‘immemorial usage’, but that was then deemed a kind of overriding higher custom37 and in any event always national. In the meantime, in common law countries like England, the emerging rule of precedent confined the role of custom or market practices further (see again section 1.3.3 below) and to a large extent they lost their status as a dynamic source of law.38 As we shall see, this also affected equity, which until then had functioned as another more flexible corrective or supplement of the law, particularly important in commerce and then also in finance, a facility now often taken over by legislation, although the equitable jurisdiction is not completely exhausted as we shall also see.39 More recently, especially in England, academia has become more active in the law and has started to look for a more coherent framework of rules distilled from disparate case law and statutory texts. Although the English courts have remained pragmatic, there thus also entered a measure of nationalistic system thinking, at least at academic level in England,40 more so than in as part of the common law. Thus, the law merchant as an independent legal order governing the legal relationship between merchants had ceased to be recognised. One other consequence was that henceforth the national common law sustained the international character of commerce only to a limited extent, more in the nature of courtesy or comitas. cf C Schmitthoff, ‘International Business Law: A New Law Merchant’ (1961) Current Law and Social Problems 129, 138. This nevertheless proved particularly important for negotiable instruments (the first time the promissory note was declared a negotiable instrument in England was in 1680, in the case of Sheldon v Hently [1681] 2 Show 160. This development also concerned bills of lading, and (later) documentary sales, such as FOB and CIF sales, ship mortgages, the stoppage of goods in transit, and the concept of bailment (therefore the protection of the physical possession of goods), agency, partnership and joint ownership where international commercial practice continued to be followed. However, once having lost the autonomy of its courts, the commercial law could never recover a truly independent role in common law countries, and the same may now also be said of its modern branch of financial law. It is clear that the law in England has difficulty in particular with international custom and then also with transnationalisation tendencies, see more in particular section 1.4.8 below. Nevertheless, even domestically, commercial law is not incidental or mere lex specialis to the common law and it clearly covers whole areas of the common law in full in a distinct fashion while the general English aversion to system thinking allows this to continue. 36 However, commercial law was poorly administered by the common law courts, and this is an important reason why in common law the law of chattels long was, and probably still remains, underdeveloped. The greater speed and flexibility of the older proceedings, not bogged down by procedural and evidential formalities, had fostered trade and proved especially important for foreigners and their protection. These benefits were lost when the common law judges became the commercial judges, most with experience only in land law and some in tort. Even today this is reflected in high costs and inefficiencies. The further result was that much commercial expertise and flexibility were lost in this part of the law. By the end of the nineteenth century, the international connection had also been neglected, so that commercial law became a domestic affair in England (and its dominions), a situation further promoted by the preponderant impact of British colonial trade, which was not considered to be different. But pragmatism remained, generally meant to support business, especially in the London markets. 37 Not, therefore, very different from the Roman law on the European Continent, see s 1.2.5 below. 38 It set customary law in concrete and it thus lost much of its dynamic character; it was thought that this prevented courts from becoming confused, a somewhat strange argument. See JH Baker, An Introduction to English Legal History, 3rd edn (London, 1990) 418; see also RW Aske, The Law Relating to Custom and the Usages of Trade (London, 1909) 23; and HJ Berman and C Kaufman, ‘The Law of International Transactions (Lex Mercatoria)’ (1978) 19 Harvard International Law Journal 221, 227. See for a more recent analysis n 494 below. 39 See s 1.3.1 at n 304 below and more recently for the important Lehman cases, Vol 2, s 2.4.3 below. 40 Especially in the twentieth century, when the academic study of law became more established and valued in England. See ss 1.3.2 and 1.3.3 below for the role of the Law Commission in this process and for early codification ideas in England. A more formalistic approach is adopted here but it is not the traditional common law attitude, which was fact rather than rule oriented, and moved from case to case.

Volume 1: The Emergence of the Modern Lex Mercatoria 23 the US where this struggle is now often cast in terms of legal realism versus legal formalism or doctrinal law as we shall see.41 In England this attitude also affects the commercial and financial law and then integrates it further into the common law English style. The consequence of this integration of commercial law into the common law is that the distinction between commercial and other private law is no longer fundamental in common law either, except that no systemic unity is assumed. More important in this regard is the realisation that certain features of the ordinary common law of contract, such as the concept of consideration, do not affect the agreement to transfer negotiable instruments, implemented through delivery or endorsement. Also, contrary to the more normal nemo dat rule, bona fide purchasers or holders (in due course) of these instruments are generally protected. Indeed, this type of protection is better supported in commercial law than in the rest of the common law (equity excepted),42 and underscores the point that integration between common law and commercial law does still not fully exist in common law countries. On the other hand, it was already mentioned that contract and movable property law derives in common law from the commercial practice which suggests greater reliance on party autonomy and probably a creditor bias as against the more anthropomorphic consumer law and debtor protection orientation of the codification tradition in civil law. This being said, the distinction between law and equity (discussed in section 1.3.1 below), which initially each had their own courts, may be the more important distinction in common law countries, and also cuts through what may still be considered commercial and modern financial law, equity notions having become a particularly important support (despite the confining nature of the rule of precedent). Here we find company, tax, and bankruptcy law, the law of trusts, including related structures like constructive trust and segregation, tracing and tracking facilities, floating charges, conditional or finance sales, assignments, and set-off, indirect or undisclosed agency, fiduciary duties, rescission defences in contract, and the facility of specific performance and injunctions. Largely substituting in modern times for this equity jurisdiction, there is now in common law countries also substantial legislation in the field of private law, which also extends much into commercial and financial law. Indeed, legislation now often supersedes the corrective powers of the equity judges as we shall see in section 1.3.1 below. While equity judges had often looked for 41 See more particularly s 1.3.4 below and especially the comment by Atiyah and Summers (n 9) Ch 9, 245ff. See for the UCC approach, also n 43 below and accompanying text. Legal formalism is here the opposite of legal realism and rests on the idea of the self-sufficiency of the legal system as a set of pre-existing, often hard and fast, black-letter rules that can be more or less mechanically applied and that are considered to produce acceptable results in a more objective manner. In doing so, legal formalism is inclined to disregard the original purposes which a particular norm was meant to serve and does not test its practical effects. This is law as technique, the modern expression of legal positivism, see also s 1.4.17 below, signifying a mechanical process of application, which is now also very common in English law firms and at the Bar. There is no intellectual interest in its content or progression. Even so it does not amount to system thinking proper and there remains a practical bend in the approach. 42 Sale of goods, transportation and insurance law, considered the typical commercial law subjects in common law, developed from the trade between England and the European Continent and acquired some distinguishing features from that contact, in which there may still be faint remnants of a Roman law orientation. As the common law mainly developed in connection with land law, it at first possessed more scope for the persuasive force of other law in these commercial areas. As already mentioned, the treatment of the sale of goods, transportation, and insurance, as especially defined contract types, was itself due to continental influence: traditionally the common law does not define different types of contracts and does not endow each with its own special regime. Interestingly, English maritime law developed in this way the continental concept of the ship master based on the patria potestas of Roman law. However, as we have seen, this history no longer sets maritime contracts and maritime concepts apart as commercial law on the European Continent either. In fact, in the nineteenth and twentieth centuries, these areas of law developed more strongly and separately in England as a more important trading nation than they did on the European Continent.

24 Volume 1: The Emergence of the Modern Lex Mercatoria inspiration abroad, especially in the Roman law, statutory law is by definition more nationalistic and at least territorial. Even so, in common law countries, statutory intervention is generally still different from the civil law approach in that it tends to remain corrective or remedial and therefore incidental except perhaps in typical equity areas such as company and bankruptcy law where legislation is more comprehensive. Another consequence is that it is normally restrictively interpreted. In the common law tradition, it does not aspire to systematic thinking or overarching intellectual conceptualisation that seeks recognition in its application eliminating in the process as a matter of course other more spontaneous sources of law. As already mentioned, in the US, the Uniform Commercial Code (UCC) in section 1-103 clearly expresses the view that the statutory texts are to be liberally interpreted so as to leave as much room as possible for the common law, equity, custom, the law merchant, and party autonomy.43 Even though it calls itself a ‘code’, it is not a code in the civil law sense because it does not seek to monopolise the field and eliminate other sources of law,44 and, although undoubtedly looking for structure, it is also not systemic in the civil law manner,45 nor intended to be interpreted in that way. This represents the more traditional common law, which still finds an equivalent in England in the mostly literal and therefore restrictive interpretation of statutory private law texts,46 again to leave as much room as possible for the more traditional sources of law, especially the common law and equity (although, as we have already seen this may now be less true in England for custom, especially if international). On the other hand, the predominantly nationalistic approach to private law formation and operation, although still different from the civil law approach and possibly less pronounced in the US in commercial law, has also led in common law countries to the extension of domestic law to international transactions and consequently to an embrace of continental European conflict of laws or private international law notions pointing to the proper national connections, therefore to the idea that only domestic laws could apply to international transactions, even in international commerce and finance. This is not, therefore, transnational law. Although private international law as a system of hard and fast conflicts rules has long been reconsidered in the US, which again may well be indicative of greater flexibility as we shall see in sections 2.2.2 and 2.2.3 below, this has not been the case in England. In fact, as we shall also see, the more robust resistance to the alternative of transnationalisation of private law, including the rejection of other autonomous transnational sources of law in the modern lex mercatoria, often comes from England (and Germany), even though it would benefit English practitioners most and appears to fit the common law tradition better than that of

43 In s 1-103 UCC it is further stated that the principles of law and equity, including the law merchant and the law relative to the capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause, shall supplement the UCC, unless displaced by particular (mandatory) provisions of it. 44 It is also practical and misses the typical nationalistic element. See RM Buxbaum, ‘Is the Uniform Commercial Code a Code?’ in U Drobnig and M Rehbinder, Rechtsrealismus, multikulturelle Gesellschaft und Handelsrecht (Berlin, 1994) 197; and J Gordley, ‘European Codes and American Restatements: Some Difficulties’ (1981) 81 Columbia Law Review 140; see further s 1.3.3 below for earlier American attempts at codification. 45 The UCC does not, for example, maintain a uniform concept of property law for all the chapters or Articles. In Art 2 on the sale of goods, it maintains a more general notion of ownership and its transfer that also exists between non-professionals, but in Art 2A on equipment leases and Art 8 on the trading and holding of modern investment securities entitlements, proprietary rights are only defined incidentally, that is for each specific structure, without resorting to general proprietary principles or a unitary system of proprietary rights. That is also true in Art 9 on secured transactions, in particular in respect of floating charges. 46 See s 1.3.3 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 25 the civil law.47 It appears more welcome in France where greater transnationalisation is now often more acceptable or at least seriously considered in these matters.48

1.1.4. The Transnationalisation of Commercial and Financial Law: Common or Civil Law Approach? Methodology and Definition. The Spokesperson Function and the Question of the Public Interest and its Representation at the Transnational Level Whatever the aims of nineteenth-century nationalism in private law may have been, both in civil and common law, commercial law formation through an autonomous process of transnationalisation, mainly through the force of principles and practices, was never entirely eradicated in international dealings even in civil law countries, see also section 1.4.4 below. One may think of the law concerning bills of lading; negotiable instruments, in more modern times especially Eurobonds and euro market practices including clearing and settlement; letters of credit (UCP) and trade terms (Incoterms) where the ICC performs an important function. It may also concern the important and connected issue of finality of title transfers and payments. It may even affect the law of assignment,49 of set-off and netting in international finance. The International Swap Dealers Association’s (ISDA) Master Agreements for international swap dealing stand out as the more recent example of transnational custom formation and is highly significant in this connection (see sections 3.2.2. and 3.2.5 below and Volume 3, section 3.2.5; for the issue of finality see Volume 4, section 1.4). The Eurobond market has equally developed its own rules behind its ICMA platform. It is clear that it concerns here the key legal infrastructure of the international marketplace itself, which, it is submitted all along, in view of its size and the very nature of its flows can hardly be covered by domestic laws any longer. It probably never could but where a generation ago the international markets might still have been peripheral to domestic markets and domestic legal systems, they have now moved to the centre, their size being far greater than that of the largest domestic markets: see the figures given in section 1.1.1 above. If we think of the form this new transnational law takes, or should take, and how it compares to the more traditional common or civil law concepts of private law, it should be repeated that it is ultimately the limitation of the sources of law and system thinking, the technical or mechanical approach to law based on pre-existing legal texts, the pretence of the unity and completeness of the system and the principles underlying it, the anthropomorphic ethos, and its application in that manner even in business dealings that truly distinguish civil law from common law. That also affects our perception of commercial and financial law in common and civil law, more so than the statist or nationalistic and legislative approach per se, which to some extent both now share. It is indeed this issue of domestic system thinking underpinned by statutory texts that may particularly affect our views on the place of commercial and financial law, especially from a civil 47 This has been pointed out by others, see notably AF Lowenfeld, ‘Lex Mercatoria: an Arbitrator’s View’ (1990) 6 Arbitration International 133 in reply to English nationalism and positivism represented by Lord Mustill, ‘Contemporary Problems in International Commercial Arbitration’ (1989) 17 International Business Lawyer, 161ff, who even considered as absolutely void a contract in which transnational law is chosen as the controlling law. This has now officially been denied in the EU Regulation, (EC) No 593/2008, on the Law Applicable to Contractual Obligations (Rome I, Preamble 13), but this Regulation is otherwise not receptive to non-statist laws either. 48 See n 27 above. 49 Dalhuisen (n 14).

26 Volume 1: The Emergence of the Modern Lex Mercatoria law perspective. If we mean to go forward with globalisation in a more coordinated manner, from a legal point of view this presents a fundamental methodological issue and choice, which needs to be made and affects in particular the appropriateness of codification in the civil law manner (through treaty law or, in the EU, possibly through Regulations as was at one stage proposed for CESL) of private law at the transnational level, in terms of law formation, therefore in a top-down fashion, potentially eliminating all other sources of law and denying their autonomy. It may be repeated in this connection that the informal formation of transnational law with reference to a number of autonomous sources of law, although still prevailing in public international law following earlier Continental European views (Grotius)—recognised as such in Article 38(1) of the Statute of the International Court of Justice (ICJ) as already mentioned, for peremptory principle supported by Article 53 of the Vienna Convention on the Law of Treaties which makes even states subject to higher principle—is more suited to a common law than a civil law environment, common law still being more ‘bottom-up’ and developing from case to case, being more factual and situation or relationship sensitive in that sense. If a more formal approach is taken, notably through treaty law, we may on the other hand come closer to the civil law technique, top-down through an intellectual, government-endorsed framework or system that is then applied as such. It has been said before that this even appears to be the approach at the international level in UNCITRAL and UNIDROIT without much further discussion. It was already noted that such a system may not easily admit of other competing independent sources of law, especially overarching fundamental principle, custom and general principle, or party autonomy,50 even if the good faith notion may indirectly reintroduce them, at least in contract. A more liberal interpretation technique may more generally do so in other areas, such as, for example, in the structures of movable property, as we shall see in section 1.4.3 below, although a liberal interpretation technique is traditionally much less common in this area of civil law. Again, this may all be considered to have a special relevance in the EU where attempts have been made at a kind of codification at the (mini) transnational level in Europe, in which connection the 2008–2009 DCFR and the 2011 draft Regulation on a CESL (withdrawn in 2014) have already been mentioned. They also cover, by way of their unitary approach, professional dealings (although limited in the CESL to transactions that involved at least one small and medium sized enterprise (SME)) and thus also the areas of international commerce and finance and the operations of the international marketplace to the extent operating in the EU. The fuller implementation of the DCFR would then also have affected its centre in London, and could result in a version of commercial and financial law which is very different from the one that currently obtains there and as still obtains in Ireland, Malta and Cyprus after Brexit. In the EU, this approach through legislation would at the same time fundamentally affect and pre-empt the more informal transnationalisation drive in the modern lex mercatoria with its spontaneous revival of the different autonomous transnational sources of law and be opposed to it. This is a choice that must be made. In the view presented in this book, the new, immanent lex mercatoria is preferred for all professional dealings (even if not specifically transnational as all professional dealings even pure local ones increasingly acquire their form and inspiration from the international practice) and is indeed considered to be substantially based on fundamental and general principles, industry practices or custom, and party autonomy as independent sources of law: see section 1.4 below for a more detailed description of these sources of law and their hierarchy. Treaty law (assuming it is widely adopted), although in principle still territorial and limited to activities in Contracting 50 The lack of clarity in this respect in Arts 7 and 9 of the 1980 Vienna Convention on the International Sale of Goods demonstrates the confusion; see Vol 3, s 2.3.7, confirmed in many other UNCITRAL and UNIDROIT projects, see s 1.4.15 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 27 States, may also figure, but is then only one of the sources of this law, not the dominant one, and must find its place among the others and, even if mandatory, may yield to higher mandatory transnational fundamental principle or public order requirements and mandatory international custom. This lex mercatoria or new transnational law merchant is as a consequence not, or not necessarily, systematic, intellectual and abstract in the traditional civil law codification sense, but may be closer to traditional common law in its development and operation, and not altogether different from public international law and its sources, as they function in the law between states, as we have seen. This is the analogy that is followed in this book. In recent times, the best operation of this multiple-source type of law may be found in foreign investment arbitral awards, which may represent the more vivid expression of this approach, see Volume 2, section 1.3. In this book, it is supplemented by the notion of a newly emerging transnational commercial and financial legal order in commerce and finance, in which this new law is considered to operate. It will be discussed in section 1.5 below. As we shall see in section 1.4.14,51 rather than the formation of one coherent, comprehensive system, the result is a hierarchy of these various sources of law that become potentially applicable. Domestic law may still remain the residual rule (although itself then also transnationalised and adapted accordingly, shorn from its purely domestic peculiarities).52 As we shall also see, this transnational private law is deferential to public policy, normally still of a domestic regulatory nature, including domestic tax and environmental laws, assuming that there is sufficient conduct or effect of the transaction on the territory of the state which wants its policies enforced in this respect in the international transaction in question. This may also be the case for fundamental domestic values and may then be encapsulated in domestic public order requirements. As the new transnational law itself is substantially private law, as such it does notably not mean to circumvent relevant domestic public policies or values of this nature (although between the parties it may still seek to rearrange the risks and financial consequences), but it is subject at the same time to the transnational public order considerations developing in the transnational commercial and financial legal order itself from which the modern lex mercatoria hails and in which it operates.53 Especially in international transactions and their dispute resolution facilities, like international arbitrations, domestic concepts of public order may then increasingly be tested against the concept of transnational public order in terms of internationally accepted minimum standards as was already mentioned several times. This is an important development and is outside the development of new lex mercatoria proper unless it overlaps with its fundamental principles. It may correct it although again this may also come from within the modern lex mercatoria itself through the manifestation of such standards in overriding fundamental principle and changing values operating at the level of the parties. As we shall see, this poses in particular the question who can formulate these standards or more generally who are the spokespersons for this new law and in particular of the public interest transnationally. In this connection it was already noted that finding this balance in the operation 51 See also Dalhuisen (n 23) 129 and JH Dalhuisen, ‘The Operation of the International Commercial and Financial Legal Order: The Lex Mercatoria and Its Application’ (2008) 19 European Business Law Review 985. 52 See for the residual rule of domestic law in particular, s 1.4.13 below and JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619. 53 In American terms, the issue here is the jurisdiction to prescribe the law in international cases, and depends largely on an analysis of the facts and the circumstances of each case. This is also the approach adopted in Art 9 of the EU Regulation, (EC) No 593/2008 on the Law Applicable to Contractual Obligations (Rome I) and in a more refined way in the American Restatements (Restatement (Second) of Conflict of Laws, s 6 and Restatement (Third) of Foreign Relations, ss 402–403).

28 Volume 1: The Emergence of the Modern Lex Mercatoria of the international marketplace is truly the greatest challenge in the transnationalisation process of commercial and financial law. International arbitrators may be first in line, but the problem is more fundamental and perceived here as a key issue to which we must constantly return (see further the discussion in section 1.5.7 below). The international marketplace needs balancing at the national but increasingly also at the transnational level, if only to keep the international marketplace clean, especially now much of international trade is virtual and can no longer be easily located. It is a civil society issue. It can only be repeated in this connection that in the area of professional dealings the formation and operation of transnational private law—a de-nationalised law, shedding its statist and territorial nature—may be considered the natural and unavoidable consequence of globalisation and the internationalisation of the flows of persons, goods, services, knowledge, capital and payments. It introduces legal structures particularly made for and suited to these international dealings, which need not then be borrowed from local laws. At the practical level, the consequences, particularly in professional contract and movable property law, will be an important theme throughout, which will be summarised in section 1.1.6 below and to which Volumes 3 and 4 respectively are devoted. They are both seen as risk management tools in a much more dynamic and fluid environment. In this environment, the spokesperson function for the law is diverse. The ICC, ISDA and ICMA were already mentioned when it comes to market practices. This law needs to be proven in dispute resolution and litigators must cast around. UNCITRAL and UNIDROIT projects and activity may be indicative of general principle. Treaty law will speak for itself but is embedded in this hierarchy. Peremptory law or ius cogens refers to the fundamentals of our civilisation, in that sense it refers to itself as highest norm. In respect of the public interest and minimum standards of behaviour international organisations like the OECD, ILO, WHO, WTO may help. The informed press and NGOs may also be relevant in their identification of the public interest and its defences. In this approach, the transnationalising law between professionals in the international sphere should be distinguished in particular from the evolution of consumer law, which remains by its very nature more domestic and protection-oriented, thus more subject to special (domestic regulatory or policy) concerns even if expressed in private law (mandatory) terms. This may have immediate repercussions, for example in the way concepts of reliance and good faith are applied in contract law. The protection they bring may be less proper and necessary, or may play out very differently for professionals in their international dealings. Relationship thinking thus takes over. As we shall see in section 1.1.6 below and later in Volume 4 and Volume 5, this may be particularly relevant for financial structures involving movable assets of professional parties seeking funding in more creative ways transnationally, which structures are likely to be proprietary in those circles but may be much less suitable for consumers domestically. The distinction between professional and consumer dealings thus becomes fundamental (see further section 1.1.10 below), the former being legally increasingly transnationalised (in structure even if these transactions are on occasion purely domestic), the latter remaining foremost domestic in a legal sense; the former being subject to immanent law creation forces often based on repeat transactions, the latter being essentially regulated and therefore increasingly statutory based on the need for public protection of weaker participants under national laws.54 The result 54 The EU has legislated fairly extensively in the area of consumer law, see s 1.4.21 below, and, since the 1992 Maastricht Treaty, considers it a legitimate preoccupation, although the Maastricht Treaty did not give the EU special legislative powers in private law formation. All such powers are still based on, and confined by, the promotion of the internal market under Art 114 TFEU. It means that in the consumer area, this is still primarily a question of setting uniform consumer standards to facilitate cross-border business rather than to protect consumers.

Volume 1: The Emergence of the Modern Lex Mercatoria 29 is, at least conceptually, an ever increasing fracturing of the traditional systemic approach of the civil law, even domestically, according to the nature of the relationship of participants. This is a crucial departure in civil law thinking, more familiar to common law, which was always more apt to think in terms of relationships as we shall see in Volume 3, section 1.1.1. It may well be that in the EU, the DCFR with its codification approach and generally more prescriptive statist attitude was relatively suitable in the area of consumer law from which it hailed, and this was also borne out in the CESL, but its fundamental problem was its lack of distinction in this regard with the result that consumer law concepts and domestic notions of protection in this area constantly spilled over into the professional sphere. It was already noted before that this was always a risk in civil law which is essentially anthropomorphic in a nineteenth-century fashion but uses similar notions and protections in the more recent corporate or professional sphere. This was also demonstrated in the CESL and is wholly inappropriate.55 In fact the contract and movable property model it still uses are unresponsive, it will be argued, to professional dealings in the international marketplace and the risk management needs in this regard. It may be the reason why at least the general attitude in international dealings, therefore in the professional sphere is becoming ever more like that of the traditional common law, at least if the move towards a new lex mercatoria for these dealings is properly understood. It is not so surprising as its contract and movable property laws are founded in commercial law and have a different risk management focus than the more anthropomorphic civil law. It is also not surprising from the point of view of the traditionally more pragmatic attitude and gradual approach of the common law to law formation and its bottom-up nature. Again, common law influence is here apparent in a greater reliance on practices, custom and party autonomy. It is further promoted by the fact that it has always been more result and practitioner-oriented, is used to operating from case to case, is more sensitive to the facts—and perhaps therefore more used to supporting new business structures and their needs from a legal perspective (not unduly encumbered by pre-existing legal notions, models or systems; even the notion of binding precedent is in practice much less constraining than often thought and in any event not adhered to in the highest courts). It is also more comfortable with multiple legal sources, less with intellectualisation. It may thus be more responsive to new trends and needs and may adapt sooner even though short of legislation it may be a slow process. Again, the common law is not given to confining system thinking, whatever the modern academic tendencies in England. It can therefore look with more confidence to new developments, at least in business. Particularly in equity, it also has a number of facilities such as trusts, floating charges, and conditional or temporary proprietary interests that the civil law traditionally lacks. In fact, the common law’s traditional mistrust of intellectual sophistication gives it flexibility, in the US further supported by legal realism and policy orientation, which the civil law may now also need if it wants to progress rather than be guided by the past. One important result may be a more sustainable contract model and a more flexible approach to proprietary rights, which allows for a greater degree of party autonomy in the structuring of asset-backed funding in particular, as we shall see in section 1.1.6 below. A further important contributing factor is that the English language has become the lingua franca of the commercial and financial world. Its legal perceptions and terminology are naturally geared more towards the common law than to any other system.

55 JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299.

30 Volume 1: The Emergence of the Modern Lex Mercatoria As already mentioned, the EU idea of codification (if the DCFR may be considered representative) runs counter to these modern developments and remains inspired by the concept of a system-driven and closed unitary set of intellectualised rules that is statist and territorial, the same in principle for consumers and professionals. It then also poses the question of the status of the other sources of law. In professional dealings, it excludes the views and needs of all other countries. The US and Japan, but also modern emerging countries, especially China and India may have an interest as well and a view on how to proceed, at least with regard to commercial and financial transactions which affect or play out in their territories or in which their businesses are involved when operating elsewhere. The DCFR approach presents not only a statist, but also an inward-looking mentality, which seems distrustful of and appears unfriendly towards international business and the outside world more generally, even in international trade, commerce and finance on which the EU, like others, wholly depends. It is the expression of a fortress Europe mentality that legally is still largely unaware of an outer world and that still finds itself sufficiently important to ignore it. In the meantime, it should be noted that there is no demand from practitioners for transnational texts in this codification manner, and that the DCFR and its progeny are driven purely by a particular strand of academic opinion, especially but not only in Germany. Here intellectual prejudice is likely to dominate over quality, which compares poorly with what the UCC achieved in the US. In fact, it appears to be mainly an updating effort of the German Civil Code (Bürgerliches Gesetzbuch or BGB), now extended to all dealings within the EU, even if, according to more profound German academic and practitioners’ opinion, it is as such not of sufficient quality as a new model. See more particularly Volume 3, section 1.6 and Volume 4, section 1.11. In the meantime the German Academic Council has started to criticise legal academia in Germany itself for this extreme ‘positives Norm- und Applikationswissen’ and demands much more attention for internationalisation tendencies and empirical and multidisciplinary investigation in legal studies.56 It may be recalled in this connection that one of the basic assumptions behind the German Code was always that it was complete, stood for reality of the human condition, and had in it the solution to all problems. Justice, social peace and efficiency would automatically follow from its proper application or that of its underlying system. There was no need for empirical research. The system was right, the facts had to follow and if they did not fit there was something wrong with them or they were irrelevant. As a minimum, an effort of codification at EU level would appear to require a much more extensive discussion of these underlying issues and the methodology. It was already said that earlier UNIDROIT and UNCITRAL initiatives ran along similar lines, civil law centric, although in narrower areas (including the 1980 Vienna Convention on the International Sale of Goods) but were never particularly successful, perhaps because methodology was never properly considered but also because they had not been asked for by the business community.57 In Europe, only the 56 See its Prospects of Legal Scholarship in Germany (English translation, November 2012). 57 Thus, even the best known of these treaties, the 1980 Vienna Convention on the International Sale of Goods, see Vol 3, s 2.3, although now ratified by 78 countries, has not been accepted by the UK, nor by some smaller trading countries such as Portugal. More importantly, it was substantially rejected by the international commercial practice, which commonly excludes its application, see for a recent empirical study in the US, JF Coyle, ‘The Role of the CISG in US Contract Practice’ (2016) 38 U Pa J Int’l L 197. The UNIDROIT Mobile Equipment Convention (see Vol 5, s 2.1.9) may hold some greater promise, but even for the UNIDROIT 2009 Geneva Convention on Substantive Rules Regarding Intermediated Securities, see Vol 4, s 3.2.4, the prospects are dimming. It is altogether not a great harvest. Again, the reason is probably that UNCITRAL and UNIDROIT seldom managed to respond to true needs, and the results were generally not asked for by commercial practice, nor were they sufficiently pace setting; rather they were the product of compromises between domestic notions, often formulated by academics with insufficient practical knowledge, or by practitioners looking for a toolbox without a sufficient conceptual grasp of newer

Volume 1: The Emergence of the Modern Lex Mercatoria 31 work of the International Chamber of Commerce (ICC), particularly in Incoterms and UCP,58 driven by the business community itself, has been a success. This participation appears to be a key element in more formal law formation efforts of this nature cross-border, at least if the result is to apply to international professional dealings and relationships. It is that participation in the American Law Institute that has made the UCC so successful besides its continuing respect for other sources of law and their development, also if transnational. It has already been noted that this may reflect an older common law streak which now may well have been lost in England in favour of purely domestic notions and concepts, but such a trend may not be irreversible. It is not beneficial to London as a financial centre and hub of the international marketplace. The cry is here often for certainty but it may be very difficult to obtain, also under English law as the Lehman cases in the London courts have shown.59 It will be argued in section 1.1.7 below that the true issue is not legal certainty, which may lead to low quality and in a fast-moving world can hardly be achieved: rather it is predictability and transactional and payment finality, the latter being a more limited (proprietary) concept but easier to achieve. In the meantime, a desire to define transnational law has become apparent among some academics. This calls for caution. Nobody has ever been able to define law as such in a satisfactory manner. That would then also apply to transnational law. Even the Roman Digests in one of the last entries (D. 50.17.202) warned that all definition in law is perilous and there is often less in such definitions than might appear at first. But the process of transnationalisation can be described and also the basic sources and their hierarchy as well as the objectives and application of the resulting law. If it needs to be written up, we must also think about methodology and the status of such texts. Clearly some descriptions may be more plausible in this connection than others and some models more useful to explain and manage the process of transnationalisation and the application of the modern lex mercatoria in commerce and finance as well as the operation of the transnational commercial and financial legal order. This also applies to the formulation of regulatory or public policy transnational minimum standards therein, amplified by notions of justice and fairness, social peace, and efficiency where sufficiently pressing in the circumstances of the case. It will be argued later that this law is geared to action rather than dispute resolution, which always remains an imperfect art (see section 1.4.17 below). At least as a working hypothesis one may see that it concerns here law beyond states and their conceptualisation resulting in an autonomous (bottom-up) legal normativity that competes with state law. In this book it is cast in terms of competition between the statist and transnational legal orders, especially clear where the public interest becomes involved. As far as definition goes, a start is mostly made with a reference to Judge Philip Jessup in his Storrs Lectures of 1956 where he states that: I shall use, instead of ‘international law’, the term ‘transnational law’ to include all law which regulates actions or events that transcend national frontiers. Both public and private international law are included, as are other rules which do not wholly fit into such standard categories. developments. This may have applied in particular to the potentially significant 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade. It provided an important opportunity to move forward, but in the end proved a disappointment. See Vol 4, s 1.5.13 and Vol 5, s 2.4.5ff. In practice, more important were the UNCITRAL Model Law on International Commercial Arbitration (1985) and the UNCITRAL Model Law on Cross-border Insolvency (1997). Perhaps the greater success of these model laws derived from the fact that they did not mean to impose a uniform system but were content with more modest forms of harmonisation. They did not seek to impose from above through treaty law but were rather meant to guide domestic reform legislation. 58 See the discussion in ss 1.4.8 and 1.4.20 below. 59 See Vol 2, s 2.4.3.

32 Volume 1: The Emergence of the Modern Lex Mercatoria This is hardly a definition but underscores nevertheless the close connection between public international law and transnational (private and perhaps also administrative) law formation, although failing to suggest similar sources of law and to expand Article 38(1) of the Statute of the ICJ also into the private sphere as indeed was the approach at the time of Grotius60 whose resumption is advocated in this book. This is the ius gentium which was in those days the law of all people and not only that of states, much as it had been in the Justinian compilations, and covered both public and private law. It was argued that we are returning to that older world in terms of law formation and operation although of course not in terms of content and coverage. This being said, the term ‘transnational law’ is now usually reserved for law other than the law between states. In more traditional terminology it concerns internationalisation of private law in the business sector or the international marketplace subject to evolving public policy or transnational minimum standards. This is also the approach of this book, which sees legal transnationalisation as a process and way of thinking characterised by the operation of autonomous non-statist sources of law subject to a hierarchy established in a separate and autonomous legal order (the transnational commercial and financial legal order) with its own (correcting) public policy concepts and requirements, which, depending on the facts of the case, compete with relevant domestic legal orders and policies in the manner explained in more detail in sections 1.4 and 1.5 below. At this stage of its development, it looks for structure not system and a sufficient level of predictability. It also has its own dispute resolution technique or facility, mainly through international arbitration, see section 1.1.11 below and Volume 2, although, as we shall see, it does not necessarily mean that, in this world, law formation can be privatised in the hands of international arbitrators. That would need the endorsement of the international commercial and financial legal order itself but might then also cover the development of public policy or international minimum standards in that order.

1.1.5. The Coverage of Domestic and Transnational Commercial and Financial Law In commercial and financial law, the traditional differences between the common and civil law approach not only derive from the different attitudes to law formation and application, especially system thinking, and from the measure of independence this law may still claim in either, but there is also a difference in coverage. In common law countries, commercial law is traditionally associated with the sale and transportation of goods (which in the English terminology are not all assets but tangible movable assets only) and with the related shipping, or other forms of transportation, insurance and payment methods and therefore traditionally with the contract for the sale of goods, with specialised trade terms in that context such as FOB and CIF, and with bills of lading, bills of exchange, promissory notes and other methods of payment like letters of credit. Commercial law in a common law sense is here likely to cover the entire area, that is to say the contractual as well as proprietary aspects of the trade in these instruments and in goods, which are not clearly distinguished, therefore also the transfer of ownership and any secured interests in these assets, for example to protect payment or raise financing, and the protection of bona fide purchasers as a matter of transactional finality. In common law, the transfer of property in all goods is thus seen as essentially a commercial law issue only and not as a matter that is dealt with

60 See

also Philip C Jessup, Transnational Law, 2 (New Haven, CT, 1956) 136.

Volume 1: The Emergence of the Modern Lex Mercatoria 33 primarily by a more general system of property law (on which the common law traditionally lays less stress; to repeat, it is not conceptual). It has led to a tendency to treat the entire law of chattels and intangible assets as a distinct commercial law matter within the common law. This more fractured approach to property law is also borne out by the operation of equitable proprietary interests as more incidental rights, as we shall see, which in commercial and financial law is especially relevant in the area of asset-backed financing, leading in movable property to trust structures, floating charges, and conditional or temporary ownership rights; in the area of the assignment of receivables it has led to the possibility of bulk assignments of present and future claims, and in the payment area to liberal set-off and netting facilities as we have already seen. Future (asset and related cash) flows can thus be set aside to safeguard and protect debt. Civil law is here systematically paralysed. These issues will be the gist of the discussion of the comparative analysis of movable property law in Volume 4, summarised in the next section.61 In fact, it has already been noted that in common law countries important features of commercial law derive from equity, a facility civil law crucially missed. Indeed, it suggests a more incidental approach and brings with it greater judicial discretion, activism and direction, especially reflected in trust, company and bankruptcy law, even though this law is now largely statutory. Equity in this sense conferred greater flexibility on commercial law that is still important and might otherwise have been lost in common law countries as well. We may think in particular of notions of constructive trust, segregation, tracing and tracking, and again floating charges and conditional or temporary (finance) sales, set-off and netting, and the law of assignment. It has already been noted that in commerce and finance we find here the greatest differences with the civil law of property and obligations. In civil law, the coverage and focus of commercial law proper are traditionally different, being much broader in one sense and narrower in another. It was never a complete system covering all professional dealings. It is broader in that it is not unusual, for example, to find company law and insolvency law and much of financial law and therefore also services covered by commercial law. This is especially the case in the French tradition, which in commercial law is more service than sales-oriented. But the civil law notion of commercial law is also narrower because its coverage is only partial, as already mentioned, and is lex specialis to the system of the civil code, and major topics in the commercial law area remain covered by the general law or legal system and even where commercial law is lex specialis it is never separated from it and operated and interpreted as an integral part of it. This is so for the essences of contract law but concerns also the proprietary aspects of transactions between the parties (such as transfer of ownership in goods and investments and the creation of any security interests therein, even if connected with the sale of goods) and their operation in bankruptcy, and brings with it the civil law restriction to only a small number of internally closely connected property rights (the numerus clausus notion of proprietary right). But it also concerns the general notions of contract law and of partnerships and even corporate associations, which are equally derived from the general private law system.

61 It should be noted that in England, commercial law as such is also referred to as trade law. There is a terminology issue here within the common law family. In the US, trade law is first and foremost associated with tariffs and international trade restrictions and agreements, now centred on the operation of the World Trade Organization (WTO). The result is that trade law in English terms is private law and therefore more properly part of commercial and financial law, but it is in American terms rather public or regulatory law and thus the result of governmental involvement and international arrangements between states designed to facilitate trade or investments.

34 Volume 1: The Emergence of the Modern Lex Mercatoria If we accept for the moment globalising or transnationalising forces in the creation and operation of private law, especially in commerce and finance and thus in professional dealings in the manner discussed in the previous sections, and then turn to what may now be considered more particularly transnational substantive commercial and financial law or the new law merchant or modern lex mercatoria, we see indeed that in so far as coverage is concerned, the common law approach provides the starting point. This also means that the sale of goods, or rather the operation of the international marketplace, especially in commoditised goods or physical movable assets, remains central, as is also demonstrated by the 1980 Vienna Convention on the International Sale of Goods (CISG) and by the other work of UNCITRAL, whatever its success, particularly in the areas of bills of lading, negotiable instruments, payments and receivables financing. It is also evident in the area of shipping and maritime law. While the sale of goods and the operation of the international market are thus the major starting points of transnational commercial law, it is also true that more recently financing and financial instruments have become a particularly important part of it and are increasingly driving it. We then also move into the coverage of certain classes of intangible assets such as receivables. Euromarket products, repo practices, the Repo Master Agreement, and custodial holdings of investment securities are indicative62 but no less relevant are transnationalised assignment, payments, swaps, set-off and netting notions, especially the practices under the ISDA Master Agreements—they were already mentioned also. While the international marketplace remains at the centre of developments, here also largely in the common law manner, there is, however, also an important move towards services, therefore with respect to the latter more towards the French commercial law tradition. This suggests a broadening approach in terms of coverage but also confirms a more incidental approach in terms of newer products, like repos and swaps. It was already said that there is here a shift, partly because the typical older mercantile function of commercial law instruments, like bills of lading and negotiable instruments, is losing much of its importance in trading environments that are increasingly paperless and electronic, and that are, especially for payments and investment securities, closely connected with clearing, settlement and netting notions, now more commonly the subject of financial law as we shall see in Volume 5. So far as shares and bonds are concerned, the traditional (bearer and other) investment securities are also increasingly replaced by securities entitlements in paperless book-entry systems, see Volume 4, section 3.1, and are no longer transferred through physical delivery but rather through a system of debits and credits in securities accounts, a facility that resembles to a large extent modern payments through bank transfers, which move here to the centre and will be extensively discussed in Volume 5, section 3.1. Even domestically, the greater impact of modern finance on commercial law is increasingly clear. In this connection, it may be noted that the direction of modern company law development in both common and civil law is also in the same financial (capital markets and corporate finance) direction. These developments explain why this book pays close attention to financial products and services including their regulation, to the financial markets and their operation, and to the creation of ever more sophisticated financial instruments and payment facilities internationally, which have not only affected the way payments are made, but also transnationalised the way capital is raised (particularly in the Eurobond markets) and the manner in which investments are held, transferred and protected. Again, this is the subject of Volumes 5 (financial products) and 6 (financial regulation). It also affects the notions of transactional and payment finality in international transactions. 62 See, for the autonomy of the international capital markets and for the operation of the Eurobonds market Vol 5, ss 2.1.1–2.1.2.

Volume 1: The Emergence of the Modern Lex Mercatoria 35 It is clear that in this updated realm of international commerce and finance, the more important features of the new transnational law or modern lex mercatoria can no longer be predominantly the law of the sale of goods and related laws concerning commodity trading and shipping or indeed the mercantile law. Rather, financial law then moves to the centre of commercial law. As we shall see in the next section, even proprietary structures may in a modern transnationalised environment be fashioned at will by professional parties (subject to mere description of the assets which could be any or even classes of them as long as there is some demonstrable value) while the rights operating therein may be freely created but only work against certain classes of third parties, mainly the same professional insiders and not therefore the outsiders like the general public. This is supported by overriding public policy requirements of which the promotion of liquidity and transactional and payment finality are important aspects for professionals in their risk management, whilst on the other hand the purchaser in the ordinary course of business of commoditised products buys them free and clear of any such impediments or charges and the ordinary commercial flows are protected. It is indeed a question of liquidity for all even through in different ways for professionals and consumers as we shall see in the next section and in greater detail in Volume 4.

1.1.6. Legal Dynamism as a Key Notion in Transnational Commercial and Financial Law. Law Among Professionals in Modern Contract and Movable Property. Issues of Liquidity, Finality, and Risk Management In fact, more important than its precise coverage, is the nature of this new professional law, which is dynamic and not tied to a formal or systematic form of law formation or application and reasoning. Indeed, through its different sources, method and coverage, another significant aspect of this new transnational commercial and financial law, or new lex mercatoria, is that it embraces a more dynamic concept of law that operates, it is submitted, around a more objective and hence also more powerful concept of party autonomy, which is itself transnationalised when operating among professionals. It then functions as an original and in principle autonomous source of law among the others,63 in particular custom as support, and affects the notions of both contract and movable property. It is therefore not strictly to be associated with the freedom to contract but also concerns the creation and operation of proprietary rights effective against others although still subject to public policy or public order considerations, which themselves are then likely to be also transnationalised. This modern ‘privatisation’ of private law at the transnational level among professional participants is thus particularly connected with a reinforcement and extension of party autonomy in the international marketplace, which may subsequently fold into practices or customs commonly accepted among professionals in their business. It is an approach that was largely lost in civil law countries when commercial and financial law was domesticated and incorporated into more formal and intellectual local legal frameworks that were mostly statutory. It has already been pointed out in the previous sections that this more modern transnational attitude combines a more dynamic approach to law formation, which recognises different sources of law (analogous to the method of public international law), with a more pragmatic approach to coverage, although it is centred on the operation of the international marketplace now extended into the direction

63 See

for this concept and its autonomy s 1.4.9 below.

36 Volume 1: The Emergence of the Modern Lex Mercatoria of international finance and professional services. To repeat, it finds its limits in public policy or public order considerations, which may themselves be increasingly transnationalised, amounting to transnational minimum standards. In appropriate cases, these vie with domestic standards when international transactions in conduct and effect still come demonstrably onshore in a particular state and to the extent they do. It suggests a competition of policies already identified as a particular interest and concern in legal globalisation. In the law of personal or movable property, stronger party autonomy at the transnational level may do away in particular with the civil law notion of a limited number of proprietary rights (the idea of the numerus clausus).64 To the uninitiated, it might seem extraordinary that parties may in this way expand their rights against third parties, who in the nature of all proprietary rights would have to respect them. However, it is less objectionable where there is a strong protection of bona fide purchasers at the same time (as there always was in the common law approach in equity, which has this flexibility) or even of purchasers in the ordinary course of business 64 As will be discussed more extensively in Vol 4 and in Vol 5, s 1.1.10, civil law has traditionally been opposed to an open system of proprietary rights, sees this as a public policy issue, and recognises only a limited number of these rights. This is the notion of the numerus clausus of proprietary rights, which, however, has only operated since the nineteenth century and was formulated and discovered not much before the seventeenth century as we shall see. It goes into the fundamental distinction between the law of property and obligations in civil law at the level of the system. In common law countries, at law, the proprietary system is also closed but in equity the system is in essence open (subject to strict safeguards), important in modern finance especially in the law of chattels and intangibles. It means that third parties must respect the rights so created and acquire the assets as transferees subject to the rights of others but only to the extent that they knew of them at the time of their acquisition. That is the most important safeguard and constraint. It follows that in that (equitable) system, bona fide purchasers or assignees (for value) are generally protected. This is now commonly extended to transferees of commoditised products acquired in the ordinary course of business. There is here no search duty either except for insiders such as banks and professional suppliers who should and can know better and avail themselves of these facilities. This means that the ordinary commercial flows are always protected against this type of proprietary interests which cannot be traced in them. A more open system of proprietary rights in this manner allows for stronger risk management tools among insiders as we shall see. Surprisingly, the idea of a numerus clausus of proprietary rights is now sometimes also advocated for common law by proponents of the law and economics school who favour standardisation; see TM Merrill and HE Smith, ‘Optimal Standardization in the Law of Property: The Numerus Clausus Principle’ (2000) 110 Yale Law Journal 1; see also H Hansman and R Kraakman, ‘Property, Contract, and Verification: The Numerus Clausus Problem and The Divisibility of Rights’ (2002) 31 Journal of Legal Studies 373. They see it as a protection for unsuspecting third parties, but the latter are increasingly protected as buyers in the ordinary course of commiditised products, as we have seen, and only insiders have a search duty and would know what to look and ask for as they themselves will use these structures. For them more important is their need for better risk management and tailor-made products as a matter of risk management within their group, which the promotion of standardisation denies. As we shall see in Vol 4, s 1.3.9, it is in finance a challenge to the strong and very necessary risk management element inherent in party autonomy in the creation of (equitable) proprietary rights or charges in modern finance, particularly in new forms of asset-backed funding where there is increasingly strong evidence of a more flexible use of proprietary rights. See for other common law writers on the subject of the numerus clausus, B Rudden, ‘Economic Theory v Property Law: The Numerus Clausus Problem’ in Oxford Essays in Jurisprudence, 3rd Series (Oxford, 1987) 239. See further A Fusaro, ‘The Numerus Clausus of Property Rights’ in E Cooke (ed), Modern Studies in Property Law, Vol 1 Property 2000 (Oxford, 2001) 307. For the idea of contractualisation of proprietary rights in common law, see earlier also JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 624; see further Vol 4, s 1.10. It may be noted in this respect that German case law opened up the system through its concept of Sicherungsuebereignung, see Vol 5, s 1.4, and also went the way of recognising proprietary expectancies or conditional ownership rights (or the dingliche Anwartschaft), see BGH, 22 February 1956, BGHZ 20, 88, although this important concept was not developed further and remains largely confined to the area of reservation of title as it does so fare in the Netherlands (in the form rather of a conditional proprietary right), see Vol 5, s 1.2. An insufficient insight into the nature of the commercial flows and fear of breaking the numerus clausus notion (which is itself not expressed in the BGB) were important contributing factors. It is to be noted in this connection that the DCFR follows here entirely in German footsteps, may even be regressive, and has been incapable of formulating newer insights; see the discussion in Vol 4, s 1.6.

Volume 1: The Emergence of the Modern Lex Mercatoria 37 of commoditised products (who need not then be bona fide and in any event do not have a search duty). Proprietary rights are here not cut off at their creation but only at the level of their operation; see further the discussion in Volume 4, section 1.10. It then becomes a question of transactional and payment finality. This may be considered as increasingly customary in professional circles or in the international marketplace and reflects equity in a common law sense. Again, it suggests a strong but also more objective notion of party autonomy in this area. Not everything goes, however, and transnational public order restrictions may still impose themselves, although there is legitimisation through evolving transnational practice. Public order, in particular, here protects the commercial flows in the international marketplace against the effects thereon of greater freedom in the creation of proprietary rights. To repeat, they then only operate among a group of professional insiders such as banks and suppliers who are or become used to these newer techniques and use them themselves. They have a search duty, but the ordinary course of business is freed from the impact of adverse interests so created. It means that ordinary people need not be wary of such interests when buying a car or refrigerator. That may be seen as a crucial departure and denotes the limit of greater party autonomy in this area, allowing property law nevertheless to become a prime risk management tool amongst professionals, especially clear in asset-backed funding where floating charges and conditional or temporary ownership rights (more particularly demonstrated in investment securities repos as finance sales) may thus freely operate side by side and next to more traditional security interests. It is indeed submitted that this is becoming a key facility in the modernisation of personal or movable property law at the transnational level, see again, more particularly, Volume 4, section 1.10. Earlier it was noted that it should also be realised that in common law, movable property law derives from commerce, not so in civil law. The example was a can of milk. In civil law it is there to be drunk when all is over, in common law it is there to make higher value products out of it to sell. Hence the emphasis on risk management of assets in the latter. If one keeps in mind the autonomous development of negotiable instruments and documents of title in the older lex mercatoria, this more modern development related to the operation of the international marketplace and its proprietary structures may be less surprising. It is now more especially relevant in modern financial transactions, even at the domestic level. In civil law countries, this is generally not yet sufficiently identified and analysed, although it is even now sometimes found in the area of finance leasing65 and repo financing66 and in the area of receivables and their transfer and in the interests67 that may be created in them.68 65 See Vol 5, s 2.4. 66 See Vol 5, s 4.2. 67 For assignments of receivables, greater latitude is now sometimes assumed in civil law, and in international transactions parties might at least be able contractually to choose different domestic laws of assignment. See the discussion in Vol 4, s 1.9.2 and Vol 5, s 1.1.10, see also Dalhuisen (n 49), Business Law after Brexit. In Dutch case law, for example, in proprietary aspects of assignments, the law of the underlying claim (which can be chosen by the parties) and in other cases the law of the assignment (which can also be chosen by the parties) have sometimes been upheld as applicable following Art 12(1) and (2) of the 1980 Rome Convention on the Law Applicable to Contractual Obligations, now Art 14(1) and (2) of the 2008 EU Regulation (EC) No 593/2008 on the Law Applicable to Contractual Obligations (Rome I), rather than on the law of the debtor or that of the assignor. The theoretical reason is that in many legal systems claims are not considered assets in a proprietary sense but obligations in which area there is traditionally more room for party autonomy. It is a misconception, see also Vol 4, s 1.9.4. Although the greater flexibility it brings even in civil law systems may be treasured, it is limited to claims. 68 See for the bona fides requirement in England allowing the collecting younger assignee to retain its collections, which was only implicit in Dearle v Hall (1828) 3 Russ 1, Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703. There is no investigation duty and acquiring knowledge of the earlier assignment after the second

38 Volume 1: The Emergence of the Modern Lex Mercatoria Moreover, for assets located in different countries, even now one technique is to locate them all at the place of the owner, already often favoured for receivables, so that they can be transferred in bulk under one regime. That is important but may still suggest the application of a (reformed) national law although subject to fundamental adjustment of more traditional conflict of laws notions (here the lex situs rule for the applicable property rules). In the case of monetary claims, it still requires recognition of such interests at the place of their collection, mostly the place of the debtor, also clear in enforcement. That means that the uniformity of the legal regime cannot be maintained throughout, especially when it matters most. In a more advanced legal environment, the owner’s law could be transnationalised or formulated by the parties at the transnational level, regardless of location, in the manner just mentioned,69 again subject to proper protection of the commercial flows as a public order requirement of the transnational commercial and financial legal order itself. This results in an informal uniform regime, applicable everywhere and also affecting local collections, potentially even bankruptcies, which are issues to be discussed further and more specifically in connection with the international arbitration practice in financial dealings in Volume 2, section 2.4.3. It is the force of transnational practice that makes the difference, imposing its own rationality and ultimately entering domestic legal regimes also, even in bankruptcy where it is especially important, in this area buffeted by evolving mandatory transnational custom and general principle,70 assignment (but before notice is given thereunder) is irrelevant for the entitlement to the collection. If there is a registered charge, there may be constructive or implied notice, although this is not automatically the case in England and in particular does not apply to any restrictive assignment covenants in a floating charge as these covenants need no filing. See further Vol 5, s 1.5.9. In this connection, it should be noted that especially the English equity rule protecting the first collecting bona fide assignee is not proposed to be adopted in the DCFR (it protects the bona fide assignee but forgets to require collection, see Art III-5:121 (1)), which would appear to be the necessary corollary of a more open system of assignment, see Vol 4, s 1.11.3. The 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade also suffered from a lack of conceptual clarity and innovative spirit, see Vol 5, s 2.4.5ff, which led to its failure. Its main problem was that it could not assimilate the receivable with the promissory note. The measure to which this is done determines the success of rules of this nature. cf also s 2-110 UCC in the US. Its major achievement was nevertheless a liberal identification requirement, which allowed the inclusion of future claims, but major practical shortcomings of the Convention were in its failure (not immediately clear from Art 8) to provide a uniform notification regime (or its waiver) and in its documentation or formalities regime (or their waiver). This was unfortunate, especially in the context of bulk assignments, all the more so as under Art 27 it remained unclear which local law might be applicable. The reliance in these aspects on domestic law destroyed any notion of an international bulk assignment, which was the true focus of the Convention. The DCFR also deals with the subject but does not manage to move it forward either, especially because of its lack of insight into the asset nature of claims and the operation and significance of bulk assignments. Closely related was the UNCITRAL Convention’s failure to establish a uniform regime for priorities. It concerns here the right of the assignee in the receivables over the right of a competing claimant. Instead, the Convention refers the matter to the law of the assignor (Arts 22 and 30), or leaves it to the Contracting States to opt for one of the systems set out in the Annex to the Convention (Art 42). Inspired by the UCC filing system, the Annex itself prefers registration of an assignment (Arts 1ff of the Annex). But Contracting States may also opt for a prior tempore rule based on the time of the contract of assignment (Arts 6ff of the Annex), which conforms to the German approach. Finally, Contracting States may also opt for a priority rule based on the time of the notification of the assignment (Arts 9ff of the Annex), which is wholly unconducive to bulk assignments and rather reflects old French law. All these different options suggest that no unity l results in some of the most important aspects of assignments. 69 See for receivables, n 67 above. See for this technique more generally Vol 5, s 1.1.10. 70 Indeed, the final test of such newer (prospectively internationalised) proprietary structures is in bankruptcy. Precisely because bankruptcy is still a matter of domestic law, this area is likely to encounter the greatest problems with transnationalised property rights and other new financing structures. The idea of autonomy of transnational law requires that transnational law may increasingly demand recognition in domestic bankruptcy courts as customary law. Note in this connection, in particular, the Australian (Victoria) cases in IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008] HCA38, in which the Australian High Court ultimately accepted that, at

Volume 1: The Emergence of the Modern Lex Mercatoria 39 and potentially supported by the New York Convention in arbitrations, and increasingly even by the transnational public order itself. If we concentrate on transnational commercial and financial law, we may indeed note that a more diverse and fractured system of proprietary rights is evolving at that level with different proprietary notions for different areas of the law or for different (financial) products and this system may eventually also be followed or recognised domestically. Again, it assumes and confirms a greater degree of party autonomy, even in proprietary matters, but it is also more objective, meaning fenced in by the practices evolving at that level and the need for protection of the ordinary commercial flows as a transnational public order requirement in the manner just explained. This may affect, in particular, modern forms of (electronic) payment, securities entitlements and their transfer; the treatment of conditional and temporary ownership rights in finance leases and repurchase agreements or finance sales; the (bulk) assignment of payment obligations, receivables financing and securitisations; the development of security interests in the form of non-possessory floating charges; the notion of agency (and the transfer of ownership in indirect or undisclosed agency); the evolution of fiduciary duties; and the important principle of segregation of assets in formal, resulting or constructive trusts, and the facility of tracing. In this connection no less important are the modern notions of set-off and netting. To repeat, one recognises here transnationally the innovative pull and challenge of equity in a common law sense, where, because civil law did not have this facility, the greatest differences between common and civil law resulted. It will be discussed more extensively in Volume 4, sections 1.3.1ff. Domestically, the more incidental and fractured attitude to proprietary rights and the absence of systemic thinking in this area have in more modern times been more fundamentally supported by the different chapters or Articles of the UCC in the US, which are often particularly enlightening in these areas. The French, alone among major civil law countries, in their Code Monetaire et Financier of 1999 and its more recent amendments, also of its civil code, have shown a willingness to adjust, largely for financial services purposes. In the process they have also acquired a level of comfort with different proprietary structures for different financial products leading to significant innovations in France in the laws concerning repos, securitisations, assignments and reservation of title, while in the French Code Civil, through more recent amendments, floating charges and (formal) trust structures have also been introduced. However, French law, although having become pragmatic in these areas,71 still lacks the detail and also clear academic support as to what is necessary least in a non-financial CCP (central counterparty, see also Vol 5, s 2.6.4) in respect of mutual airline claims resulting from passenger cancellations and ticket changes, a transnational form of clearing and settlement and set-off trumped the Australian bankruptcy laws. This was an important precedent; see further C Chamorro-Courtland, ‘The Legal Aspects of Non-Financial Market Central Counter Parties’ (2012) 27(4) Banking and Finance Law Review, and an advance notably on British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390, discussed in Vol 5, s 3.2.3 in connection with novation netting and its limitations in bankruptcy in England. In the meantime, international bankruptcy principles are developing and are being written down. See IMF, Orderly & Effective Insolvency Procedures (1999) and World Bank, Principles and Guidelines for Effective Insolvency and Creditors Rights Systems, May 2001 available at www.worldbank.org/ifa/ipg_eng.pdf. However, their usefulness will be limited if they do not manage to deal with the very concepts of proprietary or priority/separation or segregation rights, and their operation and acceptance in the international sphere. The same applies to the modern set-off and netting facilities in terms of preferences as we shall see in Vol 5, s 3.2.7. 71 See Vol 5, s 1.3. The French, at least in commerce and finance, ultimately proved to be pragmatic by introducing in the last 25 years through amendments to their Bankruptcy Act, amendments to their Code Civil (CC), and the introduction of a new Monetary and Financial Code (CMF). It resulted in the following facilities: (a) the reservation of title, now in Arts 2367–2372 of the French CC (Ordonnance no 2006-346 of 23 March 2006) as a true payment protection devise (abandoning in the process the fundamental concept of ‘solvabilité apparente’, see Vol 5, s 1.1.9);

40 Volume 1: The Emergence of the Modern Lex Mercatoria to make such a fractured system function properly, notably in terms of party autonomy and the protection of commercial flows.72 Rather, it still captures these newer developments in static laws or formal legislation, not merely in a facilitating manner but in a limiting and prescriptive way. These adjustments were basically an instant reply to market pressure, also in terms of Paris keeping up with London as an international financial centre. They are not necessarily more fundamental in terms of a new paradigm in respect of the legal system of private property rights as a whole. They are nevertheless important indications of a less dogmatic approach in civil law. It should be noted in this respect that the Germans have made no such attempt so far, mainly for fear of destroying the unity of their system. This also transfers into the DCFR, which maintains a similar unworldly approach and may even try to undo whatever case law had achieved in Germany in terms of floating charges and bulk transfers of future (replacement) assets as we shall see in Volume 4, sections 1.7.9 and 1.11.4. It all comes down to the legal power over future commercial and related commercial and cash flows even when emerging in different countries. It has already been submitted that it is the international flows as such, their size and nature that count. Importantly and as will be seen more particularly in Volume 4, this motivates altogether new concepts and uses of property and their operation at that level. Conceptually, at least at the transnational level, the result of newer thinking in this area is thus a more dynamic law of movable property in modern transnational commercial and financial dealings. However, legal dynamism and a less static approach to private law and its rules are not confined to personal property. They are at least as necessary and demonstrable in contract law, where so far, the modern notion of good faith has been used in major civil law countries domestically to create greater flexibility. Behind it, the other sources of law, which these codes had tried to eliminate or licence as discussed above, may resurface. Still there is a lack of relationship thinking here also and no sufficient distinction between the consumer and professional contract in civil law but there is likely to be more distinction at the transnational level, it is submitted, where in this area there are no preconceived systematic constraints either and the different sources of law more freely operate. Even pressing moral, social and especially efficiency considerations operating transnationally may then find readier acceptance in a more modern interpretation technique,

(b) the bulk assignment for financial purposes (Loi Dailly) now in Arts L 313-23–L 313-35 CMF; (c) securitisation or titrisation through the creation or facilitation of fonds communs de créances (FCCs), now contained in Arts L 214-43–L 214-49 CMF; (d) repos or pension livrée in Arts L 432-12–L 432-19 CMF; (e) finance leases (already earlier regulated by Law 66-455 of 2 July 1966 on the credit-bail), now in Arts L 313-7–L 313-11 CMF; (f) the floating charge since 2006 in Arts 2333–2366 CC, Ordonnance no 2006-346 relative aux Sûretés of 23 March 2006, see also Rapport au Président de la République relative à l’ordonnance no 2006-346 du 23 Mars 2006 relative aux Sûretés, JO no 71 of March 24 2006 (it was followed by a short Decree No 2007-404 of 22 March 2007 concerning some aspects of real estate mortgages); and now even (g) the trust or fiducie since 2007 in Arts 2011–2031 CC. See also P Matthews, ‘The French Fiducie: and now for something completely different?’ (2007) 22 Trust Law International 1. It was followed in 2009 by the introduction of (h) the fiducie-sûreté, in Arts 2372-1–2372-6 (mobilière) and Arts 2488-1–2488-6 (immobilière) CC. It allows the setting apart of property with a trustee for the benefit of funding parties subject to the conditions of the arrangement. Appropriation is possible as an alternative to security interests, still subject, however, to the return of any overvalue but in the case of natural persons only, Art 2372-3 CC. The introduction of these new facilities completely destroyed any idea of one system of proprietary rights in France (although this author is not aware of any study explaining the impact on the Code Civil and its proprietary system), whose 200-year anniversary was nonetheless celebrated in some style in 2004. Under the circumstances, one wondered why. 72 No less ‘damage’ to traditional civil law system thinking in this area came with the EU Collateral Directive, see Vol 5, s 1.1.8, which pulled the rug out from under most continental orthodoxy in the law of personal property in the context of finance. The Dutch and Germans were no longer able to integrate it into their ‘systems’ and the Directive’s contents figure as a special section to their Codes.

Volume 1: The Emergence of the Modern Lex Mercatoria 41 although again likely different for professionals. These considerations, except those concerning efficiency, may not always be highly relevant in international trade, commerce and finance and in any event may not always give more protection. They may even give less, especially when it comes to a more literal interpretation of documentation as we shall see. A truly dynamic concept of contract law may go further and be more fundamental. It questions (as in movable property) in particular the validity of the present civil law anthropomorphic model based on consensus and intent. One must think here in particular of the infrastructure of modern contract. It suggests a different approach to contract formation, during which, depending on the phase of the negotiations, pre-contractual duties emerge and parties assume steadily increasing obligations. So much is now often also understood in domestic laws, but they do not go so far as to recognise that contract formation no longer depends on a ritual kind of mating dance in the offer and acceptance language, traditionally also resulting in a fixed moment of contract formation.73 At least for duration contracts, the more modern approach increasingly accepts a progression (and subsequent potential degression) in commitment during the entire contract period,74 in which 73 As to the more traditional offer and acceptance notion, it is seldom realised that it is relatively recent. On the European Continent, the natural law school of Grotius and Pufendorf in the seventeenth and eighteenth centuries had completed the theoretical structure of the law of contract as we know it today in civil law. See Grotius, De Iure Belli ac Pacis, Lib II, Cap XI, iv.1, emphasising the mutuality of promises but not yet the consensus idea itself or the more modern model and process of offer and acceptance, but cf also Cap XI, xiv and his Inleidinge or Jurisprudence of Holland (RW Lee trl 1953) III.10, where Grotius noted that by contract we mean a voluntary act whereby the one party promises something to the other with the intention that the other party should accept it and thereby acquire a right against the first party. cf also Pufendorf, De Iure Naturae et Gentium 1674, Lib III, Cap IV, s 2.7. This resulted in the general applicability of the famous maxim pacta sunt servanda, itself derived from the early Canon law heading of the relevant chapter in the Decretales of Pope Gregory IX of 1234, which had been at the beginning of this development (Pacta quantumque nuda servanda sunt). Through the seventeenth-century works of the French jurist Domat, Les Lois Civiles dans leur Ordre Naturel, Livre I Introduction (Paris, 1777), the narrower concept of consensus entered the French Codes. Key is that it captured the contract and the rights and obligations arising thereunder at the moment of its formation, the determination of which then became a separate but prime issue. The other great French jurist, Pothier, in the eighteenth century formulated in this connection the notion of offer and acceptance more precisely, see Traité des Obligations, no 4, although the question of acceptance had already been raised by Bartolus in connection with the use of agents: Commentaria D.15.4.1.2. Only in the nineteenth century was this insight described in terms of intent or the will of the parties, typical for those days (see Vol 3, s 1.2.1), which led to more refined offer and acceptance theories. In common law, as we shall see in Vol 3, s 1.2.2, there is no similar emphasis on consensus or a meeting of minds in terms of contract formation and validity, and the parties’ will or intent relates there rather to the choices parties have made, particularly in terms of risk management. In common law, it is the more objective notion of consideration, which is the concept of exchange or bargain (or sometimes the notion of sufficient reason) that still provides the main basis for the validity of the contract itself. It means that only those who have invested can have a cause of action under the contract and claim its benefits. Offer and acceptance language dates here only from the nineteenth century, imported from the European Continent, probably via Scotland, and goes foremost to the issue of when the contract was concluded (denying in the process the fluent nature of contractual commitment during its various phases). 74 It means among other things that the moment a contract is concluded or formed may not be as clear as it used to be. More formal notions of offer and acceptance, both in common and civil law, are replaced by a longer drawn-out negotiation or formation process where conduct and (detrimental) reliance become key at every stage. Especially in respect of larger duration contracts, new rights and obligations may thus appear all the time depending on the stage reached in the contract. They may also be extinguished during the contract period, which may be seen as a legal environment subject to constant change. It follows that credit must more readily be given to the raising of expectations and any detrimental reliance on them by others. The way one party chooses to organise itself may itself give rise to these expectations. Thus, the buying of a ticket on the bus and the purchase of groceries in a supermarket can often best be explained by reliance on the organisation that the seller of these services or of the goods has put in place and the choice and selection power that is in this manner given to the buyer rather than in terms of offer and acceptance or consensus.

42 Volume 1: The Emergence of the Modern Lex Mercatoria conduct and reliance,75 disclosure duties,76 a commencing of performance,77 and acceptance of risk of future developments78 also figure.79 It is possible to move further and put the whole emphasis (not just in terms of formation) on justified expectations, detrimental reliance, duties of care and co-operation, of disclosure, investigation and loyalty, and on the contractual purpose, and consider them to be the basic source and essence of modern contractual rights and obligations, only the details of which would then depend on the more specific objectives of the parties. In this connection, importantly, professional parties The way the seller has organised itself in these situations does not, for example, allow the ticket seller or cash attendant discretion in refusing the travel service or the taking away of the groceries if the correct price is offered unless there are special reasons which the ticket seller or cash attendant would then have the burden of explaining. Intent of the ticket seller or cash attendant is largely irrelevant. It more generally poses the question of when reliance by others becomes justified and starts binding the party having given rise to the expectation. This will often depend on the circumstances and is therefore a factual issue, in which the type of parties may be significant but at least in commerce and finance also a commencing of performance may be required. At least the reliance must be detrimental. Again, a party must have invested in order to claim the benefit never mind the intentions. A purely executive contract (a promise for a promise) may thus not be a sufficient basis for a claim; there may need to be some investment or a commencing of performance. 75 Indeed, in the newer approaches, detrimental reliance on reasonable expectations (which again suggests the relevance of the circumstances and type of parties) is the basic issue in contract formation and its timing, while culpable breach of such reasonable expectations and duties is the prime ground for actions for damages. It is clear that such actions may be more closely related to tort than to more traditional, subjective concepts of contract. Conduct and detrimental reliance become key in terms of contract formation and are themselves dynamic in determining the emerging rights and obligations of the parties and therefore the content of their contract. They do not merely operate besides offer and acceptance, but rather the latter become a subcategory of the former. 76 In later phases of the contract, too, new rights and obligations may emerge, although, like in the case of precontractual disclosure and even negotiating duties, perhaps less between professionals than between professionals and weaker unsuspecting parties. The European and UNIDROIT Contract Principles simply accept consumer notions and do not distinguish between consumer and professional dealings. That is also the basic approach of the DCFR, see more particularly Vol 3, s 1.6. As for these contractual negotiation duties, see Vol 3, ss 1.3.12ff. Modern contract theory differentiating between the types of parties in this instance may explain the English case of Walford v Miles [1992] 2 WLR 174, and the denial in it of the duties of pre-contractual negotiation and co-operation between professionals, although it did not rule out claims in negligence for costs incurred unnecessarily. 77 In particular and as alrerady mentioned, reliance might need a response in some commencing of performance by the relying party and cannot be merely in the mind or on a piece of paper. It is an aspect of reliance having to be detrimental. See for this requirement PS Atiyah, ‘Contract, Promises and the Law of Obligations’ (1978) LQR 193. In the early droit coutumier in France, where the promise itself became binding, this extra requirement (besides that of a lawful cause) was not unknown either, at least in the law of sales. See A Esmein, Etudes sur les contrats dans les très ancien droit français 5, 29 (Paris, 1883). The codification dropped the concept and may therefore be considered to have a lesser requirement for contract validity and enforceability than the immanent transnational law may have and the common law traditionally also has. 78 Another key modern insight is that entering into a relationship of whatever nature implies acceptance of much of what follows and for which one may not have bargained, and in any event much may happen which could not have been foreseen but must still be accepted. That is risk acceptance. When signing a contract, parties thus take considerable risk, especially between professionals in duration contracts. It will not give them a way out of the contract on the mere basis of lack of original intent except in extreme cases (when holding a party to the contract would become manifestly unreasonable). In such relationships, much unknown risk must be considered discounted, see further Vol 3, s 1.3.14, and any detriment falls where it falls and that must be accepted as a risk one took (unless one was able to allocate it to the other party in the contract in a force majeure clause or otherwise eg through change of circumstances or hardship clauses—hence the idea of risk management—but such an allocation may still be narrowly interpreted). The European and UNIDROIT Contract Principles and DCFR appear hardly to be aware of this and the Vienna Convention in Art 79 operates with a broadened subjective force majeure concept, which, as it here concerns professional sales, may be unsuitable. As a minimum, it may still have to be interpreted restrictively. 79 Yet another aspect of modern contract theory is the importance of the demonstrable contractual purpose in determining the contract’s content and effect, again as some objective standard and regardless of what the original intent of one of the parties may or may not have been. This is the essence of teleological interpretation.

Volume 1: The Emergence of the Modern Lex Mercatoria 43 may also insist on a more literal interpretation of their contract if not already implied in a good faith approach, whilst the contract more properly functions as a road map and risk management tool between them.80 In terms of contract law evolution, we must thus first consider the question of whether the professional (duration) contract is still based on intent (consensus) or rather on conduct and (detrimental) reliance supplemented by a host of extra contractual rights and duties. Conduct means here a signalling mode raising reasonable expectations subsequently backed by investment (or in the case of an exchange of promises by a commencing of performance), without which no claim can be made under the contract. In the common law manner, the commercial contract thus requires that kind of consideration. The parties’ intent (in terms of consensus) is secondary in contract formation and cannot in itself sustain the binding force of contract. It acquires importance mainly where clear choices have been made in terms of risk management. Even then, texts are restrictively interpreted, especially if the contract is perceived as a roadmap between professionals. Differences about meaning are resolved by reference to reasonableness meaning peer group perceptions. It follows that defences and excuses may also be limited and usually are. In common law, this may be explained by the contract having first emerged in commerce while the civil law consensus or will concept remained typically anthropomorphic, geared towards private parties and their concerns. It was already noted that in modern times, this often implies a consumer law bias with strong public protection elements, which easily wafts over into the professional sphere. The transnational law of contract, when properly understood, following common law principle in this regard, rejects this. It may be observed in this connection that the common law has no basic philosophy of contract, like that of will and consensus in civil law, but only reacts to certain behaviour or signals. It suggests two different cultures. Civil law-based parties in particular need to be aware of it when they choose English law to apply in international contracts. It is true that offer, acceptance and intent language came over from civil law into the common law, but in commerce the approach remains quite different. The common law concept of party autonomy is more objective and may be more fitting for the corporate situation.81 The difference is evidenced especially in the defences such as mistake, misrepresentation or fraud, which in the common law do not depend upon what was intended (again the personal condition is ignored) but rather emerged in equity as incidental relief in the remedy of rescission, which depends primarily on the facts, see Volume 3, section 1.4.2. Furthermore, in the common law professional contract interpretation is literal and does not commonly allow for the excuses of force majeure or change of circumstances in the major conditions of the contract unless written into the contract itself (or sometimes operating within 80 As we have seen, in a more objective contract interpretation, parties may also face pressing external ethical, social and efficiency standards in the implementation of their transaction, although the impact will again depend on the situation, including the type of parties and taking into account the standards they may have set among themselves. In professional dealings the emphasis thus falls on efficiency. This is sometimes called the normative interpretation technique, which goes well beyond a mere teleological one; see also Vol 3, ss 1.1.6/7. The term ‘normative’, when used in this connection, does not refer to any ideal type or to ethical aspirations per se, as it usually does in the positivist tradition, but rather refers to legally or objectively binding considerations or correctives which may have an extra-legal origin in moral, social, cultural or economic considerations. It may also simply relate to rationality or common sense. Again, it is more than a merely purposive or teleological interpretation, which looks for the objective of the agreement in terms of its interpretation (although this is also important in this context). 81 This ‘corporate situation’ is one in which the person who signs the contract seldom knows what is in it except for the commercial objectives and relies only on his or her authority, while different departments, with little awareness of one another, have been involved in the negotiation in respect of different parts which may remain unconnected, and the ultimate text comes from outside, from non-party lawyers who are probably the only ones who understand the contract language.

44 Volume 1: The Emergence of the Modern Lex Mercatoria it as an implied condition). Lack of blame in the case of breach is irrelevant. So, the defences/ excuses: ‘I did not mean it’, ‘I cannot help it’ and ‘it is not my fault’ carry a great deal less weight in the common law than in the civil law of contract. Only the other party not performing a basic condition is a clear-cut excuse. This is also likely to be the approach transnationally in the professional sphere, one reason being that among professionals the problem of one party in distress should not normally become the problem of the other, who is a complete bystander and certainly cannot help it either. In any event, the party in distress under the contract may have thousands of them, for example, a supplier of commodity types of products, under many of which it may do very well. The counterparty may have only one contract on which it depends. Why should the first one be excused unless perhaps the situation is thus that there results severe distress for this party overall? It follows that objective good faith adjustments are also unlikely to be lightly conceded in the modern commercial contracts, especially in duration contracts if written as roadmaps and risk-management tools. Again, things may be different in situations of dependency, where the ‘relationship sensitive’ feature of the common law of contract is illustrated. That may be so especially in consumer dealings, but less between professionals and is quite the reverse of civil law, which defines the contract types but is traditionally hardly sensitive to the types of relationship created. It explains why the common law needs good faith far less than civil law in allowing for different types of parties and their strengths:82 it is part of the structure of the common law of contract supplemented by fiduciary duties and notions of reliance, and sometimes natural justice. To repeat, it follows from the civil law approach, which emphasises the type of contract instead, that good faith protections for consumers constantly threaten to show up in business dealings in the same contract type. This newer contractual approach or model will be discussed more extensively under modern contract theory in Volume 3. It involves a process of objectivation of norms in which in a largely corporate environment traditional will theories and an anthropomorphic attitude to private law,83 and to contract formation in particular, are abandoned, and at least duration contracts may be seen as a form of partnership or a framework in which new obligations emerge in a continuous process of law formation that is not solely guided by the parties’ will at a fixed moment in time but rather by conduct, reliance and acceptance of risk, especially of ever changing circumstances. It may still give rise to force majeure excuses or post-contractual renegotiation duties, although in professional dealings, short of a force majeure or contractual hardship clause, only when the risk of new developments becomes manifestly unreasonable for one party to bear,84 which in professional dealings is not likely to occur soon. 82 See for the different common and civil law approaches in this regard, Vol 3, s 1.3. 83 The strong emphasis on the will is a typical nineteenth-century continental European idea, connected with Romantic philosophy, and suggests a thoroughly anthropomorphic attitude to contract law that is out of place for professional dealings in a largely corporate environment. See also n 253 below. See for the more modern idea of party autonomy and its present-day meaning and operation, s 1.4.10 below. 84 In the case of hardship due to intervening unforeseeable, unavoidable and undiscounted circumstances, re-negotiations may be sought under the UNIDROIT Contract Principles (written for professional contracts) as soon as the contractual equilibrium is disturbed, while there need not even be severe financial consequences (Art 6.2). This is hard for professionals to understand. One may wonder whether this rule is also considered to be related to good faith and therefore mandatory under these Principles. Again this could at most be so in clear cases. It is consumer thinking. At least the DCFR avoids here good faith language, Art III.-1:110. In a similar vein, surprising (standard) terms must be expressly accepted even among professionals (Art 2.19), while Arts 7.1.6 and 7.4.13 limit their freedom with respect to exemption clauses and agreements to pay fixed sums for non-performance. These rules also seem to be mandatory among professionals. This is also the attitude in the DCFR. The question is why? Who needs protection here, and against what?

Volume 1: The Emergence of the Modern Lex Mercatoria 45 It has already been noted that good faith but also market practices now often operate as a front behind which legal dynamism is rekindled, at least in contract. It will be argued later and was already mentioned before that in civil law, in professional dealings, good faith means in truth a liberal interpretation technique in contract (rather than a superior behavioural standard as the opposite of bad faith) and is soon accompanied by the revival of other autonomous sources of law, including fundamental principle.85 It is submitted that in professional dealings, good faith case law can often be better analysed in this manner.86 The more modern civil law literature may becoming more aware of these developments.87 Some of these ideas can also be identified in England88 although they are expressed differently.89 They are clearer in the US, where they are

85 In countries such as Germany, Austria, Switzerland and the Netherlands, in contract law, the modern, more dynamic approach is now indeed closely associated with the good faith notion in the interpretation and supplementation of contracts. In its extreme form, it may even lead to contractual adjustments on the basis of what may be considered fair and reasonable in objective terms, or even rational and common sense, or what may be required in a social sense in terms of (re)distribution or is morally demanded in an advanced society. In Germany, in particular, that plays a role in terms of pre-contractual disclosure duties as it had earlier in the case of profound changes of circumstances. This has been an area of statutory law since 2002. Again, the problem is that consumer law thinking quickly spills over into professional dealings. This is also true of the DCFR. 86 Although in civil law, the notion of good faith is often considered just one (other, open but mandatory) norm (the opposite of bad faith), which supplements the codes (but is only in interpretation authorised by them to do so), it was already submitted that at least in professional dealings it stands in truth for a more liberal interpretation technique and has acquired in that context a multifaceted character and is by no means always mandatory as a higher norm. Rather, it (a) supplements the contract; but may sometimes (b) also derogate from it if the result would be manifestly unreasonable; (c) may activate other sources of law; and (d) stretches existing norms to new situations by selecting new facts as being legally relevant. It will be argued in Vol 3, s 1.3.4, that in operating in these ways, ‘good faith’ is sometimes judicial discretion and sometimes judicial limitation. It may be legal principle or a more precise legal rule. It is sometimes the highest norm (if morally, socially or economically sufficiently pressing, and may then be mandatory), sometimes a practical norm (if promoting good sense, co-operation and reasonable care, and is then directory). It is sometimes legal refinement and differentiation, sometimes generalisation and system building. It may be rule formulation, or rule application, selecting and weighing the relevant facts and defining the legal consequences (Konkretisierung). It may even be subjective, although it is mostly objective. It sometimes looks at the nature of legal relationships of the parties and their special interests and sometimes at the nature of their transaction and its particular features. At one time it may set rules for judicial decision making but at other times provides only judicial direction and guidance. It looks for fairness, particularly in consumer and small company cases, and for what makes sense and is practical, particularly in business cases. It is sometimes structure, but mostly movement. It is always inter-relational but is probably more important in human relationships than in business dealings. See further Vol 3, s 1.3.4. 87 Misuse of the notion of good faith is not excluded, however, and intellectual prejudice may be as rampant in its application as in the application of the legal model good faith is meant to correct or expand, eg by referring to certain behaviour as ‘obviously contrary to good faith’, see also J Vranken, Exploring the Jurist’s Mind (Alphen aan den Rijn, 2006), see also n 417 below. 88 See Lord Hoffmann in ICS Ltd v West Bromwich BS [1998] 1 WLR 896, 912, referring to the reasonable man approach, with a preference for contextual interpretation instead of abstract literalism, but also in BCCI v Ali [2001] 2 WLR 735, 749 restating the principle of literal interpretation on the basis of a narrow view of the parties’ intent, at least as a starting point. Similarly, Lord Steyn in Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 alluded to the contractual language, the contractual scheme, the commercial context and the reasonable expectations of the parties. This is relationship thinking and its path-finding approach of Lord Bingham in terms of relationship thinking in formation of contracts was demonstrated in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, 439. English case law is careful to avoid broad concepts, however, also teleological interpretation (of statutes), and prefers to use the term ‘purposive’ instead, which may denote a more limited concept. See further the comment of Lord Denning in Bulmer v Bollinger [1974] Ch 401, s 1.3.3 below. 89 The common law’s emphasis on the nature of the relationship between the parties means that it needs the notion of good faith much less than civil law in this connection. Implied terms, fiduciary duties, notions of reliance, and sometimes resort to natural justice do the rest. Protection of small investors against their brokers may present a case in point. Good faith notions in civil law do not reach as far as fiduciary duties traditionally do in common

46 Volume 1: The Emergence of the Modern Lex Mercatoria closely connected with legal realism.90 As already noted, they receive insufficient acknowledgement in the DCFR (and earlier in the Principles of Contract Law (PECL)), which now stands for the latest, more classical, example of codification thinking in Europe, see section 1.4.21 below. The reason for this is again the continuation of the nineteenth-century anthropomorphic idea of contract, old-fashioned offer and acceptance language, antiquated will theories followed by an emphasis on intent leading also to the idea that a contract and its rights and obligations still have a fixed origin in time. It is supplemented by the notion of fault in the excuses (force majeure and change of circumstances), again a personalised consideration. It is followed by a prescriptive consumer law ethos which makes these texts altogether unsuitable for professional dealings and reflects a model which in twentieth-century terms amounts to a consumer approach, still meant to operate for all. This is a serious mistake. law. Moreover, the common law is less unfriendly to other sources of law, as we have seen. The often heard proposition on the European Continent that English contract law is primitive because it does not even accept the notion of good faith, is therefore ill-informed and unperceptive. See further Vol 3, s 1.3.7. 90 See MA Eisenberg, ‘The Emergence of Dynamic Contract Law’ (2000) 88 California Law Review 1747. In the US, the notion of good faith now operates more directly than in England: see for a fuller discussion Vol 3, s 1.3.7. In the UCC under German influence, a general reference to good faith was inserted in s 1-304. It imposes an obligation of good faith in the performance or enforcement of every contract or duty under the UCC, but strictly speaking not in the formation. It means that the notion does not operate in pre-contractual situations, neither does it in the post-contractual phase. The concept is only incidentally relevant, see UCC ss 2-603, 2-615. At least in the UCC, good faith strictly speaking does not cover gap filling either but only the performance or enforcement of the contract, joined by a general provision on the unenforceability of unconscionable clauses in contracts for the sale of goods, see s 2-302 UCC, particularly (but not only) relevant in sales to consumers. Interestingly, s 1-201(b)(20) UCC defines the concept as ‘honesty in fact in the conduct or transactions concerned’. The ‘in fact’ language suggests a subjective approach (‘empty head, pure heart’), but has gradually acquired a more normative or objective meaning, see s 1-201(19) (old), while s 1-201(a)(20) (new) now adds after ‘honesty in fact’ a reference to ‘the observance of reasonable commercial standards of fair dealing’. Indeed, for sales, s 2-103(1)(b) UCC had done so earlier, now repeated in its new version (s 2-103(1)(j)); see also s 3-103(a)(6) UCC (for negotiable instruments), s 5-102(a)(7) UCC (for letters of credit) and s 9-102(a)(43) UCC (when used in the area of secured transactions). See for a more limited use of the concept in this area of proprietary rights, Comment 10 to s 8-102 UCC (for adverse claims in security entitlements). There are several other references to good faith in the UCC, eg for the sale of goods, in ss 2-603 and 2-615. It remains exceptional in the common law of contract, however, and is substantially statutory and even then, as in the UCC, incidental, as the many individual references to it show. On the other hand, in the US, the non-binding Restatement (Second) of Contracts of 1981, s 205, stated for the first time more generally that every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. This was then followed in the 1990 revision of s 3-103(a)(4) UCC (for negotiable instruments), which, as far as the UCC is concerned, was first in accepting the idea that good faith could also mean the observance of reasonable commercial standards of fair dealing, but good faith remained here also a matter of performance and enforcement of the contract only. This is now the general UCC approach. It follows that in the interpretation of intent, the normative approach is now increasingly followed in the USA. Australia and New Zealand also have abandoned the narrow common law approach in this area. More limited notions of foreseeability and reasonableness may, however, commonly still be found in most legal systems as possible correctives to the parties’ exposure in this connection when it comes to any assessment of damages even where the requirements of good faith are deemed violated in a more objective sense. For the US see also EA Farnsworth, ‘Good Faith in Contract Performance’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995) 153. See for a case that could more readily be explained as covering a pre-contractual situation, Teacher’s Ins & Annuity Ass’n v Butler 626 F Supp 1229 (SDNY 1986) in which a developer refused to close a loan deal while objecting to a pre-payment fee in the closing documents. The court recognised a duty of good faith and fair dealing in every commercial transaction and found a breach of this duty on the basis of commercial practice, which accepted pre-payment fees in loan agreements even if not normally included in a bank’s commitment letter. The court therefore rejected the borrower’s argument as a pretext for getting out of the deal, also taking into account that the draft loan agreement had included the fee and that the problem had never been raised until the eve of closing. The case can, however, also be seen in the context of performance pursuant to the commitment letter.

Volume 1: The Emergence of the Modern Lex Mercatoria 47 To repeat, for professionals, the contract itself is likely to be primarily a roadmap and risk management tool. Even good faith interpretation does not then always provide more rights or protection; it can also be restrictive, especially when predictability requires it. Proper risk management through contract is an overriding objective in all professional dealings. Particularly in this respect, the initiative of the parties remains paramount and their intent relevant but it is not a formation issue, rather a question of implementation where good faith protections and corrections recede in importance. This being said, it can easily be maintained and accepted that good faith underlies all contract interpretation, including professional contracts as is now often the more modern approach in the civil law of contract. Again, it is basically not then an objective behavioural standard but an interpretation tool that allows the other sources of law to re-appear and operate, in which connection it should be understood that it may work out very differently in consumer and business dealings. Proper relationship thinking is always the key in contract and should move to the centre of the good faith concept itself and the liberal interpretation facility it embodies. Literal interpretation is then likely if the text is clear or as it may be understood by the peer group. It is like an instruction manual where one also does not ask what the writer intended. Civil law still has some way to go in this respect.91 It follows that in modern contract theory, the notion of party autonomy is here recast primarily in terms of initiative and organisation.92 It is no longer psychological and is more objective, locked in, in particular, by conduct and reliance notions and supplemented (and sometimes corrected) by other higher sources of law. The modern notion of good faith, if properly understood, supports this and may thus extend as well as limit the protections of the parties depending on the nature of their relationship (different in professional and consumer dealings) and on the type of their deal (different, therefore, in duration contracts and sale of individual goods). Again, the commercial contract will then often be interpreted literally. Good faith itself requires it in professional dealings; in such situations it may mean fewer rights, not more. Modern contract theory93 generally underwrites a more dynamic concept of contract law (see Volume 3, section 1.1.4), accepted at least in more ambitious domestic academic writing, although

91 More recent Dutch cases law appears to have relented, see Vol 3, n 4. 92 Especially in terms of risk allocation, including the risk of unforeseeable events, particularly in duration contracts, party autonomy thus remains an important concept, fully recognised by modern contract theory, especially between professionals and includes their right to set standards or even eliminate adjustment possibilities except in extreme cases. Only if the situation gets totally out of hand will there be redress under more objective good faith notions, which may include termination of the agreement, but again it is unlikely to be an issue of lack of intent. Parties retain here a sense of initiative and imagination and will use their contract as a tool of risk management in so far as they can foresee these risks or otherwise introduce a force majeure or change of circumstances clause in the contract. Intent is here no longer central to the contract’s validity in terms of consensus. It still is where choices are made but is even then objectivated and may become subject to literal interpretation of the contractual texts. 93 For modern contract theory, see especially Eisenberg (n 90) 1743, 1747, and earlier S Macauley, ‘Non- contractual Relationships in Business’ [1963] American Sociological Review 55 and ‘Contract Law and Contract Techniques; Past, Present and Future’ [1967] Wisconsin Law Review 805; G Gilmore, The Death of Contract (Columbus, OH, 1974); PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) and Essays on Contract (Oxford, 1986); RA Hillman, ‘The Crisis in Modern Contract Theory’ (1988–89) 67 Texas Law Reporter 103 and ‘The Richness of Contract Law: An Analysis and Critique of Contemporary Theories of Contract Law’ [1999] Michigan Law Review; J Beatson and D Friedman, ‘Introduction: From “Classical” to “Modern” Contract Law’, in J Beatson and D Friedman (eds), Good Faith and Fault in Contract Law (Oxford, 1995); S Styles, ‘Good Faith: A Principled Matter’ in ADM Forte (ed), Good Faith in Contract and Property Law (Oxford, 1999) 157; R Brownsword, Contract Law: Themes for the Twenty-first Century (London, 2000); Hugh Collins, The Law of Contract, 4th edn (London, 2003); E McKendrick, Contract Law, 6th edn (Basingstoke, 2005).

48 Volume 1: The Emergence of the Modern Lex Mercatoria in practice the notion of good faith is by no means everywhere similarly viewed, extended or challenged as we shall also see. It is, however, true that under pressure of circumstances, domestic courts have often been forced to implement newer ideas in order to remain credible and responsive, using a liberal interpretation technique for which in contract good faith now often stands, although even then, in the civil law way of system thinking, at least in academia, there also remains an urge to use the new (good faith) law merely to complete or reinvent the system through extrapolation and reinterpretation.94 Again, transnational commercial and financial law is here more likely to be responsive and ultimately to lead in a different way. To repeat, it takes in both contract and movable property law the risk management perspective, which connects both the contractual and proprietary examples of legal dynamism given above. It should be noted, in this connection, that at the more formal level, even for contract law, the 1980 CISG is not up to date and this is no less true for the UNIDROIT and European PECL and the more recent DCFR as a model for a uniform European (EU) private law, followed in 2011 by a CESL project, all of which will be more extensively discussed in Volume 3, section 1.6 for contract, and Volume 4, section 1.11 for movable property, including receivables. The conclusion is that at the transnational professional level, we must now consider a different notion or model of contract and of movable property which are both closer to commercial reality. This favours the commercial law approach in common law countries. As we shall see throughout, the DCFR, in particular, does not present an adequate response or perspective for professional dealings transnationally. In summary, in terms of modern legal dynamism, it could perhaps be said for international commerce and finance that what the civil law concept of good faith, if properly understood as

94 See also s 1.4.1 below. Thus German academics typically still look for system everywhere, even in more opentextured provisions and often talk in this connection of, for example, the inner system (Binnensystematik) of the good faith notion, referring in particular to the reliance notion, pre-contractual duties, normative interpretation, supplementation and correction techniques, the (continued) validity of the contract, the performance obligations and excuses of the parties, and, in appropriate cases, to their renegotiation duties, all originally developed on the basis of the concept of good faith. In German doctrine (see the major commentary of Palandt/Heinrichs, Bürgerliches Gesetzbuch (München, 2011) at s 242, nos 2 and 13) there follows then some attempt at classification of the functions of good faith (Funktionkreisen), such as interpretation, supplementation and correction of duties or adjustment in case of a profound change of circumstances, functions which are by no means new and are now expressed in specific provisions of the BGB: ss 241(2), 280, 311(2) and (3), 313. They had already appeared in the Justinian Digests in connection with the definition of the powers of the Roman praetor in contract law (D.1.1.7 Papinianus). See also F Wieacker, Zur rechtstheoretischen Präzisierung des sec 242, Recht und Staat in Geschichte und Gegenwart (Tübingen, 1956) 20. Within these good faith functions, there is a further effort to distinguish classes of cases (Fallgruppen), such as, in the supplementation function, the development of pre-contractual and post-contractual rights and duties and of consumer or workers’ rights (not necessarily, however, along the lines of altogether clear rules or new contract types), and, in the correction function, the emphasis on estoppel, abuse of rights, own co-operation duties, and the manner in which rights were acquired or are invoked such as in the case of standard terms. However, only some clear notions were identified in this manner, such as the abuse of rights (exceptio doli), the notion of clean hands, of own misbehaviour and of lack of co-operation; none very original. Also the loss of a right to performance became accepted if there was contrary conduct or if there were declarations on which the other party could rely as an excuse. Another development was the loss of rights while not invoking them in a timely manner (Verwirkung). All are of limited application, however, and it is altogether not a large crop. The search for rules in the above manner ignores not only the dynamic character of the concept of good faith and the accent on relationship thinking, distinguishing professional dealings, but also good faith’s modern multifaceted nature and its importance as a liberal interpretation tool, reintroducing all traditional sources of law, rather than as an objective behavioural standard of its own, see n 85 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 49 a transforming force, may be doing for contract is increasingly matched by a similar transforming force in respect of movable property, a development reminiscent of equity in common law countries.95 It makes the civil law approach adapt to more modern needs, in contract ultimately allowing for different types of relationships to be taken into account and in movable property for a degree of party autonomy in proprietary matters to make room in particular for financial products backed by asset flows in temporary or conditional ownership rights and floating charges.

1.1.7. Legal Pragmatism at the Transnational Level. Notions of Certainty, Finality and Predictability. The Need to Find Structure, Not System Altogether the emerging new transnational law merchant or modern lex mercatoria, based on its various sources and the hierarchy of norms deriving from them (as further explained in section 1.4.14 below), that is the law of international professional dealings, is less systematic and more pragmatic, particularly in its method, coverage and responsiveness. It takes its impulse from the globalisation and size of the commercial and financial flows as we now see them, and its method and inspiration from law formation and law finding in public international law. This all goes to legal dynamism, especially in contract and movable property as submitted in the previous section. In particular it does not represent a closed system of legal norms or a closed intellectual structure. The resulting law is less concrete and cannot avoid some flux if only because it is still in its formative stage geared to responding to new situations and newer practical needs. It embodies a way of thinking and presents an environment in which existing rules are foremost guidelines (unless the situation is fully repetitive like domestically in conveyancing) and subject to a good deal of party autonomy, although of a more objective nature as also explained in the previous section. But the new lex mercatoria espouses firm notions of finality especially for payments and title transfers as we shall see below and has distinct views on the operations of financial markets in particular. There is here no legal void, although, like in public international law, much remains to be explored but the preposition is that international business can live with it better than with an amalgam of domestic laws that were never written for it and often have a consumer bias. Although it was submitted and accepted that local law remains the residual law in international transactions, it becomes then part of the lex mercatoria after shedding its purely local features.96 It should be noted that even domestically, a similar state of fluidity is becoming clearer in respect of much black-letter private law except, perhaps, in the few areas where the law remains absolutely settled, such as in the area of conveyancing of real estate or where mandatory law is imposed especially through regulation. Even then, texts are seldom fully clear, policies may 95 It may also be said that, although this good faith concept has (except in the US) so far met with less favour in common law countries (which, as noted in n 89 above, have other techniques that may lead to similar results, especially the emphasis on the nature of the relationship of the parties, fiduciary duties, implied terms, and the notion of estoppels and reliance), in movable property, on the other hand, this equitable transformation process has not yet been recognised in civil law countries with the exception perhaps, at the formal level, of modern developments in France, as demonstrated in n 71 above, while in particular the EU Collateral Directive of 2002, discussed more fully in Vol 5. s 1.1.8, may give some indication of what is to come. So may the 2001 UNIDROIT Mobile Equipment Convention, see Vol 5, s 2.1.8. 96 The more philosophically engaged reader may see here a Platonic feature in that the new commercial law structures possibilities of sources into what is relevant for the situation in question and to deal with its facts, a Kantian feature in how commercial and financial law looks from the rationale of transnationality through the category of ideal mercantile practice, and a Hegelian feature in the dialectic between idea/paradigm/hypopothesis and legal reality/necessity, law as self-realisation of society as it moves forward.

50 Volume 1: The Emergence of the Modern Lex Mercatoria be poorly expressed or unattainable, and their meaning evolves in any event in interpretation. To repeat, the idea is here that human behaviour cannot be systematically captured for the present and the future—a particular academic ideal and preoccupation in Germany, which may soon lead to the tyranny of the intellectual framework. In line with Kahneman, human behaviour is in this book not considered rational but full of contradictions and prejudice coupled with a lack of information or knowledge. That is what rationality tries to combat and why we have law, which is not rational per se either but the product of the need to balance conflicting interests and perceptions. That is order, in civil society better when it achieves justice, social peace and efficiency,97 which must be its objective and determines also its legitimacy beyond legal formality of a democratic or other participatory nature (like in customary law) or any other legislative or judicial process. In this book the international flows are considered free and should not be manipulated, but the participants can be regulated and their relationships ordered even though this may ultimately also have an effect on these flows themselves. How exactly this is to be intellectually perceived and supported remains the challenge, not in the least for the law. For the social sciences, as we have seen, the ideal of an adequate intellectual framework and the notion of certainty in the conclusions have been fundamentally questioned, not only by Popper and his followers.98 One may also recall in this connection the reference of Jerome Frank to the childish dread of uncertainty and unwillingness to face legal realities.99 The rules directing human behaviour, either to guide or correct, are therefore also uncertain in their effectiveness, especially when imposed from above. Society always moves and there is considerable contingency in this movement that cannot be predicted with any confidence. The factual situation changes all the time. So does the configuration of the facts even without societal movement. Even when we think that we have captured its condition, this may only be incidental knowledge. We are not in the natural sciences where there may be immutable rules for us to discover. In society those we note may change and those we make may not work. There is no complete and full insight or sufficient knowledge of what is happening. In private law, greater fluidity is the unavoidable consequence of factual patterns becoming ever more diverse and complex, and of practical needs evolving ever more quickly. In the area of what we might term ‘directory law’ (or default rules), where the legal system has mainly a support function, this may be more readily accepted and can also be more easily handled through the use of party autonomy in choosing or amending the applicable rules between parties in particular situations, but it is also unavoidable in the law’s application in areas where it is (semi-)mandatory, even in private law, as in personal property law or in contract when the contractual infrastructure is an issue, for example, in terms of legal capacity to contract, in issues of validity and legality, or in matters of the continued existence of the agreement and obligations thereunder. To repeat, law is here perceived as primarily the result of a constant dialogue in society (or more in particular the community it concerns) on what it is and needs in the relevant legal order, which stresses its policy-oriented nature rather than its aims of an objectively rational system that finds its main justification in its logical coherence and assumes that all problems can be solved

97 It is well known that in economics the maximisation of personal preferences is considered rational per se at least in the aggregate, and leads in this view automatically to efficiency and in ‘law and economics’ it is even argued that it also achieves justice and social peace, although others see it more as a tool of critique, see n 374 below. It has long been questioned especially in respect of distribution, see also the text at n 367, and further J Britton-Purdy, DS Grewal, A Kapczynski, KS Rahman, ‘Building a Law-and-Political-Economy Framework: Beyond the Twentieth-Century Synthesis’ (2020) 129 Yale LJ 1784. 98 See nn 236 and 265 below. 99 J Frank, Law and the Modern Mind (London, 1930) 41 and 159.

Volume 1: The Emergence of the Modern Lex Mercatoria 51 by its proper application.100 In fact, in this approach, the law will never be fully known. This is clear when considering public order or public policy, which cannot be static, but it is also true in fundamental principles and values concerning private law when notions of justice, social peace and efficiency enter the discussion if becoming sufficiently pressing in the particular case. It was already said that custom and practices are no less dynamic and always changing. So are general principles. Party autonomy is so per definition as it reacts to its environment. But even the written law is in its response not different, as we see all too clearly in interpretation and gap filling if they can be properly distinguished. All is movement (philosophically it reminds of Heraclitus), there are here no absolute standards in social behaviour, and this is now probably more readily understood, especially by the so-called ‘legal realists’ in the US,101 who present the view that the private law is only legitimate in its operational adequacy and ethical, social and economic sufficiency. Thus, pressing ethical, economic, efficiency, utilitarian and social factors are indeed accepted as having an impact on private law, affecting the formation and application of both statute and precedent. Again, there is no closed system of rules or legal norms and ever evolving values, policies and needs become key issues in the interpretation process, even if in commerce and finance and therefore in the law between professionals, value considerations may often be less relevant, and rather issues of efficiency and utility or fraud may be overriding. Cost-benefit analysis may then also become important in the operation of this law and its application, especially where it is regulatory. Again, it is an issue of efficiency. Although this perspective was first more clearly articulated in the US in the 1930s (see section 1.3.4 below), under the pressure of the circumstances, it has also been accepted (albeit often reluctantly) in one form or another in countries such as Germany, Austria and the Netherlands, see section 1.2.13 below, which, in the civilian law tradition, still work in essence with a statutory text and its system and continue to allot great importance to it. This followed at least in the law of obligations as applied by the courts. The ensuing flexibility may be clearer in negligence but also obtains in contract (especially behind the good faith concept) more than in movable property law, although it was observed before that this more open attitude often finds itself still constrained by systemic considerations, and flexibility is then used mainly to the extent necessary to keep the existing (national anthropomorphic) system operative and credible. It is submitted that civil law has here further to go. Rather there are engrained strong re-systemising tendencies in academia at the domestic level, already noted also.102 In Europe, especially, this still underpins a strong culture of legal positivism and confinement, law as technique and a ticking off exercise in the consumer law mode, but it has increasingly problems with legal innovation and globalisation, in fact with all contingencies. It was already said that it was forced to adopt a liberal interpretation technique in respect of codified texts, especially in the law of obligations, which could otherwise no longer be considered complete, nor operate as such, but at least in civil law countries, nationalistic system thinking remains a prime intellectual preoccupation.

100 This goes back to the question whether law is a system, which vexed Max Weber, see n 7 above, who was perplexed that the common law did not have it or strive for it, see also GJ Postema, ‘Law’s System. The Necessity of System in Common Law’ UNC Legal Studies Research Paper No 2324438 (2013). It is part of a legal positivist undercurrent, especially in the work of Hart in England and earlier also apparent in American Law, but rejected in legal realism, see in particular the comment by Atiyah and Summers (n 9) and it is also implicit in the work of R Dworkin, Taking Rights Seriously (1978) and Law’s Empire (1986). 101 See n 41 above. 102 See n 94 above.

52 Volume 1: The Emergence of the Modern Lex Mercatoria There is here considerable tension, particularly in civil law where there still continues to operate a belief in established national academic models adequately capturing and guiding reality,103 even for international transactions in respect of future fact patterns. This attitude has also spilled over into countries like England, where, especially in circles around the Law Commission, whose aim is to articulate law reform, statutory law and thus legal texts are also popular and a system mentality has been cultivated. It is promoted by excessive confidence in putting the practice of the law mostly in existing models promising certainty where continental academics see themselves often as surrogate practitioners by handing out legal opinions (Gutachten in Germany) in litigation on that basis. It has already been noted that even the German Academic Council is complaining of this attitude in academia in Germany.104 Greater fluidity in the rules raises indeed everywhere the issue of legal certainty, or lack thereof, and predictability. In modern international transactions (given their ever-greater frequency and value), this problem is aggravated by the fact that legal certainty can hardly come any longer from domestic laws that were never written for them and often operate at the cost of limited sophistication. The traditional conflicts rules of private international law, always pointing to the applicability of a national law, may reach their useful end or suggest a certainty that may be of such a low quality that it may destabilise the relevant commercial and financial transactions for solely dogmatic reasons, often being no more than pure nationalism supported by domestic system thinking. Again, it requires international transactions to be cut up into domestic parts, often still different for contract and property aspects, in the hope that they together still add up to an adequate legal framework for the transaction as a whole. Certainty of this nature is then indeed based on the notion of law as pure technique or a preexisting logical framework, which, when properly applied, always arrives at the correct answers in respect of the past, present and future and achieves justice, social peace and efficiency per definition. It has already been noted that codification in the civil law manner was its culmination, but a search for certainty of this nature may hold everything back, especially in international transactions. Barring public policy or regulation, it is then left to professional parties through extended and objectivated notions of party autonomy to somehow chart a course through the risks of their international transactions, on both the contractual and proprietary side, in the manner that was discussed in the previous section, where it was also noted that, given the proper space, their contract is then likely to become a roadmap and risk management tool needing literal interpretation. Even good faith may require that in those circumstances and means in the professional sphere the beginning of transnationalisation. It has further been pointed out that proprietary structures, especially in international finance in asset-backed products, become in this way also tools of risk management that may be extended trans-border, supported by industry practices subject to a more sophisticated protection of the ordinary course of business against hidden charges which then only obtain against third party professionals who are aware and commonly avail themselves of them. In this structuring, there are also tax and regulatory complications and their management to be considered even if parties 103 For the connected problems see s 1.2.12 below. 104 See text at n 56 above. It concerns what is perceived as an excessive concentration on ‘positives Norm- und Applikationswissen’, see ‘Perspektiven der Rechtswissenschaft in Deutschland’ Drucks. 2558-12 (November 2012, English translation 2013). The complaint is that academics behave as if they are practitioners and there is no new thinking, only endless polishing and perfection of the existing system. The German Academic Council issued a call for the study of the internationalisation of the law and the processes of alternative law and norm creation while demanding a strengthening of the foundational subjects and the opening up of legal scholarship towards a more internationalised, interdisciplinary empirical, and diversified way of studying and researching, but see also the comment of Teubner in n 236 below, an unexpected source asking for orthodoxy to be reestablished.

Volume 1: The Emergence of the Modern Lex Mercatoria 53 may be able to do little about them when their transaction comes demonstrably onshore in a particular country, although they might to some extent still be able to structure around them (potentially subject to transnational minimum standards) or at least divide the financial consequences between them. It has already been noted also that the virtual nature of much of the international flows makes it increasingly uncertain whether these international transactions can still be spotted or located in some national law. It makes the search for transnational minimum public policy standards all the more urgent, although it is still less clear how this may be applied for example, to taxation, which remains national by its very nature, although it is conceivable that international minimum standards of behaviour may also increasingly extend to transnational tax avoidance schemes. The OECD is active in this field. In the absence of a supranational legislator proper, and given the insufficiency and often backward-looking tendency in much existing local black-letter law or even treaty law, at least in private law, we must get used to the idea that the certainty that commercial (or more generally professional) law requires comes in a modern internationalised environment in private law increasingly from the understanding, discipline and practices of the participants themselves, helped or balanced by fundamental and more general legal principles that transcend national laws. This suggests, it was submitted, in the professional sphere in particular, a greater role for industry practices or custom and party autonomy, therefore a more sophisticated risk management facility even in proprietary matters, always subject on the one hand to the requirements of the commercial flows and their promotion and on the other hand to legitimate public policy and public order concerns, particularly in terms of market abuse but probably also in terms of labour and ultimately even consumer protection and that of the environment, which concepts are then likely also to be transnationalised as transnational minimum standards. That, it is submitted, is the future for private law in the commercial and financial sphere if globalisation holds, and this should be better understood by all. Instead of certainty of a nationalistic nature, which may now often only be obtained at too low a level in terms of quality and efficiency or sophistication for the international transaction as a whole, it is proposed that from a private law perspective the emphasis should rather be on finality of title transfers and payments, therefore on transactional certainty,105 which is a much narrower

105 Thus, only in terms of the narrower issue of the finality of their transactions especially in respect of title transfers and payments, is there an overriding need for certainty which the law merchant was always prone to provide, viz the law of negotiable instruments and bills of lading. Certainty of this more limited nature has traditionally been stressed in English case law ever since Lord Mansfield, especially in mercantile transactions; see Vallejo v Wheeler [1774] 1 Cowp 143, 153 (KB); see more recently Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2003] 1 Lloyd’s Rep 571, 577 (Lord Bingham of Cornhill) and Compania de Neviera Nedelka SA v Tradex Internacional SA, The Tres Flores [1974] QB 264, 278 (Roskill LJ). For the US, see McCarthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988). Again, it should be noted that at issue here are often negotiable instruments and letters of credit, all related to payments, or bills of lading, therefore a narrower strand of commercial law where finality is indeed of special importance and a proprietary issue. See also Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002). It should not be confused with certainty. In this context, emphasis on finality is not incompatible with the transnationalisation of commercial and financial law; see also JH Sommer, ‘A Law of Financial Accounts: Modern Payment and Securities Transfer Law’ (1998) 53 Business Law 1181. It is submitted that the concept of finality may be enhanced by it because the international marketplace itself demands it. It would also seem misconceived to ask in this context for clearer rules of conflict of laws and be satisfied even with arbitrary rules and therefore an arbitrary choice of some domestic law, whatever its quality and responsiveness. That is a step back and contrary to the basic tenets, history, and true needs of international commerce and finance. These are nationalistic academic fabrications. The more recent and new references in this connection to ‘certainty’ in the Preamble (6 and 16) of the EU Regulation (EC) No 593/2008 on the Law Applicable to Contractual Obligations (Rome I) are misconceived and disappointing, but typical of traditional conflict of laws thinking.

54 Volume 1: The Emergence of the Modern Lex Mercatoria but also much clearer concept,106 and on predictability for the rest. Finality is a key issue in transactions, including payment, as we shall see throughout this book, and is therefore a central theme and concern of the new lex mercatoria besides, and closely connected with the protection of the ordinary commercial and financial flows against adverse interests. It is in the first instance a proprietary matter but it is also a public order requirement in itself. The concept of predictability, on the other hand, is less absolute and strives for rationality and sensibility. It rests on the idea of law as sufficient guidance for parties to determine their behaviour and for judges to reach a conclusion in dispute resolution. It is a concept different from legal certainty, which, as just mentioned, sees law as pure technique with inbuilt automaticity in result. It then also talks of errors of law, but unless manifest, all legal findings are, upon interpretation in view of the relevant facts, opinion. Certainty of this nature is unrealistic, often even undesirable, inimical especially to newly developing values and needs. One could thus argue that it is also unjust, anti-social, and inefficient. Predictability assumes rather movement and can deal with legal dynamism. Some degree of legal uncertainty is a fact of life and not necessarily to the detriment of the legal profession. It is unavoidable in incongruent factual patterns or in newer configurations of the facts, more so in view of societal change and contingency. In commerce and finance, its importance is increased by the ever-greater internationalisation, itself mostly seen as an important and irreversible process if we wish to prosper. It is further enhanced by the uncertain grip of domestic regulation in international transactions.107 Yet the lack of certainty in a technical sense should not be more destabilising than absolutely necessary and may be one reason why the professional community may prefer to live with its own rules to the extent it can. Again, it suggests a measure of spontaneous transnationalisation and a greater reliance on (transnational) custom and practices and, further, a greater degree of party autonomy but also its objectivation. Aiming at better risk management tools, it is for this community to decide what it prefers unless there are major public order or public policy issues involved, and it is likely to find it better to operate under more flexible rules than under antiquated or parochial rules. At least professionals come from a community that is used to taking and managing risks and they may be better able to deal with flexibility than with the supposed certainty of inadequate rules.108 Indeed, it appears that professionals can normally handle these risks aided by an ability to devise better structuring and protection schemes among themselves. 106 In terms of the legal characterisation of transfers and their finality, important issues arise in securities transfers and in payments, especially those through the banking system. They centre on fraudulent or defective instructions, the meaning of acceptance of the transfer or payment, the question of capacity and intent, and the transfer and its formalities (eg, in terms of existence, identification and delivery of the assets) and acceptance. In terms of transnational general principle, which may well be in the process of becoming customary in a mandatory manner, the necessary finality may here be underpinned by: (a) de-emphasising the role and subjectivity of capacity and intent while giving these notions an objective meaning; (b) the abstract nature of all transfers in the German tradition (separating them from any underlying contractual or instruction defects); (c) the independence of the transfer or payment obligation and of the transfer and payment itself, as derived from the negotiable instrument and the letter of credit practice; (d) the bona fides of transferees once they have been credited or have received the assets in respect of any defect that may attach to the title, in other words the underlying assets (securities and cash) may be assumed to be clean; and (e) justified reliance of transferees and especially payees who were owed the relevant assets or moneys and received them. Thus it may be shown that transnationalisation may provide a considerable support function, especially in this key aspect of finality of international transactions; see also the previous section text at n 64 and more particularly Vol 4, s 1.4.6. 107 In international situations, uncertainty may be compounded by the question of how far domestic mandatory regulatory laws or public policy may still impact on international transactions, see also n 53 above. It creates uncertainty of a different kind and raises issues of relevant contact, conduct and effect that, at present, are only capable of resolution on a case-by-case basis. See more particularly ss 1.5.6 and 2.2.6ff below. 108 For the notion of professional, see s 1.1.10 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 55 It is also the essence of enhanced party autonomy in the law of movable property, as we have seen, and it is much of the international transaction lawyers’ activity. It is promoted by their clients’ (a) better understanding of the trade, the market infrastructure, and the requirements of the commercial flows, while developing and formulating custom and practices in these areas and enforcing them among themselves; (b) access to the international commercial arbitration practice in the case of disputes between them; and (c) being better positioned to ask for help, when needed, from states in the form of supporting treaty law (or within the EU in the form of Directives or Regulations, of which the Settlement Finality and more particularly the Collateral Directives were prime examples).109 Organisations such as UNCITRAL, UNIDROIT and especially the ICC may provide a useful supporting function in this connection as well, but only if activated upon industry requests. It is a situation that has, in fact, existed in commercial and financial practice for quite some time, has not led to disaster, and is unlikely to do so in the near future. This evolution should therefore be approached with confidence and imagination. It should now receive a better intellectual framework in order to make the best of it and the process more transparent, understandable and better controllable. Perhaps we should also understand that law is not merely about what should not be done but is mostly a facilitating force: how things can be done better. It is the law in action rather than in litigation, see section 1.4.18 below. In truth, at least at the transnational level in the private law among professionals, the search is on for a new legal framework that is closer to present-day international reality and to how society works for them, and is capable of supporting their transactions in a more responsive and imaginative manner for the benefit of all. It has already been submitted that, theoretically, the formation, operation and application of the new transnational law merchant or lex mercatoria in the professional sphere in this manner takes its cue from the development and application of public international law. It is about how commercial (and financial) law is escaping the grip of domestic system thinking and is being transformed to better support international transactions and to provide a reasonable degree of predictability and greater finality where it matters, particularly in title transfers and payments. To repeat, the limits are public policy and public order, which themselves may be transnationalised, the articulation of the public interest in this environment being one of the major challenges of legal globalisation. In private law, this takes us back to the time before the great nineteenth-century codifications when lawyers like Grotius accepted many sources of law and sought to find structure in them, not system.110 This is an important distinction. Finding structure is a dynamic forward-moving process of articulation and simplification making the law more transparent and comprehensible. Finding system, on the other hand, is based on the idea that the system as system represents or can find reality and has in it all answers (see also section 1.2.13 below). In this way it seeks to set present-day law in concrete and is retrospective by definition. At best, it means to extrapolate newer law from past experiences and assumes an existing intellectual model or system that can 109 See also n 72 above. 110 See also the reference to the work of Max Weber in n 7 above. As we have seen Weber’s explanation for law as system was pragmatic and meant to best support a modern capitalist environment, but it did not exclude other approaches that could be as efficient, notably that of the common law, and system thinking was thus not considered the only support for the prosperity of the markets. The argument was never reduced to certainty of the technical automatic type either but it valued predictability highly.

56 Volume 1: The Emergence of the Modern Lex Mercatoria handle all eventualities. It has already been said that it suggests that life is basically repetition and that intellectually we live under the tyranny of the existing framework which is then considered closed. The new transnational law merchant rejects this, is dynamic and forward looking. The system is open and it is not for governments or the judiciary to keep it closed as if it belonged to a small priesthood. Even domestically, we know this from interpretation and gap filling (if they can be distinguished). But it will also be shown that this law is not averse to structure and even seeks it, foremost, by type of relationship, subject, or product. The laws of assignment or set-off and netting may present examples amongst many others. It follows that the content and operation of the modern lex mercatoria, if properly understood, is by no means as vague, novel, uncertain, or incomplete as is sometimes argued. As we shall also see, its hierarchy of sources and norms, with local law remaining the residual rule, presents a full operative legal system for those who still wish to see one, no less than any domestic one: see sections 1.4.14 and 3.2 below. But even then, it does not claim to have all the answers, which can only be found in a continuous process of legal discovery, in which governments and courts domestically try to help and stabilise their law and may even try to push it forward, although even then they can never fully do so and may often be seriously mistaken. It was never realistic to think otherwise. Transnationally, it is an impossibility.

1.1.8. Social, Economic, Intellectual, or Democratic Legitimacy A recurrent theme in discussing immanent law formation in the manner described here and the operation of the modern lex mercatoria and its sources and their operation at the transnational level is the question of its legitimacy. In this connection it is often thought that statist law is more legitimate because it is democratic, at least in democracies. This underpins in the minds of some also the argument for codification, its supremacy and system thinking in that context, an issue that will be further discussed in section 1.2.11 below. It must be doubted whether this is the correct perspective. First, the major modern civil codes—those of France and Germany—did not come about through a democratic process. The common law emanating principally from the courts could even now hardly be so characterised. Second, many countries are not democratic or where they formally are they may remain ruled by elites or are heavily influenced by pressure groups of all sorts including the corporate lobby. Finally, where through legislation social values are incorporated into private law, there is clearly much to be said for democratic support, but in civil society social values enter through case law just as much. So they do in the daily legal practice and that has proven to be more than necessary. Indeed, it will be repeated throughout this book that our values or fundamental principles are not dependent on recognition by a formal democratic process, meaning in practice by state recognition. They come as social values as much through courts or even more importantly in the daily practice of the law, see further the discussion in section 1.4.18 below. It follows that law formation cannot be identified with the democratic process even if it would often be better. Law is foremost order and may be preferred to disorder even if that order comes from the vilest dictators. Clearly, it is better if it promotes justice, social peace and efficiency, it was already mentioned several times and the quality of the balance they achieve, whilst often conflicting, is in this book considered the true legitimisation of any legal system, including bottom-up law formation outside any political process like the evolution of the modern lex mercatoria. That is what civil society is all about and these considerations then also become the overriding objectives in interpretation of all law, if they are sufficiently pressing. Democracy may help and make the law more broadly acceptable but it must also be realised that there are

Volume 1: The Emergence of the Modern Lex Mercatoria 57 many other forms of participation, customary law being the major example which may even be considered more legitimate in the community or legal order it concerns and—should participation be the real issue—very much underpins the modern lex mercatoria, as we have seen although these communities and their rules need not be romanticised. They can be quite violent, fierce or regressive as for example, the international marketplace may be also. For that we have in particular the corrective of public policy or in the international markets transnational minimum standards, the formulation of which was already considered above as one of our major challenges in legal globalisation. In fact, codification in the German manner had intellectual coherence and system thinking at its core, as we have seen,111 and was as such never democratic, the idea being that in this manner society could operate better, but there was also a more transcendental aspect: states being considered as having the deeper insights into society and how it works. This is the idea of the state as secular messiah which lays in this manner claim to absolute power. That was one consequence of romanticism as we shall see in sections 1.2.9ff below and had never much to do with democracy. This idea remains much alive even in countries which subsequently turned into formal democracies. Such a state may then speak through its academies, at least in private law formation, and rubber-stamps their efforts. In this approach, the law derives its legitimacy foremost from the academic effort itself and its search for ‘truth’ in that sense and from its models to represent it, rather than from any formal democratic acceptation process. In any event, formal democracies like that of France often operate here by mere decree. This formal democratic process might be so policy-oriented that it could become a disturbing factor, at least in private law formation, or, especially in regulation, it may be based on incomplete or wrong information, or on mere wishful thinking in structures that can never work. Financial and environmental regulation spring to mind but endless reforms of criminal law may suffer from similar defects. It confirms that at least in private law other considerations besides the degree of participation like the promotion of justice, social peace or efficiency may better underpin the legitimacy of this law formation. It may promote immanent law formation and application, moving away from the statist primacy, always obvious in customary law. Although in the academic perceptions custom and practices are often declared inferior or primitive, in that view something for the tribes in Africa, nothing suggests that they are so in their operation, not in a tribal environment either. In private law formation, at least in international commerce and finance, they have much to do with the infrastructure of the marketplace and are likely to be highly sophisticated. Custom of this nature stands for a more diverse society and for a multifaceted and more dynamic system of law formation. It denotes respect for society and its routines which are vital for its organisational survival, see further the discussion in section 1.4.8 below. But there is also a connected, more pernicious, aspect to the democracy argument of which the student should be well aware. Even if we are now more conditioned to accept that at least domestically states have largely taken over the law formation function, in modern society often using the formal democratic process in particular to support their role which commonly seeks change to achieve political objectives or to build society, see section 1.3.7 below, it should be clearly understood that democracy of this formal kind does not justify complete or absolute power in the law formation process. Quite apart from the ultimate test in justice, social peace and efficiency, even in democracies, states are not legitimised to take over everything, even if they had the insights, and make all activity subject to their licence and guidance, for example, in contract or property. Although this might have been very much a German idea believed to 111 See also Max Weber, nn 7 and 110 above.

58 Volume 1: The Emergence of the Modern Lex Mercatoria be more fundamentally supported now that Germany has become a democracy, French sociologists like Gurvitch112 long pointed out that democracy does not mean state absolutism in law formation; even formal democracy does not take all. Rather as part of it, there has to be respect for other communities and the way they operate as a matter of diversity unless there are overriding public policy or public order issues at stake. In the communitarian view,113 it is often considered that communities and their rules may be more legitimate than the statists laws can ever be, never mind how formally democratic. This may mean that community values enter the application of state-directed administrative law, for example in the distribution of social housing, bus routes, and access to schools, where, besides more local values, the need for social peace (and prevention of crime) may lead to another perception of equality and access than adopted in statist legislation.114 This is obviously controversial but it is the consequence of communitarian law being just as participatory and representative and as such potentially even more legitimate than state law. It is not different in the international marketplace. It is important to understand and then also to realise and accept that in civil society, custom but also party autonomy do not operate merely by state fiat either, however democratic. Freedom is not a licensed concept. Although they are subject to public policy correction, there are autonomous sources of law, also in democracies. That becomes quite obvious in transnational law, much as it also is in public international law. The same goes even more for our value system and probably also for our general principles. Again, modern states of whatever political conviction do not have the last word in everything using their law formation powers in the process, not in democracies either, unless the public interest becomes seriously engaged and even then, there may be superior principle, for example, of equality and proportionality. It was already mentioned that in American realism, law is considered the product of the constant debate in society, which is the ultimate arbiter of its legitimacy, and it can never be fully known. To repeat, in civil society we cannot assume that black letter statist laws, however formally democratic, automatically extol our highest values,115 and promote justice, social peace and efficiency per definition and in interpretation and application, we note that these considerations acquire autonomous status (and may be contradictory when they must be balanced). Statist law has here no higher rank or greater legitimacy. In particular, in Western society, we may consider issues of diversity and equality as being often higher. Even the public interest is in its policy orientation as expressed in legislation not necessarily synonymous with our (progressing) values but rather with state action for change which power is not, it was submitted, unfettered. In reality, the result may be layer upon layer of often well-meaning regulation but their focus and interaction may itself not be sufficiently known or understood, and it may have many unintended consequences which the law in its application may need to correct, more in particular when other more fundamental policies or principles are or become involved.

112 See G Gurvitch, Sociology of Law (1942) and also the comment at n 623 below. 113 Ph Selznick, The Communitarian Persuasion (Washington DC, 2002). 114 See M Hertogh, ‘A “European” Conception of Legal Consciousness: Rediscovering Eugen Ehrlich’ (2004) 31 Journal of Law and Society no 4. 115 See also the discussion in the DCFR Introduction of the 2008 text starting at no 9. In the German tradition, it is still assumed that the text embodies our social values and that they are not higher although the ultimate decision is left by the drafters to ‘others’ (no 14). The authors themselves proceed on the basis that all is governmental recognition and licence and that the result is just, promotes social peace, and is efficient. There is no need for interdisciplinary and empirical study. Transnationalisation cannot exist. It is an extreme form of legal positivism, very prevalent in Germany, even now resisted by the German Academic Council as we have seen, see n 51 above but justified even by Gunther Teubner, see n 236 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 59 It was already submitted that in the absence of states as law-making powers (except in treaty law), and thus also in the absence of any formal democratic process, the transnational modern lex mercatoria is in essence based on a number of non-territorial, non-statist autonomous sources of law, notably fundamental and general principle, custom and practices and party autonomy, sometimes joined by uniform treaty law, while the residual rule remains territorial local law. Law is a societal phenomenon, which finds its role in the manner of its expression and application. This will be elaborated below in sections 1.4 and 1.5 on the operation of the international commercial and financial legal order, its autonomy and law formation powers and their result. It will be demonstrated in that context that the basic rules as well as the structure of this new law derive from more universal fundamental values and public order requirements; others from societal and efficiency needs or pure rationality; and yet others still from statist action, notably in treaty law (or Regulations and Directives within the European Union) or ultimately still through a legislature or domestic court system at least to the extent international transactions in conduct and effect still come demonstrably on shore in a particular country, more urgently if the local public interest becomes also engaged. As already noted, transnational minimum standards of public policy may then also develop, especially necessary when these transactions are largely virtual and local contacts become uncertain or incidental or remain remote. Again, the balancing of the international marketplace by transnational minimum standards is considered very necessary in international commerce and finance, if only to keep these markets clean, and it was already submitted repeatedly that their formulation and application is the greatest challenge in the legal transnationalisation process. The idea is definitely not that the international marketplace should now appropriate everything, which it is only too inclined to do.

1.1.9. The Traditional Civil and Common Law Notions of Commercial Law. The Notion of Commerciality In the previous sections we looked at the different notions and coverage of commercial law in both civil and common law, and at commercial law formation at the transnational level, its reaction to system thinking, its need for more dynamic law, and its legitimacy. Its expanding international coverage has also been considered. This may merit some further consideration and discussion of the more traditional theoretical notions that are still used in domestic laws to set commercial law apart even if, as we have seen, its independence in both civil and common law countries is in question although for different reasons. As we shall also see, these more traditional notions of commercial law do not best serve the transnationalisation concept, which depends rather on the notion of professionality (see section 1.1.10 below). The search is then on for a substantive criterion in which the more traditional notions of commercial law need not, however, be completely discarded, but if one starts by looking at some civil law commercial codes, for example the French Code de Commerce (CdC) of 1807 (redrafted in 2000) and the German Handelsgesetzbuch (HGB) of 1900, as well as at a common law commercial code like the US UCC of 1962, one may see considerable differences even between civil law countries and an haphazard approach that gives little guidance for the future. As regards the coverage of commercial law, which differs markedly even between the CdC in France and the HGB in Germany, in civil law it is always related to commerce, in which connection a notion of commerciality is used. As compared to common law, the concept of commercial law may be narrower and incidental, often more service-oriented as already noted. In France,

60 Volume 1: The Emergence of the Modern Lex Mercatoria there is particular importance in the distinction as commercial disputes are still brought before separate commercial courts but the concept was never wholly clear. In modern common law, there is no clear commerciality notion or concept either and therefore also no single overriding criterion that determines the coverage of commercial law. As we have seen, it traditionally covers the sale of goods, use of cheques, and security interests in personal property. Importantly, non-merchants engaged in these activities are then covered as much by commercial law as are merchants and this is borne out by the UCC in the US.116 However, in so far as contract law has its origins in commercial law in common law countries, it is generally more geared to professional dealings and it has already been noted that this has consequences in the interpretation of contractual texts, which may be more literal when they are meant as roadmaps and risk management tools, see section 1.1.6 above. In England, movable property equally had its origin in commerce and is characterised thereby, finding further support in equity as we have also seen in section 1.1.6 above and it then manifests itself also primarily as a risk management tool. As such, these models of contract and movable property may be less suitable for non-merchants or consumers and they may need special protections, consumer contracting parties in situations of dependency and consumer buyers of consumer products for example, against security interests or charges created in this manner. For the common law, it was already noted that there is here also a difference in the approach to custom, which has a broader and more independent meaning in commercial law going beyond mere contract terms and therefore also operating in other areas such as movable property. Thus, in documents of title and negotiable instruments there is no need for consideration for their trading while bona fide purchasers of these instruments are protected. Here one detects indeed special concern with the commercial flows and with finality, but beyond this, in common law, it is now often tradition or statutory convenience that determines whether a matter is considered part of commercial law. There are hardly any particular consequences or special features left in the law deriving from the mere commercial law qualification. There are none in the type of courts before which commercial cases are brought, although in England, there is still a commercial law division in the ordinary courts. However, there remains the important feature that both contract and movable property are commercial in origin whilst commercial custom remains respected as an independent source of law. Earlier the example was given of the sale of a pint of milk: in civil law the assumption is that it will be consumed; the contractual interest is a health issue, the proprietary interest dissolves upon consumption. In common law the starting point is that the pint of milk will be used to make enhanced products for commercial gain. That has naturally profound consequences for the contract and property model that emerges here as has been shown and must be kept in mind continuously. 116 Within the US, the UCC from the beginning separately defined the notion of merchants and dealings between merchants in s 2-104, but only in the context of the law of the sale of goods and not in any broader sense. The UCC did not eliminate consumer sales from Art 2 UCC, but only has some special rules concerning merchants. A merchant is here defined as a person who normally deals in goods of the kind or otherwise holds himself out by his occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment as an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill. Dealings between merchants are transactions with respect to which both parties are chargeable with the knowledge and skills of merchants. In earlier versions of Art 2 UCC, a broader distinction between consumer and professional sales was proposed: see ZB Wiseman, ‘The Limits of Vision: Karl Llewellyn and the Merchant Rules’ (1987) 100 Harvard Law Review 465. Art 2 UCC is therefore less professional-oriented than originally planned, reflecting the reality that in domestic sales professional dealings have so far acquired fewer distinctive features. Consumers have in the meantime obtained special protection under broader consumer laws, often at the federal level. In this manner, commercial law has indirectly regained a place of its own.

Volume 1: The Emergence of the Modern Lex Mercatoria 61 In the US, the UCC (originally from 1962, but frequently revised thereafter), which applies as uniform law (exceptionally) in all States of the US (civil and commercial law being State matters),117 from the beginning defined the notion of merchants and dealings between merchants in section 2-104, but only in the context of the law of the sale of goods and not in any broader sense. It has not otherwise a comprehensive concept of commerciality and covers only a limited number of especially selected products, specifically negotiable instruments, bills of lading and warehouse receipts, and letters of credit. It also deals with secured transactions in movable property (including intangibles) and now even with finance (equipment) leases, which were eventually distinguished from secured transactions, and with electronic payment systems and the holding of investment securities. On the other hand, it does not cover transportation, either on land or by sea, nor the related insurance. Company law and bankruptcy were never part of commercial law in the common law sense.118 It is equity. As mentioned, in civil law countries that still have a separate commercial code, there is usually some more substantive criterion of commerciality and therefore at least in theory a clearer view of what is commercial but again there is only incidental coverage. In France, there is the notion of the ‘commercial act’; in Germany the idea of ‘dealings with merchants’. These definitions form the intellectual basis of the coverage by the commercial codes of these countries as we shall see in the next section, but these distinctions are less fundamental and comprehensive than one would think, and the coverage by the commercial codes is in both France and Germany often erratic. Non-merchants may sometimes also find themselves covered by these codes, for instance in writing cheques. Again, in France the most important factor is not coverage by the Commercial Code itself, but rather the jurisdiction of the commercial courts in mercantile matters still with lay judges, and an accelerated procedure. These courts no longer exist in Germany. There are still commercial sections in the lower courts of that country, with some lay input, but they otherwise operate much like normal courts.

117 It means that the UCC was promulgated separately in each State of the Union and that the text may still vary between States. Also, amendments are not introduced simultaneously in all States. Some have repealed part of it (especially Art 6 on Bulk Transfers), but others have not. The UCC was itself a joint project of the American Law Institute and the National Conference of Commissioners on Uniform State Laws, started in 1942. The American Law Institute is a private body, since 1923 devoted to the harmonisation of legal concepts among the various States of the US, especially through producing Restatements of the law as it has done in various areas such as tort, contract, agency and (interstate) conflicts of law. The Restatements are non-binding, but have nevertheless had a considerable impact on the further development of the law in the relevant areas and serve as guidelines for the courts. The National Conference of Commissioners on Uniform State Laws, on the other hand, which has existed since the end of the nineteenth century, has drafted a number of Uniform Laws for adoption in the different states. The UCC is by far the most important of these Uniform Laws and is now accepted (with certain modifications) in all 50 States of the Union. In this aspect it is unique, other uniform laws were only adopted by some states. The UCC uses the term ‘Article’ in the sense of chapter or book. Each is divided into individual sections. Besides the chapter on sales (Art 2); there is the one on Bills of Exchange and similar types of payment instruments (Art 3); on Bank Deposits and Collections (Art 4); on Letters of Credit (Art 5); on Bulk Transfers (Art 6); on Documents of Title including Bills of Lading and Warehouse Receipts (Art 7); on Shares, Bonds and similar types of investment securities (Art 8); and on Secured Transactions (Art 9). Art 1 contains definitions. It is no exaggeration to say that Art 2 and especially Art 9 were at the time of their first publication (1952) original pieces of legislation. They were substantially introduced in the various States of the US after 1962 and are regularly updated. Some new chapters have been added, particularly Art 2A on the Equipment Lease (a form of finance leasing) and Art 4A on Fund Transfers (payments). 118 The UCC is in fact often considered bipolar with, at the one extreme, the sale of goods in Art 2 and at the other the security interests in Art 9, although the sale of goods remains at the centre of commercial law itself; see K Llewellyn, ‘Problems of Codifying Security Law’ (1948) 13 Law and Contemporary Problems 687.

62 Volume 1: The Emergence of the Modern Lex Mercatoria In view of the limited modern impact of the distinction between commercial and civil law, some civil law countries such as the Netherlands, Switzerland, Italy and Brazil have done away with it altogether. However, as has already been mentioned several times, and as we shall see in the following sections, in the modern internationalised marketplace, the distinction between professional and consumer dealings may have become more apt, with the former essentially being covered by a transnationalised legal regime or order and the latter remaining in essence subject to more prescriptive domestic laws. Obviously, if there is to be any true meaning in distinguishing legally between commercial and other matters, it must be in some special legal regime applying to merchants and the dealings between them. At the very least, the commercial law regime may be more informal and customoriented, if not also more international. No less important would be the competence of special courts to hear commercial cases with simplified proceedings. They would be more specialised, less formal and speedier or be replaced by international commercial arbitration. Yet little is left of this in local laws in Europe. As we have seen, in common law, the major difference may now be in the role of commercial custom as a source of law, although in England in practice now also often more limited, see also the discussion in section 1.4.8 below. Again, there are no longer any autonomous courts. In the US, on the other hand, the UCC reflects an accommodating approach to custom, which might also be transnational. To repeat, in section 1-103(a)(2), the UCC envisages that the Code, for the areas it covers, is to be liberally construed to promote its underlying purposes and policies, one of them being to permit the continued expansion of commercial practices through custom, usage and agreement of the parties. As just mentioned, France looks in this connection at acts of commerce and Germany at the dealing with and therefore the status of merchant. Even in France, the German approach is often considered the more logical one, but at the time of the French codifications at the beginning of the nineteenth century, it was not considered proper to create a special class of people—in this case merchants—with different rights, even if these rights did not imply privileges but sometimes a less refined and speedier regime of enforcement. Nevertheless, treating merchants differently was considered counter to the then new notion of equality. The result was that the basic French concept of commercial law became tied to commercial acts or actes de commerce engaged in by otherwise equal people—at least that was the idea. There is no conceptual definition, however, and these acts are merely enumerated; compare Articles L 121-1 and L 110-1 (old Articles 1 and 632) CdC. They concern mainly the purchase of assets for resale and the intermediary services rendered in this connection, the renting of property, manufacturing activity, transportation and banking business. Even though the basis was therefore not the concept of merchants or commercants, who are people or entities who habitually engage in commerce, the acts of commerce, as enumerated, are only covered by the CdC if they occur between merchants, except in so far as bills of exchange and cheques are concerned, which are commercial between all persons (except in a procedural sense). In France, the result is that in their dealings merchants may often not always be engaged in commercial acts as defined (even if they operate as merchants). On the other hand, persons not normally engaged in commerce may still engage in commercial acts but are not then covered in their activities by the CdC (except for bills of exchange and cheques). They are in any event sued in the ordinary courts. In practice, the substantive relevance of the doctrine of commercial acts in France is modest, even in the law of sales. The most important aspects of commercial sales are that testimonial evidence against commercial contracts is admitted, which is unlike the situation under the Code Civil (Article 1341 CC). Furthermore, case law established that registered mail notice rather

Volume 1: The Emergence of the Modern Lex Mercatoria 63 than court action is sufficient to put a party to a commercial contract in default, thus creating the condition in which the remedies of rescission of the contract and/or damages become available.119 Another point is that joint and several liability of commercial debtors is presumed, thus derogating from the rule in Article 1202 CC. Since 1925, Article 631 CdC (old) has provided further that agreements to arbitrate future disputes are valid and enforceable in matters in which the commercial courts are otherwise competent. Tying commercial law to acts of commerce (as enumerated) is often presented as the objective approach, as distinguished from the subjective approach, to commercial law—in French droit réel versus droit personnel. This latter approach ties commercial law to the activities of merchants. In theory, France has opted for the objective approach (enumeration of the acts of commerce) with a subjective twist and limitation (in the indirect reference to these acts having to take place between merchants). In Germany, it was the reverse: all merchants are governed in principle by the Commercial Code, but only for the activities it covers. Here, the term ‘merchant’ remains largely undefined, although case law looks for an element of independence, of business activity, and of repetitiveness of the activity. It follows that in Germany the coverage of the Commercial Code is primarily based on the activities of merchants as such (if both parties are merchants or at least the party making commitments), but only in those areas covered by the Commercial Code, which also in Germany is somewhat haphazard. It follows that commercial law does not cover activities between merchants which are not commercial in terms of that code. So, even in Germany, a definition of commercial acts (Handelsgeschäfte) comes in, although some activity is considered commercial per se. Where non-merchants engage in commercial activity, such as the writing of cheques or the drawing of bills of exchange (which is covered by a separate statute), that activity may still be covered by the Commercial Code, but the activity is then considered commercial only in a more generic or broader sense. In fact, many provisions of the HGB do not cover specific commercial matters at all and apply equally to non-merchants. The distinctions are therefore not so clean and clear in Germany either. Much is historical accident, not fully cleared up in 1897 when the current German Civil and Commercial Codes were put in place. There are many voices in Germany arguing for an abandonment of the distinction between civil and commercial law altogether.120 It was already argued before that given the degree of transnationalisation we now have in the commercial sector, there is every reason to have a different law for professional dealings, notably separated from domestic consumer law concepts and no longer a lex specialis to it, see the next section. For the time being, in Germany, as in France, the substantive law effect of commercial acts between merchants is also limited and incidental. Of particular interest, however, is that the transfer of a business activity implies the liability of the transferee for all its outstanding debt (section 25 HGB). This is a much contested rule. Another interesting feature is that interest and fees are implied in business activity and need not expressly be agreed (section 354 HGB). The real problem in all this, in both France and Germany and in all countries that still maintain similar abstract criteria for the application of commercial law, is that merchants are engaging not only in commercial activity, but also in non-commercial acts. On the other hand, non-merchants also engage from time to time in commercial activities. The consequence is that neither the concept of merchant nor the concept of commercial activity can be defined exclusively in terms of the other. Hence the confusion.

119 Cour de Cass Req 28 Oct 1903, DP 1.14 (1904). 120 See CW Canaris, Handelsrecht, 22nd edn (München, 1995) 8ff, cf also K Schmidt, Handelsrecht (Köln, 1999) 5.

64 Volume 1: The Emergence of the Modern Lex Mercatoria Another notable aspect of commercial law in France and Germany is the absence of any general reference to the status and impact of custom and industry practices, even in commerce. As we have already seen, this is entirely in line with codification thinking that is suspicious of, and uncomfortable with, other sources of law, and particularly with an internationalist approach. But beyond pure system thinking, especially in commerce, this attitude was always curious. It has already been noted that in France, commercial law as a separate body of law remains more important than elsewhere because of the special court system. Historically, French commercial law originated on two fronts: in trade with England, through the Channel ports, leading, besides sales law, to maritime and insurance law; and in trade with Italy, through the fairs of Brie and Champagne, later moved to Lyons, in the east, leading to special laws concerning transportation on land, bills of exchange, and bankruptcy.121 Rules were first codified in the Règlements de la Place de Change de la Ville de Lyon of 1667, largely copied in the first all-French commercial code (Ordonnance de Commerce de Terre) of 1673, promulgated by Louis XIV and amended in 1716 and 1739. It was the result of an initiative of Minister Colbert who also ordered an Ordonnance sur la Marine, which was promulgated in 1681. They served as main sources for the French CdC of 1807. As a consequence, the French Commercial Code still maintains the distinction between land and sea transportation law (in Books I and II old), although maritime law became the subject of many different statutes. In the meantime, company law was put in a separate statute in 1966, bankruptcy in 1967 and banking in 1984. Many other provisions were repealed and the CdC became much depleted, although it still covered commercial intermediaries and exchanges, negotiable instruments and the jurisdiction of the commercial courts. These subjects have more recently been regrouped in the new French CdC of 2000, which again also covers company and bankruptcy law. As for the specialised French commercial courts, there are many commercial courts throughout the country. Their presidents are elected by the local business community and they have lay judges. These courts have their origin in an edict of Charles IX of 1563, which established an elected lay commercial court in Paris to decide the smaller commercial cases. This set-up was subsequently copied in many provincial towns. These commercial courts heard the commercial cases, including matters of company and bankruptcy law regarding merchants. The proceedings were and still are more informal and geared to greater speed. Parties need not be represented by counsel. The system has worked well and traditionally had a good reputation, although in modern times it has not remained free from scandal and accusations of rigging. Belgium also has a system of commercial courts, but they were abandoned in the Netherlands. As in Switzerland and Italy, which took the step earlier, there is no longer a separate commercial code. Some of the content of the former commercial codes has been shifted to the civil codes or otherwise to separate statutes. As regards the history of commercial law in Germany, there was great diversity in civil and commercial law between the different German states and Northern German (Hanseatic) towns, well into the nineteenth century. After 1848 there was at least one Bill of Exchange Act as a uniform law, promulgated per state and not at national level. From 1861, there was a General German Commercial Code, itself at first a uniform law, but it acquired federal status in the North German Bund in 1869 and became the all-German Commercial Code after Germany’s unification in 1871. A commercial Supreme Court was established in Leipzig in 1871. After 1879 it

121 See, for the history of French bankruptcy, Dalhuisen on International Insolvency and Bankruptcy, vol 1 (New York, 1986) 1–60.

Volume 1: The Emergence of the Modern Lex Mercatoria 65 was converted into the German Supreme Court or Reichsgerichtshof (now Bundesgerichtshof in Karlsruhe) and the separate commercial court system disappeared. Thus in Germany there are no longer special commercial courts but there are special commercial chambers within the courts. They deal with commercial cases pursuant to the Gerichtsverfassungsgesetz of 1877. Each contains two lay judges who need not be lawyers. They are appointed for a term of four years, which may be extended. As already mentioned, the German Commercial Code was adapted in 1897 at the time of the general German private law codification (Bürgerliches Gesetzbuch or BGB), without a fundamental reorientation, and was then called the Handelsgesetzbuch or HGB. Both entered into force on 1 January 1900. In 1937, company law (the AG but not the GmbH) was put in a separate statute. In Germany, bankruptcy law had always been separate.122

1.1.10. Old and New Commercial and Financial Law. Internationality and a Transnational Notion of Professionality. A Separate Legal Order for Professional Dealings? We have seen that the contract for the sale of movable tangible assets (or goods in a common law sense) is often still considered to be at the heart of commercial law in common law countries where this law is trade-oriented. In civil law, there are only some limited special rules for sales in the commercial codes, which otherwise have a bias towards the commercial rendering of services but also cover other subjects such as (sometimes) company, insurance, banking, and bankruptcy law. Professionality of the contracting parties is not a feature per se of traditional commercial law of this type, not in common law countries either, but if, as in France and Germany, special commercial law rules are sometimes still applied to these transactions, it is because in essence they are concluded between merchants, therefore in more modern terminology between professionals in their trade. Whatever the traditional differences between the French and German approaches in this respect (see the previous section), this suggests greater expertise, business contact, and regular activity for financial gain123 and therefore an activity between professionals or businessmen in the corporate sphere, even if sales may also be concluded between private persons under the normal private law rules, and cheques drawn and services of transportation and insurance contracted by them under the same commercial code. Again, even if we accept this underlying concept, it did not lead to a separate legal system for professional dealings. Increasingly, whatever was left of commercial law was incidental and always lex specialis to the codified civil system which remained anthropomorphic, geared to dealings between natural persons. For domestic activities, one may conclude as many have done, that the distinction between business (or professional) and private (or non-professional) activity as such gradually became less important for the law. This was further promoted by de-emphasising or ignoring the role 122 For a history of German commercial law, see L Goldschmidt, ‘Universalgeschichte des Handelsrechts’ in his Handbuch des Handelsrechts, 3rd edn (Stuttgart 1891). See, for nineteenth-century discussions on the relationship between the BGB and HGB, P Raisch, Die Abgrenzung des Handelsrechts vom bürgerlichen Recht als Kodifikationsproblem im 19. Jahrhundert (Stuttgart, 1962). The first more theoretical treatises on commercial law appeared from the sixteenth and seventeenth centuries, notably in Italy: see Straccha, Tractatus de Conturbatonibus sive Decoctoribus (1553), and Casaregis, Discursus Legales de Commercio (1740). See, for older French commercial law, J Savary (who largely drafted the Ordonnance of 1673), Du Parfait Negociant (1695). 123 cf also the definition of merchant in the UCC in the US in n 116 above.

66 Volume 1: The Emergence of the Modern Lex Mercatoria of custom. It is reflected in commercial law having become less significant as a different branch of the law everywhere, even if France still maintains a separate court system for commercial disputes. It has already been noted that some civil law countries, such as Italy, Switzerland, the Netherlands and Brazil have abandoned any such distinction and there is no longer a separate commercial code in these countries. Many writers in Germany also argue for this as noted above. In modern times, domestically, special treatment has often become important, not for business dealings, but rather for consumers or non-professionals in their dealings with each other and particularly with professionals—therefore outside commerce. The result is that professionals and their dealings are again differently treated, although that is now not so much by design on the basis of special commercial or customary considerations, but rather by default, on the basis of special needs taken into account for others, especially consumers. It was already said before that the risk always was that in a unitary system of private law, as remains the civil law idea, these extra consumer law protections were then likely to waft over into commercial or professional dealings, the reason why the question of separation of consumer and professional dealings has again become urgent, especially now that the latter need a globalised or transnational approach. It was already said that this may be relevant, for instance, in the application of modern notions of good faith to determine the rights and duties of the parties to a contract, when expertise and reasonable expectations may be taken into account: compare in particular sections 157 and 242 of the German BGB. This was considered especially important for the protection of weaker parties but should be much less relevant for professional dealings: see section 1.1.6 above and in particular Volume 3, section 1.3.3. It was already noted also that in civil law, the good faith notion should result in considering more carefully the nature of the relationship of the parties, the legal effect thereof on their dealings becoming a distinctive feature, as it is in common law where this is more innate and it needs no doctrine of good faith to that effect: see Volume 3, section 1.1.1. As we have seen, the result may be less protection for professionals. The notion of good faith in civil law may itself require it but it is here only at its beginning and there is commonly still a serious danger of a spill-over effect of consumer protections into professional dealings, see further the discussion in Volume 3, section 1.3. It has already been said (in section 1.1.5 above) that in recent times financial rather than trade or mercantile considerations have emphasised the special nature of modern commercial law and are introducing new notions not only of contract, but also of proprietary law, especially in asset backed funding. Again, this is particularly relevant for professionals and consumer notions do not help here. In the financial world, leases, repos, secured transactions (including floating charges), and investment securities entitlements have thus given rise to new notions of proprietary rights, which are alien particularly to traditional civil law thinking and its systematic unitary approach and pay no regard to the traditionally closed nature of its proprietary system. In section 1.1.6 above, the dynamic nature of modern contract and movable property law in the professional sphere was already introduced as a major modern development typical of professional dealings especially transnationally. To repeat, at this stage, this is mostly relevant for professionals, with commercial law merely the likely conduit, but it is another reason why modern commercial law as a separate part of private law is once again in the ascendant. As already mentioned, the additional reason is transnationalisation. Under the pressures of financial innovation and internationalisation or globalisation, not only is a transnationalised system of substantive law being created, but this system is at the same time acting as a laboratory in which legal experimentation is taking place, separated therefore from the rest of private law in its domestic variants. It may well be that the effect of blockchain and the smart contract will accelerate this development and show more clearly its need and progress in finance but also in shipping or other forms of transportation. This is the challenge of the new

Volume 1: The Emergence of the Modern Lex Mercatoria 67 lex mercatoria or law merchant, a law for international professional dealings whose features are legal transnationalisation, dynamism and also, unavoidably at this stage, experimentation, as we have seen. But it may also lead to a great deal of legal simplification. As will be discussed in greater detail below, this law and its newer structures are indeed largely meant to operate between professionals who are more likely to be able to deal with them and to fashion them. They are also better able to deal with risk and manage it, even legal risk. It reinforces the emphasis on professional dealings as the essence of all commercial and financial law and of its separateness from the rest of private law. It is connected also with the operation for them increasingly of a distinct new commercial and financial legal order which is transnationalised as is the law it creates, see section 1.5.5 below. In any event, special (but not necessarily better) treatment of professionals has always remained important in several aspects of international dealings, of which the international sale of goods is perhaps still the best example, see also the discussion in section 1.4.4 below, even if financial dealings may now have exceeded them in importance or at least in legal attention. Even if the 2011 EU proposal for a Regulation on a CESL, already withdrawn, had a different consumer-oriented approach to cross-border sales within the EU, international sales present a clear instance of a situation where extra risks and complications gave rise to a different legal regime. In a technical sense, international sales have always been considered contracts between professional parties only, therefore between parties who are knowledgeable in the area of their sale and its risks, are likely and able to make the special arrangements necessary in this connection and are aware of and able to develop special industry practices to this end, for which in international sales one should always be on the lookout (compare Volume 3, sections 2.1.4/5). Furthermore, in the additional arrangements completing an international sale, such as transportation and insurance, one may also see differences in treatment as compared to domestic dealings, which are likely to be more consumer protection-oriented.124 Unlike domestic sales, the subject of international sales in this sense is indeed not commonly thought to cover consumer sales at all, or even sales of goods concerning which an otherwise professional party does not have special knowledge. To the extent that a distinct pattern has developed, the international sale is further limited in scope in that, as a term of art, it is not believed to cover the sale of real estate, negotiable instruments, other documents of title, bonds and shares, or assignments of intangible property (such as receivables) either. This is clearly reflected in the 1980 (UNCITRAL) CISG, Article 2, which offers a partcodification of the applicable directory law and is meant as a uniform law—it has already been mentioned several times. As we shall see (in Volume 3, section 2.3.1) it has been adopted by many countries, even if in practice it is often expressly excluded by the parties to these sales, meaning that the larger actors remain sceptical of the result. One particular reason is the subjective nature of the concept of fundamental breach in Article 25 and of force majeure in Article 79. Another is the unilateral right of the buyer to reduce the price under Article 50. The smaller seller is here particularly at risk. But there is also confusion about the relationship of the text to other sources of law, evidenced in Articles 4, 7 and 9, and about the old-fashioned offer and acceptance language in Part II, which is still directed towards spot sales between private individuals. There is further the partial coverage of the subject of sales in the text, which does not deal with title transfer and the key notion of transactional finality: see further the discussion in Volume 3, section 2.3.2.

124 See for the concept of merchant and its importance in Art 2 of the UCC, n 116 above. As just mentioned, domestically its importance is now often de-emphasised, but internationally it is being revived.

68 Volume 1: The Emergence of the Modern Lex Mercatoria Other types of sales may, of course, also be the subject of international sales contracts, including consumer sales, which may require a whole set of other safeguards, increasingly important in cross-border internet transactions (it was the aim of the draft EU Regulation for CESL) and the rendering of connected cross-border services. Again, they are not commonly included in a reference to international sales in a technical sense, which, as to subject matter, is therefore limited to tangible movable assets sold between professionals located in different countries. In such sales, there are traditionally different rules as to delivery and passing of risk. In view of the distance, there may also result some special duties of care of the buyer to protect the goods upon arrival should disputes arise and goods be rejected. On the other hand, the seller might have a special duty if the buyer delays taking delivery in order to preserve the assets, even if the risk has passed to the latter (for example, upon tender of delivery); compare Articles 85ff of the CISG. The subject of international sales will be dealt with more extensively in Volume 3, Part II. As just mentioned, much more obvious is the professionalisation in connection with modern financial dealings, even domestically, which is often connected with newer concepts in the law of movable property, like finance sales and floating charges. If one takes the UCC as an example, it is clear that Article 2 on the sale of goods still maintains a general notion of ownership and its transfer that also obtains between non-professionals, but in Article 2A on equipment leases and in Article 8 on the trading and holding of modern investment securities entitlements, the emphasis is on professional activities (of intermediaries and on the relationship of investors with them). Of further interest here is that proprietary rights are only defined incidentally, that is, for each structure specifically without any resort to general proprietary principles or a unitary system of proprietary rights, it was already mentioned before. That is also reflected in Article 9 on secured transactions, which in its latest text tends to address itself more particularly to professionals (thus excluding consumer transactions; compare, for example, section 9-109(d)(13)). Again, this is all about finance. In Article 4A (section 4A-108) on electronic payment, consumers are explicitly excluded. They are also excluded in Article 5 from the practice of issuing letters of credit (section 5-102 (9)(b)). It confirms the assumption that because of the specialised nature of these financial arrangements, they cannot be handled by or are less suitable or even dangerous for non-professionals. In the meantime, separating out international professional dealings has become increasingly common, even outside finance. Sensitivity to the special nature of activities of professionals operating internationally is, for example, suggested in the 1995 UNIDROIT Principles of International Commercial Contracts. According to the Preamble, they apply only to international commercial contracts, a restriction not contained in the 1998 (Lando) Principles of European Contract Law (PECL), which also apply to consumer dealings but are otherwise quite similar. In the UNIDROIT Principles, internationality and commerciality are not defined but the idea is clear, even though many of the rules seem to come straight from domestic consumer laws. This explains the similarity with PECL. Both sets of Principles will be analysed in greater detail in Volume 3, section 1.6. Thus, in these various areas, the distinction between professional and other dealings has become important, at least transnationally.125 A more radical approach altogether is the distinction 125 The notion of commerciality has also been defined in the context of sovereign immunity in terms of the distinctions between acts de jure imperii and de jure gestionis, but the aim is then to distinguish public and commercial acts of sovereigns and their agencies, not to distinguish between (international) commercial and other private law acts. In the EU, on the other hand, it is the notion of consumer that is of considerable importance, notably in the protection of consumers through consumer contract law. The ECJ has defined ‘consumers’ as natural persons acting outside the range of professional activity: see Case C-361/89 De Pinto [1991] ECR I-1189. Problems may arise where individuals also act professionally, raising the question whether such activities may still

Volume 1: The Emergence of the Modern Lex Mercatoria 69 in general between the professional sphere on the one hand and the private or consumer sphere on the other with emphasis therefore on: (a) the types of parties rather than on the nature of their dealings; and (b) the qualification of the one as essentially globalised and legally transnationalised, and of the other as remaining in essence domestic. Modern commercial law is then typically tied to all flows of goods, services, knowledge and money between professionals, who increasingly conform here to internationally established patterns. This may become relevant even if on occasion they may still be operating purely domestically, yet under internationalised standards. There is here no basic other limitation in scope. This is the preferred approach in this book, which ties the new transnational law to the emergence of a new legal order for all professional dealings, whether or not playing out domestically or trans-border. See further the discussion in section 1.5 below. The result in so far as the applicable law is concerned is the application of transnationalised legal concepts to all dealings of professionals to support their legitimate needs (which are needs that do not offend public order and policy in the place of operation). That is the modern concept of the lex mercatoria as here defended, in which, as we have already seen, there are several sources of law among which local laws may still play the residual role, but, crucially, these local laws are then transnationalised and may accordingly be adapted and transformed to fulfil their role in that context and at that level.126 Professional dealings are here considered to be all dealings in the international flows of goods, services, capital and technology between individuals or entities that: (a) (b) (c) (d)

make it their business to do so; regularly engage in that type of activity; are sufficiently expert in it,127 and commonly seek to make a profit.

The direct consequence is a less subtle and anthropomorphic legal attitude to these professionals who are used to dealing in risk. It may also mean specialised proprietary structures not used in other parts of private law, and a more dynamic approach to contract, both of which were summarised in section 1.1.6 above and which will be dealt with more extensively in Volumes 3 and 4. In sales, this leads to the basic distinction between professional and consumer sales, with the legal regime applicable to professionals being considered increasingly transnationalised. Again, this would be so even on those occasions when the relevant transaction may not have any international aspects; in this approach, it would be unrealistic to consider local professional dealings to remain subject to different rules if they concern the same business and are similarly structured. Economically speaking, there is indeed ever less justification for subjecting professional dealings benefit from consumer protection. Protection is not afforded unless the professional activity was insubstantial: see Case C-464/01 Gruber [2005] ECR I-439. The counterparty may here rely on his good faith when an individual contracts for his business. It is also relevant whether the goods are or could be used for professional purposes or require delivery at a business address, or there is VAT registration. This suggests that the buyer may have raised wrong expectations and accordingly bears the risk, but in internet transactions it may be simply the nature of the goods and the likelihood of professional use that will determine the issue. 126 See JH Dalhuisen, ‘What Could the Selection by the Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619. 127 Again, note the definition of merchants in the UCC, see n 116 above, which deletes, however, the profit element. Another feature is here that only companies are likely to be involved in international dealings (therefore not individuals, certainly not consumers), their business requiring some expertise and being on some scale while the interests to be defended are considerable. It underscores that these situations primarily arise between parties that are aware of and used to taking some risk and are apt to handle it professionally and engage in it for a profit.

70 Volume 1: The Emergence of the Modern Lex Mercatoria to a different legal regime depending on the origin of the parties and their location in one or more countries. In any case, it has already been said repeatedly that much of their dealing is now virtual, while law as a framework of rights and obligations has no natural abode or situs. The result of the underlying flows being internationalised is a unitary legal approach for all operations in the professional sphere conducted in these flows in which internationality need no longer be defined. Neither needs commerciality. Arbitrary distinctions in this connection may thus be avoided.128 It should be clear that these transactions are no longer confined to the sale of goods or other forms of trading or even financial transactions, but may also include agreements between, for example, large law firms and accounting firms in the realm of services even within the same country. In summary, the consequence of a transaction being in the professional sphere, or rather in the transnational commercial and financial legal order, is the increased likelihood of it being taken out of the domestic law context altogether, on both the contractual and proprietary side (for movable property). It will be governed by its own set of transnational legal concepts in a unified cross-border legal framework emanating from the transnational commercial and financial legal order, even if within that new law the contractual and proprietary structures may not yet form a single coherent system of rights and obligations. This precisely defines the scope and challenge of the new lex mercatoria. It was argued before that the professional community is likely to be well able to deal with this challenge, devise the necessary protections and make good use of the flexibility it entails within the larger space for party autonomy it is being given. Indeed, this has become the major task of structuring or transaction lawyers in international commerce and finance and may, as we shall see, be supported in international commercial arbitrations.

1.1.11. The Role and Status of International Commercial Arbitration. The Notions of Internationality and Commerciality Revisited It is submitted that international commercial and financial dealings are increasingly taken out of a domestic legal environment and function in the transnational commercial and financial legal order under its own lex mercatoria. This is proving to have also a profound effect on dispute resolution in that order which is primarily international commercial arbitration. It is common still to domesticate international commercial arbitrations in the place of the seat, which continues to nationalise all arbitrations even if international.129 This is itself increasingly contentious and not sustainable, a fundamental issue dealt with in greater detail in Volume 2. In practice, in the laws 128 See for the discussion of these definitions to distinguish international commercial arbitration, s 1.1.11 below. The considerable confusion in this connection arising in the EU in the context of its DCFR as a proposal for the codification of private law in the EU and the more recent carve-out for the law of sales in the October 2011 EU proposal for a Regulation in this area (CESL), will be discussed in Vol 3, s 1.6. It may suffice here to say that in these texts no proper distinctions are made between consumer and professional dealings and between domestic dealings and transnational dealings, all dealings within the EU for these purposes now being considered domestic. There is thus no room either for a separate transnational legal order operating within the EU. The consequence is that consumer protection issues spill over into professional dealings, also where they are transnational within the EU, eg between Portugal and Finland. This is another world with very different ideas of risk. Not recognising this makes these EU proposals potentially untenable in the professional sphere. 129 The notion of the ‘seat’ of an arbitration in the place where it is conducted (making its lex arbitri applicable and, in the view of many, founding the award in it also, that is always in a national law) is in itself a strange one and hardly rational. It corresponds with the Savignian notion that all legal relationships have a seat or Sitz in a national law and that notion is then expanded to all legal action. This became the mantra in a time of extreme nationalism but was always axiomatic, no more than political philosophy. Furthermore, extraterritoriality of this law is then

Volume 1: The Emergence of the Modern Lex Mercatoria 71 of arbitration, a transnational approach to international professional dispute resolution must now increasingly be taken.130 It is, in fact, implied in the reference to international commercial arbitration itself, but the true consequences remain disputed. It is generally accepted, however, that in international arbitrations different arbitration rules apply, although it may still be contentious in how far, and that there is a special internationalised arbitration regime when the (professional) parties come from different countries; when the subject matter is of an international nature; or when the arbitration takes place in an unrelated country. Compare the French Decrees Numbers 80-345 and 81-500 (1981) and the new Decree Number 2011-48 (2011), setting international commercial arbitration fundamentally apart; see also Article 1(3) of the UNCITRAL Model Arbitration Law of 1985, updated in 2006.131 This Model Law (which does not as yet dispense with the notion of the seat), although not a treaty text, is important in the furthering of a special regime for international arbitrations and is now substantially adopted in several common law countries including some States of the US, but also in Scotland, and some East European countries including Russia. It is much used as guidance elsewhere, even in countries such as England and Germany, which did not follow it literally but have new arbitration Acts, although especially the English Act of 1996 still does not maintain a fundamental distinction between domestic and international arbitrations, only some extra rules. The distinction leads to the application of additional or different arbitration rules for international commercial or professional disputes. In this connection the following special features of international commercial arbitration may be noted: (a) The separation of the arbitration clause from the rest of the agreement, which separation finds its true legal basis in transnational law or in the international commercial and financial legal order, its principles and practices covering the modern lex mercatoria concerning dispute resolution and any public order issues. automatically assumed, governing the international arbitration in all its effects in whatever place. This is an expression of statutist thinking (see s 2.1.2 below) commonly limited, however, to status and real estate matters, see also Vol 2, s 1.1.8 below. Seat notions also emerged later in company law, but there it remained uncertain whether it was completely formalised at the place of the registration of a company or whether the place of its real activity had to be considered instead. This remains internationally an unresolved issue to this day and there are two different views. It is also reflected in international bankruptcy, although there seat language is not commonly used, rather the notions of primary and secondary bankruptcy depending on the intensity of activity in the country concerned. Following this thinking, it could equally be claimed that the seat of an international arbitration is in the place where the dispute has arisen or plays out, and is not formalised at the place where the arbitrators sit. 130 See for this internationalisation or delocalisation of international commercial arbitration J Lew, ‘Achieving the Dream: Autonomous Arbitration’ (2006) 22 Arbitration International 179 (Freshfield Lecture, 2005); and earlier J Paulsson, ‘Delocalisation of International Arbitration: When and Why it Matters’ (1981) 22 ICLQ 53, and more recently J Paulsson, ‘Arbitration in Three Dimensions’ (2011) 60 ICLQ 291; see further also n 134 below and Vol 2, s 1.1.8 below. See for the classical defence of legal nationalism in international arbitration, the denial of the latter’s existence, and the belief in the dominance of the seat and its local lex arbitri, FA Mann, ‘Lex Facit Arbitrum’ (1986) 2 Arbitration International 245. Yet the development has been steadily away from localisation ever since the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards did away with the double exequatur, meaning that recognition of awards elsewhere no longer depended on the prior sanction of the courts of the seat. 131 The UNCITRAL Model Arbitration Law accepts that an arbitration is international when the parties (at the time of the conclusion of the arbitration agreement) have their places of business in different countries, or the place (or seat) of the arbitration or the place of (a substantial part) of the performance is outside the country of the parties. Parties may also expressly agree that the arbitration shall be international. As to ‘commerciality’, the Model Law states in a footnote to Art 1(1) that it should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature whether or not contractual. It then gives a number of non-exclusive examples. The idea clearly is that all international business disputes are covered.

72 Volume 1: The Emergence of the Modern Lex Mercatoria (b) The law declared applicable to the rest of the contract does not then control the arbitration, nor does the lex arbitri of the seat except in a supporting role. In order for the arbitration to show its international character, any absence of a choice of law by the parties must be interpreted as applying transnational law.132 Any other interpretation risks the arbitration becoming domestic. Even in a supporting role, the lex arbitri of the seat is subject to the higher rules in the hierarchy of the modern lex mercatoria or transnational law, like fundamental notions of due process or established international arbitration practices. (c) Any domestic lex arbitri specifically chosen by the parties must still be considered part of the transnationalisation process to preserve the international character of the arbitration, and that law is in its application not then purely local either but also preceded and varied by the higher sources of arbitration law and the public policy provisions of the transnational law and is adjusted and shorn of its purely domestic elements to support the internationality of the arbitration. (d) It means limitation of the impact of lex arbitri of the seat which in international arbitrations does not supervise either except where the arbitration in conduct and effect demonstrably comes onshore. This requires more than a theoretical neutral seat selection, and it may do so in several countries, including those of enforcement. (e) It follows that the meaning and extent of party autonomy in this connection, in particular the meaning of the arbitration clause and any other powers of arbitrators result from transnational law (unless expressly stated by the parties otherwise, which risks the arbitration becoming domestic). (f) Transnational law then determines the jurisdiction of arbitrators, activated to that effect by the arbitration clause but not fully created thereby, there may be other powers resulting from the lex mercatoria as transnational arbitration law, for example to deal with proprietary and public policy issues. This activation itself is also a matter of the transnational law. (g) It means that the status, role and powers of international arbitrators are founded in this transnational legal order either indirectly via the arbitration clause or otherwise directly and covered by its laws and public order requirements. That includes the power of arbitrators to determine their own jurisdiction (Kompetenz Kompetenz). (h) Transnational law then also applies to the concept of arbitrability, which now also covers competition, securities and other public policy issues. It then also determines the power of arbitrators to deal more generally with public policy issues and raise them themselves for example, in matters of fraud, market abuse, tax evasion, money laundering, and other forms of corruption. (i) In this international order, the parties define the nature of their dispute and law of whatever nature must be pleaded as fact and must be proven. There is no authority for arbitrators to go beyond it and clarify the law. They are not spokespersons for any legal system and their awards cannot be precedent, nor can consistency be an objective, it all depends on what the parties have pleaded which may be incomplete, self-serving or wrong. Arbitrators only weigh the evidence put before them. (j) Public order considerations can only be autonomously invoked by arbitrators to the extent the transnational arbitration law allows it and the arbitration clause itself is no sufficient support. This also applies in proprietary matter when there could be third party effect of the

132 Since the LCIA Rules of 2014, a choice of the law of the seat is deemed implied if the arbitration clause does not make a different choice, see for a critique Vol 2, s 1.1.9. The transnationalisation of the applicable arbitration law is thus denied.

Volume 1: The Emergence of the Modern Lex Mercatoria 73 awards in terms of recognition and ranking of proprietary interests and preferential status through the recognition of set-off and netting facilities. (k) The transnational status of the process also determines the procedural flexibility and discretion of international arbitrators in matters of admission of evidence and applicability of private international law rules or the modern lex mercatoria as to the substance of the dispute if the parties in agreement have not decided otherwise. (l) It also applies to the reasoning of international arbitrators, which is determined by the international arbitration practices themselves. (m) Transnational law or the modern lex mercatoria provide then also the context for the acceptance of multiple sources of law and their hierarchy in the new law merchant or the modern lex mercatoria in matters of substantive law application in international arbitrations, when properly pleaded by the parties. (n) It means that even if the law of the seat would not allow it and insist on the application of some national law under its conflicts of laws rules, it would not matter. As will be submitted later at least for proprietary and status matters, these powers might even become comparable to the role of equity judges in common law jurisdictions.133 It depends on transnational, not national law. (o) The lex arbitri of the seat is also irrelevant as to the international status of the ensuing award, which needs no local approval or support. (p) This also leads to a limitation of the review by the domestic courts, either when the awards are challenged in the country where they are rendered (of their seat or any other) or in the context of their recognition and enforcement in other countries. This is recognised in the 1958 New York Convention. (q) It follows that notably the sanction of the courts of the seat is no longer required for the international standing of these awards and is no precondition for their enforcement elsewhere. It also follows that their annulment at the seat is no longer dispositive in recognition and enforcement elsewhere either.134

133 See JH Dalhuisen, ‘International Arbitrators as Equity Judges’ in PH Becker, R Dolzer and M Waibel (eds), Making Transnational Law Work in the Global Economy: Essays in Honour of Detlev Vagts (Cambridge, 2010) 510. 134 This is the French position culminating in the Putrabali decision of the French Cour de Cassation, n 27 above, but it is also the American position, see Chromalloy Airoservieces Inc v Arab Republic of Egypt, 937 F Supp 907 (DDC 1996) although the reasoning is different. In France the award is considered transnational although recognition still a part of French law. In the US, although international arbitral awards may still be considered domestic, it is still considered a matter of domestic US public policy (that generally favours arbitration) whether a foreign annulled award can be recognised and enforced in the US regardless. US courts exercise their discretion under the New York Convention in this manner, see further Vol 2, s 1.6 below. The key is that annulment by the court of the seat is not dispositive in the US either and that is more and more the international attitude and in fact the consequence of the New York Convention having abandoned the double exequatur of the 1927 Geneva Convention and having rendered annulment at the seat no more than a ground for refusal of recognition and enforcement elsewhere as a matter of discretion of the recognising court. However, there is often still considerable confusion. The need for support at the place of the arbitration from the courts of the seat is often confused with the question of where the arbitration and the award are founded. In practice, support may be necessary in many countries, often other than those of the seat. Recognition and execution is only one example. This support is usually not necessary in the country of the seat where there are mostly no relevant assets or activities as the seat will be chosen for its neutrality in this respect. Provisional measures and preservation matters equally do not normally concern the country of the seat but must be demanded wherever relevant. Many countries may thus have to support and the lex arbitri of any of them is then relevant, not merely, and certainly not exclusively, the one of the seat. It may be that the courts of the seat and their laws are the more appropriate when it comes to appointing arbitrators and dismissing them, if the applicable arbitration rules chosen by the parties do not provide for such

74 Volume 1: The Emergence of the Modern Lex Mercatoria Thus on a better view, these awards and the arbitration agreements from which they arise, as well as the powers and status of international arbitrators, are founded in the transnational commercial and financial legal order itself from which they derive their legitimacy and the awards their international currency.135 It is a limited dispute resolution facility that is focussing on the resolution of problems as presented by the parties and not on law formation. Still, international arbitration may not then be merely based on party autonomy, which would limit the jurisdiction of international arbitrators and could not explain their powers in proprietary matters affecting third parties (including set-offs) and in public policy issues. It follows that on a better analysis the arbitration clause activates but does not found the arbitration. Or at least, that would now appear to be the more satisfactory academic model to explain and clarify what is happening and to guide the process of international arbitration in respect of commercial and financial disputes between professionals in our times and which will be the subject more properly of Volume 2, where the dangers and challenges to this type of dispute resolution will also be explained (in section 1.1.14). In this approach, globalisation of commerce and finance goes together with transnationalisation of its legal regime and of its dispute resolution, review and enforcement facilities. In fact, there is little point in being a nationalist in a globalising world. It produces ever more unsatisfactory or contradictory answers. We see here a historical trend: law, even commercial law, was nationalised in the nineteenth century and became territorial. That was the model and political philosophy of those days. This trend is now reversed, the movements of the international flows of goods, services, information, payments and money (if not also of people) and their scale require it. It earlier led in Europe to the conditions that made the EU in its present much extended form possible and necessary and is also at the heart of its openly declared existence as a separate legal order. But the trend now goes beyond it. That is confirmed in international arbitration, especially in French case law up to the Cour de Cassation, which introduced the concept of an international arbitral order. It is simply the dispute resolution aspect of the transnational commercial and financial legal order, even if the new French Arbitration Act of 2011 hesitates to draw the conclusion and still seems to think that international arbitration to the extent it operates in France remains a French product which would only be so in a support or enforcement function. All the same, the more modern trend is no longer concerned with definitions like ‘internationality’ and ‘commerciality’, but rather with professional dealings per se, as we have seen in the previous section, which operate in their own transnational commercial and financial legal order. The special arbitration regime for professionals in their international dealings is indirectly, even if incompletely, confirmed in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Article 1.3). First, there is the reference to ‘foreign’ awards and abolition of the double exequatur, meaning the need for recognition first by the courts of the seat as precondition for recognition elsewhere, which had still been the approach of the earlier Geneva Convention of 1927. It allows states to limit the application of the Convention to

eventualities, but even such measures have no force per se outside the countries of the seat. Extraterritoriality of the laws of the seat in this regard may not be assumed and it is quite possible—even if undesirable—that other arbitrators emerge elsewhere and that they, or dismissed arbitrators, proceed to an award. It will ultimately all be a matter for review and recognition in recognition countries, where indeed the true control is, not therefore in the country of the seat. 135 See for the Putrabali case, nn 27 and 134 above, see further Vol 2, s 1.1.8 below. The idea has been defended that party autonomy itself carries the delocalisation, it then being seen as a legal order of its own. The pre-existence of an international commercial and financial legal order that sanctifies party autonomy of this nature and also founds the status and powers of the arbitrators, which are merely activated by the arbitration clause, is here preferred.

Volume 1: The Emergence of the Modern Lex Mercatoria 75 commercial awards (the ‘commercial reservation’).136 The New York Convention thus limits itself normally to international commercial arbitral disputes, although expressed in the (imperfect) language of 1958, which could not have foreseen the direction international commerce and finance was to take, nor its modern scale and its ever more justified claim to constituting a legal order of its own as it did well into the eighteenth century, an approach for modern times to be explored further below in sections 1.4 and 1.5. It follows that there is an important distinction with ordinary court proceedings which is that except in areas where arbitrators have gained original power under transnational law, they do not operate as judges proper and are dependent on the parties for the definition of their dispute and the applicable law. As all foreign law, it must be pleaded as fact and it and its effects are determined by expert testimony upon cross examination as a matter of the preponderance of the evidence so presented. Arbitrators are thus more like juries and unless so authorised by transnational law, they cannot intervene and clarify the modern lex mercatoria and are not spokespersons and law makers for it. Where they may have acquired such original powers, conceivably in public policy determination as under foreign investment law, there is increasing resistance against such a role in terms of supervision and accountability and that should be a pointer. Law formation whether in public or private law cannot truly be privatised. It will be argued in Volume 2, that the answer is an international court from which arbitrators should be able to ask preliminary opinions in public policy issues and perhaps also in property matters, therefore in issues that affect the public or third parties, see further the next section.

1.1.12. International Arbitration and the Role of Ordinary Commercial Courts Compared. Need for an International Commercial Court? In international arbitrations, the transnationalisation of modern commercial law is often dealt with informally. Subject to the parties’ ultimate control (if in agreement), international arbitrators tend to enjoy great freedom in conducting these proceedings and in finding the applicable law, but they are limited to the representation of the parties and their submissions and the way these parties define their dispute on either point of fact or law except in the areas where they have exceptionally obtained autonomous powers under transnational law. Within these confines, they commonly assume flexibility in fashioning the rules of procedure and evidence and the applicable private international law rules (wherever they may still be considered relevant, notably, in the approach of this book, only when local laws operate as the residual source of law in the modern lex mercatoria). In finding the applicable substantive law, they may also rely on transnational custom or principle where pleaded and may operate with a different concept of party autonomy, which might even extend into the proprietary area, as we have seen. In that manner they may also be able to deal with public order matters, like competition issues, where the question also is, as we shall see, whether international arbitrators have power to raise such issues themselves. It was submitted that this is also determined by the modern lex mercatoria with its various legal sources and their hierarchy, here applicable to the transnational dispute resolution process, which then also covers the role and powers of international arbitrators. Although in principle

136 Even if they do not do so, the common view is that disputes between states on boundary and similar political issues, perhaps including disputes with foreign investors (unless further treaties allow it in which connection bilateral investment treaties or BITs may be important), are excluded and so too are employment and family law issues unless incidental to the main dispute.

76 Volume 1: The Emergence of the Modern Lex Mercatoria arbitrators are not legal activists as judges may be and act much more like juries, their role may then become more akin to that of judges,137 especially in proprietary and status matters, as well as in policy corrections. As just mentioned, international arbitrators may now be able to assume autonomous powers in aid of public policy or public order requirements and may transnationalise them, although this remains a contentious and sensitive area, see Volume 2, sections 1.1.10, 1.1.14 and 1.2.5 below and the question still is how far this goes and is allowed under transnational law and how it must be handled. They are also in charge of their own reasoning in this regard. In Volume 2, it will also be discussed whether and to what extent this may be different in foreign investment arbitrations. In international commercial cases, it is submitted, national courts should assume a similar attitude, but often hesitate.138 This is again an issue of powers.139 To support the new transnational

137 See also n 133 above. 138 It is worth noting in this connection that there may be a formal attempt at approximation when parties choose a local court for the resolution of their international commercial disputes. This is the subject of the 2005 Hague Convention on Choice of Court Agreements, which facilitates international recognition and enforcement of ensuing judgments in all Member States of the Convention, along the simplified lines of the New York Convention for international arbitration awards. This is considerable progress. The Convention has so far only been ratified by Mexico, the EU (for all its Member States) and Singapore. It has been signed by the US, China and the Ukraine. The treaty has entered into force. The difference remains, however, in the attitude to the applicable law, where arbitrators may be able to exercise greater freedom upon the submissions by (one of) the parties. It is submitted that ordinary courts chosen by the parties should do the same so that a real alternative results, the distinction then being only in the greater procedural formality and the possibility of appeals in the ordinary courts, a facility, it is further submitted, the parties should be allowed to exclude (an issue with which the 2005 Convention on Choice of Court Agreements unfortunately does not deal—such an exclusion is still against public order in many countries). 139 Note also in this connection Judge Wilkey speaking for the majority in the Court of Appeals in the American case, Laker Airways Ltd v Sabena Belgian World Airlines 731 F2d 909 (DC Circuit 1984), at the same time as the English judiciary in Amin Rasheed Shipping Corporation v Kuwait Insurance Company [1983] 1 WLR 228, 241, see n 141 below: ‘Despite the real obligations of courts to apply international law and foster comity, domestic courts do not sit as internationally constituted tribunals. Domestic courts are created by national constitutions and statutes to enforce primarily national laws. The courts of most developed nations follow international law to the extent it is not overridden by national law. Thus, courts inherently find it difficult neutrally to balance competing foreign interests’. Note that this statement came in the context of the explicit rejection of the balancing test later followed in para 403 of the Restatement (Third) of the Foreign Relations Law of the United States (1987), even though the need for a reasonable link between forum and controversy was considered to be an important limitation on US jurisdiction. This Restatement was in preparation at the time and is now more commonly accepted, cf the US Supreme Court in Hartford Fire Insurance Co v California 509 US 764 (1993), in which both the majority and the dissenting minority relied on it. See for a further and more particular discussion, the dissent of Justice Scalia in that case. To the extent this Restatement is now accepted, it puts the status of the courts in dealing with international commercial cases on a different footing. Drafts (of Dec 11 2015) for a Fourth Restatement deviate, however, from this balancing approach and suggests instead that federal courts take account of the legitimate interests of other nations as a matter of prescriptive comity. The idea is that potentially conflicting state interests of different countries come together in harmony. It would seem that a balancing test is rejected but it remains obscure what is put in its place (p 39). Note also that by using a forum selection clause, it is normally accepted (unless the forum selection would work out to be unfair or utterly unreasonable for one of the parties in the circumstances of a case) that parties may choose a court that balances the potentially involved governmental interests better or more neutrally or in ways they prefer, as an international commercial arbitration tribunal, which undoubtedly has an international status, would also do; see also s 2.2.6 below. To the extent national courts are increasingly willing to do the same, again it is not illogical to impute to them a similar international status. It would certainly seem fair to say that, especially under the influence of much increased internationalisation and globalisation since 1984, matters have moved on. It should also be noted in this connection that, within the EU, domestic courts in EU matters sit as European courts subject to the guidance of the ECJ, from which prejudicial opinions may be and frequently are requested.

Volume 1: The Emergence of the Modern Lex Mercatoria 77 law in the professional sphere, it was argued that it would not be a bad idea, nor too far-fetched a proposition,140 to set up an international court or similar facility for professional dealings operating in a similar manner as the commercial courts once did in regionally divided countries. One first step in this context would be to accept that domestic courts in international commercial matters sit as international commercial courts.141 Judgments of these courts should then become

The notion of national courts sitting as international courts is therefore by no means new. Another issue that could be raised in this connection is whether domestic courts would have to be more conservative in developing international law than international courts or international arbitrators would have to be. In this connection the observation of Lord Slynn in the first Pinochet case [2000] 1 AC 61, which implied that the House of Lords in a case like this one did not sit as an international court and would therefore be more restricted in developing international law, may be of interest. The majority clearly did not see it this way, although it did not argue the point explicitly. cf also L Collins, ‘Foreign Relations and the Judiciary’ (2002) 51 ICLQ 509 with reference to the Court of Appeal in Kuwait Airways Corp v Iraqi Airways Co [2001] 3 WLR 1117, 1207 in which the further development by the English courts of international law as to what was justiciable or not was also not considered impeded. 140 See in favour of such an international court to operate as a special court in the supervision and recognition of arbitral awards internationally Mauro Rubino-Sammartano, International Arbitration Law and Practice (Alphen aan den Rijn, 2001) 980, and JH Dalhuisen, ‘The Case for an International Commercial Court’ in KP Berger et al (eds), Private Law and Commercial Law in a European and Global Context. Festschrift für Norbert Horn zum 70. Geburtstag (Berlin, 2006) 893. See further HM Holtzmann, ‘A Task for the 21st Century: Creating a New International Court for Resolving Disputes on the Enforceability of Arbitral Awards’, and SM Schwebel, ‘The Creation and Operation of an International Court of Arbitral Awards’, both in M Hunter et al (eds), The Internationalisation of International Arbitration, The LCIA Centenary Conference (1995) at 109 and 115. The concern of these last two authors is the recognition of foreign awards under the New York Convention of 1958 and the possible bias of local judges. The idea is to replace their involvement with that of an international court, which would acquire exclusive jurisdiction in the matter. Enforcement of recognition orders of such an international court would, of course, remain a domestic affair. It would be logical that such a court would also become solely competent for challenges or setting aside petitions, which are now normally brought in the domestic courts of the seat of the arbitration. Other forms of ancillary proceedings could be added, such as interim protection measures and compelling the attendance of witnesses, see also Hunter et al (above) at 157. The proposal is important though more limited than what is proposed here. 141 See for the idea of local courts operating as international courts in this connection, also the English case of Amin Rasheed Shipping Corporation v Kuwait Insurance Company [1983] 1 WLR 228, 241. The case is of special interest in view of the important cast of judges expressing their (minority) views in the lower courts with the House of Lords ultimately re-establishing orthodoxy. The facts in this case are not of great import. There was an insurance contract concerning an insurer in Kuwait, drafted much along the lines of the relevant standard English policy, yet without a choice of law and competent forum clause. There thus arose concern about the applicable law and about the jurisdiction of the English courts. In the lower courts, Judge (as he then was) Bingham [1982] 1 WLR 961, thought that the contract could be covered by an international regime inspired along English lines (although not so in this case), so that under the applicable English rules of international jurisdiction the competency of the English courts could be established on the basis of the application of English law. In the Court of Appeal, the Master of the Rolls, Sir John Donaldson, thought that English courts could have jurisdiction over an unwilling defendant because the English courts could, in cases like these, function as international commercial courts. In the House of Lords [1984] 3 WLR 241, Lord Diplock thought, however, that contracts could not operate in a legal vacuum as they would then be only scraps of paper. International law was clearly considered vacuous in this connection and the implication was that only a domestic law could apply, which in this case was eventually thought to be English law, a view supported by Lord Wilberforce. Lord Diplock further thought that English courts could not operate as international commercial courts and thus force themselves on unwilling defendants. For English jurisdiction in cases like these, there would have to be a solid basis, which could be, but need not be, and in this case was not found to be, in the application of English law, especially since there was a Kuwaiti court available. In a later unrelated case, EI du Pont de Nemours v Agnew [1987] 2 Lloyd’s Rep 585, Lord Bingham, then in the Court of Appeal, borrowed some of the ‘legal vacuum’ language but seemed to leave open entirely the question whether that vacuum could be filled by transnational law, including transnational general principles or custom, while in the same year in the Deutsche Schachtbauund Tiefbohrgesellschaft case [1987] 3 WLR 1023, the Court of Appeal under Sir John Donaldson held unanimously that at least international arbitrators could rely for the applicable law on internationally accepted principles, thus accepting not only general principle as a source of law but

78 Volume 1: The Emergence of the Modern Lex Mercatoria universally enforceable, much as international arbitration awards are under the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards or as in rem judgments are habitually enforced (against the ship) in admiralty worldwide. The advantage over international arbitrations is that there might be more stability in such a court system. On the other hand, local courts might still be predisposed to apply their own regulatory laws even in international cases that have little contact with their own territory and may also not attain the status of equity judges that arbitrators might now have in the development of transnational law, see the previous section. There may also be the obvious linguistic problems, the threat of endless appeals and a predilection for procedural complications. Altogether local

allowing international principles and customs to operate in that connection also. Notably, this was not considered to be against English public order. See further the discussion in s 3.3.1 below. It is sometimes submitted that this could only be so in international arbitrations and that at least the 1980 Rome Convention on the Law Applicable to Contractual Obligations did not allow it in ordinary courts: cf Dicey and Morris on the Conflict of Laws, 13th edn (London, 2000) 1216 and 15th edn (London, 2012) 1223, but in truth the text is inconclusive and the point seems never to have been considered. As far as the 1980 Rome Convention was concerned, it was a matter of interpretation on which there was much contrary opinion in the rest of Europe. In any event, where more substantive rules are introduced, as in Arts 5, 6 and 7, more general principles of protection or balance were used. The replacement of the Convention by an EU Regulation in 2008 has not clarified the issue, except that under its Preamble, parties may choose a non-statist law even though the relevant text was ultimately deleted from the body of the Regulation itself. It also left open the question whether judges may do so in appropriate cases if no such choice has been made by the parties. In the US, opinion also moves in the direction of accepting international principle as the applicable law in appropriate cases, see eg DW Rivkin, ‘Enforceability of Arbitral Awards Based on Lex Mercatoria’ (1993) 9 Arbitration International 67. This may also apply to ordinary courts. In connection with international arbitrations, the question has further arisen whether they themselves could operate in a legal vacuum, therefore, in this terminology, separate from a domestic law or legal system (or local arbitration Act), often perceived to be the domestic law of the seat of the arbitration: see also text at nn 110ff above, see further Vol 2, s 1.1.8 and also A Redfern and M Hunter, Law and Practice of International Commercial Arbitration, 5th edn (Oxford, 2009) 188ff, somewhat softened in the 6th edn of 2015, see Vol 2, s 1.1.13 below. ICSID arbitrations notably do not operate in a national arbitration framework and are subject to treaty law. Again, the more significant issue would appear to be whether the vacuum may be filled in another manner, eg by transnational law emanating from the transnational commercial and financial legal order as the new law merchant, setting also common international arbitration standards. One thing is clear, in these international cases, there is a close connection between the law applied and the status of the tribunal. If the law is transnational, it is not strange to assume that tribunals applying such law (be they national courts or arbitration panels) thereby acquire an international status. Thus when in Amin Rasheed [1983] 1 WLR 228, 241, there was a discussion of English law being applicable as common currency or lingua franca, this implied internationalisation of both the applicable law and the courts applying it. Seen from this perspective, it was not at all so strange that the commercial courts in London, in the minority opinion, were considered to operate as international commercial courts. Of course, commercial courts in other countries could then claim a similar status. Neither is it strange that this may affect unwilling defendants, assuming an adequate rule of jurisdiction could be formulated for these courts under international (customary) law or on the basis of general principles. The jurisdictional limits could then be found in a vibrant forum non conveniens approach in the courts asked to exercise this jurisdiction and in a broad concept of lis pendens operated in other international commercial courts subsequently petitioned and asked to intervene, or in an intelligent handling of subject-matter jurisdiction and comity requirements in the American manner. See also s 2.2.6 below. One consequence which is often overlooked is that the ensuing judgment could then hardly be qualified as a purely domestic judgment any longer either and be asked to be enforced as such. In fact, judgments of this nature should be enforced in the manner of arbitral awards under the New York Convention or now also in the manner of the 2005 Hague Convention on Choice of Court Agreements. Ideally, the principles behind these Conventions should be extended, in which connection the question of proper (judicial) jurisdiction would also have to be further considered. Another idea would be to allow the parties to select the regime of these Conventions for the international recognition of commercial judgments.

Volume 1: The Emergence of the Modern Lex Mercatoria 79 courts may remain little geared to international business and its legitimate concerns and needs. An international court system comprised of domestic courts sitting in international commercial cases (they could have some lay judges) could, however, have a central highest international appeal court to test points of law (thus forgoing national layers of appeal). That would not apply to international commercial arbitrations, which normally do not provide for an appeal in this sense, international arbitrators not having a law clarification role in a similar manner. That would then remain a key difference and matter of choice for the parties. Importantly, this international commercial court could also be enabled to give preliminary opinions on points of transnational private law or the modern international lex mercatoria, more particularly also on such issues as the reach of domestic mandatory and other regulatory laws in international cases and on matters of international procedure or public order, if the relevant court or arbitration tribunal or the parties in agreement on such a request so wished. In principle, this would follow the EU example of preliminary opinions under Article 267 of the Treaty on the Functioning of the European Union (TFEU). Ultimately, such a highest court might also deal (more efficiently) with international enforcement of commercial judgments and arbitral awards if contested (on the limited grounds set out in the New York Convention but substituting international public policy considerations for domestic ones) and take over the adjudicatory challenges and supervision of the arbitral process in the courts of the place of the arbitration (seat), although these courts could still function in support subject to a similar system of preliminary opinions, which could also be requested by the arbitration tribunal if it considered its authority to be undermined in this manner. Interim measures, especially involving attachments or similar preservation orders, might also be sought from such an international commercial court, especially if assets were located outside the country of the seat of the arbitration. It would not be the idea, however, for this court to operate otherwise as an appeals or review court, certainly not in the substance of the decision, except, conceivably, as just mentioned, in respect of local commercial courts acting as international courts in international commercial disputes. This international commercial court should have exclusive jurisdiction in the areas of its competence and be allowed to base its decisions on transnational or international principle and practice much as the ICJ does for public international law disputes under Article 38(1) of its Statute and Article 53 of the Vienna Convention on the Law of Treaties. In terms of this book, it would be best to introduce in respect of substantive private law issues the hierarchy of norms of the lex mercatoria (see sections 1.4.14 and 3.1.2 below) supplemented by a balancing facility or minimum international standards in respect of governmental interests (public policy or regulatory issues) as an international public order requirement. The creation and operation of this International Commercial Court along these lines would require treaty status. Its findings should be accepted as final and be directly enforceable in all Contracting States, therefore in all states participating in this approach. It follows that commercial judgments or arbitral awards ignoring such decisions would not be effective or would be remedied accordingly. This new court could thus become an important aid to the development of transnational commercial and financial law and its creation would at this stage probably be more important than codifying transnational law itself for which there is no sufficient direction in practice and theory and no sufficient platform among legal practitioners.142

142 See for practitioners’ input in limited areas the UNIDROIT Mobile Equipment Convention of 2002, Vol 5, s 2.1.8 and the EU Financial Collateral Directive, Vol 4, s 3.2.4. See for the lack of this input in the DCFR and CESL and their uncritical following of the established civil law codification ethos, s 1.4.21 below.

80 Volume 1: The Emergence of the Modern Lex Mercatoria In particular it could strengthen the public interest and its formulation and recognition in international cases. Although, as has already been noted,143 a number of eminent authors have given their support to the idea of creating an international commercial court for the supervision of international commercial arbitrations and the enforcement of international commercial arbitration awards under the New York Convention of 1958, the subject needs renewed attention. The extension of its jurisdiction to recognition problems in all commercial judgments worldwide (on similar grounds to those contained in the New York Convention) is a further possibility. Decisions would be published in principle (even though parts might still have to be anonymised to protect confidentiality). This jurisdiction could of course still be expressly excluded by the parties in their agreements.144 In Volume 2, section 3.5, it will be argued that the Transatlantic Trade and Investment Partnership will provide a chance to move in that direction, although for the time being it may be eclipsed by the framework of the Canada-EU Convention (CETA) which introduced a hybrid system of arbitration and an appeal court.

1.1.13. Structure of this Volume Before the emergence and development of the new lex mercatoria is discussed in greater detail, it may be useful for those particularly interested to dwell a bit longer on the traditional sources of private law in civil and common law countries, on the development of the codification approach and its significance in this regard in continental Europe, and the survival of other sources of law. This is the subject of the next two sections (section 1.2 for civil law and section 1.3 for common law), where a further explanation will also be offered for the limited room traditionally left in civil law for the application of fundamental and more general principles and custom. It will also seek to explain and compare attitudes in this regard in the common law and its modern American variant. In section 1.4, the sources of the modern lex mercatoria will be discussed more extensively in their operation in civil, common and transnational law. In section 1.5, the discussion will move to the operation of international legal orders and the abandonment of an exclusively statist and territorial view of modern private law creation in favour of a more modern sociological and economic approach leading to a form of universalism (at least in international business dealings). This will lead to a fuller introduction of the concept and operation of the hierarchy of principles and norms in the modern lex mercatoria, which theme will be further explored in part III after the traditional conflicts of law approach and its problems have been more fully analysed in part II, including the complications arising internationally (and therefore also in the application of the modern lex mercatoria as a hierarchy of norms) with governmental interests as expressed notably in domestic regulation and similar domestic public policy directives. At issue

143 n 140 above. 144 There is some example in the WIPO procedure concerning domain names conflicts. Under the classic rules of private international law great differences could arise, encouraging forum shopping. The WIPO procedure allows everyone to ask online to be entitled to use a domain name registered in the name of someone else. The WIPO then appoints an arbitrator, who decides within six weeks. If s/he finds in favour of the claimant, the respondent may appeal to the normal state courts to get his domain name back. The first cases were decided on general principles and on those derived from national laws, but are now increasingly determined on the basis of the (transnationalised) case law of these arbitrators, which can be accessed online.

Volume 1: The Emergence of the Modern Lex Mercatoria 81 here are possible clashes with (domestic) regulatory laws or the competition between different legal orders, especially in public order and public policy issues. For the internationally-oriented student interested in the development and operation of different (commercial) legal systems, this lengthy excursion may also serve as an explanation for much of what may, at first glance, look unfamiliar or strange in other legal systems and which s/he has not previously encountered. In particular the different approaches in civil and common law to the sources of the law, statist attitudes and system thinking should be better understood by all. This volume will be followed by a second one on dispute resolution, especially international arbitration in its different manifestations in international commerce, finance and foreign investment showing how this dispute resolution facility may affect the applicable private and regulatory law, how it deals with transnationalisation, and how it deals with the impact of the public interest in terms of public policy and public order in ways which may increasingly be different from those exhibited by domestic courts. As to the applicable private law, the approach taken throughout this book is relationship and product-oriented, not systematic although there is a search for structure—see the discussion in section 1.1.7 above. The primary aim is to identify and describe a number of legal constructs as they operate today, such as in contract, for example, the notion of offer and acceptance, conduct and detrimental reliance, the type of performance that may be demanded and obtained, and the operation of defences such as misrepresentation and excuses such as force majeure and change of circumstances. This may be amplified with regard to the special rules concerning the sale of goods and contractual agency (in Volume 3). In personal property, it concerns also the rules pertaining to assignments (in connection with receivables financing and securitisations), leases and repos (as examples of modern finance sales), or floating charges in secured transactions (in Volume 5). This is done first to highlight the intrinsic aims and problems in these constructs and their use, then to see what local laws have done with them, and ultimately to consider the requirements of and developments in the transnational practice. In modern movable property, for example, party autonomy (therefore contractual clauses) is the beginning, but practices and fundamental and general principle will be shown to be needed to underpin newer proprietary structures operating at the transnational level. As we have already seen, there are also public order requirements at that level to protect the international flows of commerce against all kinds of unknown charges or other proprietary interests that may have been so created. In a comparative sense, therefore in respect of the examples used as illustration and guidance and in identifying a trend or general principle in national laws, I confine myself in this book largely to the laws and practices of the major countries of the common and civil law, therefore to the laws of England and the US on the one hand, and of France and Germany on the other. This is not done out of disrespect for any other, but not all can be covered and what is covered should, in the author’s view, be covered in some depth to have meaning. The focus is therefore on the laws in the major industrial, even post-industrial, nations, the development of whose legal systems has been of prime importance for the evolution of commercial and financial law so far. These legal systems are also likely to provide the natural starting point for the globalised transnational legal structures developing in the international commercial and financial sphere and therefore for professional dealings worldwide. However, it will also be shown that it is often necessary to move well beyond what the laws of these countries can contribute to arrive at the new lex mercatoria, which crucially depends on various other sources of law (see section 1.4 below) to move forward and respond to the newer needs and challenges globalisation and the size and nature of the transnational commercial and financial flows now pose for the law to remain responsive.

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1.2. The Origin of Civil Law. Its Traditional Approach to Law Formation and to the Operation of Private Law. Effect on Commercial and Financial Law 1.2.1. Introduction The development of modern international commercial and financial law as an autonomous transnational non-statist phenomenon and the problems it encounters in that connection may be better understood when greater light is shed on the development of the various sources of private law and their autonomy in the course of time in Europe. Although we have become used to the idea that the law, even private law, comes from states— in civil law through codification, in common law of the English variety through the idea that all law ultimately emanates from sovereigns who would only accept and enforce their own laws (and those of others to the extent incorporated in their own or recognised by them)—it was not always thus and is in fact a typical nineteenth-century nationalistic perception or paradigm whose prevalence may now be ending, at least in international commerce and finance. As we shall see, it had found important support earlier, among eighteenth-century philosophers, but it was a more recent development that became connected with the emergence of the modern state and perhaps the demands of modernity itself and its increasing need for state intervention. In England, by that time, it had already led to the absorption of the autonomous commercial (and Church) laws into the common law, being the law of the King’s courts,145 even though the commercial law is, to this day, as we have already seen, not as completely integrated into the general body of the common law as it is in civil law. On the European Continent, the ius commune, which was the pre-codification universal private law of those days, derived from Roman law, as such never promulgated but operated as a superior form of customary law. It supported but did not interfere with commercial law. As a consequence, commercial law developed mainly from practice and local supporting statutes. It retained greater independence longer than in England, which in Continental Europe it took the nineteenth-century codifications to eliminate when commercial law to the extent still distinguished operated in a way subservient to the national civil codes. This may well prove to have been an exceptional situation and the statist, nationalistic, nineteenth-century view of commercial and financial law may abate, and, it is posited, could now be coming to an end. As submitted all along, globalisation is here the driving force at least in commerce and finance. In that sense, a situation more akin to the one that existed under the ius commune may be revived for cross-border transactions and international dealings of that nature. As already noted, it is in essence a return to the method of Grotius, which allowed for multiple sources of law and was never abandoned in public international law where it is still preserved in Article 38(1) of the Statute of the International Court of Justice in respect of the sources of public international law. Room is thus created for the revival of a non-territorial transnational lex mercatoria, based on similar sources, as the substantive private law for dealings between professionals (and even as procedural law in international dispute resolution as we have also seen), albeit in a much-updated form. It has been mentioned before that this may lead to, and require, a more fundamental separation from consumer law that is likely to remain purely domestic longer. It has become more public policy-oriented and prescriptive and remains as such also more nationalistic. 145 See n 31 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 83 It is obvious that this development is connected with newer economic and social undercurrents of the law and its globalisation in the professional sphere. It has already been posited that that law is or may be immanent, a product of bottom-up law formation. It presents a view of private law formation and operation that has in the meantime received renewed attention in modern American academia, particularly in the ‘law and economics’ and ‘law and sociology’ variants of ‘legal realism’, even if as yet American legal scholarship has not devoted much attention to the development of these ideas in the context of the modern evolution of a transnational commercial and financial law.146 It is nevertheless particularly revealing to consider modern American attitudes to law formation and application, which will be summarised in sections 1.3.5 to 1.3.6 below. But first, to set the scene, the development of the legal systems and sources of law in Western Europe will be covered in some detail for those who may be interested in it. It is only possible to offer here the briefest of sketches of the intellectual, cultural and social evolution of law, especially private law in the two major Western manifestations: civil and common law. Much of this is now ignored in modern legal scholarship, and for many the materials may no longer be easily accessible, but the author hopes that the overview that follows may provide both insights into the past and a basis for further exploration of what may come in the future. The evolution of the civil law is the subject of section 1.2. The evolution of the common law will be discussed in section 1.3. The effect of these two traditions on the emerging lex mercatoria will be discussed in sections 1.4 and 1.5.

1.2.2. The Early Developments of Private Law on the European Continent. Roman Law In the Western world, Roman law was the first legal system to develop into something that went beyond the basics147 and it still has meaning today.148

146 See, however, RD Cooter, ‘Structural Adjudication and the New Law Merchant: A Model for Decentralisation’ (1994) 14 International Review of Law and Economics 215, and Dalhuisen (n 23) 129, and s 1.5.5 below, and JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers ULR 19. 147 See F de Zulueta, The Institutes of Gaius, Pt 1 (Oxford, 1946, reprinted 1991), Pt 2 (Oxford, 1953); Fritz Schulz, History of Roman Legal Science (Oxford, 1946) and earlier Principles of Roman Law (Oxford, 1936); B Nicholas, An Introduction to Roman Law (Oxford, 1962); D Daube, Roman Law (Edinburgh, 1969); W Kunkel, Römische Rechtsgeschichte (Köln, 1964); M Kaser, Römisches Privatrecht, 14th edn (München, 1986); WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europese Privaatrecht [Chapters on the History of European Private Law] (Groningen, 1993). 148 According to the writer Livy (or Livius), Rome was founded in 754 BC. At first it was under the leadership of Etruscan kings, who could exercise all powers (or imperium) in this small community of probably no more than 10,000–20,000 people. Imperium included the judicial function which was exercised on the basis of the king’s insights, some customary law, edicts decreed by the king, and some laws (leges) issued by popular acclaim through a people’s assembly or Comitia, which was later subdivided into 30 groups or curiae when Rome became larger, each of which would send representatives and also provide military personnel for the defence of the City. Even then there was already a Senate, which, however, could only give advice (senatus consulta). This system continued after the last king, Tarquinius Superbus, was ousted in 509 BC, following—according to the story—the outcry caused by his son Sextus raping the famous Lucretia, who then killed herself. Henceforth, two consuls were appointed for a term of one year, during which they each exercised the imperium in full, including the judicial and legislative functions, although it became established that they were subject to the leges of the Comitia, which were considered higher than their edicta.

84 Volume 1: The Emergence of the Modern Lex Mercatoria Early Roman law is understood to have developed substantially from the law of the XII Tables (lex duodecum tabularum) of around 450 BC—which is said to have been lost when Rome was invaded in 390 BC.149 According to some they never really existed. However, there are many references to them in the later literature. Reconstituted but fragmentary and often speculative texts have been produced since the sixteenth century.150 They show that the Tables contained the basic, largely administrative rules and criminal laws of early Rome as well as the rules of procedure in force in those days.151 There were soon interpretation questions concerning the XII Tables. New actions (legis actiones) were increasingly deduced from them, but, although contested, these seem to have been kept secret by the caste of priests that had started to occupy itself with the judicial function. This situation is reported in the much later Digests (see section 1.2.3 below) in an excerpt of the Enchiridion of Pomponius (D.1.2.2). A secretary, Gnaeus Flavius, let out the secret, for which the population greatly venerated him (D.1.2.2.7). The published practices showed an advanced interpretation technique in which the literal meaning of words had often been abandoned and the few original actions had been broadened to provide better protection, although there remained a great deal of formalism: the right formula still had to be used and a mistake would lead to the loss of the case, which could not be restarted (D.1.2.2.6).152 Around the same time (367 BC), the important office of the praetor was created. This introduced a new and important phase in the development of the Roman law. The praetor was meant especially to focus on the judicial function by granting newer actions. As he also had the imperium, he had original law-creating powers and could thus issue his own edicta. From then on, for the most part, Roman private law no longer developed through the existing leges or plebiscita but rather through the office of the praetor. His role was to add to the actions which derived from the XII Tables or from the leges and plebiscita (D.1.2.2.10). This office was a high one but lasted

Eventually the lower classes (plebs) obtained a veto right on all the activity of the consuls through the tribunus plebis after threatening to leave Rome and create a separate city which supposedly would have fatally undermined Rome’s infrastructure and depleted the ranks of its footsoldiers. From 367 BC, they were allowed to appoint one of the consuls. Eighty years later under the Lex Hortensia of 286 BC, after further strike action, they were allowed to create their own laws by plebiscites (plebiscita), which laws were subsequently given the status of leges, applicable to all (D.1.2.2.8). 149 According to the story, the Tables were produced in order to better protect the plebs who from early on had objected to the uncertainty of their predicament and to this effect had managed to have the imperium transferred for one year to 10 lawmakers (the so-called decemviri de legibus scribundis). They started to record the laws, but also abused their imperium and extended it in time. The consular system was firmly re-established, however, after one of them, Appius Claudius, set eyes on the beautiful Verginia and indirectly made her his slave. She was killed by her father to avenge her honour and to ‘re-establish her freedom’. Their legislative work was, however, enacted. This is all reported with some relish in the much later Digest Part of the Corpus Iuris Civilis of the Emperor Justinian (D.1.2.2.24); see the next section. 150 The most widely used is Schoell, Legis XII tabularum reliquiae (1866). 151 According to Livy, the XII Tables were in their time considered the true source of public and private law (fons omnis iuris publici atque privati). From early on, they established a number of important principles. Legal equality was accepted, especially after the lifting of the prohibition on marriages between the patriciate and the plebs. There was no primogeniture, nor legal incapacity of women; no privileges in penal law, and no penalties without a judgment, even though they could still be harsh, but the death penalty itself became subject to some important safeguards. Apparently, slavery barely existed in Rome’s early days, but not paying one’s debts could lead to slavery by the sale of the debtor to the surrounding tribes. Slavery could also arise from war; in fact, the institution of slavery is often thought to have had its origin among prisoners of war (ius servitutis bello introductum). 152 The importance of Flavius’s intervention was that it opened the law and its enforcement to outsiders, therefore to lawyers outside the priestly circle, which had tried to monopolise the judicial function through secrecy. The legal actions so revealed are referred to in the Digests as the civil Flavian law (ius civile Flavianum), later extended by Sextus Aelius as the Aelian civil law.

Volume 1: The Emergence of the Modern Lex Mercatoria 85 only one year, at the start of which the new praetor had to say which actions he would allow; he could not then deviate from this programme, although he could extend it. The praetor was free in principle, but normally continued the previous practice. As a jurist of repute, he thus became constrained by the practices elaborated by his predecessors, by his training and reputation, and by the view of fellow jurists. Eventually, this led to a standard text, which became known as the Edictum Perpetuum. It was lost in history, but reconstructed by the German scholar Otto Lenel in the late nineteenth century (third and last edition, 1927) and proved a most important document, also because large parts of it were later incorporated in the Corpus Iuris (see next section).153 It all shows that, like the later English common law, Roman law was essentially an action-based law and developed accordingly. These actions were either in rem if intended to recover an asset, or in personam if intended to force someone to give or do something or to abstain from action. The Edict and its interpretation created the so-called praetorian law or the ius praetorium, also called the ius honorarium (D.1.2.2.10). This ius was technically different from the ius civile, which remained the old law prevailing among the Roman citizens. It was narrower, could be changed rapidly and was in principle only valid for one year. As a decretum, it was subject to the higher XII Tables, to the leges and to the plebiscita, which remained themselves the real basis of the ius civile, for which the ius honorarium was only meant as support (D.1.1.7.1), but at times the praetor did not hesitate in his function of allowing or denying actions under his Edict to intervene and aid, supplement or amend the ius civile when required by the public interest (propter utilitatem publicam). As such, he was effectively considered to be the living voice of the Roman ius civile (viva vox iuris civilis, D.1.1.8). In this respect also, there is a parallel with the later common law, where, in a wholly unrelated development, the Lord Chancellor could intervene in a similar manner through equity, although, it would appear, only in a more incidental manner (see section 1.3.1 below). The office of the praetor demonstrated, as equity later did in England, that private law may need a facility of this nature to move forward, and that without this facility, in the absence of ready statutory intervention and amendment, private law has a tendency to lag behind practical needs and expectations. It may ossify. The absence of such a facility in civil law may have accounted and may still account for extra difficulty in updating itself. This is then left to the interpretation technique of the ordinary judges or legislation which may be long in coming. Eventually a special praetor was appointed for foreigners (perigrini), the so-called p raetor perigrinus operating alongside the praetor urbanus (D.1.2.2.28). This became necessary as foreigners did not benefit from the protection of the Roman ius civile, which was only intended for its citizens but they needed some protection in their relationship with the Romans and among themselves when in Rome or its provinces. This protection was provided in Rome by the ius gentium,154 henceforth further developed by the praetor perigrinus much as the ius civile was by the praetor urbanus. The ius gentium could thus be part of the ius honorarium when formed

153 The praetors would not themselves adjudicate cases, but would in each instance indicate to the parties the action on the basis of which they could argue before a privately appointed judge (iudex privatus), often supported by lawyers (iuris consulti), in the nature of a modern arbitration, the decision in which would be enforced. The praetors could also formulate exceptions if the basic claim was admitted but special circumstances were pleaded in defence. They could also issue so-called interdicts as orders or prohibitions in obvious cases, eg when there was unjustified appropriation of someone else’s goods. If litigation was necessary but the defendant did not want to submit to private judges, the praetor could declare him indefensus, so that he lost his case, although he could reasonably object to the proposed judges. 154 This ius gentium should be clearly distinguished from the law that later became the law between nations for which the term ius gentium is now used.

86 Volume 1: The Emergence of the Modern Lex Mercatoria by the praetor but applied in principle to different people. In other respects, foreigners remained subject to their own laws, for instance in matters of marriage. In fact, the law was considered personal and not territorial, each tribe having its own, as Roman citizens had in the form of the ius civile. But as the ius gentium was law that was considered primarily based on natural reason and as such considered common to all of mankind (quod naturalis ratio inter homines constituit, D.1.1.9), it became applicable also to dealings between Romans as supplementary law. Ultimately, it became the universal law in the tradition and philosophy of the Stoa, as we shall see. It is this law that was restated in the later Corpus Iuris (see next section) and became the foundation of the ius commune on the Continent of Europe, meant to apply to all. In this environment it may be seen that there was not much need for a conflicts of law doctrine in the modern sense. For Roman citizens in Rome, the ius gentium proved particularly important because it allowed for the development of a different form of proceedings alongside the legis actiones, allowing the plaintiff to describe the relief sought in the complaint itself. This was the procedure per formulam, which was to become the normal manner for the commencement of all civil legal proceedings. The ius gentium also proved crucial for Roman citizens in other respects. As it was much concerned with trade and commerce, it made the consensual contracts (bona fidei iudicia)155 of sale, rental, deposit and loan legally binding (D.2.14.7).156

1.2.3. Classical Roman Law and the Corpus Iuris Civilis After a period of strife culminating in the murder of Julius Caesar in 44 BC, his nephew Octavius, in 27 BC, under the name of Augustus, assumed the consulate and imperium for life and at the same time the right of veto of the tribunus plebis. There was no more second consul. This is considered the beginning of the Roman Empire, although officially the Republic continued with all its laws and the Octavian succession was explained rather as a return to older values. It started, however, an important new phase in Roman history, which also had an effect on its laws. The Senate substantially assumed the legislative function of the Comitia, which had become unwieldy (D.1.2.2.9). The senatu consulta thus acquired the force of law but the Senate in practice exerted only a rubber-stamping role. This meant that henceforth all leges were made subject to the imperium of the Emperor (constitutiones principis, D.1.4.1). The further development of the praetor’s Edict came to an end and was, by the middle of the second century AD, overtaken by imperial constitutions.157 The procedure per formulam and the private nature of the proceedings were also abandoned, and by the third century law suits were brought before imperial judges (cognitio). It is often thought that this centralisation weakened the intellectual advance of Roman law. But first there developed a special class of lawyers, who could give official opinions (responsa), not unlike Queen’s Counsel (QCs) in modern England. Some of them were highly regarded and acquired an official status, with their responsa acquiring the force of law (D.1.2.2.49). In Rome,

155 In the ius civile, consensus itself had never been sufficient to create a contract and it gave binding force only to a small number of specially defined contract types and for sales had only developed a special type of formal transfer for certain assets (mancipatio). 156 The ius gentium was also the law covering slavery and freeing of slaves (manumissus D.1.1.4). It confirms that slavery was originally only known in respect of or among the perigrini. 157 Not dissimilar from common law countries in modern times where legislation is taking over from the equitable jurisdiction of the courts, see s 1.3.1 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 87 the law that was so constituted rightly became a matter of great pride to its citizens and, alongside literature, was seen as a most important intellectual and cultural manifestation. A selection of the responsa, especially of Papinianus, Ulpianus, Paulus and Gaius, are found in the later Justinian Digests as part of the Corpus Iuris (to be discussed shortly), and earlier had been ranked in the case of conflict (in the Lex Citandi of 426 AD). They became the true source of classical Roman law and operated beside the imperial constitutions. It is at this time, in the second century AD, that Roman law is generally thought to have reached its high point, although probably excessively venerated in nineteenth- and twentieth-century Roman law scholarship. The accent was on case law and on detail, not on general principles or on systematisation or a more abstract science of the law. The result is considered best reflected in Gaius’ legal treatise of that time (the Institutiones), which was long lost but a copy was found in Palympsest in Verona in 1816. The subsequent centralisation of the judicial function included the possibility of addressing questions directly to the Emperor who would answer in published rescripta. These did not, on the whole, aspire to the intellectual heights of the responsa. Many of them are still known; they illustrate the mature period of Roman law and a more political, verbose and often less precise style, especially since the Emperor Constantine the Great (306–37 AD), who earlier introduced freedom of religious worship. Religious and ethical overtones were then increasingly introduced (in a Christianised Empire, especially in the East). There was also loss of effectiveness. True, all foreigners in the Empire became citizens after 212 AD, but many kept their own customary laws, leading to fragmentation. This is clear especially from the legal texts found in modern times in Egypt (the papyri). With the expansion of the Empire, it became vulnerable and more difficult to rule, particularly at the fringes. In 330 AD, a second capital was created in Byzantium (subsequently Constantinople, now Istanbul). After Theodosius the Great (379–95 AD), who made the Christian church the state church (C.1.1.1), there were always two Emperors, often more. Each had the imperium and therefore remained fully competent throughout the whole Empire, even if one resided in the West in Rome, or later also in Milan or Ravenna, and the other in the East in Constantinople. Constitutions were issued together, at least that was the idea, and when one Emperor died the other was fully in charge and could block a successor, in practice especially the Emperor in the East, although it often required force. The centre of the Empire was gradually shifting eastwards, driven by economic forces, while after 395 AD what much later came to be called the Dark Ages started to dawn in the West. Upon the demise of the Western Roman Empire in 476 AD following the attacks of the Vandals under Odoacer, the Emperor of the East in theory regained sole powers throughout the Empire, as these had never been surrendered158 but his powers in the West were in truth at an end.

158 Odoacer accepted this and wanted to become an officer of the Empire or rather ‘a patrician in charge of the diocese of Italy’ under the Emperor Zeno, as indeed requested by the Roman Senate, which declared the continuation of the imperial succession in the West inopportune and asked Zeno to re-establish unity. The Emperor, resuming full powers, refused to recognise Odoacer. Instead, he allowed the Ostrogoths under Theodoric to take over, but Theodoric soon became an independent ruler. Some of the Eastern Emperors, in particular Justinian (after 527 AD), later managed to re-establish an important presence in Italy, but this proved only temporary. Indeed, at first, the Germanic usurpers of Italy continued to see themselves mostly as kings, consuls or patricians under the Byzantine Emperor and were soon accepted as such. The structure of the old Empire thus remained basically intact in Rome, under the Senate (although by now not much more than a local administrative body), but the West was de facto dominated by the newly established northern tribes: the Ostrogoths in Northern and Middle Italy, later followed there by the Lombards; the Visigoths in Southern France and even Spain; the Burgundians in the Rhone valley; the Francs in Northern France; the Saxons in Northern Germany, in parts of the Netherlands, and eventually in England.

88 Volume 1: The Emergence of the Modern Lex Mercatoria It follows that Roman law continued to develop largely in the East, in Byzantium, culminating in a kind of codification under the Emperor Justinian, which was achieved between 529 and 534 AD upon the direction of his minister Tribonianus and the law teachers Theophilus and Doretheus. This was the Corpus Iuris Civilis.159 It had been preceded by a Codex of Theodosius II of 438 AD, meant to establish some order in the Constitutions and Rescripts of the Christian Emperors, and earlier by private selections of them in the Codices of Gregorianus and Hermogenianus. The new Corpus Iuris was more comprehensive and (in the Digest part) included the opinions of major classical jurists (iuris consulti), which ultimately proved more significant as it formed the basis for the later revival of Roman law in Western Europe. The Corpus represented the result of around 1,000 years of legal development and has rightly been identified as a mark of great civilisation, even though some of the best work of the great classical jurists might have been missed out or may have been corrupted in the final texts.160 The Corpus Iuris was not guided by any set of overriding legal principles161 and was not systematic; it recites scattered cases, opinions and statutory texts, and continues to reflect a casuistic and fractured approach to the law. It even contains long historical tracts. It struggles with definitions and with the different sources of law, which it did not mean to supersede but rather gathered in one text.162 Again, the approach was not primarily intellectual or academic. In that Nevertheless, officially, the imperium of the Emperor of the East over the West lasted until the age of Charlemagne, around 800 AD, when this artificial situation was ended and the Emperor of the East accepted the existence of a new Empire in the West (much later called the Holy Roman Empire), which became effectively a German empire until its demise in 1806, although it considered itself a continuation of the Roman Empire in name, which proved important for the status of Roman law as we shall see. 159 The most used English translation of the Corpus Iuris (Digests) is Alan Watson, Digests (Philadelphia, 1985). 160 The search for these so-called interpolations became a favoured activity in nineteenth- and twentieth-century scholarship although it was not new, see also n 157 below. But proper study of Greek translations of lost earlier Latin texts, which were abundantly available, showed that many of these ‘impurities’ and contradictions had already existed in the classical period and that there had never been much coherence between the classical authors, whose work was from that point of view probably less sophisticated than often thought or expected. The search for these interpolations became, as a consequence, disfavoured towards the end of the twentieth century. Even the classical Latin texts, where surviving, were not always as perfect as they might have been. It is often thought eg that the Institutes of Justinian were in better classical Latin than those of Gaius. 161 At one stage, it became widely accepted that this Roman law fostered lifeless rationalism and property absolutism. It was then even suggested that, upon its reception in Western Europe, it not only proved devoid of values (except mercenary ones), but that it was morally menacing, especially in commerce: see for a discussion JQ Whitman, ‘The Moral Menace of Roman Law and the Making of Commerce: Some Dutch Evidence’ (1996) 105 Yale Law Journal 1841. In the twentieth century, it created an anti-Roman law sentiment, especially in Germany, where Roman law teaching had in any event been abandoned since the Nazi era (because it was not germanic). Similar views could subsequently be heard in respect of the German civil code (BGB), which had a strong Roman law pedigree and proved indeed capable of serving any succeeding regime in Germany. Left-wing thinkers inclined to a similar attitude. This severe view is now largely abandoned. More positively, it can be said that the reception of Roman law did not stand in the way of modern commerce, which often required a more dynamic approach. As was already shown, the Roman law hardly addressed itself to commerce and finance at all. In the meantime, natural law principles, increasingly secularised since Grotius as we shall see, developed important new perceptions and values, notably in the seventeenth-century Dutch school of jurisprudence. Local custom and sometimes statutes became the essence of commercial law while Roman law only served a support function. 162 It is true that in the first Title of the Digests there are a number of more general remarks and even definitions. Thus, invoking Celsus, the law was considered the art of what is good and fair (ius est ars boni et aequi, D.1.1.1). Invoking Ulpianus, justice was considered a constant, unfailing disposition to give everyone his due (iustitia est constans et perpetua voluntas ius suum cuique tribuendi, D.1.1.10). In addition, the basic principles of the law were said to be: to live honourably, to injure no one and to give everyone his due, while being learned in the law was to know what was just and unjust. In D.1.1.1.2, public law was distinguished from private law as it was observed by Ulpianus that some things were good from the point of view of the state and others from the point of view of the individual. Thus, there were

Volume 1: The Emergence of the Modern Lex Mercatoria 89 sense, it was not a modern European-style codification or an example for it. Although there was no clear intellectual system or methodology, there emerged, however, a number of broader supporting ideas. In particular, it confirmed the notion that each free man was part of a society founded on respect for the law; that the Empire and not individuals would defend the person and his property, enforce binding contracts, and guard against wrongdoing; and that the Empire was in this respect one trained hierarchy of functionaries, including judges, who answered to the Emperor alone.163 Much of it is still fairly easily understandable. This is so also because, until the twentieth century, the Corpus Iuris managed to retain legal force at least in some parts of Europe, especially in Germany, and was never completely forgotten. Even now the Corpus has residual importance in Scotland, South Africa and Sri Lanka,164 although it is mainly followed in these countries through the works of the seventeenth- and eighteenth-century Dutch writers such as Grotius, Voet, Vinnius, Huber, Groenewegen, Van Leeuwen and Van Bynckershoek. The Corpus Iuris consisted of four parts: the Digests or Pandects (50 books), the Codex (12 books), the Institutes (four books), and the Novellae, which contained imperial decisions added later. The Digests contained opinions, scholarly excerpts and case law.165 The fiction was that there was no contradiction in them and that it presented a working system, although much of it might never have had practical meaning. Moreover, it was in Latin while Byzantium spoke Greek. It could thus be accessed only through experts.166 Yet one still finds in the Digests the public and private interests recognised and protected by the law. Private law was considered to be deduced from natural law (which obtained between all living creatures, even animals), from the ius gentium (which was the natural law applying to human beings such as the rights of parents over children and the right to repel violence and wrongs), and from the ius civile (which was the law for citizens of a particular state and could go beyond the ius gentium in more specific rules, which may or may not be in writing). Then follows a definition of all three in D.1.1.1.3/4 and D.1.1.6/7, and subsequently also of the ius honorarium in D.1.1.8 and of the ius gentium again in D.1.1.9. These definitions, which struggle with the differences between ethics, laws and instincts, were hardly perfect and were not of much consequence for the rest. Indeed, at the very end in D.50.17.202 it was rightly said that all definitions in the law are dangerous (omnis definitio in iure periculosa est). The importance was that the Corpus Iuris remained comfortable with different sources of law (subject always to the emperor’s amending powers) and it did not intend to present one integrated system. That came later in the nineteenth century especially with the German Pandectists who developed this Roman law further as the living law of Germany before the codification of 1900; see s 1.2.9 below. 163 F Schultz, Principles of Roman Law (Oxford 1936), also noted the lack of interest of the Roman lawyers in general principles or underlying concepts, which they considered dangerous but he nevertheless observed that all legal systems tend towards some common notions and he also identified a number in classical Roman law. 164 In these countries, there was unavoidable English influence in the law, but differences from the common law are still significant, especially in property law, in the binding force of contracts regardless of consideration, in the possibility of third parties deriving benefits from a contract, in the possibility of specific performance as a contractual remedy, and in the unitary law of torts based on the Lex Aquilia. On the other hand, in trust, company and bankruptcy matters, these countries have substantially adopted common law (equity) notions, and this is clearly seen in commercial law. For an early authoritative description of Scots law, see James Dalrymple of Stair, The Institutions of the Law of Scotland (1681) and for a later one, Bell’s Commentaries (1820). Since the Act of Union, the UK Parliament has been empowered to enact legislation for all of the UK, but as far as the Scots are concerned only ‘if for the evident utility of the subjects within Scotland’. 165 The Digests, which had gained the force of a Constitution eliminating all other opinions, contained in particular a selection of the most important iuris consulta from the great Roman lawyers on particular issues. It reflected through them also much of the contents of the Edictum Perpetuum. These materials were to some extent categorised and harmonised into a more coherent whole in order to eliminate contradictions or the resurrection of long-abolished practices, but there was no clear underlying unified system as one would find in modern codifications. It was unavoidable that in this way older practices were connected with newer ones and made for imperfections and lack of coherence. The textual changes necessary to achieve some cohesion are now called interpolations, see also n 160 above, and have mostly been traced. 166 See Koschaker (n 5) 128.

90 Volume 1: The Emergence of the Modern Lex Mercatoria basics of modern continental European private law, including the notions of ownership, possession and holdership; and of contract law (although this was less developed in Roman law as was the law of torts and unjust enrichment). The Codex167 contained the imperial constitutions and rescripts to the extent that they were still considered relevant. Those that were not included lost the force of law. Those included were not reissued. This meant that they retained their order in the sense that, in the case of conflict, the newer prevailed over the older. Here we find, for example, some of the Roman laws of insolvency. The Novellae were added later after the death of the Emperor in 575 AD and contained his newer Constitutions. Constitutions of later Emperors were henceforth also called Novellae, although not officially made part of the Corpus Iuris. They were in the Greek language. The Institutes was a textbook written for students but also obtained the force of law and summarised and explained the basics of the law as it then stood. In this respect it followed very closely the earlier example of Gaius, who, as we have seen, had written a similar book in the second century AD. As we have seen, in classical times, Roman law had been action based. It seems to have remained so, even though litigation solely based on actions disappeared together with the proceedings based on the formulae, later replaced by cognitio proceedings in the imperial courts. No system of purely subjective rights based on more general rules followed, however. Thus, a contractual right could not be generally maintained, and an action based on a particular type of recognised contract had to be brought. Only later, in medieval studies of Justinian law, and particularly in those of the secular natural law school of Grotius, did a more general concept of rules and rights emerge (see section 1.2.7 below). In the Constitutio Tanta, by which the Corpus Iuris was promulgated, the Emperor Justinian attributed the prompt accomplishment of this enormous task to the aid and grace of God, considered it sacred and an eternal oracle, and forbade any additions to it of any commentary (see paragraph 29, but of course he did not forbid newer Novellae; he could not and did not mean to bind his successors). In the case of doubt or need for supplementation, resort should be to the Emperor alone in the nature of the practice of the Rescripts,168 who in this sense had already replaced the praetor much earlier, as we have seen.

1.2.4. The Revival of Roman Law in Western Europe: The Ius Commune As was pointed out in the previous section, the fall of the Western Roman Empire in 476 AD led to a general decline in the influence of Roman law and its legal institutions in Western Europe. It had to make way for new tribal or local laws if it had not already done so, but it never disappeared completely. First, some territory in Italy remained for a considerable time under the influence of 167 The term ‘codex’ suggests a codification in the modern sense, but in fact means ‘tree cork’; it became the Latin word for a book with proper pages rather than a scroll. 168 The Corpus Iuris was restated and revised in Greek under the Emperor Basil of Macedonia and his son Leo the Philosopher in the tenth century and was then called the Basilica. As already mentioned, it had always been curious that the Corpus Iuris had been in Latin, as it was directed at people who spoke Greek (as the West was already lost) and could therefore not read it. The reason was that the old Roman law had such prestige and legitimacy that at first nothing could detract from its texts, while the language of the court administration also remained Latin for some considerable time. The Basilica combined the relevant Digest, Codex and Novellae according to subject matter, resulting in a single document of 60 books. The Latin text remained at first controlling, and was added in the margin (the scholia). After 1175, the Basilica was considered to have obtained the force of law and remained effective as such until the end of the Eastern Empire, when it fell to the Turks in 1453 AD.

Volume 1: The Emergence of the Modern Lex Mercatoria 91 the Emperor of the East and in 554 AD the Emperor Justinian, through his sanctio pragmatica, declared the Corpus Iuris applicable even in Italy, which country was as such expressly mentioned (rather than the whole Empire of the West). Second, the Frankish tribes in northern France, the Burgundian tribe in the Rhone valley, the Visigoths in southern France and in Spain, and the Longobards or Lombards in northern Italy, permitted the Romans and Gallo-Romans in their territory to retain their Roman laws and even codified these in so-called Leges Romanae. The best-known of these was the Lex Romana Visigothorum, also called Breviarium Alaricianum or Alarici as it was compiled by their King Alaric II in Toulouse in 506 AD. It was particularly important as it included the Codex Theodosianus, which would otherwise have been lost, and also parts of the Institutes of Gaius, themselves only rediscovered in full in 1816. Then there was the Lex Romana Burgundiorum, from their King Gundobad, and the Edictum Theodorici from the Ostrogoth Theodoric in Italy, both also from the beginning of the sixth century AD. Third, these tribes also codified their own laws in the Leges Barbarorum, as they came to be known, which showed some Roman law influence, although they were mainly concerned with criminal law. Of these, the Lex Barbara Visigothorum of the Visigoths (641–701 AD) in southern France and Spain (there the Fuero Juzgo), the Lex Ribuaria of the Ribuaric Franks (around 700 AD) and the Leges Longobardorum of the Lombards (seventh to ninth century, starting with the Edictum Rothari) were the most important, but similar laws existed among the Frisians, Saxons, Bavarians and other Germanic tribes in Germany. Most importantly, as early as the fifth century AD the Salian Franks in northern France produced the Lex Salica. It is still known today for the hereditary nature of the kingdom; it reposed in the male line only (LXII (5) or (6), depending on the known texts), although not coupled with a right of primogeniture, as became the more modern variant. These laws were based on the personality principle, as has already been mentioned, which was the principle originally also found in Roman law. This meant that different tribes or groups of citizens in the same territory were governed by separate laws. In Rome this had necessitated the development of the ius gentium for dealings with foreigners, eventually creating a supplementary natural or uniform law for all, as we have seen, while the personality principle was virtually abandoned when all inhabitants of the Roman Empire were declared citizens in 212 AD. However, it did not drive out all local laws. By this time, the Empire had become too big and diverse, and with the invasions of the newer tribes that did not wish to surrender their own laws, the personality principle re-emerged, especially after the Empire disappeared in the West, though notably the Lombards in Italy also started to impose some of their own laws on foreigners in their territory, as the other tribes must also have done for their organisational and more policy-oriented decrees.169

169 In any event, intermarriage changed tribal divides, and rulers naturally became interested in the effect of their politically inspired measures on those living under their rule. Thus, from the eighth century onwards there are clear signs of territorial laws in the so-called capitularia, applicable to all in the various tribal territories, at first especially those of the Visigoths. These capitularia were mostly purely organisational, but when touching on private law they often showed Roman law influence, as had the Leges Barbarorum in a similar way. In private law, the capitularia became the basis of what were later considered regional or local laws, especially in northern France. They were there often referred to as customary law or the droit coutumier (to some extent a misnomer, as they also included local statutory law), later written up in regional or city law books such as the Coutumes de Beauvais initially and later in the most important sixteenth-century Coutumes de Paris. These local laws were usually drafted by people who were also versed in Roman law. Roman law itself, which remained more influential in the southern parts of France and in Spain and Italy, was then referred to as the droit écrit, but in the absence of any promulgation it was only binding because of custom and therefore in reality only another kind of customary or traditional law.

92 Volume 1: The Emergence of the Modern Lex Mercatoria The relationship between both local and Roman law often remained tenuous, as we shall see in the next section, especially after Roman law revived more generally. Its status was challenged in France in particular; it posed the question of the hierarchy of the various sources of law. Yet it is clear that the general decline in civilisation, although less apparent in Italy, southern France and Spain, led to a lesser degree of sophistication in the laws of most parts of Western Europe at that time. In fact, there may have remained little need for them until (as in earlier Roman times) the further breakdown of the tribal system; the increase in private commercial dealings; the subsequent reinforcement of private property rights and of the right of individuals freely to enter into binding contracts; and the re-emergence of some stronger form of statehood with more centralised enforcement powers. In many parts of Europe, these developments did not take place much before the thirteenth and fourteenth centuries, and then at first only in small regions or cities.170 Thus at first there was not much need for the more sophisticated parts of the Roman law contained in the Corpus Iuris. In this situation, only some knowledge of the simpler and more direct Codex and Novellae survived. In the absence of any formal legal education, the Institutes were not widely known either, and the Digests were lost altogether, although a copy of them was found in Pisa in the eleventh century (around 1050 AD). This led to a revival of the study of the Justinian Roman law, first in the new University of Bologna where the great Irnerius (in German often referred to as Wernerius) taught on the basis of it.171 This happened at a time when society began to feel the need for better laws. The impact of the Corpus Iuris, especially the refound Digests, which concerned itself mainly with private law, became then enormous, although at first only at the academic level. Irnerius came to be called the lucerna iuris, the lantern of the law.172 What the Bible was to theology, the Corpus Iuris soon became to legal studies. Its influence on legal practice grew steadily, at first particularly in the Church or Canon law, which had limited coverage but universal reach. Canon law was imposed in the manner of modern legislation as, unlike the newly revived Roman law, it was officially promulgated (by the Pope). It was foremost concerned with typical Church organisational matters and with the law of marriage, but eventually came to cover some patrimonial law as well, especially the areas of Church property and contracts. Parties could also agree to submit disputes to Church courts when Canon law or otherwise Roman law would be applied. Gradually, however, the old Roman law moved beyond this limited remit and entered everyday life more generally as of the fourteenth century in many parts of Europe. It resulted in what was later called the ius commune (a term derived from the definition of the ius gentium in D.1.1.19). This was therefore Roman law as revived in Western Europe on the basis of the Corpus Iuris. As already mentioned, it was not promulgated (except much earlier in 554 AD in some parts of Italy) and since there was in any event no single (or indeed any) legislator

170 Even the Empire of Charlemagne of around 800 AD did not provide such an environment and did not make much difference for the development of private law, although the administration of justice was improved through the reorganisation of the judiciary. Only when the Holy Roman Empire itself developed further in what became Germany did it start to favour the older Roman laws, not only to confirm its own legitimacy, but also to provide greater legal support and unity on the basis of a proven model. Even in southern France, for example, the Breviarium Alarici was, for the same reasons, pushed aside in favour of purer Roman law but only after the twelfth century, as were the Leges Romanae in the Italian cities. 171 This university was organised and run by an association of students. Legal studies became so popular that it is said that the university soon had 10,000 students from all over Europe. It was located in what was then part of the territory of the German Emperor, who supported this education as a unifying force. He provided special protection to foreign students and in particular broke with the rule that persons from the same region were jointly and severally liable for each other’s debt! 172 See Odefredus, Lectura super digesto veteri at D.1.1.6.

Volume 1: The Emergence of the Modern Lex Mercatoria 93 competent to enact Roman law (even though the German Emperor laid claim to it, as we shall see, later followed by other sovereigns especially in France), it was not possible for it to develop through legislation. Its further development was thus largely left to legal scholars and, to a lesser extent, educated judges. This was also a result of its more complex nature. Its force derived from its greater sophistication; from its status as the law of the Roman Empire (itself being revitalised by the German Emperors); from its unifying nature (there were already bits and pieces of it everywhere, as we have seen, except in England beyond the Canon law); and from the fact that, in an intellectual sense, it came to be considered the ratio scripta or the rational law, and as such an expression of the natural law supplementing, if not also correcting, all other law. Hence the importance of academic legal studies and of the professors, who were largely responsible for the further evolution of the ius commune. This was also true of the later civil law or codifications and was in the nineteenth century substantially derived from the ius commune tradition, until in the twentieth century the civil law courts became more activist and started to take over. After the seventeenth century, the ius commune was eclipsed by the secular natural law school and the subsequent civil law codifications of the nineteenth century, as we shall see. In the twentieth century, Roman law lost any remaining unifying tenor and became truly part of history except in certain smaller legal pockets such as South Africa, Scotland and Sri Lanka as already mentioned.173

1.2.5. The Ius Commune and its Relationship to Local Laws Including Newer Commercial Law The revival of Roman law in Western Europe from the eleventh century AD onwards, which had a profound effect on the development of private law on the European Continent (and to some limited extent even in England as we shall see), is a long story but can only be recounted in a nutshell. It is common to distinguish between a number of successive phases, which played themselves out in different countries in different ways.174 173 See text at n 164 above. 174 The earliest school was that of the Glossators under Irnerius in Bologna, also active in Montpellier in France (Placentinus) and as far north as Oxford (Vacarius). Another famous name in this school was Azo (in Bologna), who wrote excerpts for students, especially of the Codex (Summa Codicis). Their method was to make remarks (glossae) in the margin of the Corpus Iuris, which at first mainly took the form of grammatical comments and explanations and cross-references, but later also indicated similarities and contradictions and identified those rules, mainly of a Roman organisational nature, which obviously no longer had much current application. These Glossators, as they became known, span the period 1100–1250 AD and their work on the Corpus Iuris was selected and combined in the great glosse of Accursius, also at Bologna (Glossa Ordinaria). This was the end and apotheosis of the first phase. Their successors tended to elaborate further on these glossae, most notably a more critical group that flourished in Orléans in France between 1250 and 1350 AD, the so-called Ultramontani under de Revigny. How much of this early work had practical significance other than through Canon law and legal education, can only be guessed. Later followers, mainly in Italy, took a keener interest in the practical side and searched in a scholastic manner for general principles. This allowed for an influx of Christian morality, already found in Canon law at that time, with its divine or natural law (see also s 1.2.6 below). These commentators and practitioners are called the Post-glossators or Commentators and produced what came to be known as the mos italicus, of importance especially in the newly semi-independent cities of Northern Italy where oriental trade and local commerce started to thrive and where there was a corresponding need for better laws in a geographical area that also prided itself on its Roman ancestry and where the Roman laws, especially the Codex of Justinian, had never completely lost their validity. In this school, which roughly spans the period between 1250 and 1500 AD, we find the great medieval Italian jurists Bartolus and Baldus.

94 Volume 1: The Emergence of the Modern Lex Mercatoria Again it should be remembered that this revived Roman law was not officially promulgated but was only considered a higher form of custom. As a consequence, the theoretical basis for its application was always in some doubt and its force in relation to local law uncertain.175 It is true that the Digests themselves (D.1.1.9) had stated that all nations partly made use of laws that were particular to them (in Roman terms the ius civile) and partly made use of such laws that were common to all (in Roman terms the ius gentium). In the Middle Ages, this was interpreted as meaning that the law common to all mankind was in fact Roman law as passed down through the Corpus Iuris, which was then considered the ratio scripta or ius commune omnium hominum, to use the wording of D.1.1.9. Hence the term ius commune, which was the written (Justinian) law or lex scripta (or in France the droit écrit). However, the ius commune also had to be seen in the light of local laws, under D.1.1.9 called ius proprium, which the lex scripta or Roman law could not ignore. This posed among others the question of the true relationship between the ius commune and local laws, therefore the problem of priority of the various sources of law.176 This still has meaning today when we consider the modern lex mercatoria and its relationship to domestic law. It became a fundamental issue at the time, as not only local customs, but also local statutes or similar edicts competed. In D.1.3.32.1, there was a first complicating provision, which said that custom could invalidate the law (leges) as it was simply a later demonstration of the people’s will. However, in the case of the ius commune,

It is in this period that a better insight into more general rules and subjective rights under them started to emerge. These Commentators no longer thought exclusively in terms of actions and procedural law, as Roman law had been prone to do even in its Justinian variant, or inductively on the basis of existing actions and case law. This allowed for the beginning of more systematic thinking, which was further developed in the natural deductive law school of Grotius, therefore by the seventeenth century, and perhaps a little earlier by Donellus, see s 1.2.7 below. Canon law and local law influence was probably also conducive to it. The sixteenth-century School of Bourges in France, also called the school of the Humanists, among whose number were Donellus (also in Leyden), Cuiacius and Antonius Faber, concerned itself more with the Justinian texts themselves and tried to discover the various interpolations from classical Roman law. It is also referred to as the mos gallicus. It was not interested in the glossae or the practical application of the Roman law and had a considerable influence on the seventeenth-century Dutch School of Grotius, Voet and Vinnius. The latter, however, never lost sight of the practice of the law. It can be said that developments since Accursius were best summarised towards the end of the seventeenth century by the work of the Dutch scholar Voet (1647–1713) in his Commentarius ad Pandectas, which acquired a status in Europe similar to that which the Glossa Ordinaria had had earlier. The school of the Usus Modernus Pandectarum (Modern Use of the Digests) 1500–1800 AD, mainly in Germany, but also in Italy and Spain, was more a continuation of the mos italicus, but it studied non-Roman sources as well. This school was represented by scholars like Carpzovius, Brunnemannus, Bachovius, the Hubers, Berlichius and Mevius. It is not mere chance that this later school was also the most practical in view of increased practical needs. These writings all tended to be in the nature of what we now call restatements, and had only persuasive force. 175 See Koschaker (n 5) 191. 176 Priority was claimed explicitly by feudal law: see Libri Feudorum 2.1, but also by the Canon law, Decretum of Gratianus (which contained an early compilation of the Canon laws), Distinctio 1. As to the feudal law, the corpus iuris entry is short and cursory, it was Lombardic law, not really Roman law at all and a later addition, contained in TWO letters written to Bologna students, often interpreted from a Roman law perspective, and ultimately absorbed by it, very unlike the practice in England that seems to have ignored this text. It is clear in the notion of possession which in England became a proprietary right connected with seisin following the Saxon gewere, on the Continent it became increasingly the way in which a proprietary right was expressed and defended, therefore more abstract and intellectual, not merely physical, cf J Chorus, ‘Investitura Proprie Decitur Possessio: Some Remarks on Possession in the Libri Feudorum’, in Omaggio a Letizia Vacca (Jovene Editore Napoli, 2018).

Volume 1: The Emergence of the Modern Lex Mercatoria 95 this was not necessarily believed to apply to new statutory law,177 except perhaps to city ordinances (or statuta in Northern Italy). Others thought that the rule of D.1.3.32.1 could mean that the lex scripta, therefore Roman (private) law itself, was not merely set aside by new custom but more generally by all local laws, and especially in Northern France no distinction was made in this respect between local custom and statutory law (combined in the droit coutumier). On the other hand, Canon law, wary of pagan and secular influences, was inclined to reach the opposite conclusion and insisted that bad local law must always be postponed.178 That became the rule even beyond the reach of the Canon law in most parts of Europe and continued also after the Reformation, when in the Protestant countries Canon and Roman law were separated. What was more rational and reasonable (ratio scripta) therefore prevailed,179 and that was normally considered to be the Roman law rule (quidquid non agnoscit glossa, nec agnoscit curia). But the practical relationship between Roman and local law was not perceived in the same manner everywhere, and this may be seen as an early expression of tension between positive laws and more fundamental principle or higher and more universal demands of rationality, fairness or justice, or efficiency. As just mentioned, in France it was clear that the kings wished to promote the local laws (droit coutumier), including their own decrees, at the expense of the Roman law (droit écrit), which they saw as the inimical imperial or German usurper’s law. This law was therefore considered applicable only if local law did not provide a solution. In northern France—that is, the part of France north of the Loire river, including notably the Paris area—Roman law thus largely disappeared, and its study was even forbidden in the University of Paris from as early as 1219 AD (officially by a Pope who was not interested in furthering German imperial ambitions at the time) until well into the seventeenth century, although in southern France it always remained more powerful. Even in the north, as we have seen, Roman law influence subsisted indirectly in the written-up droit coutumier, especially in property and contract law. In Germany, the rule became the opposite, probably more as a consequence of the weakness of the Emperor than his strength. To counteract the effects of the lack of centralised power

177 There was a problem in that originally the Emperor, who was German, thought to have sole legislative authority over Roman law and the power to amend it, and not, for example, the King of France. This issue was resolved in the fourteenth century in the sense that in this respect, in his own lands, a king was considered to have the status of the Emperor: princeps imperator in regno suo: see Koschaker (n 5) 141. This maxim belongs with another: quod principi placuit vigorem legis habet. It is the paradigm that any sovereign could make law, see further also nn 186 and 208 below plus accompanying text. 178 Canon law thus wished to reduce the pagan influences of local or tribal laws on the argumentation of Decr Grat, Dist 8 c 5, which saw Christ as the truth and therefore not custom. The Decretum of Gratianus relied here on the ius naturalis or natural law, meaning biblical law as expressed by human beings: see more particularly s 1.2.6 below, which could sometimes also be seen in Roman law as ratio scripta and was then also higher law, besides the mores meaning local customary law, which, technically, could also include the received Roman law, but was then considered lower. However, Canon law itself had to give precedence to the natural law in that sense also. The implication was that the ratio, which was rapidly associated with all Roman law or ius commune, prevailed over bad law: parvum usum ratio vincat, see also WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europese Privaatrecht [Chapters on the History of European Private Law] (Groningen, 1993) 46. However, the ius commune itself eventually became subject to the same requirements of the ratio rather than being equated with it. This development occurred in the seventeenth to eighteenth centuries, when what was rational was increasingly separated from the Roman law, which thus no longer automatically qualified as the ratio iuris. That was already identified as the achievement of the natural law school of Grotius in Holland and more so of the Vernunftrecht of his followers Pufendorf and especially Wolff in Germany, as we shall see in s 1.2.7 below. It suggested a new hierarchy under which the secular natural law as developed in this school took precedence. 179 See also Instruction Court of Holland, 20 August 1531, GPB II, 703, Art 81.

96 Volume 1: The Emergence of the Modern Lex Mercatoria and the ensuing diversity of the various German regions, Roman law acted there as unifier and became the preferred law, especially after the setting up of a central court for all of Germany, the Reichskammergericht of 1495 AD with its seat in Wetzlar, north of Frankfurt.180 Before it, local laws had to be proven as a fact and, until they were, the Roman law prevailed as the law best known to the court. That was generally also the approach in Italy.181 There was another aspect to this development. Even where local law prevailed, at least as long as it was considered reasonable, it was often interpreted in a restrictive way to leave as much room as possible for Roman law. This approach was deduced by Bartolus from D.1.3.14, which required that all that was counter to the ratio iuris should not be extensively interpreted and should in any event not be considered a legal rule under D.1.3.15. In this vein, the reach of Roman law was further expanded through analogous and extensive interpretation (D.1.3.12 and D.1.3.13). The result was that in the ius commune local law was often restrictively, and Roman law extensively, interpreted. Thus only when local law was clearly different, as was normally the case in personal and family law and sometimes in inheritance questions, would Roman law have no effect. This approach nevertheless left room for the development of city laws, especially in Northern Italy, as in Pisa, Bologna and Milan, relevant in particular for commercial law where there were many city regulations or ordinances. It also happened elsewhere, especially in the trading cities of the Hansa in northern Germany and the Baltic and later in towns like Antwerp, Rotterdam and Amsterdam. In the view of Bartolus, there was always room for such law as custom, and city councils were able to accelerate the pace through written city laws and regulations, which were considered to have similar status (paris potentiae), although, again, all such local law was to be restrictively interpreted in the face of Roman law on the subject. In France, again the opposite approach became accepted, supported by Molinaeus (1500–66), especially after the Coutume of Paris was published in 1510. This was liberally interpreted and the Roman law restrictively.182 But, as we have seen, there remained room for the Roman law, even in northern France, particularly in the law concerning personal property and obligations, as was later also shown in these areas in the works of Domat and especially of Pothier, which eventually formed the basis for much of the later French Code Civil in these areas.183 As for these local laws, they were enforced in France by the so-called parlements of which the Parisian one was the most important. These parlements were regional bodies which grew out of

180 The German writer and philosopher J.W. von Goethe, Dichtung und Wahrheit, 3.12, reports, however, on its large business but very limited number of decisions: according to him, in 1772 there were 20,000 cases pending, of which the 17 judges managed to decide only 60 per year. In modern times it is reminiscent of the caseload of the Human Rights Court in Strasbourg. 181 In Spain, between 1256 and 1265, Alfonso X El Sabio of Castille compiled a code of law for his territories called the Siete Partidas, which was promulgated in 1348. It was a very full code in seven parts, as the title says, covering the laws in general, including a restatement of much organisational Church law, governmental law, procedure and property, domestic relations, sales, succession, crimes and general principles. At the same time as it was promulgated (in the Ordenamiento de Alcala), it was made clear, however, that royal decrees and local laws retained precedence. The Siete Partidas were in turn much influenced by Roman and Canon law, which was also used in their interpretation, and was studied with great intensity in Spain in the scholastic manner of the Commentators. Some of these studies, which, although scholastic, showed independence of mind, were also used by Grotius to build a rational secular natural law system in his De Iure Belli ac Pacis; see n 180 below. Like Bartolus, they started to look at specific legal structures such as contract and property, as such followed by Donellus before Grotius, see also JE Scholtens, ‘Bartolus and his Doctrine of Subjective Rights’ (1958) Acta Juridica 163. 182 See also the practical eighteenth-century treatise of Bourjon, Le Droit Commun de la France et la Coutume de Paris Réduit en Principes. 183 See n 200 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 97 the Curia Regis. They therefore developed originally not as representations of the people, but as courts, in which the nobility and later also established lawyers (then called the noblesse de robe) exercised a judicial function, often on a hereditary basis. As early as 1277, the Parlement of Paris was ordered by the King to apply local law before Roman law, while at much the same time, as has already been mentioned, the study of Roman law was forbidden in Paris University by a Pope unwilling to promote German influence. Eventually these parlements also obtained a legislative function when judges started to interpret the law by issuing general dispositions (arrêts de règlements). In a later phase, the parlements even acquired the power to promulgate the King’s laws, which had no force and would not be enforced by these parlements without it (droit d’enregistrement). Both powers made the parlements considerable forces in the land, sometimes even directed against the King. From the reign of Louis XIV in the later seventeenth century, there was a constant struggle to at least suppress the promulgation powers of the parlements, which effectively gave them a veto over royal decrees and their application in an era when legislative intervention at state level was still believed to be exceptional and only remedial. It was the French Revolution which eventually led to the abolition of the parlements, while the new French Civil Code of 1804 (Article 1) was quick to decree that laws entered into force only through promulgation by the sovereign and that there was also no longer any power for judges to decide by general disposition (Article 5).

1.2.6. The Early Notion of Natural Law in Europe It has been said before that after Grotius natural law in its secular form became a new legal current besides the ius commune. To some extent, it became integrated in it; in other aspects it was a kind of parallel law which, however, became increasingly leading at least in its method. It was always more intellectual and sought structure rather than pretending to be the positive law, which it nevertheless meant to support and explain. The notion of natural law itself had a long history before it acquired the modern secular form of fundamental and general principle; see more particularly section 1.4.16 below. As noted above, according to the Digests (D.1.1.1.3), the Romans saw natural law as in essence instinct, the law that ruled animals and people alike, expressing itself in the attraction between the sexes and the love of and care for one’s offspring. This was the Greek view of the pre-Socratic society, expressed by the sophists. It did not explain, nor was it concerned with any relationship with the positive law, which for the Greeks of those days was always the law of the polis or city-state.184

184 Thus the sophists believed in positive law as created by the polis and equated the natural laws with more primitive notions of revenge and self-help remedies. In the subsequent teachings of Socrates, however, pure reason becomes the anchor of all law, which then inclined to a divine meaning in terms of beauty and goodness of which there was in this view intuitive knowledge, even though it was still best expressed in the polis. It required and directed knowledge of oneself (‘know yourself ’), which resulted in a good and practical lifestyle of which freedom, equality and fairness were the expression. The result was individualism especially in the experience of one’s values and a rejection of the overarching power of the polis. In Plato’s philosophy, this beauty and goodness rises to a metaphysical idea of reality, which represents an ideal world that can only be glimpsed through contemplation and of which the world that we see and its laws are merely a confused reflection. Natural law is then part of metaphysics and applies to the whole cosmos. In daily reality, it remained in this view, however, the polis that is the best expression of this higher idea and presents a way of life outside which there can hardly be virtue.

98 Volume 1: The Emergence of the Modern Lex Mercatoria It is known that in Rome around 50 BC Cicero tried to write up or construct a natural law code but it was mostly lost. Natural law was here still nature itself, seen as unchangeable, but Cicero, who was more a philosopher than a lawyer, broadened the concept, clear from his work De Legibus, in that he considered pure reason the true law, as such part of all mankind, knowable by the most learned, who had perfected the natural powers of understanding and could thus express or positivise this law. As natural law, it had direct legal force and effect, could not be abrogated, and was thought especially to result in respect for freedom, equality and fairness as they were believed to have existed in the original and true human condition. These were considered the most precious social goods, best protected within a state, which was no less considered a product of nature in this rational sense. To give everyone what belonged to him (as may still be found in D.1.1.10) was the most profound expression of this philosophy in private law. This was the essence of the Greek philosophy of the Stoa, which in the Hellenistic period abandoned the central idea of polis and expounded the notion of rationality of Socrates.185 It was pantheistic and universal and saw the acceptance of this state of affairs as the highest human endeavour leading to the greatest harmony and happiness. In this view, states or organisations were not considered to play a different role from individuals and were subject to the same rational imperatives. Morality acquired a social function; impulsive and emotional behaviour was to be controlled. Evil was an aberration not compatible with true nature or reason, had to be fought, and would eventually lose. After Cicero, Seneca around 50 AD, and later the Emperor Marcus Aurelius around 160 AD, were important Roman followers of this philosophy. In this sense, the philosophy of the Stoa was substantially different from the other (older) great philosophy of Aristotle, which was less idealistic and perhaps more optimistic. It saw creation and achievement rather than self-control and endurance as the essence of human happiness, and true virtue as keeping a balance between extremes such as avarice and generosity. The highest emotional state was intellectual, in which reason could change habits and bring them under control leading to balance and virtue, but not all could attain this state even if it were better. The ethics of Aristotle are therefore less demanding and oppressive than those of the Stoa, but also less idealistic and universal. Natural law was in the Aristotelian perception the law of physics with its causality independent of human judgement or behaviour, ruling everywhere. Positive law was different (the relationship was not yet made clear) and involved human judgement and could therefore vary and lead to inequality and lack of freedom. That was the choice of a state or community dictated by utility. This kind of law was seen as, in essence, a human artefact. So was the state or polis in which it was still considered that human beings could only truly develop. In this view, the state was a local reality, not a universal condition or expression of pure reason. Private law had to be seen in that context and thus still took the perspective of the polis or community rather than of the protection of more universal personal rights. Justice was whatever brought most happiness and balance in such a community. All depended on the environment and the situation; there was less of a universal moral perspective. The concept of polis rises here to a religion or an all-life experience as life in this view had a tendency to descend into chaos. It must save what can be saved in order to maximise virtue in its citizens. Private law then also had that function and did not primarily denote respect for individual rights. There are here no ideas of democracy or inalienable rights either. They cannot exist separately from the polis (and its exigencies), which still came first and had the last word. 185 See the previous footnote.

Volume 1: The Emergence of the Modern Lex Mercatoria 99 There was, however, agreement with the Stoa in so far as that the world order was considered a given, subject to immutable or causal laws of nature. But in the Aristotelian view, men had freedom to deviate and make alternative arrangements in areas where the laws of strict causality did not obtain, for example in arranging one’s personal and social life, or states imposing their own order. For the later Stoa, this was rather an aberration and demonstrated an improper use of abilities and a denial of nature, which was more fundamental in character. In Roman times, there had been several more basic ideas as noted in section 1.2.3 above, but one dominant religious or similar force never seemed to be present at the intellectual level to deeply influence the positive law as it developed at the height of the classical period. Although different considerations and attitudes naturally had an impact on the formulation and interpretation of laws, they appear not to have had great significance in the distribution of justice and in the legal activities. This is the reason why these issues were not raised in the previous sections. As just mentioned, in Ulpianus’ definition of law in D.1.1.10, the accent is on giving everyone his or her due, much in the tradition of the Stoa, but it did not carry any deeper message for the entire Corpus Iuris. Nor apparently did the Christian religion, which was by then universally accepted in the Roman Empire, although it did inspire many imperial constitutions later. It has already been mentioned that in the Justinian Digests, the ius gentium becomes the universal (private) law and was then seen as the positive elaboration of the natural law (D1.1.1), expressed, for example, in respect for one’s parents and the acceptance of the gods and of the state (D.1.1.2.). In Rome the ius gentium—it may be recalled—was originally the law for foreigners but was later considered to have been laid down for mankind more generally, largely based on rationality and common sense and, in the Roman view, not always immutable, even though expressive of a certain intrinsic order (the idea in D.1.1.9). A more fundamental notion of natural law was used along these lines to broaden and develop this ius gentium as universal law further, was then considered superior, and believed incapable of amendment by legislation (D.1.2.11 and D.7.5.2). In this sense, the ius gentium as described in the Justinian compilation floated on the natural law, which came first but was, as we have seen, a limited concept still described rather as a force of nature. Although it was meant to influence the ius gentium, it was not clear how far this went and to what extent it had an effect on the law in its daily operation. At the time of the renewed study of the Roman law in the late Middle Ages, the situation was quite different. It was the time when the study of theology also took a great leap forward and began to impose its views on the law. The study of both theology and law became s cholastic in that each unquestioningly accepted the authority of the Bible on the one hand and of the Corpus Iuris on the other and did not then consider the world from any other perspective. However, given the overriding authority of the Church, the practice, if not also the study, of the law became subject to the theology of the Church, which in turn became connected with philosophy, in particular with the works of Aristotle. This conditioned the attitude of Thomas Aquinas, considered the greatest thinker of the time, who addressed the law in his Summa Theologica. Once Thomism became the official line of the Catholic Church, it was bound to have an immediate effect on Canon law, which was naturally infused by Church morality and philosophy. Eventually, it also had an impact on the rest of the law, and particularly on legal studies affecting the Corpus Iuris. In the Thomist scheme, there were Divine and Human Laws. The first was either written law, derived from the Bible and its interpretation, mainly in the uncompromising North African manner of St Augustine, or natural law, which was its elaboration in the formulation of which humans, as reasonable beings, could participate. Biblical commands to love one’s neighbour and to honour one’s promises could thus be elaborated into a set of rules concerning inter-human relationships and into a law of contract and property. Aquinas’ Human Law was the rest, including

100 Volume 1: The Emergence of the Modern Lex Mercatoria Canon law and the Corpus Iuris, as well as domestic laws,186 which thus became subject to a legal superstructure. As a consequence, natural law became closely related to the biblical commandments of the Old and in particular the New Testaments. As a consequence, this law, being religious, pretended a universal application and was considered directly effective and could not be overruled by the positive human laws. Under it, in the style of St Augustine, there was no basic freedom or equality, as there was none in the distribution of grace and salvation. In the style of Aristotle, in the Human Law uneven distribution of ownership or even slavery could be condoned (by the Divine Law) on the basis of utility, although equity should guide it. As Human Law was subject to natural law of this kind, it was first and foremost considered an aid to the perfect Christian community, which was, incidentally, an improvement on the view of St Augustine, who had viewed the state and its laws as in essence evil or at least a response to evil and therefore motivated by it. It was also a nod in the direction of the Stoa.

1.2.7. The Emergence of the Secular Natural Law School: Grotius’s De Iure Belli ac Pacis, its Approach and Impact As far as Grotius (1585–1645) is concerned, it is possible to read almost anything into his works, so prolific and eclectic was he on such a broad range of subjects during a long life of writing. He was knowledgeable in theology, moral philosophy, history, and the classics, and knew the writers of his day. Yet he may be best understood as a lawyer and is best known for his initiation of the secularisation of natural law as it had developed until that time under strong religious influence. The essence of his legal thought, derived from the philosophy of the Stoa, was that the law was not limited in its effects by time and space. It transcended borders and jurisdictions and depended for its force on fundamental principles, which were universal and could be directly invoked regardless of their further clarification in a system of positive law. Thus, in Grotius’s view, there was in essence only one law and one community of mankind, while the laws applicable between individuals were in essence the same as those between organisations and between nations. These were views already expressed by Seneca and Cicero, again in the tradition of the Stoa, and had also received strong support in some scholastic writings, especially in Spain, although then still driven by religious fervour.187 186 From early on it was thought that the will of the state could impose this Human Law in the same way as the Pope imposed his will through Canon law although this was still believed to be exceptional, most certainly in what is now considered private law. The Divine Law, including its Natural Law, was always superior because it was supposed to direct mankind towards its salvation. With the Church in command of interpretation of the Divine Law, including Natural Law, all law thus became subject to the prevailing higher norm of Christian morality, at least in its more ethical or policy-oriented aspects; see further also nn 169 above and 178/198 below plus accompanying text. 187 It has become fashionable to emphasise the Spanish roots of the secular natural law school, and Grotius himself referred at times to the Spanish writers of the sixteenth century, but used their insights mainly to separate himself further from scholastic thinking. See, nevertheless, on these roots Otto von Gierke, Johannes Althusius und die Entwicklung der naturrechtlichen Staatstheorien, 3rd edn (1913) 157; J Kohler, ‘Die spanishen Naturrechtslehrer des 16. und 17. Jahrhunderts’ (1916–17) 10 Archiv für Rechts- und Wissenschaftsphilosophie 235, later especially also M Diesselhorst, Die Lehre des Hugo Grotius vom Versprechen (Köln, 1959); F Wieacker, ‘Die vertragliche Obligation bei den Klassikern des Vernunftsrechts’, in Festschrift Hans Welzel zum 70. Geburtstag (Bonn, 1963); and R Feenstra, ‘L’Influence de la scolatisque espagnole sur Grotius en droit privé’ in P Grossi (ed), La seconda scolastica nella formazione del diritto privato moderno (Milan, 1973) 377; and ‘Les Sources Espagnoles de la Pensée juridique de Grotius’ in Historia del Pensament Juridic, Festschrift Francisco Tomas y Valiente (Barcelona, 1999) 137.

Volume 1: The Emergence of the Modern Lex Mercatoria 101 Although these basic principles were considered immutable, in Grotius’s view they did not depend on divine inspiration, but relied for their expression and implementation on rationality and utility in the affairs of this world. So, the key was: (a) fundamental and general principle; (b) rationality; (c) utility; and (d) their interconnection as bases of the law and of all legal systems. This remains the essence of all modern natural law philosophy. Even though natural law, which became in more modern perceptions mostly expressed as directly applicable fundamental and general legal principle (see section 1.4.16 below) may no longer be perceived as immutable, even in its fundamental principles, for example in terms of human rights and other social values, this approach remains key in all legal redirection and therefore also in the understanding of the present transnationalisation process of private law. This is the reason why this theme is further explored below. It raises some important issues, notably: (a) the relationship between principle and positive law and the possibility (or not) for the positive law to deviate from principle that is fundamental; (b) the identification of the substantive rights and the method of finding structure in them; and (c) the intervention of states in the law-making process and the impact of public policy or reasons of state on law formation. In view of the basic notion of universality, this statist aspect became particularly problematic and will be further discussed in the next section. Grotius’s prime importance is that he had a different view of natural law from the one previously prevailing and began its secularisation. The essence of it as explained in his main work, De Iure Belli ac Pacis of 1625,188 was that all people had a similar inner understanding of what was good or evil189 and that this distinction, although of divine origin, was rational (I.1.10.1) and as such held true for all, even for God, who could not change it, and it would even hold true if God did not exist (I.1.10.5). This is probably the most provocative statement of the whole work, although it was not new and was also a view held by the Spanish scholastics.190 Its true message was that mankind had to strive for the good it knew and to subject its inclinations to the natural law that emerged in this manner and to its principles of peace, freedom, equality and fairness, which were understood to be universal.191 It led to a preference for the 188 This book exists in an English translation by FW Kelsey (Oxford, 1925) reprinted by WS Hein & Co (Buffalo, NY, 1995) and in a French translation of 1867 by Pradier Fodore, reprinted in 1999. 189 Of the natural law, therefore of the innate distinction between good and evil and of the basic rights and obligations resulting from it, the Old Testament’s Ten Commandments were considered an important manifestation, as was the New Testament’s Sermon on the Mount, and even the Roman law as ratio scripta, but only to the extent that they were rational, and therefore able to distinguish good and evil in the above sense. Rationality acquired independence and was not, or was no longer considered, inherent in any of these sets of laws. Where there was no such rationality, these laws could only be binding on those for whom they were made; therefore, the Old Testament with its many derivative rules only for the Jews, the Roman laws only for the Romans, and the New Testament’s commandments only for Christians. 190 See n 187 above. 191 The practical effect was that, where the Augustinian/Aristotelian principle had sought to explain and accept human inequality, Grotius insisted on their equality, certainly before the (natural) law. Thus the emphasis turned to peace, freedom, equality and fairness as it must have existed in mankind’s original state. This led in essence to four key legal principles: (a) the principle of respect for others and their assets (alieni abstinentia); (b) the principle of respect for commitments voluntarily made (pacta sunt servanda); (c) the principle of repair of damages culpably inflicted on others (damni culpa dati reparatio); and (d) the principle that infringement of this natural law must be punished (poena inter homines meritum). The basic proposition was that these principles could be found in the study of the laws of all civilised peoples (I.1.12) and had to be carefully distinguished from positive law elaborations, therefore from their subsequent detailed implementation, and remained valid regardless. These were therefore the guiding principles of his natural law, which were considered invariable, aprioristic but rational, much in the style of Cicero. They remain the basis, it is submitted, of all natural private law in a modern sense. All the rest, including the State, its organisation, the status of the individuals as free citizens,

102 Volume 1: The Emergence of the Modern Lex Mercatoria Greek philosophical school of the Stoa rather than the Aristotelian/Thomist school that had dominated theology and the law until then. This secular natural law was further believed to be supported by mankind’s presumed natural instinct for peaceful coexistence (appetitus societatis, Prol 6). It did not exclude the existence of Divine Law, but importantly it was considered another form of positive law, which had to express the basic tenets of the natural law in this sense. This allowed Grotius to separate the law from: (a) the theology of St Augustine; (b) the philosophy of Aristotle; (c) Thomism; (d) Canon law; and (e) their influence on the Roman law revival. He did not abandon the old philosophy categorically, and in fact praised Aristotle as philosopher (but not his work on ethics and the law, Prol 42, 43). Neither did he separate the law fundamentally from the teachings of Christianity itself or from its morality, or in fact from (moral) philosophy, only from the philosophical and theological views that had become traditional. The separation from the Roman law revival also did not entail its rejection but it allowed independent study and critique plus, eventually, the addition of general principle found in domestic laws.192 The separation from theology altogether was achieved in this school by Pufendorf in Germany, who came 50 years later (after Hobbes); the separation from philosophy and ultimately even from Roman law or the ius commune came in this school later still, through people like Wolff, who sought to build the law on the pure ratio as it was understood in the eighteenth century in Europe at the time of rationalism or the Age of Enlightenment.193 This was the time of the Vernunftrecht,194 the logical–mathematical deduction or mos geometricus of the law. It achieved a degree of abstraction in rule formulation that became systematic but also speculative, yet made codification in the modern civil law sense possible although it had not been its objective. The natural law contained henceforth the fundamental universal principles of the law (naturae principia) but also the principles that could be deduced from them (Prol 8, 15, 39, 40). There is, in this approach, a difference from the ius gentium, which was here considered based on utility, could be changed and appeared through communis opinio or common sense (aliquis communis captives or even slaves, and ownership and the way in which it was held, did not belong to this natural law (or the principles deduced from it). It was so-called voluntary law or ius voluntarium. Here the ideas of the Stoa were abandoned. These facilities were only there to improve the human lot after mankind had lost its innocence, but they were not its ultimate state. It meant that by no means all subjective rights were an expression of natural law. Yet the key subjective rights (the suum) could be deduced from them and were: (a) the right over oneself or the right to liberty; (b) the right over some others, such as in this vierw a wife and children; (c) the right over one’s property; and (d) the right to claim against others. All the sasme, even the right to private property itself was not considered an original natural right but a human invention dependent on the human will, which natural law could only protect in that manner (I.1.10.4 and 7). 192 The key message that followed was that natural law was not monopolised by any religious or philosophical current, although Christians like Grotius himself would in a Christian society elaborate the positive laws in a Christian way and seek in that manner the fulfilment of natural law ideals: peace, freedom, equality and fairness. There is a strong ethical and irenic inclination, which, although in Grotius’s case closely related to his protestant religion, did not need to be religious. He thus argues (even contrary to the views of Cicero) that vows may not be broken, even if made to criminals and tyrants, and that the requirements of good faith must also be maintained in respect of them. On the other hand, one must also not always insist on one’s rights, certainly not on the right of war (even in the case of self-defence), of retrieval of possessions, of enforcement of obligations, or on justified punishment. In this approach, Roman law was often criticised, for example in its requirement of delivery for the transfer of title in movable corporeal assets. Transfer at the time of the conclusion of the contract was thought more natural. This attitude to freedom has been called a Copernican revolution in the law: see JHA Lokin and WJ Zwalve, Europese Codificatiegeschiedenis [History of the Codification in Europe] (Groningen, 1992) 32. See also J Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991) 112ff for the (weak) relationship with the new (and later) ideas of Descartes, Hobbes and Locke. 193 See Koschaker (n 5) 249. 194 See also n 191 above and n 201 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 103 consensus, Prol 40), even though in appearances that difference would not always be great, and when reference to the natural law school was made, they were often considered together. This ius gentium was, however, part of the changeable, voluntary law or ius voluntarium. In this view, all national or domestic laws were subject to natural law and to the principles deduced from it, but also to this ius gentium or common-sense law, and this was true for the laws concerning individuals, organisations and states. In this way, this natural law acquired the highest rank in the hierarchy of norms.195 It was typical of this approach that the ius gentium was not only interstate law as it is now often still thought to be (neither had it been in Roman law). Rather, like the natural law, it was considered universal, being based on logic and rationality, on more universal notions of utility, and common sense for all, as such still subject, however, to the fundamental universal natural law principles of which it was considered an expression. In finding and further developing structure in this law, not system per se, Grotius strove for coherence and support in what he found in terms of substantive rights in Roman and Canon law, in the earlier substantive law searches of Bartolus and Donellus,196 but also in local laws.197 This proved a vital departure and allowed for the development of a more coherent framework, especially of private law, which left the action orientation and therefore procedural tenor of the private law behind. His Introduction to Roman-Dutch Law,198 published in 1631 but written (in Dutch) during his captivity around 1620, was the first major manifestation. It had a lesser impact than De Iure Belli ac Pacis (1625), but is no less significant because of its greater detail in demonstrating the method. In De Iure Belli ac Pacis, which deals with the law concerning war and peace, there are large tracts on private law in Book 2 (chapters 2 to 19), particularly on the behaviour between individuals and on contract as being the basis for the behaviour and agreements also among nations, which, as mentioned above, Grotius thought similar, in the manner of the Stoa. The further elaboration of the private natural law on this basis was done by later writers, especially by Pufendorf in Germany,199 Domat and Pothier in France,200 and by German rationalists like Wolff, who, as just mentioned, increasingly espoused a logical mathematical approach.201 The price was everincreasing differences in the details of the law, which discredited this method, the rational and internationalist aims of which were finally destroyed by nineteenth-century legal nationalism and statist perceptions of all law formation. Its substantive rule-finding orientation was eclipsed by pure intellectual system thinking, as we shall see, by then at the national level. It had already opened the road to the early modern codifications of civil law, first in France in 1804, then in Austria in 1811, while the German Pandectist offshoot eventually led to the German Code of 1900 (the BGB). By that time all universalism had gone and all of them were nationalistic. However, the natural law school’s method of substantive law finding still stands out as having freed the study and development of the law from its historical (religious and philosophical) clutches. It was already said that natural law revival of this nature tends to stand at the beginning 195 It solved the problem of the ranking of state-imposed law: see s 1.2.8 below. 196 See also n 174 above. 197 This applies, for example, to the notion of good-faith acquisition in movable property law. Grotius first spotted these developments in Holland and noted them in the margin of the Lund manuscript of his Inleidinge tot de Romeins-Hollandsche Rechtsgeleerdheid (1631) [Introduction to Roman-Dutch Law], 2nd edn (Dovring, Fisher and Meijers, 1965) 50–55, later also noted in Northern Germany by Mevius, Commentarii in Ius Lubecense Libri Quinque (Frankfurt, 1700). 198 RW Lee (trl), Introduction to Roman-Dutch Law, 2nd edn (Oxford, 1953). 199 S Pufendorf, Ius naturale et gentium. 200 J Domat, Les lois civiles dans leur ordre naturel, and R-J Pothier, Traité des obligations. 201 C Wolff, Ius naturae, methodo scientifica pertractum; see also text at n 178 above.

104 Volume 1: The Emergence of the Modern Lex Mercatoria of any new age when a reappraisal of principle and the formulation of new rules to respond to new needs overtake the established order. In our day and age, it is for a new transnational law or lex mercatoria to facilitate the globalisation of trade, commerce and finance by breaking the grip of domestic laws and showing that there is law beyond it. Even if there has always been some such source in new principle and in custom, and (more) rational behaviour has been the essence of most rules, the true challenge, at least in international trade and commerce, is now to create or identify a more than incidental set of legally enforceable rights and obligations at global level. This is the subject of much of this book, which in this respect goes back to pre-nineteenth-century perceptions of law formation and legal effectiveness, although not to pre-nineteenth-century law or the old ius commune. The term ‘natural law’ itself continues to give rise to problems of definition.202 In this book the term ‘fundamental and general principle’ is mostly used instead. It is a more modern terminology but can be seen as the continuation of natural law’s secular expression. However, the idea that these principles may be immutable is abandoned; see further section 1.4.16 below. Another particular achievement of the natural law school, which also remains valid today, was its understanding that there is no fundamental difference between abstractly formulated principles and the legal rules that are applied in each case, and that in respect of the latter there is in any event never a clear line between law as rule and law as principle, or even between the law that is (lex lata) and the law that should be (lex ferenda), or between rule and guideline. There is, in other words, never an absolute preset system of precise norms (or black-letter law) for each case, but in each instance the legally relevant norm must be found and articulated, no less than the legally relevant facts. If this is not accepted as the starting point, it will come through interpretation. It is submitted that probably unknown to themselves all practising lawyers operate this way best to reflect the needs of their clients. It is also the source of legal dynamism, see section 1.1.6 above. In the articulation of the relevant norm, the configuration of the facts and the needs they reveal then play a decisive role. In analysing and formulating the applicable norm, the method thus becomes inductive as well as deductive (for a fuller discussion of these methods, see sections 1.2.13 and 1.4.3 below). From this point of view the law, also private law, is always moving and can never be entirely predetermined in a set of pre-existing written rules. Or to put it in the terms of Cardozo: ‘Law never is, but is always about to be’.203 States and courts may try to stabilise this law but it has already been noted that that can never be the end of it. Legal positivism of this nature is not decisive as we know from interpretation and gap filling. It becomes all the clearer in legal transnationalisation.

1.2.8. The Status of State Law in the Philosophies of Grotius, Hobbes, Pufendorf, Locke, Kant and Hegel. The Impact of the Age of Enlightenment and the Road to Codification of Private Law in France The concept of secular natural law as an autonomous law-formation source requires finally discussion of the ascent of state power in private law formation, first to achieve specific political objectives, but ultimately on the European Continent formally to nationalise all private law formation through codification. 202 See also s 1.4.16 below. 203 See Respectfully Quoted, A Dictionary of Quotations Requested from the Congressional Research Service of Congress (1989) 191 (from a Yale lecture of 1921).

Volume 1: The Emergence of the Modern Lex Mercatoria 105 As mentioned in the previous sections, in the approach of Grotius, who wrote his major works when the devastating Thirty Years War was raging in Germany (from 1618 to 1648), all law was in essence non-statist, universal and therefore not confined in time or space, an approach supported by the philosophy of the Stoa—the political correctness of seventeenth- and eighteenth-century thought which in ancient Greece had marked the transfer to Hellenism and a more cosmopolitan approach to law, which moved away from the city state or polis of those times and its confines. This law applied to private citizens and states alike and did not therefore fundamentally distinguish between public and private law. Natural law was considered to contain the basic principles. In Grotius’s approach, the positive law could be more confined but also more expansive than this natural law or order. That was the realm of the ius gentium or voluntary law based on rationality and utility, always meant, however, to support the natural law. Both were considered directly effective and enforceable in the sense that they did not need the intervention of a state to become positive. Other spokesmen, such as judges and commentators, could be just as authoritative. Again, it is very much reminiscent of present-day public international law (Article 38(1) of the Statute of the International Court of Justice) and, in the approach of this book, of modern lex mercatoria law formation, which method is borrowed from it. It posed, however, the question to what extent the state could override the ius gentium or even the natural law.204 We may think first of local ordinances and even custom. They were in principle subject to the higher natural or rational law, as we have seen, but state law could go against it even though it was then likely to be localised or territorial. This raised the issue of its true status, legitimacy and effect. This can also be expressed in terms of the impact of public policy or the ‘raison d’etat’ or the state’s command on the law, its formation and application. Here there are considerable tensions in Grotius’s work (and that of his successors), and in this respect it was less clear cut. Ever since, this has been an important issue in the study of the relevant sources of private law in national and especially internationalised legal orders. One key question became whether the public interest exists, who represented it and spoke for it and defined it. Was it subject to the natural law or was it a law unto itself? Was the state of nature more commercial and essentially peaceful or was it war prone? In the latter view, there was likely to emerge a basic division between civil society and the state. A subset became the question whether mutual satisfaction of self-interests through exchange can be publicly beneficial, a view often ascribed to Adam Smith but raised earlier in a more religious context where it was reduced to the question whether self-love and egoism of this nature can lead to a public good and justify it. In the end this gave way to a secular model of commercial sociability that could not resist and was increasingly influenced by the state.205 The question of the public interest thus became closely connected with the extent of and justification of state power, nationalism, and territorialism in the law, and then also affected the status of other sources of law. In institutional terms, at least some hierarchy would have to be considered. In this connection, state absolutist tendencies became increasingly clear as the drift

204 It has already been said that the secular natural law considered itself superior in the hierarchy of norms, it being the better expression of rationality: see also the text at n 195 above. 205 See DS Grewal, ‘The Commercial Oeconomy’ in The Invention of the Economy (forthcoming). The work of Hobbes, who seperates in time that of Grotius and Pufendorf, proved here a key disturber ‘whose work was too great to be ignored, but whose name was too disreputable to be praised’. The view that combined self interest could be collectively beneficial and morally and religiously acceptable may be associated with Jansenist thinking, based on interpretation of Augustinian philosophy, and propounded by Pufendorf. In this view, the ‘invisible hand’ was the hand of God, orderly and optimal therefore as part of a providential order, a system of natural liberty meaning still some restraint of state power.

106 Volume 1: The Emergence of the Modern Lex Mercatoria of eighteenth- and nineteenth-century thinking on the European Continent. It was ultimately connected with the emergence of the modern state as an organisational entity concerning itself with an ever-greater multitude of facets of daily life. This kind of modern state sees itself as a central force, therefore not merely as a facilitating or correcting entity, even if its power may still be balanced by more objective notions of decentralisation or subsidiarity, of proportionality, of democracy, rule of law and human rights or laissez-faire doctrines. It meant that the law not only became the state’s main tool to enforce its public policies—directly backed up by its coercive powers—but that all law formation was increasingly considered the sovereign’s preserve, including the formation of private law. We are then in nineteenth-century continental European legal thinking. The law that private parties produce themselves in custom or practices or in contract is then only accepted if condoned by the state. These are no longer autonomous sources of law and this kind of participatory law making, for example in custom, is then deemed inferior. This attitude also applies to party autonomy which then depends on statutory licence and description. Fundamental and general principle (or natural law) is also ignored unless especially authorised to operate, most likely in good faith contract interpretation but not elsewhere, notably not in property, tort or unjust enrichment. That became part of the codification ethos.206 Thus fundamental principles (international or other), custom and practice and general core principles have to overcome any statist claims to exclusive law making in order to remain effective. Any international legal order, in order to re-establish itself, has to deal with these statist ambitions also. In Grotius’s time, there had not existed a concept of a state being the fountain of all law. As noted before, originally it was assumed that the German Emperor had power over the Roman law as the Roman Emperors of the East had before, although this power was ultimately thought to reside in all sovereigns.207 The Peace of Westphalia (or Munster) in 1648 had shifted the balance of power from religion to rulers, only after Napoleonic times substantially to states. At first in private law, the intervention of sovereigns or states was thought only to be facilitating or dictated by specific public policy or order requirements, and was relatively rare to be exercised at the level of the sovereign. Instead there were city ordinances of all sorts especially also in commerce as noted before, it raised the question of their status in the hierarchy of norms especially in their relation to Roman law as we have seen in section 1.2.5 above. In criminal law, there was always more state intervention, even though criminal law did not depend on legislation either. That is still the situation in common law countries, but in civil law countries this attitude wholly disappeared. One original idea, already held in the Middle Ages, was that the sovereign was anointed, and able to exercise divine right. Such a sovereign could indeed impose law, but could still not go against the divine or natural law, only support and enunciate it. For intervention in private law, there also had to be a just cause or good reason. Originally, this confined a sovereign’s power in 206 In private law, it came to be supported by an abstract or theoretical/academic model of the reality of human behaviour, believed to be potentially close enough to that reality to serve as a guide and framework that could predict the desired outcome: see more particularly the discussion in s 1.2.9 below. It was the inheritance of the Vernunftrecht and its search for a logical mathematical model, see text at nn 194 and 201 above, but it became a more fundamental scientific German academic ideal in the nineteenth century and ultimately a political issue as we shall see. It ignored all other law formation and sources of law or considered them inferior. As we shall see also, through their academies, states were then assumed to have some superior or at least better insight into what is needed in society, in law formation even to balance the rights and duties between private citizens: see also the discussion in s 1.2.10 below. Only subsequently did democratic legitimacy also become an issue: see s 1.2.13 below. See for system thinking in the approach of Max Weber (n 7) where utility and the contribution to modern capitalism is the key issue. 207 See n 177 above. Even in medieval thinking, states could impose the Human Law, see n 186 above, although they seldom did.

Volume 1: The Emergence of the Modern Lex Mercatoria 107 law making considerably, although there was even then the idea that in truth only sovereigns could validate laws, precisely because of their divine right.208 Others, like Bartolus, had thought that the law-making power truly resided in the people, in the consensus populi, of which notably custom and local commercial laws were the expression, although the people could transfer this power, revocably, to the sovereign. But there remained the issue of state intervention for public policy reasons and objectives more precisely, which as a concept was at first not fully developed. In Grotius’s view, the state depended on the will of the people and was therefore a utilitarian construct of the voluntary law or ius gentium and not itself dictated by natural law, as we have seen, although natural law fundamentally supported all that was agreed. In that context, there were no fundamental or inalienable human rights either. To the extent they existed, they could always be surrendered (to the sovereign state). In fact, in Grotius’s approach, there was already an implicit but full subjugation of the individual to the state through the theoretical construction of the social contract (borrowed from Aristotle) by which state law (ius civile) could conceivably become superior to all other sources of law (including therefore the natural law and ius gentium) if so required by public policy or reasons of state. But it would somehow have to be so intended by its people and the state was not anointed. Following this approach, the state remained in principle subject to the fundamental natural law principles itself, but that was only so: (a) barring the agreement of the subjects to the contrary in areas where natural law was not mandatory but permissory (compare De Iure Belli ac Pacis II, 2.5); and more importantly (b) unless the public good required otherwise. In that case, there was no sanction against a state that behaved contrary to natural law (compare De Iure Belli ac Pacis II.14.6.2). As the public interest is hardly a clear concept, it in fact gave states a free hand, even in the philosophy of Grotius. They defined the public interest. Inalienable rights against such a state emerged later and remained fragile. Only then did it become possible to talk again of value systems with a normativity that ultimately did not depend on states. It is clear in this connection that, in the end, Grotius’s concept of natural law could not resist the increasing power of the modern state, and allowed for the prevalence of domestic imperatives, and therefore of national laws imposed in the public interest, however defined. Ultimately, and somewhat surprisingly, there was here also no beginning of an overriding concept of the rule of law as the basis for the exercise of all power in conformity with natural law. But there was certainly the continuing notion that the law did not depend for its validity on state sanction alone. Any restraining influence of universal natural law concepts on state action increasingly disappeared after Grotius. This is clear in the work of Thomas Hobbes (1588–1679) in England, but also filtered through into that of Grotius’s successor in the natural law school: the German writer Samuel Pufendorf (1632–94), even though still trying to limit the effect whilst propounding the value of natural liberty in a societal and commercial sense,209 probably helped by commercial interests becoming stronger again in the eighteenth century after the disastrous wars of the seventeenth. In Hobbes’ view, rather than there being a natural instinct of people wherever they were or they came from to live together in peace (appetitus societatis) in the style of Grotius, the human condition was considered to be one of all against all (bellum omnium in omnes).210 To constrain the right of the strongest, people had to impose laws upon themselves. These became

208 cf W Ullmann, The Medieval Idea of Law as represented by Lucas de Penna (London, 1946); see further the comments in nn 177 and 204 above and n 272 below. 209 De Iure Naturae et Gentium (Libro Octo). 210 De Cive I.12, with the accent on each man being allowed to use his power as he will to preserve himself, T Hobbes, Leviathan, ch 14.

108 Volume 1: The Emergence of the Modern Lex Mercatoria the sole sources of justice, which could only operate through a state (after the natural condition had been abandoned).211 There follows no less the construct of a social contract under which individuals in order to live in peace abandon their personal rights (except those to life and limb). The accent shifts here entirely to the modern state, which decrees the laws, ultimately even private law, and also sanctions customary law. Crucially and regardless of the construct of a social contract to the effect, this had nothing to do with modern ideas of democracy, rather the opposite: state absolutist tendencies. In this system, the sovereign does not owe obedience to its own laws and natural laws are at best a matter of conscience for the sovereign. They do not have a normativity of their own. Pufendorf follows this reasoning in essence also: the state is necessary if only to discipline fallen mankind (in the Augustinian view); natural law has a meaning only if it has become positive law upon the order of the sovereign.212 International law, as the law between states, has no longer an autonomous place in this approach either. Hence its struggle for legitimacy all the more so since the nineteenth-century ascent of the nation state. Treaty law is explained as state law, customary international law is no law at all. While towards the middle of the seventeenth century in England through John Locke, under strong Dutch republican influence,213 the concept of inalienable rights against a sovereign emerged as a protection against the all-powerful sovereign under the social contract, at that stage of jurisprudential thought the effect was mainly in private and criminal law, still centred on notions of freedom or autonomy, equality and ownership. But even in Locke’s case, this was all seen within the context of the modern state, which, on the basis of the public good, through legislation, could also affect the inalienable rights, although ultimately the people retained the supreme power to remove the legislature. Only in the teachings of Rousseau did these inalienable rights acquire a human rights flavour and internationalist status, but even in his view these rights were given back to the state so as to re-emerge as state-protected private rights. Immanuel Kant (1727–1804), while accepting the existence of rational legal principles, did not give them any autonomous legal status either.214 All depended on their incorporation in the positive law by a state which could ignore them. The rational legal principles (although distinguished from moral principles) were no more than guidelines, and had no legal force of their own. The later dominant nineteenth-century philosopher, Hegel (1770–1831),215 confirmed this view, in which law could be no more than positive (statist) law.216 It always had a local character, as it was the expression of a national spirit and depended for its force on a sovereign and for its contents on the will of a people but only as expressed at the level of the state. Here enters an irrational element and nationalism starts to prevail, which leads into the discussion of the nineteenth-century German Historical School and the impact of the Romantic movement, see the discussion below in section 1.2.9. Again, it should be noted that there is here a progression from the raison d’état or public order considerations prevailing over natural law to the notion that, ultimately, all law emanates 211 De Homine X.5. 212 See n 209 above, at VIII.9.5. 213 J Locke, Two Treatises of Civil Government (1690). 214 I Kant, Metaphysik der Sitten (1797) 340, 341; Mary Gregor (transl), The Metaphysics of Morals (Cambridge, 1991) 148. 215 G Hegel, Grundlinien der Philosophie des Rechts (Berlin, 1821) paras 211ff; TM Knox (transl), Hegel’s Philosophy of Right (Oxford, 1967) 136. 216 Vattel, writing in 1758, ultimately considered the state not bound by the will of anyone or by any universal laws, but acting only in its own interest. Customary international law is at best reduced to a form of implied consent of states. See in this connection for the development of the notion of positivism in legal terminology, s 1.4.17 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 109 from a state, including private law. It may be of interest to show some of the emerging opinions in this connection, leading up to the later ideas of codification of private law in France. Although François Quesnay (1694–1774) had said that men do not make law, but only discover those laws that conform to ‘the supreme reason that governs the universe’—a typical Enlightenment view that presumes an innate order in human relationships—it was even then thought that this law was more readily discovered by a state.217 Montesquieu (1689–1755) had still thought that private law was connected with regions, climate and customs,218 but the Philosophes of that time, who were at the heart of the French Enlightenment (and Encyclopedie) movement thought differently and rather supported the search for universal (intellectual) principle.219 Subsequently the issue was from whom this law, therefore also private law, emanated. In this connection the Abbé Sieyes (1748–1836) declared that the nation was prior to everything—‘Its will is always legal; indeed it is the law itself ’220—although such states were to be guided by reason preferably through the intervention of enlightened despots or an elite, who would then also formulate the law. These ideas may be seen as the background to the French codification and to the nationalisation of private law formation in France. Others, like Rousseau, preferred the idea of the general will, more in the style of Grotius,221 defined by the social contract which made citizens outside it antisocial.222 In truth, even in the Enlightenment movement, law started to stand for the state and its insights and organisational talents, rather than for rationality. Thus, the idea of the radical reshaping of society through state law took hold, ultimately extolled in the Republic of Virtue of Robespierre, in which states were paramount in all things; individuals were nothing. All was policy. There was no natural or other immanent law or balancing principle left.223 This is Romanticism, of which Rousseau was the true originator, but which got its real chance in Germany. While summarising the views of these thinkers on the sources of the positive law, it should be realised that (with the exception of Rousseau and Robespierre) they were first and foremost philosophers and not political theorists. They are therefore less explicit than modern thinkers on law and state would be. Nevertheless, the drift in their ideas is clear and undoubtedly had to do with the emergence of the modern state in an increasingly nationalistic environment in which the law, even private law, was ultimately thought to be at the will of legislators, therefore of the state, or at least that became the idea. The law is here made, subject of written texts, and even in private law—that is in the law between individuals or private citizens—in essence no longer found in moral, social, rationality or efficiency needs, but prescribed by the organisational talents and insights of the modern state, which then also becomes the ultimate definer of our values. There are no other. 217 See G Bruun, The Enlightened Despots (New York, 1967) 32; see further also G Himmelfarb, The Roads to Modernity (New York, 2005) 181ff. 218 Spirit of the Laws, XIX, s 4. It is interesting that a historical or cultural element is introduced here that goes against the more mathematical and universalist notions of natural law. This was also the approach of his contemporary Giovanni Batista Vico, as such precursor of the nineteenth-century idea of law as a national product, which found its defenders in Germany, particularly in the Historical School as we shall see in the next section, and in England in the philosophy of Burke, Bentham and Austin. 219 Condorcet (1743–94) opined in this connection that a good law was for all, just as any true proposition is valid for all; see F Furet and M Ozouf, A Critical Dictionary of the French Revolution (A Goldhammer trans) (Cambridge, MA, 1989) 729. 220 Sieyes, Qu’est-ce que le tiers état? (1789, republished New York, 1979) 10. 221 It came to the Encyclopedie through Diderot’s article on ‘Natural Law’, where it was still connected with the idea of true rationality or reason, and as such always paramount. Rousseau no longer saw it that way. Law and its creation became the policy (and whim) of the sovereign. 222 J-J Rousseau, The Social Contract, Vol IV (G Cole transl) (Chicago, IL, 1952) ch 8, 439. 223 Lettres a ses commettans (Paris, 1792) II, 55.

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1.2.9. The German Pandectists and the Historical School. German Idealism and the Road to Private Law Codification in Germany In the previous section, a number of eighteenth-century ideas on the law, private law in particular, its origin and nature were discussed. They always return, and modern thought about the law, private law in particular, seems not to have moved forward a great deal, although modern attitudes, especially in the US, started to concentrate more on interdisciplinary studies and empirical research, testing in particular more abstract legal notions and presuppositions in real life, as we shall see, and considering their ethical, social, cultural and economic impact, especially in terms of policy and its effect. It has already been noted that in this approach, the law is considered the result of the constant debate in society about its coverage and meaning and it can never be fully known or stabilised by legislatures or courts, whether in private law, regulation or otherwise and however pushed forward. Even resort to rationality whatever it may be, which is often still assumed to underlie all legal normativity, might not be able to complete it and elevate it into an intellectual system of full coverage through systemic thinking. Even in civil law which is more inclined towards it, this is clear especially in interpretation and gap filling whenever new and unexpected fact patterns arise and probably clearer still now that we must also think of the law’s transnationalisation in commerce and finance. In civil society, pressing issues of justice, social peace and efficiency may then also enter the equation; public policy is another—it was already mentioned several times. At least in the American idea, law moves with society, the system is open, necessary in order to remain relevant for the next generation. Law is there basically to make life easier for all, not merely to take care of dispute resolution and its (greater) formalism, see section 1.4.18 below. The previous discussion introduced in this connection the subject of codification of private law in civil law countries, especially in France. Before coming to the German codification variant, which came in 1900, about 100 years after the French one, and ultimately to the topic and method of codification more broadly, the German Pandectists and the German Historical School of the nineteenth century must be mentioned. First it should be realised that during this period, the Roman law of the ius commune continued to hold sway in Germany besides the law of a multitude of German states and cities, and it was further developed. This was done by the so-called Pandectists, who managed to give an important further stimulus to this law whilst intended to develop it more as the living law operating in Germany at that time. It meant that even the Roman law of old acquired a more nationalistic and territorial German flavour. Second, there was also what became known as the Historical School which overlapped in time but was separate and more a movement than a positive law creator. It is the school of thought attributed to FC von Savigny, Professor at the Humboldt University in Berlin from its foundation in 1810. He rose to fame early, as the result of a pamphlet written in 1814,224 in which he attacked in extravagant terms the suggestion of FJ Thibaut, Professor in Heidelberg, for an all-German civil code to counter the great diversities of laws in the different states within the Germany of those days (Germany being unified only after 1870),225 some need for which could hardly be denied, although there remained room for legitimate disagreement on the method. In the course of this diatribe, the French Code Civil of 1804 was sharply criticised, called a cancer that had spread into Germany (where it was and remained in force in areas that had been occupied by the French), in which context von Savigny condemned not only its system but also the works of Pothier on which 224 FC von Savigny, Vom Beruf unserer Zeit für Gesetzgebung und Rechtswissenschaft (1814). 225 FJ Thibaut, Über die Notwendigkeit eines allgemeinen bürgerlichen Rechts für Deutschland (1814).

Volume 1: The Emergence of the Modern Lex Mercatoria 111 it was partly based. Later (in the largely rewritten second edition of 1828, followed by a third one in 1840), he accepted the unfairness of this attack. His main thrust, which he did not weaken, was in fact against the natural law school because of its abstractions, and especially its universalist pretensions and its perceived lack of respect for the historical development of peoples, although the basic approach of the natural law school had in the meantime already led to the national Prussian, French and Austrian codifications. Although they were undeniably expressions of individual states, and in that sense nationalistic, von Savigny considered them unscientific, by which he meant that they did not properly reflect the natural development of the laws of these countries (or Volksgeist). In this connection, he showed a marked, rather modern, preference for a more flexible and dynamic concept of the law and also became concerned about the static nature of legislation and of codification in particular. That part of his thinking was, however, soon forgotten. It suggested a practical down-to-earth approach based on local laws and their dynamics, but the truth was that von Savigny was not a practitioner (although he had experience as a judge) and was mainly interested in Roman law, which he admired. This was not the ius commune version either,226 even less the work of the Pandectists—it was considered too diverse and by many not sufficiently enlightened—but rather the classical Roman law in so far as it could be known or reconstructed, or otherwise the Corpus Iuris up to and including the work of the glossators.227 The rediscovery of the Institutes of Gaius in 1816 clearly helped in this connection. However, there were some glaring contradictions from the beginning. First, this effort was hardly German or nationalistic. It was notably not sociological either, or value and policy conscious.228 Although there developed in Germany also a German wing in this movement,229 whose argument ultimately centred on the quality of the ius commune as explained by the Pandectists and of local laws and their further progression, it was ridiculed by von Savigny and his successor Puchta, although it could have provided a more obvious basis for German codification than Roman law casuistry. Their work still has importance for the development of the modern lex mercatoria as non-statist law because it relied (against Puchta and his statist views) on the autonomy of community law (Genossenschaftsrecht), which was not contractual (as corporations were considered to be) but communal (Associationsgeist). Hence the idea of the private law corrected by the public interest with its objective requirements that are founded in the community itself. In a German way, the private and public sphere are here closely related and not necessarily separate.230 One may recognise this better in the formation and operation modern lex mercatoria. If indeed the idea had been ultimately to be guided by the Volksgeist, under Puchta, it soon became a belief in national laws, which was then translated into national legislation and therefore codification for a modern centralised and civil service-dominated state and judiciary. It was also inspired by theories of Fichte with his glorification of the active, dynamic and imaginative

226 To which he nevertheless devoted much of his earlier research published in his Geschichte des römischen Rechts im Mittelalter (1815–31) six vols, although his admiration stopped at the glossators. 227 To which he devoted his second main work, the System des heutigen römischen Rechts, published in eight volumes between 1840 and 1849, supplemented by another two volumes on Obigationenrecht in 1851 and 1852, in the parts concerning the different contract types never completed. 228 His books were ultimately neither treatises on Roman law nor on the use made of it in nineteenth-century Germany but presented rather a more abstract legal theory of private law; see especially also the Vorrede in which this is explained (especially XVIII, XIX and XXV). Much of it was translated into English. See for his work and also that of Puchta, H-P Haferkamp, Georg Friedrich Puchta und die ‘Begriffsjurisprudenz’ (Frankfurt, 2004), 118ff. 229 It was led by G Beseler, Volksgeist unter Juristenrecht (Leipzig, 1843), and later by O Gierke, Die historische Rechtsschule und die Germanisten (Berlin, 1903). 230 Although seen as opposites, the private sphere remains distinct and its law autonomous and diversified.

112 Volume 1: The Emergence of the Modern Lex Mercatoria (Germanic) self, ultimately best realised within a state outside of which in this view individuals could not achieve their purpose or attain their aspirations and freedom.231 The Volksgeist thus started to be concerned with form rather than substance.232 As a romantic notion,233 there is here considerable tension in legal matters as all law, not only legislation, is based on or assumes 231 JG Fichte, Sämtliche Werke iii 47/8, and vi 306. (Berlin 1845/46). It reminds of the idea of the polis in Greek philosophy, see s 184 above, but became ever more pronounced, now at the level of the modern state. 232 The question then became whether the Volksgeist was the national spirit (or perhaps an assortment of national spirits), which prevailed autonomously, or rather became the ordering technique of a modern state, which determined the shape of the new codified law. Was it therefore national custom-oriented, or was it state action-driven? In other words, was the concern immanent law formation (even if Roman law inspired) or was it about strategy and policy? Was the new law to be embedded in social cultures or values, in economic realities, or propelled by public policy? Or was it, at least in private law, mainly an intellectual exercise—private law as icon of German legal thought and intellectual culture—or all of this and more? In the meantime, the Volksgeist itself appeared to become largely anti-industrial, anti-capitalist, anti-big city, and in that context sometimes even anti-Semitic, see the comment of Klenner in n 236 below. 233 Romanticism itself may perhaps best be defined as mankind’s efforts to come to grips with its own irrationalities. It is as such a reaction against the Enlightenment which, in line with the classical tradition, proceeded from the idea that all had its given place and that also applied to human action which, if properly understood, was in truth rational and that was then also the underlying theme in the law, which was contained thereby. This reminds of the Stoa and Grotius’ teachings, see s 1.2.7 above. Romanticism reacted against this. See for an introduction to romanticism, Isaiah Berlin, The Roots of Romanticism (Mellon Lectures, 1965–66, edited by Henry Hardy first published in 1999).In romanticism, the true accent is on will or creation, not primarily on knowledge and innate patterns or empiricism. Rather, it is based on the idea that everyone creates its own universe including its values and that is it.There is no structure in our experiences beyond what people have managed to create for themselves. There is no limit to freedom in that sense, nor is there any form to the unceasing flow of human experiences. Social reality as we can perceive it is an amalgam of dark forces that can at best be understood in terms of myth and symbolism or metaphor, but we never really know for what they stand. There is no innate rationality. In this mindset, the state also becomes a mystical institution, and so is the law that it then creates, but it can do so at will and there is, at least as far as human behaviour is concerned, nothing beyond a state’s control and there are here no innate rules or limitations for states either. Soon it was thought that there was no other source of law, rationality or even morality outside it, nor were there any freedom or values beyond it. Man can only live in society in which all is policy. Rousseau used here the theory of the social contract, Hegel the dialectically progressing spirit to reveal the ultimate truth in the real world. The origin of these ideas may already be found in the Greek view that mankind could only achieve its true fulfilment in the polis, as we have seen in s 1.2.6 above, but the more extreme modern version may be found in Fichte (n 231) and in Hegel (n 215) where the state becomes the true expression of the human condition and its laws the only laws that count, seen here as an ongoing process of positivation in the self-realisation of man and of its freedom in that sense, that is, always through the state. In this view, the invisible hand of the market can also be manipulated, and so can the rest, either in a conservative or progressive manner or in any other. The creation can be improved and that becomes the true task of humanity through the state. The action is not then primarily on knowing society but on creating it, with the state as the ultimate modern re-creating force. Law formation becomes a tool in that process, which is organised by each individual state in its own image or inexorable march into history. That is one idea of modernity, see further s 1.3.7 below. Later nineteenth-century private law codification may be seen in that context, especially in Germany, and is not then confined in its reach by innate, pre-existing principles or realities properly discovered. The idea becomes rather that an intellectual construct of this nature, although based on past experiences and insights, can be recast and systemised at will. As such, it can fully control social realities (whatever they may be) for now and the future, see n 234 below for the philosophical back-up. The system of law is then the one we make, and its values are the ones we give it through the state. Again, this is strongly romantic and remains a dominant strand in the codification ethos besides mere system thinking, which was probably always anaim of German idealism but then without any restraint in reality; rather is was reality and there was nothing beyond this kind of academic model which figured as truth, see further n 236 below. In this manner, the combination of romanticism and idealism is given over and made subservient to the hubris of the modern super-state in what was believed to be a makeable society that could be recast at will by states and in which the law was used to impose and enforce their aims; see further also the discussion in s 1.3.7 on postmodernism. In this vein, even academia and its models would lose out against politics.

Volume 1: The Emergence of the Modern Lex Mercatoria 113 some sense of order even if it redirects it. The key would appear to be in the true knowledge of reality and how it works and whether such knowledge could be reliably attained. Only thus could a better legal normativity or framework be assured. The modern state was then thought to have that knowledge or the deeper insight per definition. In the Fichtean view, it became the secular messiah. The true aim of the Historical School became increasingly to support that notion leading to its aim of formulating an intellectually coherent system of law on which the state would rely and in which even the analysis of the old Roman casuistry became secondary. Intellectualisation along national lines thus seemed to become the objective in order to raise the law to a higher level as a prelude to national codification, which was then no longer to reconstruct the original Roman texts either. This led to a second contradiction in that the intellectual and more abstract method of the natural law school, which was so vividly rejected for its universal claims, was in this respect fully embraced and continued, ultimately descending into pure academic system thinking, albeit of a domestic nature, see for system thinking more in particular also section 1.2.12 below. The idea was that in this manner the truth in the law could be discovered (per country)234 and a legal system could be devised that was connected with it and was stable.235

234 In practice, this became the real successor of the Vernunftrecht, see text at nn 186, 193 and 197 above, and raises important epistemological questions in terms of a-prioristic knowledge, abstraction and social control through intellectual system thinking, which also poses the question of empirical verification and validity, and truth in that sense. The philosophical concept of realism assumes here that these a-prioristic abstractions reflect nature or reality, also in the social sciences, meaning that all order that is so found was already there, is intrinsic, and the knowledge of it of a universal nature. This is reminiscent of essentialism or the structuralist approach in more recent French philosophical thinking (Levi Strauss). In this view, academic endeavour brings out the essences and empirical research is not truly necessary; there is a claim to scientific truth, in the social sciences ultimately borne out by acceptance in the peer group (rather than in practical result or operational benefit) and ultimately by the state. It allows for little disproof and whether or not it has meaning in real life is not then a prime issue. It is assumed. In romanticism that goes even as far accepting in this connection the ‘truth’ of what is in fact mere policy even if cast as an intellectual choice in this regard. Another view is that these academic models remain volatile and are there merely to simplify our perceptions of the world to increase our ability to improve it but they change all the time. To gain more ground and credibility, models of this nature may be supported by ‘epistemic communities that look for new perceptions and paradigms all the time’, see for these communities, J Krieger (ed), 1 The Oxford Companion to Comparative Politics (Oxford, 2013) 351 and PM Haas, ‘Introduction: Epistemic Communities and International Policy Coordination’ (1992) 46 International Organization 45 and more recently PM Haas, ‘Ideas, Experts and Governance’ in M Ambrus et al (eds), The Role of Experts in International and European DecisionMaking Processes: Advisors, Decision Makers or Irrelevant Actors? 19 (Cambridge, 2014). See earlier also JG Ruggie, ‘International Responses to Technology: Concepts and Trends’ (1975) 29 International Organisations 557. See for paradigm change also n 254 below. The idea behind these communities is to develop and sustain new visions all the time, see also C Heath and D Heath, Made to Stick. Why Some Ideas Survive and Others Die? (London, 2010). The danger is that they become fundamentalists in what they have found and that modern networking takes over in the recognition of their ideas, resulting in ‘socialized truths tests and common causal beliefs’. All then becomes communal opinion (seeking), critical of others but uncritical of themselves. This may also reach politics when intimnately connected. The EU is sometimes identified as one of those communities, being prone to clichéthinking and deadlock, not capable of rethinking anything. The Intergovernmental Panel on Climate Change (ICPP) is sometimes held out as another example of such a frozen systemic community which may easily be hijacked by a small group of insiders who rely on deference to science or pretend a politically untainted form of credibility and scientific rationality. Haas himself noted that despite a veneer of objectivity and value neutrality, the findings may remain highly political if not also irrational. That may be clearer where in the romantic mindsets states take over in all forms of organisation including law making alleging an insight into the truth of human relationships through its academies that might be contrived. It remains to be seen in this regard whether an epistemic community can be created to sustain legal transnationalisation especially in commerce and finance where it would need to evolve in support of positive law formation and application at that level.

114 Volume 1: The Emergence of the Modern Lex Mercatoria At least in its aspirations, this went far beyond the work of the Pandectists. It was not necessarily practical but pretended to a higher form of ultimate rationality that the state would support and express as its higher truth. Although intellectual in this way, it aimed to be parochial at the same time. It ultimately came to embody another typical nineteenth-century German aspiration of law as system and its application as mere technique, not unlike the achievements in the natural sciences. This may be seen as a particular support and product of German idealism,236

The philosophical discussion about realism is not new and has gone on since medieval times under the name of realism versus nominalism. It is further complicated by the need of language to represent the models which creates another lawyer of complexity beyond any rationality that may lay behind it and then needs expression if it is still to be taken seriously and means to go beyond mere speculation or policy objectives. See also the research of LM de Rijk, notably ‘The Role of Language in the Empericism of Aristotle’, Royal Netherlands Academy of Arts and Sciences (Vol 67, 2004) and the views in Platonic, Aristotalian and Medieval thought. Realism (which should be well distinguished here from the modern American notion of legal realism) suggests in this connection that the academic model presents indeed truth. Nominalism holds the opposite. Although in this latter view a-prioristic rules may still exert some control over nature or reality, whatever that is, all is ultimately definitional and a true insight into the creation is not considered to be within human bounds. This led to the idea—even for Kant—that the laws of Newton were not laws found in nature, but were mere human abstractions or models that nevertheless could explain nature (better). But the true relationship was never clear and it was conceivable in this approach that in due course an entirely different theory could emerge that explained nature better. In fact, we might never know the real truth (the noumenon). If this were to be so in the natural sciences, it would be all the more so in the social sciences, including the law, where there may be no discoverable truth in how society works at all. At best it can be established that certain concepts work better than others but this may be time and place specific and not permanent. Here empirical studies become important and pragmatism sets in, see also s 1.3.7 below. 235 See, for an interesting contribution and the damage the scientific idea of law in this sense may have done, the work of G Samuel, ‘Can Legal Reasoning Be Demystified?’ (2009) 29 Legal Studies 181. See, for a more fundamental criticism of framework thinking of this kind also the work of K Popper, cited in n 265 below. 236 German idealism is referred to in this context but is hard to describe or define; see also K Americs (ed), The Cambridge Compendium to German Idealism (Cambridge, 2000). In a narrower sense, it is often associated with the speculative philosophy of Fichte, Hegel and Schelling and the idea of the pre-eminence of the modern state, but it may also be seen as a more comprehensive German intellectual ideal, which sought to understand all our most basic intellectual concerns. As such, it was in origin a scientific method based on introspection that allowed for other tools than pure reason to reach levels of reality believed to exist beyond mere common sense observation and it suggested a speculative feature in this endeavour. It was not merely deductive or analogical but extended into model building. It could become quite experimental, even speculative. In the Hegelian view it was the progression of the spirit through dialectical reasoning that gave us insight. This kind of idealism was concerned, in particular, with the development of modern science and its impact and effect and with our capability of steering newer realities in this manner. Much behind this was the thought that there were indeed universal concepts that held this world together, and not only in nature or in the natural sciences; in society they might be discovered by the social sciences. Although they might never be fully known (in Kantian parlance the world of the noumenon), the world could be improved by searching for them. This then became the scientific ideal also in the social sciences. It put intellectual endeavour of this nature or Bildung at the centre of modern development. Especially (although not exclusively) in the manner of Hegel, the dialectically progressing spirit is expected to reveal here the ultimate truth in the real world. If the facts do not fit the picture so developped, they must be misunderstood or adapt or are ignored and become irrelevant. Empirical research is not necessary. Truth, justice, social peace and efficiency will follow the proper understanding engineered in this way in the study of society and its operation. In the law, rigid system thinking may be the result and is then perceived as the correct legal methodology, see further also the discussion in s 1.2.11 below. It should be noted in this connection, however, that Hegel was no supporter of von Savigny and repeatedly rejected the teachings of the Historical School as atavistic, unworldly and ignorant of present-day needs and interests; see H Klenner, ‘Savigny’s Research Program of the Historical School of Law and its Intellectual Impact in 19th Century Berlin’ (1989) 37 American Journal of Comparative Law 67, 77, who noted the conservative, mystical and even reactionary undercurrents in the Historical School and in the work of von Savigny in particular, in this respect thought to have been entirely in line with the Prussian politics of the day. Much the same concerns have been expressed, however, about Hegel’s work. In art, the result was (confusingly) called naturalism, meaning a scientific or academic depicting of reality, see A Hauser, 4 The Social History of Art (London, 1951), 60ff. Indeed, reality itself becomes here a purely academic concept, in the criticism of Nietzsche mere fiction or myth even if necessary to organise life and for it to continue,

Volume 1: The Emergence of the Modern Lex Mercatoria 115 ultimately descending into the idea (not, however, universally held237 but much followed) that through a scientific model akin to that of the natural sciences,238 a set of legal rules could be distilled that had validity, reflected reality, and held in it the solution to all legal problems, past, present and future. It was fair, society promoting, and efficient by definition. No further research was necessary. This is an advanced form of the philosophical concept of realism. Legal positivism Nietzsche Werke, 1895ff, XVI, 19. In this view, only music had a more direct but only fleeting connection with an inner world or deeper reality. This type of idealism can only be mentioned here but, like romanticism (see n 233 above) and nominalism (see n 234 above), this is not the place further to elaborate on these important ideas or undercurrents in modern thinking, except to say that these searches became central to German thought and scientific endeavour in the nineteenth century. It was at the heart of the rise of German academic influence and gave German science its pre-eminence, which lasted until World War II and reached its height during the Weimar Republic in the universities of Goettingen, Halle, Jena and Berlin (Humboldt); see also P Watson, The German Genius (New York, 2010). Intellectualisation is here innovation and renewal and finds therein its reason to exist. It is sadly missing from modern academia in Germany, not least in legal studies, possibly because of a feeling that it led Germany astray, see also G Teubner, ‘Law and Social Theory: Three problems’ (2014) 135 Ancilla Iuris, even though the German Academic Council (Wissenschaftsrat) complained in 2012 about an excess of ‘positives Norm- und Applikationswissen’ in German legal academia (see nn 56 and 104 above) and started to ask for more transnational, empirical and interdisciplinary research. Rather, this type of explorative thinking remains at the heart of the academic endeavour in the top US universities and law schools to which the German academic method emigrated, leaving the European universities behind as mere high schools, teaching a fixed curriculum and, in the law, using practitioners` handbooks. Innovation and experimentation became secondary; they are deemed speculative and as such then often unacademic. Ultimately this endeavour crystallises around the very question whether there are innate structures in reality, as our thinking perceives it, whether they can be spotted and our language can express them, or whether all is merely in the mind or psyche even if some structure may sometimes still be discerned and some may be seen to be better than others—Wille und Vorstellung in Schoppenhauer’s more sceptical philosophy. Can we know reality through scientific endeavour, or otherwise perhaps through religious revelation and mysticism, or through searching our inner self for hidden truths revealed through intuition or common sense? Is the human mind indeed capable of understanding all or is it too small or limited for this? At best our knowledge would be very incremental. It may be observed in this connection that modern philosophy since World War II has largely separated from the German nineteenth-century tradition and no longer seeks inner, more universal structures (if we may leave the French structuralists to the side). It is as such much more diversified but also, it could be argued, much more disjointed and its objectives are less clear, its impact less obvious, also in the study of the law, even in Germany, where students now commonly know nothing of this. 237 Scepticism appeared early, especially in the works of Dilthey (besides Nietzsche and earlier Schopenhauer, see the previous note). It suggested complete relativism which, at least in the social sciences, is perhaps the essence of the modern scientific idea and modernism itself; see also s 1.3.7 below. It did not mean the end of system thinking especially in the law, but only that it was not based on any inherent normativity but indeed rather on some models that identified and were based on some more durable structures in past experiences, which these models then strung together into a more coherent intellectual framework or narrative for the present, if not surrendering to mere policy. The concepts behind an intellectually higher developed private law were then thought to be based on quantitative and qualitative simplification, which made their application possible and led to an intellectual system that could claim still to have the legal answers and to solve all problems. Logic, deduction and analogy remain then the basic tools. This was later also called Begriffsjurisprudenz (see also s 1.2.13 below) and it could be said that von Savigny’s work and method were the start of this; see also K Larenz, Methodenlehre der Rechtswissenschaft (Berlin, 1979) 19; J Ruckert, ‘Savigny’s Konzeption von Jurisprudenz und Recht’ (1993) 61 Tijdschrift voor Rechtsgeschiedenis 65; and Haferkamp, n 228 above. In law, the nature of the system and legal system thinking then became a more particularly German concern, especially vivid in the early parts of Von Jhering (1818–92’s Geist des römischen Rechts (auf den verschiedenen Stufen seiner Entwicklung)). It pre-empted a more sociological approach and may be value and policy insensitive. Legal positivism, with its ultimate belief in the dominance of statutory texts, follows and von Savigny is often considered an early adept, although he seemed less dogmatic and was mistrustful of texts, see the discussion in the text preceding n 227 above. For the law, this system thinking or search for system in this comprehensive and exclusive sense survived in Germany even in the important works of Eugen Ehrlich on law and sociology, following the sociologist Max Weber, n 7 above, see further also the discussion in s 1.2.13 below. 238 See for the sclerosis in theoretical thought and for further elucidation of this way of thinking in post-war academia in the social sciences and its comparison especially with the more creative English/American way of

116 Volume 1: The Emergence of the Modern Lex Mercatoria is a narrower variant: there is only interest in the statutory texts and the system underlying them. There are no other considerations or values in the formation and application of the law, very much the practitioners’ tenor in Europe at the moment to which academic thought has become subservient whilst writing practitioners’ handbooks.239 The German Historical School from the beginning promoted this idea resulting in a strong intellectual overlay but also much tension in the underlying concepts. It became the centre of a particular German intellectual endeavour240 that became the model at the heart of the German private law codification during the nineteenth century.241 Subsequently it became also much of the codification philosophy and interpretation model based on it elsewhere, as it were even retroactively in countries like France242 and Austria, which had codified much earlier. The idea was

thinking, J Galtung, ‘Structure, Culture, and Intellectual Style. An Essay Comparing Saxonic, Teutonic, Gallic and Nipponic Approaches’ (1981) 20 Social Science Information 817. One problem became here what the true objectives of scientific endeavour still were for the law. The human mind and its creativity remained at the centre of academic thought but it was not clear to what kind of discipline its freedom was to be subservient and what the true meaning and purpose of academic endeavour was to become. A better world, but by whose standards? Or was it all mere policy and political choice? As the humanist ideal of freedom had in the meantime largely collapsed into nihilism or extreme existentialism, there was a risk of all ending up in the tyranny of the intellectual framework, whose origin, foundation, purposes and ideals were unclear, see further n 265 below. The practical issue became how renewal could still come about in the law, eg the way back from nationalism to forms of universalism, or from formalism to greater forms of adaptability, at least in international commerce and finance and what the role of legal scholarship still was to be, see n 262 below and also s 1.3.6 at n 389 below. Is legal academia still able to fundamentally rethink anything and get traction? See further also the discussion in s 1.2.13 for Germany and for modernism and post-modernism the discussion at the end of s 1.3.7 below. 239 The message in this book is that we look for or should be looking in the law for structures at the micro level (see s 1.1.7 above), not for system in this all-dominating sense of holding in itself the answer to all legal problems and laying claim to absolute truth even in the social sciences. At the macro level, there is a need for developing ever newer models to clarify and simplify our approach to and understanding of what is happening and to what is needed in society. These models must constantly evolve, nothing is fixed per se, see also nn 235 above and 265 below. Academia must be innovative and look for ever better ways in a fast-changing environment. Without it, it is nowhere, and nothing is fixed or absolute. 240 See n 7 above for the views of Max Weber, who thought that system thinking of this kind was necessary to better support a capitalist economy although he had difficulty explaining how the very different common law did work as well for England. 241 Thus, in law, the nature of the system and legal system thinking became a particularly German concern, especially vivid in the early parts of Von Jhering’s Geist des römischen Rechts (auf den verschiedenen Stufen seiner Entwicklung), see n 237 above. The idea was that in law formation, the state follows the insights of its academies, and then claims superior knowledge (not democracy) for its authority to nationalise all law creation and rubber-stamps the academic proposals. Interestingly, it led from the beginning to von Jhering’s rejection of the purely national character of private law. The fact that Roman law at its most developed was received in Germany showed, in his view, its more universal character. This makes a great deal of sense and goes back to natural law thinking, but could not break the strong and irrational undercurrent in the nationalisation of all private law in Europe since the nineteenth century. Nationalistic system thinking remains a strong German conviction; see also the reference to Karl Larenz in n 6 above, although in a later phase of his life, von Jhering himself started to question not only nationalism but even system thinking of this nature, in what became to be called Interessenjurisprudenz. See also the work of Heck, Kantorowicz, and Ehrlich referred to in s 1.2.13 below. It puts greater emphasis on justified practical need and a more dynamic approach to private law and its formation and application. It had particular relevance in matters of interpretation. 242 See even now in France eg G-G Granger, La science et les sciences, 2nd edn (Paris, 1995) 70, still extolling this kind of scientific ideal for the law, in which abstract models of the real world, built on practical experience, are applied through logic and mathematics to new fact situations. Creating these models is considered real legal science meant to find the missing links in legal normativity and able to predict and regulate all human behaviour. The idea is that ultimately one great universal model of rules can be found that covers all, nature as well as human relationships. Short of such an ultimate triumph, the question remains, however, how such models can be tested for their (continued) validity, also in law and other social sciences, whether they are self-contained, autonomous and closed, and what place innovation and experimentation have in such an approach and how it can come about; see also the text at n 264 below. See for the role of empirical research s. 1.3.7 and n 390 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 117 therefore that all these codes presented or were based on a sufficiently clear idea of the reality of human relationships, how they worked and what was behind human behaviour and endeavour, and could thus control and guide society completely producing at the same time the right answers in terms of justice, social peace, efficiency and growth for the past, present and future.243 The downside was that the law became set in concrete in nineteenth-century models that were given excessive weight and were hard to escape and provide for answers in the twenty-first century. The immediate result was that during the earlier part of the nineteenth century, the moment for a German codification was not thought to have come since there was no proper all-German legal science. Filling this void became von Savigny’s programme, undertaken by himself and his students, among whom could be counted in particular Puchta (his successor in Berlin), Dernberg, Vangarow and Windscheid (in Leipzig).244 At the same time, Theodor Mommsen meant to unravel the Roman constitutional and criminal laws, and sought nineteenth-century conceptual inspiration in them in these areas, at least for Germany. In the field of criminal law, codification had already started, however, especially after 1813 in Bavaria through the work of Feuerbach, followed in 1851 by a new Prussian Criminal Code. It followed that in an exalted idea of the modern state, the autonomy of private law was progressively abandoned in favour of state formulation of the basic tenets of all law, even of private law. The choices to be made and policies to be followed in this respect were laid down by the state. Individual rights and powers became less important, and in fact depended on state licence. Whatever was not covered by such law could not legally exist and was not legitimate. Values only mattered in as far as formulated by the state. This is the nineteenth-century romantic and German idealist inheritance and overlay, in which the Volksgeist itself becomes superfluous except for its nationalism, whilst all law, including private law and its values, becomes in the end subservient to modernity and its aims, and therefore political in a nationalistic sense with the modern state at its centre. The most significant formulation and intellectual underpinning of this result may be found in Hegel’s Philosophy of Rights (1821),245 an extraordinary work that may be deeply admired for its profound phantasies presented as reality narratives.246 Rather, it was submitted, the social structures are open, meaning that new needs and perceptions enter human experiences all the time. Values are not stable either. Extrapolation is dangerous, perhaps clearer in economics: the situation of economic depression in the 1930s was not the same as the economic malaise after the two oil shocks in the 1980s, or after the financial crisis of 2008, and the pandemic in 2020/21. The natural sciences, on the other hand, may be seen as representing more properly a closed system where there may be eternal laws. It follows that academic models in the social sciences including the law are more in the nature of tools of ordering and critique of what we have than representing ultimate truths. At best, they could lay claim to representing present realities better and providing a more adequate framework of understanding, but it all remains to be seen and one cannot be sure. They are not there to predict the future and guide it with any kind of confidence. 243 This at first led to simplistic uncritical commentaries on the new codes, such as, in France, the commentaries of Aubry and Rau, but it is also at the heart of many subsequent commentaries, which are then seldom more than descriptive and mere practitioners’ manuals. They do not fundamentally critique the system but accept it as basic and follow it in the scholastic fashion. University studies in the law are then mostly similarly scholastic, uncritical, and not innovative, therefore hardly academic. 244 Of their books, Windscheid’s commentary was the most important: Lehrbuch des Pandektenrechts, which was reprinted even after the BGB was promulgated and at that time updated by Kipp (1900 and 1906). 245 See n 236 above for Hegel’s criticism of the early Romantics. However, some basic human rights were guaranteed but now only to the extent formulated by states. That had been the achievement of the French Revolution and its Déclaration des droits de l’homme (et du citoyen) and was the inheritance of John Locke. Yet even then, they often could not be directly invoked and meant in any event little in private law. In the meantime, the more universal or pan-European spirit of the ius commune was lost. 246 In this view it was the progression of the spirit through dialectical reasoning that gave the necessary insight (and ultimate rationality or a form of logic), where the state becomes the true expression of the human condition and its laws the only laws that count, seen here as an ongoing process of positivation in the self-realisation of man and of its freedom in that sense, that is, always through the state and based on conformism by the rest.

118 Volume 1: The Emergence of the Modern Lex Mercatoria In Germany, these notions and feelings ultimately came together, even though balanced at first by a laissez faire attitude. It did not aim at complete transformation but rather at reform.247 That was the background of the German codification in the Bürgerliches Gesetzbuch or BGB of 1900. Especially after the unification of Germany in 1871, the need for a national German codification was felt and the systemic scientific basis for it was then considered to exist, although von Jhering in his later work had already criticised this intellectual exercise in favour of a more practical (German) and less academically abstract (Roman) approach. Indeed, when the first drafts of the new Code (or BGB) appeared, they were criticised for their dogmatic and high professorial tone and for their lack of interest in social and practical issues,248 although the result was ultimately rather conventional249 and, often following Pandectist thinking,250 not always considered to have been a great improvement.251 Commercial law concepts, developed in the ius commune were often ignored.252 In practice, the approach was twofold. First, a general basic structure or general part of the (private) law was developed in which notions of subjective rights and legal act or Rechtsgeschäft and Willenserklärung figured large.253 These general notions were thought to operate in all legal 247 Moves to a more radical social approach came later, during the Weimar Republic after World War I, but led to nothing, see KW Noerr, Zwischen den Mühlsteinen, Eine Privatrechtsgeschichte der Weimarer Republik (Tübingen, 1988), although case law and more incidental legislation had already started to protect workers, consumers and later also small investors. Newer amendments to the BGB further destroyed any idea of one particular leading concept but the approach remained unitary, one system for all. 248 In particular, it did not lead to a whole ‘socialising’ or other transformation, although it was tried in Germany in the 1920s and is entirely compatible with codification thinking, based as it is on the notion of the makeability of the law and its system, including private law, and its total severability (it was believed) from any underlying principle (no natural law ideas) and complete surrender (if needs be) to politics: see further Noerr (n 247) and also the comment of Teubner in n 236 above on the German dread of legal experimentation after World War II leading to an extreme positivism even in German legal studies of private law. 249 Ultimately more by default than by design built on Roman law, but there was much borrowing also from the French Commercial Code. This was recognised by B Winscheid, Die geschichtliche Schule in der Rechtswissenschaft (1878). 250 Clearly, no more was considered necessary until the upheavals after World War I and the need for workers’ and consumer protection began to be felt, but it did not even then fundamentally transform private law and move it forward. 251 In fact, following probably more than was admitted nineteenth-century German Pandectist thought, there was at the practical level a significant break with the ius commune and its forward development, which was not always considered favourably; see H Coing, ‘German Pandektistik in its Relationship to the former Ius Commune’ (1989) 37 American Journal of Comparative Law 9, noting in particular the regressive attitude in respect of some of the major achievements of the ius commune such as the unification of the law of contract; the abandonment of the distinction between stipulatio and the contract consensus; the overcoming of the rule ‘alteri stipulari non potest’ with the development of agency (which the Pandectists exceptionally accepted, however) and the thirdparty beneficiary concept; the assignment of claims and the abandonment of the construction of the procurator in rem suam; the development of a general tort action based on an extended actio legis Aquiliae; and the transformation of the actio de rem inverso into an unjust enrichment action. 252 They had been left to a different branch of the law (so-called Deutsches Privatrecht). It had already resulted in an academic attitude in the Pandectists that had little to do with the practice of the law, notably with subjects such as company, patent and bankruptcy laws, and nurtured a tendency in them to become as intellectual and even system oriented as the school of von Savigny had always been. 253 The strong accent on the will in this connection is also a typical nineteenth-century idea, connected with romantic philosophy in which the creative force of mankind took centre stage; see n 224 above. Although the general will embodied in the state was supreme, individuals in the space left to them could still create their own environment in any way they wanted. So von Savigny, see 3 System des heutigen römischen Rechts (1840) 257. This emphasis on the will (rather than ratio), often in a personal anthropomorphic sense, already found in Kant, with its emphasis on freedom and creation, became relevant in private law especially in contract and offer and acceptance theories. As we have already seen in s 1.1.6 above, it suggested a thoroughly anthropomorphic attitude to contract law. It was to be expressed, however, in the statist legal framework and became a licensed concept.

Volume 1: The Emergence of the Modern Lex Mercatoria 119 institutions, subsequently to be developed as a second tier in family, property, contract and tort law, and to be interpreted in the light of the essence of these institutions. Together they formed the ‘system’, which was considered scientific and without which there was not supposed to be any correct legal reasoning. Again, this was evidence of a more general typical nineteenth-century scientific urge in Germany; see also section 1.2.13 below. Legal dynamism was not considered to be able to operate outside such a system, never mind what the national development of a people suggested or (globalising) business required. Thus, the system was closed and became everything.254 This may not be objectionable as long as it is empirically tested for its continued self-sufficiency and has an appreciation of the incompatibilities, contradictions, and insufficiencies when this law meets the facts in their ever-evolving appearances and unexpected configurations. This is where the problem starts: see further the broader discussion in section 1.2.13 below. To repeat, rather than as an academic model only, the system became perceived as a given societal truth, even if ultimately merely a political fabrication, and was as such basically static, although subject to some interpretational flexibility but always within its own ground rules or intellectual system (until formally amended).255 Again, in such a world, empirical testing was neither necessary nor relevant; this law was considered complete and to cover all eventualities including newer situations. It was considered close enough to reality to continue to lead and guide it. By definition it was just, promoted social peace, and led to efficiency, never mind how out of date it might have become—it remained the pretence. But it will be argued later in sections 1.2.11 and 1.4.1 below that this type of law formation and application may be subject to severe intellectual prejudice and, in its statist, formal and technical attitude and rigidity, has a problem with civil society, is likely to be confining, favours the establishment, and is the enemy of a dynamic forward-moving world. Whatever the early objections may have been to this system thinking, which eliminated all competing sources of law, the new German Code entered into force in 1900 after some minor revisions. The new Commercial Code (Handelsgesetzbuch or HGB) of 1897, largely a recast of the Commercial Code of 1861 (see section 1.1.9 above), entered into force at the same time.

1.2.10. The Civil Law National Codifications and their Coverage As noted before, the abandonment of the procedural and often incidental nature of private rights under the ius commune, and the progressive development of subjective rights under more general rules that were deduced from Roman and natural law principles, rationalisations, utility and from case law, or sometimes from local laws, was a long process on the Continent of Western Europe. This law was only delivered from its Roman and later religious (Canon) law overtones through Grotius and his followers, and was then able to find a more articulate modern-day expression.

However, the subjective interpretation technique that followed from this notion of ‘will’ subsequently had to be tempered to remain credible, first by a more literal interpretation based on mere declarations and later by a more normative approach to interpretation of the contractual rights and obligations of the parties, originally in purposive and teleological interpretation techniques and ultimately especially through good faith notions or a more objective approach to contract formation and application in terms of conduct and reliance, but this newer approach has still not fully played out. See for modern contract theory s 1.1.6 above and further Vol 3, s 1.1.4. 254 See also n 235 above, n 265 below, and s 1.2.11 below. In n 94 above, it has already been stated that German academics typically still look for system everywhere, even in more open-textured concepts such as good faith. 255 See also text at n 233 above for the early tensions this created, even in Germany.

120 Volume 1: The Emergence of the Modern Lex Mercatoria On the European Continent, by the eighteenth century, it had allowed for the creation of a legal framework of private law that was substantially considered rational, in its basics universal and intrinsically coherent, and capable of being comprehensively written down. It subsequently became intertwined with nineteenth-century nationalism and later with typical academic system thinking, which pretended to be able to capture reality and singularly able to steer it as we have seen. This was increasingly supported by newer ideas about the makeability of society through political action, then always national. Secular natural law, which had been found to be inadequate and in its universalism inappropriate, nevertheless still provided the basic method and material for the modern civil law codifications, therefore for the French Code Civil of 1804, even for the German BGB of 1900, and all others,256 but was then deemed fully expressed therein and did not retain a residual supplementing or correcting role. Codification was itself not a natural law school idea. We have already seen at the end of section 1.2.8 above that it was at first more properly a product of the Enlightenment in the age of Condorcet, and therefore of French philosophical thought, with which the more German search for an intellectual system and the idea that it could only emanate from a state eventually fused. In section 1.2.9 above, it was further noted that, in Germany, codification was at first rejected by von Savigny, but later more particularly underpinned by German idealism supported by the notion of society creation at the national level and subsequently in private law more particularly by rigorous system thinking (always of a nationalistic academic nature). Indeed, it may still be maintained that the French Civil Code is primarily a product of the Enlightenment, an exercise in clearing up and rationalisation, and the German Civil Code one of romanticism and idealism in which first intellectual systematisation and subsequently the makeability of society through its laws, even private law, took centre stage, the state acting here essentially through its academies claiming superior societal insights into what was truly needed and would work. In practical terms, after the French Revolution in 1789, the Déclaration des droits de l’homme began to insist on a national codification of at least criminal law (Article 8); henceforth it would be the same for all residents (Article 6). In the first French Constitution of 1791, codification of the civil laws throughout France was demanded. Still, it was not necessarily out of a nationalistic spirit but rather out of a desire for equality and certainty for all, also in private law. As we have seen, only in the German Historical School did the nationalistic spirit (Volksgeist) take centre stage from the beginning and (whatever the contradictions in this school, which was fascinated by classical Roman law), after Fichte, Hegel and Puchta, the idea that the law could only be expressed through legislation at the level of the state as an imposed order that could only emanate from it. In the meantime, the French and German Codes were not the only ones. The elaborate Prussian Landrecht of 1794, prepared by Karl Gottlieb Schwarz, who also called himself Svarez, had preceded the German Code in Prussia. It remained effective there until 1900 (and in some of its organisational and administrative law provisions even until the official end of the Prussian state in 1947). Austria produced a more important work in 1811, the Allgemeines Bürgerliches Gesetzbuch or ABGB, prepared by Franz Aloys von Zeiller and still in force today. The impact of the French and German Codes spread rapidly, while whole new codes were introduced even in the twentieth century: in Switzerland in 1912 (prepared by Eugen Huber),257 in Italy in 1942, in Portugal in 1967, in the Netherlands as late as 1992, and in Brazil in 2002. These latter five

256 Codification in the UCC sense should here be distinguished as it was never meant to cover the whole ground and left ample room for other sources of law as we have seen in s 1.1.3 above, text at n 40. 257 The Law of Obligations was in fact already codified in 1883 and remained separate from the Code but was substantially amended in 1912.

Volume 1: The Emergence of the Modern Lex Mercatoria 121 codes were greatly inspired by the German example. French influence substantially waned, but it remains important, especially in Belgium and Luxembourg, and also in Spain and in many countries of Latin America. The Prussian Landrecht (‘Land’ in the sense of ‘country’, not of immovable property) was a code of more than 19,000 Articles, which also covered criminal law and much organisational, procedural and administrative law, and was indeed meant to contain all the law that was to be in force in all of Prussia at that time.258 It was quite different from the later French approach in drafting the Code Civil, where there was an effort to be concise, while the impossibility of covering every eventuality was understood and accepted from the beginning. It is an important insight in modern codification that is nevertheless often presumed to be complete (leading to and requiring a liberal interpretation technique to maintain this pretence). In France at first only private law was covered (1804); it was later followed by a commercial code (1807); a penal code (1810); and procedural codes for the civil, commercial and criminal courts (1806 and 1810). A similarly concise approach was taken by the Austrians in their codification of 1811. In France, it was the practitioner Portalis who ultimately managed to provide the necessary direction after four false starts under Cambaceres, later Consul together with Napoleon. Napoleon himself took an interest after 1800,259 although his true impact has never been properly established and was probably exaggerated later. Crucially, Portalis stressed that a code of this nature could not foresee everything but had to stick to a broader view and should not go into detail. That was the task of judges imbued with its general spirit. Unlike Justinian and Frederick the Great, there was here no fear of comment and interpretation except if done through the courts by general disposition (as the old parlements had done in France, see section 1.2.5 above). On the narrower subject of codification coverage—as may already be clear from the foregoing—modern civil law codes never had a pre-set content. Thus, some countries included in their codes company law and bankruptcy law, but they could also be covered by different statutes. In this connection, it should be appreciated that the term ‘code’ itself means nothing, and that all civil law private law statutes have a similar approach and status and are imbued with the same philosophy. The form is therefore not important and nothing should be read into the term ‘code’ itself. It is the method that counts, especially the intellectual unity of the system and the subordination of all other sources of law. Although in civil law countries, the idea no doubt was always to cover substantially all of the civil and commercial law in comprehensive codes, it is ultimately a question of convenience whether they do, or whether parts of it are enacted in separate statutes. The enactment procedure and requirements are no different, and convenience is the reason that the contents of the various

258 Prussia in those days spread from some possessions in the west, through the north into Berlin and its surroundings and into the very east of Germany, to what is now Poland, while there were also some possessions in the south. In this large area, the Landrecht was only meant to replace the supplementary, mainly general Roman and Saxon laws, and as such still remained supplementary to local laws where in force. Only in some Prussian areas, where, at the beginning of the nineteenth century, French law had been introduced under French occupation and had abolished the local laws, did the Landrecht become the primary source of the law. On the other hand, in large areas that became Prussian only after 1815, French codified law continued into force until 1900, especially in the Rhineland. The Prussian King Frederick the Great, who ordered this early codification and had been wary of lawyers and of the poor state of the knowledge and administration of the laws in this scattered kingdom, insisted on detail and thought that the judicial function could thus be reduced to the pure administration of the law. Hence its bulkiness, which he ultimately also disliked. 259 The history of the new CC is told by FA Fenet, Recueil complet des travaux préparatoires du Code Civil (Paris, 1827) 15 vols. The new commission of 1800 managed to make a proposal in four months (!), which was preceded by the famous Discours préliminaire of Portalis, see also n 260 below.

122 Volume 1: The Emergence of the Modern Lex Mercatoria codes may differ considerably from country to country while some parts of the law are left to be covered by more specific statutes. The key is that in a codification country they are all systematically connected into one system of private law that, in its purest version, is considered complete, exclusive as a source of law, superseding all prior enactments and other sources of law, and to be explained from within, assuming a single rational framework that is to provide all the answers. It is therefore not relevant that some subjects are covered in different statutes: all is considered one ‘system’, at the heart of which sits the civil code as the big spider in the web. As mentioned before, France and Germany also have commercial codes operating besides the civil codes, but always as one part of the same ‘system’, although their contents differ considerably (see section 1.1.9 above). On the other hand, Switzerland, Italy, the Netherlands and Brazil no longer have different commercial codes. Their content substantially merged into the civil codes as we have seen, although some of it may still be contained in separate statutes, such as company and insurance laws. Bankruptcy is another case in point: in most countries on the Continent, bankruptcy law started as part of the commercial codes, at least in countries that reserved this remedy for merchants, as France in essence still does today. Yet even in France, bankruptcy law was eventually taken out of the Commercial Code of 1806, as was company law, and was only reintegrated in the new Commercial Code of 2000. In Germany, bankruptcy never was part of the Commercial Code and company law (in so far as the AG type of public company is concerned) is no longer; in the Netherlands, after the demise of the Commercial Code, company law was transferred to the Civil Code. Bankruptcy law was part of the old Commercial Code at first, but had long been a separate statute (since 1896) and remained so after the new Civil Code became effective in 1992. In truth, bankruptcy is not properly a subject of private law at all. It is regulatory and only figures as part of private law for historical reasons. A specific feature which resulted from the circumstances of the time was the emphasis in these codes on natural persons and their relationships or dealings in an era when corporate entities or legal persons hardly existed. It led to a particular emphasis on the protection of natural persons in what we now call consumer law, which redistributed risk in contract in situations of force majeure and eventually also when circumstances changed and limited property rights from the beginning to those few, common in an anthropomorphic environment. Commerce and its special features or requirements in this regard were likely to leave more to the parties whilst allowing for greater party autonomy but this was largely ignored. It meant that the consumer ethos and its limitations and protections soon applied also to corporate and professional dealings. Although some of it was covered in commercial codes, they were rudimentary as noted, only lex specialis to this consumer law which applied in principle to all. Besides codification itself, it was identified as a more fundamental difference with the common law, in which contract and movable property law derived from commerce whilst the law would not redistribute risk and in equity allowed greater party autonomy in the creation of proprietary rights subject to the protection of the general public which had no search duty; it was limited to the professional insiders. The civil law tradition, which continued in the German Code of 1900 and the Dutch Code as late as 1992, with its emphasis on consumer law, operates to the detriment, it was submitted, of the development of a proper professional law and may also explain some of the resistance to its proper transnationalisation. As has already been observed, the consequence of nationalism and a local consumer law ethos was that civil law as we know it today is not one single family of law. It stands for codified private law as it was nationalised per country. Decisions in one country have not even persuasive force in the others. As a family it is dysfunctional. Naturally, as a point of comparative law, the laws of other countries may be held up as examples and so also could be the laws of non-civil law countries, but it is uncommon. Not even a shared origin in Roman law and in secular natural

Volume 1: The Emergence of the Modern Lex Mercatoria 123 law school thinking makes a difference, while general principle or custom are also not supposed to bind them closer together; this would be more likely if business law was properly separated. In any event, and as noted before, they are in many civil law countries contested as independent sources of law. This situation is different between the countries of the common law, which still have a basic communality in their laws and have in that way remained closer: see further section 1.3.2 below. The origin of contract and moveable property law in commerce may also help and it is not at all uncommon to see English and American cases cited at least for their persuasive force in other common law jurisdictions. This would be very unusual in civil law countries.

1.2.11. Nationalism and System Thinking. The Question of the Continued Relevance of the Civil Law Codification Idea Although all three early civil law codes (Prussia, France and Austria) were in essence based on the method of the natural law school and aspired to a form of rationality, as we have seen, their status and approaches were different. The Prussian Code was, as also noted, intended to cover everything, and as a consequence did not mean to leave much room for interpretation but was at first only a subsidiary source of law. The French and Austrian Civil Codes were, on the other hand, relatively short, were primary sources of law, stuck to the main topics and left the rest to interpretation, which consequently acquired a pivotal role. The Austrian Code, in its Article 7, allowed in this connection still for recourse to natural law if there were neither precedent nor other related statutes to resolve the issue. But the French Code was in this respect considered self-contained. That proved an important feature, which at first seemed to follow from the explicit abolition of all customary local laws in Article 7 of the Introduction Statute. It came about after Cambaceres had insisted on the continuing relevance of those laws and of the Roman law if not conflicting with the new Code. One recognises here the attitude still present in common law countries which in principle allows case law, equity and custom to operate besides statutory law. In view of the great regional diversity in these laws in France at the time, others insisted, however, on their abolition. In fact, Portalis thought this abolition the most essential part of the whole project,260 although in the discussions it had been observed that Roman law would always continue to have the persuasive force of the raison écrite. The principle was, however, established that all other sources of law besides the code had lost their legal effect unless specifically referred to therein. The much later Swiss Civil Code has a well-known special approach to its coverage in Article 1. It establishes that the Code answers all questions in the areas it covers but in the absence of a specific provision, it allows judges to have regard to custom and otherwise formulate the rule as if they were legislators. This approach remains unique in civil law, although ostensibly limited to gap filling, assuming here a fundamental difference with interpretation. But this facility is seldom

260 See Fenet (n 259) xcii–xciii. The views of Portalis are also otherwise interesting, see his ‘Discours Preliminaire sur le projet de la commission’, Fenet II 466: Codes are not made but move with the people. The laws are made for the people and not the people for the law. The legislator is more of a priest than an authority; wisdom, justice and reason are the guide. There is no perfect text. Lacunae are unavoidable, not all can be foreseen and this must be left to judges to deal with. Codification is not the place for experimentation since only the practice can discover the real needs. One may agree with all of this but nevertheless ask how in a faster-moving environment this kind of law can adapt and remain meaningful or whether codification becomes more of a hindrance than a help and favours ossification.

124 Volume 1: The Emergence of the Modern Lex Mercatoria used in Switzerland and has not led to a more dynamic approach to private law formulation. Indeed, the concept of civil law codification being self-contained and complete, and as such capable of covering all eventualities, remains in the minds of many one of its essential features. Even today, civil law cultivates this concept of codification being exclusive in the areas it covers, also in the sense of later statutory law having absolute precedence over all prior laws in these areas. It had, or acquired, that pretence even in countries like Austria and Switzerland, which had broader interpretation and supplementation provisions. In a more extreme form, it was already demonstrated that one finds this philosophy centred around system thinking and logic particularly in the German BGB and now also in the DCFR and its progeny in the EU. Again, one may note the pull of academia, which started to believe in the codified system being an adequate, if not also a true and complete expression of the reality of human relationships that could be so guided and controlled for the greater benefit of all. The basic texts are not then questioned and the approach is scholastic. However, only by moving interpretation and therefore the judge to centre stage was it able to work with that fiction and this attitude. In fact, the civil law codification idea suggests and implies a substantial measure of interpretational freedom for the judiciary, more so where the codification is less comprehensive or becomes older when reasoning by analogy in particular becomes a major tool to cover newer fact situations that could never have been considered by the older texts. Yet, in this approach, judicial liberty remains generally system bound and contained in that sense. All must be explained from within. It has already been noted in section 1.2.9 above that it is this academic ideal and pretence that has become the main distinguishing feature of all civil law, even if it was probably not the original idea in France. In the German manner, it resulted in a closed system of legal normativity, particularly targeted to the consumer. To repeat, in this way of thinking, there are no other sources of law, while the updating of the model is primarily left to academic research based on an extrapolation of past experiences embodied in the system, although subject to legislative approval. In this view, Parliament must rubber-stamp these academic efforts and not enter own ideas lest politics destroys the coherence of the system. In this mindset, political input would be tantamount to interfering with the laws of Newton. Logic is at the heart of this endeavour and will fill the gaps or missing links. The outcome is not questioned—it was already said that it is considered just, and to promote social peace and efficiency per se—and empirical testing is not considered decisive. As we have seen also, this became the civil law version of legal positivism and formalism—law as technique—which in international transactions, at least, may now be nearing its end: see section 1.4.17 below. It follows that all civil law codification tends to be intellectually highly ambitious but may ultimately prove to be unrealistically pretentious. Law becomes professorial, expressed in legislation and refined by judges in the system but in modern times, especially in the area of the law of contract and of personal property, it may have fallen far short of what is now required, at least in commerce and finance at the transnational professional level, see section 1.1.6 above, and it may be questioned whether codification of this sort and its system thinking remain here the proper answer. It may be posited that, as such, they could become socially and economically destabilising.261 261 It has already been suggested in the text at n 27 above, that there may be a price to pay for the sense of confinement in coverage that results from system thinking in the above civil law manner and from a codification ethos of this kind, for its inflexibility and its atavism, and for its in-built intellectual prejudice. It is arguable that it is exactly this attitude that has contributed, for example, to financial practice disappearing from civil law countries towards New York, London, Singapore and Hong Kong, all common law jurisdictions, and therefore to a serious

Volume 1: The Emergence of the Modern Lex Mercatoria 125 Rather, the challenge of modernity and its progression, see further section 1.3.7 below, is constant renewal and innovation, including private law, more in particular in commerce and finance, for codes to grow out of their consumer law mentality and adjust for transnationalisation. It is not unlike the situation in my house: I have an electrician and a plumber who can do very important things and make everything work, the electrician a whole electrical circuit, but they are of a relatively low education based on repetition. Much of the law is similar and repeat business of sorts even if we admit that all houses and all legal situations are different. Much can be learnt at the level of apprenticeship—it is the idea of a tool box. But if we want a wireless system, we shall need scientists to develop it and it will never be coming from my electrician. So, it is in the law while moving forward; it is unlikely to come from its practitioners. Here we need a higher form of education and insight to show better ways and to understand that what we have may become a hindrance. It requires another way of thinking that may well surpass much present academic thought which prides itself exactly of that toolbox. Whatever German academic thinking may have produced in nineteenth century thinking, it is now focused on this more limited modern result and is setting the tone in the EU and academia within it. Law formation and the policies and choices behind it and their validity are ignored. All emphasis is on the application of rules that are not further questioned. However, it may well be necessary to revisit the whole concept of civil law codification and its methodological approach to law formation and application more fundamentally, especially when a form of unified private law is considered for the entire EU covering also transnational professional dealings. This would be proper now that the operation of other autonomous sources of law has become increasingly evident and imposes itself in the international practice where a separate commercial and financial legal order has been spotted, seen in this book as the essential framework for the operation of the modern lex mercatoria. As mentioned before, the 2008–2009 DCFR is the latest expression of the codification ambition in Europe, now for the EU. Completeness, statism and staticism are its philosophy. But it remained in essence a consumer law document and transnationalisation is then still pre-empted by a nationalistic, statist law-formation ethos meant for transactions between individuals. It is very different from the approach of the UCC in the US, which at least in commerce and finance promotes legal dynamism and diversity and respects other sources of law. It has already been noted that, regardless of its name, the UCC is not a civil law-style codification at all. It may be noted that the rejection of other more dynamic non-statist sources of private law was never fully accepted, even in civil law,262 to which, in their interpretation paragraphs, the Austrian and Swiss Codes already testified. In any event, as will be discussed in more detail in section 1.2.13 below, in the area of interpretation, adherence to the system often became a question of semantics. General principle, good faith notions, custom and policy considerations connected with pressing ethical, social and efficiency concerns, unavoidably re-entered the equation at the interpretational level. So, what was so utterly rejected at the front door of law formation returned in the application process through the back door of law interpretation. The need for considerable freedom of interpretation to maintain the civil law pretence of completeness led to making use of all these sources, whether or not considered independent or autonomous regardless of how legal

Continental decline in a strategic industry and its intellectual back-up. It appears that the legal risk in respect of newer financial products is too high for this business to stay on the European Continent. As for EU efforts along these codification lines, London should beware. After Brexit, the insufficiencies of Continental legal systems may prove a considerable hindrance for getting business back from London. 262 See also text at n 284 below.

126 Volume 1: The Emergence of the Modern Lex Mercatoria scholarship reacted.263 Secular natural law tendencies thus survived, but it was seldom admitted that this could happen and system thinking remains paramount, at least in the modern German tradition. The proper role of academia is—it was submitted—indeed to formulate ever better hypothetical models,264 primarily to order the mass of information that comes to us in terms of legislation, cases, reform proposals and writings all the time, to clarify, simplify and find structure, but no less to test and critique in this manner the law that derives from more formal sources, such as legislation and cases, or from immanent sources such as fundamental and general principle, custom and party autonomy, and move the law forward in that manner.265 This activity may at

263 See for this reaction especially in Germany also n 94 above. There is still a more technical aspect to this when it comes to the possibilities of appeal on points of law, which was originally often considered confined to an appeal of statutory interpretation only, in which context an appeal on points of law derived from other sources was not possible: this was the area of fact. Another view was that, if there were other sources of law to be considered, they could become relevant only if the statutory source was fully exhausted, assuming that moment could be truly determined. 264 See n 242 above. By what the search for these academic models should be guided is a key challenge. Extrapolation of past experiences, existing case law and statutory texts became the usual approach in private law, but new paradigms or ways of looking at things or new pictures of reality may also be a guide, as is in the present the struggle between nationalism and globalisation in the formulation of private (transnational) law in the professional sphere. These paradigms need clear identification and appear to be the vehicles by which the science of the law can progress. Imagination and innovation, even experimentation, then become the centre of academic activity, see S Kuhn, The Structure of Scientific Revolutions 3rd edn (U Chicago Press, 1996), who defines a paradigm as a prerequisite to perception suggesting that what one sees depends on what one looks at and on what previous visual-conceptual experience has taught one to see, but the crucial change of paradigm comes exactly from an ability to see differently. M Foucault, The Archaeology of Knowledge (trl AM Sheridan Smith Routledge, 2002) was also concerned with paradigm shifts but saw them as related to periods and spaces, therefore to group efforts in time and place which are often not clearly identified or articulated, more the idea of the Zeitgeist. It is apt to produce cults, see further n 234 above for epistemic communities and their operation. Alternatively, lateral thinking has be suggested by Edward De Bono, Lateral Thinking (Cape, 1967), sometimes also called ‘out of the box thinking’, which is consciously unanalytical. The teaching of the positive law or the law as it is and its application may not then be considered a proper academic subject but a high school activity. The writing of practitioners’ handbooks is then equally considered unacademic and must be left to the practice of the law. That is indeed the attitude in the top American law schools, which will not engage in that kind of activity. Innovation and other ways of seeing is here the key, therefore the law of tomorrow, not teaching and expanding the existing ‘system’. 265 See for the relationship with reality, the text at n 234 above and for new paradigms and their importance see also the discussion in s 1.3.6 below. See for the new paradigms in civil law at the beginning of the nineteenth century, s 1.2.12 below. It was submitted previously that the law is an autonomous social force largely there to promote order, but better if it promotes in that context justice, social peace, economic efficiency and growth. That is the challenge of civil society, not different in the modern lex mercatoria, although the emphasis might shift to efficiency. In doing so, participants, including scholars, who study this process are likely to be guided by all kind of ideas, axioms or metaphysical ‘truths’ and other paradigms or mantras of which they may be hardly aware and which are often cultural but may also be generational. Even for academics, these are often not the subject of empirical study as noted before and adequate critique. Hence the often biased, (semi-)religious, atavistic, and conventional or purely wishful threads, even in academic findings or proposals. So far, there is little that is truly objective in the social sciences, except perhaps past experiences, although not even then their weight or importance. With present insights, it is probably not possible to do better, but it demonstrates and confirms that scientific truth hardly exists, neither in law formation nor application. It is another way of saying that academics may search for ‘truth’ but they are unlikely to find it in the social sciences. It becomes an issue especially where resulting legislation nevertheless pretends to have the correct insight and answers. At least one can test and discuss these prejudices or paradigms whilst certain outcomes may be empirically shown to be more ‘truthful’ than others. It is sometimes said in this connection that academically there are no facts without a model and no model without facts. It suggests a dialectic environment, but a key point is that

Volume 1: The Emergence of the Modern Lex Mercatoria 127 the same time provide better guidance for practitioners, in which connection another legitimate academic activity is finding more structure (but not imposing system in the above manner) in the positive law; see section 1.1.7 above. It was already posited that models of this nature are always preliminary and do not necessarily denote deeper truth but may generate renewed interest also in the more doctrinal aspects of the established law, where the better understanding of new paradigms may lead to more reliable, academically induced innovation. It is the task of academia everywhere to test these models for their usefulness all the time and improve them. It has already been noted that this is mostly not happening in modern civil law, academics largely missing the practical insights into what is going on and what is needed, while there is distrust of empirical research and interdisciplinary activity. In civil law, the academic models as contained in the old codes continue to aspire to be the sole guide and the emphasis is then on application, not law formation, but it is an ever more doubtful attitude that diminishes the true role of academia: academics writing practitioners’ handbooks and taking pride in it whilst becoming subservient! Even research institutes concentrate on rendering opinions about the positive law’s application. In education, the tool box idea prevails and academics behave as if they were practitioners. all academic thinking is abstraction in which only certain perspectives are taken or angles (eg ethical, social or economic perspectives or models or, in legal formalism, a purely legal one) are considered or their balance uncertain, so that it can as such hardly cover the totality of life (or reality in that sense) and its experiences, let alone their ongoing evolution. Facts in an academic sense thus become contextual fictions, in their description no more than opinion although some may be shown to be truer than others. It may be argued that only transcending philosophy captures them as they are or at least may be able to demonstrate better why we must beware. This being the case it is not surprising that in the law, tension arises between fact and norm. One may say that there are no legal norms without legally relevant facts and no legally relevant facts without legal norms. However, particularly in academic system thinking, we tend to work first and foremost on the norm side and devise models of norms that then allow us to determine the legal relevance of facts (from an academic point of view), but whether that is satisfactory at the practical level is a different matter. It may be argued that, particularly in civil law, we constantly confuse here the academic with the practical or assume them to be congruous per se. It may result in considerable intellectual bias in dispute resolution; see also the discussion above in n 87 and in s 1.4.2 below. For further thought on these important issues and particularly on the method and relevance of theoretical constructions or models in the social sciences (although not elaborated for the law), reference may also be made to the scepticism of KR Popper (1902–92), The Open Society and its Enemies (London, 1945), The Poverty of Historicism (London, 1957), and The Myth of the Framework (London, 1994). Here the idea is that we can study the predispositions in academic thinking through ‘critical rationalism’, possibly empirically but there is no scientific certainty. The academic framework is no more than an abstraction and we can still choose, which choice may then become a moral issue or at least a matter of individual responsibility, particularly in the social sciences. Paradigms assume such choices although they may remain largely hidden. Finally, in Hayek’s work, The Sensory Order (Chicago, IL, 1999) 230, the limits of reason in this context were further explored. Building on his earlier work, Hayek presents here two opposing views: rational constructivism claims that all that mankind achieves is due to reason and subject to human abstraction and control. This was in this view the aspiration of Plato, Descartes, Hegel, and Marx. The other approach is critical rationalism, which challenges the view that reason is capable of fully understanding and planning the social order. That is Popper. Operating through trial and error is then the best we can do and there are many unforeseen spontaneous consequences of our actions. Knowledge is widely dispersed although it can come together eg in the marketplace or in similar environments. The result is a spontaneous unplanned order, which is in this view the best we may be able to hope for. Central planning is bound to fail. Thus, there is no way eg that regulation can overcome the vagaries of the market process and guide the invisible hand because we do not have that kind of insight. Economic models capture at best correlations, not causations. The same is true for social models. They are neither objective nor comprehensive and much may fall in the cracks. Similar scepticism applies to statist rule making of all sorts, while causation acquires a non-automatic, non-mechanical and non-deterministic meaning. Much is here considered random in our social developments and its events. Even the possibility of progress may be doubted as society moves forward all the time and we can only capture past experiences and hardly predict the future on the basis of it. It is not the task of science: nobody has figured out how the markets will react and move tomorrow; even the weather can hardly be predicted with certainty.

128 Volume 1: The Emergence of the Modern Lex Mercatoria This is not to suggest that this activity is not important, only that it is hardly academic. It is also not to say either that it is inferior—but it is steeped in the past, at best able to fill in gaps in the system on the basis of legal reasoning that depends on the established canons of interpretation, steeped in logic, also mostly nineteenth century in its perceptions. Again, a true academic approach looks for new models all the time that may better capture realities and needs as they evolve, and can more clearly explain and simplify. It is geared to innovation without which it is nothing. These newer models often require a jump or new paradigm as just mentioned. They may not be purely rational and there is no guarantee that they will be better. Much of it may be speculative and may upon proper empirical testing for its operational validity and efficiency lead to nothing, but at least in terms of this book, in international dealings and the law applying to them, it enables us to contemplate alternatives to nationalist codifications, especially the revival of the lex mercatoria as transnational law in the professional sphere, and suggest its structure and operation in a new and distinct legal order. In that context, it is possible to identify a more dynamic contract and even movable property law, at least for professional dealings: see section 1.1.6 above. In finding structure at the micro level, for example in the law of assignment or set-off and netting, it may also give us additional tools to respond better to presentday needs and requirements but it may require much more. These activities are perceived as the key academic endeavour in law and it remains the attitude in the best American law schools, although unfortunately lost, for the most part, in Europe, particularly in civil law countries and their universities.

1.2.12. Modern Policy Arguments in Favour of a Statist and Static Attitude Towards the Formation of Private Law. System Thinking and its Deficiency. Misunderstandings Concerning Democratic Legitimacy and Certainty As was explained in the previous sections, the original idea of codification of private law, both in France and Germany, had to do with the emergence of the modern state and its organisational powers. Especially in Germany, it had nothing to do with more modern democratic notions, rather the opposite: state absolutist tendencies, which were suspicious of civil society. In this vein, these codes or their derivatives have mostly proved willing to serve any kind of regime since. In more modern times, in conclusion it may be said that a number of concepts or paradigms in particular support the statist and static or rule-based approach to private law formation, and therefore the civil law codification approach: the idea (a) that through an intellectual system we can fully capture human relationships and activity and subsequently guide and control it for the present and the future; (b) that the state through its academies has the better insights in these matters and should promulgate the result and centralise law formation at the level of the legislature; (c) that this is also better democracy (assuming that we now have a properly elected legislature) as all rules are then ultimately seen as policy requiring validation by a formal democratic process (whilst there is no other participatory form of law making); and (d) that this approach provides greater legal certainty, which is then valued as a special good in its own right. These latter two points have already been discussed in sections 1.1.7 and 1.1.8 above and will not be here extensively revisited but only summarised. Much has also already been said on legal system thinking in private law. The key question for practitioners, legislators and judges is here often the same: extrapolation of past experiences, or alternatively developing a view of what is needed in an ever-changing world and moving forward

Volume 1: The Emergence of the Modern Lex Mercatoria 129 with it and to do so in a way that retains confidence and credibility or legitimacy or the appearance thereof. To repeat: do we live with an account of human behaviour that can scientifically be clarified and is in essence based on repetition? That is the neoclassical view in macroeconomics, often believed to have failed us, but we struggle with the same problem in the law. Or must we accept that the future is different from the past and, with present insights, cannot be systematically captured? In this latter view, we need to become more comfortable with dynamic law, which, at least in private relationships in professional dealings, that is in private law, develops itself all the time through its different sources in terms of fundamental and general principle, custom and practices, and party autonomy in areas of the law at the free disposition of participants, therefore in essence autonomously, although, locally, aided and stabilised or even corrected by legislation or, internationally, by treaty law, assuming there is an obvious and useful need (as well as the required insight). There may then also be case law through the judiciary or similar authorities, relevant especially in interpretation and gap filling at national levels. This law is likely to be imbued by public policy or public order considerations, of which again the legislature and the courts may be spokespersons, although they are not the only ones in civil society. Preserving the existing system is not itself one of these considerations. It was argued that these insights are all the more relevant now that domestic systems have ever greater difficulty updating themselves and can hardly deal with globalisation. In any event, they have proved in practice to be riddled with contradictions and inconsistencies; it must be admitted that even the new Dutch Civil Code of 1992 or the Brazilian one of 2002 could barely catch up. In fact, it has already been said also that the whole notion of codification in the civil law sense is in the balance and is challenged, at least for professional dealings. The democratic argument in aid of exclusive state action in laws formation is superficially understandable and convincing, but it was already noted that in democracies, even now, private law legislation, at least in civil law countries, is mostly formal democracy only, and not therefore participatory; there is not much political choosing, but largely parliamentary rubber stamping of government proposals. It may in fact be one of the reasons for legislative inertia and lack of interest in this activity, especially in civil law countries. It has also led to much delegation to the executive branch. In any event, many civil law countries still have much private law that did not come through a democratic process at all. More importantly, neither does the common law, which came from the courts. It never affected national or even international acceptance, for example in private international law and its legitimacy in that sense. It was submitted that the true test of legitimacy is rather in the promotion of justice, social peace, and efficiency, and its success. Of course, in Europe, legislative inertia could now be reversed, notably at EU level, but that does not necessarily produce a true democratic back-up either, or even promote better and operational insight. How democratic and insightful, for example is the DCFR, which since 2008–09 has been circulating as a model for a European civil code, and more particularly the Draft EU Regulation on a CESL would have been if stamped into law at the EU level. It may be seriously questioned, see also section 1.4.21 below, CESL in the meantime already having been withdrawn. Rightly, it did not get any traction. The project still proceeded on the basis that government had the answers but one should wonder whether such an approach can still succeed. In any event, there might not be sufficient authority in the EU for such a project, which could only be justified on the basis of the dubious ground that the completion of the internal market requires it.266

266 See also s 1.4.21 below. In this connection, it should be noted that, in the US, private law remained State law and there has never been a move to federalise it. Not even the UCC is federal law. American students in the major

130 Volume 1: The Emergence of the Modern Lex Mercatoria At least professionals do not want that kind of law, never asked for it, and seem to be capable of living without it. The further argument that all law is policy or values, and therefore needs democratic validation, may also require some greater elucidation, as these policies and values are then thought to be solely for the political process to select and determine and are in that approach considered legitimate only if made or imposed through the formal legislative process of a state, preferably democratic, but it would be a sad day indeed if they could only emerge in the law in this manner, see again the discussion in section 1.1.8 above. That all law is public policy in this sense became nevertheless one of the tenets of legal realism in the US or at least one strand in its thinking; see sections 1.3.3 and 1.3.6 below. This view no less inclined to some form of statism in private law formation and application, but it was never universally held nor widely followed and states were hardly seen as monopolists of social values.267 Indeed, although policy considerations are often crucial in the formulation and interpretation of the law, at least in the United States it is now better understood that not all is public policy. Social policy is as important268 and is continuously expressed more particularly through case law, also of a private law nature, and in fact no less or much better in the way the law is explained and applied between practitioners, see section 1.4.18 below. Economic consideration and efficiency notions may also be relevant in this connection, although the emphasis should be no less on achieving greater justice and social harmony, which all may conflict and have to be weighed in individual cases. In any event, it should be considered that much in private law is not clearly of such a policy nature. For example, how the law of assignment is structured is hardly political. Neither may be the concept of possession in civil and common law. In fact, dealings between professional participants do not normally produce great moral issues or problems of (re)distribution that may require higher intervention. The economic system and how it works are largely known to, accepted by, and depended upon by professionals.269 Special protections, such as those now often necessary in consumer dealings or for smaller investors or depositors, would not normally be applicable among them. Between professionals, notions of good faith, which are in respect of weaker parties often invoked as public order concepts as we have seen, may mean less protection, a more literal approach to contract interpretation, fewer disclosure duties, and renegotiation in the case of changed circumstances only in extreme situations, see section 1.1.6 above. As a

law schools are used from the beginning to 50 jurisdictions operating side by side, plus the federal one. It may be argued, however, that there is some ‘national’ private law in terms of a general common overlay besides the federal legal order. It stimulates an understanding of, comfort with, and respect for legal diversity from the beginning. That is a great advantage as compared to the background of most European students. 267 There even began to result a denial of the difference between public and private law in the US: see JH Merryman, ‘The Public Law–Private Law Distinction in European and American Law’ (1963) 17 Journal of Public Law 3; EJ Weinrib, The Idea of Private Law (Cambridge, MA, 1995); JL Coleman, The Practice of Principle (Oxford, 2001) 3ff. See for a more recent discussion also N Jansen and R Michaels, ‘Private Law beyond the State? Europeanisation, Globalisation, Privatization’ (2006) 54 American Journal of Comparative Law 843, and, by the same authors, ‘Private Law and the State’ (2007) 71 RabelsZ 346, 352. See further MJ Horwitz, ‘The History of the Public/Private Law Distinction’ (1982) 130 University of Pennsylvania Law Review 1423. The true difference is in the cause of action and remedies. In private law, even if reinforced by mandatory state intervention, eg in the area of consumer law, the recourse remains damages (or specific performance). In public law, there will be enforcement by governmental agencies, while private parties do not have redress unless they have specifically been given it. In this respect the distinction remains of major significance and also operates at the transnational level. The modern lex mercatoria is respectful of domestic public law in this sense provided it has a sufficiently close connection to the case in question in terms of conduct or effect. See also ss 2.2.6ff below. 268 MA Eisenberg, The Nature of the Common Law (Cambridge, MA, 1988) 28. 269 See for a definition of professionals in this connection, s 1.1.10 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 131 consequence, in business dealings in particular, much can be left to bottom-up law formation by professional participants. Customary law is in truth as participatory as formal democracy can ever be. It underlies also the importance of party autonomy, which acquires greater force when evolving into and being supported by custom or general principle supporting its autonomous status in that world, even if still subject to public policy correction when appropriate, or transnationally to international minimum standards. It follows that in an advanced decentralised social and political environment, therefore in civil society as we understand it, not only policies and values but also newer practical considerations emerge and move the law forward all the time. As such, they are expressed and find respect in many different ways and are not solely articulated through the statist political process whether or not supported by academic models. Especially in civil society, these policies and considerations should not be considered the sole preserve of national legislators, and this argument is not valid in support of all law, including private law, having to be exclusively statist and being nationalised in that sense. It has already been said several times that law is properly speaking the product of the continuous debate about it in society or the communities it concerns, no more no less, and has many spokespersons and sources. Much of the development of consumer law was, for example, based on a better appreciation of the difference in the relationship between consumers and professionals, resulted from more sophisticated relationship thinking in private law, and emerged through case law,270 often long before legislators became active in this field. The same was true for workers’ protection, and this is a process of law formation that continues all the time. The more important conclusion is that, however intermingled public and private law intervention may now be, there is a compelling need and full legitimacy for private law formation beyond the reach of states. In fact, it was already argued that true democracy is respectful of diversity in law formation and of the operation of different communities under different rules unless legitimate public policy or public order issues are at stake. So is the rule of law. Again, nothing supports the idea that states have here the deeper insights in the reality of human relationships, in the needs of society, or in anything else, and must therefore prevail. Typical nineteenth-century German thinking about private law and its formation thus comes to an end.

1.2.13. Interpretation and System Thinking in Civil Law: Begriffsand Interessenjurisprudenz, Freirechtslehre and Wertungsjurisprudenz in Germany. Modern Hermeneutics and the Role of Case Law and Precedent in Civil Law When we distinguish law formation and application, the latter concerns foremost interpretation of the known rules. The ius commune had not been able to develop a coherent view,271 but it fundamentally accepted the operation of multiple sources of law. In its treatment of formal (written) legal texts—even though legislation was rare and the competence to legislate contested at the level of the sovereign, see section 1.2.8 above—it did not incline to literal interpretation, especially not of the glossae of the Justinian texts, and it may even have veered to what we now call teleological interpretation. The idea inherent in the law was considered dominant, and finding

270 Lord Bingham in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433. 271 See also J Schroeder, Recht als Wissenschaft. Geschichte der juristischen Methode vom Humanismus bis zur historischen Schule (München, 2001).

132 Volume 1: The Emergence of the Modern Lex Mercatoria it the most urgent activity, which was certainly also true for the Corpus Iuris, which needed application and interpretation in many different times, regions, and circumstances, the effect of which could not be centrally overseen. A logical approach based on pure deduction or syllogism never seems to have gained much ground either, although analogy was popular and proceeded on the basis that if the originators of the relevant legal texts had thought of it, the particular facts would have been similarly covered.272 Sophistry and hair splitting were avoided. Rationality and perhaps even balance or reasonableness in that sense were often implied. Natural law undercurrents could not be ignored, hence sensitivity towards fundamental and general principle. But even in contract, as we shall see in Volume 3, section 1.3.2, there did not develop a more coherent approach to interpretation either, although a literal interpretation was here also avoided while writers like Grotius started to think in terms of aequitas. On the other hand, after the enactment of the nineteenth-century codifications, there was at first much emphasis on literal interpretation of the texts.273 It was indeed supported by the use of syllogism in which a black-letter rule (which could later also be derived inductively from case law) operated as the major and the facts of the case as the minor. For example, if it were decreed that everyone must drive their vehicle on the right, then that would be the rule or the major. You happened to drive your car on the left: that would be fact or the minor. The result is a violation of the law (in this case often the criminal law narrowly interpreted everywhere, but it could also lead to an action in negligence). This is called deductive reasoning and is quite simple on its face. Logic is here at the heart of the legal interpretation process, in which the rule is taken as literally as possible (while historical interpretation is not then accepted). Clearly, the weakness is in the choice of the major and the minor: ultimately this technique only deals with form not substance and may create problems, especially where, in our example, the person in question used a bicycle, which might not have been a ‘vehicle’ in a literal sense, for example, a moped. Interpretation through induction,274 in which the higher category is ‘all that moves on wheels or mechanically’, or finally through analogy,275 could then follow. Here reliance on the system as a 272 See more particularly Baldus at C 6.50.1 under 1, and for the powers of the sovereigns to legislate Lucas de Penna, Tres Libri Codicis (C 10–12) at C 12.15.1; see further nn 177, 204, and 208 above. 273 See also the reference to Aubry and Rau in n 243 above. The original French idea of the role of the judge was indeed that of bouche de la loi therefore a civil servant job. There was then no interpretational freedom, interpretation in essence being left to the legislator. This affected in particular the activity of the Cour de Cassation, which was to preserve this system and guard against judicial interpretational freedom. It was considered as such part of the legislative branch and would quash offending judgments and refer the matter to another court for decision. But as of 1837, the Cour de Cassation started to take the lead in interpretation and it is now generally considered part of the judicial branch and supervises the interpretation activity in the lower courts on points of law. 274 This technique is also referred to as per genus proximum et differentia specifica, leading to a logical Begriffspyramide. In civil law, it is a commonly used method for analysing case law. By removing extraneous facts one may find the higher rule and by adding others one may find the new lower rule. In consumer and worker protection, for instance, one may conclude that the protection of weaker parties is the higher rule; adding in small investors one may then conclude that they are also protected under a lower rule, and so on. So much seems clear, but considerable problems arise where, for example, civil delicts are compared with more narrowly defined criminal acts, or where legal structures that may at one level seem comparable, have in law a very different function (such as security interests on the one hand and conditional sales and transfers on the other, see Vol 5, ss 1.1.3 and 2.1). The inductive method is therefore by no means objective, and is always dependent on structural characterisations and policy issues or objectives. In civil law, the method may have to be restrained to fit within the overall system of the applicable code and will not then produce any rules which become too remote from the larger codified framework. 275 From the point of view of logic, analogy is a problematic concept, which nevertheless is considered to have great importance in legal reasoning, more in particular in common law, see LL Weinreb, Legal Reason: The Use of Analogy in Legal Argument 2nd edn (Cambridge, 2016). It is about the relationship between norm and fact in one situation to be applied to another, eg, if cars are subject to the rule that they must be driven on the right, by analogy

Volume 1: The Emergence of the Modern Lex Mercatoria 133 whole could provide further ‘certainty’. Analogy and what it truly was and how it was to be used posed in particular further problems. If it were the true method of the common law, as is often argued and mostly taught, one could wonder whether that kind of intellectualisation truly reflects the actuality in judicial decision taking, let alone in the daily operation of the law in real life. All three methods had the problem that they had difficulty dealing with new situations as they all were extrapolations of the past. Whatever the appearances, and however perfect the system of reasoning may have looked, this type of deductive, inductive or analogical reasoning was not automatic in its results or even objective, and implied in fact much discretion and variation, which posed the question of the institutional power of the interpreter, first and foremost the judiciary. However, limited this power may have been perceived to be originally after the codification, if it did not work in the sense that it did not yield a reasonable or sensible result when actual disputes arose and had to be resolved, especially where the judiciary was only meant to apply general rules to individual situations, formalism of this nature had to be abandoned. Interpretation on the basis of the purpose of the rule (purposive or teleological interpretation) or the policy behind it would then appear unavoidable, assuming the purpose could be clearly established, which in the present example could be either limitation of bodily harm of others or the efficiency of traffic movement, but it was at first not favoured. Depending on the purpose the rule was given if not clearly expressed in the rule itself, this approach was no less subjective. Another obvious and probably even more immediate problem was what to do with apparent contradictions, which arise in any formal system of rules when applied to newer or incongruous fact situations, and with extra-judicial considerations, such as those of justice, social peace and efficiency, when not directly appearing from the written texts but becoming sufficiently pressing in the circumstances. These considerations could themselves also be contradictory. It is clear that the various forms of logic are not the answer here either. As a minimum it should be accepted that the law practises its own notion of logic in legal reasoning. This then also applies to the notion of causality in an environment in which much development and much that happens is hardly causal but rather random and fortuitous. Then there was public policy to consider which could evolve quickly and is often less than rational, rather political choice whilst the demands of society and the political establishment change the law and its application all the time. In this book there is the additional consideration that for professional dealings that are becoming increasingly internationalised there are likely to be different needs and perspectives, quite different from consumer law that is often still the basis of local laws, as was submitted, and remains in any event more local and regulated. In fact, it may be surmised that the true law only exists in its application, either in dispute resolution but much more importantly in the daily practice. Ius in causa. The written law, even the other sources of law in as far as they can be formulated, are only guidance; they provide tools and ways of knowing the law’s direction. They also allow us to know the law better and provide greater legitimacy. But they can only deal with the past, so does systemic or doctrinal thinking and logic in the application, at most guided by an extrapolation of past experiences. It signifies

this requirement could be considered to exist in respect of bikes in the absence of a rule for them. But, similarly, the situation for bikes might be compared to that obtaining in respect of mopeds, which in many countries may be used on pavements moving in any direction. Again, there is nothing objective per se in these choices. Analogy raises the issue what is different and what is the same. For greater objectivity, it may need some underlying systemic coherence, especially to be determined in case law, the finding of which then may become part of the socratic teaching method, in particular in US law schools. This may approach systemic thinking and a capture in past experiences which conceivably makes this an academic exercise of sorts, also a scramble for certainty, but also less practical and of lesser quality in terms of responsiveness to newer needs.

134 Volume 1: The Emergence of the Modern Lex Mercatoria the tension between law formation and application in the system or between innovation and the doctrinal law which often pretends to know better, but the real law is unwritten, is not even found as pre-existing, but, it is submitted, gives meaning to the existing legal sources, their diversity and flexibility once connected with the facts as they present themselves in their endless variety and evolution. It was indeed submitted that this law can never be fully grasped or comprehended but is the result of the constant debate about it in the community it concerns. As such it is not territorial per se either and allows for transnationalisation. Rather, it is a social and cultural product which does not always denote progress in a more liberal sense either but centres around the question of what society we have and want. This is social policy, which is not linear, often pluriform and fragmented, not necessarily state imbued, and not completely monopolised from above; it should also be considered in this connection that much state regulation might not have the immediate protection of its citizenry in mind but simply creates order in the hope that everything might be better thereafter like in environmental and financial regulation and in taxation, where serious side effects must always be feared. This is an issue in historical interpretation—the rule may have been totally wrong or ineffective in retrospect—and may then also be an issue in purposive and teleological interpretation and it may ultimately require a normative interpretation. That is reality different in professional or consumer dealings or other types of relationships. The issue is always how different types of relationships are to be dealt with and how future needs are to be discounted. Institutionally and largely by default, judges acquire here a special place and power in the law’s application if disputed or becoming incoherent and retarded. They even may become law makers of sorts (unlike arbitrators who do not have that role and are unlikely to have that power, only solve problems as the parties have presented them, a key distinction as will be elaborated in Volume 2) but the end result is never perfect, the judiciary is dysfunctional in many countries, often overburdened, hardly equipped for this task, whilst the case is not seldom lost in procedural wrangling and endless appeals (which arbitration is likely to avoid). Yet an order of sorts is likely to be served, at its best indeed enhanced by more and better justice, more social peace, and efficiency. This was already identified as the true challenge in civil society but there are no guarantees and nothing is certain lest it be a certainty of such low quality that it destroys everything. It follows, however, that to expect here much guidance from judicial reasoning is wrong even if the decision may be right which is often more likely to be the case. The present emphasis in teaching on dispute resolution, where the law is at its most uncertain, may signify failure. It is in fact the daily operation of the law widely understood and accepted, meaning reasonably trusted, and voluntarily complied with that is the key to its success; it should be litigation avoiding. The law is there to make life easier for everyone, not merely to solve disputes. The more rules there are, the more unlikely the law is to succeed, and it may be an indication of its insufficiency, its overburdening and ultimately its loss of credibility and failure, however democratically decreed and whatever judges are able to do. Litigation should remain the exception, and is hardly the means to adjust the system through generalisation. The challenge is to keep the law living and credible, an ever-greater task in more modern and complicated times, where the insights into how society works and what it truly needs is often lacking whilst past experiences are hardly reliable guidance. Against this background, it is not surprising that in Continental Europe at least in private law the codification notion, with its preset intellectual system of rules and its addiction to logic in their application, became increasingly dependent on more liberal interpretation techniques, if only to support its claim of completeness and of being able satisfactorily to cover all eventualities, including newer fact situations and modern societal developments and demands. This became all the more necessary in the absence

Volume 1: The Emergence of the Modern Lex Mercatoria 135 of regular formal amendments, which proved to be politically unrealistic to expect. Judges were thus increasingly left to engage in elaborating and adjusting the system, which started to buckle under its own weight and pretence of completeness. Dispute resolution was then believed to be the means to adjust the system as a whole, hence judicial law making to clarify and perfect the system in which the dispute itself and its resolution soon became secondary. Thus, in civil law, legal thought especially in universities in the twentieth century increasingly concentrated on the question of judicial interpretation of the system and its continuing credibility (and supplementation or gap filling). It translated indeed first into some form of systemic and analogical reasoning in dispute resolution, subsequently also into teleological interpretation and then even into the appreciation of extra-legal considerations, especially pressing ethical, social and efficiency considerations. In a more normative approach, other competing values or policies started developing and intruding also. Then there was the (horizontal) impact of regulation and public policy. As mentioned before, it moved the judge to centre stage, even in civil law, at least in academic discourse whatever the quality (and authority) of the judiciary in social and economic matters. Again, in civil law, system competition became soon dominant rather than individual dispute resolution, which was then only and incident and means to create better law. It should be remembered that originally the civil law had been much less concerned with dispute resolution; it was correctly perceived as an imperfect art. Rather it had been much keener to formulate law that would work better in daily practice and lead to a better life for all, see also the discussion in section 1.4.18 below. This then became the assigned role of the judiciary for which it was hardly made. The upshot was, nevertheless, that extra-systemic or perhaps even extra-legal considerations increasingly entered the law and concerned in particular ethical, social and efficiency considerations or practicalities, in essence the question of an open or closed system of legal rules, however administered in which it became questionable whether any system could be maintained and realistically defended. Apart from public policy issues, at least in international dealings it demonstrated in particular a need or room for other sources of law to operate and re-enter, which codification had meant to subdue. It is at the heart of the development of the modern lex mercatoria as presented in this book and concerns the operation of fundamental and general principle, custom and practices, and the status of party autonomy operating besides or even against legislation and case law, see further sections 1.4 and 1.5 below. In Germany, the need for greater interpretational freedom led early to the theory of Interessenjurisprudenz. It accepted that extralegal considerations, when indeed sufficiently pressing, could be taken into account in the judicial function and adjudication as against that of the original Begriffsjurisprudenz, which in its interpretation technique continued to rely on the text of the law, its system, and logic in its application.276 It remained leading and had its origin in the works of von Savigny and his method and in the early approach of von Jhering. It remains at the heart of the German academia endeavour and its teaching at present, which is hardly critical and forward looking, especially in the professional sphere. This discussion has already been started in section 1.2.9 above in connection with the development of legal thought in Germany in the nineteenth and twentieth centuries and concerns legal positivism. It is not to say that Begriffsjurisprudenz was without merit, as it managed further to develop large areas of the law in an intellectual manner and in case law often attained greater 276 See n 237 above. See for system thinking also the discussion above in s 1.1.2. Koschaker (n 5) 279 attributed it to eighteenth-century thinkers such as Wolff, see n 234 above, but considered the idea abandoned since the freelaw-finding movement in early twentieth-century Germany. By 1910, Ernst I Bekker had already been more subtle in his Grundbegriffe des Rechts und Missgriffe der Gesetzgebung, 176ff and 180ff, but it may have been premature. See also n 94 above for the disparate search for system in modern case law analysis in Germany. See for the attitude of Portalis in France, n 260 above, and for the views of Max Weber, nn 7 and 240 above.

136 Volume 1: The Emergence of the Modern Lex Mercatoria clarity and order, but it was seriously restrictive and is now often seen as the true expression of system thinking and a journey into past experiences, as such retaining a large following in Germany where it regained again massive support after World War II, when the legal experimentation seen in the earlier Weimar Republic became suspect.277 The Interessenjurisprudenz, on the other hand, had its intellectual base in the later work of von Jhering, as we have already seen,278 subsequently more particularly elaborated by Heck,279 and which received a more sociological expression in the so-called ‘free law’ movement (Freirechtslehre) often associated with the work of Hermann Kantorowicz280 (a student of Max Weber) and especially Eugen Ehrlich.281 Indeed, both approaches moved adjudication and dispute resolution to the centre of academic attention in the 1930s, while there was henceforth less interest in the adequacy and efficiency of the law as a whole in ordinary life, see further the discussion in section 1.4.18 below. In this more recent emphasis on litigation or the law’s role in dispute resolution, there was a move from macro to micro thinking, much as there always was in common law, that as a practical matter could only be known through the courts. It is submitted that this presented a major shift in the academic approach to law in civil law countries, which, by the later part of the twentieth century, acquired a new lease of life and became system perfection through case law.282 Whatever the ebbs and flows of these movements, they demonstrate that from early on it became an important issue whether a freer attitude towards (statutory or code) interpretation 277 Teubner (n 236) 193 refers in this connection also to the National Socialist dominance of political theory over law; see also n 236 above and further Bernd Ruethers, Die unbegrenzte Auslegung: Zum Wandel der Privatrechtsordnung im Nationalsozialismus (Tübingen, 2004). Here the post-war (West) German attitude and its extreme positivism are seen as an immunisation of the law against any invasion by the ‘bacillus’ of social and economic theory. It contributes to the academic emphasis in present-day German scholarship on the autonomy of the law, unlike the approaches developed during the pre-war Weimar Republic. Even the transfer of knowledge from social theory into law is criticised (p 204). However, the autonomy of the law in this sense is axiomatic or mere paradigm and the impact of the requirements of justice, social peace and efficiency are in civil society undeniable once the primary purpose of the law—creating order—is achieved and this would appear to allow at least for critique from social and economic theory or models and also for their guidance in law formation and application. However, the same sense of immunisation may then apply to all foreign influences even after globalisation but means that the German Rechtswissenschaft can hardly be called academic. It may appear extreme in its nationalism and legal positivism and in wanting no more than to be the producer of practitioners’ handbooks and legal opinions (Gutachten) for the courts. It was already submitted that this attitude is scholastic, there is no critique of the basic texts and approaches except in the minutiae. This is ‘positives Norm und Applikationswissen’, now even criticised by the German Academic Council, see nn 56 and 104 above. There is in this approach no room for interdisciplinary and empirical studies while transnationalisation also remains beyond the reach of this type of scholarship. Even in an EU context, these issues are hardly considered or the discussion becomes contrived and convoluted, ever more complex and dense, often caught in German legal jargon and cliché. The role (and potential lead of) public international law as analogy and guidance in how transnationally the different sources of law operate is often ignored or misrepresented; even by J Koendgen, ‘Die Rechtsquellen des Europäischen Privatsrecht’ in K Riesenhuber (ed), Europäische Methodenlehre, 3rd edn (Berlin, 2015) 96, 100. 278 See R von Jhering, Scherz und Ernst in der Jurisprudenz (Leipzig, 1884) and Der Zweck im Recht (Leipzig, 1887), see also text preceding n 252 above, see further n 237 and accompanying text. 279 Ph Heck, ‘Gesetzesauslegung und Interessenjurisprudenz’ (1914) 112 Archiv für die civilistische Praxis 1, see also H Schoppmeyer, Juristische Methode als Lebensaufgabe: Leben, Werk- und Wirkungsgeschichte Philipp Hecks (Tübingen, 2001). 280 H Kantorowicz, Der Kampf um die Rechtswissenschaft (Heidelberg, 1906). 281 E Ehrlich, Grundlegung der Soziologie des Rechts (München, 1913). 282 See again n 94 above. Currents of the so-called Freirechtslehre survive in Germany, but they became more incidental and weaker. See, however, the early work of J Koendgen, Selbstbindung ohne Vertrag (Tübingen, 1981) and before him J Esser, Vorverständnis und Methodenwahl (Frankfurt, 1970), Dogmatisches Denken im Zivilrecht (Frankfurt, 1972), and Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts, 4th edn (Tübingen, 1990). See further the father of legal hermeneutics (juristische Hermeneutik) in Germany, H-G Gadamer, Wahrheit

Volume 1: The Emergence of the Modern Lex Mercatoria 137 was acceptable and how this was to be handled. Where advocated, the more liberal attitude never meant a free-for-all but only promoted greater flexibility, particularly to meet social needs, yet it sharply divided the followers of von Savigny, on the one hand, who were likely to be more systematic in their approach, and those of von Jhering, on the other, who were likely to be freer and more practical. The twentieth-century development shows the ups and downs of these two approaches. By mid-century there appeared to be more freedom in this respect in legal writing than at the beginning and the end. Courts felt at first more constrained, but towards the end of the century there seemed to be greater flexibility in case law than there was in academic writing, but typical codification thinking still put the system first, and interpretation was rather seen as a way to elevate and complete it.283 Dispute resolution became a mere tool. Again, this is strongly supported by legal positivism, which regained much momentum in academic discourse, and not only in Germany, see also the discussion in section 1.4.17 below. The more extrovert, freer, socially-oriented approach was found earlier in France in the (later) writings of François Geny, in those of Raymond Saleilles and Léon Duguit (who recognised in its extreme form only social, not private rights) at the turn of the nineteenth century, and later in those of Rene Demogue, and in the Netherlands in the writings of Paul Scholten. It had a direct effect on interpretation techniques. Philosophically, this is the field of hermeneutics. In a more methodological sense, it concerns the explanation of texts and application of rules in the manner just discussed. In a more ontological sense, it concerns the intellectual power over this process but also the more conserving impact of culture, tradition and habits or practices on the one hand and the expanding ideas of justice, social peace and efficiency on the other,284 perhaps even the pull of globalisation.

und Methode, Grundzüge einer philosophischen Hermeneutik, 6th edn (Tübingen, 1990); K Engisch, Einführung in das juristische Denken, 9th edn (Stuttgart, 1997) 80; R Zippelius, Juristische Methodenlehre, 10th edn (München, 2006) 99; W Fikentscher, Methoden des Rechts in vergleichender Darstellung, Band IV: Dogmatischer Teil (Tübingen, 1977) 191ff; F Müller and R Christensen, Juristische Methodik, Band I, Grundlagen, Öffentliches Recht, 9th edn (Berlin, 2004) 250ff; A Kaufmann, Analogie und ‘Natur der Sache’, 2nd edn (Heidelberg, 1982) 37ff. It no longer seems greatly to affect the systematic approach to which most modern German PhDs, theses for professorships, handbooks, and articles testify. Begriffsjurisprudenz, with its emphasis on system thinking, remains even stronger in legal practice and education. Most work tends to be descriptive of the German rules and its system, and of the way it operates. This is fitting-in or refinement, not renewal, eternally polishing what there is. It has already been noted that the German Academic Council sees the German legal professorate as a bar to renewal. As a result, ‘law and economics’, for example, is in Germany often studied in economics faculties. Empirical studies, interdisciplinary approaches and internationalisation tendencies do not get much attention. In Germany, sociologists (not lawyers) have more recently taken different views, see N Luhmann, A Sociological Theory of Law (London, 1985), who noted and took up once more the self-creating (autopoietic) force of all law but, although accepting the dissolution or disintegration of the system on a continuous basis, Luhmann still insisted on a simplistic bilinear law/non-law matrix that was basically stabilised by states and their courts, although in terms of recognition by the autonomous law itself, but, one must assume therefore, still caught up in its system thinking. This approach did not catch on in the US but was (partly) the root of the work of G Teubner towards the modern lex mercatoria, see n 608 below and as such deserves mentioning, although Teubner’s approach also remains a minority view in Germany. In such an atmosphere, it is not surprising that in searches for European rules of private law, especially in the DCFR (see s 1.4.21 below and Vol 3, ss 1.6.4ff and Vol 4, s 1.11) there is no enquiry into true needs nor a review of method and objective. The anthropomorphic intellectual model (here derived from the German BGB) is not fundamentally questioned and is still assumed automatically to produce justice, social peace, efficiency and economic growth, now even through statist intervention of this nature considered at the EU level. There is no empirical verification of its validity and responsiveness, which are still assumed to follow from the intellectual coherence of the system itself. The methodology is not questioned. 283 See s 1.1.6 above for the notion of good faith and how its freedom may be recaptured by academia in system thinking, even for the operation of the good faith notion; see in particular n 94 above. 284 In this regard, reference may especially be made to H-G Gadamer, Wahrheit und Methode (Tübingen, 1972, English trans Truth and Method (New York, 1975).

138 Volume 1: The Emergence of the Modern Lex Mercatoria Whatever the approach, a more ontological view readily leads to the insight that the purpose of the law is always extra-legal in that it serves practical, ethical, social or even economic or political needs or ends, and that in civil society the law therefore does not stand alone or is an end in itself. Except in areas where the law is clearly settled and becomes largely mechanical, as perhaps still in the conveyancing of real estate and in the application of traffic laws, rules become more like guidelines, in their application largely dependent on the configuration of the facts and on the ends the law is meant to serve, barring public order constraints. Objectives, whatever they may be and however determined, thus become important tools in the law’s interpretation, also in private law. It has already been noted that this may also be seen or expressed as ‘policies’ (see also the discussion in the previous section) though again, they do not then only emanate from states. What a reasonable person may have thought (differently for professionals and consumers), or what is fair in the circumstances, what good faith requires, or what is socially acceptable and practised, or what is efficient or makes sense may then also become normative. One sees here a clear connection with American ‘realism’ and its law in action and search for better law, which will be further discussed in section 1.3.4 below.285 Legalism, positivism and formalism286 would appear to be here abandoned. This may be supported by widespread redistributory ideas in respect of risk, particularly in consumer dealings. There are also employment protection issues and one must also think of the modern welfare state, public health and the environment, but also questions whether the judiciary can truly handle this and is the appropriate body. In this connection, special attention may finally be given to what is in Germany now called the Wertungsjurisprudenz.287 Here texts and cases are indeed considered to be no more than guidance. Following Wittgenstein, the use of language is not separated from contemporaneous meaning and is determined by conventions that change all the time. It is not believed to be objective and even literal interpretation is still interpretation. Historical meaning has no relevance. All must be seen in the context of now and is determined by the social environment as it exists today. This allows in particular for an interpretation according to present-day values and contemporaneous policies and needs. The consequence is that the law on the one hand becomes more sensitive to daily requirements, but on the other hand becomes more politicised. It should be well distinguished from the nationalisation of all private law formation in codification countries in Europe, which foremost suggests historical interpretation and statism. Wertungsjurisprudenz rather means legal dynamism, especially in law application/interpretation. In its policy orientation it may show an especially close connection with American realism in method. In both approaches, the law may indeed be seen as the result of the constant dialogue in society about what it is, although the result may differ: in Germany it may mean primarily legal support for the social welfare state and its redistribution policies, in the US rather sensitivity to the ever-changing balance between the public interest and market forces, the German idea being based more on human dignity, the American on progress, whatever that may be. 285 This connection seems obvious but was ultimately not accepted by Kantorowicz himself, who saw the difference in the attitude towards the rule as a major intellectual divide; see ‘Some Rationalism about Realism’ (1934) 43 Yale Law Journal 1240. In short, Kantorowicz saw legal rules as abstract structures while he assumed that the common law lawyers could never consider them separate from facts. One cannot escape the impression that Kantorowicz’s emphasis had shifted since his first book of 1906 and that he had become more interested in systematic thinking and abstraction in the meantime. See for a fuller discussion, VG Curran, ‘Rethinking Hermann Kantorowicz: Free Law, American Legal Realism and the Legacy of Anti-Formalism’ in A Riles (ed), Rethinking the Masters of Comparative Law (Oxford, 2001) 66. 286 See more particularly the discussion in s 1.4.17 below. 287 It had its origin in national socialism when the BGB itself was made subservient to its philosophy and demands, see K Lahrenz, Über Gegenstand und Methode völkischen Rechtsdenkens (Berlin, 1938), following Carl Schmidt, Über die drei Arten des rechtswissenschaftlichen Denkens (1938).

Volume 1: The Emergence of the Modern Lex Mercatoria 139 In countries like Germany, this could lead to judicial prejudice in favour of a modern social culture, if necessary, against the texts of the laws and earlier case law. As such it is now not widely favoured in German legal practice, yet it remains an often-hidden undercurrent in German legal reasoning,288 even though, at least on the surface, rigorous system thinking remains the prevailing method as we have seen. It has already been said that even in respect of new case law, German academia sees it mostly as its task to explain it in terms of further perfecting of what already exists in terms of the system.289 Indeed, as a minimum, civil law judges everywhere will remain concerned in their reasoning with how to fit their decision into the system, even when forced to go beyond it in substance. This has also to do with their institutional powers, which, especially on the European Continent, do not formally include law formation. As shown, in Germany, this attitude is the one still favoured in the leading work on legal methodology of Karl Larenz, who, although aware of the law’s dynamics, ultimately captures it in interpretation of the national system only.290 Again, the hope is that this contributes to certainty in legal outcome, whatever its quality whilst new cases multiply all the time, rules become antiquated, and factual situations diverse or ever more unusual in terms of old rules, and globalisation on its present scale may change everything. So may further technological advances. Again, there is so far little room for experimentation, empirical and interdisciplinary research or sensitivity to the dynamic forces of globalisation and transnationalisation of the marketplace. Even in international transactions, there is in this approach only concern for local texts and policies as they used to exist. As a contrast, in this book in matters of interpretation, at least in international commercial and financial transactions, the accent shifts to reintroducing all traditional sources of law, even where domestically no longer allowed to operate autonomously or considered merely territorial. To repeat, in this context the accent is not on certainty but on finality in transactional matters and payments and otherwise on predictability as a dynamic rather than a static concept of legal certainty, the latter being perceived as standing for the past and a parochial attitude, potentially of such low quality in respect of newer developments that it destroys everything; see section 1.1.7 above. Better still is the recognition in international commercial and financial matters of the full bottom-up force and effect of the law formation facility of the modern lex mercatoria and its different sources of law and their hierarchy, see further sections 1.4 and 1.5 below. In pressing cases justice, social peace and efficiency considerations must be considered in addition. Public policy may correct in appropriate cases; if still national they may have to yield increasingly to transnational minimum standards in respect of the operations of those who develop their business internationally and who, together with the states they come from or where they operate, claim the benefits of globalisation.

288 Esser and Koendgen could be seen as protagonists of the Wertungsjurisprudenz, see for their work n 282 above. See in the Netherlands, HCF Schoordijk, Realistische en Pragmatische Rechtsvinding (Oisterwijk, 2014). It remains in Germany a minority in academia and also in case law, as we have seen, even if it must be appreciated that judges may be under much pressure on occasion, although they are likely to operate on an ad hoc basis in such cases. More generally, judges may shy away from being seen to protect any particular societal trend or political philosophy or to show bias in favour of certain values in this manner and present them as superior, especial now that the social welfare state itself is under increasing pressure and bankrupt in many countries because of extreme demands made on it and unrealistic promises having been given earlier. Indeed, when the social balance changes, this philosophy and its origin would rather appear to suggest that the law will move with it as well. 289 See also the remarks in n 94 above. 290 See n 6 and further n 287 above, Larenz showing ambiguity in the school of German system thinkers and articulating its method, but in Methodenlehre der Rechtswissenschaft (Berlin, 1979) 441, he continues to support also his early political sensitivities and law’s politisation, now in favour of a modern Germany.

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1.2.14. The Decline of Private Law in Civil Law Countries? The Codification Idea and Business Law in Europe after Brexit The question may be asked whether in the civil law perception private law as such has declined in the context of overwhelming state intervention, policy support or derogation that goes well beyond the issue of enforcement which in civil society became a state monopoly if only to preserve social peace. Nobody is to buy an axe to enforce its rights against neighbours although a measure of self-help may persist when we claim proprietary rights, for example, in a bankruptcy upon a possessory security interest or appropriate a preference in a set-off, now often expanded by contractual netting facilities like in the international swap markets. Also, in smart contracts we may increasingly see an automatic enforcement mechanism: cars may not start if the regular instalment payments are not made. Owners might even be excluded from access to their homes and lose their electronic keys if mortgage payments are suspended. This may all be understood, but it was also noted that at least in civil law the whole concept of contract had become more fundamentally dependent on state recognition and support.291 In property law the numerus clausus notion became similarly emboldened as a state-imposed limitation. Effectively it could be argued that party autonomy itself became a licensed concept and lost its status as an autonomous source of law, earlier only hemmed in by specific public policy considerations. Fundamental and general principle, custom and practices similarly lost their autonomous status. The question may be asked whether this is different in common law countries and whether transnationalisation may free private law in particular from these statist constraints in its progression at least in professional dealings even if we allow for the fact that everywhere public policy has become much more dominant in its requirements but it needs not be represented by states only and may embody social demands or policies, transnationally more in particular to be translated into international minimum standards of behaviour and transnational limits of legal structuring in the international marketplace as we have seen. Some of the undercurrents will be revisited in section 1.3.7 below and may have to do with the quest for modernity and the different views on the role and operation of the administrative state as against those of the marketplace in this process. More immediately after Brexit and with the legitimate aim to retrieve business from England and from the reach of its common law, especially in commerce and finance, on the European Continent we have to think in particular and more fundamentally how this can be done and whether we have the legal environment and means to make this happen. It may be clear from the foregoing that civil law was never truly made for business. Its codifications were always nineteenth-century anthropomorphic, geared to natural persons in what we now call consumer law. This also remained true for newer codifications like the ones in the Netherlands in 1992 and Brazil in 2002 and it is not different in the recent Belgian proposals which still look for a unitary approach, basically the same for consumers and business unless some specific exceptions and clarifications are made for the latter and they are few. We have also seen that in civil law countries there is no true commercial and financial law or law concerning professional dealings except incidentally as lex specialis to these civil codes and their systems. It was not helped by their intellectual bias either, which easily allows for a form

291 See G de Almeida Ribeiro, The Decline of Private Law (Oxford, 2019). See for similar concerns about the decline of contract law, Vol 3, s 1.1.6.

Volume 1: The Emergence of the Modern Lex Mercatoria 141 of prejudice for example against commerce in favour of more social postulates. In this perception, contract law is intent-based, and the contract easily considered flawed for lack of it, whilst default is excused by lack of blame. There is much scope for interpretation and supplementation on the basis of social policy, especially to help weaker parties like consumers, workers, small investors or depositors, maybe even leading to derogation from contractual texts, now mostly under good faith cover, likely still to be the same for consumer and professional dealings. In such a system the law takes it upon itself to redistribute risk on the basis of public standards. Party autonomy is under pressure and has even less meaning in property law. With the exception of corporate law, itself often studied without context, commercial law is largely neglected as an academic subject. It was already shown and will be discussed further in the next sections that the common law of contract and movable property derived on the other hand from commercial law and practice and was always more independent even within the common law and more fact- and need-based and practical. That gave it an advantage in business, helped by equity, much missed in civil law where the greatest differences with the common law are. Modern commercial and financial structures are likely to be equitable in a common law sense. The professional contract is here foremost a road map and risk management tool, a kind of instruction manual where one does not ask either what the writer might have intended. Defences and excuses are, as we have seen, limited and there must be an investment or beginning of performance before there is a cause of action. Where choices are made and there is still doubt, the peer group’s perception determines meaning. In property, the foremost concern is also with risk management, closely connected with liquidity and transactional and payment finality concerning assets or classes of assets in transformation as part of production and distribution chains where the objective is adding value rather than consumption, which makes the assets disappear when their legal status becomes irrelevant. It was already said that there is no greater asset destruction than under the Christmas tree; common law is concerned with how the presents get there, civil law with what is left. Again, that is consumer law and remains the civil law orientation at least in movable property, where even the asset status of intangibles is often still denied, very different in common law, where at least in equity these assets are there to be traded and to be used in commerce and finance just like any other. To repeat, professionally we may then think of newer proprietary structures like conditional and temporary ownership rights or finance sales in repos and leases, of floating charges as another form of asset backed funding, and of segregation of beneficial and economic interests and their legal protection in constructive trusts. Again, equity supports here better answers, also of what assets legally are, and it can cover intangibles, notably monetary claims and classes of them, and even include future replacement assets like receivables, and cocktails of goods, services, information and technology. It is not limited to the civil law numerus clausus of proprietary rights either and can handle a measure of party autonomy in the creation and operation of proprietary rights in these assets as long as the general public can ignore them. It also has a broader international reach, at least in the English-speaking world, although it does not mean that it is more transnational in outlook. As we have seen, civil law is held back and is more scattered, in its modern version strictly formalised in national system thinking. There is no concept of the professional contract and of movable property operating in professional dealings. When attempts are made at formal unification, like in the 1980 CISG Convention, the UNIDROIT Principles of International Commercial Contracts, the Principles of European Contract Law (PECL) and the Draft Common Frame of Reference (DCFR), the result is not convincing because consumer concepts and principles of protection waft over into commerce and finance and are there rightly questioned. It does not

142 Volume 1: The Emergence of the Modern Lex Mercatoria want its risk management arrangements challenged except in extreme cases. That is its notion of certainty. The CISG on the other hand, even though limited to professional sales, still retains a subjective notion of intent and breach, remains concerned about objective blame and risk redistribution, and is in its focus on individualised goods seriously out of date. It is rejected by the commercial practice which does not recognise itself in it. An ill-fated and confused EU attempt at creating a Common European Sales Law (CESL) was quietly withdrawn in 2014.292 Beyond these limited formal efforts and initiatives, legal transnationalisation remains largely ignored. The situation is clearly aggravated in international commerce and finance where the international flows in goods, services and money and the practices of the international marketplace and their dynamics are mistrusted. In this perception, they cut into the status of the domestic courts and their law clarifying authority especially in appeals may seriously affect the financial interests of local practitioners. Acceptance of transnational bottom-up law formation also offends here the notion that all law must issue from a sovereign, but it is often a self-serving paradigm. Rather than transactional certainty, legal certainty of a nationalistic type is likely to be further invoked even if it is of such a low quality that it destroys everything. A great deal more real may be the concern about the proper balance between the international marketplace and public policy.293 Private international law, geared to the application of national laws only, remains here the perspective but is hardly able to give guidance and makes local insufficiencies spill over into the international sphere. There are more fundamental issues: it does not accept the unity of international transactions and still requires activities in the international flows to be cut up in domestic pieces in the hope that local laws so made applicable to each of them, different for contract, proprietary and enforcement aspects, still add up to some sensible legal regime concerning the whole, which is unlikely. It always had problems with public policy. Even before the globalisation of production and distribution chains, it proved also hardly suitable and mostly artificial in tripartite cross-border relationships. That proved to be so for agency, trusts and the custodial holdings of investment securities, clear in The Hague Conventions of 1978, 1985 and 2002 concerning them, and it is not different for international assignments as we shall see in Volume 4, sections 1.5 and 1.9. In the meantime, it was already noted that the transnational Eurobond market became imperceptibly the largest capital market and the transnational swap market the largest market of all, both legally substantially ignored because of the local perspective of most legal observers, and they went their own legally transnationalised ways behind the ICMA and ISDA platforms. The international practice may be able to take the risks, perhaps prefers obscurity and the lack of clarity to inappropriate and uninformed meddling. The essence is that there remain forces at work that cannot be fully captured by state intervention even if it could be perfectly guided by supreme insights in how society works and operates. It is the thesis of this book that the equilibrium between market and social forces is at the heart of a modern society’s success. It cannot be stable, although states can help stabilising it, but that is a political process that is not always successful. Indeed, it remains to be seen whether Brexit can be so for the UK and how the EU responds, not in the least also in its approach to business law where there appears to be insufficient understanding and a considerable intellectual deficit to make it work transnationally, notably in international production and distribution chains and in their financing.

292 JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299 (EBLR 2013) and SSRN Working Paper Series. 293 JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers ULR 19 SSRN Working Paper Series.

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1.3. The Origin and Evolution of the Common Law. Its Approach to Law, Private Law Formation and Operation 1.3.1. Common Law and Equity It is now time to come to the other original legal system in Western Europe, that of the English common law. To thoroughly understand its beginnings, it is necessary to form some mental picture of the England of the late thirteenth and early fourteenth centuries, when in the time immediately following the death of Bracton,294 it had become clear that no general reception was to be accorded to Roman law and that English law was to be an independent development. It meant that, even where English law followed Roman law, it was following that law by choice and not by necessity.295 Nevertheless, the common law developed in a manner very similar to Roman law, that is, action-based and originating in the law of procedure.296 This was favoured by the centralisation of the legal protection under the King almost from the beginning of the Norman conquest of England after 1066 AD. This centralisation was in turn a natural consequence of the feudal system with the Crown at its pinnacle. In this system of essentially landholding, royal protection was demanded and given in land and criminal matters, but was eventually extended to civil matters also, at first especially tort. The original idea was that if the King agreed with the request for protection, he would issue the relevant order or writ to his sheriffs to take the necessary action. This intervention was soon assumed by the royal curia with more regular procedures under which standardised writs or remedies (or indeed procedural relief) would be given provided the claimant could prove the basic facts on which the remedy was based. This function of issuing writs was later centralised in the office of the Lord Chancellor while the curia in the thirteenth century expanded into three royal courts in London (Common Pleas for normal private suits and supervision of the lower sheriff courts, King’s Bench for politically-oriented matters or appeals, and Exchequer for taxes) supplemented by travelling or ‘itinerant justices’ operating on the King’s behalf. Writs then became commands to the relevant judges to call the defendants into their courts to resolve disputes of fact in connection with the relief provided under the writ. In commerce there were specialised and often local mercantile or commercial courts, as we have seen in section 1.1.3 above, which administered their own laws. Moreover, there was still some old Anglo-Saxon but also newer feudal law on the basis of which disputes were resolved in the ancient communal and newer private (and feudal) seigniorial or palatine courts for local tenants, but the issuing of writs leading to proceedings in the King’s courts became more popular also in land issues. At first, they largely depended on favour, but they soon developed into the formulation of certain but still quite narrow standard types of relief. They would then be granted as of right meaning that a private party could issue the writ itself and led to redress if the judges found that the factual conditions for the relief existed, while leaving the determination of these facts to a jury. These writs were subsequently written up and became accessible in the register brevium (a breve being another word for writ).

294 See n 309 below. 295 HG Hanbury, Modern Equity (London, 1935) 1. 296 For a full history of the English law, see WS Holdsworth, History of English Law, 16 vols (1922–56). The last four volumes were edited by AL Goodhart and HG Hanbury.

144 Volume 1: The Emergence of the Modern Lex Mercatoria As the royal courts became the normal venue for these suits, it followed that they would hear only certain types of complaint; it all depended on the availability of a writ. Thus, the claimant had to find the right form of action without which he would fail; there were no substantive rights that could be enforced as such. Although the King, through his Chancellor, at first retained freedom to develop new writs, this power or discretion to make new law was in fact questioned after the basic English charter of Magna Carta was agreed in 1215, and it was curtailed in the Second Statute of Westminster in 1285. The facility to expand became limited to actions in similar cases only (the writ in consimili casu). If there was doubt, the matter was to be referred to Parliament for statutory intervention. Thus even in common law, statutory intervention was not alien to its progression although it remained unusual. This writ system allowed a nucleus of more predictable law to develop while the writs evolved somewhat further and older ones were abandoned. It brought one national law, although centralisation was at that stage a more outstanding feature than nationalism. As already mentioned, this law was original, therefore not Roman. It is indeed interesting that no external law was used to achieve this unity. The result was a true English development, which led to a distinctive legal culture that was largely procedural, basically practical, and evolved over a long period of time in a peaceful, constant but also haphazard manner. Eventually under this law, the royal courts started also to judge the ‘fairness’ of the older Anglo-Saxon and feudal laws surviving outside this system, as was at the time also done on the European Continent (see section 1.2.5 above); subsequently they suppressed them or brought them within the common law and the ancient Anglo-Saxon and feudal courts were then folded into the common law courts. They subsequently also subsumed the commercial law or law merchant into the common law (see section 1.1.3 above), which had until the sixteenth century been developed largely in trade with foreigners and had obtained some continental flavour. Commercial law thus lost its independence also, although it retained some different status and was not integrated. As noted, it made a difference as to the status of custom. The same happened to Church law, as we have also seen.297 As a further consequence of these developments, from the seventeenth century onwards, the merchant and ecclesiastical courts were also merged into the royal courts. Although the common law was, and is, often presented as customary law of ‘general immemorial usage’, it originated rather in the writs and forms of action, resulting in constantly evolving judge-made law. Decisions were published from the thirteenth century onwards in so-called Yearbooks, although judges would often invoke precedent on the basis of their memory and of what they had seen earlier in cases before them or remembered colleagues saying. The creation of the Inns of Court in which the practising lawyers—judges as well as advocates or barristers— would assemble and be educated, was favourable to this development. Four of these Inns still exist today, and all judges and barristers must be members. However, as we shall see, the rule under which these precedents had to be followed developed much later. As after 1285 the King or his Chancellor were no longer free to formulate new writs, common law was slowed in its further development. It acquired a rigidity that eventually necessitated a supplementary approach, statutory help remaining exceptional. This new approach emanated also (like the writs) from the King through the Lord Chancellor, but in a different type of law with

297 This meant in particular that the law of marriage also became part of the common law while the exclusive jurisdiction of the Church in these matters ended. Seen from a twenty-first century perspective, this had the unfortunate result that the common law became the arbiter in the definition of marriage rather than merely regulating the civil consequences of any type of relationship or partnership of this nature.

Volume 1: The Emergence of the Modern Lex Mercatoria 145 its own courts. They acted not on the basis of writs but rather of subpoenas and sat without a jury while their practitioners were solicitors, although barristers later took over much of the court activity. This was equity, administered by the Courts of Chancery.298 Under it, at first, the Chancellor was given discretion to decide in pressing cases according to his own conscience, but after the position of Chancellor became secular (starting with Thomas Moore in 1529), the discretion faded.299 Interestingly and very much against the original idea, as of the later eighteenth century, the further development of equity became increasingly embedded in precedent, as the (common) law also was, and equity thus acquired a rigidity of its own.300 As a consequence, it became clear that equity was to remain incidental and never developed into a full system of more natural or equitable justice, but importantly it went as far as to issue injunctions when fair and equitable. Although an independent system of rules, it could not ignore the common law and was meant to follow, not to obstruct it, and was as such only a reflection of the common law’s imperfections. For greater intervention, legislation became to be considered more proper. 298 For this development, it may be of interest to quote from the first edition of Hanbury, Modern Equity (1935): ‘In the mediaeval period, the Chancellor was the most important personage in the country next to the King … A very important function of the Chancery was the issuing of writs … A setback to the too rapid increase in its powers was provided by the growth of Parliament … but this had its defects … unadaptability … [W]hile the certainty and rigidity of the law was a good thing, it was equally a matter of satisfaction, at any rate to the poorer class of litigants, that there should be some source … whose justice should … be able to grant relief in hard cases … The law … in that period presented somewhat the appearance of a young infant … [L]ike most things that are both young and strong, obstinate and unbending. The mediaeval Chancellors were peculiarly well fitted to relieve hard cases; they were ecclesiastics and learned in the civil and canon law … They would give or withhold relief not according to any precedent, but according to … the merits of the particular case before them … [and] their innate ideas, prompted by morality, honesty, conscience, or knowledge of good or evil. From these abstract virtues springs equity … Maitland points out that in the thirteenth and fourteenth centuries the Chancellor very probably did not regard himself as administering new law. In many cases we see him working hand in hand with the common law judges … The great [new] weapons of the Chancery procedure were the writs of subpoena and quibusdam certis de causis, whereby the Chancellor could summon a defendant before him to answer certain unspecified charges. The very vagueness of these writs made it impossible for a plaintiff to fail … on a mere technicality’. 299 The facility is believed to have become more or less mature by the time of Lord Eldon as Lord Chancellor at the beginning of the nineteenth century. Until the fusion of the administration of law and equity in England in 1873–75, the equity judges continued to operate separately (Court of Chancery). Even now, technically, at least in England, law and equity have not merged, only their administration. The equitable powers still reside in a special branch of the ordinary courts, but other judges may also exercise this jurisdiction concurrently. It is true, however, that Parliament has taken on much of the equitable law making jurisdiction. 300 In Keppell v Bailey [1834] ER 1042, 1049, the Chancery Court famously held in this connection that at least in respect of land ‘incidents of a novel kind cannot be devised and attached to property at the fancy and caprice of any owner’. In Hill v Tupper [1863] 2 Hurlst 7 C 121, it was further said that ‘A new species of incorporeal heriditament cannot be created at the will and pleasure of an individual owner of an estate and he must be content to take the sort of estate and the right to dispose of it as he finds the law settled by decisions, or controlled by act of parliament’. In the US, where there still appears to be greater flexibility and more recently statutory law has helped especially in respect of floating charges (Art 9 UCC), there are nevertheless also some limits identified, especially in testamentary grants and grants of servitudes, see Johnson v Whiton 34 NE 543 (1893) and Werner v Graham 183 P 945, 947 (1919). Indeed, there is a traditional resistance in the US eg to recognising equitable servitudes in chattels and they are in any event cut off by the bona fide purchaser protection principle: see for a rare discussion, Z Chaffee, ‘Equitable Servitudes on Chattels’ (1928) 41 Harvard Law Review 945 and ‘The Music Goes Round and Round: Equitable Servitudes and Chattels’ (1956) 69 Harvard Law Review 1250. See more recently in a modern context Molly Shaffer Van Houweling, The New Servitudes (2008) 96 Geo LJ 885, dealing with the myriad restrictions on how electronic programs can be downloaded and used leading in the US to so-called click-wrap licences, which may still be considered merely contractual but concern also the so-called ‘free software’ and ‘free culture’ and tend towards affecting remote users and therefore start running with the burdened assets, automatically binding current possessors.

146 Volume 1: The Emergence of the Modern Lex Mercatoria Equity managed to fill a number of important gaps or shortcomings, however, and notably developed the trust further while also recognising conditional and temporary ownership rights in movable property. In contract, it created the rescission remedies and also the notion of specific performance. Fiduciary duties were introduced to protect inequality of the parties, especially in situations of dependency. Equity would combat many other forms of abuse directly. In all, it generally infused the old law with some more ethical notions, a more up-to-date set of values perhaps, and a greater sense of fairness, which even now can lead to new forms of relief. Thus, important new vistas for original development are still open on occasion. In England, that concerned the law of assignment301 and early in the twentieth century the development of the floating charge302 and much later of the Mareva injunction.303 It is thus fair to say that the equity judge at times still assumes broad law formation power and creates or develops new legal structures. In modern times, in England, Lord Denning in particular remained an activist equity judge.304 This shows some similarity with the development of the praetorian law or ius honorarium in ancient Rome,305 but equity remained more incidental in its relief, although particularly active in the area of fraud and breach of confidence;306 in the development of the equity of redemption when forfeiture was threatened under a real estate mortgage; and later especially in the transformation of the use into the modern trust as already mentioned, where equity got its real chance. It was a facility the civil law missed. For more ethical considerations, on the European Continent there had originally been the Canon law although it had a limited reach and later there was the natural law school, as we have seen, but both proved less creative than equity was in England. As has already been said, the greatest practical differences between common and civil law today (apart from the former’s more procedural attitude and feudal land law, and the latter’s systematic, codified and intellectual approach) are, so far as the law of property and obligations is concerned, precisely in the products of equity, and in the more activist attitudes of judges under it, especially in combating abuse.307 These differences are notably in the future proprietary interests in personal property, equitable mortgages and (floating) charges, trusts, constructive trusts, tracing, unjust enrichment, agency, equitable assignments, set-off and netting. Then there

301 See Dearle v Hall (1828) 3 Russ 1, allowing the first collecting assignee to retain the collections if in good faith. 302 The technique has generally been upheld in English case law since the end of the nineteenth century: see Salomon v A Salomon & Co Ltd [1897] AC 22; Government Stock v Manila Rail Co [1897] AC 81; Re Yorkshire Woolcombers Associations Ltd [1903] 2 Chap 284; and Illingworth v Houldsworth [1904] AC 355, see also Vol 5, s 1.5.2. 303 Mareva Compania Naviera SA v International Bulk Carriers SA [1975] 2 Lloyds Rep 509. 304 ‘Equity is not beyond the age of childbearing’ in Eves v Eves [1975] 1 WLR 1338, 1341, but recent case law appears more cautious, see 16(2) Halsbury’s Law of England, 4th edn, reissued (2003) 149. 305 See also WW Buckland and AD McNair, Roman Law and Common Law, 2nd edn (Cambridge, 1952). See for the praetorian law, s 1.2.2 above. 306 In fact, in this area the powers of the equity judge have never been questioned, see the old rhyme: ‘These three give place in court of conscience: fraud, accident and breach of conscience’. It confirms original power and no need for precedent or statute in these areas, cf also Lord Bingham in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1QB 433. 307 Although equity judges would at times rely on Canon law and Roman law texts and in particular on seventeenth-century Roman–Dutch legal scholarship and its fusion with natural law in the secular natural law school since Grotius, this was as supporting arguments and they were not directed thereby. In the areas mentioned, the law of equity managed to move further and ultimately retained comparatively more flexibility as we shall see throughout, especially after continental private law was set in concrete in national codifications in the nineteenth century, even if equity itself became more restrained as we have seen. Legislation took over, also in England, but never completely.

Volume 1: The Emergence of the Modern Lex Mercatoria 147 are the fiduciary duties in cases of dependency. In contract, there are rescission facilities and specific performance. Most importantly, in the area of remedies, equity developed injunctions as (Chancery) court orders to prevent rather than to indemnify harm after the fact. These court orders have no true equivalent in civil law. As already mentioned, they are issued when it is ‘just and equitable’ to do so, which implies considerable judicial discretion again to combat more directly all forms of abuse. Greater judicial discretion coupled with greater judicial activism may more generally be found in all equitable relief and explains much of the judicial activity in trust, company and bankruptcy law, although it remains incidental and dependent on the facts of the case: see particularly Volume 3, section 1.4.1. Again, the development of the law of equity remained limited to certain areas and is even there patchy. As in the cases of trusts, companies and insolvency, there only developed a more comprehensive approach through legislation. Equity used a number of maxims, which tended to broaden its reach somewhat further. Important ones are: ‘equity looks to intent rather than to form’, ‘equity will not permit a statute to be made an instrument of fraud’ or ‘equity does not act in vain’, ‘where there are equal equities the first in time shall prevail’, and so on. Others, however, rather limited it: ‘he who comes to equity must come with clean hands’, ‘he who seeks equity must do equity’, ‘delay defeats equity’ (laches), and ‘equity follows the law’, which suggest at least in principle (although not always in practice) a subordinate role. The greater problems with equity resulted, however, from the duality in the courts. Points of law had to be dealt with in the King’s courts, points of equity in the Court of Chancery. If points of law and equity were raised in the same case, the result was that the case would go backwards and forwards between both sets of courts potentially causing endless delays and more costs, as vividly recounted by Charles Dickens in his novel Bleak House. In the nineteenth century, this led in England to the fusion of the courts of law and equity (in the Judicature Acts of 1871, 1873 and 1875). The result was one court system, although not strictly speaking the merger of the two sets of courts or laws. The Court of Chancery is still competent in typical equity matters, such as trusts, company and bankruptcy cases, and grants injunctions if such is just and equitable. The main importance of the reform was that points of equity could now also be raised before the courts of law and vice versa. Of the old law courts, the King’s (Queen’s) Bench (which since 1970 has included an Admiralty and Commercial Court Division) and the Court of Chancery became Divisions (together with the Family Court) of what is now called the High Court of Justice in London, to which the itinerant justices, who normally come from the Queen’s Bench, also belong. The above history explains a number of important aspects of English law and concerns also the law in all countries that followed it. As it is not intellectual or systematic but rather practical and the result of gradual development, no great need was traditionally felt for complete clarity in the authorities and competencies of the courts and in the type of laws they administered. There was always some overlap of functions, which gradually separated but also came together again. Thus, originally the King was supreme but delegated authority to the Lord Chancellor, appointed and discharged by him, first to issue writs upon which his courts would act and later to give equitable relief. Subsequently, the courts acquired virtual independence from the King, while the Lord Chancellor as issuer of writs and later as equity judge also became independent (but could be dismissed) in these functions, which were not merged, while the King could still issue amnesties or commute sentences. The Lord Chancellor could thus streamline the procedures in the King’s courts through the writs; later he could in equity also derogate from their powers. Although he could not do so officially as it was still said that ‘equity followed the law’, he could create a string of exceptions, for example fiduciary ownership types giving beneficiaries proprietary protection while respecting the ownership position at law. He could also impose injunctions

148 Volume 1: The Emergence of the Modern Lex Mercatoria to order litigants to do certain things or refrain from doing them or he could issue an order or decree to comply with the law pending full litigation.308 The 1873–75 Act established that in the case of a conflict between law and equity, the latter prevailed (section 25(11)), but it should be realised in this connection that equity had by then lost its function of appealing to the judge’s conscience and was largely formalised in a set of incidental rules, the more general ones now coming through legislation. Inconsistencies remain, notably in set-offs, tracing, compound interest, illegal contracts, limitation of actions, and monetary remedies for wrongs. However, there seems no great urgency, at least not in England, to sort these inconsistencies out. Through the existence of equity as distinguished from common law, common law may be referred to in the narrow sense of being the private law different from equity and statutory law, but the term is also commonly used for all private law in the Anglo-American world to distinguish it from the civil law. It then includes the other sources of English law, especially equity. It is a confusing terminology of which the novice should be aware.

1.3.2. The Common Law Approach to Scholarship It has already been noted (in section 1.1.3) that Roman law never meant much in England, even though common law developed in similar ways. In the first four centuries AD, when England was part of the Roman Empire, Roman law must have been in force, but there was hardly any trace of it left when the common law started to develop. Henry de Bracton tried to show the seeming similarities between the early common law and Roman law in the thirteenth century,309 but this proved an idle, although spectacular effort. In the previous section, it was mentioned that in equity Roman law concepts were sometimes invoked but that was by choice, not by necessity. Although both Roman and common law were procedural in nature and developed in not dissimilar ways, Roman law was particularly incompatible with the Germanic or Anglo-Saxon notion of seisin or physical possession, which dominated the law of chattels in England, and more generally with the feudal law that dominated the law of real estate and put all ownership of land in the Crown subject to individual estates or tenure in land, again based on the notion of seisin or physical possession. The feudal system in respect of land and the physical notion of possession or bailment in respect of chattels prevail in the common law to this day. Feudal law therefore still covers the traditionally most valuable class of assets. This law also had much influence on the law of chattels, as in equity the proprietary interests in land are often considered extended to chattels, which is of particular importance for beneficial and future interests in these assets. It primarily concerned here trusts and conditional or temporary ownership forms and floating charges. It resulted in a flexible and open system of proprietary rights in chattels and intangible assets (see section 1.1.6 above and Volume 4, sections 1.3.7/8 and 1.10.2) of which there is no real equivalent in civil law. 308 Thus, the Court of Chancery was a prerogative court set up by the King to achieve greater justice for the people against the common law. When, however, he tried to set up another prerogative court to protect himself against the common law, which also covered public law writs to protect citizens (habeas corpus) against public authority or to give orders to officials (mandamus), the result, the so-called Star Chamber, became an important issue in the Civil War that ended in 1640, when it was removed and the principle (since Magna Carta of 1215) that the King operated under the common law and its courts was firmly re-established. In this struggle, the King at one time even considered adopting the Roman law and ousting the common law altogether. 309 H Bracton, De Legibus et Consuetudinibus Regni Angliae (see also the edition by T Twiss with a nineteenthcentury English translation).

Volume 1: The Emergence of the Modern Lex Mercatoria 149 The practical nature of the common law moving from case to case never combined very easily with the much more intellectual approach of the ius commune.310 Legislation is restrictively interpreted to leave as much room as possible for the common law and equity, based upon and accompanied especially in England by a careful analysis of the facts, in which there is sensitivity to new practical needs. In fact, in England, there was never much interest in a more academic approach to the law. Legal teaching at first took place in the Inns of Court as we have seen but rapidly declined and this decline continued well into the eighteenth century. Besides law reports, there were hardly authoritative legal texts. All depended on what lawyers picked up in practice and on their ‘feel’. Only towards the latter part of the eighteenth century, Blackstone (since 1758 the first Professor of Common Law in the newly created Vinerian Chair at Oxford) was able to write down the first commentary on both private and public law (including criminal law); common law never developed or set much store by distinctions in this regard.311 The Downing Chair of Law was founded in Cambridge only in 1800, but like the Vinerian Chair in Oxford was unsuccessful in creating a proper law school as there were still no degrees in common law. Until that time, only Civil (in fact Roman or Roman-related) law including church law was taught (by Regius Professors of Civil Law) in both Oxford and Cambridge, supported by a degree, but it hardly attracted students. Modern law schools were first established at University College in London in 1826 and at King’s College in London in 1831. Only after an 1846 Select Committee of the House of Commons demanded an instruction in the ‘scientific and philosophical aspects’ of the law, and called for proper academic degrees in the (common) law, did things change, but by 1900 there were still few law graduates and only about 10 law schools. This number had risen by the 1970s to about 30 and is now around 75. Treatises and academic writings have also multiplied. They became significant much earlier in the US, as we shall see (in section 1.3.4 below). In England, well into the 1960s, much that was taught in law schools was still taught by way of preparation for the solicitors’ exam, and most law teaching remained part time. Eminent law scholars (such as Pollock, Anson and Dicey at Oxford or Maitland at Cambridge) were few. Thus, the status of legal scholarship remained subdued. It was largely descriptive and its meaning as intellectual illuminator, forward-moving force, and innovative facility was poorly understood. In fact, in England for a long time the informal rule obtained that only the opinions of dead scholars could be cited as authority in court.312 Opinions of the Bar especially from King’s/Queen’s (from whose ranks judges still largely come) were much more important than scholarly findings. Members of the Bar mostly held no university degree in law at all. It may thus be seen that only in the last 50 years have English law schools developed more broadly, and English judges and the Bar have become more receptive of legal scholarship, which itself has become more imaginative. More recently, it has also shown some interest in sociology,

310 See Lord Goff, ‘The Future of the Common Law’ (1997) 46 ICLQ, 745: ‘The historical fact that common lawyers have been reared on a diet of case law has had a profound effect on our judicial method. Common lawyers tend to proceed by analogy, moving gradually from case to case. We tend to avoid large, abstract, generalizations, preferring limited, temporary formulations, the principles gradually emerging from concrete cases as they are decided. In other words, we tend to reason upwards from the facts of the cases before us, whereas our continental colleagues tend to reason downwards from abstract principles embodied in a code. The result is that we tend to think of each case as having a relatively limited effect, a base for future operations as the law develops forwards from case to case … This method of working can be epitomized in the statement that common law lawyers worship at the shrine of the working hypothesis’. 311 W Blackstone, Commentaries on the Laws of England (4 vols 1773). 312 See Donoghue v Stevenson [1932] AC 562, 567.

150 Volume 1: The Emergence of the Modern Lex Mercatoria economics and psychology, but it still retains a broadly formal (or doctrinal) bias,313 intent largely on making some better sense out of disparate cases and statutes. As such it remains essentially reactive and even system seeking, stuck in the past and its experiences. It may even show an unexpected affinity with the civil law predilection for (statutory) text.

1.3.3. The Common Law Approach to Precedent, Legislation or Codification, and Statutory Interpretation It was already mentioned that the common law eventually accepted the binding force of precedent, also referred to as the stare decisis (et quieta non movere) rule. It is often considered one of its basic traits, very different from the civil law approach,314 but has been adhered to formally only since the end of the nineteenth century.315 It ties a judge to his own decisions as well as to those of all his colleagues at the same or higher level, but supreme courts are commonly excepted, as is the Supreme Court in the UK, and it usually only concerns the ratio decidendi of these decision, that is, to the legal principle considered involved although this may improperly suggest an easy separation between law and fact and a particular preoccupation with the norm side of the law as will be discussed shortly. Observations on the law with no particular relevance to the case (obiter dicta) have no such force and effect. The stare decisis rule was never rigorously followed in the US, where there are far too many cases and the Federal Supreme Court and lower federal courts are under the Constitution at times highly political bodies that must acknowlegedly respond to fast changing circumstances. Still, they respect precedent in principle also. Again, the rule does not apply in the highest courts and the Supreme Court of the United States will overrule itself if it considers it necessary. Within each State of the Union, in matters of State law, the lower State courts also follow their own precedents, subject to the decisions of the higher courts, but the Supreme Court of each State will also overrule itself if necessary. Absent federal law (notably in bankruptcy) and federal questions, federal courts will apply the law of the State in which they sit. As we have seen at least in England, the precedent rule now also applies in equity,316 which, against the original idea, could become as a consequence just as rigid as the law, and strictly speaking it applies even to findings on customs and their existence.317 This may have become 313 See also Atiyah and Summers (n 9). They identify the differences in this regard between the US and English approach, the former academically showing some greater ressemblence in its formalism and doctrinal attitude to the codification idea and system thinking. Note that in England and the US (in fact in the entire common law world) the term ‘doctrinal’ stands for the positive law and often for this more formal approach. That may be different in civil law, where it more generally refers to legal doctrine or the results of academic thinking, which suggests a more jurisprudential attitude. 314 The Latin expression of the principle might suggest a Roman law origin but nothing could be further from the truth. Justinian law in C.7.45.13 had expressly rejected the principle: judges must judge only on the basis of the laws, not precedents (exampla); see also Baldus at C.7.45.13 pr. That remains the attitude in civil law to this day. It is also the attitude of international courts; see Art 59 Statute of the International Court of Justice, and of arbitrators. The ius commune would allow, however, an interpretation to become customary when it acquired the same legal status as custom. This became generally accepted; see Baldus at D.1.1.37 under 2 and at C.9.1.4 under 4. 315 It was only formally adopted by the House of Lords in 1898 in London Tramways v LCC [1898] AC 375. 316 For equity, ossification in this manner dates at least from the early nineteenth century, see n 294 above. 317 It set customary law in concrete, see also n 38 above and accompanying text. Custom thus lost much of its dynamic character; some believe that this was done to prevent courts from getting confused, see JH Baker, An Introduction to English Legal History, 3rd edn (London, 1990) 418; see also RW Aske, The Law Relating to Custom and the Usages of Trade (London, 1909) 23, and HJ Berman and C Kaufman, ‘The Law of International Transactions (Lex Mercatoria)’ (1978) 19 Harvard International Law Journal, 221, 227. See for more recent case law and literature also n 494 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 151 particularly relevant in commerce and finance after commercial law was integrated into the common law in the eighteenth century and overtaken by it even though it retained some independence. As already mentioned (in sections 1.1.3, 1.1.7 and 1.1.9 above), it created rigidity even in the application of commercial law and risked depriving it of the flexibility and movement that are inherent in it. Particularly in this area, in England, custom now thrives perhaps less than one would expect although it might still do better here than in the rest of private law, see also section 1.4.8 below. It was already submitted that equity is here also of special relevance. While discussing the role of precedent even where the accent is put on the ratio decidendi or the legal issue decided in the case, it should be considered that in common law, precedents may be best seen as little stories, pictures, or vignettes, where in a particular situation law is explained and applied in relation to some specific facts and cannot be separated from them. To see in them the expression of more abstract general rules, ultimately separated from the underlying facts and elevated to a higher intellectual level, goes against common law thinking and is reminiscent of system thinking in civil law. It is a strand of thought, however, not now uncommon in English academia, much less so in the US where there is scepticism of all such more formal thinking: again, law is then made in society and the result of a constant debate that is never ending; it can never be fully known. That is legal realism in the US as we have already seen, where much is (changeable) social policy, see further section 1.3.4 below. However, common law judges are pragmatic, also in England, and the search is then, foremost, for the nearest precedent (even in respect of statutory rules) among several possibilities once the facts are on the table and carefully analysed, and a new story or narrative will be developed for the particular case in which (new) law and (new) fact are not strictly speaking separated; that seems to be the key to a proper understanding of precedent in common law countries. It is therefore less important and controlling than often claimed. Again, the senior courts are not so bound (not now in England either as we shall see below) and fact situations can easily be distinguished and newer situations accommodated. In civil law, there is in principle no similar need to follow precedent because of the codification of the law and its specific rules, which often pretend to contain the whole system of the law. Civil law traditionally is not dispute resolution-oriented, as we have also seen, but was rather meant to provide a framework to facilitate daily life as a whole, make it more rational and easier for all, see also section 1.4.18 below. Litigation is here intellectually the exception. In common law, the emphasis was different precisely because the law could only be known in the context of litigation. Scotland, even if often considered a civil law country, accepted the binding force of precedent also, again explicable in the absence of a codification of its Roman antecedents. It was already mentioned that there is convergence here, as aging civil law has become much more dependent on interpretation, which manifests itself especially in case law (see also the discussion in section 1.2.13 above) and civil law judges normally also try to stick to a line and do not want to be erratic and there is clearly a consistency and credibility element also. Nor do they want to be inefficient. In that sense, civil law judges also accept the persuasive force of precedents, while in the absence of specific codified rules, or in the case of old ones, they may rely even more firmly on reforming precedent within their interpretational freedom. There is a difference however. In civil law precedent mainly works on the rule side and is meant to move the system forward. Facts and norms remain thus more fundamentally separated and it is the abstract expression of the rule in case law that thus becomes of prime interest. Again, it can be explained by civil law working mainly on the norm side, common law being more fact sensitive and more hesitant to separate fact and rule. All the same, given the stare decisis rule in much of the common law, and barring correcting statutory law, it became more difficult to react to changing moral and social attitudes or to what was clearly wrong or had been superseded in the law and as a consequence the unfettered

152 Volume 1: The Emergence of the Modern Lex Mercatoria application of the rule came under pressure in England. Although it officially still prevails, in 1966 the Lord Chancellor announced that the House of Lords could henceforth indeed overrule itself,318 but that was not to apply to lower courts.319 The approach in England is therefore now much as in the US but always left considerable room for artful interpretation. Again, the stare decisis rule was probably never what it is often reputed to be.320 To the extent it is related to the notion of consistency, in England, Lord Bingham, one of the most important modern judges and ultimately the (last) Senior Law Lord, said: ‘I do not think any of us aims to be consistent. I actually regard consistency in a judge as a vice’.321 This reflects individual attitudes but also confirms that English judges remain pragmatic and solution-, not system-, oriented. Precedent is here only a guide unless there is clear repetition. The greatest judges would not have it otherwise. For many, the perception remains, nevertheless, that by following precedent in the absence of any general codification, the common law sustains itself in a similar rule-based manner, even though these rules are unwritten, and is believed in this way to promote predictability. Hence the frequent references to the rule in such and such a case. Again, the crucial difference is that these rules are not set in a coherent framework or applied systematically. There is no comprehensive effort to relate them to each other except in more academic writing, which then has a tendency, also in England, to become doctrinal, but, in practice, law application remains fact based. Statutory law in the private law area, with the notable modern exception of the US as shown in the Uniform Laws and in the US Bankruptcy Code, and perhaps also with the exception of nineteenth-century commercial law statutes in England, does not have coherence as a primary aim and often remains a collection of incidental and disparate rules written for particular situations or covering particular concerns. In essence, it is still considered remedial and there definitely remains a lesser urge to conceptualise in common law. Respect for precedent is not meant to overcome this. At the beginning of the nineteenth century, therefore at the same time that the stare decisis rule became more firmly established, Jeremy Bentham started to argue in England in favour of codification, not on the basis of natural law and practical use, but rather on the basis of his wellknown utilitarian principle that the legal system should contribute to the greatest happiness of the greatest possible number of people.322 In his view, this required a comprehensive body of laws, but this principle was also to be applied to each individual rule. Although Bentham was principally opposed to the natural law school and its abstractions, in the practical elaboration of codes his approach would have led to some similar rational deductive manner of rule formulation. It would also have been normal to expect some universal law to emerge from this utilitarian approach but it was eliminated through his more surprising requirement of codification of this type of law at the national level. Opposition to the codification idea, which in England never got much further, came in particular from Edmund Burke, who did not believe that through legislation or otherwise one could or 318 House of Lords Practice Declaration [1966] 3 All ER 77. 319 Notwithstanding Lord Denning’s dissenting opinion in Gallie v Lee [1969] 1 All ER 1072. 320 There iremains much confusion about this rule of precedent. It was submitted that the rule should only concern the way law is applied to fact situations, and not abstractly determine what is ‘law’ and therefore operate in isolation on the norm side when the (new) rule distilled may become entuirely abstracted and separated from the fact situation out of which it arose. See for various views of precedent in common law countries, M Eisenberg, The Nature of the Common Law (Cambridge, MA, 1988) 50, 55. Thinking in terms of precedent should also not be confused with analogical reasoning, which is existing rule-based. 321 Obituary, Daily Telegraph, 13 September 2010. 322 ‘Codification Proposals’ in J Bentham, Complete Works (1854) 4. See also P Schofield and J Harris (eds), Jeremy Bentham, ‘Legislator of the World’: Writings on Codification, Law and Education (Oxford, 1998) 5.

Volume 1: The Emergence of the Modern Lex Mercatoria 153 should overturn the fruits of the past.323 Bentham’s disciple, John Austin,324 although a utilitarian, subsequently viewed the law, also private law, as pure command of the sovereign leading to a strong form of national positivism, which in England gained deep roots to the present day and is probably reflective of a nationalistic attitude that might have preceded Burke, Bentham and Austin, but which was typical of the nineteenth century and the common core in the teachings of them all.325 Thus law, even private law, is national per se, therefore also in commerce and finance. In Burke’s approach, there was here an early vision of a Volksgeist in the development of the law, much as von Savigny would propound in Germany at the same time (see section 1.2.9 above) and which one may still find in the US as well.326 But there was no preference for statutory law and none of the theoretical systematic attitude to rule formation, which von Savigny wanted as a first step to, and a precondition for, codification at national level and which, in typical nineteenthcentury scientific fashion, was ultimately favoured in Germany as we have seen. In fact, it led in the civil law codifications to a revolutionary break with the past—with Roman as well as local laws or custom, no matter how much lip service was still paid to them. Burke was here more consistent in leaving the development of the law to natural (but national) forces. It meant that, after the Napoleonic wars, English law was not overtaken by the codification ethos, even though now also becoming more nationalistic in the modern nineteenth-century statist fashion. However, streamlining also came to be necessary in England, and even there, statutory law proved the more efficient way of doing so, also overtaking the equity jurisdiction in this regard. But statutory law never claimed to cover the whole field as the civil law codes tended to do and remained essentially remedial or an expression of policy geared to particular situations or objectives (such as consolidation or simplification and later also social objectives). It remained in England only one source of law besides the old (common) law, equity, and customary laws and only prevailed if it explicitly amended or abolished the earlier rules. It has already been noted that statutory law, at least in England, remains in that sense subsidiary, corrective and incidental even today. As such it is narrowly interpreted. In England, the court system was substantially modified and simplified by statute, first in the Common Law Procedure Act of 1854 and more fully in the Judicature Acts of 1871, 1873 and 1875 as already mentioned. These Acts made it possible to invoke law and equity in all courts (section 25(11) of the Act of 1873). Moreover, they abolished the forms of action (or old writs) and allowed all lawsuits to start with a simple (writ of) summons which did not need to articulate a specific type of claim or cause of action but only its substance. However, in practice, the relief that could be obtained in this manner still corresponded to that available under the older forms of action. This was particularly clear in tort cases where the old forms became the modern intentional torts. A more analytical approach became possible, however, and in case law eventually a broader tort of negligence was developed.

323 Reflections on the Revolution in France (1793, reprint Oxford, 1993). 324 See J Austin, Lectures on Jurisprudence, vol 2 (R Campbell Ed) (London, 1875) c XXXVII. 325 The nationalistic or perhaps more cultural historical element was first articulated in England by E Burke, Reflections on the Revolution in France (1793, reprint Oxford, 1993). Burke and Bentham thus came together in this nationalistic sentiment (although not in the codification idea), which in the teachings of Austin culminated in the view that all law depended on the command of the sovereign, see Austin (n 324) vol 2, 91–103. 326 See, among those who see all of American law as embedded in typical American values, eg, R Post, ‘The Challenge of Globalisation to American Public Scholarship’ (2001) 2 Theoretical Inquiries in Law 323, but in the ‘realist’ sense law may be validated in ways other than state command or legislation alone. In the US, this type of nationalism has therefore not led to the idea that all law is necessarily statist and immanent law is not as such suspect, at least to the extent that it may be considered part of the American way of life.

154 Volume 1: The Emergence of the Modern Lex Mercatoria At the same time, important legislation was introduced in particular areas of substantive private law, also in commerce, including the Bills of Sales Acts 1854, 1866, 1882, 1890 and 1891; the Bills of Lading Act 1855 (supplemented by the Carriage of Goods by Sea Acts (COGSA) 1971 and 1992); the Bills of Exchange Act 1882, the Factors Acts 1823, 1842, 1877 and 1889; the Partnership Act 1890, the Sale of Goods Act 1893 (replaced in 1979 by an amended version); the Maritime Insurance Act 1906; the Companies Acts, including the winding-up of companies, 1844, 1856, 1862, 1948, 1967, 1986, 1989, 2004 and 2006; and the Bankruptcy or (now) Insolvency Acts 1824, 1849, 1861, 1869, 1883, 1914, 1985, 1986, 1994 and 2000, supplemented by the 2002 Enterprise Act. In 1925, the whole law of real property law was restated by statute in the Law of Property Act. Also, in the area of torts and consumer protection, there is now much legislation. There is no doubt that even in private law, legislation may thus become more policy-oriented also, not only merely streamlining, as indeed modern civil law statutes also are. On the other hand, conceptualisation remains rare: it has already been noted that the English are not given to generalisations and mistrust general concepts and system thinking. This is still very clear in the company, insolvency and financial services legislation. However, the English Bills of Exchange Act 1882 and Sales of Goods Act 1893, drafted by Sir Mackenzie Chalmers, have been lauded as great pieces of English conceptual (commercial) legislation. So may be the 1996 English Arbitration Act, much inspired in this connection by the UNCITRAL Model Law. In the US, private law is still a matter for the different States of the Union, although they have obtained some uniformity in uniform laws prepared by the Commission for Uniform State Laws, of which the UCC, co-authored by the American Law Institute (ALI), is the broadest and by far the most important one, accepted in all States as we have seen. The UCC was substantially the product of the efforts of Professor Karl Llewellyn, who showed strong conceptual thinking, reflected at least in the original set-up. The result was an important reforming statute that did much more than restate the old law and was to some extent a reminder of the codification approach in Europe, very different therefore from the modern English approach to statutory law and its craftsmanship, which, as mentioned and except for the nineteenth-century commercial law statutes, often still remains directed towards special situations and is casuistic in that sense. It was already noted several times that while not claiming sole authority and respecting other sources of law especially the common law, equity and custom unless overruled, the UCC remains very different from civil law codifications and was never a true codification in that sense.327 In the US, at individual state level, there had long been some civil codes (the so-called Field Codes, according to some inspired by Benthamite thinking) as well, for example in California, in which much of the old common law was written up. However, their nature was also substantially different from that of the European Codes in that they did not overrule the common law. In essence, they served only to facilitate access.328 There are further the modern Restatements in which various areas of the law (such as contract, trust, and agency) are summarised by the ALI, a private institution created in 1923 by the American Bar Association, which also co-operated in the drafting of the UCC as just mentioned. The Uniform Laws as well as the Restatements

327 As mentioned in n 44 above, it misses the typical nationalistic element and is practical: see further RM Buxbaum, ‘Is the Uniform Commercial Code a Code?’ in U Drobnig and M Rehbinder (eds), Rechtsrealismus, multikulturelle Gesellschaft und Handelsrecht (Berlin, 1994) 197; and J Gordley, ‘European Codes and American Restatements: Some Difficulties’ (1981) 81 Columbia Law Review 140. 328 In fact, in 1888 the Californian Supreme Court in Sharon v Sharon 75 Cal 1, 13 (1888) declared that in instances where the Code was so confused and uncertain that it could be given no intelligible meaning, it could not be considered to have changed the common law. Already under its s 5, it was stated that the Code was substantially the same as prior law.

Volume 1: The Emergence of the Modern Lex Mercatoria 155 are regularly updated. Although the latter are not legislation and may not even have persuasive force, their unifying impact is often considerable. Like the method in the UCC, the one in these Restatements is more directly intellectual, and, again, reminds one in this aspect of the European codification approach. There is no equivalent in England, even though it has the Law Commission, which from time to time suggests legislative improvements in the law, but rather on more specific issues as we have seen.329 It misses in particular the practitioners’ input and an innovative spirit. Also in common law countries, legislation raises the question of statutory interpretation. To repeat, in most of them, particularly in England, statutory law of this nature is often still seen as a foreign element in the development of private law, mainly correctional and therefore restrictively interpreted, much as criminal laws are in civil law, and there remains therefore as much room as possible for law and equity, even customary law and the law merchant now most clearly expressed in section 1-103 UCC as we have seen. In any event, if the statutes do not clearly abolish older law, the relevant case law can still be pleaded. In that sense, all statutes in the area of the common law are considered only a restatement, elaboration or correction of what went before, unless specifically stated otherwise.330 In this connection, it is well known that English judges remain wary of teleological interpretation of statutes, more so than their modern American counterparts,331 and will commonly also not consider the preparatory instruments as a guide to (historical) interpretation. They tend towards a literal interpretation technique.332 This also excludes the consideration of the statutory history and parliamentary commentary in the drafting stage, the so-called exclusionary rule, which finds its counterpart in contract in the parol evidence rule, see Volume 3, section 1.2.4. Although the exclusionary rule has now been abandoned in England and the parol evidence rule much softened, the courts still remain reluctant to move too far from texts and give them a broader meaning.333 Nevertheless, formal interpretation of statutes will be amplified 329 As recently as 1974, Scarman LJ thought that the common law system had reached the end of the road, saw judges on the one hand as being duty bound to sometimes resist the will of Parliament, but argued on the other hand for the common law itself to move to a statutory base as an exclusive source of law, see English Law, the New Dimension (Hamlyn Lecture, London, 1974) 77. He wanted, however, general principles, rather than detailed rules. The Law Commission set up in 1965 was seen as the centre of this activity but it soon downgraded its ambitions to more piecemeal proposals for law reform, much of it in a correcting mould. 330 More boldly, it was held in Dr Bonham’s Case (1610) 77 ER 646, 652 that if an Act of Parliament was against common law right and reason, common law would control it and adjudge it void. At least in England, that is not the practice. As Parliament cannot act ultra vires, the courts cannot annul statutes. However, in the US the judiciary can hold statutes at least unconstitutional ever since the famous case of Marbury v Madison 1 Cranch 137, 2 L Ed (1803) 60. For civil law in respect of private law formation, see the situation under the French CC (Art 5), which expressly withholds that right from the courts and is here illustrative for much of the rest of civil law (see also s 1.2.5 above in fine). 331 See for the US s 1.3.4 below. 332 See Lord Denning, The Discipline of the Law (London, 1979) 11ff and his comments in Bulmer v Bollinger [1974] Ch 401: ‘[T]he draftsmen of our statutes have striven to express themselves with the utmost exactness. They have tried to foresee all possible circumstances that may arise and provide for them. They have sacrificed style and simplicity. They have foregone brevity. They have become long and involved. In consequence the judges have followed suit. They interpret a statute as applying to the circumstances covered by the very words. They give them a literal interpretation. If the words of the statute do not cover a new situation—which was not foreseen—the judges hold that they have no power to fill the gap. To do so would be naked usurpation of the legislative function … [T]he gap must remain open until Parliament finds the time to fill it’. Coming from Lord Denning, one may detect some irony in this statement. 333 Legal certainty was often invoked as a conclusive argument, but Lord Denning in Denis v Johnson [1979] AC 264, 276 proved sceptical: ‘Some may say—and indeed have said—that judges should not pay attention to what is said in Parliament. They should grope about in the dark … I do not accede to this view. In some cases, Parliament is assured [by the Government] in the most explicit terms what the effect of a statute will be … In such cases, the court should be able to look at the proceedings’. See also the House of Lords in Pepper v Hart [1993] 1 All ER 42.

156 Volume 1: The Emergence of the Modern Lex Mercatoria by reasoning through syllogism and subsequently through induction or analogy but it remains selective and cautious; see for civil law section 1.2.13 above. Again, this may be different in the US, especially in legal realism as we shall see shortly.334 In that approach, the Americans clearly allow room in appropriate cases for other considerations, including pressing ethical, social and efficiency needs. In their codes such as the UCC, which calls for liberal interpretation, they do not follow literal or even systematic reasoning either or at least do not see it as a bar to achieving social adjustments or to evolving economic, utilitarian and efficiency considerations. This difference from the English attitude is borne out by the English Interpretation Act of 1978, which was largely a restatement of the Interpretation Act of 1889, often considered a little precious and pedantic, even in England. The restrictive interpretation technique means in practice that the English legislator is required to be more specific and precise than its civil law or even American counterpart and that as a consequence the drafting of statutes is often cumbersome and unduly detailed, again geared to particular situations and problems. But it is also an attitude and contracts in common law tend to be equally elaborate reflecting no less specific situations and worries while in this manner risking to leave other eventualities uncovered. It has already been said that the English legal mind is uncomfortable with and remains wary of generalisation.335 In short, in traditional common law practice, contractual drafting is not conceptual either, rather more practical and often long. This can have advantages. Particular examples of this type of statutory drafting appeared between 1985 and 1987 in the English Insolvency, Companies, and Financial Services Acts. For the reason stated, the technique of drafting lucid legislation seems to have eluded the English, although the nineteenth-century commercial statutes were sometimes more conceptual as noted above. So, too, is the UCC in the US. Even in England, there are more modern exceptions such as the new English Arbitration Act of 1996, also already mentioned (which had, however, the UNCITRAL Model Law for an example). They also had largely single draftspersons. Clearly, it does not always need to be this way. In statutory interpretation, there is in any event in England a gradual change in favour of a more ‘purposive approach’ ‘to promote the general legislative purpose of enactments’, which eventually may also affect the drafting technique and there is a more flexible approach in contract interpretation as well.336 However, statutes continue to be strictly interpreted in England, a rule, in fact, of long-standing validity (at least since 1343).337 It allows more room for the old common law but there is clearly also a modern concern that the judiciary may get too close to legislative activity under the guise of interpretation.338 Under the influence of EU law, which, in the civil law tradition, is much more conceptual in its legislative approach, English judges now more generally also consider the preparatory work. EU law is further used to and perhaps even based on the expectation of teleological interpretation, which also affected the attitude in the UK. It is unavoidable in the interpretation of EU Directives. It is nevertheless undeniable that, in common law for the time being, a restrictive attitude is still taken to the interpretation of statutes. This means that there is at least in private law ample room 334 See for a discussion, RS Summers, ‘Interpreting Statutes: Legislative History’ in Essays in Legal Theory (Dordrecht, 2000) 251. 335 See also the reference to Blake in s 1.4.7 below. 336 See for a number of more recent House of Lords cases, Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913 and BCCI v Ali [2001] 2 WLR 749, in which in contract interpretation a reasonable-man approach was adopted. Yet at least as a starting point, the literal attitude towards statutory enactments remains largely intact. 337 See also TFT Plucknett, A Concise History of the Common Law (Boston, MA, 1956) 333. 338 See Lord Simonds in Magor & St Mellons RDC v Newport Corp [1952] AC 189, rebuffing Lord Denning on appeal.

Volume 1: The Emergence of the Modern Lex Mercatoria 157 for the operation of law, equity and custom besides statute (as section 1-103 UCC specifically recognises). As we have seen, this may, apart from the lack of system thinking, be the fundamental difference with the civil law codification approach.

1.3.4. Intellectualisation and Conceptualisation in Common Law. Modern American Academic Attitudes Towards the Law and its Development: Legal Formalism and Realism In the foregoing, it was repeatedly pointed out that traditional common law tends to be practical, moves from case to case, and is not intellectual. It certainly never went through an intellectual phase as the ius commune had already done in the time of Bartolus and Baldus, again, but more markedly, in the natural law school of Grotius, Pufendorf, and later in the Vernunft law of Wolff, and in the nineteenth-century German Pandectist School. Even if modern civil law became ultimately dependent on positive state law or at least on national law (which could also be case law), all codification thinking was and remains basically intellectual and conceptual as we have seen, geared to generalisation and system thinking. It found as such no clear counterpart in common law, also not when statutory law started to become more prevalent, although in the US through the Uniform Laws and Restatements, intellectualisation and conceptualisation became more prominent than elsewhere in the English-speaking world. Indeed, in the US in the twentieth century, a need came to be felt to study the law in a more academic and abstract manner, as such providing alternative ways of thinking about the law altogether, which potentially became quite different from practitioners’ or doctrinal law. Rather than systematisation, it ultimately proffered an academic model or ideal meant in particular to guide legal updating and suggesting newer ways to reform. It was promoted at first by the coming into being of major national law schools such as those at Harvard, Yale, Columbia, Chicago and Berkeley339 and the requirement that all lawyers obtain an academic qualification in the law. At least in private law, this American legal scholarship remained at first closely associated with the traditional search for legal consistency in rule patterns (whether derived from case law or legislation), which as we have seen continues to be the drift of the English academic approach.340 This so-called legal formalism (an American term only invented later) was thus primarily intent on finding a framework of rules especially in case law. It was closely connected with legal positivism and the legal practice,341 as such a reminder to some extent of the rule-based codification approach with its emphasis on intellectual coherence. This type of scholarship is not extinct and continues particularly to look for the logical thread in disparate case law and often also in statutory enactments and means to articulate the underlying consistency of the rules and to incorporate or distinguish (new) cases on that basis. However, in the US it does not necessarily elevate this system to a higher pinnacle or believes it complete and self-sufficient as civil law is more likely to do, although this kind of legal formalism often led and still leads in England also to an academic predilection for black-letter or doctrinal law and automaticity in its application as we have seen.

339 See also LI Applebaum, ‘The Rise of the Modern American Law School: How Professionalisation, German Scholarship, and Legal Reform Shaped our System of Legal Education’ (2005) 39 New England Law Review 251. 340 See for the diverging attitudes in England and the US in the twentieth century in particular Atiyah and Summers (n 9) ch 9. 341 See also s 1.4.17 below.

158 Volume 1: The Emergence of the Modern Lex Mercatoria Unlike in England, in the US this more formal attitude—for case law articulated especially by Langdell at Harvard in the late nineteenth century—did not last long. It demonstrated an attitude derived from the natural sciences and their mathematical models, much as there was in German idealism at the time as already noted in section 1.2.9 above, but the Americans soon became sceptical of such a mechanical approach and were more willing to abandon it altogether.342 There, the openly accepted political role of the US Supreme Court and of the federal circuit courts in particular, helped to create a greater interest in extra-legal and policy objectives or considerations behind the law and eventually in legal values rather than in their black-letter manifestations. There were always strong natural law undercurrents in the American Constitution itself. It means that in appropriate cases, law, even private law, including judicial decisions, came to be seen primarily as instruments not only to guide societal and market forces but eventually also to promote welfare and social and economic progress more generally. Another feature may have been a stronger merger of law and equity, also of the courts, which adopted the more activist equity court approach across the board. Rationality is not assumed. Law and the decisions were then no longer considered neutral or objective per se. Rather they were seen as rationally indeterminate, which means that they were not causally or automatically to result from the rules. The behaviour of judges and juries and what motivated them is then of particular interest and acquired a special support in ‘law and psychology’, but altogether the study of the impact of the law in terms of the promotion of justice, social peace (or welfare), utility and efficiency became the more likely perspectives in legal studies, hence the interest in policy and at the academic level the connection with sociology, economics, political science, and the interdisciplinary and empirical approach that follows. It also explains the renewed respect for philosophy. In its most pronounced form, at least in academia, the search may then be on for altogether newer models that lift all positive law up to a higher level of enquiry and insight. What the Germans sought in the nineteenth century in system thinking acquires here a different impetus: a renewed and more open search for a greater truth behind the law and its operation that will explain more and guide better. The expectation is that there are always better academic models in the making and that we can reach for a better world in this manner, which prepares us more adequately for the future at the same time. This then becomes the real heart of the modern study of the law, especially in academia in the top US universities that separates itself from the daily practice. Public and private law or law and policy are little distinguished. Critical legal studies, now often evolved in race and gender or other social policies, are strongly pushed because that is what society is most concerned with for the moment. The result is primarily an academic exercise in terms of re-education which poses obvious problems in terms of reliability of outcome. Not only are the paradigms of this process and their identification often unclear, but the results of, for example, empirical research (which must test the outcome) may also be superficial. Yet the effort itself is credible and, at least from a societal perspective, very necessary. It means that there is less interest in the older themes of private law, like contract, property, and bankruptcy laws. Doctrinal law is mistrusted; there is a greater interest in policy than in court cases and their reasoning, often being considered superficial or even suspect. European law schools remain removed from this world and in their practice orientation usually mechanical and hardly academic or innovative in that sense—it was already noted in section 1.2.13 above. It may be somewhat different the closer one gets to the marketplace and its operation from a public policy perspective: mergers, acquisitions, corporate action, securities and 342 See also R Feldman, The Role of Science in Law (New York, 2009).

Volume 1: The Emergence of the Modern Lex Mercatoria 159 financial regulation. Here the Americans also regain an interest in the applicable rules, although American academia at the top rather seeks to test them for their continued validity according to newer academic insights developed in the above manner. It is in fact given over to critique of this nature, no more, no less, and to the innovation that follows. Whether that is the right way to educate students may remain a question but it is true that major US law firms only hire that kind of students assuming they come from the best law schools where the positive law is often poorly taught and hardly a tool box provided (about which law firms complain, but hire nevertheless). Dissenting opinions make it possible to follow the debates within the judiciary. Where such dissenting opinions are sometimes also given in Europe, it is indeed clear that there is not the same leeway in the alternatives. It is a difference in attitude and education but a formal reason, already noted, is also that the judiciary, whether in England or on the Continent, does not have a similarly strong constitutional position vis-à-vis the legislature in law formation. Judges therefore have fewer alternatives and like to be more circumspect and on the European Continent perceive system thinking and reasoning of that nature as their protection. English judges stay, or profess the appearance of staying within precedent for much the same reasons. It has already been noted several times that, in this aspect, current thinking in England (at least at the academic level) may be closer to that of the European Continent than to that in the US.343 It shows that the common law tradition is not uniform and is in fact subject to a considerable divide (between the US and the rest). In the more open American approach, the search for consistency and legal certainty then also acquires another dimension. It is not a system nor a set of existing black-letter rules that are believed to sustain it. Rather, in all decisions, the outcome is ultimately deemed to be determined by what in society or in the relevant community is considered right or otherwise normative, articulated in each case. This becomes the more complex notion of ‘policy’. To repeat, the law is here the result of the debate in society. It can never be fully known. Or to put it in the words of Holmes: the law is not a Hegelian dream, but part of the lives of people.344 Legislation (particularly in regulation) and case law try to stabilise it, but it is only a limited effort of a domestic nature that may now be especially wanting in the international flows. Particularly in areas where the law remains unsettled, rules, even if derived from statute, largely acquire the character of guidelines. This is reminiscent of the approach of the free law movement in Germany and especially of the Wertungsjurisprudenz (now in the minority, see the discussion in section 1.2.13 above), but goes well beyond it, has deeper roots, is more profound, and largely accepted as self-evident. In the US, at the top, the Constitution is often considered complete in its arrangements and therefore always requires a flexible approach to interpretation to be able to cover rapid changes in society. This permeates the whole legal system and the approach to it. For private law, this is reminiscent of liberal code interpretation in civil law but without its systemic reasoning and the connected inherent limitation on innovation and dynamism. New circumstances and new factual patterns show the way. Law derives from fact: ex facto ius creatur is the leading principle so that there can be a living law. Rather than a systemic approach (on the norm side), it confirms a policy-oriented attitude (focussing on the fact side and on result), although in the US the extent of the freedom of the courts in this connection, and especially of the Federal Supreme Court in respect of the Constitution, remains a hotly debated issue. All the same, the US Constitution is often said to have in itself ample resources for the changing needs of successive generations.345 Thus from early on, constitutional law was meant to define 343 See Atiyah and Summers, n 9 above. 344 OW Holmes, ‘The Path of the Law’, in Collected Papers (London, 1920) 194. 345 See notably Felix Frankfurter, Of Law and Life & Other Things that Matter; Papers and Addresses of Felix Frankfurter, 1956–1963 (PB Kurland ed) (Cambridge, MA, 1965) 59.

160 Volume 1: The Emergence of the Modern Lex Mercatoria ‘the whole American fabric’,346 in which connection the courts were thought to speak for the entire experience as a nation and to reinterpret the Constitution on the basis of the prevailing American value system as it evolves.347 It helped that, in its general norms, such as the due process, interstate commerce, and full faith and credit clauses, and in its bill of rights, a special overlay of fundamental principle was included in the text itself. It constitutes a framework of higher norms or values that are constantly rebalanced in the ongoing construction of a collective entity, which is intended to be—in the language of the Constitution—an ‘ever more perfect Union’. These are the underlying natural law tendencies already referred to. To this should be added the already mentioned American facility of the federal courts to overrule statutes if deemed unconstitutional. State courts may also do so in respect of State statutes. They will be tested against the relevant State Constitution, which is likely to contain similar principled language, in appropriate cases subject ultimately to the control of the Federal Supreme Court itself. One may assume that this attitude has an important impact on all legal reasoning and interpretation in the US, also on that of state (private) laws even of contracts, whose interpretation may be no less ‘policy’-oriented in appropriate cases. It was already said also that this is social policy of which government is not the sole source. In the US, a liberal interpretation technique of statutes in this manner is now explicitly accepted in many fields of the law, in commercial law expressed particularly in section 1-103(a) UCC, as we have seen.348 Similarly, in contract interpretation, mere deductive approaches or other forms of legal or logical formalism have been increasingly rejected.349 Legal sophistry and doctrinal thinking becomes particularly suspect. This is supported and favoured by American academia in its search for newer ways through improved models, frameworks, perceptions, or paradigms. This more sociological approach in law application and interpretation became apparent early on in the works of Oliver Wendell Holmes, later Supreme Court Justice, and of Roscoe Pound at Harvard. Social needs in particular would thus be considered in determining legal issues. The new approach itself was further elaborated by Karl Llewellyn in what, since the 1930s, has been called the American school of legal realism.350 Again, legal formalism is then usually associated with the notion that law is rationality personified, to the point of forming a mathematical/logical model, in the sense that its rules are pre-set and make the administration of justice potentially a mechanical activity of application: law as technique, much of which can still be found in the civil law codification ethos and its system thinking as we have seen. In this latter approach, law and

346 See John Marshall in Marbury v Madison n 330 above. 347 See OW Holmes in Missouri v Holland 252 US 416, 433 (1920). 348 ‘To promote its underlying purposes and policies’, which was explained as to simplify, clarify and modernise the law governing commercial transactions, to achieve uniformity among the various states and to permit the continued expansion of commercial practices through custom, usage and agreement of the parties; see also s 1.1.3 above. Here we see custom appear as an alternative and favoured source of law, as good faith (more timidly) is now also under the UCC, see Vol 3, s 1.3.7. 349 See MA Eisenberg, ‘The Emergence of Dynamic Contract Law’ (2000) 88 California Law Review 174; MA Eisenberg, Foundational Principles of Contract Law, 17ff (Oxford, 2018). Here all axiomatic/deductive reasoning is abandoned and normative reasoning adopted, in which non-legal arguments will be considered and also brought within the law. Where they conflict, such a conflict will be resolved in the context of deciding the case: ‘The best theory of contract law is normative and pluralistic’. 350 See for the many other supporters at the time, MJ Horwitz, The Transformation of American Law 1870–1960: The Crisis of Legal Orthodoxy (New York, 1992) 171. The term itself appears to have first been used by J Frank, Law and the Modern Mind (London, 1930).

Volume 1: The Emergence of the Modern Lex Mercatoria 161 fact remain fundamentally separated, the law being considered as a system of rules and deemed self-contained, whether or not encapsulated in codification notions, and there is no outside goal. It assumes an order of its own, which, if properly applied to the facts, leads to the right answers in terms of justice, social peace and efficiency. The realists, on the other hand,351 had more difficulty in precisely defining their method, but basically looked at the law as it functioned in society (law in action) and at its operational sufficiency.352 Here the idea emerged that the law automatically changes in its application to newer situations while law and fact are not fundamentally separated. The quality and effectiveness of the law and the results enter into its legitimacy. This is far removed from the traditional tenet of legal positivism. Again, in this approach, extra-legal objectives and policy considerations, especially overarching notions of justice, social peace and efficiency, become important in the application of the law.353 The modern study of the law in the US attempts to guide this process better. Hence law and ethics, law and society, law and economics, law and politics or critical legal studies. Again, legal normativity, if a system at all, is open. Legal realism of this nature354 assumes a general awareness of what is ethically, socially, and perhaps even from the point of view of utility and efficiency, desirable, although legal studies

351 See for the modern views of formalism, B Leiter, ‘Positivism, Formalism, Realism’ (1999) 99 Columbia Law Review 1138. See for the classical texts on legal realism, K Llewellyn, ‘The Effect of Legal Institutions Upon Economics’ (1925) 15 American Economic Review 665; ‘A Realistic Jurisprudence—The Next Step’ (1930) 30 Columbia Law Review 431; ‘Some Realism about Realism’ (1931) 44 Harvard Law Review 1222; ‘The Normative, the Legal and The Law-Jobs: “The Problem of Juristic Method”’ (1940) 49 Yale Law Journal 1355; and The Bramble Bush: On our Law and its Study (New York, 1951). Most of the leading ideas were already contained in OW Holmes, ‘Path of the Law’ (1897) 10 Harv LR 457 and were authoritatively restated by F Cohen, ‘The Problems of a Functional Jurisprudence’ (1937) 1 Modern Law Review 5. 352 See L Alexander, ‘With Me, It’s All er Nuthin’—Formalism in Law and Morality’ (1999) 66 University of Chicago Law Review 530, 531. Thus the essence of legal formalism becomes the systematic application of a rational system leading to mechanical decision taking and autonomous reasoning. It then stands for positivism, see Leiter (n 351) 1145; see also B Neuborne, ‘Of Sausage Factories and Syllogism Machines: Formalism, Realism, and Exclusionary Selection Techniques’ (1992) 67 New York University Law Review 419, 421 (claiming that ‘pure formalists view the judicial process as if it were a giant syllogism machine …’); see further N Duxbury, Patterns of American Jurisprudence (Oxford, 1995) 10, putting emphasis in this connection for legal formalism on ‘the endeavour to treat particular fields of knowledge as if governed by interrelated, fundamental and logical demonstrable principles of science’. 353 There is a more sophisticated critique of legal formalism, especially in the US, which challenges more generally this law’s claim to immanent moral rationality and inherent coherence: see R Unger, ‘The Critical Studies Movement’ (1983) 96 Harvard Law Review 561, 571, objecting to legal reasoning built on it as a pretentious and self-centred method of legal justification in dispute resolution concerning matters that are in truth often social and therefore ideological, philosophical or visionary in nature, see also n 368 below. This critique especially concerns unjustified claims to impersonal purposes, policies and objective principles as tools of legal reasoning. The law’s claims to objectivity and rationality are altogether denied. See in defence of formalism in this connection, however, EJ Weinrib, ‘Legal Formalism: On the Immanent Rationality of Law’ (1988) 97 Yale Law Journal 949; ‘Jurisprudence of Legal Formalism’ (1993) Harvard Journal of Law & Public Policy 583. This discussion is not about automatic application of black-letter law but the prime purpose is rather to separate law from politics while maintaining its autonomy. Religion, morality and considerations of social peace and efficiency are not excluded but seen as immanently embedded in this type of legal reasoning, especially in terms of distributive justice. In that sense, there is nothing formal about this concept of law and legal method, which is not then statist or static either but can sustain itself from within. 354 There was also here an implicit reaction against ‘laissez-faire’, which was even associated with legal formalism and then deemed its accomplice. Soon there was emphasis on the makeability of society in which the law and its progression were actively to function. As such, legal realism became in the American mind closely connected with social pragmatism; see also TRS Summers, Instrumentalism and American Legal Theory (Ithaca, NY, 1982).

162 Volume 1: The Emergence of the Modern Lex Mercatoria may not be able to claim a distinctive insight into evolving political preferences. Thus, in its studies, the realist movement tended to become empirical, while wanting to be scientific and objective at least in this manner, but it also had to accept that mere behaviourism in the end did not provide all the answers and could not fully explain law’s normative (rather than descriptive) nature; see also the discussion in section 1.3.7 below. Yet it brought to an end the prevalence of literal and logical interpretation techniques. A lesser need was henceforth felt to apply rules in an intrinsically consistent manner and black-letter law as such lost much of its lustre in academia and was henceforth often deprecated as ‘doctrinal’.355 Certainty of this nature became suspect. Although it favoured conceptual thinking in law formation, for which in private law there was German influence as may be shown in the UCC and also in the Restatements already mentioned, it can only be repeated that in this approach the existence of these texts was not to thwart other more urgent considerations whatever they were. General doubt could also be shown as to whether the original solutions were ever truly valid or rather based on a misunderstanding or insufficient appreciations of the issues it tried to cover. Again, policy became here strongly separated from application, the first one becoming a typical academic concern, the latter being left to bar examination. It follows that in the US, the difference between legal formalism and a more policyoriented approach to the law and its application has long been understood. The first question became in each instance: what is the policy, what is the law trying to achieve? This being said, in some writings,356 a particular search was made in this connection also for more fundamental legal aspirations common to all civilised legal systems to arrive at a more objective and universal notion of fairness and justice in a modern redistributive social environment. This reconfirmed natural law undercurrents at the same time.357 In fact, in the US, they are never far beneath the surface as could be seen in particular in the work of Lon Fuller.358 In matters of application, arbitrariness in rule making by the competent authorities is here identified and more fundamentally questioned.359 In this approach, there was no reality beyond human experience, or, if there was, it was not relevant. It was always in flux and could be fashioned. There were no absolute answers but what was useful was true or at least true enough. That was, at least, the answer in American pragmatism, see also n 394 below. All law is here considered experimental and provisional. Determinism was rejected and optimism prevailed, see further the discussion in ss 1.3.6–1.3.7 below. 355 As shown in n 358 below, the concept of formalism has not been completely abandoned. A plea for greater formalism at least in the interpretation of contracts between professionals is still heard (not unlike the approach of this book in professional dealings, see s 1.1.10 above), see, eg RE Scott, ‘The Case for Formalism in Relational Contracts’ (2000) 94 North Western University Law Review 847. 356 J Rawls, A Theory of Justice (Cambridge, MA, 1971) and Political Liberalism (New York 1996). 357 Notwithstanding the nationalistic tenor, especially in major criminal law issues, references to international standards of human rights have been made by Justice Kennedy in the Supreme Court cases outlawing anti-sodomy laws and the death penalty for minors, see Lawrence v Texas 539 US 588 (2003) and Roper v Simmons 125 S Ct 1183 (2005). 358 See L Fuller, The Law in Quest of Itself (Chicago, IL, 1940). It laid much stress on the inherent morality of the law (rather than its rationality). The approach of Rawls, in search of public policy justifications in the law (see n 356 above), was very different but no less naturalistic. 359 There is tension here. Holmes eg was much against natural law and as such he could even be classified in the positivist tradition. Law came down from authority/officials (including the courts) and was to be clearly distinguished from morality, see his ‘The Path of Law’ (1897) 10 Harv LR 457. However, he was not a formalist but extra-legal considerations were only accepted within the context of serving the end of legal rules, which, when conflicting, would be determined by the utilitarian calculus in the Benthamite tradition, see notably the comment in PS Atiyah and RS Summers, Form and Substance in Anglo-Amrican Law, a Comparative Study of Legal Rreasoning, Legal Theorty and Llegal Institutions 247 (Oxford, 1987). Pound also believed in the authoritarian

Volume 1: The Emergence of the Modern Lex Mercatoria 163 In England, on the other hand, at the more intellectual level, private law thinking remains largely dominated by the writings of Austin and later Hart,360 based on a vivid statist positivism. Legal formalism thrives in such an environment and is, as we have seen, still largely the adopted method of legal scholarship in the UK which focusses on the law’s application and in that context on doctrinal thinking. The approach of Hart was fundamentally questioned by the American Ronald Dworkin,361 his successor at Oxford, in whose view social and policy considerations play an important role and figure in legal principle. Again, this is in the tradition of American realism. Nevertheless, in so far as legal theory is of interest at all in the development of English law, which remains largely practitioner dominated (especially by the Bar), the approach of Hart still remains the prevalent one and appears unavoidably nationalistic, insular and, as it is mostly explained, formalistic.

1.3.5. Post-realism or Legal Functionalism in the US: The ‘Law and …’ Movements Legal realism is a development which evolved ever more pronounced in American legal scholarship towards the end of the twentieth century, where courses in law and ethics, law and religion, law and sociology (law and society), law and economics, law and psychology, law and aesthetics, law and politics, law and culture (or critical legal studies) and so on are now common. It is also referred to as post-realism or functionalism resulting in the ‘law and …’ movements, which became popular in the top American law schools. The result is that black-letter (or so-called doctrinal) law is ever less favoured, at least in legal scholarship and in law teaching in the more important law schools. It is taught as an unavoidable minimum in the first year, often as a demonstration of how the law should be or should not be, or should be no longer. Legal scholarship of this nature has become ever more jurisprudential and less practice-oriented or doctrinal. Again, its objective is rather the development of views that engender renewal and improvement of the law through analysis, academic critique, and a forward-looking attitude: what is needed to keep the law credible and meaningful for the next generation? The diversity of society and the impact of technological developments then become the more important issues. It was already said that in this approach the positive law’s application by the courts is often mistrusted.

nature of the law, see R Pound, ‘Law in Books and Law in Action’ (1910) 44 Am LR 12 and further D Nelken, ‘Law in Action or Living Law? Back to the Beginning in Sociology of Law’ (1984) 4 Legal Studies 157, 160. In the application it should be used primarily to prevent or address social conflict and common law or other legal principles should be accommodated accordingly. 360 HLA Hart, The Concept of Law (Oxford, 1961, 2nd unchanged edn 1994). Here we also find an intellectual justification for the national character of that law which leaves Parliament absolutely sovereign in law formation, although, as we have seen, that does not rule out the further autonomous development of common law and equity unless specifically overruled. Other competent organisms of a national character (such as judges on the basis of their professional practices) may contribute to the application of the law, but there is no true place for non-national sources of law, nor in truth for public international law either, and within England not even much for custom (which in this approach is still seen as primitive or regressive law) or legal principle, let alone for a transnational law merchant. 361 R Dworkin, Taking Rights Seriously (Cambridge, MA, 1977).

164 Volume 1: The Emergence of the Modern Lex Mercatoria It has already been mentioned also that especially in ‘law and ethics’, ‘law and sociology’,362 ‘law and economics’,363 and now also in ‘law and psychology’,364 there is an ever greater shift to more empirical research to prepare legislation and monitor its effects. Proponents unite in wanting to fill a perceived vacuum in which law making and application were mostly seen as matters of opinion, experience, intuition, or perhaps (political) wishful thinking. Even if law formation and its application are not neutral or objective, but rather ever more policy-oriented, the newer directions mean to bring more objectivity to this discussion, although there was serious criticism from the very beginning.365 Excessive focus on dispute resolution is here also avoided.366 There is genuine interest in how the law comes about and functions. The effects of legal change are measured, in ‘law and economics’ especially for its efficiency and perhaps its effect on distribution.367 On the other hand, environmental justice and critical race theories (or critical or political legal studies more generally)368 have added an ever-stronger political dimension to legal theory, now focussing especially on race and gender and other social policies. It should be appreciated that this critique tends to go well beyond mere legal analysis of policy and action and there is room not only for cultural considerations, national and other values or Burkean and Volksgeist notions, but also for (minority) group demands and for the perception that the law as it is may not be able to promote justice (or equality in a practical sense) without deep (political) reform. In its application, it may well be that, at least at the academic level, the law as a rational system is increasingly mistrusted in the US and seen as an objective that is hardly capable of definition or even comprehension. 362 At first, much associated with the work of Philip Selznick at Berkeley, see eg P Nonet and P Selznick, Law and Society in Transition: Towards Responsive Law, 2nd edn (New Brunswick, NJ, 2001); and P Selznick, The Communitarian Persuasion (Washington, DC, 2002) and earlier The Moral Commonwealth: Social Theory and the Promise of Community (Berkeley, CA, 1992). 363 The ‘law and economics’ movement tries to rationalise the legal rules and their effect from the perspective of economic efficiency and distribution. It is a more recent phenomenon, particularly derived from the economic thinking of von Hayek and the legal thinking of RA Posner, Economic Analysis and the Law (Boston, MA, 1973); see also WM Landes and RA Posner, ‘The Influence of Economics on Law: A Quantitative Study’ (1993) 36 Journal of Law and Economics 385, but it can be dated back to RH Coase, ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics 1, and to G Calabresi, ‘Some Thoughts on Risk Distribution and the Law of Torts’ (1961) 70 Yale Law Journal 499. 364 See for the uncertain and uneven progress of this approach, JRP Ogloff, Taking Psychology and Law into the Twenty First Century (New York, 2002). Earlier efforts had centred on the impact of psychoanalysis on the law see, eg, J Frank, Law and the Modern Mind (London, 1930); see also CG Schoenfeld, Psychoanalysis and the Law (Springfield, IL, 1973), but it failed fully to convince. More recently, the emphasis is rather on cognitive processes. 365 See RS Summers, Instrumentalism and American Legal Theory (Ithaca, NY, 1982) 115 with reference to the ‘deadly bog of behaviorism’. See further also the classic retort of AA Leff, ‘Economic Analysis of Law: Some Realism about Nominalism’ (1974) 60 Virginia Law Review 451. 366 As for dispute resolution, empirical answers may be sought to the question of when and how non-legal considerations enter into the judicial decision-making process, thereby becoming legally normative and enforceable. What are the costs and benefits? 367 See n 97 above for the particular economic notion of rationality and its tendency to ignore distribution issues, even notions of justice and social peace, see for a more recent critique J Britton-Purdy, DS Grewal, A Kapczynski and KS Rahman, ‘Building a Law-and-Political-Economy Framework: Beyond the Twentieth-Century Synthesis’ (2020) 129 Yale LJ 1784. 368 The openly left-wing aspirations of this movement, see, eg, AC Hutchinson (ed), Critical Legal Studies (Totowa, NJ, 1989), have contributed to an old-fashioned rhetoric and uncritical use of cliche, leading to unnecessary isolation. It has tended to cloud its innovative approaches and to conceal the much broader relevance of many of its ideas. It can be seen as the politicised branch of modern legal thought in which rationality and a unitary approach to justice are particularly questioned; see also the work of RM Unger at Harvard, n 353 above and his ‘Liberal Political Theory’ in Hutchinson, ibid, 15, and Duncan Kennedy, A Critique on Adjudication (Cambridge, MA, 1997) and later ‘Three Globalizations of Law and Legal Thought: 1850–2000’ in DM Trubek and Alvaro Santos (eds), The New Law and Economic Development 19 (Cambridge, 2006). This movement has forked in different directions that concentrate on race and gender and social policy more generally.

Volume 1: The Emergence of the Modern Lex Mercatoria 165 In the manner of Hume’s scepticism and of some of the twentieth-century Scandinavian scholars, contradictions and irrationalities in the law’s aims are noted but accepted as unavoidable, even if the ‘law and economics’ movement tries to be more rational (at least it can calculate) and in that sense also more scientific. In the wake of these developments, in the US more traditional jurisprudential concerns about law as order and even natural or positive law approaches have receded into the background or are recast in a different mould. Where the positivist or black-letter/doctrinal law approach has been substantially weakened, the search for the true justification behind the law has intensified.369 It has already been noted that there was always an idealistic undercurrent in American legal thinking probably connected with the strong idealistic flavour of constitutional principle. It means that law in the US is hardly any longer considered a product of the command of the state, although it may still be seen as embedded in a national recognition and acceptance process, therefore in American values and culture rather than in more universal principle.370 It may well be that a naturalism of American dimension is here impliedly assumed. Indeed, there is often little consideration of internationalism or universalism, or an acknowledgement that this American experience is part of a broader Western culture which is democratic and decentralist, subject to the rule of law, and mindful of basic human rights, even if in the twentieth century in the shaping of this more universal culture, the Americans, with ups and downs, have largely taken over from Europe as we shall see in section 1.5.6 below.371 It is clear that (a) the lack of a unitary view of what justice is or of what the law needs to achieve in terms of social ordering; (b) the questioning of established value systems in favour of national or group cultures, race or gender; but also (c) the influence of market forces and what are considered utilitarian preferences or rational choices in that sense, have had a considerable effect on modern legal studies in the US. They may to that extent have combined so that ultimately the more extreme view is being heard that the law does not present its own normativity or system of values at all and therefore lacks autonomy,372 although it is not denied that in its daily application purely doctrinal thinking and formal thinking cannot be avoided.

369 This is by no means new, see FS Cohen, ‘Transcendental Nonsense and the Functional Approaches’ (1935) 35 Columbia Law Review 809, ridiculing legal doctrine. Here law is indeed social policy. 370 Others only advocate a national value system to underpin the law, which is not necessarily a conflicting proposition. It is sometimes even believed to be one of the great insights of legal realism; see Post (n 326); see also text at n 281 above for similar thinking in German Wertungsjurisprudenz. 371 But see also Roper v Simmons 125 S Ct 1183 (2005) and Lawrence v Texas 539 US 558 (2003) and Justice Kennedy’s references therein to international normativity of a human rights nature in the US. Except for some comment in these cases, the idea here is that the legally relevant culture and values remain primarily national and do not therefore have an anchor in the broader modern Western world, even if that produced the idea of the modern state, of democracy, rule of law, and protection of basic values in the first place. None relies, however, on mere positivism or the state’s command to validate the law. Only in the American ‘law and economics’ movement does there seem to be some greater understanding of the international dimensions and validity of the basic legal concepts, at least in commerce and finance, see, eg Cooter (n 146) 215, but it remains rarer and has barely affected trade law or transnational law formation more generally, see also text at nn 394 and 625 below. 372 RA Posner, ‘The Decline of Law as an Autonomous Discipline: 1962–1987’ (1987) 100 Harvard Law Review 761, see also P Schlag, ‘The Dedifferentation Problem’ (2009) 42 Continental Phil Rev 35. Some care is appropriate, however, and semantics enter easily into the discussion. Considering the law intellectually as an individual (philosophical) category, therefore subject to its own structure and normativity, does not necessarily mean isolation and absolute separation from other categories, such as the ethical, social and economic ones, as is very clear, eg, in the formulation of statutory law and regulation but also in a normative interpretation technique. They are closely related and influence each other; how much so and in what manner is an obvious area of academic studies. It is clear that in times of greater social and political movement and lack of consensus, there

166 Volume 1: The Emergence of the Modern Lex Mercatoria It is submitted, however, that the law, being a prime vehicle for establishing order and balancing conflicting interests in society, cannot be completely identified with some extra-legal category, be it morality, sociology, or economics, but follows an own course, although it will discount them all if sufficiently pressing, albeit always in its own manner. As such there is a degree of autonomy, but it cannot be seen in isolation and it cannot be absolute. It follows, among other things, that in the US some renewed respect for the doctrinal aspects in the study of the law may be overdue. Finding structure (not system) in the law, especially private law, as it moves forward may then also be a legitimate academic task.373 That is not the approach, however, of much of present-day American academia at the top intellectual level. In the US since the 1970s, the result of the newer perceptions has been a considerable further intellectualisation of legal studies, particularly in the leading US law schools, resulting in an immense flood of literature and debate, which has produced some valuable new insights. Not all movements have retained their popularity, however, and ‘law and society’ and ‘critical legal studies’ are perhaps less favoured now than they once were because they are considered to have become staler and may have evolved into race and gender studies or social policy more generally. The ‘law and economics’ school remains popular as the more scientific branch of modern legal thought,374 which has attempted to translate and explain many legal structures in

is greater tension but also a greater need (at least in an academic sense) for these different areas of study to sustain and enlighten each other. That may well explain many of the ‘law and …’ movements in the US at present. That there is less use for them in Europe at this time might be explained by a greater social consensus or cohesion there (at present). This may also be relevant in international commercial and financial law, where, it could be argued, there is a greater consensus and therefore less need for political, moral or social adjustments to the evolving new law merchant. On the other hand, the emergence and autonomy of the international commercial and financial legal order—as will be posited in s 1.5 below—is itself a social and economic phenomenon. Utilitarian considerations are here of great importance in what is largely the elaboration of commercial and financial exigencies and realities in the formation and application of this new lex mercatoria in which market forces play an important role. Again, a key issue remains the balancing with public interests and how they are being expressed and can be articulated. 373 cf for this discussion s 1.1.7 above and also the discussion at n 264 above. 374 This school has different strands but the one associated with neo-classical economics is the more prevalent, see also nn 97 and 367 above and 378 below. Individual actors are here at the centre of economic activity. They are assumed, at least in the aggregate and in terms of a method of critique, to act as rational beings who maximise their own benefit or self-interest and respond to prices and pay-offs, including legal sanctions, rationally. The aggregation of their choices is accepted to result in a variety of standards and institutional frameworks that the law will (or must) sanction. Why we nevertheless maximise some preferences and not others is less clear and depends on values which economists on the whole do not seek to explain. The basic assumption then is that all human behaviour is in the aggregate predictable and can be set out in a coherent intellectual framework. The notion of maximisation of benefit or utility allows for calculation if one assumes that it is achieved where at the margin the cost and benefits become equal. If a utility function can be established in this way which ranks the alternatives mathematically, maximisation results where the derivative is zero. It suggests an equilibrium when all participants have achieved this point. When utility is maximised in this manner, it suggests that the greatest good for the greatest number of people is achieved. This may therefore be a powerful microeconomic tool to determine the most efficient rule, at least that is the idea. One important aspect of ‘law and economics’ is then to predict the effect of rule or sanction change on this equilibrium. From an economic point of view, considerations of efficiency and distribution of wealth and income promote change. Economics may then suggest the better rule, especially from the efficiency perspective (it is less clear whether they can say anything about distribution), measured by the change in equilibrium. Assuming a minimum of order, what happens here is that even the pursuit of justice and social peace is cast in terms of the pursuit of economic efficiency (or public good effect, not primarily values). It is shown in this connection that the latter need not conflict as much with the former as is often assumed. Clearly, as a (re)distributive concept, justice as a balancing of interests is not an economic concept. It is, however, arguable that people may be worse off if distributive justice prevails over efficiency; see L Kaplow and S Shavell, ‘Should Legal Rules Favour the Poor?’ (2000) 29 Journal of Legal Studies 821, questioned by J Waldron, ‘Locating Distribution’ (2003) 32 Journal

Volume 1: The Emergence of the Modern Lex Mercatoria 167 microeconomic terms,375 while valuing predictability376 and measuring the law’s (economic or efficiency) effects.377

1.3.6. The Progress So Far. Legislature, Judiciary and Legal Practice. The Autonomy and Independence of Legal Scholarship in the US. Doctrinal Scepticism As to the progress and meaning so far, to start with the most apparent and acclaimed functional strand, ‘law and economics’, it is widely understood and accepted that it provides little guidance to the law’s application and to legal reasoning. It is basically concerned with policy and therefore may remain of limited value in the law’s application. It may advise more successfully on new rules and their likely economic and financial impact, but, even then, it has notably not much advice to give on conflicting interests and (re)distributive issues with which law formation is

of Legal Studies 277. It is true, for example, that if we provide free housing to one poor person, it must be paid for by others and that it may be the other poor who could suffer most, eg in a higher cost of their accommodation. In this approach, economic ordering on the basis of efficiency in this sense is considered to be at the very heart of all legal systems. What is efficient is then objectively the maximum that can be produced from the same amount of input, but there are other definitions, eg, of Pareto and Kaldor-Hicks. In practice, what is efficient may primarily depend on an investigation of the behaviour of individuals and how they respond to various incentives to maximise their self-interest but it complicates matters and may, in terms of rule change, defy a priori analysis. 375 One way to approach the subject has been to see legal sanctions as cost and apply conventional microeconomic price theory. In this way, it can be measured how people react and change attitudes. The idea is that people respond to higher sanctions as they do to higher prices and adjust their behaviour. Manufacturers may in this way minimise their risk and go for better quality if poor quality is punished. How much they do will depend on the level of the fine. This is capable of calculation by using supply and demand curves (assuming there is full competition). 376 A complicating factor is that cost may also include social costs or externalities that may not be properly charged to those carrying out that activity such as (often) pollution of the atmosphere. Competing interests, like the need for clean air as against industrial activity, determine the acceptance and extent of these social costs. This implies a trade-off which, in ‘law and economics’, is cast first and foremost in market terms or as competition for scarce resources. It concerns here aggregated individual (rational) choices in which fault does not figure. Even if subsequently the law asks who is at fault, eg in pollution matters, or what legal justifications or excuses there may be, the efficiency question should first be posed as (in this view) the legal rule or result can (often) be explained in terms of a contribution to (or even being the product of) what was most efficient. 377 For the legal allocation of social cost, an important tool is produced by the Coase theorem; see Coase (n 363). It operates basically as follows. Intuitively we assume that a polluter should not externalise the cost of pollution and therefore be subject to claims for damages by victims of its pollution. However, this may be subject to more careful analysis. If a factory causes smoke damage to laundry hanging out to dry, the five most affected neighbours may each suffer damage of $75, giving a total of $375. A way to avoid this is for the factory to install a smoke screen at $150 or for each neighbour to buy an electric dryer at $50 each, giving a total of $250. The question is, who pays, assuming a right to clean air is assigned to the neighbours. In that case, the factory can either pay the neighbours $375, build a smoke screen for $150 or buy the neighbours dryers for $250. The smoke screen will be most efficient. However, if the factory were given the right to externalise the pollution, meaning that there is no right to clean air for the neighbours, rational neighbours would join together to purchase the smokescreen for the factory assuming that they do not have transaction costs that would increase the amount of $150. The conclusion is that if there are no transaction costs, the most efficient result will always obtain regardless of the choice of legal rule. Institutions and legal rules thus only matter as a consequence of non-trivial transaction costs. There is no search here for better rules and property rights remains unaffected, only the optimal use of resources is considered. However, even if the rule concerning clean air does not matter, it still affects the distribution of income, about which the theorem says nothing. It is also clear that if there were transaction costs (meetings of neighbours to arrange, transportation costs, etc) that might increase the cost of the smokescreen to $260. Dryers would thus be

168 Volume 1: The Emergence of the Modern Lex Mercatoria primarily concerned.378 Importantly, between economics and law, the shift is here often from the rational (in as far as we can understand and capture it) to the reasonable, at least in adjudication. It has already been suggested that perhaps the true significance of ‘law and economics’ is as (yet another) model for academic critique of the legal rules we have or want to introduce.379 That may also go for the other functional approaches. More generally, a lack of clear direction in them may be noticeable, and there is so far less impact on the positive law in the US than one might think, although attention is sometimes paid to these newer approaches and ideas in modern case law, ‘law and economics’ especially in antitrust matters and damage calculations, and like the others sometimes in (draft) statutory law, and also in newer Restatements. Whatever their merits, the intellectualisation of legal studies in the US in this manner has created a distance between academic legal thinking and the legal practice (in courts and legal services) in an environment in which the practical orientation of the living law itself may have hardly changed. Legal scholarship has become more independent and is rejecting the shackles of

preferred, whether the factory pays or the neighbours. It is then better that the rule puts the burden on the factory, which will save $110 overall and is clearly the most efficient rule in those circumstances. It minimises the transaction cost. Thus, the rule depends on the minimalisation of transaction cost; again, it is in particular not a question of blame, although a fairer distribution of the cost may come in separately (as a matter of wealth or distribution). These theorems maybe too utopian or clever, as such not a true reflection of reality and present abstractions that never truly occur and may therefore be of limited value; see DA Faber, ‘The Case against Brilliance’ (1986) Minnesota Law Review 917, 918. More importantly, in terms of modern game theory, what is identified here as transaction cost may in truth be a price negotiation between strategic players who have different information, not therefore a given price as in price theory. Rather game theory should be applied, see RD Cooter, ‘The Cost of Coase’ (1982) XI Journal of Legal Studies 1. Attempts have been made nevertheless to explain more generally the law and the choices to be made in this connection; see, in particular, AM Polinski, An Introduction to Law and Economics, 2nd edn (Boston, MA, 1989). It concerns here nuisance laws, contract breach, car accidents, product liability, and litigation. Legal rights and markets are thus believed to interact in the sense that legal rights may be understood through the contribution they make to an efficient trade-off in the above sense. The law of torts can thus be explained as a tool to contribute to the optimum level of accidents (Calabresi), in terms therefore of its contribution to efficiency (Coase). In contract law between professionals, the contribution to efficiency (and reduction of transaction costs) may be even more obvious legally to explain its operation. 378 The neo-classical strand focuses not only on the (aggregate) behaviour of individuals in the market, but also on what makes this behaviour more predictable, and on the development or evolution of the law in this connection and its contribution. This is sometimes also referred to as the second generation of ‘law and economics’ and suggests a close connection with social psychology. See for a summary, R Nobles, ‘Economic Analysis of Law’ in J Penner, D Schiff and R Nobles (eds), Jurisprudence and Legal Theory (London, 2002) 855. What is self-interest; what are the preferences of people; are they always economic and rational; how does this work in a group? See further also J Britton-Purdy, DS Grewal, A Kapczynski and KS Rahman, ‘Building a Law-andPolitical-Economy Framework: Beyond the Twentieth-Century Synthesis’ (2020) 129 Yale LJ 1784. This second generation is more interested in the internalisation of values in this connection, the motives for doing so, and the application of economic modelling techniques to this process, see especially R Cooter, ‘Law and Unified Social Theory’ (1995) 22 Journal of Law and Society 50; ‘Three Effects of Social Norms on Law: Expression, Deterrence, and Internalisation’ (2000) 79 Oregon Law Review 1; see also R Cooter and D Ulen, Law and Economics, 6th edn (Harlow, 2011). 379 There is another more political strand in ‘law and economics’ which concentrates on how law is made in the legislative process, therefore as a political tool. This is the area of public choice theory and political economics. It comes down to analysing the personal interests and preferences of policy makers, who are assumed to act much like other individuals and rationalise their preferences and also maximise their self-interests. The state is here not the subject of study (as in political science) but rather the politicians, civil servants, pressure group officials and the like. This strand of thought originates in L Jaffee, ‘Law Making by Private Groups’ (1937) 51 Harvard Law Review 201; and later in JM Buchanan and G Tullock, The Calculus of Consent (Ann Arbor, MI, 1962). Its offspring is part of the Chicago School, which is largely empirical. Another variant is that of ‘analytical politics’, the idea being to build formal (mathematical) models of collective decision making, see eg A Schwartz and RE Scott, ‘The Political Economy of Private Legislatures’ (1994) 143 University of Pennsylvania Law Review 595.

Volume 1: The Emergence of the Modern Lex Mercatoria 169 appellate jurisdiction on the one hand and of the law firms’ needs and requirements on the other. This is in principle not different from elsewhere when law becomes academic and is directed towards better understanding and towards change, often educational, but it must as such still find recognition. It was already suggested earlier that especially in Europe legal scholarship may have become too subservient to dispute resolution in the appellate courts of which it then becomes an extension and risks becoming captured by the appellate syndrome with its systematic intellectualisations. This is especially the case in civil law in which the dispute at hand and the facts are soon forgotten and legal clarification become a ‘l’art pour l’art’ introspective exercise promoting a type of rationality which may not be truly there and may amount to intellectual prejudice in a form of system thinking that pretends to be a scientific presentation of realities of how society works. It suggests and is then used as a façade for objectivity and scientific credibility but is may become a cover for political choice and personal preferences. In this situation, it is particularly appropriate for legal scholarship to debunk uncertainties and myths, which is often not happening in Europe but which arguably received a renewed impetus in the functional approaches in the US. The further danger especially in Europe is that academia may be keen mainly to provide some tool box for the legal profession in this process of adjudication, in which it then also educates its students, for a business, therefore, where billing and efficiency of that nature are the essence whilst notions of the law’s integrity and of ethics become secondary. In fact, it could be argued that the whole court system is captured by the legal profession for economic gain, not only in Europe. Whilst the legitimacy of the legislator and courts comes from their institutional position and presents as such at least a valid base for academic attention and respect, the legitimacy of the legal profession must be in much greater doubt and is more shaky coming mostly from a narrow positivism that sees primarily law as technique and depends on a ticking off facility, then seen as a form of logic and rationality, merely to support this approach and give it legitimacy in which the courts are often operating in support of what in truth is merely a business where economic benefit is all. It is the legal profession’s ‘raison d’etre’ and for its billing practice it uses a notion of certainty which attaches itself to a high degree of legal formalism as the only way to be credible and justify itself, which academia is then supposed to support. Hence the practioners’ handbooks written by academics, but it can be argued that they are seriously uncritical and not conducive to the law’s further development, and as such unacademic. It was already noted that in-house law departments may operate differently; they have to make things work, must be aware of social developments, keep the peace as much as possible and do not depend on billing. Although it is easy to see that there is an inclination in academia to be subservient to both, courts and practice, the danger is that it is caught between the two which may have led to a serious decline in credibility of legal scholarship, especially in Europe, even paralysis. In the real world, arbitration has tried to steer away from both, but it is also a business, largely recaptured by the legal profession, and has long fallen for the temptation of procedural complication and judicialisation; it has also other serious problems whilst its nature, reach and authority are often poorly understood, see Volume 2, section 1.1.14. The functional approaches may be conducive to underpin the authority of the law and save the credibility of legal studies. At least, this type of intellectualisation has meant greater independence and critique in the US, leading to doctrinal scepticism and especially in critical legal studies to a questioning of the court system, although it may also be noted, and it may be a consequence, that even in ‘law and economics’, at least in private law, one may still see a lack of recognition and therefore a lack of theoretical input in legislation even in the regular amendments and revisions of the UCC where pragmatism mostly continues to prevail. Also, the further elaboration of the

170 Volume 1: The Emergence of the Modern Lex Mercatoria important federal bankruptcy statutes seems in the end not to have been greatly affected by newer economic theory and thought.380 The reason may be that especially in private law, the increasing emphasis on policy in modern legal realism had already shifted the attention to law making in terms of public ordering. The functional approaches in academia are then mainly considered to explain and sustain it further, not change it. In fact, in a politicised environment, the essence of private law as a facilitating rather than mandatory force to balance conflicting interests between private participants may even become misunderstood, distorted or ignored.381 This was noted before and is a danger, but it correctly suggests a close connection between public and private law, even though, as was discussed in section 1.2.13 above, social policy may also manifest itself autonomously,382 whilst not all is social policy either.383 In that sense, the functional approaches as means of critique mean rebalancing and could even become a critique of legal realism itself rather than promoting and completing it. It was already noted that much legal theory resulted during the 1980s in the US but fizzled out, which may have left a substantial void in American legal theory as to where to go next.384 The method in this book is more relaxed. It does not rely on any of the functional approaches per se but invokes them in support, one reason being that they can hardly be separated. Rather, the method used is borrowed from public international law and its roots are found in Grotius who identified this approach as applying to all law formation and application. Thus, the modern lex mercatoria operating as the law in the transnational and commercial and financial legal order foremost re-establishes the unity in methodology in law formation and application which prevailed before the nineteenth century. It is posited that all lawyers, whether they are aware of it or not, operate in that manner, at least at the international level. The essence is that the legal order beyond a number of fundamental principles, which are themselves not necessarily invariable or immutable either, is contingent and expressed in ever changing customary law, legislation (or, internationally, treaty law), general principle, and party autonomy. This tracks Article 38(1) of the Statute of the International Court of Justice and adopts its method. As we shall see in section 1.4 below, in private law, fundamental principles may be foundational like notions of contract, property, tort, and unjust enrichment, or correcting like the protection of weaker parties, competition, public health, and the environment. In more modern times, there may also be horizontal effect of human rights as protection particularly in situations where power is exerted. In litigation, there are due process considerations. Again, custom and practices expand on these principles. So do legislation, general principles, and party autonomy. Sometimes the resulting rules are mandatory, even in private law, more likely the closer they are to fundamental principle or public policy. One may think of notions of capacity, contract validity, and property. Many other rules are directory or default rules which may be set aside in their relationship when both parties agree. All may in their application be subject to pressing considerations of justice, social peace and efficiency, which may themselves be contradictory. Here one may see the operation of the functional approaches better. 380 See Elizabeth Warren, ‘Bankruptcy Policy Making in an Imperfect World’ (1993) 92 Michigan Law Review 336; but cf also T Jackson, ‘Bankruptcy, Non-bankruptcy Entitlements, and the Creditors’ Bargain’ (1982) 91 Yale Law Journal 857; see further GE Brunstad, ‘Bankruptcy and the Problems of Economic Futility: A Theory of the Unique Role of Bankruptcy Law’ (2000) 55 The Business Lawyer 499. 381 See, for a critique, A Katz, ‘Taking Private Ordering Seriously’ (1996) 144 University of Pennsylvania Law Review 1745. 382 See text at n 268 above. 383 In this manner, governmental interests and their validity also became an overriding theme in conflicts of laws in the US at an early stage, see s 2.2.2 below. 384 cf S Moyn, ‘Legal Theory among the Ruins’ in J Desautels-Stein and C Tomlins (eds), Searching for Contemporary Legal Thought (Cambridge, 2017) 99.

Volume 1: The Emergence of the Modern Lex Mercatoria 171 Although states have become traditional stabilisers of the law, they only operate d omestically or territorially and even then, their laws may be subject to higher (domestic) fundamental principle and custom, clearer, even locally it was submitted, in interpretation. Internationally, they may also function through treaty law, subject always to higher rules operating at the transnational level. Admiralty apart, in private law formation, treaty law has hardly been successful: the Vienna Convention on the International Sale of Goods has not been accepted by the commercial practice as it never recognised itself in what proved to be an academic project no one had asked for. Probably only the Cape Town Convention is truly credible albeit so far mainly for its Aircraft Protocol. Most of these treaties are at best only partial codifications. Thus, the Vienna Convention does not cover the vital property aspects of a sale, and was hardly ever made for the operation of international supply and distribution chains and the integration of goods, services, information and technology in the production process and in the acquisition and transformation of commodities to semi-finished and finished products transferred in bulk. Another problem is that treaty law of this nature is hardly conducive to adaptation when international practices and needs profoundly change. Hence transnational custom must prevail over it. State courts may be other stabilisers and we allow them a law-making function at least within the system of law they can discern in dispute resolution as underlying their own rules, although in truth, they may then express more in particular the impact of the other sources of law and the configuration of all of them in individual fact situations as we have seen. Again, even where statutory law claims a monopoly in law formation, through interpretation (and gap filling if it can be distinguished), it was submitted, all other sources of law re-enter the equation. Hence, case law is not considered here an autonomous source of law. Judges might have some law-making power but they do not issue new rules. The ability especially of professional judges to handle this activity, and their insights, prejudices and courage were already mentioned also. Other important stabilisers are culture and religion. Academia is or should be one also and may rely here even on some idea of the laws’ rationality, even pursuing systemisation in private law. All the same, it remains doubtful whether there was ever a stable core and a sufficiently objective and balanced set of standards even in private law. Again, the American functional approaches show other directions. Especially in ‘critical legal studies’, it became seriously questioned whether there could ever be a ‘correct’ answer.385 In such a view, appeal is a useless gamble and waste of time, indeed much understood by those who opt for arbitration. The other functional methods, often no less ‘critical’, remain here mostly more optimistic. It was submitted that lawyers of all ages operate within the above framework and that it may have changed less than we often think.386 If we finally reconsider in this connection legal formalism in the sense of textual coherence and systemic logic, or as extreme legal positivism, it should not be discounted in all contexts. It was already said that doctrinal law retains an important function in academia if only to demonstrate how the law should be, should not be, or should be no longer. In this connection, the following observations may be pertinent also for the US: (a) At the legislative level, the absence of clear views on what private law is and how it operates may have to be accepted. Here, public policy considerations will often motivate and determine what is to be done. The rules are then likely to be mandatory (eg, in competition and bankruptcy law), directly impacting therefore on private actors and their behaviour. 385 cf D Kennedy, Three Globalisations of Legal Thought:1850–2000 (Cambridge, 2006). 386 See for an attempt at summarizing where we are, J Desautels-Stein and C Tomlins (eds), Searching for Contemporary Legal Thought (Cambridge, 2017). What comes after the functional approaches, what is legal scholarship for, how much has it truly contributed to the living law? Or is there only to be more ‘critique’?.

172 Volume 1: The Emergence of the Modern Lex Mercatoria Practising lawyers have to accept the legislative outcome in respect of activities or transactions properly covered by it and are likely to be neutral except if the rule of law itself or fundamental principles of a modern open civil society are ignored or challenged, or the legislative result makes no sense or is practically unmanageable. The role of lawyers at the legislative level will mainly be in the drafting of statutes in such a way that they can be understood and applied. Contradictions must be minimised. To that extent, not only common sense but also a measure of systemic formalism is necessary and may be expected. The perspective is here black-letter law although that does not mean that this law even if mandatory and clear can escape operating in the context of all other sources of law, including fundamental principle, public policy or international minimum standards in a globalising environment. (b) Especially for the judicial interpretation of these texts in subsequent case law, the absence of a unitary view on what private law is or should strive for may present greater problems. As we have seen, at least in dispute resolution, American lawyers may now generally take a more normative approach to interpretation and accept in that context extra-legal or policy considerations more freely in terms primarily of ethics, social needs, economic efficiency, and perhaps public health and environmental requirements and other public policy considerations. That also goes to mere default rules of private law, which can commonly be set aside by the parties but become mandatory if they do not agree to do so, even though one could still assume here some greater judicial flexibility for lack of a clear public policy element. Especially if these rules are considered to express the preferences of parties—had they thought about it—rather than public policy, notions of fairness, or utility, they could be interpreted differently. Hence the idea, here also, of the openness of the system, meaning that the relevance of black letter rules may be limited in appropriate cases. It was noted in this connection that law firms in particular often thrive here on a greater degree of formalism, without which there is hardly any yardstick for the quality and credibility of their services. Nonetheless, at least in contract, civil law lawyers in their attitude to interpretation under the good faith approach may yield in appropriate cases to different considerations notwithstanding their general inclination to system thinking, but all lawyers will in normal situations be constrained in the application of extra-legal (policy) considerations if they are not in accordance with the drift of the positive law derived either from statute or precedent; this is also true in the US. It would seem that only in pressing (or hard) cases could that be different and would other, extra-legal considerations enter decisively, but that would then be so only incidentally.387 Moreover, even in the US, in comprehensive statutory law, such as the UCC or Bankruptcy Code, tax laws, company laws, and federal procedure, a more coherent and systemic attitude to interpretation follows from the statutory approach, but practical considerations unavoidably still come in, especially when a rule is ambiguous, increasingly out of date, or when it is unclear that it can apply to the facts of the case at all or may lead to ethically, socially, or economically unacceptable results. Again, the automaticity in law application looked for in legal positivism has its limits everywhere, though perhaps less so in law firms. It follows that responsible lawyers of all eras while applying the law, will show respect for the doctrinal or positive law, in particular for all black-letter law, at least as a starting point.

387 As could be expected, in the US the discussion on interpretation itself is lively; see for a balanced view, M Stone, ‘Focusing the Law: What Legal Interpretation is Not’, in A Marmor (ed), Essays in Legal Philosophy (Oxford, 1995).

Volume 1: The Emergence of the Modern Lex Mercatoria 173 To that extent, they will accept its autonomy and articulate its values even if the extra-legal purposes that the law serves and moral, social and/or economic values cannot be ignored and may in pressing cases motivate judges to reformulate existing legal rules at least for the particular occasion. Resort to immanent legal sources (such as fundamental and general principle or practices and custom) or public and social value considerations will then come in as support. That was considered to be in the nature of all interpretation, here seen primarily as the revival of all traditional sources of law at that level with an extra overlay of public policy or public order requirements in appropriate cases, even if this development might manifest itself more clearly in the US. The positive law thus understood is then no longer merely black-letter but needs constant reformulation; it is unavoidable everywhere, especially in periods of rapid social and economic change, even if the doctrinal nature of much law cannot simply be ignored if legal texts are still to have any meaning, and finding the law in newer situations remains, therefore, a cautious, searching process everywhere that is likely to lag behind, even if American legal scholarship appears at present keener to close the gap or lead the way. (c) In the transactional practice, the task of practising lawyers is again different. They will have to write down in a comprehensive and coherent manner the deal reached by their clients and the risk distribution inherent in it. There follows logic and coherence or formalism in that sense while taking into account the minefield (for them and their clients) of public policy and public order requirements, therefore, of regulation, taxation and more fundamental considerations, in international transactions often in different countries or deriving from the transnational commercial and financial legal order itself which may well go beyond party autonomy. In as far as they can be foreseen, they will have a special role in assessing and distributing the legal risk, in international cases particularly in terms of the applicable law, including public policy at that level, and the jurisdiction of the courts or arbitrators in case disputes arise. As for the applicable law in such cases, this will also involve an assessment of context, policy and extra-legal considerations that may become relevant in the application of the contract and of the law that governs it in its proprietary or other consequences at the transnational level. Obviously, in international cases that will be all the more challenging as practising lawyers will often have to navigate or structure around atavistic and parochial local laws and will in this connection also have to assess the possibilities and impact or effect of a contractual choice of law or jurisdiction. This requires a further assessment of what, for example, a contractual choice of a domestic law may mean in international cases in areas of the law that are not at the free disposition of the parties, usually those that have to do with third-party rights, such as property, collateral and bankruptcy issues, or with governmental or regulatory policies of the countries most directly concerned, or with public order issues at the transnational level.388 A further assessment may then become necessary also in respect of the applicability of the transnational lex mercatoria and its meaning and content, including the hierarchy of legal sources it represents, but also of notions of international public order or comity in respect of foreign regulatory laws that may have a sufficient relationship with the case, as we shall see more fully in section 1.5.8 below. It may correct the transaction or seek to do so. Here the

388 See JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619, and also the discussion in s 1.4.10 below.

174 Volume 1: The Emergence of the Modern Lex Mercatoria appellate domestic jurisdictions and the local practice in particular may be less friendly and accommodating, the courts because it may undermine their power, they can hardly be the spokespersons for transnational law, and the local law firms because it is against their legal certainties and practices and their financial interest. Financially, it may cut off the branch on which they sit as law firms in the main international commercial and financial centres may take over. It is submitted, however, that the international practice, in particular in its structuring activity, is probably creating law more than legislatures, but it is also submitted that in-house law departments are here often better placed than outside law firms, not only because they are less motivated by billing practices and profitability, but because they know more what is needed and do not live from complications in the applicable law. One may think of the entire operation of the Eurobond market and the swap market under respect of the ICMA Global Repo Master Agreement and the ISDA Swap Master. Especially in-house law departments of large companies or banks, may thus become important spokespersons for the new transnational order even if they do not (yet) realise it. Transnational customary law is the result which may become mandatory in appropriate cases or situations and may then also affect third parties in the process, for example, in the proprietary aspects of Eurobonds and their repos and the set-off aspects of the netting provisions in swaps. (d) As far as dispute resolution goes and the litigation practice is concerned, the feasibility of the jurisdiction of the ordinary courts in whatever countries, or of arbitration and other dispute solution techniques will then also have to be considered (see section 1.1.11 above) and especially the role of bankruptcy courts in international finance, which remain domestic. It is clear especially in the recognition of foreign proprietary rights, that legal formalism cannot be the sole guide here either and much will depend on good judgement. Courts may have here still more power than arbitrators who must limit themselves to solving a dispute as presented by the parties, in principle on the basis of the law they plead (as fact) and no other although that may include transnational law. Unlike judges, international arbitrators have no power to speak for any legal order and clarify any law, they are not law makers, although it may increasingly be different when public policy issues are at stake—it is an important and highly contentious issue discussed further in Volume 2, section 1.2, a discussion already started in section 1.1.11 above. Their power to assess proprietary rights and interests or preferences under whatever law may also be in serious doubt. Yet even domestic courts in transnational cases may not have original power of law application as any transnational law must (like all foreign law) be pleaded as fact before them. (e) In legal scholarship all is free. Here legal formalism or thinking in terms of black-letter law, systems and their application suggest a fixation with yesterday’s law and past experiences. Subservience to the appellate courts and to the legal practice must be avoided. Clearly, modern American academia goes beyond this, and concentrates on the transforming forces and processes in all law. In fact, it stimulates them and tries to guide them with new ideas. It takes a vivid interest in why and how rules are better accepted (or internalised) and voluntarily complied with. Indeed, in the major American law schools, legal scholarship is deemed to be nothing if it is not innovative or fails to explore new ways in a more scientific manner. The concern is for the law to retain a meaning for the future and to continue to guide us, including the appellate jurisdictions and the legal practice, in an ever more meaningful way. American legal scholarship therefore looks for new paradigms all the time389 and reflects 389 See on paradigms text at n 264 above and s 1.3.7 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 175 their impact on legal principles and rules and their formulation and operation on a continuous basis. It is the key to newer academic models to guide the law better into the future and to critique the existing positive law or find more structure or purpose in it. It was already said that the newer functional approaches—especially law and economics—may play that role more in particular. Empirical research, as we have seen, becomes here a key issue testing these newer or even older models and leads to the study particularly of rules that respond to newer situations and demonstrate their validity and effectiveness.390 There remains also a keen interest in more philosophical questions such as the meaning of fundamental principle, systematic thinking, its openness and its relation to and effect on social realities, whatever they may be, the conditions for legal knowledge, and the use made of it. It may also be seen in the interest in cognitive psychology. Legal education follows and is then likely to be experimental and free thinking, not doctrinal, keeps its distance from the courts and the legal practice, thus allowing for free thinking and innovation. The positive law is indeed used as an example of how the law should be, should not be, or be no longer. Nothing is taken for granted. It promotes a more modern outlook, vocabulary and articulation of the law that is problem solving-oriented and does not find the solutions merely in past experiences. Each professor will espouse an own view and students will be exposed from the beginning to often great differences in approach. At least in the US, this is considered healthy and to reflect real life. In the meantime, a more activist judicial approach seems to have become apparent everywhere, not only in the US, even where still hidden in system thinking. It is obviously motivated by the enormous social, cultural, scientific, demographic and ecological changes we see pressing upon us all the time. It is a matter of perception and study whether this is affecting the very nature of the law itself and its operation in society. Even if as a result the law itself were in modern times in essence seen as an empty shell, depending on other sciences to fill it, the next question would still be what should fill it on occasion and how? If extra-legal norms or demands must increasingly be taken into account as legally normative and thus binding, it still has to be asked which ones, when and to what extent? Or to put it differently, when do these norms become legally enforceable (thereby entering into the law) and who decides or fulfils here the function of spokesperson? What if they conflict? That is, it is submitted at the heart of the probing attitude of much modern American legal scholarship. Thus presented, this search is a function of the acceleration in social evolution. It has unavoidably led to disorientation, certainly also in the application of the law. American legal scholarship reflects this and has accepted it as a challenge rather than an embarrassment. Outside the US (except to some extent in Canada), the more modern American ideas have not so far played an important role, even though they are widely noted.391 Neither has the ‘law and economics’ school in international commercial and financial relationships of a private law nature, even in American scholarship, it was already mentioned,392 and in the reformulation of substantive rules of transnational law at that level, notably in international business law. As a consequence, American scholarship has hardly figured in the development of the new 390 But empirical research has its problems, see also s 1.3.7 below. It demonstrates one other point, being that this type of interdisciplinary research is only worth doing at the top level. Much of it remains amateurish, see DR Hensler and MA Gasperetti, ‘The Role of Empirical Legal Studies in Legal Scholarship, Legal Education and Policymaking: A US Perspective’ in R van Gestel, H-W Micklitz, EL Rubin (eds), Rethinking Legal Scholarship: A Transatlantic Dialogue (Cambridge, 2017). 391 See, eg, Penner, Schiff and Nobles (eds) (n 378). 392 See exceptionally Cooter (n 146).

176 Volume 1: The Emergence of the Modern Lex Mercatoria transnational law merchant or modern lex mercatoria, although one would assume that it is in principle friendly to it as would all legal currents that see group cultures and values as a determining factor in (bottom-up) law formation.393 In international trade regulation or liberalisation, many American commentators, looking mainly at trade restrictions, invoke here simply a liberal, market-oriented spirit aimed at the free movement of goods, services and capital.394 Where a form of re-regulation is necessary, they are then likely to deprecate the notion of sovereignty so as to achieve a more proper balance between international and national legal orders or lower local or cultural organisms through notions similar to that of subsidiarity. That the American ideas and functional approaches have not so far found greater resonance, at the transnational level or even in other parts of the common law world, let alone in civil law countries, especially in private law, is not entirely surprising in view of their already noted modest effect on the positive law in the US itself,395 while they tend in any event to be oriented more towards governmental interests and intervention, their policy, manner, and desired or real impact, than towards the operation of law between private parties. The conclusion of the foregoing is therefore that notwithstanding innovative thinking, especially in the US, even less progress has been made so far elsewhere in terms of the functioning of other than formal national legal orders and the sources of law in non-statist orders—which is the prime concern of practitioners of the transnational law merchant and of this book. In civil law countries, an old-fashioned positivism centred on formal system thinking founded in past experiences and formulated by states continues to prevail and was even attempted to be recast in an imperative codification manner at the level of the EU, viz the DCFR effort. These efforts are captured by an analysis of existing domestic statutory and case law and by what the local practice can handle and sustain. Although in common law countries, academic support for transnationalisation would be easier to fit, at the moment it is more likely to come from American than from English academic thought but it has no great priority in either of these countries. As international commercial arbitration practice may also show, so far progress in terms of legal transnationalisation has probably been greater at the practical than at the intellectual level.

393 Subject, of course, always to governmental interests or public order and public policy concerns, the extraterritorial validity of which would, however, still have to be determined on their relevancy from case to case (barring treaty law or accepted international law concepts, c.q. transnational minimum standards): see s 2.2.6 below. 394 See, eg, John H Jackson, ‘International Economic Law: Reflections on the “Boilerroom of International Relations”’ (1995) 10 American University Journal of International Law and Policy 595 and for a discussion D Kennedy, ‘The International Style in Postwar Law and Policy’ (1995) 10 American University Journal of International Law and Policy 671. They focus in that context mainly on the removal of tariffs and quantitative restrictions without a cost analysis per se and present in essence a pragmatic rather than a theoretical approach, especially in the issue of re-regulation at international level (primarily in WTO/GATT/GATS). This approach is not concerned with methodology or deeper theoretical insights. See for a criticism on this point, JP Trachtman, ‘John Jackson and the Founding of the World Trade Organization: Empiricism, Theory and Institutional Imagination’ (1999) 20 Michigan Journal of International Law 175 and earlier, RA Posner, ‘The Decline of Law as an Autonomous Discipline: 1962–1987’ (1987) 100 Harvard Law Review 761 also touching on the lack of interdisciplinary work in the area of international economic law and on the dominance of positivism and utopian ideals in that area. See further also the comment on this discussion of M Koskenniemi, ‘Letter to the Editors of the Symposium’ (1999) 93 American Journal of International Law 351, suggesting that lawyers employ the tools of any method they find useful in a particular case and not be guided by any one in particular. But see more recently the work of AO Sykes, The Law and Economics of International Trade (Cambridge, MA, forthcoming). 395 See n 380 above.

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1.3.7. The Quest for Modernity, the Problems in the Post-modern Era. The Attitude to and Effects on Law Formation and Operation The modern world is marked by a search for the extension of its insight horizons in order to reach ever deeper realities. We do this in order better to control daily life and to take advantage of its opportunities. It is the more natural preoccupation of academia, first in the world of the natural sciences, and of the academic model that, through a better understanding of nature, has allowed us not only to discover and harness, for example, electricity, but also to make use of many other facilities that we have so discovered. We can now put someone on the moon and get him/her back. The intrinsic rules of nature are here for us to discover and subsequently to find ways to make the best use of them. In the natural sciences we cannot change the rules, only identify them. They are a given or a truth in that sense, as such often presented as a closed framework, although that is not the case with the use we can make of our knowledge of them. It allows us to improve the environment or our health on the basis of what we then claim to be objective or scientific standards, although there are choices to be made and there may still be doubts. In the social sciences, on the other hand, we have an open system of needs and values which change all the time and we can change the rules and practise the concept of the makeability of society, allowing us to adapt or change the rules of behaviour when we go along. Unlike the insights we obtain in the natural sciences, social or economic rules, thus developed or imposed, can barely lay claim to universal truths and may also not work well. There are hardly any eternal laws discovered so far to cover and guide developments in society, predict their occurrence, and allow for stable ways to react. We notice economic cycles but have difficulty to spot them and hardly have scientific means to adjust them in a predictable and secure way. In private law, beyond the basic notion of contract, property, tort, and unjust enrichment, much remains also muddling through, for example, the law of assignment or set-off and netting, in legislation often based on no more than mere opinion on what might work better, not seldom ending in compromise, challenged or even corrupted in its application by unexpected side-effects. This may be all the more obvious in public law, notably in regulation where there is likely to be an enhanced policy aspect and often also greater urgency and need for more immediate action but less experience. Again, there is hardly any science that makes this process more predictable and secure. Improvisation is then more likely or experimentation as we have seen in abundance after the financial and pandemic crises of 2008 and 2020. It was pointed out in the previous sections that so far the more functional approaches in the US do not appear to have made much difference and our insights remain limited. The rules we adopt then change depending on the situation and their full impact and reach can often not be predicted. Still, we seek guidance that may be obtained from academic models to provide clearer insights in the promotion of human relationships, social peace and welfare, or efficiency, health, safety, utility, and more or better growth. In modern times, states in particular seek out these models to advance society, might encourage and fund academia to the effect, and they use the law to enforce their choices, never mind how temporary or ephemeral these insights or models may still prove to be (although, if politically unsuited, they may still be ignored or ridiculed). In doing so we like to adopt the attitude of the natural sciences even though we are far away from similar certainties. In fact, we mostly must still go by past experiences and extrapolate in the hope that this fits and contributes which may hardly be the case; again, it suggests that the past rules over the future and that human behaviour and reaction is basically repetitive. In terms of presentation, the resulting measures are commonly presented as objectively necessary,

178 Volume 1: The Emergence of the Modern Lex Mercatoria often indeed as scientific, if not self-evident,396 although according to many, the development of economics, sociology, and psychology as sciences after World War II397 has been seriously disappointing. Indeed, economics is now often called the dismal science. It can reveal certain correlations but not predict a great deal and seems helpless in moments of economic crisis, which it can barely explain and even less predict or resolve with any degree of confidence so that only experimentation is left. It cannot show clear ways to prosperity for all either. New facilities that have been created, for example paper currencies, often remain poorly understood in their effect and management, more when operating at the transnational level like the Euro. So is the modern function of banks, not to forget crypto currencies and fintech, which will be much the subject of Volumes 5 and 6. Academia appears a long way from any definitive insights into social and economic realities, therefore in what we are doing and even less in where we are going and how this new world truly works. Much is no more than guesswork. Nevertheless, we regulate with alacrity and enthusiasm. The coronavirus crisis demonstrated from the beginning another point. The scientific models may seriously conflict so that choices still have to be made even if all of these models were reliable. Medicine, economics, sociology and psychology might have very different views on what must be done. In this case, all admitted not to have much of an idea at all, most of this will only become clearer in retrospect, the rest is speculation, but even if each had a clear idea, they would have conflicted in the advice so that it would still have been a political choice which equilibrium was to be preferred. Science can do very little in such situations, even if often used to disculpate the politicians in their choices. An interdisciplinary approach would recommend itself but it usually still looks for patterns in the past even if these patterns are often unclear too and may have no meaning for a different future. The conclusion must be that in these matters, we are on shaky grounds when we use scientific models to predict the future and how things will turn out. Such science can only be reliable about the past, perhaps the present and maybe about the immediate future, but the decisions that must be taken often concern the longer term, a different world where science in so far as we have been able to develop it may be of little reliable help. Science cannot truly predict the future. Nobody knows how the exchanges will react tomorrow; even the weather cannot be scientifically predicted with certainty. That is no less true for the climate debate, hence the endless use of the words ‘may’, ‘might’, ‘would’ and ‘could’, all admissions of a non-scientific and speculative perspective. The press is full of them and now lives from predictions; it would be interesting to hold an audit at the end of each year when it would become clear how much of it was pure nonsense presented as scientific fact. One aspect of modernity is nevertheless the constant remodelling of society by government on the basis of these limited and changeable insights and their balance for the greater benefit of all. This is the realm of the modern administrative state with its substantially rule based ethos and perspective on civil society. Again it assumes the better understanding at the level of the state, whether or not helped by academia, assuming the substantial reliability of its models and an adequate understanding of their effects, the absence of unintended consequences, and a sufficient insight in the equilibrium of competing forces, the practical result often being layer upon layer of laudable governmental regulation, however ‘scientific’, hardly aware that the problem it tries 396 See also n 264 above for comments on these ambitions. 397 There is a determinism implicit in this scientific approach to life which has long been noted. Philosophers such as Berlin and Popper, coming from the German scientific tradition, which they mistrusted, used their lives’ work to warn against the enemies of an open society and of freedom limited in this way, see for the work of Popper, n 265 above. Earlier, the Kantian tradition had equally sought to preserve the maximum freedom outside the natural sciences out of similar concerns.

Volume 1: The Emergence of the Modern Lex Mercatoria 179 to solve has shifted whilst this layering itself may be stifling society and the effects may not be properly understood. Cost-benefit analysis is supposed to help but the tools and insights to make this work may be largely missing too. Perversely, it may result in serious threats to progress or in a type of progress that proves to be unsustainable or is misguided and thus conducive to crises. In fact, society may prove less makable than we thought and there may be internal countervailing forces or stabilisers of which we know very little and which we have not much incentive to explore. That is then the invisible hand. Government may be much less powerful and in control than it likes to believe and advertises. One can consider this further for the law. In comparative private law, as we have seen, the codification system in civil law countries is often perceived as an abstract and artificial model that is considered scientific, as such meant to contribute to a better world between citizens and corporates under government guidance moving forward beyond a minimum of order. It assumes the sufficiency of a nationalistic and territorial approach of top-down rule formation. It is convincing to many, hence the increasing accent on private law legislation, even in common law countries. Since Max Weber,398 there is a claim to objective progress in this manner regardless of the realisation that indeed in a fast-changing world all law in its progression tends to become fluid, often mere policy, to the ideals of which it is made subservient, even in private law. Again, it assumes that we have the necessary insights and means of rationalisation but it would appear to follow that there is no scientific objectivity or objective guidance per se. Behind all positive law lie choices which are often less than clear and can hardly lay claim to perfection or even informed insight. Little is ‘scientific’. This may be all the more so for more direct governmental intervention through regulation. One may recognise here the struggle and progress of legal realism in the US. While in this perception, law seeks to promote justice, social peace, efficiency and growth as the challenge of civil society after basic order is established, and therefore goes beyond the pursuit of some basic order, it can only respond to these objectives as we perceive and define them from time in the realisation that they may be contradictory and are subject to different views of what civil society is and stands for. Democracy may help and make the measures less questionable, but true legitimacy comes, it was submitted, only from the real contribution to justice, social peace and efficiency which represent ever changing values and aspirations and there is hardly any predetermined solution for anything irregular or new, unless one measures all in terms of economic growth, whatever the quality. It was already submitted that the choice between the demands of justice, social peace and efficiency is always political and a question of balance or equilibrium, which, with present insights can hardly be scientifically determined or left to any of the functional approaches. Again, much is guesswork in the hope that the result is sustainable improvement. According to some, as we have seen, law, even private law, has lost its independence or autonomy here altogether. To repeat, it underlies to a great extent the discussion on legal realism and the modern functional approaches in the US. Although an older German root in the discussion still presents law formation and operation as an objective intellectual process, in day-to-day realities, we struggle with the legal articulation of everchanging values and practical needs. For better or worse, it gave states the room increasingly to take the lead in law formation but often without much of a compass; its academies were not necessarily scientific either. Although this is clearer to discern in regulation, for example, in finance, consumer protection, or in respect of health and environmental issues where the public interest and objectives may take more readily over from private concerns, private law formation is not exempt. Importantly, there 398 See n 7 above.

180 Volume 1: The Emergence of the Modern Lex Mercatoria are here no less issues of values or morality even of culture and religion to consider, not only in family law where it may be most obvious but also when and how a promise becomes enforceable or may be excused and how private property can be used. One particularly important question in this connection is then in how far states and their laws should also get involved in the shaping of a more modern moral private order and even regulate it, touching then also on cultural stands and religion. This was and is certainly the aim of totalitarian regimes, either to the left or the right. In a secular democratic society, on the other hand, especially religion is left well alone except to counter fanatical excess, but a question may still be asked about morality or our value system. Is it more like religion where modern states, albeit within the limits of public order as they define it, will respect it for what it is and also accept the guidance of new values when they emerge in the operation of policy, or do they consider themselves in charge of such values also, or at least will they only allow them to operate in the law to the extent they have recognised and accepted them? It may be recalled that even in private law that may be the civil law-style codification attitude to which in Europe the DCFR still bears witness in its approach to the status and power of fundamental principle. It is a major issue and favourite debating point in the ethical aspects of modernity.399 It should be realised that this goes beyond mere fairness in society of which politicians already consider themselves the ultimate arbiters. The more pressing question is thus whether states through their laws are also the ultimate articulators of our social values. That would be one approach, but it might be considered highly undesirable by many in civil society. In other words, can we and should we devise from the top-down standards to promote social morality and make it stick? Is the positive law also subservient to this objective? Is there statist morality as there is statist law and in some countries still state religion? Could the modern state have a similar role to play in its articulation? Here the redistributive nature of modern society has in recent times in particular been met by the ethics of social responsibility or loss thereof. Or is the modern state perhaps itself a moral problem, demonstrated in the Western world by its financial bankruptcy which may well entail a moral bankruptcy at the same time? Over-leveraging society and a shortage of financial discipline all around could then be considered a manifestation, which would at the same time imply the failure of the state’s own more contrived, variable or ‘new’ concept of moral order. It is all the same obvious that states and their powers, however obtained and exercised, are a key factor in the promotion of a more modern and often highly artificial society of which they are the central organisers. This continues to suggest a top-down world in which other forces must be evaluated and those of the market subdued or controlled, hopefully for the better, but nothing can be taken for granted whilst health services and the environment in particular may suffer exactly because of governmental neglect, although without government it could even be worse. In the meantime, it became the late twentieth-century model in the West to operate more or less in concert internationally, in Europe particular so in the EU. This may increasingly affect and hamper or redirect all bottom-up or more natural processes, including participatory forms of private law formation, such as, in commerce and finance, industry practices or custom and their recognition and enforceability. But it was also pointed out that even democracies are not entitled to take all and must respect the decentralisation of power.400 At least religion, probably morality, and hopefully academia, remain here more fundamentally free in civil society as we perceive it

399 These important issues can here only be flagged, not further discussed, but see eg MJ Lacey and MO Furner (eds), The State and Social Investigation in Britain and the United States (New York, 1993), especially their first chapter on the rise and role of modern government ‘Social Investigation, Social Knowledge and the State’. 400 See nn 112 above and 623 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 181 but it may give rise to serious tension and implies a substantial redistribution of initiative, costs and risks through government. In fact, it must be considered whether in a modern society of this nature, all is potentially manipulated from the top and artificial without a clear view of the results beyond some hope of some better world among much wishful thinking, expediency and self-serving aspirations in the world of politics, if not also beyond it. For this modern state is easily hijacked by insider groups or local cabals and elites, not only in smaller countries, never mind the democratic model that is easily manipulated. They live by their own political survival instincts in the measures they order, to which the public interest ten becomes subservient. It may concern an entire political class; one then talks of state or regulatory capture.401 It means a lack of competition at the top and an inability of the democratic process to counter these forms of societal appropriation and monopolisation, which uses the state and its powers to maintain itself, often by promising increased benefits for all in terms of welfare. When everything goes off the rails, the same group will present itself as saviour. Even in more normal situations, there is enormous pressure of this nature on the modern state and its laws to which opening the liquidity tap is often thought the easiest answer. Redistribution of the cost through the tax system, public borrowing, printing money, or devaluations then become tools to deal with many issues, whilst banks—often through poorly focused or unenforced regulation—prove willing, are encouraged, or are forced to lend to the multitude as a kind of human right (considered banks’ ‘social’ function), no less to states, preferably at low interest rates that are manipulated to the effect by central banks. This is then advocated to result in a fairer society, whether or not stable or sustainable, which may thus become an issue of tortured morality or of a surrender to irrationality. Bankruptcy looms for this kind of modern state, including its citizens and banks. Yet it is clear that in the West this approach, however driven, promoted welfare considerably. Its achievements are recent but undeniable and date from the period after World War II. They may at least in part be credited to modernity in the above sense, that is state intervention of this sort, although it is fragile and may now well be running into considerable buffers notably in terms of complexity and monopolisation. It is also very costly and may be considered wasteful. It is the thesis of this book that progress in this sense was achieved primarily because of a vivid competition between the state and other forces, mainly the markets, states being guided by their models and political instincts, the other forces by their own rationalities or by the invisible hand, although the market also uses scientific models of its own. We need a form of central overview and organisation at the level of the state (the flip side is these terrible wars), but there may still be other communities that operate by their own rules, and it remains a key issue. It was already said that even democracies cannot take all,402 whilst the twentieth-century model that eventually found complexity, cost and globalisation in its way was increasingly balanced by international market forces, which became one way to correct local political cultures and expediencies or show up their insufficiencies and failures. This could prove painful at times and mean a reversion to the laws of the strongest, but it may be the consequence of the modern state and its driving forces having overreached, that means ultimately losing control showing that its models or insights are insufficient and inadequate. Health and environmental crises on the other hand and increasing concern with globalisation may drive the population back to a more nationalistic

401 This is the world of public choice theorists, see G Stigler, ‘The Theory of Economic Regulation’, (1971) Bell Journal of Economics and Management Science 3. 402 See also the discussion in s 1.5.6 below.

182 Volume 1: The Emergence of the Modern Lex Mercatoria statist framework but it does not guarantee any better insight and can hardly deal alone with pandemics, the environment, cyberspace, or bio warfare, and nuclear threats to society. If this author may use a personal experience to demonstrate the point and perhaps by metaphor show better where we are and what we are doing, it may go as follows: I like to design gardens and use classical patterns but I soon realised that they are very costly as they require a bevy of gardeners. I stuck to my basic pattern but used the help of nature and let grow all that wants to participate but vigorously clean out the wild growth from time to time to maintain a minimum of order, and graft the wild olive and other trees if I want to keep them. I pretend that in this way I have achieved in 20 years one of the more beautiful gardens on the Portuguese west coast, even if semi wild, at reasonable cost. I have a friend in the town of Sintra, who also has a large garden which she attends to with five gardeners. Plants are carefully selected and raised, all detail is taken care off, everything is manicured and the total is of great artificial beauty, but very costly to maintain. We discuss at length the different concepts and different results and aesthetics. In this metaphor, mine stands for the marketplace and hers for the administrative state. The one is more individualist, promotes what will grow, but is also rigorous in cleaning out the weak or what does not fit the pattern; the other stands for a whole arrangement, selects the place of each item, and cares for all, even if ultimately it cannot avoid cutting and letting go also, but it does so with care. There is no wild growth. This is the social model that we have successfully aimed for in the West but we see a shift in electoral sentiment and a move away from supporting communities towards greater individualism (or more wildgrowth). The state is pushed back, taxes reduced. Many, being richer than before, believe that they need society less to sustain themselves and like the free for all because they expect to be the survivors and may even favour a more brutal environment which promises lower cost, and therefore less taxation. They may even want a more autocratic government to cut out the rest and clean out the field for them. Values shrink, honesty and decency may suffer, more corruption may be accepted. In that climate, social democracies and Christian democratic parties, which were absolutely dominant in many countries in Europe after World War II, collapse and fascism raises its ugly head more easily. Weaker minorities become vulnerable whilst democratic values, rule of law notion, and human rights become secondary. News becomes entertainment, the notion of truth strongly partisan, and the political debate acrimonious. We seem to be moving altogether in this direction which suggest a social equilibrium different from the one that had become a common good till quite recently. That would appear to be one part of the equation. Especially in the international commercial and financial flows, the autonomous self-creating forces in the markets, in society, also in its laws and morality, which modernity had sought to diffuse or redirect, may then reassert themselves in the absence of world government and may support a new equilibrium at the transnational level where states are receding. It was already said that it can be seen, at least in part, as a necessary process, the consequence of the modern administrative state running out of tools and its inclination towards sclerosis whilst this competition may increasingly be vital to further progress to keep a proper balance between public and private interests, government and markets. Crises and serious disruptions may thus be deemed necessary and acceptable to get back to greater rationality and better discipline. In this view, too much of government but also too much of the market leads to societal dysfunctioning and ultimate correction, now increasingly directed from non-national orders. Governmental overreach is to be combatted but the marketplace should not be a free for all either; it has already been pointed out several times that the true issue in globalisation of trade, commerce and finance is the reformulation of the public interest at that level, who its spokespersons are, what the role of domestic public order requirements remains when they impinge on international transactions in a situation of conflict between what may be parallel legal orders.

Volume 1: The Emergence of the Modern Lex Mercatoria 183 Are international minimum standards of behaviour developing to balance the international marketplace? It touches on the issue of resources and who are entitled to them. Whilst the poor have undoubtedly been doing better, the rich might get too much space. Post-modernism, as here understood—and there are many definitions—postulates the full achievement of a society that operates altogether on scientific models although they need not be entirely state driven and may also be used by markets or other forces to understand their own workings better. Such a society is then considered to be entirely steerable, more truly by states, therefore territorially confined, law formation being indeed one of its major tools. Although further to Weber, this would ultimately lead to an iron prison of rationality and bureaucracy, domestic irrationality may so far have proved to be the greater danger and globalisation the more immediate challenge to an administrative state culture of this sort. All the same, the continuing competition between states, the market, and other forces suggests that this process was never complete and there always remained important bottom-up energies, nationally and transnationally, that are not fully controlled or controllable in this manner and that may be necessary or even desirable to avoid statist excess. So post-modernity must and does also consider modernity’s collapse and faces the lack of structure that may result. It is forced to live with many contradictions and unsatisfactory explanations. Part of this is indeed the emerging realisation that rationality of the sort the human mind can understand and articulate is not comprehensive when it comes to how society works and responds, neither nationally nor globally, existing models and processes are not complete and objective and they may not sufficiently capture what is going on and there is little in this artificial world that can lay claim to it, quite apart from it being often superseded by political expediency which cannot avoid choices to be made between the views of different disciplines as we have seen or more likely different societal pressures. What are the ideas behind them; in particular, how much room is left in the social sciences, including the law, for other ideas and forces, and what provokes change and adjustment and how can they be managed? It has become clear that paradigms are important403 and underlie much of our thinking and action, and therefore also the way a fully operative modernist society can work. These paradigms which provide new insights or models are not themselves state controlled and are often generational, moved also by societal shocks or changes or newer expectations, see also the discussion in section 1.2.11 above, and are effective in particular when society recognises a new reality. But newer models that so emerge are increasingly disparate and may even severely conflict within one discipline. Each presents no more than one particular view of or take on reality that cannot and often does not lay a great claim to ‘truth’ (or no longer does so), whether or not in academic packaging. As to the relative virtue of the evolving models for action, it was already said that empirical research should help but is often a poor check and then appears to depend on often flawed statistics. This is at least in part so because they invoke fact and try to measure, but in a scientific environment, it may be very unclear what facts are and much cannot be measured. Facts may best be captured naively or intuitively; once we start to describe or define them, they tend to fall apart and become abstractions or contextual, often mere opinion.404 First, there is the perspective

403 The beginning of the discussion of the notion of ‘paradigm’ is associated with Thomas Kuhn (UC Berkeley), The Structure of Scientific Revolutions (University of Chicago Press, 1962). See further the discussion at n 264 above. 404 In American pragmatism, there is a belief in empiricism, where what seems useful or works best is the criterion for (greater) truth. This proves to be no less subjective, although it is mostly not perceived as such, or at least it is felt that it can be objectively stated what works better and is therefore more true in that sense.

184 Volume 1: The Emergence of the Modern Lex Mercatoria we take: if we contemplate a work of art, for example, we may take a historical point of view and will then be interested in the author and when it was made; the lawyer on the other hand would be concerned with the question of who owns it; and from an aesthetic point of view, we are concerned with its quality. It may thus be clear that we talk from different perspectives from the start, often without realising it. More importantly, even in this simple example all perspectives would seem objective, but none are: if the painting is not signed and dated, there will be different opinions, while even if it is signed and dated there may be the matter of authenticity; the legal title may be obscure, say the painting was once stolen; and as to quality, which should be objective fact, it is in truth pure opinion. But the most important conclusion must be that people are not talking about the same facts in the first place; intellectually, they come from the perspective of different disciplines. Upon a proper analysis, most discussion breaks down in this way, even academically.405 Often unrealised, there are different perspectives and people talk about different things and then also measure quite differently. It may also be true that our language is not capable of properly reflecting reality or at least distinguish the different forms and facets of it. The rationality behind it may remain opaque, there may be double meanings, we can only give it contemporaneous context, there are many, etc. Even within the same discipline such as the law, it can then still be asked whether, for example, civil law codification works well. How could it be scientifically or even empirically established that other ways of law formation, for example, immanent law formation through practice and custom, do not work better even if they are less ‘scientific’? That could especially be asked of the common law, which has a different tradition. This is relevant if we should now be moving into the direction of some kind of codification of private law in the EU, as the DCFR would want it: see section 1.4.21 below. These more fundamental questions are, however, seldom asked by its protagonists, one reason being a lack of thinking about method, but the other probably being the problem with empirical research and with the determination of what, indeed, counts and works better, which can hardly be objectively determined and may remain mere opinion, although it might be true that civil law works better for consumers than professionals. It leaves ample room for fads and fashions in academia and elsewhere, for an uncritical ‘follow the leader’ instinct, not seldom encouraged by a press that has lost its news distribution function to the net and becomes mere opinion or lifestyle obsessed with little time and money for informed investigative journalism beyond the prurient and obsessive. All may best be It is interesting that the emrpiricists maintain here often the more instinctive or ‘naive’ approach to facts and see these as objective. At least the result is an outward-looking attitude instead of the more German approach in which no empirical research was needed to test the academic nmodel, which was deemed correct or true per se until a newer model came along; see also the discussion at n 234 above. Some have maintained in this regard that only what can be expressed in language is real but we may understand much more than we can say and it is probably not the true test either. In the meantime, it cannot be denied that there is a considerable problem with empirical research and its methodology and reliability. Much of it is primitive and does not go beyond basic statistics while the evidence produced is often self-serving, see also n 390 above. 405 In politics, the modernist approach divides more than anything else the so-called progressives and conservatives. The former have greater confidence in newer models and trust them better, never mind the occasional hiccups and potential straightjacketing of society. Societal forces, like market forces that are not yet fully controlled in this manner, are suspect and should be increasingly regulated in order to achieve a better world. Conservatives are more sceptical of regulatory insights and also have confidence in more parochial concepts such as religion, culture and nationality. They also are more comfortable with original market forces, especially as a check on what they consider governmental or modernity’s excess. Both invoke ‘facts’ to support their case, but they are likely to use very different perceptions of reality here: the conservatives the ‘naïve’ version, the progressives intellectualised versions. Again, the key is to understand that by invoking facts, they may not be talking about the same thing or even the same concept of reality and are therefore unlikely to convince each other.

Volume 1: The Emergence of the Modern Lex Mercatoria 185 understood as entertainment whilst fake news is rampant, not so much as pure disingenuity but more surreptitiously by constantly selecting and putting accents, blowing one thing up, ignoring others according to the whims of the day (or what sells best). The conclusion must be that in most of our societal assessments we are on less solid ground than is often assumed and that little is truly scientific; when it comes to society and how it operates, there is not much certainty in the modernist world and much make believe. The approach in this book is one of modernity supported by the scientific cult. We have no other option than to progress in more scientific ways, that is through ever newer scientific investigation and models if we wish to move forward in order better to understand what is happening and better to provide for the future. In that sense, we must look for greater truth through science all the time, there is no other way except religion or conspiracy theories, but we must understand the limitations, which may have much to do with what the human mind can grasp and explain. Our capability of discernment and understanding may not be unlimited and is in any event very incremental. At least in the social sciences we know so far too little to be confident. In other words, as long as we do not quite understand how to reshape societal forces in more propitious ways, it may be better to leave them alone unless they obviously offend or common sense tells us otherwise. Again, it should be understood that science cannot deal with contingency. Nobody knows what is truly happening in society and how the dice will roll next. With present insights, it may be clear that we need both government and the markets but the balance or equilibrium is ever shifting and can hardly be objectively or academically determined and predicted. The law as pure expression of the statist order was never all-powerful, in business now challenged in particular by globalisation and its autonomy may reassert itself through its inner structures—it forms itself as a societal phenomenon and could never be fully discarded or perverted by states without considerable collateral damage or a serious loss of credibility. Not all can be manipulated for free and forever. It was submitted that in civil society law properly understood always came from many sources, which may conflict but also correct. It is ultimately the result of the constant debate in society and the community it concerns about its extent and meaning. States (and their courts) may seek to stabilise it and propel it but are even locally not all-powerful if the rule of law is properly understood and the independent progress of society and its values respected. States do not necessarily have the deeper insights. They are not in charge of our values. Other stabilising forces may come from culture, religion, the invisible hand of the market, or more rational tendencies, the latter to be promoted more in particular by independent academic research. In a globalising world, the impetus may here increasingly (have to) come from transnational legal orders and their own progression. Internationally, the administrative state then only operates at the level of treaty law. It was already said that the EU operates here as a kind of mini-globalisation that is still controlled from the top in the statist manner, although it is increasingly contested even in Europe, hence Brexit, never mind the EU’s towering success so far. The consequence is more strife and uncontrolled energy in globalisation, the reason why much of this is feared by ordinary people, not without reason, but there may not be much of a true alternative if we wish to progress further. To repeat, the true question then becomes what the minimum standards of behaviour and protection still are and how they are going to be found and formulated and enforced at the international level. The new millennium, being generally indulgent, is bored with these issues, which may not fit the modernist agenda. However, the student must understand some of it in order to follow the discussion better as it has a major impact on how we look at the law and its formation, operation and interpretation, now especially in the professional sphere at the transnational level, be it private law (as a kind of scientific, statist, codified system or not) or public law, such as financial, environmental, health and safety regulation, competition law and privacy laws. The terrorist

186 Volume 1: The Emergence of the Modern Lex Mercatoria attack in the US in 2001, the financial crisis that erupted after 2008 and ultimately became a crisis of government debt, once more showed the limitations in the modernist agenda. So did the pandemic health storm in 2020. One must admit that science found a vaccine very quickly, but it was hardly the government’s organisational power. It posed again the question what the true role of modern government is and how it can best be activated and guided. In the modernist perception, these crises should not occur, or, when they still do, we should at least be able to predict them and deal with them adequately through government. But there is mostly no framework and there proved to be no pre-set answers beyond the opening of the liquidity tap which then becomes hard to close; for better or for worse, the notion of government itself is in constant evolution and flux. It was always subject to newer insights, needs and values, and more so probably now that in many areas the effects of globalisation and non-statist action become unavoidable and are increasingly being felt whilst a standard organisational and legal framework is missing and must be redesigned or emerge bottom-up.

1.4. The Sources of Law in the Civil and Common Law Tradition. The Approach in Transnational Private Law and the Hierarchy of Sources of Law and their Norms in the Modern Lex Mercatoria 1.4.1. Statutory and Other Sources of Law. Nationalism and System Thinking in Civil and Common Law The practical significance of the discussion so far is as follows. By the end of the eighteenth century, in Europe, Continental private law (which was substantially the only law there was) had largely developed spontaneously, although with a strong base in Roman law, which had never been promulgated but was considered superior custom, supplemented sometimes by Canon law and regional or city regulation, the latter especially relevant in commerce. This came to the point where legal scholarship was able to formulate a large number of substantive legal rules on which individuals could base their actions and claim their most important individual or subjective rights. They were no longer forced to rely on more narrowly defined causes or forms of action or enforcement rights. In formulating substantive rules of private law in this manner, it proved possible to connect them into an intellectual framework that was internally coherent, or could at least pretend to be so. It became the foundation of the civil law as we have seen and know it today. It was and remains largely anthropomorphic with a heavy accent therefore on what now we call consumer law and protection. Business law was neglected and limited to some rules of exception. Common law, on the other hand, was also considered a form of customary law but remained in essence action based, still developing from case to case on the basis of factual situations and problems as presented by the parties in litigation. It was not intellectual and the urge to define subjective rights more abstractly and subsequently to find some system in private law came later, if at all complete. Although even in common law countries legal scholarship was found increasingly to look for it in disparate case law and legal texts, the true task of academia was not believed to be finding system in the past or present. The approach remained pragmatic or later in the US more especially social policy driven as we have seen. Here the origin was often more commercial and contract as well as movable property law emanated from commerce. This may suggest a business or even creditor-oriented bias in the common law whilst the consumer tends to be neglected except for some more modern often statutory exception rules.

Volume 1: The Emergence of the Modern Lex Mercatoria 187 The Continental progression was the achievement of the secularised natural law school after the seventeenth century (although preceded by the work of the Glossators and their progeny). In finding structure, the emphasis thus shifted from an inductive to a deductive approach of rule formulation and application in the elaboration of which rationality as it was then perceived took centre stage and Roman law was no longer believed to be its sole expression. Religious and other cultural overtones were increasingly subdued. It left the question whether such a framework of legal norms could be considered closed, relevant more in particular when legal personality, the corporate sphere and the business world also had to be increasingly considered. As of the nineteenth century this became nevertheless much the codification idea in civil law notwithstanding the fact that newer values and ideas of justice, the requirements of social peace, and of efficiency evolve all the time. This mattered more especially when everywhere the existing rules had increasingly also to be balanced against newer public policy (regulatory) and public order requirements, which became often pervasive although perceived henceforth as national pursuits. In a more academic environment, it was indeed considered possible to formulate and apply rules of contracts (binding as such) in terms of offer and acceptance, consensus and its defects, enforcement and its excuses. It also became possible to arrive at a unified concept of negligence, and to develop a single system of property law based on internally connecting notions of ownership, possession, and holdership or detention in respect of each proprietary right, which were clearly defined although small in number (this was the numerus clausus notion). It allowed some derivative proprietary rights to operate besides ownership, through usufructs, easements and some types of long leases in land, and even security interests, but no others. Limitation of the proprietary rights was the simple consequence of these rights being effective against third parties, which remained exceptional and assumed some standardisation around established and well-known practices. The difference could be illustrated in relation to rights and duties of third parties in respect of the assets concerned, particularly in terms of the recovery rights of owners or of secured creditors of a bankrupt debtor in (constructive) possession of the assets, in the sense that those with proprietary rights in them could segregate and reclaim the underlying assets from the bankrupt estate of any debtor while those with obligatory rights could not and became common creditors who could recover only pro rata from the proceeds of unencumbered assets of the debtor’s estate. Another aspect was the free alienability of these proprietary rights (therefore without consent of the owner of the underlying assets even if these rights were limited).406 That was the issue of liquidity.407 Although contractual income, user and enjoyment rights could also be transferred (through assignment), normally even without consent of the owner of the underlying asset, the difference was that any proprietary right in the asset upon transfer released the transferor of all connected (proprietary) duties, which an assignment of obligatory rights could not do. Only the asset but not the liability side could be so transferred.

406 This alienability did not strictly speaking apply to security interests (although they could be transferred with the debts they insured), the proprietary nature of which was illustrated primarily by their priority status in the secured asset and their ranking among each other according to the time of the creation of these rights. 407 It became thus clear that proprietary user, income and enjoyment rights did not undermine the liquidity of the underlying asset, which contractual user, income and enjoyment rights still did. This could be easily demonstrated with regard to proprietary or contractual rights of way. In the first case, the right transfers with the property and binds the succeeding owner which is not the case when this right is merely contractual. The transferor remains in that case liable for the free passage but can no longer perform as he is likely to have lost the possession of the property. It means that contractual rights impede the transfer facility and the liquidity of the underlying asset. Thus, a transferee takes subject to all prior proprietary rights in the underlying assets but not to any contractual rights in them, see the discussion in Vol 4, s 1.1.3.

188 Volume 1: The Emergence of the Modern Lex Mercatoria On the European Continent, these more intellectual insights emerged relatively early in the study of the law. The codification drive itself, in which legislation moved to centre stage, was a later, nineteenth-century development. It needed the substantive rule formulation and subjective rights approach, which were largely the achievement of the earlier secularised and de-Romanised natural law school, as we have seen, but codification itself was mainly inspired and promoted by the evolution of the modern state in which the concept of a national law became a priority. It at first was intended to promote greater uniformity, equality and predictability in the exercise of the citizens’ rights while doing away with antiquated, diverse and often regional rules, in the process helping to consolidate these states further and to support and confirm their central organising role and view of society or approach to modernity. In these objectives, one recognises the older ideals of the French Enlightenment and its emphasis on rationality. It required a legislative drive, which in due course also became an important vehicle perceived to support and even to enhance the national social order and its economy in a more political manner per country. Rationality was no longer the main guide and its reach was in any event no longer considered universal. Nationality and territoriality became thus emphasised in what had become essentially a statist approach to law formation and application. All sources of law beyond legislation were eliminated. The focus thus shifts to the role of the state as such and national cultures; one may note here the German romantic tradition in which codification takes on a life of its own and private law soon lost its autonomy and even its claim of rationality. Thus, the state, its insights, values and organisational talent became all. It was balanced by German idealism, meaning the academic ideal that abstract models could still be devised and at least in private law legally endorsed which in this view were sufficiently reflective of reality to steer and guide society (and the markets) better. These models were foremost furnished by the academies or law schools the state itself had organised. Society would conform and be guided and improved on the basis of these models which became equated with the state realities or a higher truth. Although in such an environment the true legitimacy of private law was still considered to come from a form of self-evident systemic coherence that the state academies believed they were able to provide, it stood for the state and its insights which did not primarily aspire to objective rationality and law’s autonomy. There was no other law, there were no other legal sources. This allowed policy to enter into private law formation and application more directly, but a by-product was that it set law’s development in concrete and it became difficult to adapt. The emphasis then fell on interpretation to save the system from sclerosis. In this way, it was submitted, the other more traditional sources of law, which the state and its legislation had sought to eliminate, returned: fundamental and general principle, customs and practices, and respect for party autonomy as we have seen in professional dealings, but it remained contested. Most then believed that interpretation was limited to systemic considerations. It is possible to identify here a number of early nineteenth-century paradigm shifts on the European Continent, which led to what we now perceive as the civil law, national per country, and which set it fundamentally apart from the earlier more universal Roman law, which had always accepted multiple legal sources, but also from the common law which also continued to do so. On the European Continent (a) all law thus became national, (b) even private law became statist through its dependence on legislation, (c) it became subject to intellectualisation and system thinking, (d) it was product of and subject to national public policies, and (e) it was anthropomorphic geared to relationships between private persons, which rules were then also applied to business dealings. Other sources of law became suspect or anathema, even fundamental principle in so far as not expressed by legislation. Party autonomy only operated by licence of these codes and therefore of the state. Customary law could not compete

Volume 1: The Emergence of the Modern Lex Mercatoria 189 in commerce408 unless it was specifically allowed to do so. In the process, the idea of individualism under the protection of an autonomous natural law or under fundamental principle weakened unless these concepts or values were more narrowly defined in national statutes as inalienable (human) rights. Internationalism and universalism came to an end; an overarching notion of statehood, national communities, national economies, and social policies took over, all being expressed by the state. In commerce and finance, it was reinforced by all nations eventually adopting their own currencies, and monetary and trade policies, which could equally be manipulated and cut off from (international) market forces, at least so it was intended and assumed. It followed that communities, if not statist or state recognised, were in their law-making capabilities increasingly ignored. The international law merchant could not survive in that environment either. International transactions had to be cut up per country to determine the applicable law on the basis of closest connection, which was always local in respect of each piece, in the hope that the sum total of the applicable rules would still make sense for the transaction as a whole. There was no other law. Even public international law, that is the law between nations, risked being reduced only to treaty law that was specifically enacted by them and could then also be seen as merely territorial. The monopolisation of law formation at the level of the state impeded in particular the operation of the lex mercatoria in international commerce and finance, since it was based on these sources of law and their autonomy in the transnational commercial and financial legal order. It impeded at the same time the insight into the development of transnational minimum standards or public policy and public order requirements or the operation of competing or parallel legal orders in respect of international transactions. For all its limitations and nationalistic confinement, the Continental European civil law approach nevertheless constituted a major achievement and provided also a clearer basis for interpretation, which was increasingly sustained by deduction or otherwise induction or analogy supporting systemic reasoning; at least that was the aspiration and probably also much of the initial approach. But whatever interpretational freedom was still allowed (see section 1.2.13 above), it basically was meant to serve the completion of the system and its claim to unity and full coverage. Even liberal interpretation was hardly understood as reintroducing all the sources of law that legislation had tried to banish but was only meant to make the system operate better, even though in the end the re-emergence of the more traditional sources of law could hardly be denied, especially in the case of newer developments, which made fitting them into the system more complicated and the greater academic challenge. The price overall was statism and a largely static view of the law as such closed as we have seen and based on and limited by the extrapolation of past experiences founded in nineteenth century anthropomorphic law perceptions that we now associate with consumer law. It assumed in the process that life was in essence repetitive and that its operation could be systemically mapped out and logically explained in an intellectual system that satisfactorily guided human behaviour (by country) and properly solved its problems for the present, past and future on the basis of these texts.409 Even into the twenty-first century with all its movements and innovations, it led

408 Although in civil law countries large areas of private law remained technically the subject of separate statutes, that did not make a difference as they were deemed to have the same status and approach as the civil codes and were all considered integrated in one system in which the civil code was the big spider in the web and the true oracle. The rest was lex specialis always subject to the basic ideas of the code. This also included commercial law, see ss 1.1.2 and 1.1.10 above. 409 For the basic intellectual criticisms, see text at n 263 above.

190 Volume 1: The Emergence of the Modern Lex Mercatoria to an extreme form of legal positivism on much of the European Continent: law considered ever more as a national dispute resolution technique. Equality, consistency, and legal certainty were considered guaranteed in this manner. Again, justice, social peace and efficiency were deemed to automatically derive from a proper application of the system. Empirical research was not necessary, extra systemic considerations were irrelevant, the system was the same for consumers and professionals alike, and also for national and international transactions where they came on shore or could be considered to have done so in terms of contact or closest connection. This attitude proved per definition inimical to legal transnationalisation in international commerce and finance never mind globalisation and its dynamics and the enormous increase in value of the international flows of goods, services, money, technology and information, much of which could hardly be localised any longer under the rules of private international law, but, again, they had to be cut up into domestic pieces, regardless, often still different for contract and property, in the hope that the sum total of national laws that became so applicable made sense for the international transaction as a whole. It followed that professional dealings proved difficult to distinguish from local consumer transactions and there was no concept of the operation of the international marketplace and its needs.

1.4.2. Fact and Law Finding in Civil and Common Law Whether or not other sources of private law survived besides legislation or can be revived at least transnationally or even in domestic interpretation especially in civil law countries, it follows from the foregoing that the sources of law that are here of particular interest are: (a) fundamental principle; (b) custom or industry practices which are not then distinguished; (c) legislation; (d) general principle; and (e) party autonomy. In a transnational context, treaty law may also be important as the substitute for legislation in law formation at that level. Again, this is similar for public international law, there articulated in Article 38(1) of the Statute of the International Court of Justice supplemented by Article 53 of the Vienna Convention on the Law of Treaties for peremptory norms, see more in particular section 1.4.5 below. There is in fact no clear reason why things should be different in private law formation at the transnational level. It was already said that it was the situation until the nineteenth century when even private law was considered universal in principle and the basis for the law between states. It was admitted that even now local law may continue still to play a residual role in professional dealings in the international flows, especially where the transnational law is not yet sufficiently developed, but it is then part of the transnational law itself and accordingly explained and shorn from any local peculiarities. In international commerce and finance, these sources, it was posited, are indeed the pillars of the modern lex mercatoria and promote its autonomous revival, if not also affecting and changing domestic laws, at least when applied to international transactions. The will be discussed in greater detail in the following sections. In domestic law, especially of the civil law type, the revival of these sources of law is aided by and takes in professional dealings the form particularly of: (a) a more factual and less intellectual or systemic approach to law finding; and more especially (b) a liberal interpretation technique in respect of statutory texts. In common law, it is rather the restrictive interpretation of statutes and the continuing fact- and needs-oriented pragmatism of the courts which in practice still allows resort to various sources of law at least in commerce and finance, especially custom and practices, although perhaps also now more confined in common law, especially in England if they are international, as we shall see. In these aspects, common and civil law were separately considered and compared in the above discussion before the subject of transnationalisation itself was reached.

Volume 1: The Emergence of the Modern Lex Mercatoria 191 It was noted in that connection that the fundamental technical difference between civil and common law is not in the statutory nature of private law or in its codification as such, not even in nationalism. In common law countries, there is now also much statutory private law, especially in the area of equity, viz company, bankruptcy and trust law, although even then often still considered merely remedial. Moreover, as we have seen, at least in England, the idea also developed that the sovereign was the ultimate source of law, although it did not need to be expressed in statute. Even in the US, there is a strong sentiment that the law is based in its own traditions and national experiences as we have also seen, even though this idea is less infested with sovereignty as in the American sensibilities sovereignty rests with the people, hence a strong ethos of participation in which in legal realism law becomes the expression of life itself and can be known only from the constant debate in society about its contents. The basic differences in private law formation and operation between common and civil law were identified in: (a) the civil law’s monopolisation of the sources of the law by legislation; (b) its claim to completeness; and, especially (c) its systemic thinking and intellectual approach which is active foremost on the norm side, sharply distinguished from the facts’ side, and (d) its consumer bias. It follows that the law of the codification is in essence norm not fact-oriented. In its application, it seeks out the facts according to previously established intellectual concepts, which are expansively applied. Norms are a given; facts must fall into place; real life must conform. Legal dynamism thus suffers and many facts may fall off the plate as being legally irrelevant,410 even when the applicable rule is not itself mandatory as expression of public policy. In truth, civil law in its intellectual system building has considerable problems with facts and therefore with reality, which it seeks to manage and transform or otherwise to ignore. Common law jurisdictions, on the other hand, never accepted the exclusivity of statutory law and always retained two other basic sources: (common) law and equity, and in fact also custom, the law merchant and party autonomy as further sources of law; cf. the key sections 1-103(a)(2) and (b) UCC in the US, already referred to several times, even if they may not or no longer fully reflect the modern English attitude. Moving from case to case, even in statutory interpretation as we have seen, common law attitudes did not succumb to system thinking. In fact, these deeper differences with civil law have long been discerned.411 It concerns here mainly the common law’s greater reliance on facts and its more casuistic and inductive but also more pragmatic approach to law finding, in which analogical reasoning rather than system thinking figures large, the former being more fact-oriented than the latter. By putting less emphasis on the positive law as a set of rules, and even less on a system, it does not have the civil law’s constraints as to the recognition of other sources of law. Even where, as in England, it has at least in legal scholarship probably become no less black-letter law-oriented through the academic deduction of rules from disparate cases and statutory texts, this system is still less closed, even if the role of custom as an independent legal source is now also often questioned in England (although less so in commercial law as noted before, see section 1.4.8 below) and the English do not on the whole like generalities in terms of principle, see section 1.4.7 below. In the US, this is less problematic, as there is also the political role of the courts. It allows more

410 Before the notion of good faith was substantially stretched, this applied, eg, to failure to disclose relevant information in pre-contractual situations, to conduct and reliance in contract formation, and to fundamental changes of circumstances in post-contractual situations. They were all irrelevant because the system did not recognise them. See for the modern approaches to the professional contract, s 1.1.6 above. 411 See for important comments on the differences between common and civil law legal thinking, W Fikentscher, Methoden des Rechts, Vol 2 (Tübingen, 1975), cf. for an incisive comment on the nature of the common law MA Eisenberg, The Nature of the Common Law (Cambridge, MA, 1988).

192 Volume 1: The Emergence of the Modern Lex Mercatoria easily for alternatives, motivated, for example, by ethical, social, cultural or economic considerations or more generally by policies and values, as was discussed more extensively in section 1.3.4 above in the context of ‘legal realism’. Here the more ethical and civil rights-related ethos of the Constitution also makes a difference to the acceptance of more fundamental and general principles, which may then supersede the positive (private) law in appropriate cases.412 As to the method of fact and law finding itself, there thus remain some important differences between civil and common law, which again go back to system thinking and also have an effect on the approach to rules and their interpretation. This may be explored somewhat further. The civil law lawyer faced with a legal problem normally starts from a point where there is some given system of rules and principles and attempts to deduce further rules and principles from them and from the system itself to apply to the case before her. She will spot the relevant facts in the light of these rules and principles, which provide for her a guide from the outset, which she received from education and practice. In Germany this is called Relationstechnik.413 Again, the system plays here a vital role. Other sources of law that are more dynamic would disturb the outlook. The common law lawyer, on the other hand, will first look at the facts and will then ask what the nearest case or statutory provision is, therefore whether a relevant rule can be found in precedents or in legislation that may be closest or otherwise relevant and have application in view of all the facts of the particular case. It follows that systemic thinking and suspicion of other sources of law beyond legislation are here lesser issues.414 Indeed, common law is often thought to be primarily inductive on the basis of the facts, and civil law deductive on the basis of its rules,415 although modern common and civil law are here often less far apart in practice than may appear. In the first instance, the difference may be one of procedure, not always one

412 See PS Atiyah and RS Summers, Form and Substance in Anglo-American Law: A Comparative Study of Legal Reasoning, Legal Theory, and Legal Institutions (Oxford, 1987). 413 See R Zimmermann, ‘An Introduction to German Legal Culture’ in W Ebke and M Finkin (eds), Introduction to German Law (The Hague, 1996) 1, 21; James M Maximer, ‘Methods Awareness (Methodenbewusstsein) for German Jurists’ in B Grossfeld (ed), Festschrift für Wolfgang Fikentscher zum 70. Geburtstag, 125 (Tübingen 1998). See on the reasoning of arbitrators, Vol 2, s 4.1.5. 414 In all rule formulation and certainly in statutory law, the traditional common law lawyer thus takes an ad hoc attitude and wants precise, fairly narrow rules and in statutes clear definitions, an attitude which the civil law lawyer is likely to adopt only in criminal cases. The civil law lawyer lives happily with greater abstractions and more general ideas. They quickly stake out the field for him, the issue is early placed in the whole legal firmament, while the detail is left for later in the proceedings; that then means more precise interpretation on the basis of the facts. For the civil law lawyer, too precise a rule is often seen as an unnecessary limitation giving rise to distorted interpretation, to incongruous results, and extra litigation costs. Much more might be made of this, and of the common law’s emphasis on the facts closely tied to its trial practice. This trial practice is indeed geared to fact finding and discovery to get all information first. In common law proceedings, as a procedural matter, it is necessary to prevent any surprise in court (still considered to include a jury, although in private law cases they are very rare outside the US, where there is a constitutional right to a jury in all cases although it can be and is normally waived for cost reasons). In this system, the court sits in only one session (which may, however, go on for days). In civil law, further particulars may be sought and dealt with in subsequent meetings of the courts as and when they become necessary in the view of the court. If the civil law judge is often considered more inquisitive than the common law judge, this means activity on the norm side: the assessment of which rule applies which determines what still needs to be proven as fact, while subsequently matching the facts to these rules. Others are excluded. Much more dubious, it may even induce judges to solicit new facts or organise fact finding expeditions themselves, but always guided by what in their view the applicable rules suggest. That would be much more difficult in common law courts, may even be considered inappropriate. 415 See for a classic essay in legal reasoning in respect of case law, statutory law and constitutional law in the US, which has retained its value until this day, EH Levi, An Introduction to Legal Reasoning (Chicago, IL, 1949, reprinted 1962). Here a sharp distinction between a deductive and inductive approach is (rightly) questioned within the common law itself.

Volume 1: The Emergence of the Modern Lex Mercatoria 193 of substance, connected with the operation of the common law with its greater and sometimes excessive emphasis on fact finding (notably in discovery), not shared to the same extent in civil law. The civil law lawyer, on the basis of his more abstract rules, is inclined to distinguish here sooner between facts that are or may become legally relevant, and facts that are not and will only ask the former to be proven. As a consequence, the civil law fact-finding operation tends to be quicker and less expensive and this is certainly an important reason why going to court in civil law countries is often much cheaper.416 However, there may be serious intellectual prejudice implied in this codification attitude when it comes to selecting the relevant facts.417 The consequence may be a narrowing attitude in the search for them. It has already been said that much may fall off the plate. Again, other sources of law need not be considered. Thus, pre-contractual duties at first went unnoticed until this became untenable and good faith notions introduced them. It is a result of liberal interpretation, as we have seen, re-introducing the other sources of law although in countries like Germany foremost considered supporting the system and completing it. The result is an endless polishing up of the system in academic writing, in which newer developments are made to fit, which then becomes the major academic pursuit.418 More innovative thinking becomes suspect. Again, the system is closed, new developments are ignored, globalisation is legally irrelevant, empirical studies are not necessary, and transnationalisation cannot exist.419 This approach did not take root in common law, even in the more intellectually minded modern attitudes in the US—any attempt at legal formalism in this manner was abandoned at an early stage as we have seen in section 1.3.6 above. However, in all law formation, at least that by legislators, some plan or model would seem to be appropriate and implicit, although to the extent legislation remains remedial it may not go very far, clear especially in statute drafting in England. At least in common law, system thinking and systemic reasoning did not acquire a special meaning.420 Nevertheless, the differences should not be exaggerated, especially since the pre-ordained system of rules resulting in civil law from codification is often patchy, out of date, and frequently too unfocused to be of immediate help so that extraneous facts play an ever 416 As is sometimes said: ‘opinion is cheap, fact is expensive’. The considerable difference in litigation cost is the more glaring, practical and immediately visible consequence of this difference in attitude between civil and common law. This is aggravated in England by the multiplication of lawyers’ functions and fees—those of solicitors, barristers and QCs in larger cases—while many of the rules of procedure and evidence are still determined by the jury tradition even if in private cases they are (in England) now hardly ever present. Thus at least in litigation, there clearly continues to be a different attitude to fact finding in civil and common law and to the guidance of the applicable law in finding the relevant facts early on. Common law countries like England, in fact, make litigation unattractive, not only costwise, and discourage it. One needs an obvious case to succeed and appeals are possible only with leave of the courts. This makes a great deal of sense, litis finiri, there is mostly no economic or social benefit in litigation, amongst professionals also clear in arbitration which they often favour for these reasons. 417 See J Vranken, Exploring the Jurist’s Frame of Mind (Deventer, 2006) 99ff; see for the role of tradition and its limiting effect also, JT Onnti, ‘Law, Tradition and Interpretation’ (1998) 11 International Journal for the Semiotics of Law 26, 36. 418 See n 94 above. 419 See for more recent unease with this state of affairs, even in Germany, the comments in nn 54 and 102 above. 420 The Dutch Civil Code of 1992 is here indicative of what codification does: confirm the status quo and legal rigidity especially in the law of personal property. It constrained in particular asset-backed funding, which may go far beyond secured transactions and also includes leasing, repo-financing, and factoring of receivables, all forms of temporary or conditional ownership rights in finance sales, viz legal structures with which the common law deals in equity. See in particular s 1.1.4 above and Vol 5. Another systemic weakness arises here in partuclar in the area of receivables and their asset status, transfer, and the security interest in them. More generally the notion of transfer in bulk of future assets is missing. All is based on individualisation of individual physical assets for proprietary rights to attach, a profound consumer concept as we shall see in Vol 4, see for a summary s 1.1.6 above.

194 Volume 1: The Emergence of the Modern Lex Mercatoria greater role, especially in the law of obligations (hence good faith contract interpretation and now also greater flexibility and fact awareness in the law of negligence). It has already been pointed out that in contract and tort, codification thinking is often so old or abstract that case law must move from situation to situation or from fact to fact so that both approaches become more similar. Among the most prominent civil lawyers,421 it has been questioned whether codification in the traditional civil law tradition still makes sense in the law of obligations, which may have become too factual or fact driven to allow for one intellectual system to control all.422 At least in the law of negligence, reference to socially accepted standards and behaviour increasingly suggest an open system of legal normativity, also in civil law. The different approach to fact and norm in common and civil law nevertheless remains important. In truth, norm and fact cannot be separated. It was submitted all along that what is legally relevant in the facts depends on the legal norm but the properly applicable norm can only be found through an appreciation of the facts. They are irretrievably linked and seem to be dialectally connected. That presents a conundrum that cannot be here further unravelled except to say that the positivist sharp separation between them is also unsustainable from this point of view; it is not the common law way. In practice, it is the emphasis and where one starts that count. Common law starts with the facts and puts the emphasis there; civil law still with the norms or the system.

1.4.3. The Revival of the Traditional Sources of Law through Liberal Interpretation Techniques in Civil Law. The Changing Status and Role of Legal Reasoning and Precedent It has already been pointed out several times that in civil law the exclusive civil law legislative attitude and system thinking at the level of the state presents a uniquely nationalistic nineteenthcentury phenomenon, now often considered the ultimate democratic ideal, although, at first, this legislation was by no means the result of a democratic process in the modern sense: the Prussian, French and Austrian Codes were hardly so enacted; see sections 1.1.8 and 1.2.11 above. The same may be said for the German Code which came 100 years later. It was already said also that the true legitimisation was rather found in the intellectual coherence which allowed the system so presented to be seen as the truth of how legal relationships truly worked. In any event, this legislative process, even if now more democratic, was and is still formal and amounts mostly to

421 HCF Schoordijk, ‘Enkele opmerkingen over de bronnen van verbintenis en “European law in the making”’ [‘Some observations on the sources of the law of obligations and “European Law in the making”’] (2006) Emeritaal Werk 137. 422 There are, of course, other differences between common and civil law, already referred to. It is clear, for example, that the common law was itself much more of a long historical accident. Especially in England, it is still largely casuistic and even statutory law tends to be directed towards special situations and is remedial and incidental, which also affects its interpretation, which is literal and restrictive, see s 1.3.3 above. Furthermore, common law abandoned its action-oriented approach much later than civil law, as we have seen, and was much slower in the formulation of substantive rules and subjective rights. Although, through the stare decisis rule and statutory law, substantive rules are also more actively formulated in common law, again, they tend to be narrowly construed. It means that in common law individual decisions cannot always be so easily reconciled with the rest and among the judges there is certainly no primary concern with doing so, although again academic writing often gives a different impression and by its very nature looks for more coherence, but it is of limited value as exercise into the past. Academy’s proper task everywhere, it was submitted, is finding newer models that provide deeper insights to guide us into the future.

Volume 1: The Emergence of the Modern Lex Mercatoria 195 rubberstamping academic proposals which, barring politics and public policy, claim intellectual objectivity and qualitative superiority. However, even then, new values and exceptions come into this law all the time in other ways: see in particular section 1.2.13 above, potentially putting the system under severe stress. But the formal legislative process, whether or not democratic, was never the only way in which more fundamental notions or newer social and public order considerations or values progress through the law. Indeed, they can often not wait for legislation. Legislative activity of this nature is further subject to the law of unintended consequences, sometimes fatally so; the result might not work or might be simply political wishful thinking, more especially in regulation or criminal law, as already noted, and this may no less apply to private law legislation. The new Dutch Civil Code showed many examples in personal property law especially in respect of assignments, finance sales, and security interests. Short of further legislation, corrective activity in the courts may then become necessary. Here the judiciary enters as lawmaker, admitted mostly when thought to perfect the system, especially in countries of the German persuasion as we have also seen,423 but on a more profound analysis, it was submitted that interpretation means the re-introduction of fundamental and general principle, even customary law and a reconsideration of the tenets of party autonomy in professional dealings, although it may still be asked whether such more fundamental review of the system is the proper task of judges. In particular, how would they come by their wisdom? Listening to customary law and respect for the other legal sources is here an important answer assuming that judges believe they have that authority. It has already been noted in this connection that the pretence of exclusivity and systemic completeness and the claim that the statutory system can provide for all eventualities make these codes dependent for their continued credibility on liberal interpretation powers or techniques of judges and therefore often on considerable judicial freedom and inventiveness when applying (old) rules to (new) individual situations.424 It unavoidably put the judge at the centre of legal development, which was not the original idea in civil law at all. Again, it indirectly reintroduces in this process also the force of other sources of law, especially legal principle and therefore natural law overtones and customary law, which the codes had thought to expunge. It was submitted that the ultimate justification and test of legitimacy is then not even in a formal democratic process but in the contribution to justice, social peace and efficiency. Under pressure of an ever-moving society, systematic objectivity becomes here a less absolute goal and often a fig leaf as extra-systemic ethical, social, economic and other considerations must enter the decision-making process and therefore the law, although it may 423 If a new type of contract became fashionable, its rules, if not determined by the parties to the contract, would technically speaking somehow still have to be deduced from the general provisions concerning contracts in the applicable codes. Guidance would additionally be sought in the statutory provisions concerning special contract types that could be considered related when an exercise in making proper distinctions would follow but also in systemic and analogical interpretation. In this manner, one could ask whether directors of companies had an agreement with the company in the nature of an employment contract or a contract for the provision of services or rather a contract of a sui generis type that had nevertheless some features of both but that would still need to be defined further. This could allow case law to produce over a period of time a new set of rules for that particular contract. Another example may be found in the modern brokerage contract as an elaboration of the contract of agency. It takes longer to reach the appropriate level of modern investor protection against the broker and his/her practices and is less comprehensive than new legislation, but it is often the only way in the absence of much interest or a clear view from legislators. Thus, it was unavoidable that in many civil law countries, much of the law of companies, partnerships, and employment was at first developed in case law and legal practice on the basis of rudimentary code provisions in this manner, and was only subsequently aided by legislation. 424 See s 1.2.13 above.

196 Volume 1: The Emergence of the Modern Lex Mercatoria be repeated that they should only do so in more pressing) or hard) cases where one may assume substantial support at least in the community it concerns, here the professional commercial community. Otherwise, these considerations could easily lead to more controversy. It is the fear on the one hand of judicial sclerosis and on the other hand of judicial experimentation/misunderstanding, that may be driving parties further into the direction of arbitration where there is not or should not be any law-making objective only the solution of a dispute as presented by the parties. But in a globalising environment, it was also noted that the truer challenge becomes the role of public policy balancing and where necessary correcting the international marketplace. It was already noted also that common law did not have similar constraints in terms of the acceptance of other sources of law even if traditionally it does not like principle but moves and progresses from case to case on the basis of the facts and practical needs, often in an analogical manner when asked whether there is a cause of action. In more extreme cases, it still has the corrective equitable jurisdiction in the courts. The differences are fairly obvious. Statutes are literally interpreted to leave as much room for the old methods, which mean to promote the further development of common law and equity or even the law merchant on the basis of changing factual patterns and needs. It remains a fact though and it was submitted also, that in civil law, in its more formal positivist approach, in interpretation, other sources of law or legal considerations of a different nature could not be ignored and are revived informally, even if they may remain limited. It may not be generally admitted or properly understood but at least in contract liberal interpretation through the good faith concept is expanding. How much room liberal interpretation may create also for new proprietary structures to develop may be more uncertain, but it is not impossible either (see section 1.1.6 above): a liberal interpretation technique is not necessarily limited to contract. Although formally, in a codified system (unlike in equity in common law jurisdictions as we have seen), there is only a limited number of proprietary rights, the numerus clausus, as we have seen,425 a freer, more practical and less systematic interpretation method could still allow for the development of newer proprietary interests if so required by commerce and financial practice. Indeed, to some limited extent, this happened in Germany in the late nineteenth century.426 There are also signs of it in recent case law under the new Dutch Civil Code (see Volume 5, section 1.2). Here more fundamental principle and practical needs take over. Constructive trust, tracing rights, and liens shifting into future assets might then also appear427 subject to the protection

425 See also JH Dalhuisen, ‘European Private Law: Moving from a Closed to an Open System of Proprietary Rights’, (2001) 5 Edinburgh Law Review 1, see further Vol 4, s 1.3.7. 426 Note in this connection the early creation of the non-possessory security interest or the Sicherungsübereignung in chattels and much later in the twentieth century the development of the proprietary conditional ownership expectation in the reservation of title, ultimately leading to the concept of the dingliche Anwartschaft: see for these legal structures more particularly Vol 5, s 1.4.1. These were major case-law developments, upon a proper analysis going against the (closed proprietary) system of proprietary rights of the BGB, even if often explained as developments praeter legem, therefore as being parallel to, and not truly in conflict with, the existing system. In fact, it can be argued that established practices took over and were accepted by the courts. In a similar manner, a more liberal interpretation approach, the concept of good faith or acceptable morals (gute Sitten) has been used in Germany in bankruptcy, in that case to deny proprietary execution rights or to readjust seniority and priorities against the rules laid down for them, at least in Germany. In the civil law of agency, the direct proprietary rights of principals in assets (goods or proceeds) the (undisclosed) agent buys or receives for them in his own name also became more firmly established against the system, again on the basis of practicalities. 427 One of the major drafters of the Dutch Civil Code of 1992, now noting its practical insufficiencies especially in property law, has proposed exactly aggressive remedial case law, but it may be doubted whether that is the general attitude in Dutch legal scholarship and whether case law could really start a reform on that scale so soon after the

Volume 1: The Emergence of the Modern Lex Mercatoria 197 of the ordinary commercial and financial flows, all in aid of practical commercial and financial needs or simply to prevent a windfall for others, such as creditors of an agent, who without this redress might become unjustly enriched in their recovery possibilities. Conditional or temporary ownership rights may equally become more acceptable to underpin the safety of modern financial products such as finance leases and repurchase agreements. Although in civil law countries, domestic laws are still largely unbending, these developments were noted and greater dynamism even in professional property law identified as necessary, at least in international transactions. They centre on greater party autonomy also in proprietary matters as a matter of modern risk management. Acceptance of the concept of the trust and especially of segregation in constructive trusts may then not be far behind either, although again it should be realised that it goes against the grain and system thinking of civil law, which, however, presents no legal unity, and different civil law countries may still take different attitudes.428 Indeed, it may be seen that non-statutory sources of law that go beyond the system are used in one way or another also in civil law but differently in each country. As will be argued, they acquire a particular importance in the revival of transnational private law, not in the least also in movable property law, set-off, transactional and payment finality and the notion of segregation. On the other hand, it may be exactly the benefit of a more limited systemic interpretation that no Pandora’s box is opened, and that at least in property some room for the traditional bankruptcy law principles and considerations is preserved, thus favouring the common creditors of a debtor over professionals who claim all kinds of proprietary interests and retrieval rights in the assets, even though the former normally receive very little in whatever approach and any restriction on preferential rights often means merely the reshuffling of these interests among professional creditors; common creditors are unlikely to benefit from the room so created, see again the discussion in section 1.1.6 above. The civil law idea often remains that, short of legislation, all is extrapolation from the existing national systems, in Germany the inveterate desire for re-systematisation, even in good faith case law, as noted earlier.429 Again, the common law is not so confined and is more comfortable with case law that develops on the basis of the facts and practical needs rather than deductive reasoning in the application of existing rules. It uses analogy in a freer way that is more sensitive to facts.430 In this connection, it was also noted that at least in England, statutory law is largely remedial and seldom conceptual and that the way of drafting statutes normally remains geared only to special fact situations and not to stating principle: see section 1.3.3 above.431 Statutory

introduction of the new Code: see W Snijders, ‘Ongeregeldheden in het Vermogensrecht’ [Irregularities in the Law of Property and Obligations] (2005) Weekblad voor Privaatrecht, Notariaat en Registratie 6607/8. The statutory insufficiencies are not necessarily seen here as a disadvantage and it is suggested that they give judges greater flexibility although it may be a tall order to bring the new Code into a more proximate reality in this manner. 428 See also JH Dalhuisen, ‘Conditional Sales and Modern Financial Products’ in A Hartkamp et al (eds), Towards a European Civil Code, 2nd edn (Dordrecht, 1998) 525. 429 See n 94 above. It may prove a true handicap if after Brexit commercial and financial activity is drawn towards Germany or other civil law countries, see Dalhuisen (n 14). 430 See s 1.4.2 above. 431 In this way the common law and equity still develop further. Thus, in modern times, promissory estoppel or reliance notions were accepted to substitute for the consideration notion, see Vol 3, s 1.2.3. In common law, the movement to accept the binding nature of offers between merchants, therefore regardless of the consideration requirement that made them logically (on pure syllogism) unenforceable, may also be strengthened by case law on business grounds (as was eventually confirmed in the UCC, see Vol 3, s 1.2.3). Here we see extra-legal or economic considerations leading to legal adjustment in which an expansive interpretation of a rule may allow for the evolution of alternative legal structures. In equity, floating charges were also developed through case law, as was in England more recently the important Mareva injunction; see s 1.3.1 above and Vol 5, s 1.5.2.

198 Volume 1: The Emergence of the Modern Lex Mercatoria law of this nature is literally interpreted so that there remains ample room for law and equity to operate beside it unless specifically overruled, under the UCC even of the law merchant, custom and party autonomy as we have seen. Statutory interpretation accepts this and does not go beyond it. There is no predilection for teleological or normative interpretation of statute either, at least in commercial matters, where contracts are often also literally interpreted. The result is an objectivated notion of party autonomy. Other sources are similarly treated with care. As already mentioned, at least in England principle is disliked,432 the notion of custom questioned, sometimes even in commercial law. On the other hand, the differences with civil law may sometimes appear greater than they are: even in civil law, good faith is starting to require a similar restrictive and literal attitude to contract interpretation if the contract is a roadmap and risk-allocation instrument among professionals; see again section 1.1.6 above. Similar attitudes may be expected in the interpretation of bills of lading and letters of credit everywhere. However, it was also pointed out that the distinction between professional and other dealings remains still less vivid in civil law and there is no fundamental relationship thinking. Rather it still aspires to a unitary system per country, which may be a considerable drawback. Consumer notions thus easily enter into the determination of the precise relationships between professionals. It is a most unfortunate side-effect of civil law system thinking; see further also Volume 3, section 1.1.1. In contract interpretation, it may be thought, however, that also otherwise modern Continental and American attitudes may start to converge, even to the point of the Americans becoming comfortable with the good faith notion (see also Volume 3, section 1.3.7), but it may be more restrictively handled in professional dealings than it often is in civil law countries. It still has less meaning in pre-contractual and post-contractual situations. Again, there is a more fundamental predilection for a more literal interpretation of texts in the common law concerning professional dealings where the contract is basically a road map and risk management tool or instruction manual and defences and excuses are limited; that is not different in the US in professional dealings. In fact, in the common law the prime focus of contract and movable property law was always risk management which derives from its origin in commercial law. This is very different from civil law which is anthropomorphic in origin meaning consumer-oriented in more modern times. It may be useful to repeat as easiest example the orientation of the common law: one buys a can of milk to make products, in civil law it is to drink it. That assumes very different consequences in contract and movable property law. It is of interest in this connection that the recasting of the French Commercial Code in 2016 paid more attention to the purchase of assets for resale, see section 1.1.9 above. On the other hand, the presumption must be that in Western culture where there is everywhere a similar combination of the rule of law with a neo-capitalist economic and social outlook,

432 In England, there is now at least the purposive approach of statute (see more particularly s 1.3.3 above) but it does not amount, as yet, to a more fully normative approach. It is often distinguished from teleological interpretation, which is then considered also to take into account extra contractual/legal considerations derived from pressing moral, sociological or efficiency considerations. EU legislation and its interpretation forced English judges more generally into teleological interpretation of European scripts. In interpretation, there may also be detected a stronger normative element in modern contract law, even in England, such as in the notion of reliance, implied terms, or distinctions on the basis of the character and nature of legal relationships as between professional and non-professional dealings. See also n 89 above and more particularly Vol 3, s 1.3.7.

Volume 1: The Emergence of the Modern Lex Mercatoria 199 there is profound similarity at least in result. But the remaining differences are not irrelevant, and may also acquire a competitive aspect in international dealings, especially in commerce and finance. As has already been observed, the greatest practical differences between common and civil law, as far as commerce and finance are concerned, are in equity. This may be clearly seen in the development of fiduciary duties in trust, agency and company law. It may no less be seen in the laws of segregation, tracing, equitable interests and similar restitutionary claims, shifting liens and floating charges, conditional and temporary ownership rights in chattels, and equitable assignments of intangibles, or the set-off. At least in business, the common law would appear to have the advantage in terms of a more dynamic and responsive law, further supported by a more pragmatic judiciary. But the concept of contract is also quite different, see again section 1.1.6 above and Volume 3. So, it is in respect of movable property, see section 1.1.6 above and Volume 4. This may finally also require further consideration of the evolving role of legal reasoning and precedent in civil law. In section 1.3.3 above, it has already been noted that precedent was never considered binding. The text of the codified law and its system was conclusive and was not to be interfered with by judges. But this attitude hardly remained realistic when the system for its credibility required liberal interpretation, which needed case law to preserve its pretence of full coverage and unity. Thus, in the twentieth century, case law also moved to the centre of (academic) interest in civil law although it did not strictly-speaking lead to binding precedent. Rather the inclination was, as we have seen, to consider case law as completion of the system that always remained dominant. Legal reasoning was then similarly directed. The unfortunate result was that academics, rather than looking for ever newer and better models to move the law forward and guide society in that manner, became stuck in the past and acquired a practitioners’ mentality based on an analysis of case law and legal texts. Common law, which could only be known through case law, has more experience here and remained more pragmatic. It moves, as we have seen, from case to case to find new ground in the careful consideration of the facts when necessary and is not confined to the tyranny of a framework regardless of its notion of binding precedent, which was explained as a limited concept in any event not adhered to by the superior courts, see section 1.3.2 above. Although civil law judges, while acknowledging the importance of precedent, still do not feel bound by it, they use it nevertheless increasingly as strong persuasive guidance as they do not want to be seen to be erratic or subjective. By explaining it as perfection of the system, a tilt in the direction of precedent being binding may then even be discerned for better or worse. Earlier, civil law was explained as more like policy at the macro level, intended to make life easier for all, see also section 1.4.18 below and was not primarily dispute resolution-oriented. Case law distracts from this and is more micro level directed, which suggests another orientation. This has created further tension in civil law’s formation and application, also in academic studies.

1.4.4. Survival of Transnational Legal Sources in Commercial Law. EU and Public International Law Attitudes Strong nationalism and organisation at state level were demonstrated as still being inherent in both modern civil and common law. In commerce and finance, this concerns and affects

200 Volume 1: The Emergence of the Modern Lex Mercatoria even professional dealings at the international level. It means that there is in either system in principle little room for transnationalisation leading to an overarching new law derived from different legal sources in cross-border private law transactions. On this view (national) judges will apply only a national law (it could be that of other states, but they would allow it only under their own rules of private international law or comity and is then pleaded as fact, meaning that national judges do not develop foreign law further, neither can international arbitrators) and ignore all others.433 Here the common law of the English variety and continental law increasingly combined. It has already been noted several times that this requires international transactions to be cut up into domestic pieces, assuming, first, that the proper domestic contacts can still be found for each piece (on the contract and property side or in enforcement) in an ever more virtual environment and that, second, the result still adds up to some effective legal framework for the transaction overall. In this connection, it always remained in doubt, however, how far a choice of a domestic of law by the parties could be effective especially in mandatory aspects and in public policy issues and when international standards started to prevail. In nationalism of this sort, it was noted that the common and civil law often also combined in the positivist and formal approach, in which, at least in England, principles are considered too vague (even when fundamental) and custom often atavistic (although with some greater respect for it in commercial law, see section 1.4.8 below) whilst, on the Continent, both are considered extra-statutory and do not therefore count unless they underlie and support the system itself or are specifically mentioned and authorised in the texts, as custom often is for contract interpretation,434 but not elsewhere, for example in property law. Here emerges also some communality between both legal systems in Europe, earlier identified as having to do with academic rationalisations of statutory and case law even in England and a desire for legislation on the part of the English Law Commission, which might support experiments such as the PECL and the DCFR in the EU, and therefore probably even a push towards codification in the traditional civil law sense at EU level, even in England before Brexit although not supported by the commercial practice and most likely also not by the English bar and courts. After Brexit it may be unthinkable, although a more written, rule-based system might still remain a wish in English academia, also noted before. In the previous sections, it was already pointed out that in modern times in civil law, even domestically the different sources of law may hide behind the facade of good faith, and resurface in that way at least in contract law. In a generally more liberal interpretation approach, even in the law of movable property, there may also be some flexibility. This may even support transnationalisation by expanding domestic notions in a first stage. It is, however, not the way of current civil law thinking, where even liberal interpretation often still means national system completion as we have seen.

433 See, eg M Mustill, ‘Contemporary Problems in International Commercial Arbitration’ (1989) 17 International Business Law 161ff, who even considered as absolutely void a contract in which transnational law is chosen as controlling. 434 See also K Zweigert and H Kötz, An Introduction to Comparative Law, 3rd edn (Oxford, 1997) 265. See for the perceived approximation of the English and continental law, PS Atiyah and RS Summers, Form and Substance in Anglo-American Law: A Comparative Study of Legal Reasoning, Legal Theory, and Legal Institutions (Oxford, 1987).

Volume 1: The Emergence of the Modern Lex Mercatoria 201 But it was also observed in this connection that the transnational sources of private law were never completely extinguished in commerce and finance, and continued to contribute to the infrastructure of the international marketplace. One may think of the law concerning bills of lading,435 negotiable instruments, now especially Eurobonds and euro market practices including clearing and settlement,436 the law of international assignment,437 of set-off and netting,438 and of

435 See W Haak, ‘Internationalism above Freedom of Contract’ in Essays on International and Comparative Law in Honour of Judge Erades (The Hague, 1983) 69. It is sometimes also suggested that international mandatory customary law overrides the jurisdiction of the forum actoris (of the plaintiff therefore), see P Verheul, ‘The Forum Actoris and International Law’ in Essays in Honour of Judge Erades (The Hague, 1983) 196. 436 It is often said that the negotiability of Eurobonds derives from the force of market custom: see for the older English cases on international bonds law Goodwin v Roberts [1876] 1 AC 476 and Picker v London and County Banking Co [1887] 18 QBD 512 (CA), which relate to Russian and Prussian bonds and emphasised that the financial community treated these instruments as negotiable regardless of domestic laws. See further P Wood, Law and Practice of International Finance (London, 1980) 184. See also Bechuanaland Exploration Co v London Trading Bank [1898] 2 QBD 658, in which it was accepted in connection with the negotiability of bearer bonds that ‘the existence of usage has so often been proved and its convenience is so obvious that it might be taken now to be part of the law’. See for customary commercial law further s 1.4.8 below. Modern case law does not, however, exist confirming the point although in England these cases are still considered good law. See for explicit reference in this connection to the custom of the mercantile world, which may expressly be of recent origin, Dicey, Morris and Collins on the Conflict of Laws, 14th edn (London, 2006) r 222, 1800. This general part was deleted in the 15th edn of 2012 but reappeared in part on p 2099 where in the text, but no longer in the rule, a reference to custom was maintained. It may be indicative of an increasingly ambivalent attitude in English academic writing. The transnational status of Eurobonds is probably not affected, even now that in most cases they have become mere book-entry entitlements in a paperless environment, see s 3.2.3 below. It also affects the way these instruments are repossessed or given in security, cleared and settled. 437 Important issues of notification and documentation arise especially in respect of the use of receivables in modern financing, where local law impediments to bulk assignments are increasingly removed and a reasonable description and immediate transfer upon the conclusion of the assignment agreement is becoming normative. Future (replacement) receivables are increasingly likely to be able to be included so that questions of identification and sufficient disposition rights no longer arise either. Exceptions derived from the underlying agreements out of which these receivables arise are increasingly ignored, especially any third-party effect of contractual assignment restriction, while others are limited to situations in which the assignment gives rise to unreasonable burdens, see also ss 2-210 and 9-404 UCC. The real problem may be in the finality of the transfer for lack of a clear idea what happens when the assignment contract is void or when there were insufficient disposition rights in the assignor. The promissory note as negotiable instrument with its independence from the underlying transaction out of which it arises becomes here the better transnational analogy, perhaps aided by the UNCITRAL 2001 Convention on the Assignment of Receivables in International Trade, although it has not received sufficient ratifications and is not as clear and advanced as it could have been, see Vol 5, ss 2.2.4 and 2.4.8. 438 In this connection, in the swap and repo markets, the ISDA Swap Master Agreements and the PSA/ISMA Global Master Repurchase Agreement may acquire the status of custom in the areas they cover, at least in the London and the New York markets where they operate, see further also s 1.4.8 below. This may be particularly relevant for their close-out and netting provisions in the event of default. The status of contractual bilateral netting with its enhancements of the set-off principle and its inclusion of all swaps between the same parties, leading to a netting out of all positions in the case of default at the option of the non-defaulting party and ipso facto in the case of bankruptcy, could otherwise still remain in doubt under local bankruptcy laws if not properly amended. In the 1996 Amendments to the 1988 Basel Accord on Capital Adequacy, the netting principle was internationally accepted; see also Vol 6, s 2.5. It is often considered that it concerns here so-called soft law, see on this concept further n 560 below, but it is nevertheless a most important international acknowledgement of the concept of netting, although formally still subject to the condition that the law of the country of the residence of the counterparty (or his place of incorporation) and of the branch through which the bank acted, as well as the law applicable to the swap, must accept the netting concept (which had required changes or clarifications in domestic law of several countries).

202 Volume 1: The Emergence of the Modern Lex Mercatoria letters of credit (UCP) and trade terms (Incoterms).439 This may also concern the important and connected issue of finality of title transfers and payments if only as a matter of acquired rights.440 Custom and practices thus never lost their meaning, at least not in international dealings between professionals in international commerce. Interestingly, in the 1930 Lena Goldfields v USSR arbitration,441 in which the gold concession was considered a purely contractual matter, the applicability of general principles of contract law, subsequently extended to the concept of unjust enrichment, was upheld as the proper law. More specifically in an EU context, the question of the proper sources of the private law has come up, notably in the interpretation of private law conventions, such as the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (the 1968 Brussels Convention),442 since March 1 2002 succeeded by Regulation and the proper implementation of the Directives touching on private law harmonisation, such as those operating in the consumer area, further amended in 2012, effective 2014. The distinctive interpretation technique of the European Court of Justice (ECJ), for example, as to what is contractual or not, what is a consumer contract or an employment contract or not, what is a bankruptcy matter or not, and how requirements of good faith should be defined, is not based on national laws or on principles

439 The idea of the UCP being transnational customary law is associated with the views of the Austrian Frederic Eisemann, Director of the Legal Department of the ICC at the time, and was first proposed by him at a 1962 King’s College London Colloquium, see Le Credit Documentaire dans le Droit et dans la Pratique (Paris, 1963) 4. This approach was followed in England by Clive Schmitthoff, although in his view always in the context of some national law which had to validate it, see C Schmitthoff, International Business Law: A New Law Merchant, Current Law and Social Problems (University of Western Ontario, 1961) 129. See for France, Y Loussouarn and JD Bredin, Droit du Commerce International (Paris, 1969) 48. In France, their status as international custom is now well established: see also J Puech, Modes de paiement, in Lamy, Transport Tome II, No 324 (2000); see also B Goldman, ‘Lex Mercatoria’ (1983) 3 Forum Internationale; Tribunal de Commerce de Paris, 8 March 1976; (1976) 28 Le Droit Maritime Français 558; Cour de Cassation, 14 October 1981, Semaine Juridique II 19815 (1982), note Gavalda and Stoufflet; Cour de Cassation, 5 November 1991, Bull Civ IV, no 328 (1992). In Belgium their status as international custom was accepted by the Tribunal de Commerce of Brussels, 16 November 1978, reprinted in (1980) 44 Revue de la Banque 249. In Germany, see N Horn, ‘Die Entwicklung des internationalen Wirtschaftsrechts durch Verhaltensrichtlinien’ (1980) 44 Rabels Zeitschrift 423, but German doctrine remains undecided, especially because of the written nature of the UCP and its regular adjustments, which is seen as contrary to the notion of custom, see CW Canaris, Bankvertragsrecht, 3rd edn (Berlin, 1988) Pt I, 926. In the Netherlands, the Supreme Court has not so far fully accepted the UCP as objective law, see Hoge Raad, 22 May 1984 (1985) NJ 607. The lower courts are divided. So are the writers, with PL Wery, De Autonomie van het Eenvormige Privaatrecht (Deventer, 1971) 11, and this author in favour, see JH Dalhuisen, ‘Bank Guarantees in International Trade’ (1992) 6033 Weekblad voor Privaatrecht, Notariaat en Registratie 52. English law does not require any incorporation in the documentation, see Harlow and Jones Ltd v American Express Ban Ltd & Creditanstalt-Bankverein [1990] 2 Lloyd’s Rep 343 (concerning the applicability of the ICC Uniform Rules for Collection (URC), which are less well known, but nevertheless subscribed to by all banks in England); Power Curber International Ltd v National Bank of Kuwait SAK [1981] 2 Lloyd’s Rep 394 (Lord Denning considering the UCP as such, also with reference to the fact that all or practically all banks in the world subscribe to them, which seems the true criterion in England). For the US, see Oriental Pac (USA) Inc v Toronto Dominion Bank 357 NYS 2d 957 (NY 1974), in which the force of law of the UCP was accepted ‘to effect orderly and efficient banking procedures and the international commerce amongst nations’: ibid at 959. In the US, the Incoterms and UCP are matched by similar rules in Arts 2 and 5 UCC, which may leave open the question of them operating as international custom in the US, but they would likely have that status in international cases and then supersede any conflict of laws rules in this area. 440 See nn 105 and 106 above. 441 The case has never been fully reported, but see VV Veeder, ‘The Lena Goldfields Arbitration: The Historical Roots of Three Ideas’ (1998) 47 Int’l and Comp Law Quarterly 747. 442 See, eg, the line of cases starting with Case 12/76 Tessili v Dunlop AG [1976] ECR 1473. See for the EU good faith notion, Vol 3, s 1.3.8.

Volume 1: The Emergence of the Modern Lex Mercatoria 203 deduced from them; see also section 2.3.2 below. The ECJ maintains its own normativity, which it finds in European principles and not necessarily in national laws;443 see also sections 1.4.6 and 1.4.7 below for its use of fundamental and general principle, and Volume 3, section 1.3.8 for the notion of good faith. This attitude necessarily also filters through into the national courts of Member States in the areas of private law subject to European law, which these national courts must uphold.444

1.4.5. The Method of Public International Law and its Meaning and Importance for the Development of the Modern Lex Mercatoria It has already been pointed out several times that public international law always recognised a wide variety of legal sources culminating in Article 38(1) of the Statute of the International Court of Justice, which, together with Article 53 of the Vienna Convention of the Law of Treaties, refers to fundamental and general principle, contract and custom as independent sources of law and it may even be peremptory or mandatory.445 This approach is also suggested in this book for the formation and operation of private transnational law or the modern lex mercatoria, returning in this way to the situation that prevailed on the European Continent before the nineteenthcentury era of the great codifications and their nationalism and statist law formation concepts; see more particularly section 1.4.14 below for a discussion of the various sources of transnational commercial and financial law and their hierarchy.446 In an EU context, which is itself a creation of international law, this approach may recommend itself all the more. There are not only historical but also philosophical reasons for this approach and method. The universalist approach of Grotius and its sources of law was cited447 but also its push back and limitation to public international law in nineteenth-century legal nationalism. It was submitted before that what is in essence happening now is that the ius gentium is again becoming the law covering all international dealings whether of a public or private character448 and the meaning of Article 38(1) and its application must increasingly be seen in that context, therefore as being expanded to what it always was. To repeat, we return to a pre-nineteenth century concept of law formation and application that is again universal in principle and covers in methodology both public international law (including foreign investment law) and the modern lex mercatoria in respect of professional dealings. It means that the approach to public international law and to its 443 Here again, as in statutory interpretation, exposure to European law may make a difference in English law: see K Schiemann, ‘The Application of General Principles of Community Law by English Courts’ in M Andenas and F Jacobs (eds), European Community Law in the English Courts (Oxford, 1998) 136. 444 Note for the limited jurisdiction of the EU in private law formation, s 1.4.21 below. 445 See also Roy Goode on this divergence in attitude between public and (civil law) private law in the acceptance of different sources of law, in ‘Usage and its Reception in Transnational Commercial Law’ (1997) ICLQ 1 and JH Dalhuisen, ‘International Law Aspects of Modern Financial Products’ (1998) European Business Law Review 281. 446 The discussion of this hierarchy is mostly avoided in public international law but cf for a comprehensive discussion J Pellet, in Andreas Zimmermann et al (eds), The Statute of the International Court of Justice 2nd edn (Oxford, 2012) and further also GI Hernandez, ‘A Reluctant Guardian; The International Court of Justice and the Concept of “International Community”’ (2012) British Yearbook of International Law 83. 447 See s 1.2.7 above. 448 Until that time, the ius gentium was considered universal, the law of all people (not of all nations which became the nineteenth-century translation) as the Roman law had been ever since the Justinian compilations, see section 1.2.3 above. There was not then a fundamental difference between the law between states and the law between private people or entities, see the second chapter of Book II of Grotius’ De Iure Belli ac Pacis.

204 Volume 1: The Emergence of the Modern Lex Mercatoria reasoning becomes important guidance also for the finding and application of modern lex mercatoria. While some commentators in respect of the modern lex mercatoria remain here stuck in a vague cocktail of hard and soft law,449 we have to consider methodology more seriously, especially in terms of legislation (which in transnational law would translate into treaty law) or multiple legal sourcing, but also in terms of a civil or common law approach, system thinking or policy, and perhaps also determine whether this is all merely about dispute resolution, as academics now often assume—the law in litigation—or rather that it is foremost about the law in action, therefore in its daily operation and application to make life better and easier for us all, see section 1.4.18 below. Blissfully most never comes to litigation. Good law is litigation avoiding and the emphasis on litigation and its outcome in much legal discourse (and teaching) was found to be misplaced, even self-serving in the legal profession. Throughout this book, repeated in the previous sections, the methodology and sources of law of public international law were thus used for the finding and further development of the modern lex mercatoria, returning therefore in method but not in content to pre-nationalist legal times.450 It means that the international law operating between states is used as model and it is argued that the method is not different in the transnationalisation of commercial and financial law, therefore in the modern lex mercatoria. The methodology of public international law is therefore borrowed and held up as example of how the law is found and applied also in transnational commerce and finance, relying in this respect on pre-nineteenth-century universalism in law formation and application. Foreign investment law is a good intermediate example. But this approach needs further amplification first because the text of Article 38(1) is not uncontested451 and may not be complete,452 but also because it does not clearly denote a hierarchy among its legal sources. Moreover, the objectivity of this law is not universally assumed, meaning that a form of state consent to the application of this law is by many still deemed implied and may also be expressed in the jurisdiction of the ICJ. It more in particular raises the question whether there is also peremptory law, therefore law above treaties as Article 53 of the Vienna Convention on Treaty Law explicitly accepts.453 It is in the mind of many an issue closely related to the question

449 Roy Goode, ‘Rule, Practice, and Pragmatism in International Commercial Law’ (2005) 54 ICLQ 539, 549 limits uniform law to treaty law, see also n 21 above. That was considered extreme because of treaty law’s territorial nature, although it is admitted that transnational commercial law also covers other sources of law, like model laws, contractually incorporated uniform rules, international restatements, and conscious or unconscious legislative or judicial parallelism, but it is less clear how autonomous these sources are—they are called soft law, no more, on p 541, and there is no attempt at ranking. More importantly, the transnational status of the modern lex mercatoria, seen mainly as (contractual) practice, is here doubted and would still appear dependent on a national law for its recognition while the international commercial and financial legal order is not identified as autonomous. Note that usages are here distinguished and seem not to be part of the modern lex mercatoria at all, although their true status remains also less than clear. It would seem that the true impulse is merely some coming together of national laws. There is no fundamentally new methodology or approach. K-P Berger, see n 662 below, also promotes the cocktail idea without any distinction according to sources of law, their legitimacy and especially their hierarchy. No methodology is here proposed either. 450 Earlier in s 1.1.4 above, some surprise was expressed that this analogy was not furthered by Philip Jessup, often now seen as the father of legal transnationalisation. 451 See for a comprehensive discussion Pellet, n 446 above. 452 At the more formal level, a reference to the decisions of the Security Council under Arts 24 and 25 of the Charter is particularly missing. 453 See also Art 48 of the International Law Commission (ILC)’s Articles on Responsibility of States for Internationally Wrongfull Acts, Ybk Int L Commission (2001), see further the ILC Second report on jus cogens by Dire Tladi, Special Rapporteur, March 2017. Note as of Nos 43 ff the many references to customary law implementing fundamental principle, which should then be well distinguished from general principle.

Volume 1: The Emergence of the Modern Lex Mercatoria 205 whether this law applies erga omnes,454 which in turn may be connected with the idea of an international community of states forming a distinct legal order, see also section 1.5.1 below.455 The reference may then be more generally to fundamental principles or standards in this connection. It raises in particular the question of the nature and force of international custom where the common requirement of opinio iuris may still assume some form of consent of the relevant parties also, much in the nature of custom in international commerce still being seen (wrongly as will be suggested in section 1.4.9 below) as an implied contractual term only, subject further to the requirement of longevity, also rejected for commercial law. The text of Article 38(1) is as follows: The Court, whose function is to decide in accordance with international law such disputes that are submitted to it, shall apply (a) international conventions, whether general or particular, establishing rules expressly recognised by the contesting states; (b) international custom, as evidence of general practice accepted as law; (c) the general principles of law recognised by civilized nations; (d) subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of the rules of law.

It basically assumes three sources of public international law: treaty, custom, and general principle. Case law and academic writing are also mentioned, but are subsidiary sources and it is commonly believed that they are of a lower status, the first one also because there is no rule of precedent in public international law, see Article 59 of the ICJ Statute, and there is strictly speaking no jurisprudence constante and in any event no system creation either.456 The first sentence of Article 38(1) makes it also clear that the ICJ is not a legislative body but only decides disputes as submitted to it, no more. It is further accepted that Article 38(1) is merely declaratory, it cannot determine its own force and rank in the absence of any higher law giving it that institutional power and it is therefore public international law as a whole that determines these issues. Article 38(1)’s main challenge is that it does not divide principles in fundamental and general ones. This is again the result of nineteenth-century positivist thinking in terms of sovereignty and absolutist state power, where any overriding or higher law is met with a defensive attitude even if we now accept that there may be peremptory rules, see again Article 53 of the Vienna Convention, but they are not defined. Even though Grotius is universally considered the father of public international law and based himself firmly on fundamental principle,457 there is a deficit in this respect in Article 38(1) which has long created tension. The ICJ itself has tried to avoid taking sides, goes even as far as seldom to cite Article 38(1), but is nevertheless frequently forced to refer to the ‘international community’ as the legal order between nations carefully avoiding, however, any determination what this legal order means and entails in terms of legal effect or international law formation and application. For similar reasons it has avoided to state on the hierarchy of the sources and has also remained vague on the peremptory rules, their nature and origin,458 but in recent times especially human rights and humanitarian considerations have

454 This is strictly speaking confusing. Much international law works erga omnes, notably customary law and need not be mandatory to do so; the same goes for multilateral treaty law. 455 See GI Hernandez, ‘A Reluctant Guardian; The International Court of Justice and the Concept of ‘International Community’ (2012) British Yearbook of International Law 83. 456 See also WM Reisman, ‘“Case Specific Mandates” versus “Systemic Implications”. How should investment tribunals decide?’, Freshfield Lecture (2012), 29 Arb. Int’l 131 (2013). 457 See for Grotius’ philosophy more in particular nn 191 and 192 above. 458 It is strictly speaking not a different source of law: peremptory or mandatory norms or ius cogens may emerge in all sources of law other than party autonomy and are then likely to be an expression or implementation of fundamental principle.

206 Volume 1: The Emergence of the Modern Lex Mercatoria increasingly propelled non-treaty law to the fore in terms of fundamental principle, usually sustained by customary law.459 References to natural law are here commonly avoided, but the approach is Grotian all the same in which connection the distinction between principle and rule also becomes moot.460 There are a number of clarifications to be made. First because of the absence of the sovereignty obsession with law formation and application, in transnational commercial and financial law, there may be more room for fundamental principle that is not statist but truly ius cogens. It is, as explained in section 1.4.14 below, the basis of the whole lex mercatoria. It also determines the hierarchy of the different legal sources and distinguishes in this connection between fundamental and general principles, the first ones being of a foundational or of a supplementary and policy (or correcting) nature, see section 1.4.6 below, the latter being a lower source of law in their own right, see section 1.4.7 below. By the very nature of things, this methodology also distinguishes between treaty law and party autonomy, the latter being in private law separate from state intervention (even if in public international law there may also be law between states agreed beyond formal treaty law, resulting from joint or even unilateral declarations). Law is here meant to be objective and its sources are autonomous in the sense that they are not dependent on the consent or acknowledgement of participants including governments except for the law deriving from party autonomy. The analogy with public international law further suggests an absence of system thinking, scepticism about codification in the traditional civil law sense, and a proclivity towards the common law approach to law finding which is fact or need oriented, further propelled by the English language as lingua franca of the international marketplace. This approach is not then predominantly intellectual and does not emphasise nor seeks completeness on the norm side. It remains basically pragmatic, meaning that it solves disputes and produces adequate and convincing results and is less concerned about propelling the law in a more coherent and intellectual fashion. There is no binding precedent and no fixation with consistency.

1.4.6. Autonomous Legal Sources: Fundamental Principle In sections 1.2 and 1.3 above, it was discussed how modern civil and common law developed, became nationalistic, and gradually pushed out other non-statist sources of law, at least at the domestic level, although always less, or less fundamentally so in commercial law in common law countries, notably customary law, whilst the common law did not adhere to the same extent to the supremacy of legislative or statist texts. It shows its more pragmatic and less intellectual style.461 The various legal sources were identified earlier as fundamental and general principle, custom and practice, legislation (or treaty law), and party autonomy. These sources and their progressive limitation in the civil law and their handling in the common law of the English variety will be more broadly considered and summarised in the next sections, as well as their reappearance, first 459 In Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo), Nov 30 2010, ICJ Reports, 639 (2010), the ICJ found at least that the ‘prohibition of inhuman and degrading treatment is among the rules of general international law which are binding on States in all circumstances, even apart from treaty commitments’, see further also A Bianchi, ‘Human Rights and the Magic of Jus Cogens’ (2008) 19 EJIL 491 and R Nieto-Navia, ‘International Peremptory Norms (Ius Cogens) and International Humanitarian Law’, in Man’s Inhumanity to Man: Essays on International Law in Honour of Antonbio Cassese (The Hague, 2003), 540. 460 See also Gulf of Maine, ICJ Reports 246, 288 (1984), but moral principle must be expressed in legal form, see South West Africa, ICJ Reports, 6, 34 (1966), although it remains a matter of appreciation when this has happened. 461 See further also the discussion in s 1.4.1 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 207 in interpretation everywhere, but in law formation more particularly in commerce and finance, clearer, it is submitted, at the transnational level. Here it was proposed to use the analogy with and method of public international law, see the previous section. But it was also posited that these notions and legal sources always come back in times of renewal, even purely nationally. Except for legislation (or treaty law), they are of a bottom-up (or immanent) rather than top-down law creation nature and this may now be shown to be so especially in legal transnationalisation where statutory law of the domestic kind (or even treaty law) is no longer able adequately to cover international business transactions, more particularly the operation of the international flows themselves in view of their size and nature as was already shown several times.462 Local laws were never written for that kind of activity either and treaty law is unlikely to catch up. It was also said earlier that there is now also the increasing inability to spot these activities clearly from a territorial or domestic closest contacts’ perspective in an ever more virtual world of rights and obligations. It was submitted in this connection that it is no longer rational to assume that breaking international transactions up into domestic pieces in this manner in the hope that the sum total of the domestic laws covering them still makes sense for the international transaction as a whole. As we shall see in sections 1.4.14 and 3.1.2 below, in transnational commercial and financial law, fundamental rights or principles are the foundation of all immanent law that follows and need therefore to be discussed first. They may not be many but they are the basis of the whole system of the modern lex mercatoria. Fundamental principle in the manner of constitutive or foundational law denotes in private law in this context first the force of the given word (pacta sunt servanda) or other conduct when detrimentally relied upon as the basis of contract law, but also the obligation to repair damage improperly caused as foundation of the law of torts, the notion of private ownership as the foundation of property law, and the duty to give back what is not owned as foundation of the law of unjust enrichment. One thus sees the essence of the law of obligations, property, and unjust enrichment. Fundamental principle of this nature are then also the source of supplementation of and guidance for the other applicable sources of law, which implement these principles, in international commerce and finance especially custom and practices, but sometimes also treaty law, general principle, and more especially party autonomy. One may think in this connection in particular of the challenge of newer needs and facilities in the globalised legal order like transactional and payment finality, set-off and netting mechanisms, and the operation of custodial holding systems of investment securities, all largely proprietary matters as we shall see.463 In appropriate cases, fundamental principle may then also correct whatever other rules are or become applicable from these other sources of law when applied to particular fact situations. Notions of due process, non-discrimination, and protection of weaker parties spring to mind. There may be some overlap, and corrections may in appropriate cases also come more directly from public order and public policy considerations, like in competition and environmental issues and possibly in matters of financial stability on the scale we may now require it. In such cases, public policy amplifies or corrects international transactions or the operations of the international flows by developing and imposing transnational minimum standards, although it was also already said that when in conduct and effect international transactions still come demonstrably onshore in a particular country, there will still be local minimum standards also, which may compete with other domestic governmental interests affecting the international transaction or

462 See further also the discussion in s 1.1.1 above. 463 See also s 1.1.6 above.

208 Volume 1: The Emergence of the Modern Lex Mercatoria indeed with the international minimum standards themselves. This is the area of competition of different or parallel legal orders in a particular territory which will be discussed further below in section 1.5.8 and revisited in Volume 2, section 1.2.4 for international arbitration. Domestically, constitutional principle or the horizontal effect of human rights or fundamental freedoms are now increasingly seen as expressions of these fundamental principles and start to supplement and correct the positive law. It is a more limited but increasingly important area of legal amplification, often connected with more fundamental rule of law notions. There is likely to be overlap with public order and policy requirements or foundational or other fundamental principle.464 Importantly, especially within the EU, correcting principle of this nature is increasingly invoked covering both public and private law. It may be a harbinger, model for and recognition of the operation of fundamental principle more broadly and of international minimum standards as public order and policy requirements at the same time and then may cover more ground. It raises issues of supremacy and direct effect, of proportionality, and effectiveness in EU law and its promotion. Indeed, the EU in its ‘mini globalisation’ may provide here a special and prominent example of how transnational principle comes to the fore.465 The fact is, however, that globalisation and developing principle (and custom) in private law and the evolution of transnational minimum standards go well beyond the EU, where there is formally only limited power of private law formation. It can in its generality only derive from the exigencies of the promotion of the internal market under Article 114 TFEU, see also section 1.4.21 below.466 The terminology used in this connection is often not stable, not even within the EU, and terms like ‘constitutionalisation’ and ‘horizontal effect of human rights’ may be used alternatively in this connection. The term ‘general principle’ is also used and not then distinguished from more fundamental principle. In practice, EU law focusses especially on equality of treatment, avoidance of abuse, and probably better treatment of weaker parties, including issues of age and gender. The term ‘constitutionalisation’ suggests in this connection an extension of constitutional protections into private law, relevant especially where power is exercised over others. Again, that is then sometimes also called ‘horizontal effect’, associated foremost with the operation of human rights and fundamental freedoms. In the EU, it shows a close connection with the Human Rights Charter and suggests a distinct shift away from legal positivism and black letter attitudes even in private law.467

464 See in particular John Temple Lang, ‘Emerging European Principles of Private Law’ in U Bernitz, X Grousot and F Schulyok (eds), General Principles of EU Law and European Private Law 65 (Alphen aan den Rijn, 2013) 96. 465 See also T Tridemas, ‘Horizontal Effect of General Principles’ in U Bernitz, X Grousot and F Schulyok (eds), General Principles of EU Law and European Private Law (Alphen aan den Rijn, 2013) 213. 466 See earlier T Koopmans, ‘General Principles of Law in European National Systems of Law: A Comparative View’ in U Berrnitz and J Nergelius (eds), General Principles of European Community Law 25 (Leiden, 2000), see further also Y Adar and P Siena, ‘Principles versus Rules in the Emerging European Contract Law’ in J Rutgers and P Sirena (eds), Rules and Principles in European Contract Law (Mortsel, 2015) 7. Cf also A von Bogdandy, ‘Common Principles for a Plurality of Orders: A Study on Public Authority in the European Legal Area’ (2014) 12(4) Int J Const L 980, 1004. 467 Also domestically, at least the impact of human rights on private law formation has been noted in Europe, especially in the German Constitutional Court, thus advancing also locally the constitutionalisation of private law. See for this concept in Germany CW Canaris, Grundrechte und Privatrecht, eine Zwischenbilanz [Human rights and private law, an interim evaluation] (Berlin, 1998) and in England, D Friedmann and D Barak-Erez (eds), Human Rights in Private Law (Oxford, 2001) and H Collins, ‘Utility and Rights in Common Law Reasoning: Rebalancing Private Law through Constitutionalization’, LSE Law Dept, Law and Society Working Paper Series, 2nd issue, September 2007. See further, JHH Weiler and G de Burca (eds), The Worlds of European Constitutionalism (Cambridge, 2011).

Volume 1: The Emergence of the Modern Lex Mercatoria 209 In fact, this search for deeper principle operates at several levels and may then also impact (vertically) on and limit the power of states locally to intervene through mandatory rules in private law (and the EU within its limited private law formation powers). Respect for the freedom of contract and to own property are here especially important for business. In the EU, Article 16 of the EU Charter might then also be so invoked and explained. On the other hand, human rights notions of this nature may even facilitate state intervention but in limited areas, for example in consumers’ and workers’ protection, the respect of age and gender. More indirectly, it may present a way of introducing basic values in all actions between private parties. Again, for smaller parties there may in this connection be a need for special protection against discrimination or where power is exerted against them, especially in situations of dependence. Proportionality or fit for purpose issues may, however, also figure. Then there are procedural or due process protections, especially in state courts, potentially now arising also in international arbitrations. The horizontal effect of human rights or similar protection principles against superiors or in matters of age and gender are then an indirect channel through which fundamental principle emerges in private dealings, supplementing the more foundational principles as implemented in the other sources of law and they may be so identified. Yet in the perceptions of many, these protections remain limited to areas where human rights or similar protections are at stake and then only to the extent expressed in national instruments thus still remaining state dependent (or in the EU alternatively expressed in the Human Rights Charter as laid down by the Member States,468 assuming these rights are sufficiently specific).469 They might, however, also arise from other state laws (and in the EU from EU Regulations, or sometimes conceivably even from Directives).470 The protection of small investors on the basis of a horizontal application of licensing conditions concerning financial intermediaries may spring to mind, or, in environmental

468 The EU Human Rights Charter is not supposed to be directly relevant unless specific and it distinguishes in this connection sharply between rules and principles (Art 52). This was politics and the distinction may prove to be hardly sustainable. In fact, many rules are never much more than principles; it depends on the level of abstraction and intellectualisation which may be found in all rules of general application. As far as the EU Charter is concerned, exception is in any event made for principles that are further developed by ECJ case law or in legislation, which are then assumed to be unconditional and sufficiently precise. This concerns in particular the implementation and interpretation of EU laws but may also affect national private law between private parties in the context of the implementation or application of EU laws. 469 See in this connection in particular the principle of non-discrimination and equal pay for men and women already accepted in Case 43/75 Defrenne v Sabena I [1976] ICR 547 and further the cases quoted in n 478 below; see also Case C-426/11 Alemo-Heron v Parkwood ECJ 18 July 2013, in which safeguards of employees after a takeover under national law were not believed, however, to go beyond that of EU Directive 2001/23 concerning the protection of employees in view of the freedom to conduct business, precisely because of Art 16 of the Charter. In Case C-470/12 Pohotovost v Vasuta, ECJ 27 February 2014, the Charter (Arts 38 and 47 on consumer protection) was held not to expand the rights of consumers under Directive 1993/13. Here the specific trumped the more general. 470 Note, however, that EU Directives have constantly been held not to have horizontal effect (therefore between private parties) unless they make it specific or are themselves the expression of more fundamental principle, which might then be invoked more directly. This was already determined in respect of Directive 2000/78 dealing with age discrimination, a line of thinking repeated in Case C-282/10 Maribel Dominguez v Centre Informatique (2011). Note in this connection also that the TFEU only gives a direct action between private parties in Art 101 when there is a violation of competition law; see also Joined Cases C-295/04–298/04 Manfredi/Lloyd/Adriatico. It does not, however, rule out either the horizontal effect of human rights or the impact of the EU Charter (Art 52(5) in particular). See for the operation of these Directives in finance (notably MiFID II) and their private law impact and effect, more in particular also Vol 6, s 3.7.19.

210 Volume 1: The Emergence of the Modern Lex Mercatoria law, the horizontal application of the imposition of standards by governments on companies.471 Such a private law protection or a direct cause of action for private parties damaged in finance by the behaviour of their brokers against the licensing rules imposed upon them pursuant to EU rules or by environmental behaviour of companies in violation of EU regulatory standards must, however, still be deemed exceptional472 and is not normally considered implied unless perhaps it rises indeed to the level of violation of fundamental principle. Again, the real question is then whether these fundamental principles are self-executing or still depend for their effect on some doctrine of horizontal interpretation of state (or, in Europe, EU) laws or constitutionalisation, meaning that states or statist action/recognition of such principles still has the last word. It should also be considered in this connection to what extent the so-called horizontal effect (sometimes) of (state recognised) human rights and perhaps of some more fundamental regulatory standards, therefore their effect between private parties, is in truth simply one way of revival of secular natural law notions in a state positivist environment although still limited thereby, see the discussion in section 1.4.16 below. Clearly, some need presents itself wherever power is exerted, also between private parties. Again, in the positivist approach, this protection still remains dependent on states for its expression, be it in the tortured way of horizontal effect of human rights or constitutionalisation. All the rest is then still considered soft law, not clear when and how it might apply although when it does the effects could be very hard indeed.473 However introduced, in appropriate cases fundamental principle leads to a redistribution of risk, identifiable especially in consumer dealings and labour contracts or in brokerage of smaller investors. This also allows for relationship thinking meaning that the type of private parties and the nature of their relationship may need to be considered as well. It follows in particular that human rights protections, especially when considered in respect of weaker parties, including issues of age and gender, may be less relevant in professional dealings. However, the imposition by contract of unconscionable reparation duties or damage provisions could still be offensive to them. The introduction of overriding values or principles in terms of elementary justice, social peace and efficiency considerations, or of public order and public policy notions in the law’s application in the interpretation, supplementation or even derogation of contract and other terms is of a similar nature and may then also go well beyond these more limited protections, although

471 Thus horizontal effect may still arise in a non-constitutional or non-human rights context and particularly ensues when, on the basis of EU or implementing legislation directed at Member States, private rights and obligation are newly created, varied or extinguished. It may not then strictly speaking be an issue of correction on the basis of fundamental or general principles, although they may still surface in the interpretation of the r elevant rules, rather a question of original law formation on the basis of these principles, cf Case 36/74 Walrave v Wielerbonden [1974] ECR 1405, 12 December 1974; Case 13/76 Dona v Mantero [1976] ECR 1333, 14 July 1976; and Case 94/07 Raccanelli v Max Planck Gesellschaft [2008] ECR I-5939 (at N 50), 17 July 2008. In appropriate cases, there is also horizontal effect of the four basic EU freedoms, traditionally especially the free movement of persons and services when limited through the intervention of private parties or organisations, see Case C-281/98 Angonese v Cassa di Ripsparmio di Bolzano, 6 June 2000, now increasingly also in the case of hindrance of the free movement of goods by private parties with reference to Art 34 TFEU, see Case C-171/11 Fra.bo v DVGW, 12 July 2012. The truly interesting question is whether in due course EU law will intervene and promote the mutual recognition of proprietary rights rather than have them function as a bar to the free movement of (encumbered) assets; see also the discussion in Vol 4, s 1.8.2. This case law may also be seen in the light of the extension of the Court’s case law following Case C-33/76 Rewe v Landwirtschaftskammer für das Saarland [1976] ECR 1989, disallowing, even in the absence of precise EU rules, restrictive rules of national laws if affecting private law aspects such as damage calculations, statutes of limitation, interest charges, res judicata effect, etc, when these national laws obstruct the effectiveness of EU principle, enforcing notably the basic EU freedoms of movement of goods, services, capital, information and persons. 472 See for a discussion of this issue of horizontal effect of financial licence conditions in particular Vol 6, s 3.7.19. 473 See for this issue of soft law also n 560 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 211 again, conceivably different in professional dealings. All denote a more open, not state-dependent framework of rights and obligations and may at the transnational level even lead to the identification of transnational minimum standards of protection.474 This is so to speak the next step in this development when fundamental principle comes into its own, not merely as foundational principle therefore, but also as a self-executing autonomous and independent source of law to supplement or correct the otherwise applicable law (or lex mercatoria in international business) in sufficiently pressing cases. Quite apart from these newer correcting notions, it was said before that even domestically fundamental principle reappeared in the interpretation of private law well before notions of horizontal effect of human rights or constitutionalisation took hold. The notion of good faith shows that in contract law in many countries and is then often believed itself a fundamental principle and thus mandatory. There is here overlap with the normative or liberal interpretation technique of statutory law, even public policy, see also Volume 3, section 1.1.7, which may reintroduce in particular more fundamental notions of fairness, proportionality or balance. It is true that there is still an argument in this connection that invoking good faith itself is acceptable only when it is especially authorised by prevailing codified contract law (see sections 157 and 242 BGB in Germany and Articles 1134 and 1135 CC (old) in France for the interpretation and supplementation of contracts), but, at least in Germany, it became clear that good faith was a source of law that could also impact on company law or in the exertion of proprietary rights, as good morals or gute Sitten (bonnes mœurs in France), even in the law of secured transactions, which had no special provisions for it. The new Dutch law (Article 3.12 CC) refers in this connection to generally recognised legal principles, the convictions residing in the (Netherlands) population at large and the social and personal interests involved. Probably more fundamental principle is meant here and then denotes a more open system of legal normativity, even though still of a national character. But perhaps more importantly, it will be pointed out in Volume 3, section 1.3.3, that at least in professional dealings good faith stands more properly for a liberal interpretation technique and then equates with the normative interpretation technique, and may reintroduce in that connection much more than fundamental principle, especially custom and general principle as other sources of law and is then not merely the opposite of bad faith and not necessarily a behavioural standard or mandatory either, it would be only so if it reintroduces fundamental principle. At least in the US professional parties may set standards for good faith under section 1-302 UCC as we have seen, assuming that they are not manifestly unreasonable in their effect.475 It shows clearly that good faith is not always a superior mandatory standard and may be subject to variation by contract, at least in professional dealings. In Europe, in the EU, the DCFR 2008/9, which figured as some model for a European private law codification (see section 1.4.21 below and Volume 3, section 1.6 and Volume 4, section 1.11), pays some lip service in this connection to (the horizontal effect of) human rights notions in Article I-1:102(b), but again only to the extent they derive from national instruments. This is a reflection of the modern notion of constitutionalisation, but only as a matter of interpretation of the text. The DCFR does not seem to be aware of other fundamental principles and of their status as an autonomous source of law except for the prohibition of discrimination, expressly mentioned in Articles II-2:101ff but here only in the context of contract law. The notion of good faith remains also limited (see Article I-1:102 DCFR and Volume 3, section 1.3.10) still rather

474 See also the discussion in s 1.2.13 above. 475 For the multifaceted nature of good faith, see also the text at n 86 above.

212 Volume 1: The Emergence of the Modern Lex Mercatoria as the opposite of bad faith. In fact, it is clear from the Introduction, rewritten in 2009, that the DCFR does not know quite what to do with fundamental principle, except to point out that many provisions of the DCFR are expressions of them. Beyond (the horizontal effect of) human rights (contained in national instruments) and the discrimination prohibition, which are closely related, they are not given a specific mention in the text, let alone an autonomous status, although good faith is (wrongly in its generality) given mandatory force and thus considered fundamental in this narrow substantive sense.476 In contract law, there is a curious provision in the DCFR (Articles II-7:301ff), which talks about ‘infringement’ of fundamental principle or mandatory law and voids contracts if infringing a principle recognised as fundamental in the laws of the Member States. It may mean no more than deference to local public policies and public order requirements which is also accepted in this book for the modern lex mercatoria. It should be noted, however, that as far as the DCFR is concerned, state law is here still the conduit, there are no principles beyond it and Article II-7:301 would still appear to be based on this idea, meaning that there are no common EU values in this regard, but apparently in the mind of the drafters of then DCFR we can have a common EU private law.477 There is considerable tension here. However this may be, it was already said that the DCFR generally conforms to the traditional codification ethos and its formal and positivist attitudes and beliefs in black-letter rule emanating from the state or states, in this case the EU, to be systematically applied as a matter of technique which still does not allow for extraneous considerations, see also sections 1.4.17 and 1.4.18 below. Again, only values which it formulates or recognises are relevant. Although the DCFR in its 2009 Introduction leaves the ultimate decision to others and only demonstrates that much fundamental principle is reflected in the text, it still represents the view that private law is not a carrier of values except to the extent expressly formulated by or otherwise derived from the laws of Member States or the EU itself. It can as such serve any regime as states or state like authority remain in charge of the value system. There is no bottom-up concept of social values and a notion that they emerge in a free and vibrant society all the time and are to be respected in any civil society even if states in the public interest might try to push back. The DCFR thus becomes the paradise of the black-letter specialist and rule fetishist. In that world all principle, even fundamental principle, is at best soft law until it finds expression in statist texts. This is in vivid contrast, however, to what EU case law itself has been doing as already noted. Culminating for the time being in Mangold in 2005478 and in Audiolux in 2009,479 the ECJ has made it clear that there are overarching fundamental principles that operate and are enforceable at the same level as the Founding Treaties and need not be written. In Audiolux, the Advocate General called them ‘deeply rooted principles without which a civilised society would

476 See also the discussion in s 1.4.16 below. 477 It contrasts with Art II-7:302, which refers to contracts infringing mandatory laws and appears to depend more directly on the applicable national laws including those of Member States, but the article does not determine how this national law is found and even then only concerns itself with the effects (presumably in the EU). 478 Case C-144/04 Werner Mangold v Rüdiger Helm [2005] ECR I-19981, upholding as fundamental principle the concept of non-discrimination on the basis of age, seen here as an elaboration of the anti-discrimination principle of Art 19 TFEU. This has become a check on private law legislation, although it may not (yet) be invoked directly between private parties, but see further also Case C-555/07 Seda Kucukdeveci/Swedex [2010] IRLR 346, which assumes a subjective right with reference to Art 21 (1) of the Charter on Human Rights. Non-discrimination according to nationality is no less fundamental, see Case 115/08 Land Oberösterreich v Cez [2009] ECR I-10265 and also applies in private dealings under EU laws, in this case directly. See further the discussion in n 411 above. 479 Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA a.o [2009] ECR I-9823.

Volume 1: The Emergence of the Modern Lex Mercatoria 213 not exist’.480 They are generally effective and therefore also underlie private law.481 They may even introduce private law notions, not only of damages, in the determination and enforcement of public law obligations.482 Horizontal effect or constitutional principle expressed in statist texts is not then the sole carrier of them into private law but fundamental principles expressing societal values are given an immediate effect on the interpretation (and supplementation for those who make a distinction here) of all legal EU texts, even the highest, and their implementation in Member States. There may then also be a corrective function of such superior principle affecting the legality of all these instruments which will then often be related to the legitimate and effective operation of EU law or to fundamental principle and public order standards operating at that level. They may even affect the treaty texts if conflicting with them as we have seen. New causes of action may follow483 while procedurally there may also be further immanent protections of this nature. But there is also a role in law formation proper. Even within the EU, this may put the whole process of the formation and operation of private law at that level in a different light and its statist form is then no longer axiomatic. That would also affect the DCFR if it ever became operational. It is surprising that the drafters did not seem to be aware of these developments, but the DCFR cannot ignore them even where not reflected in its text. That would also have applied to its sales carve-out in the CESL: see Volume 3, section 1.6, rightly now withdrawn. The conclusion is that there is fundamental principle in the EU that goes well beyond these texts and also suggests the relevance of transnational minimum standards of behaviour if they can be detected in a bigger world. In this connection, it can only be repeated that these principles may not be EU specific, that its private law to the extent developed by it does not operate in isolation at the EU level but in business concerns the international flows which are not solely controlled by it but are subject to the forces of globalisation, the creation of a competing transnational commercial and financial legal order, and the operation of the modern lex mercatoria between professional parties operating in these flows and that order. Arguably, the foundational or balancing fundamental principles do not derive from EU law at all, at best they are recognised and further developed by it. Within the EU, this is often considered competence creep,484 potentially more so transnationally, but is the unavoidable consequence of the EU not operating in a vacuum. There is no ‘fortress Europe’ to be maintained here either unless public order requirements of an EU nature impose themselves in respect of transactions that in conduct or effect come demonstrably on shore in the EU.

480 See para 40 of the Opinion of AG Trstenjak. 481 See also D Kraus, ‘Die Anwendung allgemeiner Grundsätze des Gemeinschaftsrechts in Privatrechtsbeziehungen’ in K Riesenhuber (ed), Entwicklungen nicht-legislatorischer Rechtsangleichung im Europäischen Privatrecht (Berlin, 2008) 54, and A Metzger, ‘Allgemeine Rechtsgrundsätze in Europa’ (2011) 75 Rabels Z 845. 482 Notably in instances of failure of Member States to incorporate in a timely manner EU Directives at the expense of private parties, see Joined Cases C-6/90 and 9/90 Francovich and Others v Italy [1991] ECR I-5357; see also n 409 above. These types of cases respond to the need to make EU law fully operative or effective, sometimes believed to be another fundamental principle by itself. In Case C-47/07 Masdar v Commission [2008] ECR I-9761, an action for unjust enrichment against the EU was created on the basis of similar reasoning. 483 This may be relevant especially if the EU gives rights without a clear enforcement mechanism. The principle of effective judicial protection is then believed to be implied and gives access to the local courts, see Case 222/84 Johnson v Chief Constable of the Royal Ulster Constabulary [1986] ECR 1651. This right to access to the local courts in these circumstances is now enshrined in Art 47(1) of the EU Human Rights Charter. Local rules of procedure may be adapted accordingly. 484 See S Prechal, ‘Competence Creep and General Principles of Law’ (2010) 3 Review of European Adminstrative Law 8. Kukukdeveci v Swedex GmbH & Co KG, Case C-550/07 ECR I-365 (2010) is often cited in this connection.

214 Volume 1: The Emergence of the Modern Lex Mercatoria In the US, under the due process and similar clauses in the federal Constitution, the impact of fundamental principle has long been clearer, in private law as well, at least in the elaboration and application of procedural and conflicts of laws rules. There is also the all-pervading reach of the Bill of Rights as positive law, not as mere ideals. In civil society, it is submitted, fundamental principles of a foundational or constitutive nature or as public order amplification or corrections support the whole structure of private law, now in transnational dealings reviving particularly in the modern lex mercatoria (supplemented by transnational minimum standards) where it may be seen by all who wish to see it. Other sources such as general principle, custom and party autonomy are no less autonomous although not fully independent as they can elaborate on but not avoid, confine or overrule these fundamental principles. They cannot, for example, abolish contract and property altogether, but they can formulate structure and fill in the details, also subject to the evolving transnational minimum standards of public policy. The drafters of the DCFR should have understood this but never considered their method. An old-fashioned codification ethos and technique was unquestioningly and uncritically adopted. But a proper consideration of methodology should have come first and would have required the authors better to understand, appreciate, and evaluate other sources of immanent law formation, above all the role and impact of fundamental principle operating in the EU.

1.4.7. Autonomous Legal Sources: General Principles In the previous section, fundamental principle was demonstrated to be the superior source of all immanent private law. General principle should be distinguished485 and is based primarily on an analysis of the answers or alternatives modern domestic legal systems may present in the elaboration of this law. It highlights in particular what may be found in more advanced countries,486 but it may also relate to rationality, utility and common sense more directly. Grotius referred to it as part of the ius gentium, or the changeable law. It is as such part of the modern transnational private law or new lex mercatoria. Common law, always having been wary of generalisations, especially in England, is not much given to general principle as has already been noted. One may recall William Blake’s well-known dictum that ‘to generalise is to be an idiot’. Even civil law codifications only accept general principles if they underlay its texts although others could never be entirely ignored. Again, general principle is better known in public international law and mentioned in Article 38(1) of the Statute of the International Court of Justice as a source of law relying on those principles recognised by civilised nations, see section 1.4.5 above. In foreign investment law, general principle also tended to be referred to in these terms in investment or concession agreements.487 In modern times, the 485 See also J Basedow, ‘The Court of Justice and Private Law: Vacillations, General Principles and the Architecture of the European Judiciary’ (2010) 3 European Review of Private Law 443, 461, noting correctly that not all general principles ascertained by the ECJ are of fundamental significance. 486 See for the aims of comparative law more particularly the discussion in s 1.5.7 below. cf in this connection also the collection of the Center for Transnational Law Cologne: Trans-Lex.org Principles with Commentary, March 2012, 5th edn August 2019, which at first contained 130 principles and rules of transnational law with commentary, much expanded in later editions. There is no clear distinction, however, between fundamental and general principle and no hierarchy, see also n 440 above. Also, there is no distinction between consumer and other dealings, but the collection is nevertheless of interest. 487 See Lord Asquith of Bishopstone, who appears to have been the first one (in 1951) to refer in this connection to ‘the application of principles rooted in the good sense and common practice of the generality of civilised nations’— a sort of ‘modern law of nature’, see Award in the Matter of an Arbitration between Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi, reported in (1952) 1 ICLQ 247, and (1951) 18 International Law Reports 144.

Volume 1: The Emergence of the Modern Lex Mercatoria 215 reference to and meaning of ‘civilised nations’ is in this connection transformed but in commercial and financial law we probably still mean here the more advanced or sophisticated countries. It may also be of interest in this connection that the construction contract of the Channel Tunnel provided that it was to be governed by ‘the principles common to both English law and French law, and in the absence of such common principles by such general principles of international trade law as have been applied by national and international tribunals’.488 In the transnational commercial and financial legal order as a newly emerging order, elaborated in section 1.5 below, one would indeed expect an attitude to problem solving that is less encumbered by the past even when borrowing concepts from domestic laws in a comparative search. The key is better solutions from more highly developed law or more up-to-date legal sources. In this book, comparative legal studies are therefore not used for their own sake but first and foremost to search for a newer normativity that enlightens at the transnational level unless public order requirements militate against it, which requirements, however, may themselves be transnationalised as transnational minimum standards of behaviour—as already mentioned several times before and as will be further discussed in section 1.5.8 below. It has been noted in this connection that it must also be considered what makes better sense or works better in the particular legal order it concerns, in this case the transnational commercial and financial legal order. Here the search for general principle leaves the domestic scene and comparative law behind, and may acquire a more universal utilitarian impetus. Importantly and as already mentioned in section 1.4.6 above, in the case law of the ECJ there are also ‘borrowings’ of private law concepts in the nature of general principle,489 such as the notion of contract and of good faith, of force majeure and change of circumstances, the notion of tort and causality in that context, of unjust enrichment, of property, of abuse of rights, see further also the notion that interest may have to be paid as damages, although it is likely that these concepts acquire special features in an EU public administrative law context where the ECJ often develops them autonomously, as for example in the administrative contract, the administrative tort, and so on. That formula was taken up in oil concessions later, therefore as a matter of contractual choice of law. Thus, in oil concessions references to the law of all civilised nations used not to be uncommon, although now probably considered offensive to the oil-producing country in question. Under ad hoc exploration agreements with Libya, the arbitrations that eventually also decided on the nationalisation issues were to be governed by the ‘principles of the law of Libya common to the principles of international law and in the absence of such common principles then by and in accordance with the general principles of law, including such of these principles as may have been applied by international tribunals’: Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v The Government of the Libyan Arab Republic (1979) 4 Yearbook Commercial Arbitration 177, 181. Especially in the oil and gas industry there were many similar clauses. Thus, the Aminoil Concession Agreement of 1979 made reference to the law of the parties ‘determined by the Tribunal, having regard to the quality of the parties, the transnational character of their relations and the principles of law and practice prevailing in the modern world’: Kuwait v Aminoil, reprinted in (1982) 21 International Legal Materials 976, 980. 488 Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334, 347. 489 See also text at n 482 above. For the interaction in comparative law especially at EU level, see K Lenaerts, ‘Interlocking Legal Orders in the European Union and Comparative Law’ (2003) 52 ICLQ 873, in which the nature of legal orders itself was not further explored and was in essence perceived as statist, but the emphasis was put on common denominators in the law of Member States as normative guidance for the ECJ, in which connection the reference in Art 288(2) of the Treaty (now Art 340(2) TFEU) referring to ‘general principles common to the laws of the Member States’ for contractual liability of the Union was noted, not so far elaborated in a clear body of case law but it reinforced at least notions of non-contractual liability under EU law in respect of national and Community public authorities; see eg Joined Cases 83/76 and 94/76, 4/77, 15/77 and 40/77 HNL and Others v Council and Commission [1978] ECR 1209. A common vision of Member States may also underlie state liability for non- implementation of community law; see Joined Cases C-6/90 and C-9/90 Francovich and Others [1991] ECR I-5357. Note that only Art 101 TFEU gives a direct action between private parties (for violation of competition laws).

216 Volume 1: The Emergence of the Modern Lex Mercatoria Guidance may then be sought from administrative law principle as much as from private law. Again, it is submitted that this would also affect the DCFR if it were ever to become law. It may still pretend to one coherent system, but following present ECJ case law, general principle would likely operate besides it as an autonomous other source of law which it could not ignore or declare irrelevant.490 It would become more in particular clear in interpretation and supplementation.

1.4.8. Autonomous Legal Sources: Custom and Practices In the context of the search for autonomous sources of law in the transnational business sphere, the notion of custom and practices491 needs to be considered more profoundly and specifically as it is potentially a major factor in international commerce and finance and a basic founding block. From the outset it should be emphasised that there is a difference between: (a) custom operating as a separate, autonomous source of law, both in contract and property (although in appropriate cases still subject to relevant public order and public policy considerations or perhaps even an objective requirement of reasonableness); (b) custom referred to in codifications or statutes when it does not operate autonomously but by licence of the relevant statute only; and (c) custom (or usages/practices) operating as an implied contractual term, when it operates by virtue of contract law or the parties’ intent492 (which in codification countries itself may not be independent either but depends on code authorisation). In the latter case, the rules are basically contractual and would have no meaning outside it.493 This is hardly custom in the proper sense. The same applies when it is statutory. 490 In s 1.4.6 above, reference was also made to Art II.-7:301ff DCFR, which appears to maintain a notion of fundamental principle distilled from the laws of the Member States. Thus general principle is sometimes also relied upon in the text of the DCFR itself. 491 The idea that customs are old-fashioned, atavistic and representative of primitive law is here utterly rejected (see also the text at nn 499 and 512 below) as well as the notion that the force of custom depends on long-serving usage. As we shall see, they may change overnight if the course of business changes, are as such a prime expression of legal dynamism, and basic to the operation of all legal systems, see JH Dalhuisen, ‘Custom and its Revival in Transnational Private Law’ (2008) 18 Duke Journal of Comparative and International Law 339. No distinction is here made with practices which are often considered more changeable and then substantially contractual. 492 This concept is fluid, however. It is not uncommon for custom as an implied condition of a contract to move from party intent to objective law. This has happened, for example, to the concept of good faith, which in England remains largely an implied condition, while in Germany and the Netherlands it now constitutes an objective norm (or in business more truly a liberal interpretation facility). Conflicts rules in contract law were for a long time also considered implied terms until it was found no longer appropriate that their status (and thereby the applicable law) was dependent on the parties’ intent, notably an issue in property law. These rules then also became accepted as objective norms, indeed more like custom. It is a strange feature of private international law that otherwise adheres so much to formal positive law concepts contained in national legislation. The reverse may also happen: confidentiality has long been considered an essential feature of arbitrations, so much so that it was often not even mentioned in arbitration statutes or rules, but its status as an objective (customary) norm to be respected by all is increasingly reduced to at best an implied condition and it is possibly now necessary to insert an express term in the arbitration clause for parties still to be able to rely on it. Thus arbitrations remain private but not necessarily confidential any longer, to start in situations where public policy issues are considered. It might yet be different in alternative dispute resolution (ADR) proceedings such as mediation, see also s 3.2.4 below. 493 It should thus be clear from the above that not all custom is legally the same or even relevant and it should be considered that some customs are no more than behavioural patterns, habits without legal significance, for example the canons of politeness and social intercourse. Others may acquire some legal effect but can still be unilaterally abandoned by giving notice to the other party. If, for example, a broker normally gives certain commission discounts, clients may come to expect them, but they prevail only until the broker unilaterally (but explicitly) amends the terms unless the habit becomes an industry practice when a legally enforceable rule may be the result

Volume 1: The Emergence of the Modern Lex Mercatoria 217 Importantly in this connection, custom may also operate as presumption. Thus at least in the international commercial sphere, typical legal capacity limitations derived from domestic law, even that of the residence of the party concerned, may be increasingly ignored especially in the case of legal entities, although purely domestically they may still remain of the greatest importance. This was shown in the cases concerning swaps entered into with municipal authorities in the UK in Hazell v London Borough of Hammersmith and Fulham and Others [1991] 1 All ER 545 (per Lord Ackner). Thus, in international commercial matters, these local aspects of capacity, but also of illegality, nullity and collapse of title or voidable title, might well become less relevant. Again, in international trade, the support of its flows may be considered a more important consideration in this regard and may underlie these presumptions of capacity and legality, at least between professionals in the business sphere as a matter of its customary law. It may also go to asset liquidity and to the important issue of transnational and payment finality where transnational custom as presumption may be particularly active as we shall also see. From the outset, it must again be noted that there is often great confusion about what custom is or what constitutes it and how and when it operates, particular in non-contractual situations, therefore as an independent source of law, which may even be mandatory. The working definition often used for custom proper as an autonomous source of law is a practice which is universal in the trade or a relevant segment thereof and can as such not be unilaterally withdrawn or changed except if it is in its very nature. Rather it requires an industry shift or the other party’s consent to be set aside in an individual case (again unless the custom is mandatory when it cannot be set aside at all as it might be in property matters including negotiable instruments and some other situations, like those of set-off and netting). Custom is not then to be fundamentally distinguished from usages or practices, although it is not uncommon to reserve the latter terms for implied contractual conditions, which is notably also the approach of the CISG and the DCFR, but it may be misleading. The unfortunate consequence is that custom is then often confined to merely a contractual (interpretation) issue. In sales in particular, that has also to do with the confusion in common law that sales are largely a contractual phenomenon, whilst their true objective is in fact proprietary, the transfer of title, to which the contractual aspects are subordinate. It is relevant in this connection that the CISG in Article 4 makes it clear that it does not deal with custom and property issues. Although in truth this reduces the Convention’s importance greatly, it follows that practices to the extent relevant are then indeed essentially contractual, see Article 9, but that should not confuse. Custom proper is quite different and more comprehensive. It is important in this connection that Section 1-103 UCC refers to custom more specifically, as we shall see, whilst later on in Section 1-303 it distinguishes practices as contractual, and indeed easier subject to adjustment, and they should not be confused. It follows that, although immanent law, custom proper as an autonomous source of law is not contractual and is hard law by its very nature, not different therefore from the other sources of law including legislation. It means that it must be applied by judges or arbitrators if its conditions of applicability are met and when properly pleaded and proven. That was indeed the position on the European Continent at least until the nineteenth century, but it was also the original position only to be set aside by mutual consent. If in the meantime in the particular instance the concession was specially relied upon, it may still be a matter of contract law, not custom or practice although not all reliance suggests or creates a contractual relationship either. This may be so regarding many habits in the sense that participants may signal their withdrawal when the otherwise applicable law would start to prevail and is then quite different from custom proper, which can be set aside only when both parties agree as all legal default rules (unless the custom itself implies otherwise) and even then only if these customs are not mandatory as they might be in property law, as we shall see, especially in negotiable instruments, or in the law of set-off and netting as these are not issues at the free disposition of the parties.

218 Volume 1: The Emergence of the Modern Lex Mercatoria in the common law.494 It did not therefore depend on special government or state sanction, either in statute or treaty, or on contract, but spoke for itself.495 Again, Section 1-103 UCC is clear and Article 4 CISG still leaves room for it. As we have seen, the nineteenth-century civil law of the codification became in principle hostile to custom as an independent source of law. Caught up in the codification ethos and sovereignty notions, custom started to suffer as all other sources of law (except statute) did. This affected the status of international custom all the more as it was not even national. Similar considerations also started to affect the status and legitimacy of custom as a source of public international law (CIL). It may be repeated in this connection that the earlier ius commune had been friendly following the Justinian Digest, but even then, it had been concerned with priority in the case of conflict (see section 1.2.5 above) where in Northern France (the area of the droit coutumier) precedence was given to local laws, but this was not the view in Germany and Italy, except for city laws in trade and commerce, which remained, however, narrowly interpreted if at all conflicting with the Roman law which did not cover these newer structures. The codifications of the French and German variety both gravitated towards and were ultimately an expression of exclusive statism, and as such monopolised law formation as we have seen.496 Custom was affected, 494 See for older authors, n 38 above and for a more recent analysis of English case law concerning custom R Thomas, ‘The Significance of Commercial Customs, Usages, and Practices in the Resolution of Commercial Disputers’ in M Goldby and L Mistelis (eds), The Role of Arbitration in Shipping Law (Oxford, 2016) 11, see further also D Saidov, ‘Trade Usages in International Sales Law’ in D Saidov (ed), Research Handbook on International and Comparative Law of Sale of Goods (Cheltenham, 2019). It shows the continuing modern struggle in particular in the English courts with the concept of custom, its nature and operation in the common law, its often more limited acceptance as an independent source of law, and its characterisation (mostly) as some sort of contract law or at best soft law, in which connection again reference may be made to Art 9 of the 1980 Vienna Convention on the International Sale of Goods, which is then often considered comprehensive, see text at n 505 below, and believed to track English law even though the Convention itself distinguished in this connection in its Arts 4 and 9 between practices which were presumed to be implied contractual terms and customs which were not covered by the Convention. But even in England customs are also important in property law (bills of lading, promissory notes, etc) and are then hardly contractual. Nevertheless, English authors commonly tend to stop at the contractual characterisation, see MG Bridge, The International Sale of Goods 4th edn (Oxford, 2017) 10.60; E McKendrik, Goode on Commercial Law 5th edn (London, 2017), 1.21; and L Graffi, ‘Remarks on Trade Usages and Business Practices in International Sales Law’ (2011) 29 JL Commerce 273. Custom becomes then largely a contract interpretation issue, mistakenly so, it is submitted. Further confusion may result from the proposition that domestic contract laws had their origin in that kind of customary law, which then declined in importance, see S Bainbridge, ‘Trade Usages in International Sales of Goods: An Analysis of the 1964 and 1980 Sales Conventions’ (1984) 24 Virg Journal of International Law 619, 623; J Coetzee, ‘The Role and Function of Trade Usage in Modern International Sales Law’ (2015) 20 Unif LR 2. For modern English law there are three important cases: Kum v Wah Tat Bank Ltd [1971] 1 Lloyd’s Rep 439 (PC, per Lord Devlin, Liverpool City Council v Irwin [1977] AC 239 per Lord Wilberforce, and Teheran-Europe Co Ltd v St Belton (Tractors) Ltd [1968] 2QB 545 per Lord Denning. They leave many doubts as to the legal status of customary commercial law in England. Although in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 394 per Lord Lloyd, it was said that in the field of commercial law the custom of merchants has always been a fruitful source of law, it remains seriously obscure what its true status now is in England. So is its role in appropriate cases as part of the modern lex mercatoria and its relationship in such cases to the common law if claimed to be also applicable, cf. R Thomas supra p 14 who notes it but does not elaborate, so also D Saidov above. It may, however, still be said that at least in commercial law, there continues to be room for custom in England as an independent source of law. Again, in the US the situation is acknowledged to be accommodating as reflected in s 1-103 UCC, see also JH Levie, ‘Trade Usage and Custom under the Common Law and the UCC’ (1965) NYU LR 1101. 495 If we still wish to talk about a rule of recognition, that rule is not then statist either, but will be another kind of rule in the legal order in which the custom operates and may in the transnational commercial and financial legal order itself be customary or an expression of its public order. 496 Indeed, the main author of the French Civil Code, Portalis, considered the abolition of local custom to be one of the great achievements of the Code, see FA Fenet, Recueil complet des travaux préparatoires du Code Civil

Volume 1: The Emergence of the Modern Lex Mercatoria 219 and at least in private law it became ignored unless statutes specifically referred to it.497 That was provided mainly in matters of contract interpretation where custom normally figured beside good faith notions in this respect: see French Code Civil Article 1135 (old); and the German BGB section 157.498 Custom’s role as an independent source of law was in fact hardly discussed any longer and its status in the rest of the private law, especially in property law, was unclear, but since legal positivism started to catch the eye towards the middle of the nineteenth century, the struggle concerning custom’s status as an independent source of law came more into the open, especially when in legal positivism the notion shifted from the study of bottom-up law formation and inductive reasoning to a state-infested concept of law creation and black-letter law conceptualism, see the discussion in section 1.4.17 below. It was already noted that the common law remained friendlier towards custom, at least in commerce and finance, see also section 1.3.1 above, even if its status particularly in England was obscured outside contract law, although the common law itself was often explained as law of immemorial usage. Similarly, Roman law had been considered a higher form of custom in the ius commune, as we have also seen. Again, in England, the status of custom in a narrower sense became uncertain, although less so in commerce and finance, also caught up as it was in sovereignty ideas which affected international custom even more, although in the literature it was also rubbished as being primitive and atavistic,499 which in business it hardly is (quite the opposite). In the meantime, commercial law and practice as well as its courts had already been subsumed in the common (Paris, 1827) xcii–xciii, see n 259 above. In Roman law, on the other hand, custom functioned as source of law at the same level as legislation, Inst 1.1.2 and D 1.3.31. It could even overrule the written law, the idea being that custom was rational law, D 1.3.39, C 8.52.1.2 but it had to be demonstrated by a form of community consensus and was as such considered participatory. In the ius commune, some believed custom to be the unexpressed will of the sovereign, but most, like Bartolus, saw it as a creation of the community, see text following n 208 above. 497 The former Dutch Civil Code (in force until 1992) in Art 3 of its General Provisions was specific in this policy and expressed it clearly, but even then it was sometimes still thought that the force of custom was ultimately decided by a higher rule, as indeed the validity of the code was, see P Scholten, Asser Algemeen deel, 2nd edn (Groningen 1934) 131. One source of law could not itself wipe out another. At most it could postpone or subordinate itself (which is uncommon). Instances of a special statutory reference to custom could still be found in the French Law of 13 June 1866 concerning commercial usages, and the Law of 19 July 1928 concerning the relevance of usages in the settlement of employment disputes, see Y Loussouarn, ‘The Relative Importance of Legislation, Custom, Doctrine, and Precedent in French Law’ (1958) 18 Louisiana Law Review 235. In Germany, s 346 HGB, which refers to custom in commercial transactions, is also such a provision but is often viewed as no more than an elaboration of s 157 of the German BGB, which allows references to good faith and custom in contractual interpretation only by statutory licence. See for more recent literature in civil law countries in law and economics mode, F Parisi, ‘Spontaneous Emergence of Law: customary law’ in B Bouckaert et al (eds), Encyclopedia of Law and Economics Vol 5 (2000), cf also Amital Aviram, ‘A Paradox of Spontaneous Formation: The Formation of Private Legal Systems’ (2004) 22 YLPR 1 and W Kerber, “Institutional Change in Globalization: Transnational Commercial Law from an Evolutionary Economic Perspective’ (2008) 9 German LJ 411. 498 As it is now mostly accepted that such good faith notions may in pressing cases also be used to adapt the contract, when they become absolutely mandatory, eg to protect weaker parties, it is conceivable that in the normative interpretation method custom may sometimes play a similar corrective role as s 157 BGB in Germany clearly suggests. Although parties may normally deviate from it when the clear provisions of the agreement prevail, this may not then be effective, custom in this instance having become absolutely mandatory, see also nn 493 above and 506 below. The new Dutch Civil Code in Art 6.2 always gives good faith a leading role and allows it to overrule not only the wording of the contract, but also the effect of custom and equally of statutes impacting on a contract. This is a unique approach, so far not followed elsewhere. It confirms that notions of good faith can be absolutely mandatory, certainly when they appeal to more fundamental principles of protection, but so may be custom that could similarly protect. 499 Even in more modern times this remains the view of HLA Hart, The Concept of the Law, 2nd edn (Oxford, 1994) 95, 106.

220 Volume 1: The Emergence of the Modern Lex Mercatoria law and its judicial system (see section 1.1.3 above) while the impact of custom at least in England was further reduced by applying the rule of precedent to it so that a finding of custom tended to deprive this law at the same time of the flexibility and adjusting facility that is its very essence.500 Common law judges may thus be forced to distinguish cases more aggressively in commercial disputes in order to overcome the restraints of precedent although some greater dynamism in the development of commercial customary law in this manner appears to have been accepted. It became clear that in these circumstances, in Europe, both domestically and transnationally, in civil and in common law, it proved easier to accept the force of custom, at least in contract, on the basis of an implied contractual term (especially in England)501 or otherwise (in civil law) only when codes or statutes made a specific reference to it. At least in civil law, that preserved the idea that the statute or code (and its system) always remained superior and the ultimate source of all private law and that domestic law remained superior in this area too. Thus, custom is in England now often seen as an implied contractual condition,502 although this posed, as already mentioned, the question whether it can also operate outside contract law especially in proprietary matters and issues of set-off and netting. Although in the ambivalence towards custom in England there is more room for it in commerce and finance, again it is not certain how much,503 especially when it is international. The consequence is that in the international markets in London common law of the English type is dominant, not international market practice, and the modern lex mercatoria as threatening force often derided for uncertainty, but if it wants to emphasise its status as international marketplace this may not be any longer advantageous even if this nationalism has so far benefitted the London legal profession enormously. It has already been noted that custom figuring as implied contractual condition is in fact not custom proper. To repeat, the UCC in the US makes it clear in its section 1-103 that custom, particularly if also law merchant, is favoured as an independent source of law while providing that the Code is to be interpreted liberally in order to permit the continued expansion of commercial practice through custom, usage, and agreement between the parties while ‘unless displaced by the particular provisions of the Code, the principles of law and equity including the law merchant … supplement its provisions’. Custom is here not defined but its overriding importance in commercial law is made plain and accepted. Implicitly the notion of one single systematic body of national law is here then also abandoned. It may be closer to the older common law position. The UCC otherwise avoids the term ‘custom’, and refers to the ‘course of dealing’ or ‘usage of trade’, at least in the context of the interpretation and supplementation of agreements for the sale of goods, therefore in contractual matters, see sections 1-303, 2-202(a) and 2-208 UCC. They may not be invoked to contradict the express terms and would therefore appear never to be mandatory, even when they concern the contractual infrastructure or issues of contractual validity. It may be asked whether that could be correct. Clearly another form of custom operates here. 500 See s 1.3.1 above. 501 See Product Brokers Co Ltd v Olympia Oil & Cake Co Ltd [1916] 1 AC 314, 324. cf also General Insurance Corp v Forsakringaktiebolaget Fennia Patria [1983] QB 856. See for custom as an implied term in England, generally Custom and Usage, in 12(1) Halsbury’s Laws of England, 4th edn (1973) 601. 502 Connected with this idea is often that such practices must be reasonable, Produce Brokers Company, Ltd v Olympia Oil and Cake Co, 2 KB 296, 298, but it should be realised that that is for the relevant trade itself to determine and this reasonableness is therefore implied in all custom unless unreasonableness may become manifest in individual cases which in professional dealings cannot be the case in the near future. 503 See in England for the notion that practice is not law, and therefore international practice is also not international law, R Goode, ‘Rule, Practice, and Pragmatism in International Commercial Law’ (2005) 54 ICLQ 539, 549. This is in the positivist tradition. Legal rules are in this view always national or must at least be sanctioned by some national legal system to become effective. Although usages are here distinguished and their normative force accepted, it is less clear why and whether they can be international and autonomous in that sense. May they overrule national law in international cases?

Volume 1: The Emergence of the Modern Lex Mercatoria 221 Section 1-303 more in particular defines the usage of trade in this connection, and also contains a statement as to the role of the course of dealing. The usage of trade is ‘any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question’. It must be proven as fact. A course of dealing ‘is a sequence of previous conduct between parties to a particular transaction which is fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct’. This is therefore the implied contract version. It is further stated that a course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement.504 It is implied that unlike custom, in the approach of the UCC, these practices can adapt more quickly. Sensitivity to accepted practices and custom is particularly important in international trade. As already mentioned, the CISG avoids a reference to custom and makes clear in its Article 4 that it is not dealing with its status as such, which means that it leaves room for it, whatever its definition may be. It was already noted that in the common law tradition, it uses the terms ‘usages’ and ‘practices’ instead and follows the contractual implied term approach in respect of them in the context of contract law only, to which the Convention limits itself as we have seen.505 504 There is a more recent view in the US that the UCC was mistaken in its reliance on custom, course of dealing, course of performance and trade usages and their unifying force, see L Bernstein, ‘Private Commercial Law in the Cotton Industry: Creating Cooperation through Rules, Norms and Institutions’ (2001) 99 Michigan Law Review 1724; L Bernstein, ‘The Questionable Empirical Basis of Article 2’s Incorporation Strategy: A Preliminary Study’ (1999) 66 University of Chicago Law Review 710; L Bernstein, ‘Merchant Law in a Merchant Court: Rethinking the Code’s Search for Immanent Business Norms’ (1996) 144 University of Pennsylvania Law Review 1765. Here the view is presented that custom, course of dealing, trade usages and so on, are first often replaced by trade organisation rules that are more precise and dispute-avoiding and may therefore play a more fundamental role than the UCC and its reference to custom whenever a dispute arises. It is further argued that usages have validity mainly outside the area of litigation, therefore only in an environment in which co-operation is productive. In litigation, it is believed that parties want to rely on state law as end game. Intriguingly, it suggests that there are different legal standards when it comes to litigation, see also s 1.4.18 below. Clear rules are indeed needed in all areas where the emphasis is on finality as in payments and property transfers, see also nn 105 and 106 above. But custom and practices will support this too and may even go further and be more precise, especially in transnational dealings. As custom and practices may have important effects outside the area of contract, which in the above criticism seems to be the area primarily considered, it may be their major importance transnationally; again one may think of the proprietary status of Eurobond and of set-off and netting in the swap markets. In any event, to obtain in this manner greater legal clarity in certain areas of international business through statist laws or trade association rules, would not appear to condemn the use of custom and similar practices or affect their autonomous status. A main area of confusion appears to arise here from the fact that custom can be further elaborated by trade associations, for example internationally by the ICC. It is submitted that that does not detract from the resulting rules’ customary status, which could thus change overnight. These trade associations are merely spokespersons for their community and for transnational law in this sense, see also text at n 513 below. In modern American literature, notions of custom and industry practices and their meaning are receiving renewed attention. See RA Epstein, ‘Confusion About Custom: Disentangling Informal Custom from Standard Contractual Provisions’ (1999) 66 University of Chicago Law Review 821; RA Epstein, ‘Reflections on the Historical Origins and Economic Structure of the Law Merchant’ (2004) 5 Ch JIL 1; TJ Hooper, ‘The Theory of Custom in the Law of Tort’ (1992) 21 Journal of Legal Studies 1; D Charney, ‘The New Formalism in Contract’ (1999) 66 U Ch LR 842. 505 Thus according to Art 9(1), the parties are bound by ‘any usage to which they have agreed and by any practices that they have established between themselves’. This is simply an extension of the contract and intent principles. It implies a subjective approach to custom. Art 9(2) tries to undo some of the impact by accepting as an implied condition ‘all usages of which the parties knew or ought to have known and which in international trade are widely known to or regularly observed (but not merely widely operative) between the parties to contracts of the type involved in the particular trade concerned’.

222 Volume 1: The Emergence of the Modern Lex Mercatoria As a consequence, custom of this nature is subjective and obviously has to be proven, but must still be more than a course of action habitually followed, has to have consistency and regularity, and must be recognised as binding by the parties. All the same, it is not strictly speaking possible for the Vienna Convention or any other to be conclusive in this matter as the force of international usages and practices derives autonomously, as indeed the force of fundamental legal principle also does and even more basically. So much seems still to be recognised in Article 4 or may follow from it. Following the codification tradition, the DCFR is also ambivalent on the subject. In Article II.-1:104 it deals with usages and practices as implied contractual conditions, much as in the CISG. Here the application these usages must also be reasonable. What is reasonable is itself defined in Article I.-1:103 as being dependent on any relevant usage and practice, so that the regime becomes circular. In footnote 502 above it was already noted that there should not be an independent precondition or standard in this respect. It is the trade itself that determines this reasonableness and it must be deemed implied in all custom unless it is manifestly absent. In the interpretation sections, again, there is only a reference to usages and practices of this nature (Article II.-8:102(1)(c) and (f); see also Article II.-9: 101(1)). More important is that any other forms of custom are ignored and Article 4 CISG language is not repeated. Again, this confirms the codification ethos, but is defective at least where custom cannot be reduced to contract as in property, a subject now also covered by the DCFR but it appears to consider custom irrelevant in that context also. That tallies with its notion of a closed regime of proprietary rights and suspicion of market forces. See further Volume 4 sections 1.10ff. In its essence, custom is an expression of what is understood as normal or best practice in the group or community it concerns and of what is in that group perceived to be most desirable in terms of rationality, utility, common sense, and experience, not in the least also when situations change. As such, it is an expression of its routines and resort to custom is engrained in all law or societal behaviour and normativity as well as in its application. It may as such be relied upon by all unless there is adverse public order or public policy to be considered. It was already said that it means that they cannot unilaterally be eliminated for example, by given notice, even if not mandatory. Unless the custom itself dictates otherwise, deviation requires consent of the other party, just like the operation of any other default rule. Normality is the true legal default rule and custom is one of its major expressions. It suggests underlying party preferences even if it may result in proprietary effect. Being immanent law, it is in business not likely to be political, censorious, or society changing, its only objective being best to facilitate and support the needs of the community it serves given its own perceptions of reality in that context and needs. Being concerned with and an expression of its routines, customary law is dynamic in concept and can change overnight. It can never be fully captured, therefore neither can the lex mercatoria of which it is an important component, nor in fact can any other living law. It was said many times that this becomes abundantly clear in interpretation and supplementation of all law. Customs of this nature are often still localised or territorial and activity specific, although not necessarily operating along state borders, and are in commerce and finance foremost guided by efficiency or need. We notice the force of routines when we start living in new surroundings. Physically, finding our way takes time but we soon develop a routine which allows us to think about other things whilst getting to work. Efficiency is here as much result as cause and feeds on itself. Businesses operate along the line of similar routines. It is a question of organisation on which other participants become dependent; it is conduct and reliance, not necessarily limited to contract. Movable property structures, security interests, set-off and netting facilities, and the key issue of transactional and payment finality were already mentioned. For a good understanding, it is important to realise that such developing custom may in origin be entirely unilateral and often

Volume 1: The Emergence of the Modern Lex Mercatoria 223 is. Discounting was already mentioned. It may first be a mere concession, subsequently a normal practice developed between two parties who come to depend on it, still purely contractual, but when offered to others, all customers may start to rely. Thus reasonable (detrimental) reliance becomes the essence outside contract formation and application and the obligation may no longer be consensual even in contract. It becomes a community issue and is in business simply the way it chooses to operate and allocate the risk it and redistributes it in this connection. Standard terms provide a similar, though distinct, example. They embody an organisation technique of the operator on which others may come to rely (who may assume in the case of consumers or other weaker parties that these terms are reasonable which is in that case an important policy test). Although many commentators, as we have seen, still take the contractual route, contractualisation means in fact the end of legal pluralism and tends to lead to a nationalistic contract law approach to custom which is too narrow. The key is that a well-established view in the industry or general understanding does not make the subsequent obligations consensual or merely contractual. So, whatever participation one may have here in mind, it is not contractual per se and it then operates in a different way. What is to be determined is when industry standardisation which may start as a purely contractual phenomenon, reaches the status of customary law in the community concerned. As already mentioned, custom may then even result in mandatory law. Particularly in property law, there is nothing necessarily consensual or contractual in its progression and the way it imposes itself. Again, we may refer to the nature of the Eurobond as promissory note.506 It is so under transnational customary law; the way it is organised (with many additional terms on its back counter to the notion of negotiable instruments) could hardly qualify it as such under any national law, for example, the law of England or that of New York, even if mostly made applicable. It concerns in particular the effect on others who are not privy to the transaction. Indeed, parties have no power over property law and are not able to choose the most convenient proprietary structure as to them, but custom may establish it amongst the participants in a trade or industry. Markets have long accepted the nature of the Eurobond being a promissory note in that market as fact. This legitimacy is determined by the market’s needs and by efficiency, the Eurobond market having become in the meantime the largest capital market in the world. The same goes for the set-off and netting under the ISDA Master, also already mentioned, see further Volume 6, section 2.1.6. The law made applicable by the parties, mostly English or New York law, is not relevant here either, particularly relevant for the strong preferences that are so created—the priority in a distribution that results is not a matter at the free disposition of the parties because of its effect on others, here the common creditors, but customary law is in the community it concerns. In public international law we use here the term opinio iuris sive necessitatis. Whether a document of title or other proprietary or negotiable instrument or a preference or lien is created is then fact in the trade or community it concerns when commonly identified and relied upon as such, no matter how it may have come about—it is truly irrelevant.507 Again, it need not be contractual but it becomes law all the same, at least transnationally, although fact being law at the same time is for some still a somewhat strange result, perhaps less so the realisation that custom must always be pleaded and proven as fact in the ordinary courts or in an arbitration even though it is law, in truth not different from the pleading of foreign law in any domestic court and it is not strange at all. In the elaboration of the rules of contract, property, 506 See n 436 above and s 3.2.2 below. See also Vol 6, s 2.1.3. 507 It is not therefore strictly true as Lord Devlin, although clearly accepting the possibility of the creation of new negotiable or other proprietary instruments by custom (although not accepted in this case), said in Kum v Wah Tat Bank Ltd, see n 494 above, that custom is simply a rule which merchants make informally for their own conduct. This type of initiative is not an essential factor and may be absent or irrelevant.

224 Volume 1: The Emergence of the Modern Lex Mercatoria set-off or procedure (notably in international arbitrations), mandatory rules of custom may then also develop, as we have seen, which therefore could not be set aside even if both parties agreed. In contract, transnationally, this may even concern legal capacity and contractual validity or legality. In personal property, it may concern more particularly the re-transfer of ownership upon default or upon an invalid contract of sale. Concepts of finality may demand extra rules of this nature in terms of the independence of the transfer, protection of bona fide purchasers or purchasers in the ordinary course of business (for commoditised products) and reliance notions, also in the case of payments. International custom in particular, may increasingly oblige.508 Custom as presumption was mentioned in this connection also. It has already been noted that custom or trade or industry practices may also be found in industry-standard terms and may then be reflected in written compilations, often of private bodies such as the ICC (in Incoterms and the UCP).509 The International Capital Markets Association (ICMA) has already been mentioned for its role in the Eurobond market. ISDA was mentioned for swaps.510 There are other compilations: the Global Master Repurchase Agreement (GMRA), now supervised by ICMA, and the Global Master Securities Lending Agreement published by the International Securities Lending Association. Syndicated loan documentation is in many cases product of the Loan Market Association. Texts may be regularly updated by these bodies and therefore abruptly changed without undermining their basic status of custom or objective law. Thus, these industry bodies, if recognised as proper spokespersons for the relevant immanent legal order, may further elaborate on them without detracting from their customary status. In fact, it may be considered a maturing of the transnational legal order if it is able to create and sustain such bodies and facilities. Another point must also be made and was already mentioned in the above. Most authorities suggest a longer process for custom to emerge out of practice. This may be questioned. Technological advance in particular may eradicate or change an existing custom overnight and create a new routine. The business community itself may grasp this nettle and simply insist on its rules or law merchant to be applied and enforced regardless of other criteria unless relevant public policy forbids it. As we have seen, trade organisations may be of considerable help to formulate customary law of this nature and make it better known and verifiable in its progression. Again, a key modern insight is indeed that the formation of custom may not be a long process; custom of this nature is dynamic and may change instantly.511 In commerce and finance, it is the simple consequence of it following and sustaining the international flows and its practices, its basic nature being a reflection of ever-changing routines, often guided by utilitarian considerations and technical advance. In this connection, it should be repeated that custom in particular develops and provides guidance in terms of what reasonably needs to be done or is efficient or otherwise clearly desirable or to be expected. These rules are likely to exist because they work, are accepted, and can be identified.512 Again, trade associations like, for example, the ICMA in 508 See nn 105 and 106 above. 509 See also n 439 above. 510 See also ss 3.2.3 and 3.2.5 below. 511 See their fluid character, n 492 above. See for the notion of ‘instant customary law’ as a source of public international law, B Cheng, ‘United Nations Resolutions on Outer Space: “Instant” International Customary Law?’ (1964–65) Indian Journal of International Law 4–5. Modern game theory also shows that, in so-called information cascades when the benefit of predecessors’ actions is compelling, widespread imitation will follow immediately: see D Hirschleifer: ‘Social Influence, Fads and Information Cascades’ in M Tommasi and KI Ieruli (eds), The New Economics of Human Behaviour (Cambridge, 1995) 188. 512 That was Hart’s view of international law, see Hart (n 499) 227, 231, cf also n 491 above which, it would seem, could then also apply to private law custom, either domestically or transnationally, but see for Hart’s deprecating attitude to custom text at n 499 above, a remnant of Bentham and Austin.

Volume 1: The Emergence of the Modern Lex Mercatoria 225 the Eurobond market and the ICC for the Incoterms and UCP, may play an important role in moving these rules further forward,513 perhaps not much different from what judges also try to do in individual cases. These are key aspects of the operation of the international markets and it is somewhat hard to understand why, this being the case, the operation of legal custom and of custom creating forces is sometimes still flatly denied in modern writing.514 It has already been noted that they may even be mandatory, especially where the infrastructure of the law of contract and property is concerned. It means that these rules are not then at the free disposition of the parties. They may as such be closely related to, be supported by or denote an elaboration of fundamental principle or in other cases of (the transnational) public order or policy.515 A particular problem arises in respect of custom as an autonomous source of law in respect of judges’ and arbitrators’ powers to invoke it upon their own motion. It may follow from custom being such a source of law that at least judges in appropriate cases would have to accept and could invoke custom of this nature ex officio: ius curia novit is a well-known civil law maxim, but arbitrators in particular might still require elucidation by the party invoking it. It was already said that custom is law but must be pleaded as fact as all foreign law in national courts must also be. Thus parties in an arbitration will normally still have to plead it and prove it, except in areas where arbitrators have acquired autonomous powers, especially if the arbitration is international, see Volume 2, sections 1.1.10 and 1.2.5 below, while the question how far judges may invoke it autonomously, especially in respect of international or transnational custom, and how, may still be the subject of justified enquiry.516 Arbitrators would in any event be unwise to so invoke custom without inviting further argument by the parties.517 513 Private codification but also case law and arbitral awards are ways through which we can know this law and it has already been said that judges and perhaps even arbitrators may also fulfil here a spokesperson function, as does legal scholarship, but their formulations are only persuasive and cannot stultify this law, especially in terms of precedent. Their findings are primarily declaratory of the law so found and applied, in arbitrations pursuant to the pleadings of the parties which may not have been complete. It was alrady mentioned that private codifiers may move on more quickly although it may also be said that formulation of custom in this manner is not always an advantage and may deprive it of some of its nimbleness. This law, as any other, is in its nature not an ‘is’ but can be and often is an expression of fast-moving realities, especially in commerce and finance. 514 See for public international law, JL Goldsmith and EA Posner, ‘A Theory of Customary International Law’ (1999) 66 University of Chicago Law Review 1113, but cf for support in private law, HJ Berman and FJ Dasser, ‘The “New” Law and the “Old” Sources, Content and Legitimacy’ in TE Carbonneau (ed), Lex Mercatoria and Arbitration (New York, 1990) 21, 28. Note also that Lord Mansfield in Luke v Lyde, 97 Eng. Rep. 614, 618 (1759), thought that ‘mercantile law is not the law of a particular country but the law of all nations’. 515 Traditional theories on custom such as the one of FA Hayek, Law, Legislation and Liberty: Rules and Order, vol 1 (Chicago, IL, 1973) 35–54, 74–90, see further n 265 above, go largely as follows: effective custom evolves through the natural selection of rules and practices but may be guided by deliberate improvements on the part of the participants, legislatures (especially if called upon to help), courts, trade organisations, and others such as arbitrators. In modern law and economics, this discussion acquires another flavour as it goes to the existence and operation of immanent legal orders more generally and that may well be the better context in which now to consider custom. It concerns a more fact-finding approach. RD Cooter, ‘Structural Adjudication and the New Law Merchant’ (1994) 14 International Review of Law and Economics 215; ‘Decentralised Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant’ (1996) 144 University of Pennsylvania Law Review 1643, see also the discussion in s 1.5.5 below. It poses the key question of the tipping point: when does habit or routine become legally enforceable? Justified reliance has much to do with it, as we have seen, but again it is important to understand that this type of participation does not make the result merely contractual. 516 It was queried especially in BP v Lyban Arab Republic (1977) 53 ILR 279, 359, see also the discussion in Vol 2 ss 1.1.10 and 1.2.5 below concerning arbitrators’ status and powers in this connection in financial arbitrations. 517 See Vol 2, ss 1.1 3 and 1.1.10 below.

226 Volume 1: The Emergence of the Modern Lex Mercatoria There should be no surprises on this point in the award. This important aspect will not be discussed here any further.518

1.4.9. The Competition between Custom and Statutory or Treaty Law. The Issue of Desuetude and the Relevance of the Good Faith Notion As far as the effect of the autonomy of custom is concerned, in its own order, this customary law first overrules other directory private law, even if statutory, unless parties wish it to be otherwise in the area where they have power, that is in legal matters at their free disposition. It was already said that not all is directory or default rule, notably not property law or notions of set-off or netting and issues of transactional and payment finality; public policy or other mandatory law cannot be set aside either, although mandatory custom may still prevail, for example in property law. For the rest, (if merely directory) it is in the nature of custom that both parties would have to agree for it not to apply or to apply differently unless the relevant custom itself provides otherwise. Without such an agreement, custom is always the default rule and no single party can opt out on its own or insist on the default rule of the otherwise applicable law. A competing statutory default rule or such a rule formulated in case law would be of inferior status. Thus, unless custom is in the nature of a concession, like a price reduction, even if habitually given, no party can unilaterally withdraw. It would not be possible either if the other party relied on the discount in ongoing transactions but that is then more likely a matter of contract proper rather than of custom as explained in the previous section.519 It follows that statutory and treaty or case law concerning it cannot and does not replace custom of this nature unless this statutory or treaty law is mandatory, but even if relevant statutory or treaty law is, it may still become ineffective if the practice will not conform and contrary custom continues to be followed or develops. This is the issue of non-usus or desuetude, more especially relevant for regulation, therefore in situations where governments intend to guide.520 It usually means that the statutory measure is too far removed from present day reality to be capable of being or remaining effective, or was wishful political thinking in the first place. 518 It is the subject of Volume 2. Especially if the arbitrator is selected as an expert out of the peer group, his or her knowledge of the customs of the trade may be depended on and arguably nothing needs to be pleaded or proven. This is, however, a different type of dispute resolution, however, see Vol 2, s 1.1.4 below, not normal arbitration. It may be recalled in this connection that where dispute resolution depends entirely on knowledge of the peer group, eg concerning quality, resulting decisions are not based on law and are not normally considered arbitral awards in the more traditional sense either, even though of great importance in the commodity trade. They are often not reasoned either and, if international, may not be covered by the New York Convention. In ordinary international commercial arbitrations, reliance on the expertise of arbitrators is a dangerous position to take and would suggest leaving facts to their autonomous determination. The result risks not being an award in the traditional sense either. 519 Yet it might be wise all the same to introduce an anti-waiver provision in the contract, see also Omri BenShahar, ‘The Tentative Case Against Flexibility in Commercial Law’ (1999) 66 University of Chicago Law Review 781. 520 Grotius noted that custom may supersede statutory law, Inleidinge I, 2.15 and 21, II, 39.20 and III 32,7. In I, 2.22 it is noted that the customary Roman law acquired the status of the written law and was then equated with statutory law. The issue of desuetude remains unresolved in the US Supreme Court, see Poe v Ulman 367 US 497 (1960). A famous example has presented itself in the US where the Alien Tort Statute (ATS) of 1789 was entirely forgotten but revived by the federal courts in respect of foreign human rights violation in Filartiga v Pena-Irala 630 F2d 876 (2nd Cir 1980) followed by the Supreme Court in Sosa v Alvarez-Machain 542 US 692 (2004). The revival in this manner of an old statute whose objective was never entirely clear is problematic and more recent case law has sought to limit its reach, see Kioble v Royal Dutch Petroleum Co 133 SCt 1659 (2013).

Volume 1: The Emergence of the Modern Lex Mercatoria 227 In other words, a mandatory statutory rule that cannot (or can no longer) or will not stick becomes ineffective even if it was meant to be mandatory. There is a lot of this in regulatory law but also in criminal reform legislation. But there may also be in property law, in the sense that market structures survive or newer ones reassert themselves; one may think of floating charges and finance sales, mostly helped by financial structuring in the margin of contract law. It is obviously a delicate issue but then also relevant in private law formation and may be conducive especially to the operation of new transnational proprietary rights or set-off facilities, whatever statutory texts including treaty law says. The written law even as a mandatory statutory system may thus be overturned by practices that move forward in more realistic ways. Again, public policy expressed in terms of support for such systems is not immune either and other participatory law, like custom, may have a higher claim to application. In this connection, it may also be observed that at the transnational level, custom is not territorial while treaty law as a form of statutory law is. It was already said that as such treaty law does not have a strong claim to being transnational at all. If it is more generally accepted it may reflect general principle but is then lower than customary law. Another issue here is whether mandatory good faith notions can prevail, in a particular instance reflecting higher fundamental principle, but see for the Dutch attitude footnote 498 above and for the requirement of reasonableness footnote 502 above, where it was always deemed to be implied. Again, it assumes that good faith or even reasonableness is always a higher norm, but it was earlier submitted, see section 1.4.3 above, that in truth in commerce and finance good faith rather means a liberal interpretation technique under which all other sources of law revive so that fundamental principle may even eclipse mandatory custom, but good faith itself does not then do so: it depends on the type of source of law it relies on in the interpretation of the contract or other type of legal relationship. In international transactions, it must further be considered in how far mandatory domestic laws are still relevant; they could only be to the extent the transaction comes demonstrably on shore in the country of the relevant law and is adverse to that country’s fundamental or public policy. In conclusion, it would seem that there are several questions that merit special attention in connection with custom: (a) is custom subjective in the sense that it only applies if implicitly made part of a contract and is therefore merely an implied term, subject further to the law applicable to that contract? (b) can it also be objective and an independent or autonomous source of law not only in contractual but also in non-contractual situations? c) is it based on regularity or is it a dynamic concept allowing change overnight in view of rapidly changing trade or financial patterns and practices, technology or taxation rules? (d) can it be propelled by trade organisations or even courts? (e) can it be invoked and applied by judges or arbitrators upon their own motion? (f) can it supersede statutory or treaty law, even if that law is mandatory, as a demonstration of non-usus of that law or desuetude? and (g) assuming it is in international transactions subject to international minimum (public order) standards, is it still subject to any domestic public order constraints, including local notions of good faith, or only to the extent these transactions still come demonstrably on shore, in conduct or effect, in a particular country?

1.4.10. Autonomous Legal Sources: Party Autonomy Party autonomy as an autonomous source of law is often associated with contract but it must be understood that it is also significant in property law, meaning the creation, operation and transfer of proprietary rights, which may have contract at their base but constitute different legal acts. It may best show in the formalities where delivery is required as a condition for title transfer; it is

228 Volume 1: The Emergence of the Modern Lex Mercatoria a bilateral act but it is not contractual, even if in Germany reference may be made in this connection to a real or property agreement.521 In contract itself, the concept can be most easily understood in terms of, and is then based on, the idea that the single word binds and forms the contract as a matter of fundamental principle, to be recognised (not created) by the positive law unless public order forbids it. It often raises further issues of will or parties’ intent, particularly in civil law, subsequently transforming in consensus as noted and as we shall see in Volume 3. In this book, the notion that the given word is binding requires a measure of investment or detrimental reliance by the other party for such party to have a cause of action under transnational law; see also section 1.1.6 above. This is redolent of the consideration requirement in common law and is considered here the true justification for the enforcement of the professional contract and/or for any action based on party autonomy in this sense at the transnational business level, further subject to relevant public policy and public order requirements of a domestic or increasingly transnational nature in terms of international minimum standards as mentioned. In a strong metaphor in France, Loysel, as early as 1607, had observed in this connection: ‘On lie les boeufs par les cornes et les hommes par les mots’ [‘One ties cattle by their horns and people by their words’].522 That was or had become the traditional French view. The text of Article 1354 of the French Code Civil (old) still reflected this: ‘Les Conventions légalement formées tiennent lieu de loi à ceux qui les ont faites’ [‘Agreements legally entered into are the law for those who have made them’] and suggests indeed the autonomy of the law that parties create.523 However, codification thinking also intruded here, and, in France too, freedom to contract is now often believed to depend on code authorisation, cf Article 1102 Cc (new) and also Article II.-1:102 DCFR. Party autonomy as some autonomous source of law nevertheless revived in France for international contracts. This became particularly relevant for the validity of gold clauses that were upheld in international contracts (but not in domestic French contracts) in the 1930s.524 Indeed, the longstanding relative popularity of the modern lex mercatoria in France may be seen in the light of the development in that country of the notion of the ‘international contract’ operating under its own transnationalised rules. It is said that in the 2016 revisions in France of contract law, party autonomy was as such reinforced. The concept of party autonomy as an autonomous source of law, at least at the transnational level, was in recent French case law also more dramatically underlined in that international arbitration clauses were considered autonomous and not anchored in any domestic law, hence the reason why an award being set aside in the country of the seat of the arbitration or origin of the award need not have an effect on recognition in France. This recognition is still a matter of French law, but not to be pre-empted by an annulment elsewhere under some domestic law (lex arbitri usually of the seat).525 Here the existence of an autonomous international arbitral order was accepted and the award was considered to be a decision in that order, albeit still 521 See Vol 4, s 1.4.6. 522 A Loysel, Institutions coutumières (1607). See, however, also the requirement of a beginning of performance at least in older French sales law, n 77 above. 523 In modern times, this basic principle has continued to find important support, see notably P Scholten, ‘Convenances vainquent loi’, Report Royal Netherlands Academy of Arts and Sciences (1930) 187, 3 Assembled Works 196, but party autonomy in contract and property is now mostly explained as government licence as we have seen. 524 See GR Delaume, Transnational Contracts (New York, 1989) 119. 525 See Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia available at www.courdecassation.fr/ jurisprudence, see n 27 above. See further P Pinsolle, ‘The Status of Vacated Awards in France: the Cour de Cassation Decision in Putrabali’ (2008) 24 Arbitration International 277.

Volume 1: The Emergence of the Modern Lex Mercatoria 229 subject to recognition in the relevant domestic legal orders under local laws (as may be varied by the 1958 New York Convention). It suggests that the arbitration clause and the powers of arbitrators are also founded in the international arbitral order, see n 135 above and further Volume 2, section 1.1.10.526 It is submitted that this international arbitral order is the same as the transnational commercial and financial legal order; see sections 1.5.1 and 1.5.4 below. It means, however, that strictly speaking, party autonomy does not stand alone but remains embedded in the legal order in which it operates and the fundamental principles and customs of that order. Transnationally it suggests, however, a more independent status than now may be assumed in civil law codification countries, where contracting became a licensed concept, the limitations potentially going far beyond what public order might have required. It was already mentioned several times that it may still be different in common law, an important reason being that the common law of contract itself derived from commercial law (as did the law of movable property). It is likely the reason why party autonomy remains a stronger concept in common law. The fact that internationally the contract is embedded in the transnational legal order may denote a similar respect for, recognition of, and attitude towards party autonomy, but also means that additional requirements for a contract’s validity under transnational law may be imposed: the requirement of a commencing of execution by the other party has already been mentioned as a question of investment and detrimental reliance to justify a cause of action. This may be seen as customary law. It is also subject to higher fundamental principle or other mandatory sources of law, discussed in the previous sections, and requirements of public order, although not, or not necessarily or no longer of a purely statist or national nature either, and, as we have seen, there may now also be transnational minimum standards of public policy and public order developing. It is clear that not everything goes, but this does not distract from the principle of contract being transnationally an autonomous source of law rather than some state licensed facility. Again, party autonomy in this sense may even enter proprietary laws concerning movable assets operating in the transnational legal order subject to stringent transactional and payment finality requirements; see section 1.1.6 above. It makes property law dynamic and an important risk management tool. The same applies to the set-off and netting concepts and the preferences they create. The special role of party autonomy in choosing the applicable law is another important aspect of the notion and its meaning, particularly within the modern lex mercatoria, which will be discussed in section 1.4.14 below. As we shall see, it can only apply in areas of the law at the free disposition of the parties, therefore only in areas where there are default rules operating, not therefore in respect of mandatory rules. It means, however, that all default law from other sources is eclipsed and replaced by the law of the country or indeed transnational law so chosen.

1.4.11. Autonomous Legal Sources: Treaty Law Treaty law is another source of law in an international context but a key feature is that it remains territorial in principle, applicable therefore only in the territories of Member States and is as such not truly transnational, although it was earlier suggested that if a large number of states participate, it may become general principle and acquire meaning also outside the group of Member States. If well done, it may also build on or clarify customary law which would further underpin

526 See for this discussion also what was said about delocalised arbitration in s 1.1.11 above and in Vol 2, ss 1.1.8 and 1.1.9 below and about the formation of legal orders in s 1.5.3 below.

230 Volume 1: The Emergence of the Modern Lex Mercatoria its claim to being part of transnational law and is here considered so in principle as it is counterintuitive to exclude it. Among legal positivists, on the other hand, there is still the opinion that only treaty law can truly be a source of autonomous transnational law, never mind its obvious territorial and nationalistic status.527 It builds on the notion that only states can make law, even private law, and that there are no other sources. The 1980 Vienna Convention on the International Sale of Goods (CISG) then figures probably as the most important example of this type of uniform substantive treaty law in the area of private law528 and is then mostly perceived as covering the field within its scope to the exclusion of other sources of law notwithstanding its Articles 4, 7, and 9, which would appear to leave its relationship to these other sources of law open or at least present no clear picture in this connection. In fact, in the absence of a higher norm, the CISG misses the authority to determine its own rank, see also the discussion in sections 1.4.8 above and 1.4.14 below. As previously mentioned in section 1.4.6 above, at EU level, treaty law translates into Regulations or Directives for the areas they cover, even though the latter do not achieve unity in the strict sense and still allow for different implementations in Member States; see further section 1.4.21 and section 2.3.2 below in which it will be shown that there are in private law several important EU company law and consumer law directives and in the area of finance the Settlement Finality and Collateral Directives and now more in particular also MiFID II in its private law consequences, see also Volume 6, section 3.7.19. As we shall see in section 1.4.20 below, UNCITRAL and UNIDROIT have proposed more of such texts in specific commercial and financial areas by way of treaty law, but they have on the whole met with little success. This is different from its Model Laws in international arbitration and international insolvency, which are not treaties and do not pretend to any formal legal status although they could still reflect general principle. In private law, in the EU, Regulations have been used particularly in the area of conflicts of laws—compare the Brussels I Regulation and Rome I in the areas of the Recognition and Enforcement of Judgments in Civil and Commercial Matters and the Law Applicable to Contractual Obligations respectively. So far Regulations have not been used to create substantive uniform private law and we are a long way from the DCFR ever being so adopted,529 although since October 2011, there has been a draft Regulation CESL for cross-border sales transactions, already

527 cf also eg, R Goode ‘Rule, Practice, and Pragmatism in International Commercial Law’ (2005) 54 ICLQ 539, where the rest is soft law or still national law like the modern lex mercatoria here seen as (contractual) practice without independent status and distinguished from customary law whose status also remains unclear, see also n 21 above. 528 The original idea of uniform sales laws dates from 1928 and came from UNIDROIT. They are associated with the name of the German Professor Ernst Rabel. A Diplomatic Conference concerning the uniform sales laws immediately followed the 7th Session of the Hague Conference in 1951, which had the conflicts Convention in the area of sales as one of its main topics. Many of the same persons became involved in both projects notwithstanding the considerable difference in approach. The Uniform Sales Laws were finally agreed in the Diplomatic Conference of 1964, which immediately preceded the 10th Session of the Hague Conference; see further also the discussion in s 1.4.20 below on the agents of international convergence in private law. 529 It raises important issues of EU jurisdiction in these matters, see s 1.4.21 below. Where the EU has no jurisdiction, Member States may still operate through treaty law as was indeed the original approach in the Brussels and Rome Conventions concerning respectively the Recognition and Enforcement of Judgments in Civil and Commercial Matters and the Law Applicable to Contractual Obligations, now both replaced by Regulations following the specific relevant change in the EU Treaty of Amsterdam in 1998 authorising this new departure but only in private international law formation not in matters of unification unless it can be tied to the operation of the internal market under Art 114 TFEU.

Volume 1: The Emergence of the Modern Lex Mercatoria 231 mentioned several times, quietly withdrawn, however, in 2014 (see Volume 3, section 1.6.13). Regulations are sometimes also used to implement Directives in the financial area, such as the Markets in Financial Instruments Directive (MiFID I and II) and the Prospectus Directives (see Volume 6, sections 3.5 and 3.7) and may in such cases have (some) private law effect. In the EU, the uniform law so created can only cover interstate or cross-border EU transactions as in the case of the CESL, but it is often broader and then intended to affect all transactions (see further section 2.3.2 below) although this raises even more urgently the question of EU legislative authority; see further the discussion in section 1.4.21 below. This is, nevertheless, also the ideal of the DCFR, but it should be realised that these EU efforts are not then transnationalisation of private law proper, but are still territorial statist interventions to create private law top down, in this case for the EU area as a whole. This method is without questioning still based on the nineteenth-century anthropomorphic model of codification, pushing out all other legal sources, the EU being considered one jurisdiction at least for this purpose and treated as if the EU were one state. Although the proposal for an EU sales law in the CESL was limited to cross-border transactions within the EU only, as just mentioned, it still eliminated the other sources of law—at least that was the attempt but it may again be asked whether the EU had that authority under its own Founding Treaties which do not deal with these matters. Whatever the view, there is nothing transnational in this law. In the case of CESL it became clear that this attitude did not inspire the necessary confidence in the business community. In fact, this community not recognising itself in the product is usually fatal for such projects. The CISG itself is an important example of a treaty that, although ratified by 88 states, is not accepted by the business community and mostly excluded. It is also relevant in this connection to consider why we have these texts for which no-one in the practice of the law was asking. They may only become relevant to the extent they manage to build on industry custom and practices or elaborate on general principle and acquire credibility in that manner. That was also true for CESL and even more for the DCFR. They are academic aspirations, in business mostly ill informed, often unworldly and generally unaware of the international marketplace which is then often considered suspect per definition. As we have seen, within the US, there has long been uniform private law among the various States—of which the UCC is the most important example. This uniformity is adopted for all transactions the subject matter of which is covered by these Uniform Laws, such as the sales of goods. This American uniform law, prepared by private groups in the American Law Institute (ALI), is neither federal law nor is it agreed between the various States of the union: see section 1.4.20 below. It is incorporated in State law, but in the absence of an agreement among the States, this incorporation remains unilateral to each State and allows for variations in the text, of which there are some even in respect of the UCC. That is the difference from EU Regulations or Directives. As far as agreed amendments are concerned, some States may also move more quickly than others so that further disparities emerge, even if only temporarily. There may also be differences in interpretation. Hence the continued importance of conflict of laws notions in the US regardless of uniform law. Nevertheless, in the US there is on the whole a positive attitude towards uniform State law, particularly towards the UCC, and judges seek uniformity in its interpretation even though the UCC itself does not demand it. It is noteworthy in this connection and can only be repeated that the UCC in the US explicitly recognises and favours the alternative sources of law even for purely intra-State transactions to operate besides it, notably custom (see its section 1-103). In this book, treaty law in the area of private law is accepted as part of the lex mercatoria even though it remains territorial and as such does not fit very well, but especially in respect of those treaties that have broad international following and substantially reflect commercial practices,

232 Volume 1: The Emergence of the Modern Lex Mercatoria of which there are only a few so far, it is more practical and also more intuitive to include them as one of the sources of transnational law. But it cannot then be avoided that it sits uneasily between transnational customary law and general principle and must find its place among the other sources of transnational law, therefore within the modern lex mercatoria and its hierarchy of legal sources, and may still be eclipsed, even if mandatory (which it is usually not so far), by fundamental principle and mandatory customary law or even mandatory general principle, see the discussion below in section 1.4.14. This could become particularly relevant if such treaty law were to deal with proprietary issues or set-off and netting or other aspects of transactional and payment finality or with assignments as in the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade, not so far entered into force.

1.4.12. Uniform (Treaty) Law and Private International Law Where substantive uniform law is developed to cover international transactions or other international legal relationships, there follows an approach to the applicable legal regime which is fundamentally different from the private international law or conflict of laws approach. It is often presented as a divide between uniform treaty law and private international law, although in the international flows it would be better to see it as a divide between the transnationalisation or lex mercatoria and its various legal sources and hierarchy between them on the one hand and the private international law approach on the other, which is based on the continuation of the application of domestic laws to the different aspects of an international transaction, split up as a consequence amongst various legal systems depending on the degree of contact with national laws, potentially different for contract, property, enforcement and public policy aspects. The uniform treaty law versus private international law debate dates from the time that all private law formation was still considered statist, hence the emphasis in this uniform law on treaty law as expression of the statist will. But there was a difference in so far that uniform law was meant to cover an international transaction as a whole to the extent it was taking place in Member States, while in the private international approach, if necessary, the international transaction was still split up in domestic parts in the hope that the sum total of the applicable different domestic laws still added up to some rational legal regime for the transaction or activity as a whole. To the extent represented by treaty law (sometimes also called ‘international private law’), this uniform substantive private law tries to formulate a joint set of norms, therefore the same rules between different countries for a particular activity taking place between them, as UNCITRAL (partially) did in the 1980 CISG for international sales and UNCITRAL and UNIDROIT have also done in other areas as we have seen already and shall see more in section 1.4.20 below. Again, if other sources of transnational law are also accepted as here proposed, uniform or transnational private law may also emerge from these other sources and treaty law is then only one of them and would have to find its place among them; see the discussion at the end of the previous section, resumed for the hierarchy in section 1.4.14 below. The private international law approach, on the other hand, relies at best on uniform conflict of laws rules as a conduit to the application of purely national laws only so that ultimately a domestic law always results as the most appropriate law to govern international transactions, if necessary, after splitting it up in domestic parts as we have seen. These conflict rules are in fact not international at all but are usually considered particular to each state, which in this way decides which foreign (domestic or national) rules its courts may recognise. They attempt to define and find closest connections between an international transaction and different countries and may present very different views as to what these are. As such,

Volume 1: The Emergence of the Modern Lex Mercatoria 233 they may differ considerably from country to country and from case to case. That is what uniform (treaty) law in this area tries to cure, no more. This will be discussed more extensively in Part II of this Volume. However, these conflicts rules or rules of private international law particular in principle to each country may themselves be made uniform internationally, normally also through treaty law. This is the remit of the Hague Conference; see again section 1.4.20 below. This Conference drafts uniform conflicts rules to be incorporated in treaties, which should be clearly distinguished from the just-mentioned uniform substantive (treaty) laws. In this connection, reference is sometimes also made to the voie directe as against the voie indirecte uniform approach in respect of treaty law applicable to international legal relationships of a private law nature. The voie directe approach then leads to the formulation of substantive uniform rules of private law by way of treaty to be incorporated in the domestic laws of the treaty states. Again, the 1980 CISG is its most important example. The voie indirecte approach, on the other hand, only leads to the formulation of uniform conflicts rules as a conduit in each Contracting State to reach the most appropriate domestic or national substantive rule. It unifies only conflict rules and makes them similar in all Contracting States. Uniform laws as part of the voie indirecte, notably the private international law Conventions of the Hague Conference, have been successful especially in the area of family law, but also managed to formulate treaty law in trusts and agency although in the latter areas with few ratifications. There is also one for sales.530 Note that these rules may lead to the application of a domestic law that is itself uniform law under applicable treaty law.531 Beyond the efforts of the Hague Conference in this respect, the EU has also been active and its 1980 Rome Convention on the Law Applicable to Contractual Obligations was one of the more successful conflicts Conventions in modern times, now succeeded (in amended form) by the 2008 EU Regulation in the same area. It covered not only sales but also other areas of contract law.532 To repeat, whatever the idea of uniformity in this area, only application of domestic law results in this manner, therefore no EU substantive law (except as to these conflict rules). The uniform substantive and conflict of laws approaches are conceptually mutually exclusive, and to the extent that both were embodied in treaty law from the 1950s onwards, they openly clashed when the Hague Conference at its seventh Session in 1951 and at its eighth Session in 1955 ultimately completed a private international law Convention on the Law Governing the International Sales of Goods at the same time as, in a separate Hague (diplomatic) Conference, the

530 The original idea for the project of uniform conflicts rules in the area of sales dated from the 6th Session of the Hague Conference in 1928 and is associated with the name of the French Professor Julliot de la Morandière. It led to a first draft in 1931. The Hague Conference produced a final text on the Law Governing the International Sale of Goods in 1955, updated in 1986. 531 In fact, conflicts of laws specialists prefer uniform law to come in only in this manner and not therefore to be applied directly to transnational transactions, see for further discussion s 2.3 below. It may be considered an extreme form of legal nationalism and is commonly not followed in these Uniform Law Conventions themselves. 532 As will be discussed more extensively in s 2.2.4 below, the evolution of the conflicts approach towards more substantive rules and principles of fairness and common sense may itself suggest a development towards substantive transnational standards which are result oriented, at least in the professional sphere. It was earlier said that expanding domestic concepts through liberal interpretation techniques to reach foreign situations in this manner would have been possible as a method of transnationalisation, not even then favoured, however, at present in civil law countries, nor indeed in England. The drawback is that each country would still have its own ‘transnational law’ and there would not be a true response to the forces of globalisation and the need to cover the international flows as flows through a single regime rather than cutting them up into domestic pieces assuming that closest connections with territories can still be found.

234 Volume 1: The Emergence of the Modern Lex Mercatoria Hague Uniform Sales Laws were being agreed, which were the predecessors of the CISG.533 The discussions continued thereafter, in the sense that the Hague Conventions on the uniform law of sales were succeeded in 1980 by the CISG as we have seen. The 1955 Hague Private International Law Convention on the Law Governing the International Sale of Goods was updated by a new text in 1986. Principles on the Choice of Law in International Commercial Contracts were issued by the Hague Conference in 2015. It is not meant to become a treaty text but rather serves the role of model law.

1.4.13. Domestic Laws as Autonomous Residual Source of Transnational Law It has been proposed before and will be argued in section 1.4.14 below534 that in the formative era of transnational private law, domestic law retains residual importance if the other sources of substantive transnational law do not yet provide the necessary solutions and may be found through the traditional conflicts of law rules. However, such domestic law then operates in the transnational legal order, is part of the modern lex mercatoria, must find its place and meaning therein, and will be adjusted accordingly, shorn in particular from local peculiarities. It means that domestic law applied in a domestic case may be different from its application in an international case even if there are no higher transnational laws available in the circumstances. The same applies when a domestic law is chosen by the parties in an international transaction, only relevant—it is often forgotten—in areas where the law is at their free disposition,535 which is notably not the case in proprietary matters (including assignments), set-off and netting, or in transactional and payment finality issues, nor indeed in matters of public policy, it was already mentioned several times. Such a choice of a domestic law then makes it also figure in the modern

533 Some of the animosity towards uniform substantive law at the time was apparent in an important contribution of Professor Kurt H Nadelmann, ‘The Uniform Law on the International Sale of Goods: A Conflict of Laws Imbroglio’ (1965) 74 Yale Law Journal 449, which also reproduced the negative opening statement on the uniform substantive law approach by the President of the Hague Conference at the time, Professor J Offerhaus from Amsterdam (at the 10th Session of 1964). In the Vienna Convention, there is an attempt at reconciling both approaches, which resulted in a substantial step backwards from a transnationalist voie directe perspective. While the Hague Sales Convention in the areas it covered more logically only relied on its general principles (Art 17) for its interpretation and supplementation, the later Vienna Convention retreated from this transnational approach and allowed in areas not expressly settled by it (but always within its scope, see Art 4) the applicability of private international law rules (Art 7(2)). The result was therefore ultimately the application of a domestic law even in areas which the Convention generally covers, although only after consideration of the general principles on which it is based (which are largely unclear, as we shall see, and there is no longer any pretence at completeness of the uniform law in areas it covers), apparently without further consideration of the international context of the sale, which is only mentioned in Art 7(1) in the context of interpretation; see for a discussion and critique more particularly Vol 3, ss 2.3.6–7. 534 See also JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619, cf also P Durand-Barthrez, ‘The “Governing Law” Clause: Legal and Economic Consequences of the Choice of Law in International Contracts’ (2012) 5 IBLJ 505. 535 It will be discussed in Vol 3 s 2.3.10 whether parties can choose transnational law or the modern lex mercatoria. This was deleted in the text of the EU Rome I Regulation, but the possibility was retained in Preamble 13 and also in Art 3 of the 2015 Hague Principles on Choice of Law in International Commercial Contracts stating: ‘The law chosen by the parties may be the rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise’, see further also the discussion in the next section.

Volume 1: The Emergence of the Modern Lex Mercatoria 235 lex mercatoria. Its application is superseded by higher rules to the extent existing. Yet it may supersede all lower rules, therefore notably also the directory or default rules of the modern lex mercatoria itself as already mentioned and as we shall see more in particular in the next section.

1.4.14. The Hierarchy of the Sources of Law in Transnational Commercial and Financial Law or the Modern Lex Mercatoria. The Meaning of the Choice of a Domestic Law by the Parties If one assumes an independent transnational legal order in which international commercial and financial transactions or perhaps all professional dealings are or may be operating (see section 1.1.10 above) and which is increasingly detached from domestic legal orders (see section 1.5.1 below), the question becomes what law prevails in that order and how it must or can be found. In the above it has been submitted that this new law or modern lex mercatoria is not one system but essentially built on the well-known traditional legal sources, still recognised in public international law, which is here used as the model or by analogy, see section 1.4.5 above, therefore on fundamental and general principle, on custom or industry practices, on party autonomy, and in some areas on uniform treaty laws. As mentioned in the previous section, this law may still use private international law rules pointing to a domestic legal system if no transnational law can be found, local law remaining in this approach the residual rule, but it will then become part of transnational law itself and will be transformed to play its role accordingly and is no longer purely domestic. As we have also seen and will be discussed further below, this is in principle no different when parties choose a domestic law to apply to their international transaction. When different sources of law potentially apply, an important issue is to determine the hierarchy between them,536 which in this book is considered the essence of the modern lex mercatoria besides the identification of its sources.537 These sources, although autonomous in principle, are connected and often build on each other and subsequently allow substantive rules to develop further. Details of these will be discussed more extensively in part III of this Volume, for contract and property, further elaborated in Volumes 3 and 4, summarised in section 1.1.6 above. As already noted several times, it should also be considered in this connection that the modern lex mercatoria may still be corrected by relevant public policy or public order requirements, either of a national or transnational nature, to be further discussed in section 1.5.8 below, although some of these public policy or public order concerns may also be reflected in fundamental principle as part of the modern lex mercatoria as a matter of private law notably in terms of evolving societal values.

536 This is increasingly understood for the modern lex mercatoria, see eg M Heidemann, Transnational Commercial Law (London, 2019), 27ff, although there are still differences as to how this hierarchy is best expressed and operates. 537 See further also s 3.1.2 below. It was discussed in s 1.4.5 above that the analogy of public international law is used as to the sources of the appluivable transnational law wirth reference to Art 38(1) of the Statute of the ICJ and Art. 53 of the Vienna Convention on the Law of Treaties. That poses for public international law also te question of the hierarchy of these sources, which has, however, remained contentious, see for a comprehensive discussion J Pellet, in Andreas Zimmermann et al (eds), The Statute of the International Court of Justice 2nd edn (Oxford, 2012) and further GI Hernandez, ‘A Reluctant Guardian; The International Court of Justice and the Concept of International Community’ (2012) British Yearbook of International Law 83.

236 Volume 1: The Emergence of the Modern Lex Mercatoria It has already been said in section 1.4.5 above that first, at the top, there are these fundamental principles further discussed in section 3.1.2 below. Foremost there is the notion of pacta sunt servanda, establishing the binding force of promises. Closely connected are the detrimental reliance and apparent authority notions. There is also the notion of ownership establishing the principle of exclusivity of property rights subject to the protection of the appearance of ownership, particularly in the possession of movables, the need for third parties in principle to respect these rights and their transferability as well as the issue of the finality of these transfers. There is further liability for the consequences of one’s own actions, especially if wrongful as tort or leading to unjust enrichment; there are special (fiduciary) duties in situations of dependency and there is the notion of fair dealing guarding in particular against fraud, market manipulation including insider dealing, and anti-competitive behaviour. There may also be fundamental principles of environmental, safety and health protection. There may be other—human rights induced or inspired, EU law also tell us so, see also section 1.4.6 above—but they would not appear to be many in international commerce and finance. All are in essence mandatory or ius cogens and form the basis of the modern lex mercatoria and constitute the essence of contract, agency, property, tort (negligence), and restitution law. But they are not only foundational. They may also supplement and even correct the positive law that results in the other legal sources, especially custom, treaty law, general principle and party autonomy. Second, in the details, one should first look for custom or practices of a mandatory nature, including proprietary protections. They may still be rare but conceivable, especially in the area of financial products. That was already clear from the development of negotiable instruments. It was, in more modern times, reconfirmed in the status of the Eurobond,538 and mandatory customary law has undoubtedly developed internationally among the participants in the financial services industry where it is often a matter of evolution of the law of movable property, at least in asset-backed funding of all sorts, including security interests and temporary or conditional ownership rights or finance sales like repos. Importantly, one may also think of the rules of set-off and netting and the priority or preferences they create and the status of the ISDA swap Master Agreements in this regard. The issue of transactional and payment finality in the international marketplace was also mentioned. The views of the more sophisticated modern financial regulators may provide a further lead here.539 This concerns public policy support, which may then also play a role directly in private law formation, including customary law in the transnational commercial and financial legal order as a matter of horizontal effect. It is then likely to refer to a more fundamental principle, but, as already mentioned before, public policy, especially transnational minimum standards, will not be exhausted in this manner and may operate separately as a supplement or corrective of the modern lex mercatoria (rather than being incorporated in it), see further section 1.5.8 below. Third, one should subsequently look for uniform substantive treaty law of a mandatory nature, at least to the extent that transactions are covered by them. Mandatory treaty provisions of a private law nature are still rare540 but could in the area of financial regulation and market behaviour increasingly derive from standards set by the EU as they already do in the Settlement and Collateral Directives and may then also derive from MiFID II, see Volume 6, section 3.7.19. They could also derive from the Bank of International Settlement (BIS), even though its rules operate so far, notably in the Basel Accords only through so-called soft law, which could, however,

538 See n 436 above. 539 See for the rules between the international capital markets participants, s 3.2.3 below. 540 A rare example is Art 12 of the 1980 Vienna Convention on the International Sale of Goods.

Volume 1: The Emergence of the Modern Lex Mercatoria 237 still acquire the form of (mandatory) custom, for example in promoting set-off and netting, or from other international organisations such as the World Trade Organization (WTO). In the proprietary aspects, which have a mandatory flavour, UNCITRAL’s work on assignments of receivables could prove to be increasingly important, although its 2001 Convention on the Assignment of Receivables in International Trade was a failure; see Volume 5, sections 2.4.5ff. The UNIDROIT Mobile Equipment Convention may be more successful, at least its Aircraft Protocol; see Volume 5, section 2.1.8. The essence is that these treaties must still yield to higher laws in the hierarchy of the modern lex mercatoria. They do not stand alone, or can monopolise the law formation and application in the areas they cover. Fourth, there may also be mandatory general principles, although also still likely to be few, but where good faith notions are considered mandatory, for example as elaboration of the fundamental principles of dependency, trust and confidence, they may fall in this category. In movable property, if it is true that new financial structures are developing transnationally, we may also see further progress under this heading, here likely as further elaboration and support of mandatory industry custom and practices. Again, set-off and netting spring to mind. Fifth, in contractual matters, one should subsequently look for the precise contractual terms as a matter of party autonomy, the force of which derives in this approach directly from the fundamental notion of pacta sunt servanda, therefore from the principle of party autonomy as an autonomous source of law: see section 1.4.10 above. Into this bracket also fit incorporated standard terms such as, in finance, the ISDA swap Master Agreement and the PSA/ISMA Global Master Repurchase Agreement, if not already customary. In international arbitration, one may here also refer to the LCIA and ICC Rules that may so be incorporated in the arbitration clause. Although in property law, the power of the parties to create new proprietary rights is generally considered limited, therefore also party autonomy, it has already been pointed out in section 1.1.6 above that one may expect greater dynamism in transnational commercial and financial law subject to the protection of the ordinary flows of business against newer proprietary rights and charges. Thus, party autonomy also has an important place in property law at the transnational level and is not then merely a contractual issue. It tracks the approach in equity in common law countries, which is likely to prove increasingly relevant in international finance, where many products and facilities, including expanded notions of set-off and netting, are equitable in that sense and may be activated on the basis of party autonomy subject always to higher rules in the modern lex mercatoria or public policy issues, of which indeed the protection of the ordinary public against such newer charges may be an important aspect. The selection of a local law is also part of this power of the parties and therefore another incident of party autonomy, as already mentioned in sections 1.4.10 and 1.4.13 above. It operates at this level of the hierarchy but again local law so chosen then functions in the international legal order as part of the lex mercatoria and must make sense in that context.541 In particular, such a chosen local law cannot be meant to undermine the essentials of the deal itself, for example on the basis of purely domestic notions such as ‘statute of fraud’ (in respect of the required documentation) or ‘parol evidence’ (in respect of the content of the contract) when, say, English law is chosen in a transaction that has nothing to do with England, unless of course the parties expressly mean to domesticate their transaction and that would be unusual.

541 See JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619.

238 Volume 1: The Emergence of the Modern Lex Mercatoria As we have seen also, a similar situation obtains for Eurobonds as negotiable instruments when, for example, English law is made applicable. Strictly speaking a Eurobond might not be a bearer negotiable instrument in English terms (see section 3.1 below) because of the multiple terms and conditions it often incorporates (which goes against the English concept of negotiability). Moreover, there is the issue that parties can hardly select a law in proprietary matters. To resolve these issues, it was already noted that is generally assumed that it is a negotiable instrument according to international practice in the international marketplace it concerns, making a choice of English or New York law at the same time irrelevant in proprietary issues of this nature, although it may still be different if these bonds are held in a book-entry system; see the discussion in see Volume 3, section 3.2.2. It was mentioned also that there would seem to be nothing against parties choosing the lex mercatoria itself as the applicable law in issues at their free disposition if it does not operate already (as mandatory law); see also the observation on the lex situs in ‘Ninth’ below. That such a choice is possible is confirmed in Preamble 13 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, replacing the earlier 1980 Rome Convention, which did not contain such a reference, see further also Article 3 Hague Principles on the Choice of Law in International Commercial Contracts and is best understood in terms of the hierarchy of norms here proposed. Again, in international transactions, the higher mandatory laws, mentioned above, in any event prevail over local laws and their application is therefore not dependent on a clause opting for the application of the lex mercatoria, whilst such a clause could not change the ranking amongst the mandatory sources of law. To repeat, parties do not have that power. It leaves the question whether judges or arbitrators may apply the lex mercatoria in its totality if parties have not chosen a law at all. Judges may still hesitate; it has already been noted that arbitrators are more likely to feel free to do so at least when the issue is properly pleaded by (one of) the parties; see section 1.1.12 above.542 Sixth, thereafter one should look for directory customs or practices, such as those, for example, that may prevail in the contractual aspects of underwriting, trading and settlement of Eurobonds, partly to be found under ICMA rules or recommendations obtaining in that market; one may similarly search for them in respect of other financial products. In this layer, we also find the UCP for letters of credit and the Incoterms, issued by the ICC if we may assume that they are now customary: see section 1.4.20 below. Seventh, subsequently one should look for uniform treaty law of a directory or default nature such as those of the CISG if and when applicable to the legal relationship in question. Again, there are not many of these rules, and their force may be limited to transactions between ratifying states or only bind courts in such states; it depends on these texts. Eighth, one should further look for directory general principles of the particular legal structures or relationships that may be considered common to leading developed legal systems. Many of the more precise rules concerning contracts may be found here. In this layer, one may also look for the intrinsic logic of the transaction and for what good faith and common sense may require beyond the dictates of the fundamental principles or public policy/order requirements as ius cogens. As mentioned before, uniform treaty law may be of further guidance as an expression of general principle even if under its own terms it is not applicable to the transaction in question for lack of an association with a Contracting State in the particular instance. Master Agreements or ICC rules, even if not incorporated in the contract, may also come in under this heading of general principle (if not already as custom). Even draft treaties may obtain some meaning here as expression of general principle. 542 See further the cases cited in Vol 2, s 1.2.2.

Volume 1: The Emergence of the Modern Lex Mercatoria 239 Ninth, by now most of the missing parts of the lex mercatoria should have been filled out, but ultimately, if there is no solution, one could still apply a national law found through the most appropriate conflict of laws rules, see the discussion in section 1.4.13 above. Thus particularly in property matters, including secured transactions, conflict of laws rules may still prove relevant in the formative period of the transnational lex mercatoria in the professional sphere.543 Here the lex situs traditionally prevails and is then mandatory, assuming that it can still be found in the international flows of assets.544 Again, traditionally, party autonomy and the directory sources of law have here no meaning except if the analogy with equity could be accepted at the transnational level and in that way a measure of party autonomy always subject to the better right of bona fide purchasers or purchasers in the ordinary course of business of commoditised products; see section 1.1.6 above. Indeed, the lex mercatoria as mandatory law at the transnational level could more readily take over; see also the comment under ‘Fifth’ above. Even now, the classic lex situs rule creates serious problems for assets that move trans-border and for intangible claims the location of which is much more difficult to establish.545 This may leave ever more room for party autonomy, here sometimes defended in respect of the choice of the applicable national laws concerning assignments of portfolios of receivables with debtors in different countries.546 In the hierarchy of norms as here explained, there is in this application of domestic law through conflicts of law rules in any event a discretionary element; these rules may become too residual in the hierarchy of norms to be binding without adjustment to allow for the internationality of the transaction so that the local laws so found applicable still make sense in the context of the international transaction. Again, local law then operates as part of the transnational lex mercatoria. As regards what conflicts rules would be applicable, the Hague Conventions could give some leads, as could, in the EU, the 2008 Regulation in contractual matters even though not binding on arbitrators. The significance of a law selection clause in favour of a domestic law is thus that such an election moves the domestic law higher, to fifth place, and therefore eclipses the directory customary law, treaty law and general principle. That is the difference; see further also the comment made above (under ‘Fifth’) in connection with a contractual choice of domestic law and its significance. The introduction of domestic law as the residual rule in this manner makes the lex mercatoria a system of law for those who still look for it, that is at least as complete as any other and 543 Transnationalisation may arise sooner when these proprietary structures are created in assets that move trans-border or are intangible or if they are created in internationalised assets, such as aircraft and ships, but no less in Eurobonds or other types of negotiable instruments or documents of title if used internationally. There are particular problems here with domestic rules governing non-possessory security interests including floating charges or shifting liens. This concerns their type, coverage and ranking, see Vol 4, ss 1.8 and 1.9. In a substantive transnationalised law sense, as to type and coverage, common law notions may increasingly show the way, see s 1.1.3 above. As regards ranking, since it concerns here the world of professionals while small creditors are mostly out of it and bona fide purchasers of chattels in any event mostly protected against these charges, the substantive transnational rules could be fairly basic: the older go before the younger, the specific before the general, the contractual before those arising from the operation of the law, and purchase money security before loan security. At the transnational level, secured loan financing is increasingly eclipsed by the use of other techniques, especially the sale and repurchase or conditional/finance sale (repos), as a funding alternative in finance leases, repos and factoring, see more particularly Vol 5. One of the reasons for this development must be that domestic notions and formalities, including publication requirements in connection with the creation of secured interests are avoided in this manner, although other problems may arise, especially in the proprietary position and protection of the prospective owner of the assets and its creditors. 544 See for the traditional views and schemes in this connection in particular H-P Mansel, Staudinger BGB Art 4-46 EGBGB Internationales Sachenrecht (München, 2015). 545 See Vol 4, ss 1.8.2 and 1.9.2. 546 See nn 49 and 67 above.

240 Volume 1: The Emergence of the Modern Lex Mercatoria overcomes the argument, frequently heard, that the new lex mercatoria cannot operate because it is not a fully operative system. What is happening is, however, that, if globalisation holds, the domestic law so applied will increasingly be preceded by ever more industry practices, customs, general principles and the demands of party autonomy while itself being transnationalised. It may be noted from the above that case law nor legal scholarship are taken here as sources of law proper. This is not to deny that judges may now act as law makers but they are perceived here to do so whilst always furthering the existing sources of law. That is the implicit constraint in this type of judicial law formation and its power, which for judges is of a limited nature to remain sustainable, not in the least also as a matter of accountability, see also the discussion in Volume 3, section 1.3.5 for the use of the good faith concept in this connection, but the issue arises in all liberal interpretation. Legal scholarship is perceived here to be of the same nature. It explains, clarifies and, where possible, simplifies the arguments, may as such be greatly helpful, but is not an independent source of law either, or is at best secondary as it also is in public international law and has a support function. Finally, as an example, it may be of interest briefly to consider at this stage of the discussion the impact of this hierarchy within the lex mercatoria concerning letters of credit. Naturally, we have here the trade practices embodied in the UCP. It is of course possible that the UCP do not fully incorporate them or that new practices develop before the UCP text itself is adjusted, in which case these additional or newer practices obtain. Incorporation in the contract is not necessary as the UCP are now mostly considered customary,547 but if they are incorporated, they achieve a higher ranking in the hierarchy of norms in this manner, as just explained, and may then well continue to prevail over newer directory custom and practices. That could be the true meaning and effect of incorporation in the contract terms, which might then be less desirable. As the UCP concern only a partial codification, they may in any event still need supplementation. Again, one way is to go immediately to conflict of laws rules. Another is to explain the UCP rules first from the point of view of their own practices and logic, to look at general principles commonly applied to them in the most important commercial countries, and only as a last resort apply a national law via conflicts rules in the manner here explained, therefore always with some discretion, including the facility of transnationalisation of the result. That would seem to be the better and more realistic approach, always considering in this connection the pleadings of the parties.548 Thus even domestic laws when still applied in this manner become part of the transnational lex mercatoria and figure therein, therefore no longer as domestic laws. This is a key insight. It is often still thought that arbitrators have here more leeway than the ordinary courts, but it must be asked why. The above gives a framework or methodology, no more. Although there may be a hierarchy amongst the traditional legal sources, it should be realised that within each source there are still likely to be contradictions: for fundamental principal issues of human rights may clash with environmental protection; customs and practices come from all sides and may also class. So may treaty law easily. General principle is in fact based on finding common ground in contradictions between more advanced legal regimes (at domestic level). Residual national laws may also do so, hence still private international law at least in civil matters. Extra-legal considerations of justice, 547 See n 439 above. 548 One may see an incipient recognition of this in Lord Denning’s remarks in Power Curber International Ltd v National Bank of Kuwait SAK [1981] 3 All ER 607, in which it was said in connection with bank guarantees that courts should not interfere with them at the behest of the underlying parties nor recognise such interference by the courts of other countries. This would appear an expression of a more fundamental underlying international principle.

Volume 1: The Emergence of the Modern Lex Mercatoria 241 social peace and efficiency may not align either. All depends on the circumstances. Public policy at the national level in terms of governmental interests or international minimum standards may also contradict. This was always obvious in the pre-nationalistic universal law idea before the nineteenth century, but has drawn more recently special attention for the development of international and transnational law against the background of their dramatic progression in a globalising world.549 Creating intellectual systems that are comprehensive and can be logically applied has been a special objective of academia in most countries since the nineteenth century but is unlikely to help a great deal at the transnational level as we have seen and legal diversity is more likely to reflect greater reality, especially transnationally, and is also better geared to newer developments, policies and values, see also the discussion in section 1.2.13 above. Especially the idea that even international law could be a system550 is a myth:551 legal systems can only exist intellectually but collapse when they meet the facts when even so-called logically coherent and complete systems become riddled with gaps and contradictions. It has never been achieved beyond nationalistic doctrinal thinking in private law, especially in civil law countries, hardly in the operation of the common law. Even at the intellectual level, system thinking never had much meaning in regulation and in other more policy-oriented parts of the law. In any event, it was argued before that in interpretation of such systems in harder cases all these contradictions remerge. Differences must be evened out in the law’s application and the decision-making process and in the reasoning. However, one may remember in this connection also the saying attributed to Lord Mansfield: ‘never give your reasons; your judgment will probably be right, but your reasons will certainly be wrong’, and the one to Lord Bingham, ‘consistency is a vice in judges’, see Volume 2, sections 4.1.1 and 4.1.11. The conclusion is that increased legal pluralism is the hallmark of an advanced society and leads to interpretative competition, case specific solutions, and cross-fertilisation.552 It is not system creating and also resists the formulation of a jurisprudence constante, as is indeed also the attitude in the ICJ.

1.4.15. Treaty Law and its Own Concept of its Place Among the Other Sources of Private Law It may be of interest to note in this connection what uniform treaty law makes of its own status where it attempts to assess its place among all sources of law (within the modern lex mercatoria and its hierarchy, see the previous section), especially fundamental principle and customary law. It was already said that it is not up to it alone to determine its own rank (except to postpone itself which is unusual) and it could never do so dispositively, although it could still recognise the situation and the hierarchy for what it is. As such it is at most declaratory. Especially peremptory or mandatory transnational rules may prevail over it.

549 See T Broude and Y Shany, Multi-sources Equivalent Norms in International Law (Hart Publishing 2011). 550 International Law Commission (ILC), ‘Conclusions of the Work of the Study Group on the Fragmentation of International Law: Difficultiesw arising from the Diversification and Expansion of International Law’, Report of the 58th Session (2006), First Conclusion. 551 Especially espoused by M Koskenniemi, ‘Global Legal Pluralism: Multiple Regimes and Multiple Modes of Thought’ (www.helsinki.fi/eci 2005). 552 M Pioares Maduro, ‘Foreword’ in T Broude and Y Shany, Multi-sources Equivalent Norms in International Law (Oxford, 2011).

242 Volume 1: The Emergence of the Modern Lex Mercatoria Rather than dealing with these issues directly, treaty law of this nature may do so more indirectly in terms of its own interpretation and supplementation. Again, one may note that law formation at the transnational level is not then the issue, only its application, limited to treaty law. This is obvious in Article 7 of the Vienna Convention on the International Sale of Goods (CISG), which has some more to say on this issue in its Articles 4 and 9, but was not able to formulate a coherent view; see more particularly the discussion in Volume 3, sections 2.3.7ff. Whatever may be said about the theoretical relevance of the distinction between interpretation and supplementation, for its interpretation, the CISG refers here to its international character, the need to promote uniformity, and the observance of good faith. The latter addition may be considered somewhat strange as it would be more properly relevant in contracts concluded under the CISG but derived from Article 31 of the (other) Vienna Convention on the Law of Treaties which more truly deals with the relationship between states, not private parties. In the approach of this book, in the context of the interpretation of the CISG Convention itself, the reference to good faith could denote more particularly a liberal interpretation technique through which the other sources of law revive. The reference to internationality could then imply a reference to the other sources of the modern lex mercatoria also. For its supplementation, on the other hand, the CISG follows the civil law attitude looking at its text and the principles underlying it (only few may be identifiable) and in the absence of them at domestic laws found through the traditional rules of private international law. Note that general principle does not mean here any broader normativity found in comparative sales law. Custom is not considered (but under Article 9 is limited to the interpretation of the contracts concluded under the Convention where it is basically viewed as an implied condition; see also the discussion in section 1.4.8 above). In Article 4 it is made clear that the application of custom as such is not covered by the Convention. It follows from the preceding sections that a more proper assessment of the situation would have led to a different terminology, in which, in terms of interpretation and supplementation of the Convention, there would have been a reference to the Convention itself, its international character, its general principles, and to the need for uniformity in its application. At the same time, it should have been made clear (as in the UCC in the US) that other sources of law remain unimpeded so that fundamental principle, custom and general principles found in modern sales laws remain relevant (besides party autonomy, which is clearly respected and supersedes the Convention under Article 6). Domestic law would only come in as the residual law under rules of private international law if transnational law as found in the above manner does not provide a solution. As explained before, such domestic law would itself become part of this transnational law and be adjusted to make sense in that context. It was also said that there is the impact of public policy to consider, at the national level to the extent international sales through conduct or effect still come demonstrably onshore in the relevant country, and otherwise under transnational minimum standards, which may even supersede the local ones unless all activity were connected with one country when there would hardly be any international sale at all. Whatever its merits, other more recent treaties have adopted a similar attitude as the CISG in these matters with slight variation; see Article 6 of the 1988 UNIDROIT Convention on International Financial Leasing, more extensively reviewed in Volume 5, section 2.4. See further also Article 4 of the 1988 UNIDROIT Convention on International Factoring (Volume 5, section 2.3.7); Article 7 of the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade (Volume 5, section 2.3.8); and Article 5 of the 2001 Cape Town Convention on International Interests in Mobile Equipment (Volume 5, section 2.1.10). The latter Convention is different in that it refers to the purposes set out in the Preamble, deletes the reference to good faith, adds one on predictability, but remains otherwise in the same mould. The 2009 UNIDROIT (Geneva) Convention on Substantive Rules for Intermediated Securities, on the other hand, does not contain any similar provision, which may well be the better solution.

Volume 1: The Emergence of the Modern Lex Mercatoria 243

1.4.16. The Concept of Natural Law and the Legal Status and Force of Fundamental and General Principle in the Modern Lex Mercatoria In order to conclude, it may be of interest to return briefly to the issue of the autonomous force of fundamental and general principle and therefore to its self-executing nature and direct applicability within the modern lex mercatoria in international transactions. This needs to be contrasted with the claims of modern legal positivism and formalism, which tend to be nationalistic, statist and territorial at the same time. Fundamental and general principle in this sense now stand for the modern version of a more universal law, earlier more commonly referred to as natural law, a term that would probably not have been invented today as it may suggest an intrinsic immutability to which few would now subscribe. It may be supported by what becomes customary and by what parties can contribute (party autonomy). Whatever the terminology, the basic issue is the existence and status of the often-unwritten law outside the positive, now mostly statist order, and legislation. The question is therefore whether we have an open or closed system of legal normativity at least in international business, especially relevant in respect of transnational law formation and application in international commerce and finance, more in particular therefore in the transnational commercial and financial legal order. In the positivist view, such law could at best be soft law. In the other view, there is really no such thing, there is either law or there is nothing, that means we either have norms that are legally binding or those that are not. There is not something in between. As we have seen in section 1.2.6, the Romans knew the notion of natural law,553 of which the term derives. In Europe, it acquired a strongly religious connotation after the twelfth century AD, when it was given a particular meaning and status in Christian teaching as first reflected in Canon law. It assumed an intrinsic (religious) normativity that was in essence a given and superior per definition. It was secularised in the natural law school of Grotius and his successors and has been an important source of law ever since, although its status, even in its secularised form, became contested, in particular by those who subsequently adopted a statist view of law formation and no longer accepted the legal force and effect of more universal fundamental principles or of principles that may be found in developed laws or in rationality or common sense. We are then on nineteenth-century civil law codification territory: there are no longer extra-systemic considerations left in private law which became national and in civil law countries codified, statist, and static therefore, with its claim to exclusivity as we have seen. 553 Ever since, natural law has had many different meanings and explanations. They all have in common, however, that it is a law that for its force is not, or at least not entirely, dependent on human intervention, as positive law is now mostly considered to be. It is not believed, therefore, to need for its validity or recognition the support of any public authority, whether of a national/statist or a supranational character. To the extent support of an ultimate rule of recognition in the sense of Hart, or an apex norm or Grundnorm in the sense of Kelsen, is needed, these rules are then also found in the natural law itself. In terms of ‘fundamental principle’ as the basis of this law, there may be an idealistic element and notion of pre-existing values but this law is not necessarily equated with the demands of morality, although there is often a close affinity. It is not necessarily immutable either, although it was often considered so. Rather, in its secular form, it became in its method closely related to rationality and in its value system more recently to human rights considerations, see the discussion in s 1.4.6 above and for an important reflection on natural law, positive law and historicity also, J Berman, Faith and Order: The Reconciliation of Law and Religion (Grand Rapids, MI, 1993) 289. In fact, in modern times, natural law often became an effort to find more structure in the law and its progression (not a fixed system therefore). It is comfortable with private law being immanent and with multiple sources of law. In that sense, custom could even be considered part of that kind of natural law also, except that to the extent the idea is to find more universal principle, custom is usually set apart as being more specific and industry or community connected, although it may no less be used to identify or find more general concepts. In constructing a new lex mercatoria, these attitudes return, as we have seen, and they remain therefore most relevant in terms of this book.

244 Volume 1: The Emergence of the Modern Lex Mercatoria The point has been made, particularly by modern positivists such as Hans Kelsen, that it is not possible to have natural law and positive law operating side by side in the same areas. They believe them to be mutually exclusive, but this depends on definitions and the issue would in any event only arise if there was genuine conflict. That is not necessarily the case. It is, for example, quite clear that, in private law, fundamental principles such as those of pacta sunt servanda or party autonomy, the notion of ownership, unjust enrichment, and (detrimental) reliance, or fiduciary duties in the case of dependency, may easily lend themselves to further elaboration without acute conflict with the positive law, however defined. They may operate in tandem and it was submitted that in interpretation and supplementation they commonly do. It was already said repeatedly also that in this way all traditional sources of law revive even in a nationalistic state positivist environment, especially if it succumbs to a liberal interpretation ethos to preserve its credibility when systemic thinking is not the only way out. But even where there may be conflict between fundamental principle and the written positive law, for example when the latter becomes irrational or disrespectful of changing social values, or its rules prove contradictory among themselves in more unusual or newer fact situations, interpretation of the principles operating behind the positive law (and its system) may alleviate these problems and tensions, and usually does so in order to make the positive law function at all. This is all the more obvious when in pressing cases we also consider issues of justice, social peace, and efficiency or public order and other changing social values. To repeat, there is much of this in all legal interpretation, although it may remain hidden in the reasoning. Indeed, the more basic truth is that the positive law, whether or not of the statist type, written or unwritten, is never complete and in practice riddled with contradictions and lack of clarity and needs constant sorting out in individual cases quite apart from new and unfamiliar fact situations arising all the time. Thus, principle is commonly used to meet shortcomings in the positive law itself in particular when relating older norms to newer facts or realities. Non-usus of black-letter laws or desuetude may become the consequence (see also the discussion in section 1.4.9 above), even if the positive law is statutory and/or mandatory, whose rules may thus become legally irrelevant. In fact, many rules and their original meanings are quickly forgotten. Much case law and how it arose is soon forgotten too. This is a continuous process that has not much to do with a perceived natural law/positive law divide.554 In fact it ignores it and is forced to do so in real life. Positive private law when properly understood is not then merely black-letter and mostly statist but should be defined in a different manner, not simply therefore to create a contradiction. Rather, it is the continuing progression and expression of these fundamental concepts, either directly or more likely through the other autonomous sources of law, in which connection custom and practices, general principle and party autonomy, but in international transactions transnationally also treaty law if widely accepted figure. Even national legislation and their systems may still retain significance, although only residually at the transnational level, as we have seen, but is even then adjusted to make sense in that context and becomes, it was submitted, in the process part of the transnational law itself. Especially in academia but also in case law, this reference frame is constantly re-developed and explained further or at least should be and it should be realised that that is what happens when legal dynamism, rather than as a spoiler, is understood and treasured to help society along.

554 Human rights and environmental protection notions may here increasingly figure as fundamental principles as well, therefore even in private law, although they might still be contentious when corrective of more positive, especially statist rules; see also the discussion on constitutionalisation in s 1.4.6 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 245 In fact, if we may accept that the positive law is simply the applicable law whatever it may be from time to time and from case to case, which was the more original idea, see the discussion in the next section, it means that in practice there is no clear distinction or borderline between principle and positive law at all. In any event, modern private law is in its formulation and application full of (implicit) references to other more fundamental principles and practices or concepts, a situation that even the DCFR in its latest Introduction recognises for that type of codification. In any event, many so-called rules, whether or not written, are expressed in abstract principle or in concepts. This was already apparent in teleological and normative interpretation, where respectively a redefinition of a rule’s purpose or demands of justice, social peace and efficiency enter the equation ever more liberally. Indeed, in practice, there is no sharp distinction between the demands of justice and law left, or between the demands of social peace and law, or between the demands of efficiency and law, which demands when becoming sufficiently pressing all enter into the law and its application in individual cases and are its justification and legitimacy in civil society, even if these demands may be contradictory resulting in riddles that must be resolved. It follows that law and its application are not mere technique, the automatic implementation of a pre-existing set of rules to (ever changing) fact situations and newer needs. If certainty were the aim, it potentially results in low quality law and is destructive, see the discussion in section 1.1.7 above. Rather, it can only be repeated, that finding the applicable law and applying it is a searching and continuing process that is necessary to keep the law living and responsive to legitimate needs, which are all needs that are not barred by public order considerations which themselves change over time. Much law emerges in this manner and becomes in this way part of the positive law at least in the professional sphere. In modern contract law, the notion of good faith and its use are particularly indicative and in truth a cover in professional dealings. It has already been said that other sources of law, including fundamental principle, often hide behind the notion of good faith in this sense, even though itself still mostly considered a higher norm or principle although it need not always to be so. A liberal interpretation technique more broadly fulfils a similar function and is used outside contract law in a similar fashion. This is properly reflected in section 1-103 UCC in the US. The essence is that it discounts all sources of law: see section 1.4.3 above. In professional dealings—it was submitted—the notion of good faith when properly understood denotes this liberal interpretation technique in contract and then stands not only for fundamental principle, but also for the other sources of law. As such it is not always mandatory either and is in any event not merely the opposite of bad faith. That may be more the idea in consumer law. In this book, no fundamental distinction is made between rules, principles and the positive law; it is all a matter of degree and in any case their meaning and application much depends on the facts. We may still see this clearer in public international law but it is not truly different anywhere else. In this view, even specific black-letter rules are no more than guidance in new or incongruous or contingent fact situations. Law, even positive law is then not, or not necessarily, national or domestic either, or even territorial; only the legislative variant (including treaty law) will be. If conflicts arise between the various norms that are emerging from different legal sources, especially when they claim mandatory application, as for example in movable property law, the hierarchy of norms of the modern lex mercatoria as explained in section 1.4.14 above, will take care of them at the transnational level. Public international law provides here the model, see section 1.4.5 above and takes us, it was argued, back to the method of the natural law school and its pre-nineteenth-century idea of the unity of all law. The independence and universality of the applicable commercial and financial law in the modern lex mercatoria in respect of all professional dealings in the international flows of goods, services, money, information and technology, built on fundamental and general principle and

246 Volume 1: The Emergence of the Modern Lex Mercatoria supported by customary law and party autonomy, are, it was submitted, particularly sustained by the operation of an international or transnational commercial and financial legal order, which can equally be identified. One could also call it the international marketplace itself, but in legal terms it may be more precise to refer here to a new legal order. This at least is the view and approach in this book and will be more extensively discussed below in section 1.5. It highlights one other particular aspect of the modern development: the emergence and operation of distinct legal orders, like states besides international legal orders like the ones between states, or confederate and federal legal orders, as in the EU and US respectively, potentially operating side by side in the same territories; see further section 1.5.9 below. But there are others, it will be submitted, such as traditionally the legal order of churches, which may equally operate trans-border, and now also the transnational commercial and financial legal order. One may even think of an international sports order, probably closer to the hearts and minds of students. The positive law in all its sources acquires its force and effect ultimately from and in these legal orders and is characterised by them. Hence the difference between church, sports, and commercial law, or typical state regulatory law and transnational commercial law. The concept of legal order is thus crucially relevant, and institutionally particularly supports the notion of fundamental principle as the basis of its legal system and is likely also to suggest some infrastructure through which the law in such orders can better develop and be known. As we shall see in section 1.5.6 below, in international commerce and finance, this order finds its origin and motivation in distinctive social and economic forces, now often connected with globalisation and the international flows of goods, services, information, technology and capital (if not also of people) as we have seen. Again, this approach to the modern lex mercatoria implies a return to pre-codification times in attitude and method, when law indeed was in principle perceived as universal. It is the reason why in the foregoing much attention was paid to them even though it could hardly be a return to the ius commune variant of the Roman law itself, which the secular natural law school had already abandoned,555 or to the approach of the German nineteenth-century Pandectists.556 It could hardly mean a return to the nineteenth-century codification practice and its intellectual model building or system thinking either, which in Europe would suggest a reconstituted BGB now at European level. This is nevertheless what the DCFR was proposing for the EU. It would seem unfeasible and undesirable, at least in the professional sphere, not only because it is unlikely to be able to accommodate the common law tradition, but also because it cannot meet the needs of business and risk management in a larger world. Codification civil law style was always consumer law. In the meantime, it may well be asked whether there is at present a sufficient number of lawyers who have the insight, vision and education legally to underpin international business

555 One may see some different tenor, however, in the work of H Coing, Europäisches Privatrecht (München, 1985–89), and of R Zimmermann, The Law of Obligations: The Roman Foundations of the Civilian Tradition (Cape Town, 1990/1993). These authors look for a revival or at least continuation of the ius commune. They follow in this respect in the steps of Koschaker (n 5) and Franz Wieacker, Privatrechtsgeschichte der Neuzeit, 2nd edn (Göttingen, 1967, reprinted 1996), who wrote, however, for a different time. Their approach was rejected by R Feenstra, ‘The Development of European Private Law’ in D Miller and R Zimmermann (eds), The Civilian Tradition and Scots Law (Berlin, 1997) but it remains valuable all the same because it is not statist in tenor. 556 Scotland and South Africa are often held up as an example in this connection, but they have systems of law that substantially developed beyond their Roman and ius commune pasts. At least in commerce and finance, they may be some model in so far as they show a fusion between modern common and civil law notions and point to a future law in which commercial law is less systemic, more flexible and above all dependent on legal sources other than mere legislation, but that would be all.

Volume 1: The Emergence of the Modern Lex Mercatoria 247 in Europe and elsewhere in this manner. It means awareness but also the ability to help build a transnational professional law out of fundamental and general legal principles, the latter derived from the diversity of national laws (civil and commercial), and particularly of custom or industry practices, and party autonomy, in business supplemented by the demands of efficiency and rationality or common sense. Is there a methodology and is there a sufficient unity in view to articulate the new transnational law on a more than incidental basis? In particular, is there in the legal profession and in legal scholarship a sufficient understanding of the dynamics of modern commerce and finance and of the different perspectives of civil and common law and of their more fundamental differences to make some fusion possible or to reach beyond either of them? Is there a sufficient appreciation of international law and its operation, whether of the public or private law variety, in the latter case normally referred to as transnational law? Do we for example understand what model of contract or movable property we need in that connection, which is much the challenge of Volumes 3 and 4 of this series, see for a summary section 1.1.6 above. Also is there the will to move forward and surrender the benefit of national legal monopolies for the legal practitioners that benefits from them? If one looks at the efforts in UNCITRAL and UNIDROIT, one must doubt that there is at the moment any consensus on method and content at all. Implicit in them is the civil law codification approach and ethos with their narrowing perspective of written rules only. It is a particular idea of legal certainty that is valued here above all else. It was already said repeatedly that it may mean low-quality law and it can be highly destructive of all innovation and the need to move forward in a contingent law environment that needs an understanding of the international marketplace and of the professional dealings in it, and requires adaptation on a continuous basis. It is probably the reason for their limited success. At EU level, newer ideas are mostly lacking, even in connection with the DCFR and it was already noted that there is no proper discussion of the methodology and objectives. The expansion of consumer law into the professional sphere is mostly thought normal in a unitary approach unmindful of relationship thinking. In this approach, unity or uniformity is largely seen as a question of compromise between national legal rules and concepts in the context of treaty or similar top-down EU law in which the German nineteenth-century anthropomorphic approach to contracting and movable property remains dominant. At least von Savigny had a method based on the analysis of a fairly neutral set of outside norms (the Roman law). That may now not be much more than the BGB which in contract and movable property is based on a nineteenth-century perspective leading to a consumer law bias. Business is not understood. The consequence is suspicion and no facilitation. The developers of the new lex mercatoria miss a neutral model although they have a method, derived in this book from public international law, see again section 1.4.5 above. They must for the rest be guided by newer values and the ever-changing dynamics and requirements of modern commerce and finance unless public policies forbid it. Mere borrowing the method from existing civil law countries and finding some kind of compromise between their laws, is unlikely to prove to be sufficient or an appropriate and adequate response. It reduces the effort to amateurism, even time-consuming horse trading.

1.4.17. An End to the Confining Views of Legal Positivism, Formalism, and Nationalism in the Professional Sphere? It follows from the foregoing that the now more traditional notion of positive private law in terms of black-letter law, statist rule, and doctrinal thinking, which is then often contrasted with the natural law approach, is in modern times closely connected with nationalism and territorialism,

248 Volume 1: The Emergence of the Modern Lex Mercatoria statutory law or similar written texts raising in the process in particular the issue of authority, system thinking/building, logic, legal reasoning, consistency, and precedent, and then mostly also legal formalism. It suggests indeed a closed system of rules, at least at the national level, that is considered sufficiently complete, even amounting to the truth of human relationships and how they function and is then assumed to be capable of solving all disputes through a mechanical application of the rules or otherwise with reference to the system underlying them. It is perceived as technique, a ticking off exercise, although it was often unclear what this truly meant as a liberal interpretation facility, which it usually admitted, even domestically, fatally undermined the concept. Unless they were assumed to be system subservient, it could not be avoided that other sources of law, especially more universal principles or practices, re-entered through the back door of interpretation (and supplementation) although it was seldom so acknowledged. This approach, already under severe strain in the US as we have seen in section 1.3.4 above, may require clarification, now more obviously in a globalising legal environment as this type of statist legal positivism became an important contributory factor to the final demise of the old lex mercatoria. It remains the main strand in legal thought in Europe, both on the Continent and even in English academia, as we have seen, supplemented and underlined by the rules of private international law, although particularly in England the judiciary may remain more pragmatic, at least in commerce and finance, but it is in international business certainly not transnationalist either. It served the legal practice well as excuse and protection, and it feeds on it, whilst this form of certainty suggests legitimacy for the practice in the national environments and preserves. Even in the big centres like London, its common law is not considered to be affected, let alone overtaken by international practices. As noted, the consequence was that even in international commerce and finance, all transactions are still cut into domestic pieces in the hope that the local laws that became so applicable to parts of the transaction (often even different for contract and property law aspects) would add up to a sensible legal regime for the international transaction as a whole for which these domestic frameworks were seldom written. This is a nineteenth-century paradigm on which the local practice became dependent but it sits uneasily with a globalising environment, especially in the professional sphere, which needs more creativity and flexibility, see the discussion in section 1.4.1 above. It may be of interest in this connection to note the evolution of the term ‘positivism’ in legal terminology. The term came into common use in the middle of the nineteenth century following the writings of Auguste Comte in France.557 In its origin, positivism denoted the scientific study of human behaviour and the identification of rules or regularities therein as the basis for the studies of the social sciences. In this sense, it was factual, not normative; it did not aspire to a better rule or result. In the law, it meant a study of natural phenomena based on the observation of human (or state) behaviour. As such, it could indeed be seen as the opposite of natural law which adhered to a more theoretical deductive approach and logical process of rule formulation on the basis of some larger ideas, an approach this original kind of legal positivism refuted. Positivism as so understood was an acceptance of Hume’s scepticism in this regard. In its original approach, custom was important and highly valued as a source of law. But there was always a problem for more academically-oriented law observers how to bring these rules together in some legal framework that could be managed and coherently applied. This still seemed to require some pre-existing notions to arrive at more general norms while in this law’s application and subsequent interpretation a more deductive or analogical approach could not be avoided.

557 A Comte, Cours de philosophie positive (Paris, 1830–42).

Volume 1: The Emergence of the Modern Lex Mercatoria 249 More importantly, this concept of positivism soon became sovereignty infested and as a consequence the notion of positivism underwent a sea change. Law became something essentially laid down by authority or officials as part of their power to guide society and promote modernity. Not least because of the just-mentioned problems with and doubts about the original concept, in legal positivism law thus became in the view of many a state construct, at best based on empirical knowledge but often inspired by political ideas on what was best in terms of transforming society and of rule change on that basis. Especially on the European Continent, it became sharply distinguished from morality, sociology, and economics or other extra judicial considerations and subject to pure system thinking and intellectualisation or rationality of that sort.558 As we have seen, in private law, this kind of positivism came to stand for black-letter law, legal formalism, nationalism and doctrinal system thinking. Indeed, we may in particular identify the following characteristics: (a) a state’s central role in all law formation (even if it is through its courts) and certainly in all law enforcement, which suggests that no law could exist outside its authority; this is statist thinking; (b) law given in this manner being domestic and therefore territorial in nature; this is legal nationalism; (c) law being captured in texts and in time, as such valid and static until its next formal amendment or adaptation in case law; this is black-letter thinking; (d) private law in particular being possessed of comprehensiveness in terms of an intellectual framework, as such considered effectively to capture reality and being capable of ordering human relationships for the present and the future; this is system thinking; (e) law being expressed in (precise) rules and dependent on logic and automaticity in its application (even if not in its formation) with a sharp distinction between norm and fact, and a connected formal or technical approach to the interpretation and supplementation of legal texts; there is a sharp separation from morality, social needs and values, and efficiency considerations; this is legal formalism; (f) there being no concern with the quality of this law and its responsiveness to societal needs which do not enter into its validity and legitimacy, this law being assumed per definition to further justice, social peace and efficiency, the only concern being formal validity and authority; this is doctrinal thinking;559 (g) the science of the law becoming an effort to avoid all speculation, to clarify only the most necessary concepts, and for the rest to simplify and describe the legal texts and their application while fitting in new texts and cases and ironing out and rationalising in so far as possible all contradictions in order to repolish and complete the system; that is legal rationalisation; (h) application of domestic law in this sense even to international dealings (through a system of conflicts rules or rules of private international law, itself considered part of the domestic law of the forum); this is nationalism run wild and becoming irrational.

558 It should be acknowledged that in philosophical discourse on the subject, the term ‘positivism’ often remains closer to the original idea of Comte and especially when we talk about legal positivism in the way of Kelsen and Hart, that remains at least to some extent the case. This may cause confusion in the debate. The positive law is then mainly social fact and can be anything or nothing. The essence is that it is what it is and could then even be an empty shell. 559 J Gardner, ‘Legal Positivism’ (2001) 46 Am J of Jurisprudence 199, see for the tensions and the view of Holmes in the US n 359 above and for differences in the English and US approaches, PS Atiyah and RS Summers, Form and Substance in Anglo-American Law (Oxford, 1987) in particular chapter 9, 240 ff. See further GJ Postema, ‘Legal Positivism: Early Foundations’ UNC Legal Foundations Research Paper No 1975470 (2011).

250 Volume 1: The Emergence of the Modern Lex Mercatoria It follows that in this world, the law is what is demonstrably on the table, more in particular in terms of statist texts and otherwise their systems and there are no concepts beyond it. Critical analysis becomes irrelevant or impossible because there are no criteria on the basis of which such an analysis can be conducted. There is empiricism only in determining which formal rules there are, but they are not tested for their responsiveness to justice, social peace, or efficiency or, if they are, it is only to prepare for formal rule change. Again, these objectives are deemed to be served per definition; other sources of law are ignored or reduced to the rank of soft law which is the usual positivist last throw and fall-back position.560 Existing rules are assumed by their very nature to come up with the correct answers. Whatever results, in this view, it is the law and is always right. It can as such not be questioned. In more advanced nations, democratic control is often cited as further support for this kind of legal nationalism and territoriality, but formal adjustment is often a very low priority in these countries, new social values may be poorly expressed or not at all and much more participatory forms of law creation like custom are ignored, see further the discussion in section 1.1.8 above. Thus, true legitimacy is not promoted but may suffer in such a formalistic environment. This becomes all the clearer in international transactions. All modern legal authors present here some view although it remains often implicit. Natural law tendencies in the sense of accepting non-statist authority in law formation and application, if only in interpretation and supplementation, are the traditional antidote. It was already said in the previous section that much of present-day discussion, at least in the context of transnationalisation, centres here on the role of fundamental and general principle as law. It should be clear

560 Soft law means in this approach rules that do not emerge from an authorised source of law, such as in international commerce and finance proposals or sets of principles from UNIDROIT, UNCITRAL, ICC or other such organisations or from think tanks that aspire to reflect the living law particularly at the transnational level. In regulatory law, the concept of soft law also exists; the capital adequacy rules of Basel I, II, and III, for example, have been so identified; see for the BIS and its activities, n 586 below. Custom and academic opinion may then also be considered part of it. So, in fact, may be practices and general principle. It may even apply to fundamental principle. They denote some guidance, some persuasive authority but have no legal status proper. It was posited, however, that pressing moral, social and efficiency considerations enter the law all the time, especially in its interpretation and application. There are also overarching principles and they are not soft law. If soft law attains the level of custom or general principle, it must also be considered good law at least within the modern lex mercatoria, as we have seen. The work of the ICC is a particularly important example: the Incoterms and UCP have been exceedingly successful and although normally incorporated by contract and then operating as contract law, they may operate as custom if not so incorporated and are indeed now usually so considered and applied, see n 439 above. The same goes for general principle and especially for fundamental principle. For those who deny the status of an autonomous source of law to custom, general principle and even fundamental principle, soft law is often the only option to give them some meaning, but it is wholly unclear what it could be, cf R Goode, ‘Rule, Practice, and Pragmatism in Transnational Commercial Law’ (2005) 54 ICLQ 539, who, although admitting that transnational commercial law is the product of various means such as international conventions, model laws, contractually incorporated uniform rules, international restatements and conscious or unconscious legislative parallelism, reduces these sources beyond treaty law (therefore the law deriving from states) to soft law and equates the lex mercatoria merely with contractual practices (supposedly still under local laws). For legal positivists, soft law thus becomes the only way to deal with a more dynamic concept of law and newer ideas. It may explain the increasing popularity of the notion, but it cannot stand in for legal dynamism itself. Indeed, legal dynamism is of a different nature and, in the view here expressed, produces hard law of which market practice and general principle are important manifestations. The lex mercatoria is thus perceived internationally as law. In fact, norms are either law or they are not. There is not truly a medium category. It means that they either must apply or they do not. If through interpretation soft law is incorporated, it is law and strictly speaking this could only happen if it were an expression of principle or custom. The same may go for academic opinion as for public international law Art 38(1) of the Statute of the ICJ also suggests but it must as a minimum be recognised in the relevant community as responsive in order to count as law. If it is, it is no longer soft law; if it is not, it truly has no legal significance at all and is mere opinion.

Volume 1: The Emergence of the Modern Lex Mercatoria 251 that the lex mercatoria approach as here explained, therefore with its reliance on fundamental and general principle and customary law and party autonomy as the basis for the whole system, is comfortable with and relies heavily on their direct applicability. It has already been noted also that reliance on principle usually stands at the beginning of any new development in the law that goes beyond the detail. So, it is in transnationalisation, but it was also said that even domestically, principle, often fundamental, is no less necessary to iron out local contradictions in the positive law, update it and move it forward for it to remain credible. Legal formalism and courts blindly following to clear their docket can give rise to great institutional injustice under the cover of the law. A change of paradigm was noted before. One may say that the new transnational approach is no more than paradigm either, but at least it is in international business more responsive to societal needs and that is in this view the ultimate key of legitimacy and validity, in terms of justice, social peace, and efficiency and balance between them. Judges must be given room to avoid a ticking off attitude, otherwise arbitrators will. As importantly, not all that happens in civil society is subject to government licence,561 it was already mentioned, especially not in democracies and that becomes all the clearer in the international commercial and financial flows or transnational commercial and financial legal order. But public policy corrections of the international marketplace should also concern us here; it was already said that they are the greatest challenge in the transnationalisation process and is the major issue, not the question whether all societal activity is or must be licensed by states. Legal positivism of the modern black-letter variety may be more easily explained and accepted in public law, notably regulation as expression of ever changing public policy, which is substantially formulated by government, subject to political expediency, and to governments’ immediate enforcement powers, either through the courts or more indirectly through governmental agencies or regulators (by giving guidance or withdrawing licences and so on) or funding and is more nationalistic or territorial per definition. As policy, it is indeed usually driven at the national level, although less so where, like in the EU, internal markets are created or trade and bilateral or even multilateral investment treaties are concluded. Even then, this law may still have some structure of its own, may not be completely malleable, at least not in the world it means to guide or change, and might not allow for full monopolisation by states or agglomerations of them.562 It was already said that many formal rules may not even work and perhaps can never do so because they represent wishful thinking and political expediency, potentially also overwhelmed in their outcome by unintended and unforeseen side effects. In any event, there are still extrapositive norms of diversity, equality, and proportionality to consider in the application. Notions of justice, social peace, and efficiency are not banned either. The development of the modern lex mercatoria through the process of transnationalisation of private law in the transnational commercial and financial legal order as basically a bottom-up process of law creation may be perceived as the clearest demonstration of spontaneous non-statist law formation in modern times. Thus, transnationalisation breaks with the positivist agenda as we now understand it in many ways and leaves statist authority, legal formalism, and doctrinal thinking behind. It maintains a dynamic concept of law that moves with the facts unless contained

561 See for this important discussion s 1.1.8 above. 562 J Habermas, Between Facts and Norms (Cambridge, MA, 1996) 428. See for the impact of culture and the contingency of the entire social orcder, the discussion at n 590 below. In this approach it may be said that law is like paper money, it only works because we believe in it. In this sense, nationalism, even religion and culture may help. All suggest undercurrents best to stabilise the law and hold it together.

252 Volume 1: The Emergence of the Modern Lex Mercatoria by public policy and public order or pressing overriding notions of justice, social peace, and efficiency. They are all in the process of being themselves transnationalised in the transnational commercial and financial legal order unless international transactions still come demonstrably onshore in conduct or effect in a particular country, although even in such cases the own public policy may increasingly conform to international minimum standards for countries that want to remain internationally engaged. We see it for example in the New York Convention in the application of the public policy bar to the recognition and enforcement domestically of international arbitration awards. In this world, the traditional and fundamental Kantian divide between fact and norm and law and morality is abandoned. To repeat, rules may be found in the facts as in custom and in ever-evolving situations where newer value standards change the legal rules. Law finds its true meaning and expression in its application. A-aprioristic norms or black-letter rules are only guidance (unless there is pure repetition and the law is absolutely settled). The idea is not system finding or system thinking but finding structure and predictability in the applicable law, or certainty of a different order notably in transactional and payment finality which is a proprietary issue, reinforced especially, it was submitted, by the sources of transnational law in international professional dealings where it is of the greatest importance, see the discussion in section 1.1.7 above. The view presented in this book is that in civil society law, private law is basically order but has in its application always an extra-legal objective and finds its purpose in the support of justice, social peace and safety, or efficiency, and possibly growth. This distinguishes civil society from a more primitive one. Beyond establishing basic order, these are the needs modern law then serves and it is qualified thereby even though these objectives may be contradictory and do not present a complete legal normativity by themselves. To repeat, law, private law in particular, operates here through a multitude of sources (fundamental and general legal principle, custom and practices, party autonomy and legislation/treaty law) and has many spokespersons (legislators, judges, arbitrators and practitioners, the informed press, international organisations and possibly NGOs). This law is not nationalistic or territorial per se but serves every particular legal order in ways typical for that order and its participants or members. It may not even present a logically coherent framework and there may not be uniformity in interpretation, which always depends on the facts, the type of business, the people or community served. These orders may be national or transnational and embody themselves diversity. Law of this nature in whatever order always moves with it and is dynamic, often uncertain, may even be confusing, and is in its formulation and application heavily dependent on the situation and the rationality of its actors. Again, this law is the result of a constant debate in the relevant part of society about its meaning or extent and it cannot always be said with certainty what it is. It can never be fully known. That is why we have lawyers. The more modern concept of legal positivism may suggest otherwise and seek greater clarity, at least at the national level, but it is doubtful whether it could make that true. There would be less strife and litigation than we have if it were so. It can only be repeated563 that a blind belief in texts and their system and their automatic application is likely to lead in a fast-moving society to ever lower quality law. The present concept of legal positivism with its nationalistic, statist, and static undercurrents nevertheless still reflects the prevailing tendency in Europe, in the older generation in England mostly supported by the followers of Hart, on the European Continent in that generation by the followers of Kelsen.564 As we have seen, it is different in the US, where legal scholarship and the courts are more used to and are comfortable

563 See s 1.1.7 above. 564 See ss 1.2.13 and 1.3.4 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 253 with experimentation, the tenets of legal formalism having been left behind, while at least in commerce the UCC remains explicitly receptive to custom and other non-statutory sources, even promotes them. In Europe, on the other hand, this form of legal positivism may explain the present widespread academic hostility towards the modern lex mercatoria and its revival, even in England, which attitude is often also presented in law teaching and from there into the legal practice. But it cannot satisfactorily explain how new values and perceptions constantly enter the law, how it deals with contingencies, even domestically, and why international transactions must always be covered by this type of national law. This is dogma, of nineteenth-century vintage; only 50 years earlier people had held exactly the opposite view when natural law tendencies were still strong and the universality of law and its rationality were presumed. There is no reason why the paradigm should not shift again. It is rejected in this connection that the modern lex mercatoria serves merely to supplement contracts, especially duration contracts operating under local laws, or to exert a special form of control,565 or to impose a new sense of justice or fairness on business, or to introduce equitable considerations.566 This misses the point, which is the operation of a new law in a new legal order with its own hierarchy of sources to be followed and implemented in international commercial and financial dealings and in dispute resolution concerning them unless public policy and public order dictate otherwise.

1.4.18. Dispute Prevention or Dispute Resolution? Law in Action or Law in Litigation A last thought may help to complete this picture. Both in civil and in common law academia, it has become normal to look at the law through the judges’ eyes, although this was not the original civil law attitude, which was policy-oriented and meant to make daily life easier for all; dispute resolution was secondary and an imperfect art. This became probably also the view in the US in the more functional approaches. In Europe, older codes and ever newer fact situations required adjustment in civil law, and this had to come increasingly from the courts, especially through the vehicle of interpretation or a supplementation, if distinguishable, as governments found it difficult to amend the codes and it seldom had priority. Thus, in both civil and common law, dispute resolution is or has become the major perspective of legal education and legal scholarship, at least in private law. In common law, that was nothing new. It is traditionally based on case law and emerges from it; indeed, originally the common law could only be known through it. Legal scholarship quite naturally then tried to draw some further rules from cases. Even the common law could thus acquire some cohesion or could appear as a system, although, as we have seen, systemic thinking never achieved in common law the dominance it has in civil law whilst academia traditionally did not have a high standing.567 The common law courts’ a ctivity remained, and remains, fact based and pragmatic, still moving from situation to situation or case to case, even when there is statutory law. On the other hand, in case law, civil law remains rule

565 Wrongly in its generality, it is submitted, proclaimed by AE Farnsworth, G Bonell and A Hartkamp in (1994) Tulane Journal of International and Comparative Law as basic tenets of good faith and fair dealing in the professional area. 566 J Covo, ‘Commodities, Arbitrations and Equitable Considerations’ (1993) 9 Arbitration International 61. 567 See s 1.4.1 above.

254 Volume 1: The Emergence of the Modern Lex Mercatoria and system based in principle, although its judges in their interpretation activity have also often been forced to move from fact situation to fact situation much as the common law judge does, at least in the law of obligations. This was discussed in section 1.4.1 above. In contract, that is often demonstrated by the use of the good faith notion. In tort, the norm became anti-social behaviour, which was so broad that for its meaning it also started to move from fact to fact. This is an important approximation but it was submitted all along that there remains a difference. First, civil lawyers are generally less comfortable with handling facts, and continue to view and identify them as relevant only from the perspective of their system. It determines what must be proven, which, it has been submitted, may amount to a form of intellectual prejudice and arbitrariness while considering and selecting the relevant facts in new situations.568 For them, the system, whatever it was or is, then still comes first and interpretation is primarily seen as its completion. It was thus noted that even in good faith case law, in Germany, academia strives to find renewed system and continues the pretence that it can solve all problems.569 There is no great recognition that in all interpretation the older sources of law regain their place which poses at the same time the question of their hierarchy, even domestically. We have seen that American realism was able to move to an altogether more dynamic concept of private law and more fundamentally accepted that a rule acquired its ultimate meaning only in its application to facts, which application changed it at the same time. There is a strong policy orientation: ‘what do we want to achieve in the application of the law’? It is in truth not far removed from the old Digest maxim: ius in causa positum, which expressed the same idea (D.9.2.52.20). System thinking is here secondary. In the more modern ‘law and …’ movements, there is more attention for the rule itself, its origin, operation, sufficiency, and meaning. In doing so, it moves beyond litigation and the system and its application become secondary. Litigation is then a mopping-up exercise in respect of the past and operates at the micro level. Rather, law becomes a macro event, a way first and foremost to guide society, provide basic order, and make it work better for the future. It is dispute prevention and much more. Hence the emphasis on policy. How the population can know these rules and obey them (voluntarism and internalisation) then became another important field of study. In the meantime, it could be noted that this American approach has some affinity with the original civil law codification idea before system thinking took over.570 It was also to make life easier for all, clear the slate of a myriad of inconsistent and antiquated local rules, and to simplify the understanding of human relationships and how they worked. Order still came first, but it was obviously better if it was also just, promoted social peace and safety, and was efficient, to be realised in a dynamic continuous process of legal evolution that remained as much daily life- as litigation-oriented. It has already been noted that this is what we truly mean when we speak of the rule of law in civil society, even if more recent concepts of the positive law may continue to challenge this perception and accept a rough and ready approach. Indeed, dispute resolution remains best seen as exceptional, exercised at the micro level, and is perhaps the most imperfect part of the law. In the one world, we are concerned about the law of tomorrow, the better rule to propel society forward; in the other about the law of yesterday, a cleaning-up operation. These two worlds and two concepts of the law are perhaps not easy to combine. In disputes, people need to be judged according to some existing standards that

568 See nn 87 and 417 above. 569 See n 94 above. 570 See s 1.2.13 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 255 crystallise at the moment of their action. That is the law in litigation that needs to be fixed in time; in the law in action the essence is rather adaptation and movement.571

1.4.19. The Development of the Modern Lex Mercatoria and Role of National Courts and International Commercial Arbitration In the previous sections it was argued that domestic courts should and could directly apply the hierarchy of norms inherent in the lex mercatoria to professional disputes as international commercial arbitrators may do when this is properly pleaded. If that remains problematic for national courts, an international commercial court system might be considered. As already suggested in section 1.1.12 above, in such a system, national courts could function as international commercial courts in international commercial cases.572 This could provide an appropriate alternative to international arbitration, with the added facility of law-making authority in judges, upon a better view, on the basis of the various sources of law of the modern lex mercatoria, or of public policy. Their judgments would then be international and they should become universally enforceable as such, much as international arbitration awards are now under the New York Convention and as ordinary civil and commercial judgments resulting from forum selection clauses are now recognised under the Hague Convention of 2005 on Choice of Court Agreements in countries that are Members of that Convention. The main difference with international arbitrations would be the potentially greater power of judges to apply such law at their own initiative, not therefore merely as fact upon the pleadings or submissions of the parties,573 and also clarify this law, potentially creating greater legal stability

571 In n 504 above, the view was noted that informal custom, course of dealing, trade usages and so on are often replaced by trade organisation rules that are more precise, especially relevant when disputes arise. It follows that, while participants may accept custom in their dealings as long as co-operation is productive, when disputes arise, they prefer these more precise rules by way of endgame. This suggests that these (black-letter) rules are absolutely mandatory in litigation when judging behaviour, which behaviour was earlier prescribed by other rules. It leads to a different rule system in and outside litigation altogether. It was submitted before that this is an interesting twist in the operation of private law that may need further thought. 572 JH Dalhuisen, ‘The Case for an International Commercial Court’, in KP Berger et al (eds), Private Law and Commercial Law in a European and Global Context. Festschrift für Norbert Horn zum 70. Geburtstag (Berlin, 2006) 893; see further the authors cited in n 140 above. 573 This dependence on the submissions of the parties demonstrates even in arbitrations between states a different non-judicial attitude in dispute resolution which leaves the parties in control but still allows one party to submit the, in its view, applicable rules regardless of consent of the other. In Aroa Mines (Ltd) case on merits, 9 RIAA, 402 (1903) it was correctly stated that arbitrators even in cases between states do not autonomously apply the rule of law and it was observed in this connection in the comments that arbitrators commonly do not act as judges deciding questions of fact and law but sometimes rather operate as negotiators effecting settlement of issues brought before them, these two approaches being considered radically different, see further Root’s Instructions to the American Delegation to the Hague Conference of 1907 in G Hackworth, ‘Foreign Relations of the United States’ (1984) 61 Digest of International Law 1128, 1135, see further also the discussion in Vol 2, s 1.1.3 and s 1.1.14 below in respect of international commercial and financial arbitration, where the accent is on the limitation of the dispute to submissions of the parties and the lack of autonomous law finding power in the tribunal, see further also the comments in Vol 2, s 1.1.14 below and the need also in commerce and finance for a more consensual approach to dispute resolution through arbitration. The Permanent Court of Arbitration (PCA) may strictly speaking not be an arbitration tribunal in this sense. Art 37(1) of the Hague Convention of 1907 makes clear as a matter of treaty law that this international arbitration ‘has for its object the settlement of differences between States by judges of their own choice, and on the basis of respect for law’.

256 Volume 1: The Emergence of the Modern Lex Mercatoria with a facility for appeal, reasons why such an international system could conceivably still function as a true alternative dispute resolution facility for parties in international cases.574 Such an international dispute resolution facility, which would appear to require some treaty support, could have a central transnational highest court to deal with appeals and enforcement. Binding preliminary opinions could then also be asked from it by the lower courts, especially in matters of the application of the lex mercatoria, the reach of domestic regulation in international cases, and the operation of public policy and transnational minimum standards. Except for the appeal function, such a highest court could also serve in international arbitrations in support and supervision. Importantly, it could also supervise the recognition and execution (or setting aside) of international arbitral awards and centralise this function under the New York Convention. It is then also conceivable that arbitrators could seek preliminary opinions from this court in the areas mentioned. The facility to request preliminary opinions in this manner, both by the ordinary courts and in international arbitration could thus become an important aid to the development of transnational commercial and financial law and more particularly to the public interest balancing the international marketplace. At one time in the 1970s, the English commercial courts thought that they could indeed operate as ordinary international commercial courts.575 In view of what has just been said, this is not as strange as it may sound. All national courts applying commercial law in international cases could thus be seen to be operating in the international commercial and financial legal order, just as all Member State courts in the EU are competent and obliged to apply EU law and they operate then as EU courts in the EU legal order subject to a facility to request preliminary opinions from the ECJ. Again, under a proper understanding of the rule of law in the transnational commercial and financial legal order, the resulting court decisions should then be enforceable wherever parties require them to be, and all civilised nations and their courts should co-operate in the enforcement effort, assuming minimum standards of procedural protection and public order are met.576 As for the ICJ and its predecessor, it was understood from the beginning that it was judicial and not strictly speaking in the nature of arbitration either, although the first sentence of Art 38(1) of the ICJ Statute makes it very clear that dispute resulution and not law formation is the task of the Court. Arbitration was here distinguished merely in the sense that the parties selected the tribunal which was to find on the basis of the principles selected by the parties, and that it was voluntary, see Advisory Committee of Jurists on the Establishment of a Permanent Court of International Justice, 113 (1920). Only this last aspect was retained for the ICJ. See for this debate in commecrcial arbitration, Vol 2, s 1.1.14 below. 574 Even the power to supplement the law was originally controversial in international arbitrations, arbitrators’ task being characterised earlier mainly as procedural, see W Craig, W Park and I Paulsson, International Chamber of Commerce Arbitration, 2nd edn (Oceana NY, 1990) 143. This view is now more fundamentalluy challenged and supplementation and adjustment may have become part of international arbitrators’ ordinary interpretation facility, at least if that is pleaded by the parties or one of them, although in areas where international arbitrators have obtained original power, eg in procedural and evidence issues, they may be able to go further. This will form much of the discussion in Vol 2 below. This being said, even then international arbitrators should not be perceived as law makers like perhaps appellate judges. They solve disputes, no more. This could be called ‘procedural’ but in essence it is factual. Their task is notably not to create legal precedent or clarify the law even if their work may still be considered in that light in academic analysis once enough decisions become available, especially in areas where arbitrators have more power, as may be the case in investment arbitrations; in commercial arbitrations they may have some as well, eg, to keep markets clean as a matter of public policy, but it is likely to be more exceptional; see on these powers further Vol 2, ss 1.1.10 and 1.2.5 below. 575 Amin Rasheed Shipping Corporation v Kuwait Insurance Company [1983] 1 WLR 228, 241; see more particularly n 141 above. 576 The English attempt to consider the English courts as international commercial courts was rejected by the House of Lords, however, see also n 576 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 257 Indeed, this situation predominantly prevails for international commercial arbitrators in international arbitrations under the New York Convention. These may be conducted ad hoc or under existing arbitration rules. The most important of these rules are the UNCITRAL Rules, the ICC Arbitration Rules of the International Chamber of Commerce in Paris and the LCIA Rules of the London Court of International Arbitration. Under the latter two sets of rules, an organisation and administration of international arbitrations is provided. These sets are regularly updated; the LCIA rules last in 2020 and the ICC Rules in 2017. As far as the applicable law is concerned, they leave great flexibility to the arbitrators (see section 14(5) of the LCIA Rules), which allows arbitrators to apply whatever rules of law they consider appropriate, supposedly still subject to the pleadings of the parties; see further the elaboration in Volume 2, sections 1.1.2 and 1.1.3. This leaves ample room for the application of the lex mercatoria and its hierarchy of norms. French arbitration law (Article 1496 CCP of 1981, now replaced by Article 1511 as part of the new French international arbitration law in 2011) and amended Dutch arbitration law (Article 1054 CCP) already allowed this earlier. The English Arbitration Act of 1996 continues to refer here rather to conflicts of law rules when parties have made no other arrangements under section 46(1)(b), even if the arbitrators are free to determine what the appropriate conflicts rule is (section 46(3)). It follows in this respect the UNCITRAL Model Law (Article 28(2)), which is also reflected in the UNCITRAL Rules of 1977 (Article 33), and thus may remain more restrictive.577 In the meantime, the UNCITRAL Rules themselves were updated in 2010, leaving the determination of the applicable law to arbitrators (Article 35), again supposedly upon the proper pleadings by the parties. The fact that the UK (unlike, for example, France and Switzerland) did not opt for a legislative split between domestic and international arbitrations may have retarded the development in this regard. The lack of distinction tends to limit the space for international commercial arbitration and to ignore its transnational character. This may then also affect the facility to apply the modern lex mercatoria. Most importantly, international commercial arbitration is supported by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 which

577 Nevertheless, even English case law upheld the application of ‘internationally accepted principles of law governing contractual relations’ in an award rendered pursuant to an arbitration governed by Swiss law, Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v Ras al-Khaimah National Oil Co [1987] 3 WLR 1023, see also n 141 above. There was no contractual conflicts of law clause and Art 13(3) of the old ICC Rules, which still required settlement of the dispute through conflicts of law rules, was applicable. Thus such a requirement seems no longer to exclude the application of general principles or of the law merchant (lex mercatoria); see also the Austrian Supreme Court (18 November 1982, (1984) 34 ICLQ 727) and the French Cour de Cassation (XXIV ILOM 360, 1984), in cases upholding the award in Case 3131 Norsolor (Pabalk Ticaret Sirketi) (Turkey) v Ugilor/Norsolor SA (1979), one of the first awards making a direct reference to the lex mercatoria under Art 13(3) of the ICC Rules at the time. See further Vol 2, s 1.2.2 below. An award that is altogether detached from a national arbitration law may still have some greater difficulty in being recognised under the New York Convention, although upheld in the US: Ministry of Defense of the Islamic Republic v Gould, Inc 887 F 2d 1357 (9th Circ, 1989), see more particularly also J Lew, ‘Achieving the Dream: Autonomous Arbitration’ (2005 Freshfields lecture) (2006) 22 Arbitration International 179, see also n 130 above, see further Vol 2 ss 1.1.8/9. In England there is the further complication that the 1996 Arbitration Act does not distinguish between domestic and international arbitrations, which tends still to suggest greater court control in (all) arbitrations with a seat in London than may be desirable. In Occidental Exploration Production Corp v Republic of Ecuador [2005] EWCA Civ 1116, it was even held (by the English Court of Appeal) that all arbitrations with a seat in London result in English awards. Implicitly, the existence of international arbitration awards is here denied. This must be a mistake. In any event, it does not directly affect awards rendered on the basis of other than a national substantive law, see also AJ van den Berg, The New York Arbitration Convention of 1958: Towards a Uniform Interpretation (Deventer, 1981) 33.

258 Volume 1: The Emergence of the Modern Lex Mercatoria (under certain minimum conditions) makes them enforceable in all participating states. They include all substantial trading nations. Such broad treaty support has notably been lacking for the international recognition and enforcement of ordinary judgments. Bilateral treaty law still remains the most normal response here but is still rare. In the US among the states, the Full Faith and Credit Clause of the Constitution at least guarantees the recognition of sister state judgments. In the EU, since 1968 there has been the important Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, now superseded (since 2002) by a Regulation in this area, followed by the very similar Lugano Convention, which ties in most other Western European Countries. In applying the modern lex mercatoria, it may even become accepted that arbitrators may act in appropriate cases as equity judges in the transnational commercial and financial legal order the way English judges have been able to do,578 that is to say remedially in individual cases, which may ultimately contribute to the formation of new (transnational) law and could in this manner even develop new proprietary and set-off structures at the transnational level.579 It will be argued later in Volume, that they might have some other original powers (see sections 1.1.10 and 1.2.5) and may in appropriate cases be able also to raise public policy and order issues themselves. They also have original power in procedural and evidential matters and over their own jurisdiction, arbitrability, and way of reasoning. This denotes a special role and specialised function for international arbitrators, institutionally rooted, it is argued, in the transnational legal order itself and not merely in the arbitration clause, which only activates these powers but cannot create them, see further also the discussion in Volume 2, section 1.1.9 below, although it would still appear wrong to consider international arbitrators as law makers in these areas in the manner of appellate judges.580 In particular, they would still be dependent on the submissions of the parties although in areas where international arbitrators now have autonomous powers, they could ask for further particulars. Even then, it would still be doubtful whether they are truly lawmakers. This is important as an insight. International arbitrators are not even then in a position to build legal systems or to redistribute the risks between professional parties, for which under the cover of good faith or otherwise, there may be room and sometimes a need in consumer cases but hardly in professional dealings (except perhaps in extreme situations when manifest unreasonableness may result). Application of the lex mercatoria also does not allow international arbitrators generally to base themselves on notions of fairness, which would make them more like amiable compositeurs,581 although international arbitrators applying the lex mercatoria are sometimes (wrongly it is submitted) still so regarded.582 To repeat, an important aspect remains that in international cases the law (or any equitable relief sought under it) must normally be pleaded; it is not for arbitrators or even ordinary judges to apply it autonomously except again in those areas where they may have original

578 See Dalhuisen (n 572). 579 It may be recalled that this was the medieval idea of the operation of precedent, see n 314 above. 580 It was explained more extensively in s 1.1.6 above what the special (equitable) arbitral powers may amount to in international professional dealings in terms of finding and operating a dynamic transnational contract and movable property law in the context of the development and application of the modern lex mercatoria, which is more fully covered in Vol 2 and there put in its comparative and historical context. 581 Even if modern international commercial arbitration under the lex mercatoria may get closer to an amiable composition, it is by no means the same and should remain well distinguished, notably because it is based on the law, although not necessarily any longer of a domestic kind, see Dalhuisen (n 572). 582 See, eg WW Park, ‘Judicial Controls in the Arbitral Process’ (1989) 5 Arbitration International 230.

Volume 1: The Emergence of the Modern Lex Mercatoria 259 powers (and ordinary judges may have more), which powers they should even then exercise with considerable restraint. It has already been said also that the civil law maxim ius curia novit [‘the court knows the law’] does in any event not apply to international arbitrators who have no law of their own on the basis of which to state or it would have to be the transnational lex mercatoria itself, in such cases also applied to the international arbitral process and to the status and powers of international arbitrators. Even then, application of such law without asking for further submissions or particulars and giving parties the opportunity of a proper hearing on it should be anathema to international arbitrators in particular; see further the discussion in Volume 2, section 1.2.5.

1.4.20. Agents of International Convergence and Harmonisation: The Role of UNIDROIT, UNCITRAL, the ICC, The Hague Conference, and the American Law Institute and Commissioners on Uniform State Laws in the US In the previous sections, reference was made several times to organisations such as UNCITRAL and UNIDROIT as agents of international convergence and harmonisation of commercial and financial laws. UNCITRAL is the United Nations Commission on International Trade Law. It was created in December 1966 and has operated from Vienna since 1969. It has been particularly active in the area of the international sale of goods and prepared the 1980 Vienna Convention or CISG. The UNCITRAL Model Arbitration Law has also already been mentioned. UNCITRAL operates in many other areas generally through Conventions, model laws, legal guides, and, in the area of international arbitration, also through Rules and Notes. Thus, there are UNCITRAL Conventions on the International Sale of Goods, on the Limitation Periods in the International Sale of Goods, on International Bills of Exchange and International Promissory Notes, on the Carriage of Goods by Sea, on Independent Guarantees and Standby Letters of Credit, and on Receivables in International Trade (to be discussed more extensively in Volume 4, section 1.9.3 and Volume 5, section 2.4). There are Model Laws on International Commercial Arbitration, Cross border Insolvency, Electronic Commerce, Procurement of Goods, and International Credit Transfers. There are Legal Guides on International Counter-trade Transactions, Electronic Funds Transfers and Drawing up International Contracts for the Construction of Industrial Works. Rules have been issued on Arbitration and Conciliation. There are, finally, also Notes, such as those on Organising Arbitral Proceedings. UNCITRAL is directly run by the UN and operates under the General Assembly. UNIDROIT is the older organisation and is rather a left-over from the former League of Nations. It was not converted into a UN agency but re-established in Rome after World War II as an independent organisation,583 funded by Italy and other participating countries. There is a healthy competition with UNCITRAL, even some overlap, but the UNCITRAL remit is narrower and limited to

583 As of 2019, it has 63 Member States and operates under a Governing Council consisting of 25 members appointed by its General Assembly for five years. This General Assembly meets once every year to vote on the budget. It also votes on the Work Programme proposed by the Governing Council, which is in charge of policy, implemented by the Secretariat headed by the Secretary General. The President is appointed by the Italian Government and is an ex officio member of the Governing Council.

260 Volume 1: The Emergence of the Modern Lex Mercatoria trade law.584 Important UNIDROIT Conventions are the ones on International Financial Leasing, on Factoring, on Agency in the International Sale of Goods, on Stolen or Illegally Exported Cultural Objects, on Mobile Equipment (also known as the 2001 Cape Town Convention), and on Intermediated Securities (also known as the 2009 Geneva Convention). The first two and the Cape Town Convention will be discussed more extensively in Volume 5, the Geneva Convention in Volume 4. As was shown, UNCITRAL has produced more results although in a narrower field but, with the exception of the CISG, has, like UNIDROIT, suffered from little ratification. At the international level, the ICC has also been operative in the area of international trade. Its Uniform Customs and Practice for Documentary Credits (UCP) have been in existence for letters of credit since 1933. Since 1956 there have also been Uniform Rules for Collections (URC). For guarantees, the ICC compiled two sets of uniform rules, the first being the Uniform Rules for Contract Guarantees of 1978 (URCG) and the second the Uniform Rules for Demand Guarantees of 1992 (URDG), replaced in 2010. The ICC Incoterms have since 1936 covered the basic trade terms such as FOB and CIF and now also cover several others. In the area of international sales, the ICC produced a Model International Sales Contract. These various rules and practices, which are important, are commonly deemed applicable by virtue of contractual incorporation or on the basis of custom. They are not promulgated in any way. The significance of the ICC and its various committees in this respect is that these texts are regularly updated and have acquired full industry acceptance and then function, it was submitted, as customary law within the modern lex mercatoria, see also the discussion in section 1.4.8 above and the example at the end of section 1.4.14 above. Other organisations such as UNCITRAL sometimes co-operate, as in the revisions of the UCP for letters of credit. These revisions do not always promote conceptual clarity and academic input is often missing, but they are at least up to date and work as they have obtained the industry’s confidence and support. As such they have proved more important so far than the work in both UNCITRAL and UNIDROIT which misses this type of backing. Besides UNCITRAL, UNIDROIT and the ICC, the World Trade Organisation (WTO) may now also have to be considered as a modern organisation, which, in the area it covers, equally moves forward on the legal front among its members.585 The Bank of International

584 The main UNIDROIT project was originally the International Sales of Goods Convention, a project started in 1928 on the initiative of Professor Ernst Rabel from Germany, later at the University of Michigan at Ann Arbor. Because of the non-functioning of UNIDROIT during and after World War II, the Dutch government was asked by the United Nations to provide a venue for the continuation of this work, which was completed in two diplomatic conferences in The Hague in 1951 and 1964. They resulted in the Hague Conventions on Uniform Law in the International Sale of Goods. The project was subsequently taken over by UNCITRAL resulting in the successor Vienna Convention of 1980 (CISG). 585 The WTO dates from 1996 and was a product of the Uruguay Round. It is the successor of the former GATT (which was reconstituted under it) and it acquired some broader powers also in the area of services (through GATS): see Vol 6, s 2.1. In particular, it established (a) a new legal pattern of conduct, integrating all previous GATT agreements into one system including the trade-related movement of persons and investments. It also instituted (b) a new infrastructure for trade relations, with its own Ministerial Conference, General Council, Council for Trade in Goods, Council for Trade in Services, Council for TRIPS, Committee on Trade and Development and its own Secretariat. The WTO further provides (c) a forum for further negotiations; and also (d) a dispute settlement procedure; (e) a policy review procedure; and (f) some special trade agreements, such as those on civil aircraft and government procurement. The basic tools of the most favoured nation clause and of national treatment, which may also cover legal and regulatory issues, are conducive to legal harmonisation, even though national policies must be respected. See further AT Guzman and JHB Pauwelyn, International Trade Law (Aspen, CO, 2009).

Volume 1: The Emergence of the Modern Lex Mercatoria 261 Settlement (BIS)’s efforts586 in the area of banking supervision, especially in respect of capital adequacy requirements, are relevant too, although not amounting to binding texts. The work of the International Organisation of Securities Commissions (IOSCO)587 should then also be mentioned. Related are the International Monetary Fund (IMF) efforts in the area of financial stability. By the end of 2008 the G-20 had stepped forward to review financial regulation at world level where earlier the Financial Stability Forum (FSF since 1999) had also been operative.588 It failed and was replaced by the Financial Stability Board, which concerns itself with macro financial supervision. The Organisation for Economic Co-operation and Development (OECD) has also been active in certain legislative areas.589 In the US, the work of the National Conference of Commissioners on Uniform State Laws and of the American Law Institute (ALI) on Restatements to harmonise the law between States of the Union has already been mentioned several times. It resulted from private initiatives, not supported by any agreement among the various States. The National Conference has drafted a

586 The BIS itself is the bank of Central Banks, originally created in 1930 to manage German reparation payments, and is directed by the Central Bank governors of the Group of Ten (G-10), which are (or were) economically speaking the most prominent nations, see Vol 5, s 2.5.1. It also serves as a think tank to Central Banks for banking regulation through the important Committee on Banking Supervision. This was extended to a much broader membership and is now called the Basel Committee, see for its role and function Vol 6, s 2.5.1. This co-ordination is motivated by the internationalisation of the banking industry. It concerns here primarily the business and regulation of commercial banks. The most important result has been in the area of capital adequacy for these banks, through the 1988 Capital or Basel Accord, cf the BIS Document on Convergence of Capital Measurement and Capital Standards, not to be confused with the 1983 Concordat concerning international banking supervision, as amended after 1992. The Basel Accord was based largely on a joint 1986 UK/US initiative, which adopted the risk–assets methodology. Following the Accord of 1988, the BIS produced a number of further communications in the capital adequacy area, leading to a formal amendment in January 1996, while in 1999 it proposed a complete overhaul of the 1988 document, which was followed by further proposals in 2001, leading to what is now commonly referred to as Basel II, effective since 1 January 2008. It has no treaty status and operates more as uniform general principle or international standard for financial regulation. It proved an immediate failure and was followed by an amended version in 2010, called Basel III. In the EU, the Basel Accords acquired official status (albeit with some modification) through Directives. The BIS is also active in other areas and issued among its many communications a Declaration of Principle on Money Laundering in 1988, a Code of Conduct on Large Risks in 1991, and Core Principles for Effective Banking Supervision in 1997. In 1998 there was a paper on Enhancing Bank Transparency and another one on Sound Practices for Loan Accounting, Credit Risk Disclosure and Related Matters. In the same year, the BIS (together with IOSCO, see n 587 below) published Recommendations for Public Disclosure of Trading and Derivatives Activities of Banks and Securities Firms. In 1999 there followed a Core Principles Methodology supplementing the 1997 Core Principles, both of which were reviewed in a consultative document of April 2006. 587 The securities business missed a similar organisation like the BIS for the international and co-ordination aspects of modern regulation. In the Americas there existed, however, IOSCO, the International Organisation of Securities Commissions, as a voluntary organisation of securities regulators based in Montreal. During the 1980s many other securities regulators joined, and this organisation now provides, through its regular meetings and various committees, a focus for international securities regulation, although not yet of the same standing as the BIS. It co-operates with the latter particularly in the area of capital adequacy for universal banks. Its most important achievement is probably the 1998 IOSCO Principles and Objectives of Securities Regulation, which contain a statement of best practices. It particularly seeks to prevent abuses connected with multi-jurisdiction securities activities. In the insurance business, there was even less international co-ordination between supervisors. The International Association of Insurance Supervisors (IAIS) is meant to fill this gap. Like the BIS, it is based in Basel. Its main achievements are in its 1995 Recommendation Concerning Mutual Assistance, Cooperation and Sharing Information and in its 1997 Model Principles for Insurance Supervision. 588 See further Vol 6, s 1.2.5. The IBRD or World Bank is also involved and the IMF particularly in connection with financial crisis management (for instance during the last two decades in Mexico, Russia, Asia, Argentina and Europe). 589 See notably its (failed) project for a Multilateral Agreement on Investment (MAI 1998).

262 Volume 1: The Emergence of the Modern Lex Mercatoria number of Uniform Laws for adoption. The most important one is the UCC, which was (exceptionally) a joint project with the ALI which became here leading. Normally the latter prepares Restatements, which are non-binding and are not meant to attain the force of legislation, but have nevertheless had a considerable impact on the further development of the law in the relevant areas. In practice, they serve as guidelines for the courts and have a strong persuasive force. The UCC on the other hand is now accepted (with some minor modifications) as uniform law in all 50 States of the Union. It was substantially conceived by Professor Karl Llewellyn (1893–1962) of Columbia University (later of the University of Chicago) as Chief Reporter with the help of Soia Mentschikoff as Associate Chief Reporter. Others, such as Professor Grant Gilmore of Yale, had a substantial input, the latter especially in Article 9 concerning secured transactions. The UCC is regularly updated and a number of new chapters have also been added, notably Article 2A on equipment leases and Article 4A on electronic payments. The above institutes and organisations mainly aim at promoting uniform substantive laws through treaty law, as parallel laws (in the US), as models (or Restatements), or through guidance. As we have seen, there has also been an attempt at drafting uniform conflicts rules. This has long been the objective of the Hague Conference on Private International Law, set up in 1893 under the leadership of Professor TMC Asser (1838–1913) from Amsterdam, who was later given the Nobel Peace Prize for his efforts (1912). This Conference produces draft treaties on private international law topics. It meets every few years on an irregular basis. Its approach is therefore notably not one of formulating uniform substantive laws. On the contrary, it is a proponent of the private international law approach, still looking for the application of a national law to apply to international transactions; see also the discussion in section 1.4.11 above. It only seeks to formulate through treaty law common conflicts principles in specific areas. In the business area, such Conventions are not many, but an important more recent example was the Hague Convention on the Law Applicable to Dispositions of Securities held through Indirect Holding Systems (see more particularly Volume 4, section 3.2.2). Others are in the field of trust and agency. Most are suffering from few ratifications. In 2005 there was added the Convention on Choice of Court Agreements. The Conventions prepared by the Hague Conference are commonly referred to as Hague Conventions but should be clearly distinguished from the Hague Uniform Sales Conventions, which produced uniform substantive sales law for goods. These were prepared at Diplomatic Conferences in The Hague in 1951 and 1964, as we have seen in section 1.4.11 above, and the Hague Conference was not involved in them.

1.4.21. EU Attempts at Harmonising Private Law Within the EU, efforts have been made in the area of unification of private international law rules, of which the 1968 Brussels Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters and the 1980 Rome Convention on the Law Applicable to Contractual Obligations were early examples. They were treaty law outside the EU framework proper. Under the Amsterdam Treaty of 1998, the area of private international law became an EU competency and the earlier treaties have both now been replaced (since 2002 and 2008 respectively, in amended form) by EU Regulations, commonly referred to as Brussels I and Rome I, the first one further amended in 2012, effective 2014.590

590 See for the situation after Brexit, A Dickinson, ‘Realignment of the Planets-Brexit and European Private International Law’ (2021) 41 IPRax 213 and JH Dalhuisen, ‘Recognition and Enforcment of Civil and Commercial

Volume 1: The Emergence of the Modern Lex Mercatoria 263 It should be noted that in the area of the unification of the substantive private law, there is no such general authority for the EU and its powers in this area must therefore be found in special Articles of the Lisbon Treaties, which now figure as the Founding Treaties of the EU. Article 114 TFEU is the most important one in this regard and puts such an effort in the context of the operation and completion of the internal market. As we shall see, it remains a serious question how much power this confers on the EU in private law unification and it could in principle only cover trade or other activity between Member States. In particular in finance, there are in this regard significant efforts in the Settlement and Collateral Directives and in MiFID (I and II), see Volume 6, sections 3.6.10, 3.7.5, and 3.7.19. There are other Articles in the TFEU which may also give some support as we shall see, but again probably not enough, at least not for a full codification effort of private law including commercial and financial dealings, assuming always that the codification idea civil law style remains valid in the first place. So-called soft law,591 through principles defined and formulated per topic, is often considered a first step for unification of this nature, and we have seen them arising in contract, trusts and even in secured transactions and insolvency.592 This activity may be worthwhile provided the need for professionals and others, like consumers, are clearly distinguished and reflected. As mentioned before, industry request and support may be a precondition for success. In commerce

Judgments in Europe after Brexit’ (2017) Butterworth Journal of International Banking and Financial Law 646. The main instruments of which the UK has withdrawn are the Brussels I and Bankruptcy Regulations which concern the recognition and enforcement of civil and commercial judgments and of bankruptcy. The Rome I and II Regulations on the applicable law of contract and tort were cloned, which means in essence retained as part UK law. 591 See for this concept also n 560 above. 592 In the EU, in contract, a private informal group financially (but not otherwise) supported by the EU (the Lando group) drafted European Principles of Contract Law (PECL), published between 1995 and 1998, largely as an amalgam or common denominator of domestic consumer laws, which will be more extensively discussed in Vol 3, s 1.6. They were very similar to the UNIDROIT Contract Principles, already mentioned in the previous section, which, however, did not apply to consumer dealings, although they were hardly less consumer oriented or anthropomorphic in their approach. Neither set proved convincing as they missed the connection with modern business needs and thinking in this area: see also s 1.1.6 above and Vol 3, s 1.6. At the academic level other principles were also being developed. The Principles of Trust Law, see Vol 4, s 1.4.6, are perhaps the most important and were formulated in a working group at the University of Nijmegen in 1998. They were short and of considerable interest. More incidental projects also emerged especially within the so-called Ius Commune Programme such as the Tort Law project at the University of Maastricht in 1998 (under Professor Walter van Gerven), followed (together with the University of Leuven) by Contract Law, Unjust Enrichment and Civil Procedure Law projects resulting in books with cases covering similar fact situations under different national laws. The Trento Project has concerned itself since 1995 with the Common Core of European Private Law, which it primarily meant to find in the study of case law in specific areas. It does not mean to produce Restatements. Both groups therefore explore case law rather than expounding new ideas. There followed the Study Group on a European Civil Code Project (Von Bar Group), which as a first step wanted to formulate Restatements in the various areas of private law. Younger academics in various universities were allotted special projects, such as sales, service and duration contracts at Utrecht/Tilburg and Amsterdam. A Coordinating Committee emerged, under which projects were spread locally. Although of interest and a good way to spread knowledge on different approaches in different European legal systems, one may well ask what the purpose of these projects was with practitioners’ input and interest largely lacking, especially in commerce and finance. The excitement clearly arose from the prospect of future codification, which was then assumed to be the proper method of EU private law formation and remained unquestioned as concept and method while purporting to be moving forward. Again, in the professional sphere the ultimate test for the validity of all these exercises is not merely the academic quality but whether the practice of the law recognises itself in the result in the light of its needs. If so, these studies could obtain an international normativity and become persuasive as general principle. Without it, they are no more than academic exercises, in practice mainly about what the law used to be in strict black-letter terms in different countries, often with an insufficient distinction between professional and consumer law.

264 Volume 1: The Emergence of the Modern Lex Mercatoria and finance, it was submitted, such principles and their collecting depend for effectiveness foremost on clarity, inspiration and guidance rather than on detailed compilations of minuscule rules, often derived from consumer-oriented domestic laws, which at least in contract and now even in movable property seems to be the preferred approach of many academics in the EU, see also the DCFR efforts. If sufficiently responsive to practical needs, in the approach of this book, such principles do not then remain merely soft law but may, in terms of the modern lex mercatoria, start operating as general principle and if generally followed as customary law. In the meantime, in the EU, beyond merely soft law or principles of this nature, especially for consumers, many incidental harmonisation measures have been implemented through Directives,593 which again can only be issued in areas where the EU was given special authority to do so. Furthermore, as Directives, they are not uniform law by themselves but present

593 This is so notably in the protection of consumers through consumer contract law. The ECJ has defined ‘consumers’ as natural persons acting outside the range of professional activity: see Case C-361/89 De Pinto [1991] ECR I-1189. Problems may arise where individuals also act professionally, raising the question whether such activities may still benefit from consumer protection: protection is not afforded unless the professional activity was insubstantial: see Case C-464/01 Gruber [2005] ECR I-439. However, the counterparty may still rely on good faith when an individual contracts for his business. It is also relevant whether the goods are or could be used for professional purposes, require delivery at a business address, or there is VAT registration. This suggests that the (consumer) buyer may have raised wrong expectations and accordingly bears the risk, but in internet transactions it may be simply the nature of the goods and the likelihood of professional use that will determine the issue. See for relevant Directives notably Council Directive 85/374/EEC [1985] OJ L210 on the approximation of the law of the Member States concerning liability for defective products; Council Directive 85/577/EEC [1985] OJ L372 to protect the consumer in respect of contracts negotiated away from business premises; Council Directive 87/102/EEC [1987] OJ L42 later amended, for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, now superseded by Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers [2008] OJ L133/66; Council Directive 90/314/ EEC [1990] OJ L158 on package travel, package holidays and package tours; Council Regulation 295/91 [1991] OJ L36/5 establishing common rules for a denied-boarding compensation system in scheduled air transport; Council Directive 93/13/EEC [1993] OJ L95/29 on unfair terms in consumer contracts; Council Directive 97/9/ EC [1997] OJ L144/19 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase on a time share basis; Council Directive 97/5/EC [1997] OJ L43/25 on cross-border credit transfers; Council Directive 97/7/EC [1997] OJ L144/19 on the protection of consumers in respect of distance contracts; Council Regulation of 9 October 1997 [1997] OJ L285/1 on air carrier liability in the case of accidents; Directive 98/27/EC [1998] OJ L166/51 on injunctions for the protection of consumers’ interests; Directive 00/31/EC [2000] OJ L178 on Certain Legal Aspects of Electronic Commerce in the Internal Market; Directive 2002/65/EC [2002] OJ L271 concerning the distance marketing of consumer financial services. The E-Commerce Directive 2002/87/EC [2003] OJ L35/1 contains in its Art 3(4) some special rules for consumer protection and allows host country measures in very narrowly defined circumstances. AEU Consumer Rights Directive, 2011/83/EU was issued in October 2011 and is foreseen to become effective by 2014. It replaces Directives 85/577/EEC (contracts negotiated away from business premises) and 97/7/EC (long distance selling) and amends Directives 93/13/EEC and 99/7/44/EC. The 2011 Directive is a maximum Directive and cannot therefore be exceeded in protection by better local provisions. One of the keys of the protection continues to be the facility to cancel the contract on receipt of the goods for which there is now a period of 14 days starting on the date of receipt of the goods. The problem remains that not all countries can afford as yet the same type and level of consumer protection. This required the Directive to be watered down substantially and again poses the question of the feasibility of one type of protection for consumers EU wide, especially now that we have a maximum Directive, which does not allow richer countries to offer more. The other point is that the EU jurisdiction is normally based on the promotion of the internal market, see text below. It is a connected issue. This effectively subordinates consumer protection, which must fit in with it. This issue and the friction it produces has started to surface in case law, see Case C-205/07 Gysbrecht/Santurel [2008] Jur.I-9947 16 December 2008, here in respect of a domestic protection going beyond the standard set in the long-distance selling Directive (which extra protection was condoned in the circumstances of the case) but it applies to all consumer protections, which cannot obstruct the internal market. The issue is here often the extra cost of sending and returning the goods.

Volume 1: The Emergence of the Modern Lex Mercatoria 265 harmonisation efforts that still need implementation at national levels, which allows for variation in the end result by Member States, although less so in so-called maximum Directives, which may not be topped up in terms of protection. In the private law area, EU Directives have also been important in respect of employment contracts594 and to achieve harmonisation of company law.595 Financial Directives may also have a private law impact,596 but in the professional sector, such Directives touching upon private law are otherwise still rare. Through Regulations, the EU could impose uniform law directly in areas of its competency, but in the private law area it has not so far done so or been able to do so except in the areas of recognition of civil and commercial judgments, bankruptcy, and in the implementation of some financial Directives. As already noted, the former Regulations concern private international

594 See especially Council Directive 76/207/EEC on the implementation of the principle of equal treatment for men and women as regards access to employment, vocational training and promotion, and working conditions [1976] OJ L39; Council Directive 2000/78/EC establishing a general framework for equal treatment in employment and occupation [2000] OJ L3003/16. 595 See First Council Directive 68/151/EEC on co-ordination of safeguards which, for the protection of the interests of members and others, are required of companies, with a view to making such safeguards equivalent throughout the Community [1968] OJ L65/08; Second Council Directive 77/91/EEC on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent [1977] OJ L26/1; Third Council Directive 78/855/EEC concerning mergers of public limited liability companies [1978] OJ L295/36; Fourth Council Directive 78/660/EEC on the annual accounts of certain types of companies [1978] OJ L222/11; Sixth Council Directive 82/891/EEC on the division of public limited liability companies [1982] OJ L378/47; Seventh Council Directive 83/349/EEC on consolidated accounts [1983] OJ L193/1; Eighth Council Directive 84/253/EEC on the approval of persons responsible for carrying out the statutory audits of accounting documents [1984] OJ L126/20; Eleventh Council Directive 89/666/EEC concerning disclosure requirements in respect of branches opened in a Member State by certain types of company governed by the law of another State [1989] OJ L395/36; Twelfth Council Company Law Directive 89/667/EEC [1989] on single-member private limited-liability companies OJ L395/40; Directive 2003/58/EC amending Council Directive 68/151/EEC as regards disclosure requirements in respect of certain types of companies [2003] OJ L221/13; Directive 2004/25/EC on takeover bids (text with EEA relevance) [2004] OJ L142/12; Directive 2005/56/EC on cross-border mergers of limited liability companies [2005] OJ L310/1; Directive 2006/68/ EC amending Council Directive 77/91/EEC as regards the formation of public limited liability companies and the maintenance and alteration of their capital [2006] OJ L264/32; Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies [2007] OJ L184/17. The EU has used the legal form of a Regulation to create new types of associations or companies at EU level, see Council Regulation (EEC) 2137/85 on the European Economic Interest Grouping (EEIG) [1985] OJ L199/1; Regulation (EC) 2157/2001 [2001] OJ L294/1 on the Statute for a European Company (SE) supplemented by Directive 2001/86/EC of the same date [2001] OJ L294/22 on employee participation; and Regulation (EC) 1435/2003 on the statute for a European co-operative society (SCE) [2003] OJ L207/1, supplemented by Directive 2003/72/EC of the same date on employee participation [2003] OJ L207/25. 596 See as part of the 1998 EU Financial Services Action Plan, especially Directive 2004/39/EC on Markets in Financial Instruments (MiFID) [2004] OJ L145/1, superseded by MiFID II in 2014; Directive 2003/6/EC on Market Abuse [2003] OJ L96/16; Directive 2003/71/EC as regards information contained in prospectuses (the Prospectus Directive) [2003] OJ L345; and Directive 2004/109/EC on the harmonisation of transparency requirements [2004] OJ L390/38 (Transparency Directive). The rules on conduct of business in MiFID I, now II, and their implementation instruments are especially important as they concern issues of agency in brokerage relationships and mean to protect (smaller) investors, see Vol 6, s 3.5 and s 3.7.19. In the financial area, in matters of private law, the Settlement Finality Directive 98/26/EC [1998] OJ L166/45 and the Collateral Directive 2002/47/EC [2002] OJ L168 are also especially relevant. They aim largely at private law harmonisation and within it at uniformity in much narrower specialised fields, see Vol 5, ss 1.1.8 and 4.1.5. In the professional sector, EU Directives touching on private law issues are otherwise much rarer but there is concern over late payments in commercial transactions, see Directive 2000/35/EC [2000] OJ L35. See for another area where the EU has acted in the commercial sphere, Council Directive 86/653/EEC on the co-ordination of the Member States relating to self-employed commercial agents [1986] OJ L382.

266 Volume 1: The Emergence of the Modern Lex Mercatoria law subjects, where, since the 1998 Amsterdam Treaty, there is now such power, but not in the substance of private law itself, which remains in its generality beyond EU legislative authority and jurisdiction as we have seen except under Article 114 TFEU to promote the internal market. However, besides these incidental measures, there is increasingly a call for uniform or at least harmonised texts in all substantive parts of private law to be produced at EU level. The essence of these projects is that the EU is then considered one market that is domestic, legally covered by only one text per subject if not full codification in the civil law manner. This is the idea behind the Draft Common Frame of Reference (DCFR), mentioned several times already. No special regime is then envisaged any longer for cross-border transactions which may operate in a larger transnational legal order. The EU would be considered one country for these purposes and all private law would become national and territorial within it, subject to, and the product of, legislation in the civil law codification tradition. Proper transnationalisation of private law would end, meaning—in the approach of this book—the (re-)emergence of different sources of law within the modern lex mercatoria as non-statist, non-territorial law for international transactions, at least for all professional dealings, among which legislative (treaty or similar) texts of this nature would at most be the residual source of law in the hierarchy of these sources. These EU efforts, while domesticating all transactions within the EU, thus seek to ignore the modern lex mercatoria and its reach. In fact, the idea is that the nineteenth-century nationalisation of private law at the level of the state continues unabated in statist texts that claim a monopoly in law formation, now at the level of the EU. The aim is then full codification in this traditional narrow civil law sense. It should be noted that in these efforts the method is not truly reconsidered: the traditional civil law codification ethos that is statist and territorial and eliminates all other sources of law is here uncritically accepted as being appropriate and correct without further discussion. More importantly, as to substance, it still follows nineteenth-century anthropomorphic thinking, in modern terminology consumer law, which is then also meant to dominate and control professional dealings. It was earlier identified as a great draw back and not conducive to attracting commercial and especially financial business from London after Brexit. As already mentioned, beyond the problems with this method, there is the important issue of whether the EU has sufficient standing to legislate in the private law area, whether through Directive or Regulation. More properly considered, the competency of the EU in these matters must derive from the EU Founding Treaties. Articles 81, 114, 169(2) and 352 TFEU are relevant in this connection. It is clear that they do not present sufficient original authority for full codification of private law within the EU, even in the consumer area (Article 169(2)) and could hardly be so interpreted. In fact, full unification of private law, including consumer law as a prime policy issue, would have to be decided at the level of the Founding Treaties themselves and Member States have not so far chosen to do so. They would then also have to decide on the method. It was already said that for the moment Article 114 TFEU is the main pertinent Article but, again, allows unification of this nature to be undertaken only in the context of the completion of the internal market, to which Article 169(2) also makes reference for consumers.597 It means that also

597 This is a narrow base. It means that unification of the rules can only be considered from the perspective of trans-border business activity in terms of completion of the internal market; it would create as a minimum a dual legal regime within the EU, different for domestic and interstate transactions. In the latter case there would be a need to show that they would demonstrably be promoted if rules were uniform. That could especially apply to mandatory rules (as they cannot be set aside by the parties), relevant more particularly in terms of consumer protection (although it would also have a meaning in movable property law). It is, therefore, not surprising that these matters are often largely considered from the perspective of such protection, but that cannot be the principal objective as under Art 114 TFEU the promotion of trans-border business rather than consumer protection

Volume 1: The Emergence of the Modern Lex Mercatoria 267 in commercial and financial law, it must still be asked how far this power truly goes. Payments, bills of exchange and cheques, letters of credit, bills of lading and trade terms may be directly relevant. So, may be the important issue of transactional and payment finality and the question of the treatment of collateral in cross-border finance to which the EU Settlement Finality and Collateral Directives testified, but what about contract and the law of movable property more generally, even sales in their contractual and proprietary aspects? Cross-border and other sales would then have to be distinguished and for local sales some uniform law between the different Member States could only be created with their consent. Importantly, this would not then be an EU jurisdiction but would have to be achieved through treaty law. It may be recalled in this connection that national constitutions tend to be specific on the point of codification and this for very good reasons. Without such authorisation in the EU Founding Treaties, no Member State would lightly want to be deprived of its own laws, especially England (before Brexit), Ireland, Malta and Cyprus of their common law. Revolutions have started for less. It means that Member States, if they want to proceed in this manner, must take the lead and change the Founding Treaties first. In other words, there must be clarity up front at the political level. Again, this should also go into the discussion of methodology, also whether an effort of this nature should result in (a) a tool box in the nature of a set of uniform definitions, (b) a restatement, (c) a set of principles, (d) an opt-in or opt-out document, or (e) a full codification civil law style. This can hardly be decided in the codification manner through the back door of an expansive treaty interpretation in which all is brought under the promotion of the internal market. Again, the EU has insufficient power to legislate in the area of private law,598 even in the consumer area, except where the issue can be sufficiently closely related to the free movement would have to be the goal. This creates little room for the extension of such protection beyond the policies already pursued by Member States to which Art 169(2) also testifies, although there might still be further harmonisation, but, again, only to the extent that the promotion of the single market demonstrably requires it and always subject to the principles of subsidiarity and proportionality. The promotion of the internal market then trumps consumer protection. See for the tension also the ECJ case law cited in n 593 above. An immediate problem results when consumer protection and the promotion of the internal market conflict. Under Art 114 TFEU as a basis for EU legislative jurisdiction, the requirements of the internal market would have to prevail. This issue has arisen in long-distance selling in connection with the right of a buyer to cancel the contract and the matter of the state and cost of the return of the goods, see Case C-205/07 Gijsbrecht/Santurel [2008] Jur I-9947 16 December 2008. The promotion of the internal market on which consumer Directives are normally based requires consideration of this basic principle first, if necessary against the protection of the consumer. As a minimum, a balance must be struck. Cancellation without cost may therefore not always be the proper remedy. In particular, further-going local rules in this respect in the country of the consumer under minimum Directives may not square with the operation of the internal market, but neither may the protection of the Directives themselves. At least in the interpretation of them, the higher principle of the promotion of the internal market on which they are based must be considered. It follows that full codification of all aspects of consumer or any other law hardly fits under Art 114 TFEU. This may be all the more true for professional dealings in general (B2B). Whatever uniform rules of private law would then emerge, there would be a continuing requirement to interpret them in accordance with the limited objective of promoting the internal market. This creates a layer of interpretation in private law that is unusual but would be continuously confining. Again, it could not be guided by the interest of consumers or any others, easily the contrary. 598 See also S Vogenauer and S Weatherill (eds), The Harmonisation of European Contract Law (Oxford, 2006); G Alpa and M Andenas, Fundamenti del diritto private europeo (Milan, 2005); and J Mance, ‘Is Europe Aiming to Civilise the Common Law’ (2007) 18 European Business Law Review 77. It could further be argued that at least in real estate and the consumer areas, domestic laws should remain dominant as a matter of subsidiarity, although, as just mentioned, the EU was given some authority in the consumer area in the Treaty of Maastricht in 1992. The ideas concerning one European private law emanated indeed from the Health and Consumer Directorate within the EU, but again the EU has no general and original jurisdiction to create uniform private law in this area either. The DCFR accepted that at least real estate law should remain domestic. Here it may be asked whether it can be

268 Volume 1: The Emergence of the Modern Lex Mercatoria of persons, goods, services and capital under Article 114 TFEU, and the EU Commission would have to make the case. Even if Article 114 is traditionally a flexible concept, at least in the eyes of the ECJ, which is indulgent,599 it would not appear to allow for a full codification of European private law. Private law would therefore normally still operate in the domestic spheres and remain national. But even if Article 114 is considered to provide a basis for full unification of private law in the EU, again, it says nothing about the method and would not appear automatically to authorise codification civil law style. Increasing EU interest in private law harmonisation, especially in the European Parliament, led in February 2003 to an EU Action Plan on a ‘more coherent European contract law’. It introduced the idea of a Common Framework of Reference (CFR), following an earlier EU Commission publication in 2001, and was itself followed by a later one in 2004 (‘The Way Forward’), which widened the scope. It instituted a group of researchers that was to deliver a final report in 2007. It was hoped that by 2009 the CFR would be ready for adaptation. The Principles of European Contract Law (PECL)—earlier still drafted in the anthropomorphic and consumer mode, see Volume 3, section 1.6—was the basis in contract. In the meantime, another group (the Acquis group), which had tried to deduce common contract principles from existing EU private law and operated mainly at the level of consumers, came together with the first group in the production of what became the DCFR in 2008–09 as an unofficial academic proposal for full codification in the EU in the traditional civil law manner. In the traditional codification manner, it supported a strongly anthropomorphic and consumer law perspective in its proposals. The property part was substantially contributed by the Max Planck Institute of Comparative and International Private Law in Hamburg and became even more typically German. Again, these efforts raise fundamental questions, even beyond the matter of EU jurisdiction to legislate in this manner.600

separated from the rest of the private law if one believes in a system. In its Green Paper of July 2010, COM (2010) 348 final, the EU Commission sought to split out contract law but similarly it may be asked whether it could stand sufficiently alone. Especially in civil law countries, that may be problematic in view of its system thinking approach. In that context, it may become more problematic still if in view of the limited jurisdiction under Art 114 TFEU, a different regime results for interstate and local dealings. 599 See also n 790 below for the EU case law pertaining to the recognition of EU ownership concepts under Art 222 of the original EU Treaty under which the Court may be more favourably inclined to its expansion EU wide than to its limitations domestically in Member States. It cannot impact on the free movement of goods but it may be expanded to facilitate it. Another problem with the ECJ may be that it is hardly equipped for private law issues. It would probably require a new chamber with experts in private law. Its working language in French is another impediment, which marginalises most judges and may give excessive power to the few who write French or otherwise to their referendars who do so and are educated in it. This could suggest a preponderance of French interpretation techniques rather than an original EU technique that also deals with common law perspectives, especially in professional dealings where the common law may be generally better developed and more practical and flexible, especially in its equity back-up, as is maintained throughout the book. 600 A critique of this nature operates at least at three levels. They should be distinguished although they cannot be fully separated. In the above, some general, although fundamental, observations were made in this connection on the nature, methodology, and ambitions of the DCFR, which carried over into the CESL (see below), but it is also necessary to go deeper into the approach of the DCFR and CESL themselves to gain an idea of their sufficiency or insufficiency. That is the second level. The third level is the very detail of the text, which for the DCFR is at this stage perhaps less relevant, although ultimately determining. In s 1.1.6 above, it was discussed how a modern professional private law would look in contract and movable property and in that connection the most substantial differences between common and civil law (of contract and movable property) were identified, which may be summarised as follows. (a) in the area of contract, the anthropomorphic attitude in civil law, its emphasis on the will of the parties, its parochial concepts of offer and acceptance, the position of the parties in the case of non-performance (and the attitude to defences and excuses in the interpretation), and in the duties in the pre- and post-contractual phases;

Volume 1: The Emergence of the Modern Lex Mercatoria 269 Was this to be the more academic and abstract, intellectual and rule-based system approach of civil law codification, or the more pragmatic fact- and needs-based common law approach? A lexicon or tool box of common terms appeared to have been an earlier preference, but such a common lexicon would assume or even require underlying systemic coherence as it suggests a definitional approach. Could such an approach, based on some compromise between domestic notions, ever make sense? Ideally, codification civil law style, if still thought desirable at EU level (b) in the area of movable property, an anthropomorphic emphasis of asset identification and individualisation or setting aside and ignoring the proprietary status of classes of assets and of future assets and their transfer or assignment, the operation of trusts, including constructive and resulting trusts, tracing and tracking, floating charges, conditional and temporary ownership rights (including finance leases, repurchase agreements and certain forms of receivable financing), agency and fiduciary duties, set-off and netting. This is in common law countries typically the area of equity and of an open system of proprietary rights, charges and preferences, where mere description of asset classes suffices and there is a substantial degree of party autonomy between professionals, proprietary rights being here cut off at the level of their operation (in respect of buyers in the ordinary course of business) rather than at the level of their creation; (c) in transactional law, the issue of transactional and payment finality, suggesting an abstract system of title transfer, see Volume 4, s 1.4.6, and an extended protection of bona fides and reliance in equity, all in order to present transactional and payment stability and clear in this way the ordinary commercial flows from all kinds of proprietary interests that may have been created, confining their effect to insiders such as banks and suppliers who can or should know of them, but not to others (the ordinary purchasers); and (d) in the area of risk management, extended notions of set-off and netting as major risk management tools especially in finance, see for the importance in swaps and repos Volume 5, s 2.3.2. These are all matters substantially ignored in or not central to the DCFR and its progeny. While opting for the causal system of title transfer, it even undermines the vital notion of finality. It is of interest in this connection and telling that the DCFR does not manage or attempt to integrate the important EU Collateral Directive. This again follows the German example, which did not manage to do so either, but it shows the insufficiency of system thinking in the German manner when it comes to modern financial or other practices and needs, to which it is inimical. In this connection, the concept of good faith and its operation in contract should also be considered. Its place is very different in common and civil law. Civil law makes much of its modern advance in this area but it remains in essence a concept that needs further development and clarification. Common law traditionally has more refined tools to achieve smooth operation in contract and supplement or adjust basic protections, see further the discussion in Vol 3, s 1.3. First, common law primarily distinguishes between parties according to their nature. In this approach, notably in contract, the emphasis is indeed on the nature of the parties rather than on the type of contract. In civil law, it has always been the other way around. Thus a rental agreement in England is considered to be a quite different type of agreement if entered into between a real estate company and a hotel, between a community and its residents in the social sector, or between a parent and a child. Although in civil law, the good faith concept may now start doing something similar, it is still in its infancy. It is more likely that good faith protection meted out in the social sector or for consumers is also transferred to the professional sector as a rental agreement, in essence the same for all. Again this also remains the approach in the DCFR. Further refinement exists in common law through the notion of implied conditions, fiduciary duties (especially in situations of dependency), reliance and sometimes natural justice. Altogether this provides a number of concepts that make the common law of contract flexible but always adjusted for the nature of the relationship between the parties, notably distinguishing between consumer and professional dealings. The common law has better tools and is probably more sophisticated in these matters and often more precise. Nevertheless, German scholarship frequently believes the common law of contract primitive because it has not developed the civil law concept of good faith but this is less than perceptive. The common law of contract needs it much less. The DCFR’s other problem is in this connection that it sees good faith in principle as absolutely mandatory and prescriptive in a consumer protection sense. It may indeed be mandatory where it refers to fundamental principle, on the overriding nature of which the DCFR is on the whole not keen, but often it does not and in any event has very different functions, which are often poorly distinguished in civil law thinking and it is in any event very different in consumer and business dealings, see again the discussion in Vol 3, s 1.3. In common law, on the other hand, parties can set standards by themselves, also of good faith. They are enforced unless this becomes manifestly unreasonable (cf s 1-302 UCC) which in professional dealings is not likely to happen soon. Here again, the key is the nature of the relationship of the parties, which in the unitary approach of the DCFR is not given its proper place.

270 Volume 1: The Emergence of the Modern Lex Mercatoria to provide greater unity more quickly (assuming a true need could be established also for professional dealings), should be the end of a process rather than the beginning, as indeed it was in nineteenth-century Germany. The project was and is political, therefore never appeared a matter primarily of method or quality. Stakeholders who were originally to accompany the DCFR project with their comments were soon elbowed out. This is normal in academic projects designed by system thinkers. The DCFR itself proved largely an update of the German BGB (including its amendments of 2002), although the Germans themselves complained that it was not German enough to pass muster and initial reactions were not favourable, even in Germany. In the view of this book, one problem is that the BGB is anthropomorphic and basically consumer law, never made for business. For more extensive comment and critique (also concerning the 2011 project of the Expert Group and the Draft Regulation for a European Sales Law (CESL), which nobody seemed to have liked either and was quietly withdrawn in 2014), see Volume 3, section 1.6 and for property law Volume 4, section 1.11.601 The DCFR as it now stands is not only too intellectual and parochial, but also devoid of both practitioners’ input and empirical testing. In its formal approach and rejection of overriding values, except if expressed in the text, it lacks sensitivity on the one hand to fundamental principles and, on the other, in its rejection of custom as an autonomous source of law, it shows insensitivity to market practices—the former even against the gist of EU law itself; see the discussion in section 1.4.6 above. The project remains wedded to a superficial concept of the operation of private law. It aims at technique in the sense of applying written texts, which are supposed to present a system that can (logically) deal with all eventualities and which, it is assumed, achieves automatically justice, social peace, efficiency and growth. This has become typical for all civil law codification thinking, as we have seen, but presents an extreme form of legal positivism and formalism. More importantly, it cannot deliver in business. In the meantime, in a Green Paper of 1 July 2010, the EU Commission reconsidered several options. It seemed to be heading for an opt-in model in the area of contract law, which still assumed that it had power to legislate such a model, short of which such a text would risk being declared invalid or, in Member States that have constitutional courts, unconstitutional. This by itself would make such an option unviable as participants would (retroactively) risk their chosen law having no legal base and therefore no validity at all. All the same, as already mentioned in 2011, there appeared a more official EU project, now from a so-called Expert Group on EU Contract law instituted by the EU Commission (in 2010). This brought the project to EU level. It sought to set contract law apart and called it a European contract law for consumers and business, but the project was in practice limited to the sale of goods, both in consumer and professional dealings, with distinctions mainly in the area of pre-contractual duties only. It followed the work of the DCFR in this area closely, itself following, in the general part of contract law, the PECL and through it the 1980 CISG (now extended to consumer dealings), so as to present a full text. It did not deal with property aspects of sales (although transfer of title is the principal objective

601 On the effort as a whole, an early critical article appeared in Germany, see W Ernst, ‘Der “Common Frame of Reference” aus juristischer Sicht’ (2008) 208 Archiv für die civilistische Praxis 248, followed by two more technically critical contributions, first of the work of the Acquis group, N Jansen and R Zimmermann, ‘Restating the Acquis Communautaire? A Critical Examination of the “Principles of the Existing EC Contract Law”’ (2008) 71 Modern Law Review 505; and subsequently of the DCFR, H Eidenmuller, F Faust, HC Grigoleit, N Jansen, G Wagner and R Zimmermann, ‘Der gemeinsame Referenzrahmen für das Europäische Privatrecht’ (2008) 63 Juristenzeitung 529, translation: ‘The Common Frame of Reference for European Private Law’, available at papers.ssrn.com/so13/ papers.cfm?abstract_id=1269270. See for a more favourable comment from a member of the Acquis group, T Pfeiffer, ‘Methodik der Privatrechtsangleichung in de EU’ (2008) 208 Archiv für die civilistische Praxis 227.

Volume 1: The Emergence of the Modern Lex Mercatoria 271 of all sales), except to require the seller to transfer the property but left open how that was to be done. There was thus no full coverage of sales, and there remained considerable problems and uncertainties regarding the way title was to be transferred, especially in trans-border dealings. Ultimately, in October 2011, the EU published a draft Regulation on a Common European Sales Law or CESL, which was substantially based on the proposals of the Expert Group. It still tried to cover both consumer and professional dealings in a unitary approach and mixed in this connection—fatally, it is submitted—consumer and professional protection needs (see further Volume 3, section 1.6.13) even though professional sales were only covered if including one Small and Medium Sized Enterprise (SME) party (as defined). The project, being based on Article 114 TFEU, was limited to cross-border dealings. It could thus be seen that it had a more limited scope, also being an opt-in instrument, but the adoption of a CESL would still have introduced and legitimised a general part of contract law that was wholly unsuitable for professional dealings, including long-term supply agreements with large service elements; see the discussion, especially on this unitary approach, in Volume 3, section 1.7. This project was in fact the thin end of the wedge of something much bigger and that was the true problem. As already mentioned, several times, it did not convince and was quietly withdrawn in December 2014. It may still be of interest that the question of proper EU jurisdiction under Article 114 TFEU was buttressed by the EU Commission suggesting that such a uniform sales law promoted the internal market in protecting small businesses and consumer cross-border dealings in particular. Great expansion of cross-border business was claimed, but it very much remained to be seen whether this would materialise.602 The impediments of cross-border activity are mostly of a very different nature. Beyond this, at the practical level, this sales project suffered from the same flaws already shown in the 1980 CISG: at least for business the concept of fundamental breach is too subjective, so is the concept of force majeure, and the unilateral right of the buyer to reduce the price is unmanageable. These are the principal reasons why commercial practice has rejected the CISG and was likely to reject the CESL as well. In fact, small and medium-sized companies may be even more vulnerable to these shortcomings for lack of leverage and organisational acumen. Moreover, they would have to face an extra layer of consumer protection. The CESL project was meant as an opt-in facility and one must wonder who would have wanted to be covered by it under the circumstances, except supposedly consumers as buyers, but

602 The claims that were made by the Commission in the CESL in this connection bordered on the delusional. It undermined the entire project and its credibility even further. The project was even claimed to be conducive to overcoming the 2008 financial crisis. It was further said that billions of business would be added to cross-border trade, especially by SMEs, and that consumers would also more actively engage in buying products elsewhere in the EU. However, SMEs are usually very successful because they are small, want to remain so, and have no interest whatever in foreign adventure where they would meet risks that are many times greater than some differences in the applicable sales laws. As far as consumers are concerned, in an open market they buy petrol in another country if, taking into account the distance and cost to get there, the price is still lower. Consumers never have an idea of the applicable law. In any event, in all cases, buying elsewhere detracts from local business and the net result in terms of activity may be neutral at best and is not by definition an increase in overall activity. The idea that transaction costs would be reduced must also be in doubt, first because of the complications in the CESL itself. For SMEs they would also be increased if cross-border business now became their objective. In any event, in the key issue in sales, the transfer of title, the CESL had no answer and provided no uniformity. Thus, legal differences and impediments substantially remained and there was no true simplification. More importantly, most people and businesses can live with that and need no legislation in this area that confuses even more. We know from the US, which has a market that is far more integrated but where private law has remained State law, that diversity of the law is no major barrier. Even the UCC remains State law; an attempt to make it federal law was abandoned early on. Of course, new initiatives in this area may help but they need to be far more enlightened to convince. Before anything else they need to simplify.

272 Volume 1: The Emergence of the Modern Lex Mercatoria the consent to the opt-in also had to come from their suppliers. In a proper analysis, a text such as the CESL, for the transactions it covers, would still have to be explained in its international context and would then have to find its place among the other sources of law covering transnational dealings (even if only within the EU) and could not exclusively regulate them. At the practical level, it may be recalled in this connection that even in the US as a much more integrated country, there is no federal law in this respect. The UCC is state law and the law of the sale of goods remains also state law even if now uniform under the UCC (Articler2). Moreover, in its Article 1, section 1-103, it clearly promotes other sources of law besides it, as we have seen, especially the common law, equity, custom, and the law merchant. It is respectful of party autonomy and in methodology not a civil law codification type of legislation at all. That was submitted as the better approach, all the more so in transnationalised business transactions. In conclusion: (a) there are serious issues of proper EU authority in the formation of private law while the need for such projects, at least outside the consumer sphere, has so far not been convincingly demonstrated; nobody has seriously asked for it; there is no cost-benefit analysis either except in the most primitive and speculative manner; (b) there are also serious problems with the nature of these projects, especially in the rejection of the legitimacy of bottom-up or other participatory forms of law formation, market custom and practices, and diversity in the sources of law; (c) this top-down statist attitude presents a danger to an open society and has great difficulty in dealing with new needs and in remaining socially and economically responsive; (d) there is no relationship thinking meaning a different approach to professional and consumer dealings with a serious danger of consumer law protection notions spilling over into professional dealings and a censorious approach being applied to all business activity; and (e) there is as a consequence no clear concept or model either of contract and movable property law operating in the international flow of goods, services, money, information, and technology. It is questionable whether commerce and finance can prosper in such a (statist and prescriptive) environment, especially now that they are substantially globalised. As a minimum, consumer and professional dealings should be separated and consumer protections should not spill over into the professional sphere. The good faith notion in contract, which tends to be censorious in consumer dealings, has a different role to play in professional dealings and may itself have to be perceived there as being increasingly transnationalised, in the process promoting, it was submitted, the other sources of law in interpretation and gap filling. The hierarchy of norms from all legal sources within the modern lex mercatoria is at present more likely to respond to true needs, at least in international business, also in commercial and financial activity between EU Member States, and its structure, role and operation should be recognised for what it is or tries to achieve. Importantly, it aims at a broader worldwide coverage. Indeed, if a more coordinated top-down effort of this nature needs to be made, at least for professional dealings, it should be considered whether the Americas and the Far East should also become involved. It should in particular be considered whether for professional activity, the typical civil law top-down comprehensive codification ethos should be left behind. The approach should be practitioner-oriented and internationalist, and there should never be an exclusively statutory attitude unless the commercial community wants it and asks for it or public policy or order demands it, which remains exceptional (although it may be much needed in the international marketplace in the areas of competition and market abuse and could then mean mandatory treaty law).

Volume 1: The Emergence of the Modern Lex Mercatoria 273 It was said many times that the formulation of transnational minimum standards in this connection is one of the greatest challenges in the transnationalisation of commercial and financial law.

1.5. Different Legal Orders, their Manifestation, and the Competition between them. Cultural, Sociological and Economic Undercurrents in the Formation of Transnational Commercial and Financial Law (Modern Lex Mercatoria) 1.5.1. The Concept of Legal Orders, their Manifestation It is posited that international commercial and financial law as an autonomous body of law and force presumes a legal environment or order in which it can emerge and operate. Alternatively, it could be said that law is what it is, and therefore also transnational law, but all law would seem to require some institutional context or environment in which it is created, functions, and can be recognised and enforced. It may also make it easier to find the relevant law and detect more structure. In this connection, the notion of legal orders may be useful and represent some reality. States were always prime examples, but they are not the only ones. There is, for example, also a legal order between states, namely the (public) international legal order. The notion of legal order is particularly used within the EU, where it denotes a (confederate) legal order separate from that of the Member States. Non-statist legal orders may also be identified, it is submitted, notably the transnational commercial and financial legal order in the international flows of goods services, money, information and technology given the dimension they have now reached. Competition between these orders may arise, especially when operating on the same territory. This is an important issue, as will be discussed further in section 1.5.9 below. The concept of legal orders is not new. Traditionally it was often assumed, for instance, that the major churches had their own legal order, of which church law was the result. Ecclesiastical courts could then exist and adjudicate this law or it could be adjudicated in the ordinary courts but always on the basis of Church law. It is still relevant as, even now, ecclesiastical law may take different views on gender and life issues, which may affect the opportunities of appointment to and promotion in the clergy, and on church membership and members’ behaviour more generally. If we assume that a church internal legal order has validity, these rules would be enforceable in state courts unless seriously offensive to that particular state and its public order. At least with that limitation, a case can be and is here often still made for (some form of) autonomy of this law. It means that such (church) rules are effective by themselves and do not depend for their force on state recognition, even if enforcement remains a state’s prerogative. This is a key insight. It follows that under the rule of law, properly understood, state courts have no option but to apply these rules in appropriate cases unless they become grossly offensive to the community at large, therefore to its public policy or public order requirements. As we have seen, in England in the eighteenth century, church law was subsumed into the common law and the ecclesiastical courts were absorbed by the common law courts. This posed the question of the continuing autonomy of this law. The same happened to the commercial law and commercial courts. Until that time, this commercial law or law merchant had also been independent as the expression of the legal order of the commercial and financial communities of those days. Although this type of law continued to have its own place within the common law as

274 Volume 1: The Emergence of the Modern Lex Mercatoria did church law, it posed no less the question of its continuing autonomy, which was dented but not fully superseded; it continued to have a place of its own, see more particularly the discussion in section 1.1.3 above. In any event, it may be asked whether this integration into the national law presented the correct perspective or whether it is an anomalous situation waiting for correction. This is the view maintained in this book, at least for international commercial and financial dealings. Naturally, a state can use its sovereign powers to prevent any other rules from being followed on its own territory (also in respect of international dealings, at least for any conduct and effect of such dealings on its territory) but the question is whether even in respect of purely local dealings that is in accordance with the modern rule of law, its notion of diversity, and the rights of different communities as long as they do not seriously offend the public order of the state in question, assuming further that this public order concept itself is reasonably enlightened, respects equality and is proportionally applied, see further the discussion in section 1.1.8 above. The monopolisation (for good reasons) of enforcement power in states, which act in these matters commonly upon the instruction of their own courts, is very necessary but that is a different issue and does not or does not necessarily mean the monopolisation of law formation and application by these states at the same time. It is not true that state courts only listen to the law of their own state if the rule of law is properly understood. Even domestically, it would mean disrespect for other rule making authority and at least in international dealings it presents a situation of overreach and concerns the important issue of legal plurality.603 Through globalisation, it is increasingly reconfirmed that legal norms have different origins and may have to operate side by side for different communities in the same territory.604 603 This issue is not new but has acquired greater urgency in more recent times, see, eg J Griffith, ‘What is Legal Pluralism’ (1986) Journal of Legal Pluralism and Unofficial Law 1, suggesting even in those early days that legal pluralism was a fact, legal centralism a myth, an ideal, a claim, an illusion, with such power nevertheless over legal practitioners and theorists that it became the foundation stone of all legal and social theory as from the nineteenth century. See more recently, also PS Berman, ‘Global Legal Pluralism’ (2007) 80 Southern California Law Review 1177, and C Scott, ‘Transnational Law as Proto-Concept’ (2009) 10 German Law Journal 866. These discussions operate at the level of legal theory. This book is particularly concerned with and sees it as its task to demonstrate the translation of these ideas into positive law in international commerce and finance, where they can now best be tested. 604 See for this legal hybridity PS Berman, Global Legal Pluralism—A Jurisprudence of Law Beyond Border (Cambridge, 2012) 14. It means acknowledgement of different competing sources of law at the transnational level; see earlier Dalhuisen (n 23) 129 and further G Shaffer (ed), Transnational Legal Ordering and State Change (Cambridge, 2012); T Halliday and G Shaffer, Transnational Legal Orders (Cambridge, 2015); P Zumbansen, ‘Transnational Private Regulatory Governance: Ambiguities of Public Authority and Private Power’ (2013) 74 Law and Contemporary Problems 133 and ‘Transnational Legal Pluralism’ (2010) 1 Transnational Legal Theory 167. See earlier M Koskenniemi, From Apology to Utopia: The Structure of International Legal Argument (Helsinki, 1989), and BZ Tamanaha, ‘A Non-Essentialist Version of Legal Pluralism’ (2000) 27(2) Journal of Law and Society 296. It may suggest regime collision between national and transnational law formation, see A Fisher-Lescano and G Teubner, ‘Regime Collision: The Vain Search for Legal Unity in the Fragmentation of Global Law’ (2004) 25 Michigan Law Journal of International Law 999. The EU in Europe is an intermediate player in this process, relevant even in the formation of private law where we increasingly see fundamental principle in human rights horizontally applied between private parties; see the discussion on fundamental principle in s 1.4.6 above and further JHH Weiler and G de Burca (eds), The Worlds of European Constitutionalism (Cambridge, 2011). See for the competition between legal communities, state or non-state, and their interaction, isolation or parallel operation, GA Bermann, ‘Navigating EU Law and the Law of International Arbitration’ (2012) 28(3) Arbitration International 397. The relationship between this EU law and transnational law formation and application is an increasingly important issue, also where the EU in the DCFR and more particularly CESL meant to create an EU (national) private law, see the discussion in s 1.4.21 above. It also needs, among other things, a concept of conflict and mutual impact, when and why, eg in international arbitration. See for ‘disordered orders’, N Walker, ‘Beyond Boundary Disputes and Basic Grids: Mapping the Global Disorder of Normative Orders’ (2008) 6 International Journal of Constitutional Law, 373. This book suggests a structure and method which is derived from public international law formation and see ss 1.4.5 and 1.4.14 above, cf also N Krisch, Beyond Constitutionalism, the Pluralist Structure of Postnational Law (Oxford, 2010).

Volume 1: The Emergence of the Modern Lex Mercatoria 275 In discussions concerning the nature and operation of commercial law, these matters tend to be neglected. It has been said by legal philosophers that ‘We do not like commerce (because we are largely ignorant of it) and we would prefer not to write about it’.605 For the few modern writers who have shown interest in the subject,606 bottom-up law formation in international commerce and finance is important. More generally, it is not difficult to maintain that all communities form their own sets of rules.607 For the current discussion, a key factor is to determine which of them have sufficient standing and autonomy to have their rules recognised amongst their members and accepted as legal rules in the ordinary courts or may even create their own courts like international arbitration tribunals, the decisions of which would then have to be enforced by states, either with or without a review of them by the courts of such states (basically in terms of any offence to public policy or order, cf the New York Convention for international arbitration). Only such communities could be considered proper legal orders. It means that rules do not operate and emerge in a void but are tied to the operation of such communities in their own legal orders, which come first, but there must also be some rules of recognition and enforcement. The evolution of legal orders in this sense might be seen as a predominantly cultural phenomenon, but it may also have its base more properly in sociological and, at least in trade and commerce, in economic realities, globalisation being an important closely related indicator. All seem to play a role, but the criteria that actually distinguish communities in this sense, that is communities with rule-making powers among their members, from mere communes that cannot be considered to have a similar standing (and are therefore not legal orders) are not clear cut. As to competition with states, statist ambitions in this field, and states’ desire for monopolies in legislation, have since the nineteenth century obscured the underlying realities and tensions as we have seen. These issues now resurface and newer orders get their chance mainly through globalisation as state powers recede and the force of the international flows in goods, services, money and knowledge becomes prevalent and no longer manifests itself incidentally. The modern communication revolution supports and amplifies this. In the process, much of the international flows become virtual and can no longer be properly located with reference to territories and state powers.

605 J Waldron, ‘Cosmopolitan Norms’ in S Benhabib (ed), Another Cosmopolitanism (Oxford, 2006) 83. See also Hall Scott ‘The Risk Flyers’ (1978) 91 Harvard Law Review 737: ‘There is no real jurisprudence of commercial law.’ 606 J Linarelli, ‘Analytical Jurisprudence and the Concept of Commercial Law’ (2009) 114 Pennsylvania State Law Review 119, 195, maintains a cosmopolitan concept of legal positivism—that is a concept that describes what this law is and how it comes into operation and functions. This approach abstains from critique of content. Removed from states, five conditions are identified for a transnational legal system of this nature being valid, binding and authentic: (a) acceptance by its participants as legally binding; (b) the rules being intelligible or comprehensive to the participants; (c) the existence of secondary rules (of recognition) and secondary rule officials who may operate across different states or other legal orders; (d) shared agency between secondary rule officials demonstrating sufficient mutual responsiveness and commitment to the legal system; and (e) primary rules that deal with the major private law topics such as contract, property and dispute resolution. See for the ‘law and economic’ approach, in particular, the work of RD Cooter, ‘Structural Adjudication and the New Law Merchant: A Model for Decentralisation’ (1994) 14 International Review of Law and Economics 215, see more extensively s 1.5.6 below. 607 Dalhuisen (n 23). See also RM Dworkin, Law’s Empire (Cambridge, MA, 1986) 191 for the realisation that a number of communities reach this stage allowing them to operate their own set of rules, even global standards. Also J Raz, The Authority of Law, 2nd edn (Oxford, 2009) 120, who accepts this even irrespective of recognition by institutionalised normative systems.

276 Volume 1: The Emergence of the Modern Lex Mercatoria In England, this friction between national and international commercial law had already developed earlier in the eighteenth century when the common law and its courts took over, as we have seen, followed on the European Continent in the nineteenth century, when all private law formation was ultimately nationalised, including commercial law, at least that was the idea. In the process, much of the modern idea of legal diversity was lost, at least within each country, although it was never complete, see section 1.4.4 above. In the process, it was already said that the common law also became unfriendly to international commercial law as it was thought that it had to issue from a sovereign and became also nationalistic. However, particularly in an international setting, freed therefore from direct state intervention and benefiting from legislative competition between states, internationally organised communities emerge, it is submitted, as independent legal orders and reassert their standing while more effectively challenging state monopolies in their law-making or law-sanctioning activities. Political philosophy, which in the nineteenth century demanded nationalist domination and the monopoly for states in law formation, may then adopt again a more universalist and diversified approach as it did earlier. In this connection, it is proposed that the international business community has become a prime example of these communities and that the re-emergence of a new and autonomous international lex mercatoria as transnational law for that community and its dealings is the natural result. This theme will be explored in the next few sections. Thus, the nineteenth-century nationalisation and territorialisation of private law come to an end, especially in the professional sphere/ business dealings. Its rationality does no longer stop at borders. It has already been observed that there is here a return to some of the environment that obtained at the time of the ius commune, therefore to the continental European approach that obtained in the seventeenth and eighteenth centuries, and even before. This being said, it should, of course, be realised that the content of the new lex mercatoria can hardly bear comparison with the ius commune or the older lex mercatoria as developed quite separately from it in those days, and there can hardly be a revival of that old law as to its substance. It is the method that counts. The component parts of this new law merchant were discussed in section 1.4 above, and will be revisited at the more concrete level in section 3.3 below and they revolve around the more traditional sources of law: fundamental and general legal principles; industry practices/customs, and party autonomy, not only in the law of obligations but also in the proprietary rights that are particularly propelled by the modern laws of international finance. A hierarchy in these norms (or legal sources) is here assumed and is considered the essence of the modern lex mercatoria as was discussed in section 1.4.14 above, see also section 3.1.2 below. In this part of the book, the prime objective is first to investigate (a) the notion of legal orders; (b) the manner of their modern manifestation; (c) the role of cultural, sociological and economic forces in this connection; (d) when immanent rules become legally enforceable; and (e) the nature and outcome of the competition with state laws especially in matters of public policy and order.

1.5.2. Law as Cultural Manifestation In section 1.2.9 above, reference was made to the people’s spirit, or Volksgeist, in the formation of the law. It became an important consideration in Germany in the early nineteenth century in the formation of a new German private law, which was meant to replace the more universal (Roman law-related) ius commune and the also more universal (ethics, rationality and efficiencyrelated) natural law tendencies that had also spread in Germany up to that time. In the end, it also replaced the more local commercial laws.

Volume 1: The Emergence of the Modern Lex Mercatoria 277 The Volksgeist or national spirit notion is associated in legal discourse with von Savigny and von Puchta, but was more properly an early expression of the age of Romanticism,608 which followed the age of Enlightenment or rationality. As was discussed above, it can be seen as an irrational element that led to (extreme) nationalism even before Germany was unified in 1871, and received strong support in the works of Hegel. It only recognised national laws in the progression of the national spirit. As such it had an early equivalent in England in the works of Edmund Burke: see section 1.3.3 above. This subsequently translated there into the Austinian notion that all law emanated from the sovereign’s command and was therefore statist even if not statutory. This Burkean view also had a sequence in the US, where American values are now often considered to be the basis of the law in the US; see more particularly the discussion in section 1.3.5 above.609 Here we have a nationalism that is not necessarily statist in the sense that it does not require all law to emanate from a sovereign—sovereignty in the US being in any event seen as vested in the people—but it then still considers all law, even commercial law, a typical domestic product or a national cultural manifestation,. This then also applied to the common law operating in the US regardless of its roots in England, even though it might not claim exclusivity. To the same extent, Section 1-103 was mentioned as confirmation. In this manner, an important cultural dimension in the formation of the law is noted.610 Although this is often conveniently associated with nationality,611 culture—whatever its precise 608 See also s 1.2.9 above. 609 See n 326 above. See also Post, n 326 above. 610 While discussing the effect of culture on the law, some idea or assumption of what law proper is would seem useful even if it has largely defied definition. As a mere working hypothesis it has been said that it concerns rules of action or conduct prescribed by controlling authority and having binding force, see United States and Guarantee Company v Guenther 281 US 34 (1929). This begs the question, however, what ‘controlling authority’ and ‘binding force’ are and when they arise. It still puts emphasis on authority and statist rule in law foprmation. Another way of defining law is as a body of social rules prescribing external conduct and considered justiciable, see H Kantorowicz, The Definition of the Law (transl E Campbell, Cambridge, MA, 1958) 79. It puts emphasis on the close association between law and sociological forces discussed in detail in the next sections, but still begs the question what ‘justiciable’ is (as distinguished from moral dictates and social conventions). Briefer is the simple observation in ‘law and economics’ that law is that set of rules that states sanction. It suggests some state coercive power, but at least limits its monopoly to enforcement, not law formation. It still does not explain when states must back up the rules of other (private) groups or associations (therefore when these rules reach the status of legal enforceability) or allow other (group) sanctions if the rules are not voluntarily complied with. This probably required a broader enquiry into the rule of law, see the discussion in the next sections and at n 634 below. Another important question in this connection is why law in this sense is usually complied with voluntarily without which it would collapse. What is the role of group culture in this connection and what is the connecting factor in terms of internalisation of its rules and voluntary compliance? This may foremost concern incentives, see for game theory, s 1.5.7 below. In this book law is considered enforceable social order and it may be completely imposed but is better if it promotes, justice, social peace and efficiency. That is considered legitimacy and is the true challenge of civil society which must formulate the rules and do so in a continuing process of law formation and application. States and their courts may try to stabilise this and move this process forward through legislation helped by judgments of the judiciary in their own territory, and by academia imbued by rationality, but there are other sources of law that impose themselves and are autonomous, that means they speak for themselves, which, it was submitted, has become the true meaning of transnationalisation. 611 In the writings of many, this seems to be axiomatic and often leads to a narrow nationalism in the law on the basis of cultural arguments, then seen as deep underlying national currents, perhaps in a mystical, irrational sense. This view tends to be highly romantic, see in this vein particularly P Legrand, ‘Europeanisation and Convergence’ in P Beaumont et al (eds), Convergence and Divergence in European Public Law (Oxford, 2002) 225, and could appraoch pure racism and then becomes the political manifestation of it. See more soberly C Harlow, ‘Voices of Difference in a Plural Community’, in ibid at 199, cf also N Walker, ‘Culture, Democracy and the Convergence of Public Law: Some Scepticism about Scepticism’ in ibid at 257.

278 Volume 1: The Emergence of the Modern Lex Mercatoria meaning—may just as easily, or perhaps more convincingly, be associated with other important notions, such as religion (for example, Christian, Islamic or Buddhist culture); region (for example, Asian, European, American or Western culture); language (for example, Anglo-American, French or Russian culture); political/economic systems (for example, Western democratic/ capitalistic/decentralised, or other more totalitarian culture); or (more commonly in the German approaches) aesthetic or intellectual endeavours (for example, Aztec, Maya, Roman, Greek, Hellenistic, Renaissance or Baroque culture). In fact, culture itself is all that mankind achieves, usually captured in a positive sense (defying therefore anarchy and other destructive human tendencies) and is as such what it is. It is not nationalistic per definition and only obtains a more distinctive meaning when used in a clearly marked narrower sense (as in a religious, ethnic, linguistic, nationalistic, political or artistic sense), particularly important for our subject when it denotes a communal mindset. As far as rule making or law formation is concerned, that requires at least two further building blocks. First, to provide a distinctive basis for the formation of legal normativity, culture as mindset must not only be strong but also needs group cohesion (among those of a similar mindset). Second (although not unrelated), there must also be some strong sense of order and some common values. In terms of law formation, culture can therefore be cast foremost in sociological terms, that is to say in terms of community and its behaviour or operation as a group. It suggests as a minimum a close connection between cultural and sociological currents or forces when it comes to the law and its formation.612 It would allow us to deduce from such a group mindset some predictability of behaviour, and therefore some ways of doing that may be considered more deeply rooted, likely to recur within the group, may be relied upon as to be adhered to and forthcoming, capable therefore of producing behavioural standards that become norm setting and thereby controlling for its members and can be recognised as such. There is here a strong reliance element and close connection with custom, see section 1.4.8 above. As just mentioned, national culture is only one expression of culture in this sense although often springing to mind first in terms of support for autonomous law formation and cohesion. It should be realised, however, that nationality may produce or be based on a rather weak kind of mindset in the above sense. Other cultural strands may be much stronger in terms of group formation and might from this perspective have a much greater claim to and potential impact on the formation of law. It is this group aspect nevertheless that in modern times makes us look primarily at national cultures and therefore at states in terms of law formation, even if we can see that group cohesion along cultural lines need not be associated with a state per se, and may in fact much better be seen in other types of communities—reference may be made in this respect, for example, to churches at one end of the spectrum or to the international business community at the other. What is clear is that for culture to count in this connection, it cannot be merely a personal or individualistic experience, it must show a close association with group trends so as to become relevant in the law-making process, but that group need not be a state. It could even be argued that it was rather unexpected that modern states came out on top. On the European Continent that was certainly not so in the times of the earlier ius commune but it did later lead to its demise. This had to do with the fact that power ultimately became aggregated at state level. In other words, the state ultimately proved to be the more natural level at which power was to be monopolised (and secularised). That was in Western Europe a typical nineteenth-century evolution, in

612 The notion of culture and its definitions have perplexed many: see for a discussion GH Hartman, The Fateful Question of Culture (New York, 1997).

Volume 1: The Emergence of the Modern Lex Mercatoria 279 England perhaps a little earlier. It is true of course that there had been dominant regimes before but they never had the physical means of communication and control to dominate society as a whole for any period of time. Rulers could at best send an army or police force around from time to time (until winter) or try to rule through a kind of feudal or similarly layered system. In fact, in connection with the strong cultural impact of group formation on its rules and the position of states in this context, a counter development should also be noted. It is likely that, whatever the cultural base and its claims to law formation, group cultures of whatever type have become less strong in Western society. This is so first because Western society is itself likely to promote cultural diversity. As a consequence, there may be different cultures of various sorts at work on the same territory, which may easily compete within states with other groupings or even the state itself. Especially where cultural diversity is promoted, national culture may thus be weakened. But perhaps more importantly, Western culture itself suggests individualism and an open, thriving, forward-looking personal attitude based on experience and investigation, therefore on experimentation at the more personal level. This is likely to make people less conformist, perhaps more tolerant and in any event more changeable but also harder to identify with group authenticity, especially at the state or national level and perhaps with culture of any sort. It may be the true reason why states came out on top in the power game in modern times and that law formation subsequently became a state preserve and in the mind of many continues to be so. One could then say that it was precisely the lessening effect of group cultures that left room for the modern state and gave its growing power a chance to impose its own laws on all within its territory even though it constitutes itself hardly any community at all (except among hardened nationalists). It confirms at the same time that the true basis for modern law formation at the state level is not, or not chiefly, cultural but is mere power. It raises serious questions about the legitimacy of the ensuing laws, at least in a cultural sense, and may then also cause problems in terms of identification, internalisation and voluntary compliance.613

613 Strands of culture that are or have remained more traditional may thus have a stronger claim to law formation but are likely to have a much more doctrinal and unchangeable attitude. They may reflect much closer-knit communities showing much more coherence, but they may at the same time lack adaptability because of the dictates of tradition or scripture. It may be easier, however, to find a much greater group sense and group normativity in such communities which are often of a religious nature representing religious values. Thus in a theocracy, law is likely to be primarily seen as part of a religious all life experience which dominates everything, also the rules of the group and of the nation. We may think this atavistic, but it is not so very far removed from some Scandinavian legal philosophers, who, in the last century, thought modern law hardly different from witchcraft: see the theories of A Hagerstrom, Der römische Obligationsbegriff, vol I (Uppsala, 1927) 17 and of V Lundstedt, Die Unwissenschaftlichkeit der Rechtswissenschaft, vol I (Berlin, 1936) 21. In any event, religious, especially Christian, values or overtones, were, until quite recently, a most obvious feature of Western values and laws as well. But it is not the only fundamentalism. The narrative of YN Harari, Sapiens, A Brief History of Humankind, 114 (Penguin UK, 2014) is here also of interest, arguing that the social order is imagined, a myth in which we believe, just like paper money, no more. It works only to the extent we respect it and it was observed further that ‘[U]nlike the laws of physics, which are free of inconsistencies, every man-made order is packed with internal contradictions. Cultures are constantly trying to reconcile these contradictions, and this process fuels change’ (p 182). The most difficult contradiction to bridge is, in this view, the one between liberty and equality but it is also said that the move is inexorably in the direction of cultural unity and globalisation although a single global culture needs not be fully homogeneous (p 187). It is of interest in this connection that even the fundamentalist (universalist) Islam concept of the law of the sharia could not avoid the influence of the state and its raison d’état, see for this development in the West in respect of the universalist natural law s 1.2.6 above. It substantially diluted it even if law formation by (Islamic) states was meant to be left only to god-fearing rulers or Caliphs aware of the divine commands, see NJ Coulson, A History of Islamic Law (Edinburgh, 1964) 129.

280 Volume 1: The Emergence of the Modern Lex Mercatoria In other words, some introspectiveness would seem inherent in all types of cultures, but with greater individual mobility and more external information, all cultures are likely to lose at least some of their singularity, and as a consequence also some of their particular mindset, behavioural predictability and group cohesion, not least in terms of values. Modern Western civilisation could be called a-cultural in this sense (not necessarily anti-cultural because it allows a variety of cultures to operate in terms of diversity, but not as monopolies) and is rather the result of this type of development in which greater individualism has emerged and is cultivated after group culture first moved away from a more tribal to a family environment, now often also abandoned. This has led to a typical Western culture trait in which individuals are now primarily bound together in an organisational rather than in a cultural sense. That organisation became the modern state,614 shorn therefore of much cultural ballast and it is or pretends to be increasingly secular. It could thus be said that it does not derive, or no longer derives, its impetus from culture, but rather from the absence of it. Even if we still speak here of Western culture, it should be repeated that this is primarily a development that shows the weakening of any particular cultural drive. Even if the result can be characterised as another culture (Western culture), it should be considered that in that kind of culture the identification with the group and therefore the group element is often weak (except again amongst hardened nationalists, fundamentalists of all sorts, or football fans, which could then constitute a cult). Its effect on the substance of the law is therefore also weakened as that law, like the group it serves, becomes organisational, dependent on conceivably more rational choices but also more subject to political expediencies and to the law of unintended consequences. It becomes opportunistic, political, coincidental, contingent, and more random in nature.

1.5.3. Law as a Political Organisational Tool. The Importance of Diversity, Group Autonomy, Democracy, Rule of Law, and Human Rights For Western society, its a-cultural or culturally diverse nature underscores the need for and existence of a more sophisticated organisational infrastructure to hold modern societies together and make them functional. Culture alone can no longer do this at that level and loses here at least an irrational or more romantic grip. Culture, to the extent it survives as a real force, then becomes more orderly, more modern and less forceful at the same time, is more tolerant and allows for (more) diversity. This may then also apply to the law that modern states produce, but it may lose credibility or even legitimacy. Thus, if we accept that the social order, as we have it, is contingent, perhaps even a myth that depends on belief, like paper money and its functioning, the lack of strong cultural backing and even that of religion or nationalism renders law and its acceptance weaker. It also makes it more vulnerable to the political process as the only true support besides perhaps some greater rationality and some broader values supported by such states. In fact, political support may itself introduce irrational political features and may as such not be an expression of increased and better-informed rationality either, but rather of expediency, thus potentially weakening the force of the law further. It may even seek to alter or correct any remaining common values. This has been discussed in section 1.3.7 above in terms of modernity and post-modernity and was considered an important issue. 614 See also J Habermas, The Structural Transformation of the Public Sphere, T Burger (trans) (Cambridge, MA, 1991).

Volume 1: The Emergence of the Modern Lex Mercatoria 281 It follows first that, in Western society, states and law as a purely organisational tool became ever more likely to be closely connected and to figure larger than in more traditional or static cultures, and that the law that was produced in this way became more variable and in principle a mechanism for remedial action, social and cultural change, and economic development according to the insights of the day. Indeed, through legislation, law became in Western society in this manner an important instrument of public policy or the ever-expanding notion of the raison d’état, in which particularly public law being the law that concerns itself with a state’s organisation and objectives, acquired an enhanced status and also imposed itself increasingly on private ordering or relationships, meaning private law. Indeed, in its more practical aspects, the operation of such a state and the impact on its citizens could change overnight, depending on the prevailing political currents. Thus social, economic and budgetary law varies with each government, so may regulation, and to see the impact of deep cultural undercurrents or even pure nationalism in this process may become a distraction. This is modernity in which nationalism itself ultimately may also flounder, never mind how much invoked as justification, see again the discussion in section 1.3.7 above. Modern states may then also intervene in private law formation. State intervention in private law became here first and foremost intent on streamlining, greater efficiency and lower transaction costs in which connection the state (with or without the help of its academics) is likely to provide in legislation private law models as directory law (with its default rules) but sometimes also (such as in property) mandatory law to protect against interfering outsiders. That at least was the Enlightenment or French version of codification, as we have seen. This happened not only in codification countries of the civil law, but also in common law countries, of which, in the US, the UCC produced in more recent times an important example in commerce and finance. Especially in civil law countries, this kind of statist private law was often given a higher status than more traditional customary or other law, as states were increasingly seen as the ultimate organisational force and as deriving a higher legitimacy from this state of affairs, so that even their private laws assumed a semblance of exclusivity, in codification countries supplemented by strong intellectualisation expressed through system thinking. That was earlier identified as the more romantic and German idealist tradition in codification thinking, where states start claiming deeper insights and a better perspective. Democracy is not the key and was often not present. Rather, legitimacy was claimed by states using and supporting their academies to provide the necessary models even if this led to intellectual abstraction, see for this codification ethos and its modern justifications in which nationalism becomes more central, and for its drawbacks, section 1.2.12 above. The rest was filled in by mere policy; even basic values became subordinate. It may notably not be the attitude of the UCC in the US (see its section 1-103) but it was demonstrated that it is still the one of the DCFR in Europe. In this civil law version of codification, which highlights the state’s regulatory and transformation powers also in private law, codification assumes then increasingly political significance and meaning under which, for example, the concept of property itself acquires a policy dimension and the social function of private property may then become more dominant. But it may also lead to sclerosis and conservatism: the state defending itself to protect its established elites against openness or more recently its society against competing and liberalising globalisation currents. Again, that is policy but in an organisational and political environment like that of the US, there developed from earlier on another strand of thinking. It is sometimes thought that respect for the law is the only thing that holds that country together, and is as such the only real bond across great cultural and ethnic diversity where a national culture plays a role only in the very broadest sense of the word. It suggests a survival instinct rather than any common cultural or other values, on very much of which there is unlikely to be any consensus at all. No wonder the

282 Volume 1: The Emergence of the Modern Lex Mercatoria force of the political debate and the great interest in America in the law; how it can be known and still be accepted by all or most; how it constantly transforms itself; and why it must do so to remain living, capable of fulfilling its function of holding society together and forming a better environment and an ever-closer Union. In this process of law remaining relevant and promoting the social order into the next generation, there may also be room for transnationalisation where it matters in the international flows, especially in commerce and finance even if this is mostly still a development to come and will also experience throw backs, probably also in the US. The essence is nevertheless that if we still speak here of a common culture, it means the prevalence of a broader, primarily Western culture of which the US has become the primary carrier in a very large and highly diversified Western society, therefore a culture only in a broadest (a-cultural) sense. This Western culture is indeed particular in that, without a strong group sentiment and regardless of its intrinsic individualism, it still manages to produce a set-up in which states and their governments could operate and provide added value to society as a whole without becoming all-dominant and suffocating, although that risk is always there. As such, the modern state is primarily the expression of societal energy rather than of a communal mindset or culture, an energy which does not allow itself to be exhausted by and entirely absorbed in the modern state, but competes with it, not in the least in the marketplace, now increasingly internationalised, to the likely advantage and the greater stability of both, even though at times of economic or financial stress it may seem otherwise. It means leaving space for international commerce and finance to operate without state interference beyond what public order may require, which requirements may themselves increasingly be internationalised in transnational minimum standards. Although states may have moved into law formation in a major way, both in the public and private domains, they would thus still have to allow room for communities, cultures, or markets that are able to maintain themselves in a rule-creating function within or beyond that state’s territory in a competition in which the lines of competency are never clearly drawn. Democracies in particular need to respect that space and cannot take all, see the discussion in section 1.1.8 above. In Western society, there is in truth no higher rule that governs this process except the rule of law itself if it is to mean anything at all. This is clear when we now also talk about legal transnationalisation beyond states. Indeed, different legal orders operate in parallel in the space so created or left in international commerce and finance, especially the international commercial and financial legal order operating besides domestic ones, as will be the subject of the following sections. Even locally, space for other communities and respect for their laws may be expressed (to some extent) in constitutions or similar organisational instruments, which provide a legal framework guaranteeing order and continuity for various groups, but more important is probably that modern Western states (like any other) remain de facto (therefore regardless of the constitutional framework) subject to a constant redistribution of organisational power (and wealth) between different individuals or groups, in which existing cultures may still play a role but do not necessarily determine the outcome. It may not leave the constitutional framework unaffected and means that the modern state and its institutional framework never had the last word, again clearer perhaps in an age of globalisation as it can no longer isolate itself from the world scene and the need for organisation at a different level.615 Again, especially in commerce and finance, the power of the marketplace now springs to mind as a competing force. It was already noted also that within the space that still exists in modern states, even those that claim formal democracy, 615 See also the discussion at n 623 below.

Volume 1: The Emergence of the Modern Lex Mercatoria 283 many (especially smaller ones) are readily taken over by elites that use the democratic process to strengthen their own grip but they are unlikely to do so forever whilst meeting competition, perhaps not locally, but now more properly in a globalising world. Internationalisation then suggests a new equilibrium based on greater openness. It follows and has been stated before that in Western culture, which is often equated with civil society, modern states (have to) accept and promote the rule of all law, whatever its legal source, unless it offends their domestic public policy and order (in a modern sense). This is fundamental and may in particular challenge the monopolisation of power by the few, as such a highly necessary process, even purely domestically in formal democracies. Especially in private law formation and operation, modern states must as a consequence be decentralist, therefore first and foremost facilitators that respect individual and group autonomy unless internal peace is challenged, efficiency is substantially threatened, or a need for a redistribution of risks and reward is indicated. In such cases, major public policy issues are indeed likely to be at stake, often supported by popular feelings, now perhaps also by broader human rights considerations, forces of globalisation, and much stronger international competition leading to greater diversification of power and to diversity itself. In the private sphere, this type of decentralist, organisational, and rather a-cultural or culturally neutral Western ‘culture’ thus allows or is forced to allow for organisational autonomy of parties, partnership and groups or communities, at least as long as the public good is not fundamentally threatened in the territory in question. At best, it will also allow and even encourage cultural diversity in a religious, ethnic, linguistic or aesthetic sense as long as these cultures prove tolerant. Totalitarian tendencies are likely to be alien to this ‘culture’, which invites others into it, while the rule of law and the concept of human rights underline basic respect for the private sphere and individual or group endeavour. It follows that, even where the modern state has assumed a central role in the formulation of private law through legislation, it becomes more limited, whatever its pretence, and any equilibrium so created cannot be permanent but is constantly challenged. Rather in the law there will be the competing forces of fundamental and general principle as well as of custom and practice as we have seen in section 1.4 and always transpires in the law’s application. In law formation, this may be clearer in business and its globalisation where public action will be mainly directed at anti-competitive behaviour and other market abuses, or the taking of undue advantage, also from the environment. It should not be otherwise directed at rebalancing the interests between professional parties (it may be different in consumer law). In other private areas, such as families, churches and similar associations, in partnerships, and companies, or now also in sports, state intervention should equally be directed at excess such as intolerance and fanaticism, subjugation of gender, or abuse of minorities or children, monopolisation, money laundering, tax evasion, and corruption. But, again, only if a major public policy issue arises should modern states intervene in these communities or in private relationships through mandatory laws. Even then, they are subject to rule-of-law and human rights limitations.616 Where states devise rules for communities beyond these public concerns, they are likely to be merely directory or guidance/facilitating and can thus be set aside by the parties, groups, or individuals concerned. Whatever the claims of nationalism in this connection, it is then important and of prime interest to note that key notions of diversity, group autonomy, democracy, rule of law, and human rights are neither themselves nationalistic in nature nor do they belong to any national culture in particular. Again, they belong to the much broader notion of Western culture (or a-culture) in which they are embedded and of which they are the expression, suggesting an attitude that is also 616 See for the rule of law also the discussion in n 634 below.

284 Volume 1: The Emergence of the Modern Lex Mercatoria concerned with efficiency and impatient with monopolies of whatever kind (except in respect of state enforcement power, in this view itself considered subject, however, to the rule of law in a transnational more modern cultural sense). The function of the modern state as promoter and engine of modernity here reaches limits. In its progression, Western culture in this sense continues to rely heavily on a) individual exertion but b) no less on self-restraint, tolerance, civic sense and participation at that individual level, c) on rationality and efficiency in an economic sense, and d) on flexibility and experimentation in an intellectual sense. Again, none of this is a typical national cultural trait or preserve even though these notions may reflect them; in a more modern and open world, they derive from a broader set of human experiences. To repeat, in such a world, culture, to the extent the term is still used, is likely to lose many of its more mystical, idiosyncratic, and nationalistic features. It should stay very clearly away from racism or culturalism in that sense and be secular. In modern society, cultural aspects of the older type are likely to be preserved only in the manner of folklore unless they retain a community form. It must be admitted that as such they may be regressive (much like nationalistic sports fanaticism) in the form of more rigid social structures, again not seldom used by the establishment or local elite to maintain itself.617 There is nothing per definition benign in community rule and communities are not paragons of virtue per se even though they are the key building blocks of legal orders, here in the form of the international marketplace which opens up those of a more domestic and confining nature. There remains then the issue whether such a community in a modern sense is merely the result of individual effort, as such maximised to reach the best effect from time to time, or whether such community may still mean something more, in particular whether its members may still feel some obligation towards the common good and whether some form of altruism also survives. As a balance, states may still attempt to impose more fundamental ideas of wealth distribution, now at the transnational level, or in Europe also an idea of EU identity and political cohesion. The issue is then one of a pure negotiation model for the best immediate benefit, perhaps more the US and UK model, or of better longer term international relationships, perhaps more the German/ EU model especially in Europe at this moment. It was already said repeatedly that the greatest challenge in globalisation is the role of the public interest and the formulation of transnational minimum standards at that level to balance the international marketplace.

1.5.4. The American Experiences and the Effect on Law Formation It has already been mentioned that what has propelled this broader Western culture is particularly the American experience, which became prevalent in the West in the twentieth century when Europe lost its grip through its internecine wars, its experimentation with totalitarian concepts, and ultimately its promotion of both fascism and communism, which only met their demise through American intervention. The American experience to the extent here relevant would appear to be marked by at least five basic characteristics which confirm the perception of modern Western culture mainly as an organisational philosophy for a dynamic and diverse society or indeed of modernity itself. First, it is secular. This does not mean that it is anti-religious, but religion is considered a private matter and the US Constitution makes sure that it remains so, so that its divisive nature and organisational power are not allowed to dominate public debate (unless prefaced by a reference to 617 See for this view, in particular, Foucault and later French deconstructionalists.

Volume 1: The Emergence of the Modern Lex Mercatoria 285 tolerance) or enter the public domain unduly. In fact, in this environment, fanaticism of whatever kind is not accepted but is perceived as undemocratic and, in that sense, as culturally ‘un-western’. Second, it reaches out and it is outward looking, meaning that more extreme forms of nationalism and culturalism or similar introspections are not encouraged but considered regressive. Even if more conservative political forces, in the US as elsewhere, play with nationalism and culturalism from time to time while local establishments may hide behind them, ultimately they do not carry the day.618 Third, the American experience has a long democratic and market tradition, which continuously separates, breaks down and fractures power and has close connections with the rule of law and civil (human) rights. It appreciates diversity and cultural competition and also refines the notion of community and party autonomy. Decentralisation in an organisational sense is an important feature, which also means that the state represents a fairly low percentage of GDP. It particularly steers clear of the idea that modern wealth and well-being is largely due to a socio-economic infrastructure in which only the contribution of the state counts, which would therefore be entitled to dominate all, at least within its own territory, and could take as much as it thought it was entitled to or could get away with (notably in terms of taxation). It is the balance or equilibrium between the state and the market that makes the difference even though it can never be pre-determined and is in constant flux. Fourth, the American experience is characterised by an all-absorbing and self-propelling inquiry into nature and mankind, its motive being the discovery of truth guided by experience and investigation, therefore to uncover a greater reality beyond what we can observe and know through our senses (which may be very little). This was always the professed objective of academia, but it may well have lost its compelling message in Europe and may have acquired an altogether different dimension in the US, even if it may also be struggling, in the social sciences in particular, where there may not be an intrinsic framework or notion of greater truth at all. All the same, it leads to a broad demand and respect for research and learning centred on the great American universities and research institutions, hence also their strong philanthropic support. This search transcends the cults of Washington, Wall Street, New York’s modern art scene, Hollywood, or Silicon Valley, which nevertheless become close second, third, fourth, fifth and sixth, and are in their own ways all part of the same process of discovery and revelation. By looking for truth or what is real (rather than fantasy, myth, or mystique) in nature and its processes or even in society, the American experience thus lives in the hope of better understanding and greater control, therefore of a better or at least a more interesting world and of progress in that more objective sense although it guarantees nothing. There is a fifth feature of the American experience, in which it may be more truly unique, even within the West: it does not seek to dominate, although it will forcefully defend itself against any physical assaults. Instead, it desires to emulate, to convince, and to involve all others to join the

618 Reference is in this connection also made to the anti-heroic, anti-utopian nature of Western culture, it being the enemy of religious radicalism, engrained nationalism and idol empires, or of deeper forms of purity and heroic salvation in a religious or national sense. Modern society is here viewed as substantially product of a more advanced city-dominated and sharing culture based on exchange/trading and is not or no longer considered an historical, cultural or religious product or accident, see I Buruma and A Margalit, Occidentalism, a Short History of Anti-westernism (London 2005) 72. These authors argue that this is what fundamental cultures outside or even within the West, and also ultra left- and right-wing factions reject. None accept it as liberating even if essentially prosperity enhancing for the many. Fundamentalists may see here materialism and sexual licence, the left a doomed society based on market behaviour, and the right an artificial bar against a idealised version of society and its development towards the strong and powerful which they favour.

286 Volume 1: The Emergence of the Modern Lex Mercatoria experience. This is different from many other cultures, which have more often sought domination and find it natural to do so. That may still be the basic attitude in Western Europe, where the reflex is often to see the American experience not as an example but as a form of intrusion, imposition, or threat. The true question everywhere is how society’s organisation and the law, its formation and further evolution and operation, are caught up in the dynamics of our present situation, this voyage of discovery, openness and national, religious and cultural demystification. In reality, we have here first the day-to-day practice of the law to consider. Much of it does not go beyond a ‘practitioners’ manual’ or ‘lawyers’ toolbox’ which can hardly be more than black-letter law. That is what in essence is now taught in European law schools, whether of civil or common law. As discussed earlier, this often shows an unhelpful acceptance of past experiences, and may be intellectually and academically of modest interest and value.619 The system and method are not fundamentally questioned. As we have seen, in US academia, this has received the name of doctrinal or black-letter law, often pejoratively. Although traditionally finding some order and structure in the law may have been enough, it was already posited several times that more important and more truly a subject of academic investigation is now where the law is going, what the alternatives are, what the law may or should achieve in an ever-evolving environment or society, how it can be known and best complied with and how its focus may change in this respect over time, and when and why it finds acceptance at group, national and now perhaps even at transnational level. How the law is applied in practice becomes secondary. This is the gist of much modern American research and teaching in its major law schools, which are experimental and normative and have in this respect divided in the various ‘law and …’, directions discussed in section 1.3.5 above. In this view, the law moves with society, is the result of the constant debate in the groups or communities it concerns, and can never be fully known. It was said before that its first task is to create order of whatever sort, but it is better if it were just and efficient and promotes social peace. It was submitted that this is the true challenge and remains also the aspiration and essence of the modern rule of law now that at least commerce and finance must start operating at the transnational level to guide the international flows, not only in business but even of people. There is here an ongoing and never-ending search for newer paradigms and models that are closer to reality as it moves forward, explain it better, simplify, and therefore hold the prospect of greater steering and predictive value. In a newer generation, these paradigms may even be found in pop culture or other popular perceptions or beliefs.620 In business, they are more likely to result from technical progress and efficiency considerations, which may change rapidly. One may think of Uber and the Blockchain. These new paradigms may at the same time allow for a more rational evaluation or critique of existing legal structures. It has already been said that the study of the positive laws should then be used as an empirical tool, merely as an example of how the law should be, or should not be, or should be no longer, now especially whilst starting to operating transnationally. The needs are what they are or become and it is the prime task of academia

619 It may be illustrative to cite in this connection the important dissenting opinion of Lord Bingham in JD v East Berkshire Community Health NHS Trust [2005] UKHL 23: ‘The question does arise whether the law … should evolve analogically and incrementally so as to fashion appropriate remedies to contemporary problems or whether it should remain essentially static, making only such changes as are forced upon it leaving difficult and in human terms very important problems … I prefer evolution’. So does this author, who considers, however, that this evolution may be quite abrupt and is not always merely incremental in a smooth and gradual development. 620 See also the discussion on paradigm change in n 264 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 287 to help guide and explain. Professors should not write practitioners’ handbooks; practitioners must do so themselves. These books deal with the past, suggest a certainty which is not there, law is technique, and they are hardly intellectually challenging but time-consuming to write while tending to be destructive of deeper analysis and newer thought in changing environments, which is the much greater academic challenge. Again, law, even in its application, is not perceived here merely as technique in which only the written-up version of it counts; see for this discussion section 1.4.17 above. Academically, the challenge is not the past which must look after itself, but to move the law into the next generation for it to remain relevant. That unavoidably has an experimental flavour to it, here perceived as the true nature of the academic effort in law. Interdisciplinary and empirical studies help in which in business we must especially be aware of the effects of globalisation. Social rules are not predetermined, even at the level of values; there is in a modern society in essence an open societal normativity which also affects the law as a system of rules that enjoys state sanction. This is probably better understood in American legal realism where the accent is more fundamentally on moving forward.

1.5.5. The Revival of Legal Universalism in Professional Private Law It may be observed that the emphasis on economic, social and psychological studies in the major universities after World War II was meant to be of help to discover more about the social order, how it operates and advances, but progress has been slow and often disappointing. We still know little about how society works and moves: it changes all the time but often imperceptibly. Models prove of little long-term use; we have crises all the time. Economics is now called the ‘dismal science’. We may have learnt something about correlations but little about causality and much of what happens may not be causal at all but merely random. At best we are in the world of probabilities. Thus printing money was once thought to cause inflation, but apparently not necessarily so, even on the scale on which it was done after 2008 and now again after 2020.621 Similarly, we think we know more about banking and its dangers and regulate enthusiastically, but we may have little idea of the modern need for and role of liquidity in society and in any event society may already have moved on so that all the new rules no longer fit and only mean to prevent another crisis which is unlikely to recur in the same way. Perhaps these rules never succeeded in their stated aims and the adverse consequences may be considerable in terms of liquidity provision and management; see the discussion in Volume 6. History may be able to tell more and show that the latest crisis may not only have been a failure of capitalism and its regulation but also of academia, which did not have the foresight to see anything coming and could subsequently not provide a reliable guide on what to do next. Much remains groping in the dark, means experimentation, and is manipulated, at least in Western society. This goes back to the discussion on modernism, see section 1.3.7 above. In Western society we assume that the law is now steeped in secular principle, therefore in some basic values of which the rule of law, human rights, and respect for individual and group

621 So-called quantitive easing after 2008 led to an unprecedented increase in money supply in the US and Europe. It was used in first instance to acquitte longer term financial instruments to neutralise its effect whilst increasing liquidity and lowering short term interest rates. Some inflationary effect was also hoped for but the more immediate result was a boom in stock markets and real estate. Nothing suggests that it will be different after the pandemic crisis of 2020.

288 Volume 1: The Emergence of the Modern Lex Mercatoria autonomy are indicative.622 This approach suggests and demands that all contribute according to capacity and that no one is held back, left behind, or excluded by insiders or assigned a predetermined role. This is also necessity, not merely some ideal or policy. In commerce and finance, there may be some new rationality or utilitarian principle as may be more particularly identified by the ‘law and economics’ school of thought. It would all seem to suggest that in a globalising society, local, national or statist cultural content in the law will ultimately yield to more universal notions. Again, much centres here around the idea of a more open society, not merely as a sign of civilisation but also of economic necessity. This would certainly be so in business and concerns especially the law of professional dealings and its transnationalisation into a new legal order, here called the ‘transnational commercial and financial legal order’ with an authority and dynamism of its own, see section 1.5.1 above. It would suggest further that even if the law, its development, and application still have an important anchor in the nation state and its organisation at the level of the positive law, that cannot be the whole story and need not be so per se or forever, at least not for all communities and activities. It was never more than a paradigm. In considering whether or not nationalism and national culture still have a decisive meaning, at least as far as professional private law is concerned, it should also be considered that much of it, at least in the law of property and contract, was seldom of a purely national (cultural) origin, even in the nineteenth century when nationalism started to prevail. Indeed, private law always had much broader historical roots (Roman or Germanic) in virtually all its major aspects in whatever civil law country. Whole private law systems were subsequently transferred from France and later from Germany to other countries. In the common law world, the law came from England, whether in the US, Canada, Australia or elsewhere. Very few countries were able to create an entirely new national legal culture. Indeed, in private law, it was already asked what the cultural or typical national aspect is of the notification requirement for a valid assignment in some countries, not demanded in others, while in 1992 the Dutch started to require it and in the same year the neighbouring Belgians abolished it. It might look like a small thing but it has major consequences in the structure of the law of receivables. There is much like this in modern private law in which practicalities should decide these issues rather than deeper considerations, which are often better left behind. This may well be so for the entirety of commercial and financial law or for most of the law concerning professional dealings, based as it is on the rationality of business and its justified needs. It hardly ever found its support in typical national considerations or deep intellectual thought, but rather in the relevant marketplace. Within modern states and their organisational structures, there is barely any true national principle or value in this type of law. Even if there was, there is ever less reason for there to be. One could still say (in civil law terms) that being part of the intellectual national system of private law presents some national value, but this system itself is largely contrived, often outdated, seldom capable of covering all realities, and, like most intellectual endeavour, in any event hardly culturally specific or territorial. The practical consequence was already described: statist thinking of this nature leads to and even requires the breakup of international transactions and flows along local lines. That is still the ethos behind private international law, which in each country provides the courts with a national conduit to find the most appropriate local law per piece of the transaction in the hope

622 Note also in this connection the Preamble to the EU Treaty, which refers to the Member States’ ‘attachment to the principles of liberty, democracy and respect for human rights and fundamental freedoms and of the rule of law’. If these are there to guide us, are they policy or law and in the latter case in particular, are they statist or non-statist concepts?

Volume 1: The Emergence of the Modern Lex Mercatoria 289 that all these local laws together add up to some rational legal framework for the transaction as a whole, but it may be repeated that it makes little sense in a modern world if only because much of these flows have become virtual, are in constant transformation and movement between states in supply lines and distribution chains and can hardly be satisfactorily located. At the same time, they may need to be given as security for working capital concerning an entire production process and sales effort, for which the application of local laws is then a fatal impediment. In this globalising environment it was submitted that even public policy and values may no longer be effective purely locally—one may think of competition, the environment, health and even financial stability, and there may be a more urgent need to formulate transnational minimum standards everywhere. How this can be done and what the relationship still is with local public policies in international transactions, is then a prime concern and was considered the main challenge in the legal transnationalisation process, see further section 1.5.8 below. The international marketplace needs balancing but how can this be done and what are the guiding principles? To conclude: the new law merchant or lex mercatoria balanced by local public policy or public order requirements when international transactions still come demonstrably on shore in a particular country (through conduct or effect) or otherwise increasingly by transnational minimum standards is more likely to provide a forward-looking model and legal framework for international commerce and finance. In fact, it was pointed out in section 1.4.4 above that it was never entirely forgotten in the international marketplace. At least the renewed search for it would appear legitimate and necessary. As an expression of the needs and sense that prevail in the transnational community, the modern lex mercatoria must provide a better steering tool for that community to manage its business and to progress, where again the truer challenge remains the formulation of transnational minimum standards, necessary if only to keep markets clean, which is also in their own best interest and very necessary for their credibility and legitimacy. If it is true, as is maintained in this book, that the Western model is successful mainly because of the balance between the marketplace and public policy, which will hopefully continue albeit constantly being redrawn, this also means that this balance must now increasingly be found transnationally. It is simply the consequence of globalisation on the scale we have it today. But it should also be repeated that the transnational commercial and financial legal order must remain respectful of states and deferential to them to the extent international transactions in conduct and effect still come demonstrably onshore, although it may be no less true that transnationalisation also guides against excess in state powers and may thus be seen as helping to create a better equilibrium even locally. But there may be conflict. Again, the interaction between domestic policies and transnational minimum standards then becomes an important issue, see also sections 1.5.8 and 2.2.6 ff below, which in dispute resolution international arbitrators in particular are increasingly asked to cover. This raises at the same time important issues concerning their powers, accountability and supervision and will be a main subject in the discussion on international dispute resolution in Volume 2.

1.5.6. Sociological and Economic Considerations in the Law In the previous sections, for Western society the force of modern private law as a typical statist or national cultural phenomenon (or both) was de-emphasised. This may be especially clear in the case of commercial and financial law. Instead, the more pragmatic organisational aspect of modern law formation was noted, while the sociological background of other sources of law was emphasised, in particular law’s association with groups/communities or markets and their functioning. The possibility of competition between legal orders on the same territory, especially

290 Volume 1: The Emergence of the Modern Lex Mercatoria in public policy aspects was also mentioned as well as the operation of parallel legal orders, see further section 1.5.8 below. At least in the communitarian view, in which, in the opinion of some,623 the notion of community may claim moral primacy over the notion of states,624 it is only logical to question whether states or nations can remain the only true sources of law and of its values. No less important is a modern strand in ‘law and economics’ that posits that the decentralisation of the law is a modern necessity.625 In section 1.5.1, it was submitted in this connection that all law emanates from or within legal orders, which are community related and of which states are only one particular example, even if at present the most important and powerful one, although not necessarily the most culturally driven. If, as suggested in the previous sections, societal energy is at the heart of all modern statist law formation, it will also sustain other communities within and beyond such states. Indeed, that could be seen as the essence of all civil societies and their evolution. It is also at the heart of the recognition of the importance of diversity and gives it meaning even though modern states were able to grab most power and monopolise it in their legislative processes and enforcement facilities, sometimes for the better, at other times perhaps for the worse. As a minimum, at least since the nineteenth century, it gave states a strong hand on their territories when there is competition with the rules of other orders and when it comes to enforcement, but it does not rule out the law-creating power of these communities, even if for enforcement of their rules they may ultimately still be dependent on (the same) states as the sole enforcement agencies in the modern world—and this is so for very good reasons, even if all law depends on voluntary compliance for its survival, an issue dealt with more in particular in the next section. Again, the key is that in a modern society, under the rule of law, law enforcement but not the law-creating function is monopolised by states. States have to recognise all law and enforce the decisions legitimately based on it, unless there are overriding public policy issues at stake. The real question then becomes which communities function as legal orders, are therefore likely to produce their own law, and are entitled to have their laws recognised and respected by other legal systems or orders, therefore especially by states, which will have to give their sanction to it, much

623 See P Selznick, The Communitarian Persuasion (Washington, DC, 2002) 64, and also R Post, nn 326 and 370 above. Some French legal scholarship insisted on the internal sovereignty of all social groupings much earlier, see G Gurvitch, L’idee du droit social (Paris, 1932) 84; G Gurvitch, Sociology of Law (1942). They were even within nations considered to create their own law, which limited that of states and was, in principle, superior to it. For a similar approach in the Netherlands, see HJ van Eikema Hommes, Hoofdlijnen der Rechtssociologie en de Materiele Indeling van Publiek en Privaatrecht [Main Principles of the Sociology of Law and the Material Distinction between Public and Private Law] (Deventer, 1983), see also the comment in s 1.1.8 above. 624 Note that this does not imply an idealized notion of community or advanced concept of democracy, see also the comment at the end of s 1.5.3 above. The issue is legitimacy of law formation other than through a formal (national) democratic or other process. Association with values, also in this context, does not signify per se higher values, but where such values are now often assumed to be national and as such to support and underpin national legal systems in particular, see also n 330 above, communities of the type here mentioned might have their own standards regardless. This goes again to the issue of the sources of the modern lex mercatoria and the operation of international minimum standards. See for the discussion of competition between legal orders s 1.5.8 below. 625 RD Cooter, ‘Structural Adjudication and the New Law Merchant: A Model for Decentralisation’ (1994) 14 International Review of Law and Economics 215. See also RA Epstein, ‘Reflections on the Historical Origins and Economic Structure of the Law Merchant’ (2004) 5 Ch JIL 1; Bo Yuan, ‘A Law and Economics Approach to Norms in Transnational Commercial Transactions: Incorporation and Internalization’ (2016) 9 Erasmus LR 5 (2016); F Parisi, ‘Spontaneous Emergence of Law: Customary Law’ in B Bouckaert et al (eds), Encyclopedia of Law and Economics, Vol 5 (2000); Amitai Aviram, ‘A Paradox of Spontaneous Formation: The Evolution of Private Legal Systems’ (2004) 22 YLPR 1; W Kerber, ‘Institiutional Change in Globalization: Transnational Commercial Law from an Evolutionary Economics Perspective’ (2008) 9 German LJ 411.

Volume 1: The Emergence of the Modern Lex Mercatoria 291 as they do to sister state laws and judgments (subject to a number of minimum conditions which should then also be clarified). It has already been put in a different way: not every commune is a community in this sense and not all make law, but some do. Who counts in this connection? Who may compete with or even prevail over states in the law formation function and under what circumstances? Where is the line? And what are the rules of the game? The notion of community in this sense could not be left to state recognition alone as that would deny all autonomy of other legal orders and could not explain international legal orders. In this connection, it could be intellectually attractive to attribute autonomy to them all, therefore to any grouping no matter how ephemeral and transient, at least to the extent that participation could be considered to have been consented to. Party autonomy would then by itself present a legal order. It is not that simple, however, not merely because it would make the setting aside of, or at least the challenge to state rules a seemingly casual affair, but more fundamentally because the notion of participation itself presupposes other (external) rules which determine when it counts, which rules are not necessarily of a consensual nature but concern the group or order (and its functioning) as a whole. These rules have a more objective status and a more independent origin, which as such are or should be identifiable. To be more concrete: even contracts are embedded in and depend for their binding force on a broader legal set-up or framework that is not necessarily voluntary in all its aspects nor depends on consent and participation alone. Participation and consent are therefore not the sole determining factors for the autonomy of these legal orders and the law that results in them. Other more objective criteria must be found to delineate the various legal orders and mark out the rules that they produce as law. (a) This would appear to concern first the identification of the relevant group of participants in a given range of activities or with a particular purpose, in international commerce and finance grouping around the international marketplace. (b) There also has to be some sustaining force or motive, as in international commerce and finance there are the force of globalisation with the large increase in the modern international flows of professionals, goods, services, money, information and technology transborder, and the need for encouragement and adequate protection of the commercial or financial interests involved in these flows. (c) This force must be capable not only of delineating the group, but also of producing and maintaining an infrastructure in it.626 (d) At least in (international) business, one would also expect some economic component in terms of efficiency, rationality, common sense, consistency and predictability, if not also some kind of morality in terms of honesty, transparency and accountability. (e) There needs to be some consensus on the basic economic system, which suggests a market approach in which states may still figure as important balancing or facilitating actors on their own territories. (f) In law, this would translate to some consensus on or inherent adherence to the fundamental principles underlying the modern lex mercatoria, its sources of law and their hierarchy, and the evolution of international minimum standards.

626 One could eg ask whether Facebook increasingly presents a community in this sense or has remained merely some commune. So far it seems to be the latter, cf also YN Harari, ‘Can Facebook really create a global community?’, Financial Times, 25 March 2017. It is important, as a system like Facebook could become more as its founder clearly envisages. It poses all the more the question of its recognition as such and the conditions.

292 Volume 1: The Emergence of the Modern Lex Mercatoria (g) Finally, there is an institutional aspect relating to the spokesperson function, which allows for articulation of these principles and rules in which, for example, in international commerce and finance, the ICC, international arbitrators, and especially legal practitioners may play an important role.627 This raises many fundamental issues. If we limit ourselves to international commerce and finance, the relevant group of participants in a given range of activities is likely to be the professionals in those trades and dealings.628 A more specific feature of the international and commercial legal order may indeed be found in its foundation in the modern flow of professionals, goods, services, capital and payments, information or knowledge and technology, the freeing of which has been the main motivation in the creation of the economic legal order of the EU and its internal market and in the creation of the WTO as successor to the General Treaty on Tariffs and Trade (GATT). These flows suggest a connected way of dealing or operating and their own patterns of rules which have no origin in domestic laws and can often not be satisfactorily explained by them but must be attributed to the operation of the international commercial and financial legal order itself. As a practical matter, in these international flows, the dynamics are likely to be wholly different from the local ones. Local law, whether statist or not, is unlikely to have been developed for them, and may be deficient, parochial, and atavistic or make no proper sense in international commercial transactions. This may show, for example, in the limitations local laws may place on the protection of bona fide purchasers or in the type of proprietary and similar rights (such as trust structures, assignment possibilities, security interests and floating charges, set-off facilities, agency relationships, and book-entry entitlements in respect of investment securities) which local laws may or may not allow to operate against third parties: see also section 1.1.6 above. In this connection, the view has authoritatively been expressed that new law is constantly formed through the sectarian separation of communities. In this view, each legal order perceives itself as emerging out of something that itself is unlawful.629 Separation is here identified as a crucial constitutive element of new legal orders, which may require in each case a normative mitosis or radical transformation of the perspective of a group or a new total life experience for a new legal order to emerge and qualify. There follows the emphasis on separateness, sustainability and prospectiveness as a group, on a rule producing willingness and capacity, and on a capability to hold the group together or at least to make it function better on the basis of its own rules. Mere communion is not enough and some (incipient) organisational structure is required. The emphasis moves here to struggle and triumph, therefore to a revolutionary element in the creation of new legal orders, which essentially compete with the older ones. In line with this approach, in commerce and finance, globalisation and the increasing freeing of the international flows could then be seen as the fuse for the change of perspective in its participants and the establishment and operation of new (international and commercial) legal order between them. 627 See further Vol 2, s 1.2 below, and also JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers University Law Review 17 and ‘The New Lex Mercatoria: an Emerging Challenge to Legal Systems in Cross Border Transdnactions’, Caribbean Academy of Law and Court Administration (CALCA Presentation Oct 2016). See for the operation of a specialised international commercial court in this process, JH Dalhuisen, ‘The Case for an International Commercial Court’, in KP Berger et al (eds), Private Law and Commercial Law in a European and Global Context. Festschrift für Norbert Horn zum 70. Geburtstag (Berlin, 2006) 931 and s 1.1.12 above. All are on SSRN Working Paper Series. Note also that T Halliday and G Shaffer, Transnational Legal Orders (Cambridge, 2015) 5, continue to put the emphasis on actors who produce these new orders in the relevant domains rather than on the flows and their force at least in transnational commerce and finance. 628 See s 1.1.10 above. 629 See R Cover, ‘Nomos and Narrative’ (1980) 97 Harvard Law Review 4, 31.

Volume 1: The Emergence of the Modern Lex Mercatoria 293 Others630 have put emphasis rather on how the new law can be found and identified, and they have suggested that, for international commercial law to arise and to count legally, in the sense that states must accept it and back it up by coercive power (unless it has major public policy reasons not to do so): (a) the norms that arise in this specialised business community should be empirically identifiable; (b) the incentive structure that produces or internalises these norms should be capable of being analysed (by using game theory and the notion of equilibrium) in order to determine whether the norms empirically found are more than social convention or moral dictates and are experienced as binding; while (c) the efficiency (or public good effect) of the incentive structure should be measurable using analytical tools from economics to avoid harmful laws (such as monopolistic practices, which will therefore not be enforced). This is a ‘law and economics’ approach in which the emphasis shifts from struggle to rationality, consistency and predictability. In ‘law and sociology’ other (supporting) insights have emerged in Europe631 and may be of interest.632 It is submitted in this connection that ‘modernity’ and the ‘advanced nature’ of new 630 RD Cooter, ‘Structural Adjudication and the New Law Merchant: A Model for Decentralisation’ (1994) 14 International Review of Law and Economics 215. A law-making community is here assumed to have a minimum level of control over the behaviour of its members. Group internalisation is the key but ultimately a question of maximising self interest. The starting point is that members will not invest unless others follow. If upon proper signalling some co-operate and others appropriate, it means that some will make money every time, others sometimes more but other times nothing at all. In equilibrium, both earn the same overall, but those who co-operate have also a public good on offer, which may induce the appropriators increasingly to co-operate. Thus in this approach, the rule forms in a community when private incentives for signalling co-operation in the group align with a public good in that group. It creates momentum which shifts the equilibrium towards general acceptance. The suggestion is that when this happens the rule becomes legally enforceable, see further also the discussion in the next section. One problem is that much private law does not operate at the level of internalisation as it is technical and must be learnt by the participants and their lawyers. Trade-offs hardly work in much of private law as it has developed and probably apply only to the bigger concepts. Once some such structures become a given, it is the innate sense, requirement of order and need to avoid contradictions that propel this law further. Businessmen learn rather than internalise and their lawyers may internalise but only after a long learning process. Conceivably, academia has here also an important role to play. External forces such as those of states may facilitate (if asked to do so), eg through treaty law (or similar interstate structures in organisations such as the EU), or, in regulation, impose themselves, even through the infusion of mandatory private law, which in particular also raises the problem of proper jurisdiction to prescribe in international cases, see also ss 2.2.6ff below. 631 See G Teubner, ‘Breaking Frames: The Golden Interplay of Legal and Social Systems’ (1997) 45 American Journal of Comparative Law 149, for a somewhat different slant on the positive new law merchant and its origin. It is spotted in the ‘close structural coupling with non-legal rule production’ (in terms of a paradox, not of a dialectical process between fact and norm) in an evolutionary progression that, in this view, in its origin relies on an imaginary or fictitious legal environment in which there is mostly a pretence of legal rights and obligations fed by expectation. This is ultimately believed to lead to ready acceptance of the binding nature of the new law, even though non-political and factual, but also to a concern about the supposedly destructive role of practising lawyers and their distortion of business realities in their alleged reference for a static (statist) system of rights and obligations. See in this connection also the interesting contribution of D Wielsch, ‘Global Law’s Toolbox: Private Regulation by Standards’ (2012) 60 AJCL 1075, looking for a universal rule of recognition which reminds of Kelsen’s Grundnorm driven into a transnational direction (it may be recalled that according to Kelsen the Grundnorm could be put in a national or international context). In this approach state law itself may be increasingly driven by the logic of globally operating social systems where in this view the distinction between statist or public law making and private law making looses much of its relevance. 632 The views of Luhman may also be relevant in this connection, see N Luhmann, A Sociological Theory of Law (London, 1985), see also n 282 above, who noted the self-creating force (autopoietic) of all law, but, although accepting the dissolution or disintegration of its system as a continuous process, still insisted on a simple bilinear law/non-law matrix, which in this view was still best stabilised by states. While assuming that only in this way law could be set aside from other normative systems like morality, it undermined at the same time the very basis of

294 Volume 1: The Emergence of the Modern Lex Mercatoria legal frameworks might themselves become supporting elements in the context of their international validity and force.633 Similar objective criteria may also emerge from a rule of law test. It has already been said that it assumes threshold standards of a more universal nature and not mere state recognition. Order may be the basic objective of the law in an organised society but it has been noted several times before that it is better if it is just, promotes social peace, and is efficient. That is what civil society is all about and the rule of law stands for and is as such a major achievement of such a society, which makes law of this nature the true sovereign. It is not uncommon to refer in this connection to the rule of law both in an institutional (‘law of rules’) and substantive (‘set of values’) sense. In the latter sense, it is the common yardstick by which the exercise of power in Western society is now more generally measured, channelled, constrained and informed, not only at the national but, it is submitted, also at the transnational level.634 It may as such even play a significant role in the allocation of competencies between legal orders or in the acceptance by states of laws and decisions based on these competencies when rendered in other legal orders, see section 1.5.8 below. The fact that there are here concepts at work that are more universal does not need to mean at the same time that they are also static, immutably predetermined by rationality, unchangeable values or (metaphysical) truths (as natural law concepts have sometimes been considered to be), see section 1.4.16 above. In fact, especially in the area of the rule of law and human rights, perceptions and values have greatly changed over the last century. Indeed, these concepts are unlikely always to go as far as to require high-minded moral standards for legal orders to operate and be recognised even if in an ideal world this might be better. At least international business and its requirements present a more mundane environment. Legal orders, in order to function, need not necessarily be democratic either nor be supported by more advanced values; it has never been a precondition for their operating at national levels,635 even if in a rule of law environment, participation becomes an important issue of legitimacy and international (or other) legal orders are not necessarily indifferent to such values in terms of their recognition either. They would be the better for it. The accent on participation is here important as formal democracy is territorial whilst participation is not as we have seen in the discussion of custom and practices, see section 1.4.8 above.

law’s self-creation, which it advocated. More fundamentally, it must be doubted whether the bi-linear law/non-law matrix or this type of black and white thinking is for real. In practice, there is much doubt and middle ground where what is law can only be resolved from case to case. An important related aspect in this approach was that individuals are mere bystanders or observers in a social communication process over which they have little control, as is also clear in their language and in society’s routines, which can evolve but not easily be changed by individuals. It is the system itself that does so and not even forms of consensus can add a great deal. This recalls the French structionalists in the social sciences and was much criticised, but see also R Nobles and D Schiff, Observing Law through Systems Theory (Oxford, 2013) 28ff. Luhmann’s approach did not catch on in the US but was (partly) the root of the work of G Teubner towards the modern lex mercatoria (nn 625/26) and as such deserves mentioning, although Teubner’s approach remains a minority view too, especially in Germany, cf further also the views of Popper and Hayek, n 265 above. 633 Hence sometimes also the reference to the law of all civilised nations, see n 487 above. The concept of what was civilised in this context underwent a sea change in the meantime. 634 See M Krygier, ‘Rule of Law’ in NJ Smelser and PB Bates (eds), (2001) 20 International Encyclopedia of the Social and Behavioral Sciences, 13403; and P Selznick, ‘Legal Cultures and the Rule of Law’ in M Krygier and A Czarnota (eds), The Rule of Law after Communism (Aldershot, 1999). 635 J Habermas, The Structural Transformation of the Public Sphere, trans Thomas Burger, (Cambridge, MA, 1991) 76, notes that the great codes in Europe were never democratically sanctioned but were subject all the same to some participation process which might have made them reflective of their times. See for the discussion of democratic legitimisation of private law formation and operation, also s 1.1.8 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 295 Common values are equally participatory notions. In international commerce and finance, all might be more difficult to be overridden, at least by states conceivably even within their own territories.636 In this connection, it was shown that fundamental principle is foundational and at the core of the modern lex mercatoria, but it was also shown in section 1.4.6 above that this law is likely to operate better and may lay claim to greater legitimacy if transnational fundamental principle also fights abuse and excess and extols virtue in the participants at the same time.

1.5.7. The Formation of Non-statist Law in Modern Social and Economic Thinking. The Promotion of Self-interest and its Limits and the Role of Game Theory In the previous section, reference was made to ‘law and society’ and ‘law and economics’ supporting a bottom-up approach to law formation especially in private law.637 We know about the (a) the self-creating or autopoietic forces of law (Luhman, Foucault, Habermas), (b) legal orders (Cooter, Dalhuisen, Shaffer), and (c) also that the transnational flows of goods, services, information, technology and money are increasingly becoming virtual and are devoid of discernible territorial contact whilst having acquired much of a force of their own. But what about rules? At least in business there are also market efficiency considerations and there may be more room for rationalisation, less perhaps for domestic policy considerations of all kinds in modern more politics driven environments. Again, it raises the issue of correcting transnational minimum standards. It was submitted that newer rules may be more clearly discernible in relation to the operation of the international marketplace upon globalisation where states and state law, whether of a political or purely facilitating nature, cannot or can no longer be considered always to have an adequate response to the situations that may arise in international transactions especially in private law. The Eurobond and international swap markets provide clear demonstrations further to be explored in Part III below. This is seen here at the heart of the demise of the traditional conflict of laws doctrines in commerce and finance, which remained predicated on the premise that all law, including that applying to international transactions, had to emanate from a state and was therefore territorial, never mind whether they entailed an adequate response to newer market needs transnationally and could formulate facilitating or correcting principles at that level. The traditional conflicts rules and theories will be the subject of the discussion in Part II of this Volume. Their further assumption was that the local laws applying to parts of the international transactions that were localised in this manner would add up to a workable legal regime for the transaction as a whole, although even these local parts could still be covered by different laws in their different aspects, for example, contract or property. This is a paradigm now fundamentally questioned when the emphasis moves to the international flows and their self-creating legal force and transnational minimum standards. As we have seen, a basic, more modern idea in this connection is that self-interest promotes co-operation in inter-human affairs or relationships, whatever we may think of altruistic or moral issues which are likely to or should be captured increasingly in transnational minimum

636 In a Western sense, it suggests the existence of more universal values that affect the legitimacy of all legal orders, of their operation, and the legal force of their rules (even internally). In the twentieth century, the well-known example was the legal effectiveness of the Nazi laws within the German legal order and their voidness per se in retrospect even within that order, at least after World War II. 637 See for a discussion of the modern functional approaches in the US, s 1.3.5 above.

296 Volume 1: The Emergence of the Modern Lex Mercatoria standards of behaviour, earlier characterised as the greatest challenge in the legal transnationalisation process. Self-interest is in this view the essence of all contract law and compliance, which is at least in the commercial and financial flows normally voluntary; no legal system could survive without it. It is therefore not force or the threat thereof but in this approach self-interest and the survival instinct that propels private law also transnationally and suggest compliance. In contract law in particular, it is considered that both parties to a contract benefit from it.638 This concept or need is not then confined to contract. In a state of anarchy, it will soon become clear, for example, that everyone benefits by driving in the same direction on one side of the road, leaving the other side to the opposing traffic. This will create a self-enforcing system of traffic control. Soon further rules will emerge: side street traffic must give priority to main street traffic before joining in and so on. It is likely that some busybody will emerge as policeman and introduce further specific rules, sustaining and amplifying an equilibrium that had already been achieved. This is now the state devising traffic (and many other) rules. The key is an order that is subsequently to be enforced when voluntary cooperation fails, in which case an enforcement mechanism must be put in place, which for very good reasons became ultimately the task of states, although not or not necessarily the law formation function itself. It should be clearly distinguished as we have seen. This type of rule formation could also happen in the further development of property, tort and unjust enrichment law. Again, the organiser might have become the state but there may be other agencies, such as in international commerce and finance the ICC or similar think tanks (see section 1.4.20 above). In this view, there may still be situations, however, where one party may attempt to appropriate more than others and where defecting from this system may be the smarter move from a self-interest point of view. It presents a considerable problem in this theory especially where there is no third-party enforcement mechanism or it remains purely private. This leads to game theory and the situation is theoretically clarified in the so-called prisoners’ dilemma and works as follows. Two persons are suspected of having committed a crime together. They have been caught and are separated in prison without the possibility of communication. The law is that if neither one confesses, each is likely to be sentenced to one year in prison. If A confesses, but not B, the former goes free (in exchange for cooperation) and the latter gets 10 years; the reverse when B confesses and not A. If both confess, they get five years each. Clearly, in this scenario, confessing is in aggregate the best strategy; at least it cuts the exposure by half. It is not dependent on the other party except if the first party expects that the latter will not confess when he or she would go free. This would be the hope of either in confessing (and cooperating with the authorities). Thus, each will get five years in the hope of better. It is true that if both stayed mum, each would get one year, but that would require some trust and may depend on them wanting ongoing co-operation as the incentive. This is indeed often considered the solution to the conundrum. Each will say nothing and both will get one year. This is also referred to as the iterated game, which achieves a new equilibrium. Short-term hope is exchanged for long-term co-operative gain and prevents defection. Transferred to commerce and finance, defectors may thus exchange a short-term gain of 500 for repeated gains of 100. Hence the maxim: ‘one-shot encounters encourage defection, frequent encounters cooperation’. Innate compliance is strengthened in such cases and rules develop. It may be followed by institutions being created within such groups to sustain co-operation, but it is accepted that in larger groups there may be a greater need for third-party intervention

638 See also the reference to economic rationality in nn 97 and 367 above.

Volume 1: The Emergence of the Modern Lex Mercatoria 297 and enforcement, in modern times especially through states.639 Also it may become too unclear otherwise what everyone wants and the result may become disorderly and contradictory. However, state intervention is not much of an option in international dealings and the transnational commercial and financial legal order must then create its own agencies or spokespersons, including agencies such as the ICC or international dispute resolution facilities to articulate its rules. At the business level, contracts are often seen as creating smaller groups or merely one counterparty where repeat business will give a good incentive for voluntary performance. So may standardisation, which supports business because of the efficiency built into it. Legal orders (through its practitioners and their lawyers or domestically in more modern times the state in legislation) may self-standardise for that reason and create common perceptions. This is clear in contract, where standard terms are frequent and recur, but it may also happen in tort in the formulation of (traffic) offences as we have seen, and even in property. Transnationally, these become important areas for customary law formation, which can also ensue in contract, concerning particularly its infrastructure in terms of capacity and validity, and affect much larger groups. Law may evolve here without states as happened before the modern state emerged in the nineteenth century and it happens—it is submitted—in the transnational commercial and financial legal order operating around a globalised market mechanism. The value of such law grows as the number of participants increase. But standardisation of this nature has its limits and is not all-controlling, even if routines are key to all societies (language itself being the foremost example), see the discussion in section 1.4.8 above and the smart contract may suggest vital further progression. Specialisation and the need for tailor-made terms or products or, in business, specific risk management tools, may continue to disturb this order640 as does the need for innovation. In fact, there is never one standard, although certain standards may last longer than others, such as languages and legal systems, but even they evolve, sometimes quite rapidly, in order to remain up to date and functional. Modern life is not and cannot be fully commoditised or be mainly repetitive along established lines. It has been said before that the future is not captured by the past and its experiences. Efficiency requires us ever to move on. So do new values and perceptions. In our time, that results—it is submitted and is demonstrable—in particular in immanent law formation in this newer transnational legal order of a commercial and financial nature strongly influenced by technical advances. Law departments in large international companies, not judges or even arbitrators or outside law firms, are especially important as spokespersons for the new order to the extent it does not increasingly speak for itself through blockchain or similar devices, whilst navigating the pitfalls of domestic and transnational public order and public policy requirements at the same time and using a combination of principle, custom, and party autonomy in the course of action they advise, especially for international professional dealings, even when there are already contracts or similar texts or devices in place when it becomes an issue of their operation; see further the discussion in section 1.4.18 above. Again, the Eurobond and the operation of the euro markets were early examples, but the same applies to the ISDA and similar master agreements that now operate for swaps and repos transnationally, see further Part III below.

639 In particular in R Ellickson, Order without Law (Cambridge, MA, 1991), there is this emphasis on smaller groups. 640 See for the problems in this connection with standardisation of proprietary rights, the discussion in Vol 4, s 1.3.9.

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1.5.8. The Competition between Transnational Law and Mandatory State Laws or National Public Policies and Public Order Requirements. The Transnational Minimum Standards It was already said that as a practical matter, it will be necessary to plead the new law as fact and therefore to demonstrate its existence both in the ordinary courts and in international arbitrations, see for the latter also Volume 2, section 1.1.3. That means that following the various sources of law of the modern lex mercatoria, fundamental principle, customary law, treaty law, general principle and agreements between the parties as a matter of party autonomy must be demonstrated to exist, as should be the relevance of any local private law as residual rule, the existence of relevant local public policy or public order requirements and whether they are superseded by transnational minimum standards and what these are. To repeat, the premise in this book is that in a modern environment states and their courts have to recognise law from whatever source it comes as a basic tenet of the rule of law and must enforce it through their courts or other facilities unless their public order is offended. It is thus obvious that in the recognition by states and their organs (including their judiciaries) of other legal orders and their laws and decisions, and in any subsequent competition between the transnational lex mercatoria and statist laws,641 the accepted set of values (or the absence thereof) in non-statist legal orders plays an important role in this recognition process. Non-statist law is likely to prevail sooner when coming from a more tolerant and secular Western environment itself imbued with notions of the rule of law. But there are clearly limits in any established legal order (certainly that of states)—expressed as public order limitations—to what can be recognised and accepted as law from whatever other (immanent or statist) legal order or source. Church law has long been an example of such recognition and its limitations; the sports community may now well present another. The essence is nevertheless that the transnational law speaks for itself and does not need prior state authorisation to operate in its territory and for application in its courts. That is fairly firmly established, and increasingly there is then a larger margin for other legal orders to operate in their own way, also upon the territory of nation states where the local mandatory laws may become more accommodating, at least if international contact and business are to be promoted and meant to prosper. In commerce and finance, this process is clearly under way and is a trade-off. If globalisation is to hold and a state wants to have its citizens and businesses operate internationally and have that benefit, it must itself also contribute to support the

641 See for this competition further Dalhuisen (n 23) 129, and BZ Tamanaha, ‘Understanding Legal Pluralism: Past to Present, Local to Global’ (2008) 30 Sydney Law Review 375, see also n 604 above for G Shaffer and PS Berman. The competition between different legal orders in the same territory is by no means a modern issue and was squarely faced in colonial times, particularly in the Dutch East Indies, where the Dutch had never been intent on bringing their own language, religion or legal system, the latter only operating in parallel. Legally, the population continued to deal under local adat law, which was only amended in minor detail in the law of property and obligations. Wherever conflicts arose, the so-called intergentile laws of those days tried to achieve equivalence of the system and the European (Dutch) law was not considered to be overriding or superior per se (which had been very much the approach in the French colonial world). See for some important studies on this subject, RD Kollewijn, ‘Inter-racial Private Law’ in BOJ Schrieke (ed), The Effect of Western Influence on Native Civilisations in the Malay Archipelago (Batavia, 1930) 204; and ‘Conflicts of Western and Non-Western Law’ [1951] The International Law Quarterly 307, showing also the different French, German and English approaches. In modern times, in a similar manner, Nigerian courts have struggled with the recognition of tribal decisions based on local and also sharia laws; see MM Akanbi, Domestic Commercial Arbitration in Nigeria: Problems and Challenges (2006, unpublished PhD thesis, King’s College London).

Volume 1: The Emergence of the Modern Lex Mercatoria 299 transnational order in respect of international dealings unless the foreign rules remain manifestly objectionable. In fact, it should be realised in this connection that domestic rules protecting special interests may be as bad and self-serving and it is not necessarily a negative that they also feel the pressure of globalisation.642 In this connection it might also be considered that in private international law or conflicts of law, it has always been clear that the toleration of rogue states ultimately leads to the acceptance externally of their internal domestic legal order, whatever its values and laws in transactions considered subject to their rules and the same may go for other legal orders, which might have much better claims, assuming always that they can sufficiently establish themselves as was posited before in section 1.5.6 above. There is no reason why that should not now especially apply to the transnational commercial and financial legal order and its norms. Nevertheless, it was also noticed and it is fundamental that modern states may still continue to counterbalance in respect of all that comes demonstrably onto their territory, not only therefore foreign national laws but also international market forces, including their customs and practices, if still driven to excess. There is here an equilibrium to be achieved under which the transnational legal order supporting these forces in principle (subject to its own public order requirements) must remain deferential to legitimate governmental interests of a domestic nature, especially in respect of all conduct and effect in the territory of the state in question, assuming that in an increasingly virtual world such a territory can still be identified with regard to the impact of the international flows of goods, services, money, information and technology. The limits to what will be accepted by states (and their courts) as valid law from other legal orders operating within it were earlier discussed in terms of democratic legitimacy, rule of law, human rights, social policies, transparency, market integrity, equality and proportionality, lack of which may potentially be affected by public order bars in the recognising country. Within Western 642 The operation of competing international legal orders may thus be instrumental, at least on occasion, in containing local cabals, even in democracies, or indeed expose them to openness and better practices or in an economic sense to more rational decentralised approaches or privatisation when more efficient. Globalisation is contributing in this way to the demise of inefficient governmental controls, to more choice and competition, lower cost, perhaps lower inflation, more openness and diversity, a better-informed public, less jingoism, more co-operation (whether in the G-7/8, G-20, IMF or WTO). Nobody claims perfection, but what may be a-statist or a-nationalistic in the transnational order is not by definition anti-democratic, democracy-offensive, or devoid of modern Western values at the same time. In the meantime, much has been written on the democratic deficit of these organisations and also of the EU both in Europe and the US, one particular problem being that formal democracy is a statist or territorial phenomenon and the traditional view is that democratic control is therefore best exercised at the level of the participating governments, thus nationally. That was also the EU’s original stance and is still one of the reasons for the limited powers of the European Parliament. There is another problem, however. The highly technical nature of much of the discussion at the international level escapes the public and it is difficult therefore for international parliaments wherever they start to operate to profile themselves, acquire credibility and inspire the masses. For the WTO, similar arrangements are sometimes suggested but unlikely to work better. The alternative is greater openness in the negotiation processes and more reliance on public opinion and NGOs’ input, besides that of local politicians. This raises the question of who may legitimately speak, while it is not clear whether the results would be any better. In all these organisations there appears to be a bureaucratic phase that precedes further democratisation and seems to be necessary to get things off the ground. The EU is the best example, but it is no different in the WTO. Of course if the international community was truly serious and willing in the matter, the formal democratisation process could easily be taken a step further. It is not beyond present-day technical means to call an international ‘constituante’, in the election of which all citizens of the world could participate and which would devise a framework that at an institutional level could deal with globalisation issues democratically. But it would be a serious inroad into the remit of the nation state, may undermine non-Western cultures, and also mean the de iure end of the influence of NGOs, reasons why this option may not gain much ground for the moment. As a prelude to world government it might also run into serious problems of diversity.

300 Volume 1: The Emergence of the Modern Lex Mercatoria society, this allows in particular for a discussion of the values of other legal orders (or the absence of such values), of the redistributive powers in or the fairness or unfairness of their systems (as may become clearer through, but also be compounded by globalisation), and of any rightful or erroneous claims of the law in the transnational commercial and financial legal order to objectivity and formal effectiveness in supporting trade, commerce and finance internationally.643 That is a necessary discussion in all civil society. Emerging transnational minimum standards are also the result of that debate in which as many as possible should participate, local politicians as well as those that operate more at the international levels, the informed press and NGOs. International arbitrators are here understood to be important spokespersons for that order also and may conduct hearings and seek expert advice in appropriate cases, assuming always that they now have powers to deal with these matters autonomously. It is a key issue in all modern international arbitration: see the discussion in Volume 2, sections 1.1.10 and 1.2.5 below. Again, especially in-house law departments have an important voice in this debate as they must deal with legal risk and also evolving public demands and perceptions on a daily basis to make their business work. In subscribing to this approach, we should be helped by the fact that, at least for the economic benefits it brings, the present more or less decentralised, more or less democratic, more or less market supported socio-economic environment finds some broad international support, at least throughout the Western world and also in large parts of Asia. In the international commercial and financial legal order, the daily business of trade, commerce and finance is in any event less politically and culturally sensitive than larger labour and environmental issues or the much broader political issues concerning growth and stability with which the G-8, G-20, WTO and IMF must grapple and which might then also have an effect in the international commercial and financial legal order, assuming some legal expression can be given to any ensuing political intervention in it.644 But at the micro level, these broader considerations seldom play a major role in business transactions. It has already been asked what, for example, the value content is of the law of assignment, set-offs, floating charges, constructive trusts, book-entry systems for investment securities and their operation, and the different rules that have developed in different countries in this regard. Yes, there is a policy content, but the rules could easily have developed differently and, as has already been mentioned, (important) details of these legal structures often seem to be matters of historical developments, coincidence, and especially of practical needs as perceived from time to time in different locations. Even where legislators have spoken, the result is seldom more fundamental and the results normally limited to past experiences, extrapolation, or the insights and exigencies of the day. Nevertheless, the minimum required communality of values or even of practices assumes a more immediate meaning when decisions reached in other legal orders, such as the transnational commercial and financial legal order, are sought to be enforced in a state legal order by inviting its coercive sanction. Assuming for the moment that the relevant legal order can be found and its laws determined, we still have the questions (a) when precisely a transaction may be deemed to arise in the international legal order; (b) how the matter of competition with state legal orders is to be handled, especially if the public interest is engaged; and (c) what to do with enforcement. 643 Critical Legal Studies have, eg, always been sceptical of the objectivity and effectiveness of black-letter law in pursuing social ordering in whatever form, therefore also when emanating from states; see for some in-depth studies the anthology of AC Hutchinson (ed), Critical Legal Studies (Totowa, NJ, 1989), see further n 368 above. 644 The rules of foreign investment and their protection against governmental (host state) intervention under public international law, especially through BITs, is another aspect of these international business dealings, which, protection against states being the issue, go beyond the mere tenets of private law.

Volume 1: The Emergence of the Modern Lex Mercatoria 301 As to the first question, there has to be some definition of what is international and there have to be some ground rules as to whether or not a transaction takes place in the international legal order. Here modern conflicts of law rules may still be of help in determining when a transaction is international, and what the most appropriate order is in which international professional activity is to take place. Traditionally the conflicts rules had the handicap that they were meant to indicate a state order only. That was the consequence of von Savigny’s approach to these rules, which date from the nineteenth-century era of state positivism and nationalism (see more particularly section 2.1.1 below),645 in which only national law had validity. A more advanced view favoured in section 1.1.10 above is that all professional business dealings are increasingly likely to operate in the international legal order even if they have no international connection on occasion, as it is ultimately unlikely that they retain different dynamics locally. In other words, they will increasingly aspire to similar legal standards, even if on occasion these transactions are purely local. Such an evolution in thought would greatly simplify the issue of finding the appropriate legal order. Of course, if all the contacts were local, the impact of the pertinent national or statist regulatory and public order requirements in respect of the transaction would more readily have to be accepted. As to the second question of the interaction between legal orders and the competition between them, this is a question of attributing competences. At the practical level, we have to consider in particular governmental interests, or public policies, or public order requirements of the recognising state, which, as suggested before, may be the case particularly in respect of international actions or transactions with clearly identifiable conduct and effect in the territory of the concerned state and it then often concerns the effect of local regulation. This may, for example, concern domestic competition and environmental issues or policies and the effect of domestic regulation (or governmental interests) in all that happens on the territory of the particular state, even if the action or transaction is itself international: see for greater detail sections 2.2.6–2.2.8 below. In the EU, this may obtain a special form, see the discussion in Volume 2, section 1.2.4 for foreign investment protection. In this connection, we have to consider the issue of the attribution of competences between the various legal orders that may claim an interest in what is in essence a decentralist or pluralist view of law making, which encourages this competition and limits the facility of states to frustrate it. But it also means that the transnational legal order and its laws are not per se higher. Again, in respect of legal pluralism or diversity, the proper concern is not here to find some super or world laws per se, but rather the identification of the more competent or pertinent legal order in respect of the particular actors or actions internationally, the law of which would then prevail. Again, it need not be the transnational legal order per se. A key point here, already mentioned several times, is that the new lex mercatoria is deferential to governmental policies and local public policy and public order considerations, at least to the extent that they have a clearly discernible connection with the case, notably in conduct and effect of an international transaction, and the relevant government has a reasonable interest in it, does not intend to overreach, and there is proportionality. It is therefore not true that the modern lex mercatoria seeks to circumvent these legitimate domestic interests. This is very clear in tax laws that apply regardless of what law the parties may have chosen or operate under. The modern lex mercatoria has to accept these laws although parties may still attempt to structure the transaction around them.

645 There was probably never much wrong with the idea that all legal relationships have a seat in a legal order, as long as that could also be the international legal order or others that were not territorially defined and merely confined to states.

302 Volume 1: The Emergence of the Modern Lex Mercatoria With present insights, these issues can often only be considered from case to case on the basis of a balancing of interests between international and domestic requirements, also taking into account, developing transnational minimum standards. These transnational minimum standards may increasingly suggest a more objective transnational or international regime even in regulation, see also the discussion in section 2.2.6 below in fine. This could notably cover competition law or the environmental restrictions on international business activity or the regulatory constraints on international banks in terms of stability of the financial system. But at least if there is sufficient urgency and balance in the approach, specific domestic policies remain relevant and legitimate in international transactions and are as such to be respected, at least for conduct and effect in the territory of the relevant state, even if not in accordance with the international trade practices which may, for example, have a more liberal bias. This balancing itself may be more properly a matter of comity in the manner of the US tradition of conflicts of laws (Restatement (Second) of Conflict of Laws section 6) and Foreign Relation Laws (Restatement (Third) of Foreign Relations sections 402–03 in the process of being replaced by a different approach)646 or, in the EU, in the manner of Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I), when not all elements of the case are connected with one country; see more particularly the discussion in sections 2.2.6–2.2.8 below. It follows, however, that the reach of policy-oriented domestic rules may either become too remote or be excessive in international transactions and that they therefore do not apply or do not apply without modification or adaptation (eg in international arbitrations).647 But again if international transactions come demonstrably on shore (in conduct or effect) in a particular country, deference to its public policy and public order requirements must be the basic approach unless superseded by transnational minimum standards. Property law in the international order may require here some special attention. It is mostly not considered regulatory but since the essence is the effect on third parties which must respect these rights, there is a public element. It is clear that participants by mere contract cannot create extra (movable or other) property rights nor determine their own rank under new security interests or favour themselves under contractually extended set-off rights. As in regulation, party autonomy is here at an end, but developing custom in the community it concerns and acquiescence in that community do establish new proprietary instruments and support them. In this book, the theme of equitable proprietary rights and international arbitrators operating in the nature of equitable judges is being considered (see section 1.1.11 above) accepting these rights while affecting insiders such as other banks and major suppliers, but leaving the international flows themselves alone so that all buyers in the ordinary course of business of commoditised products can ignore them. 646 See Council Draft No 2 of Dec-1 2015. It is noted that Section 403 of Restatement Third articulated a general principle of reasonableness based on balancing multiple factors in each case, but it shows that lower courts imposed additional comity limitations under particular statutes, often centring on the centre of gravity of a transaction, potentially different for security, bankruptcy, and trademark laws and that the Supreme Court has rejected multi-factor balancing at least in the context of antitrust laws, see F Hoffmann-La Roche Ltd v Empagran SA, 542 US 155, 168 (2004). Although the new proposals continue to recognise the principle of reasonableness, they do not articulate a general test that may be applied to every statute. In F Hoffmann-La Roche Ltd there is an awareness, however, that laws of different nations should be helped to work together in harmony. 647 Of course, when all aspects of a transaction are in a particular country, the public policy rules of this state legal order will prevail and no other. That may be so even if the transaction is international in nature as long as all its contacts are with one country only. That was clearly expressed in Art 2 of the 1980 EU Rome Convention on the Law Applicable to Contractual Obligations, now replaced by Art 3 of the 2008 EU Regulation. If they are not, there arises a discretionary element as reflected in Art 9 of the Regulation (in the context, however, of applying only domestic laws), even if it remains rule rather than interest oriented. In Europe the problem is usually identified as one of règles d’application immédiate (see also s 2.2.6 below).

Volume 1: The Emergence of the Modern Lex Mercatoria 303 Indeed, it allows the operation and recognition of floating charges under transnational law created by contract but being effective in this limited manner only against a small group of third parties who can know about these practices in which they themselves indulge and of which they should therefore be aware. They have a search duty, but this does not apply to the general public, even if there were registers of these rights, see further the discussion in section 1.1.6 above and Volume 4. The ultimate test is in bankruptcies, which remain local. Will the local bankruptcy judges accept these transnationalised proprietary interests or set-off rights?648 A special aspect here is recognition in such bankruptcies of international arbitral awards accepting them. Again, it is in the nature of a trade-off. If the country in question wants to be part of globalisation, it must yield on occasion even its own bankruptcy system, perhaps easier if an award to the effect is to be recognised under the New York Convention. Case law is increasingly aware of this.649 This leaves the last question being the one of enforcement. The assumption so far has been that under a proper understanding of the rule of law in an integrating world, decisions rendered in one legal order are accepted in others subject to minimum requirements of due process and public policy only. Indeed, at least in Western culture, it would appear incumbent on all states being part of it to enforce decisions rendered on the basis of the law of other legal orders operating within the same cultural confines subject to procedural fairness standards and decision-making professionality. There should be restraint in invoking one’s own public order as a defence, which restraint, as has already been submitted, is needed and derives from the willingness of states to have their people and businesses operating internationally and is a two-way street. If states do not want to co-operate in this manner, they should ask their citizens and businesses to stay at home. All will probably be poorer, like North Korea, but that is a legitimate policy choice. A liberal attitude to international enforcement is indeed the underlying theme in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, although still wedded to national considerations in terms of public policy constraints on the recognition and enforcement of international arbitral awards, in a more modern interpretation of the

648 The issue has arisen in the Lehman litigation following the 2008 financial crisis, see, in the US, 1 Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Ltd Case no 09-01242 (Bankr. SDNY) 25 January 2010, and in England, 2 Perpetual Trustee Co Ltd, Belmont Park Investments PTY Ltd v BNY Corporate Trustee Services Ltd, Lehman Brothers Special Financing Inc [2009] EWCA Civ 1160. At issue here was the recognition of the transfer of a security interest to another class of creditors upon insolvency. Different policies between the US (ss 365(e)(1) and 541(c)(1)(B) and UK insolvency legislation in its anti-deprivation principle deriving from case law led to different treatment: in the US this ‘flipping’ was not sustained in bankruptcy, in England it was. See also H Collins, ‘Flipping Wreck: Lex Mercatoria on the Shoals of Ius Cogens’ in S Grundmann, F Moeslein and K Riesenhuber (eds), Contract Governance: Dimensions in Law and Interdisciplinary Research (Oxford, 2015). Although not specifically addressed in these cases, the impact of foreign or transnational financial instruments pushing on local bankruptcy orders may be a key issue. Furthermore, does it make a difference when these instruments or structures are recognised in an international arbitral award and are sought to be enforced under the New York Convention? What is the force of the public policy bar in such cases? In view of the Australian Ansett case (see n 649 below), it is clear that the resolve of domestic bankruptcy regimes is weakening under the force of globalisation. This was earlier explained as the simple consequence of countries wanting the benefits and they must then also accept the occasional burdens. It is the basic assumption in this book that, barring public policies at the transnational and national levels, the size and force of the international flows themselves lead to these results. 649 Note in this connection the Australian (Victoria) cases in IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008] HCA38, in which the Australian High Court ultimately accepted that, at least in a non-financial Central Counter Party or CCP in respect of mutual airline claims resulting from passenger cancellations and ticket changes, this transnational form of clearing and settlement and set-off trumped the Australian bankruptcy laws. This was an important precedent, see also C Chamorro-Courtland, ‘The Legal Aspects of Non-Financial Market Central Counterparties’ (2012) 27(4) Banking and Finance Law Review, and an advance notably on British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390.

304 Volume 1: The Emergence of the Modern Lex Mercatoria Convention increasingly limited, however, to narrower notions of international public policy650 and therefore to international (minimum) standards. But it is also very much the philosophy in the EU in its 2002 Regulation (amended in 2014) and in its earlier Brussels Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters. Refusal to recognise and enforce now requires a ‘manifest’ violation of domestic public policy. To repeat, this means that even if an effect on public policy or order in the recognising state cannot be denied, any overriding public policy interests or public order considerations of the recognising state are only accepted when they are overwhelming and might increasingly be tested on the basis of conformity with transnational minimum standards as an expression of international public order.

1.5.9. The Operation of Different Legal Orders in Private Law: Evolution of a US Federal Commercial Law, of Transnational Private Law Concepts in the EU, and of International Human Rights Law in the Council of Europe (European Court of Human Rights) Ultimately it may be of interest to look more carefully at the spontaneous evolution of commercial or other forms of private law in some easily identifiable different legal orders such as the federal legal order in the US (where private law is normally a State matter), the confederate legal order of the EU, and the international order which the Council of Europe represents, if only to show that nothing of the above in terms of the operation of different and competing legal orders, even in private law, is far-fetched. It has already been mentioned several times before that, in the US, private law remains in essence a matter of State law and that goes also for commercial law. As a consequence, the UCC is State law, based on unification of the law between States without any federal involvement (even though at an early stage in its preparation it was considered to make commercial law federal law but this idea was not pursued). There is no agreement between the States and the UCC was adapted in each State separately and autonomously, often with some differences. Further differences may arise where some States adopt amendments and others do not or only do so later, although the unity that the Code has brought is impressive and treasured. No State goes its own way lightly and the courts—both federal and State, the former especially in bankruptcy cases in which Article 9 (on secured transactions in movable property) is often tested—support this uniformity in the interpretation process, even though it is no formal requirement under the Code.

650 International public order requirements proper are well known from the international arbitration practice in the context of determining arbitrability issues and in connection with the recognition and enforcement of arbitral awards under the NY Convention, see further Vol 2, s 1.6. The Paris Court of Appeal dealt with the issue of arbitrability of public policy-related issues (which were normally not considered arbitrable) in a judgment of 29 March 1991, Ste Ganz, Revue de l’Arbitrage (1991) 478, 480 and held that, while international arbitrators determine their own jurisdiction, including the matter of arbitrability, they may use an internationalised concept of public order, see J-P Ancel, ‘French Judicial Attitudes Toward International Arbitration’ (1993) 9 Arbitration International 121; see also V Lazic, Insolvency Proceedings and Commercial Arbitration (The Hague, 1998) 149, 278. See for the public policy bar to recognition of arbitral awards under the NY Convention, earlier P Lalive, ‘Transnational (or Truly International) Public Policy and International Arbitration’ in P Sanders (ed), Comparative Arbitration Practice and Public Policy in Arbitration (ICCA Congress Series no 3) (1987) 257. These are only two instances in which public policy played a role at the international level and may itself be international. It may also do so in other instances and it would appear that there may also be transnational mandatory competition rules operating that may void contracts in the international legal order as a matter of public policy in that order, see JH Dalhuisen, ‘The Arbitrability of Competition Issues’ (1995) 11 Arbitration International 151.

Volume 1: The Emergence of the Modern Lex Mercatoria 305 The foregoing would suggest that there is no room in the US for federal commercial law, therefore for commercial law in the federal legal order but that is not strictly speaking so. First, specific provisions in the US Constitution may lead to it. Foremost there is original federal power to legislate in the area of interstate commerce (Article II, section 8, clause 3). This has proven to be a narrow concept (as in the EU Article 114 TFEU also is or should be, see section 1.4.21 above). Article III, section 2 of the Constitution forms the basis for the legislation in admiralty or maritime transport (such as the Pomerene Act for bills of lading issued for transportation between the various States of the US, to foreign countries, US territories or the District of Columbia, see also Volume 4, section 2.1.5). Treaty law may provide another base, such as the adoption of the Brussels Convention incorporating the Hague Rules in the US COGSA in 1936 (see also Volume 4, section 2.1.10). It should be considered in this connection that admiralty is here considered to be a ‘seasoned body’ of ‘general maritime law, shared by all nations’.651 It suggests and independent body of law recognised both at the federal and state courts’ level to promote commerce nationally and internationally and then also excludes consideration of more traditional conflicts rules referring to domestic laws. Although this has been interpreted to mean that American courts will only apply their own laws or perceptions of this general maritime law,652 it may more in particular constitute an early recognition and acceptance of transnationalisation rather than an original grant of lawmaking authority at either federal or state level, and of the uniformity that follows from it, subject to unavoidable fitting in processes especially of maritime liens into domestic laws and their ranking, necessary even where treaty law also figures besides transnational custom, general principle, and party autonomy.653 At one stage, there was a broader, more general attempt made to create federal commercial law at least for all interstate commercial transactions. It was not unlike the creation of federal jurisdiction in cases where there was diversity of citizenship. It would have been similar to the de-nationalising process in a larger legal order, as we may now see globally and might be more properly the attitude in maritime matters even in the US as just mentioned. Indeed, (some) commercial law was created outside the States’ sphere proper, in which connection developing custom or the broader law merchant was also instrumental. The important role of all commercial custom was acknowledged in the UCC itself, in section 1-103(a)(2) to which reference has also already been made several times even though still by virtue of State law recognition and incorporation. However, the attempt at further federalising commercial law between the States failed in its generality—it may also hold some message of the EU and Article 114 TFEU. Yet there remain some areas or pockets where federal commercial law is still important, even beyond specific federal statutes in this area or treaty law adopted by the US. Better to understand this broader movement towards federalisation of commercial law within the US and its ultimate defeat although never entirely (which may also be instructive for the EU), one has to take a step back and consider first the picture of the applicable law in interstate cases,

651 Lauritzen v Larsen, 345 US 571, 577 (1953) and The China, 7 Wall (74 US)53, 68 (1868). It may also be accepted as ‘comparable to American law’, Davila v SS Verchanarian, 247 F Supp 617 (ED Va 1965) or as agreed by the parties, Petition Marina Mercantile Nicaraguense, SA, 248 F Supp 15, 25 n 21 (SDNY 1965). These cases suggest transnational customary law and general principle, treaty law, and party autonomy as the true sources of this law. 652 See AA Ehrenzweig, Private International Law (Leyden, 1967) 196ff. 653 The bias is then in favour of acceptance with a positive attitude towards the fitting in process. That is better expressed in the analysis of this book, it is submitted, and its methodology and approach to transnational law or the modern lex mercatoria and its sources and their hierarchy from which the close connection with the methodology and approach of the law of nations follows; it is borrowed from it.

306 Volume 1: The Emergence of the Modern Lex Mercatoria either because of diversity of citizenship or because of the interstate nature of the subject matter. Such cases arise in interstate commerce when, for example, contracts are concluded between persons from different States of the Union or the object of a sale must move from one state to another as part of the delivery process. They arise for similar reasons also outside the commercial area in an environment where there was under the Constitution (Article III, section 1) always a dual court system (State and federal), so that both types of courts (therefore also federal courts) could potentially deal with commercial issues. Under the US Constitution, federal and diversity (of citizenship) cases are specifically assigned to the federal courts but not technically cases with other interstate aspects. A distinction may further be made in this connection between procedural and substantive issues. As for the former, even in federal and diversity cases, it left the possibility of federal courts still applying the procedural rules of the States in which they sat. This did not happen. Although at first, federal courts only applied federal procedural rules in equity cases, they now do so in all cases pursuant to the Federal Rules Enabling Act of 1934 and the 1938 Federal Rules of Civil Procedure that resulted from it (subsequently also used as the most important model for State procedural law reform leading to an important measure of harmonisation). As to the substance, in federal cases, federal law applies, but in diversity of citizenship cases, the issue still arose whether federal or State law applied to the substantive issues or merits (in terms of statutory, regulatory or case law). If federal law was to apply that would have called for the development of a federal common and commercial law if these diversity cases were civil cases. However, in the important Erie case of 1938,654 the applicable substantive law in diversity cases was considered always to be the law of the State in which the federal court sat (if necessary varied through a contractual choice of law or through state conflict of laws rules; see, for example, section 1-131 UCC, which refers in this connection to the law of the State that bears an appropriate relationship to the case). There had already been a strong foundation for this restrictive attitude in the Judiciary or Rules of Decision Act 1789 (section 34) even though the US Supreme Court had at first tried to construe some substantive federal common law in areas not already covered by federal statutes. Since 1938, however, it has been accepted that there generally is no federal common law as such (including federal commercial law). Yet as already mentioned, there are still some pockets of federal private law, especially in federal statutes and case law pursuant to it, but also in some areas of commercial law and custom in diversity and other cases. Thus in marine insurance and the interpretation of the relevant policies, federal law was applied in diversity cases by the federal courts from early on, followed later by the law concerning negotiable instruments and interstate common carriers and this continues.655 There is an emphasis here on the interstate nature of commerce and the need to follow its ways and thus provide certainty, especially in terms of transactional and payment finality, therefore beyond the confines of individual States. This may

654 Erie v Tompkins 304 US 64 (1938). See in this connection especially WA Fletcher, ‘The General Common Law and S 34 of the Judiciary Act of 1789: The Example of Marine Insurance’ (1984) 97 Harvard Law Review 1513. 655 Robinson v Commonwealth Ins Co (1838) 20 Fed Cas 1002. A diversity case involving a bill of exchange in respect of the sale of land, title in which was subsequently disputed, was also held to be covered by federal law; Swift v Tyson 41 US 1 (1842), in which s 34 of the 1789 Act was held not to apply to questions of commercial law but only to the interpretation of local statutes and customs. With reference to Lord Mansfield in Luke v Lyde 2 Burr R 883, 887, it was stated that the law of negotiable instruments was not the law of a single country. In Western Union Telegraph Co v Call Publishing Co (1901) 181 US 92, the use of common information carriers was not believed subject to any State law either, but, in the absence of any federal statute, rather to federal general common law, containing the general rules and principles deduced from the common law enforced in the different States.

Volume 1: The Emergence of the Modern Lex Mercatoria 307 indeed shift the law-creating force to another more efficient legal order, in the case of the US to the federal order but only to the extent the commerce clause can support it. That is a most important conclusion. While in Erie the further development of a federal common law was halted in principle, it did not therefore strictly speaking exclude the further development of federal commercial law under the commerce clause or pursuant to interstate custom or the law merchant, especially where the formal diversity notion does cover interstate activity. On the other hand, it cannot be overlooked that the UCC firmly re-established an efficient state law regime in many of the traditional areas of commercial law including negotiable instruments and letters of credit. Yet at least in specialised areas, a federal commercial law still applies, such as for cheques drawn on the US Treasurer or for notes issued by the US. In this connection, reference is indeed still made to a federal law merchant which continues to develop separately from state law.656 As we have seen, special federal statutes may also concern bills of lading, but there may still be scope for more under the commerce clause. It is submitted that this law is built on diverse sources of which custom and fundamental and general principle are important manifestations. Party autonomy would follow. Again, it is reminiscent of the modern lex mercatoria development transnationally as described in this book, in which connection it is again important to note that the UCC in its section 1-103 accepts and favours the multiplicity of legal sources, including interstate (and international) custom and their further development. It has even been argued that there is in the US effectively a national private law that transcends both the federal and State legal orders and finds its legal force in the recognition and invocation of its rules by the American legal profession.657 Such a transcendent law would suggest the existence of a national legal order in private law in the US with a momentum and inner structure of its own. It will be interesting to see whether within the EU similar common notions will be allowed to develop, especially in intercommunity trade, in that case also better considered in the context of the modern development of the international law merchant or lex mercatoria and its multiplicity of legal sources. Article 114 TFEU would then provide the legal basis, but it is a narrow one (see section 1.4.21 above) and where applied so far it is only used to proceed in the manner of civil law codification, not therefore recognising this legal diversity; see especially the draft Regulation concerning a common European Sales law or CESL, Volume 3, section 1.6.13, although already withdrawn in 2014. In any event, it would still have to be considered what Article 114 TFEU truly covers, not unlike the commerce clause in the US. There is here room for further development at the EU level, although, as was submitted before, not without recognising at the same time the force of different sources of law, of which custom and party autonomy are important

656 Clearfield Trust Co v US 318 US 363 (1943). An important instance is thus the further development of the law merchant as such in interstate trade, more generally beyond diversity of citizenship, where it is now normally excluded, see further Southern Pacific Transportation Co v Commercial Metals Co 456 US 336 (1982). It shows clearly that there is room for such interstate commercial law in the US. Typically, federal matters are also lifted out of state law, eg a claim in respect of injuries caused to a federal soldier, US v Standard Oil of California 332 US 301 (1947). The key here is the protection of uniquely federal interests and situations in which Congress has given the power to develop substantive law, see Texas Industries v Radcliff Materials Inc 451 US 630 (1981). 657 See MA Eisenberg, ‘The Concept of National Law and the Rule of Recognition’ (2002) 29 Florida State University Law Review 1229. In this view, an economic and convenience argument may be invoked but also a common tradition fostered by national law schools and a large ‘national’ slice in the Bar examinations of each State. The informal creation of this law is stressed and its flexibility noted. The rules do not then figure as black-letter law and their binding force may depend on the situations in and the purposes for which they are invoked. They may as such provide the framework for much legal argument and the central core of much of the living (private law) in the US, much more and more fundamentally than is normally acknowledged.

308 Volume 1: The Emergence of the Modern Lex Mercatoria manifestations besides statutory texts such as the DCFR, or any other, see below. Again, this is also suggested by the American example and would be so at least until the founding EU treaties themselves would be amended to do otherwise, notably by ordering a codification civil law style for all of the EU. It was noted in this connection in sections 1.4.5 and 1.4.6 above, that fundamental and general principles are used by the ECJ. In the case law of the ECJ there are in this connection often ‘borrowings’ of private law concepts for all kinds of purposes, therefore often not even directly connected with the promotion of the internal market. They are in such instances mostly identified as general principle, such as the notions of good faith, of contract, of tort and causality in that context, of property, of abuse of rights, of force majeure and change of circumstances, and also the notion that interest may have to be paid as damages and how they are to be calculated. In such situations, these concepts often acquire special features in a public or administrative law context where the ECJ often develops them, such as, for example, in the administrative contract, the administrative tort, and so on, and may explain the lack of a reference to the promotion of the internal market. Where EU levies or taxes must be reimbursed, some special EU rules of tort and unjust enrichment have also been developed.658 Guidance may be sought here also from administrative law principle as much as from private law. At least the method of ‘borrowing’ in this sense, based on general principles of private or administrative law, appears to be well established in the EU. This movement is supplemented or potentially superseded by the efforts leading to the DCFR as an EU codification effort in the traditional civil law manner, excluding therefore any other sources of law, in the case of the DCFR as a project intended for all activity in the EU, whether cross-border or not. This law is then to supersede all local laws and is meant to form a statist codification at EU level regardless of the fact that for cross-border professional dealings, the modern lex mercatoria may lay better claim to application as a matter of the operation of the transnational commercial and financial legal order itself. It has been pointed out several times before that for the drafters of the DCFR and its progeny, there is no other law or legal source than the texts and they operate here like statist law, now at EU level, and mean to monopolise the field in the civil law codification tradition also in respect of professional dealings trans-border within the EU. But it has already been said also that the ECJ itself operates quite differently and is well aware of overriding fundamental principle and also of general principle being operative outside legislation, see sections 1.4.6 and 1.4.7 above. In this book the DCFR drive and method is found wanting especially for professional dealings. The DCFR constitutes for these dealings an undesirable layer of consumer law interference under a unitary approach which treats all private law dealings in essence the same, meaning as consumer law events to be supervised and protected accordingly. In any event, Article 114 TFEU does not give the EU codification jurisdiction, see the discussion in section 1.4.21 above. Finally, in Europe, the European Court of Human Rights (which needs to be distinguished from the ECJ), established by the Council of Europe in its jurisdiction under the European Convention on Human Rights of 1950 and its Protocols, and therefore in the legal order it represents, has also operated in the area of private law and developed in particular a notion of ownership independent from national laws in the context of ownership protection against expropriation as a human right (pursuant to Article 1 of the First Protocol). This case law is important and original as it seeks to develop among other things an internationalised ownership concept.659 658 See also T Tridemas, The General Principles of EU Law (Oxford, 1999) 313. 659 See also Jan-Peter Loof et al (eds), The Right to Property, The Influence of Article 1 Protocol No 1 ECHR for Several Fields of Domestic Law (Maastricht, 2000).

Volume 1: The Emergence of the Modern Lex Mercatoria 309 The main features are that no one may be deprived of their possessions except in the public interest but always subject to the conditions provided for by the general principles of international law (except that the payment of taxes or other contributions or penalties is not affected). There is therefore a need also to define possession, interference and any justification therefor. The Court gives in this context an autonomous meaning to the notion of possession, which is ownership connected660 but notably not limited to physical goods. There is here an emphasis on economic realities also covering beneficial rights.661 From a jurisprudential point of view, the importance is here indeed that possession, ownership or property need not be connected with a national legal order but may acquire a transnationalised meaning in the international legal order the European Court of Human Rights represents and defends. The evolution of transnational property rights will be further explored in section 3.2.2 below. The conclusion is that European students in particular must learn to think in terms of the operation of different legal orders side by side in the same territory; American students are used to this from the beginning of their studies. There is the statist legal order (in the US supplemented by the federal one), the legal order between States, in Europe for EU Members the EU legal order, and now in business also the transnational commercial and financial legal order, all potentially with their own laws. One might even discern an international sports legal order, probably closer to many students’ hearts and imagination, even if it has its problems too. In fact, it is quite possible for the internationalisation of sports to be another guide for future developments including the determination of its relationship to domestic legal orders. It was already repeatedly noted that these international legal orders are not territorial and may all come onshore at different times in different ways in different countries. Assuming a proper understanding of the rule of law, these countries would have to accept the rules and rulings of these different orders in respect of the business conducted therein unless offensive to their domestic public policies. Even then, they could still be declared irrelevant like in the EU, when they purport to limit the operation of the internal market disproportionally or unnecessarily. They may also be superseded by transnational minimum standards as was already noted in the previous section.

1.5.10. The International Commercial and Financial Legal Order: The Role of Legal Theory, Legal History and Comparative Law International flows of goods, services, information, technology and capital go in all kinds of directions. In an open society, it is not unlike water finding various ways towards the seas. There are 660 See Marckx v Belgium (1979) Series A, vol 31, para 63. 661 See Gasus Dosier- und Fördertechnik v Netherlands (1995) Series A, vol 306B, para 53. It can as such cover security interests of the tax authorities and others, reservation of title and other conditional ownership interests or limited proprietary rights. It also includes intellectual property rights and claims based on contract and tort. This is clear from the reference to valeur patrimoniale or asset, which suggests at the same time that the essence is right with a commercial value that can be sufficiently ascertained. It may as such cover goodwill or an existing clientele, see Van Marle v Netherlands (1986) Series A, vol 101, para 41, and later in Iatridis v Greece App no 31107/96, ECtHR, 25 March 1999, para 54, but not a mere expectancy (of an inheritance) or a right to receive property, see Marckx v Belgium (n 660). Yet a right to an inheritance of a deceased person may be claimable even if non-partitioned, Inze v Austria (1987) Series A, vol 126, para 38, and Mazurek v France, ECtHR, 1 February 2000. A disputed claim is not sufficiently established, but once adjudicated it is and a state against which the claim was awarded can no longer annul the claim through legislation, see Stran Greek Refineries v Greece (1994) Series A, vol 301B, para 61. Even a claim in a prima facie case might be so protected, see Pressos Compania Naviera v Belgium (1995) Series A, vol 332, para 31.

310 Volume 1: The Emergence of the Modern Lex Mercatoria here inherent forces at work, whether or not organised by the invisible hand of market behaviour. They produce their own rules, which are connected with their risk patterns and the natural need for protection of the parties concerned and their risk management facilities and powers. Barring public order concerns, for them the rules are primarily dictated by common sense and rationality in the relevant trade. This implies a strong reliance on principle, closely connected with emerging custom and practices understood by all participants, which are likely to have an important risk management or risk allocation aspect and may then even become mandatory especially in terms of property rights or transactional finality issues, as we have seen. Professional parties will elaborate in their contracts to the extent they can and matters are at their free disposition or otherwise rely on these customs and practices. In this manner, fundamental and general principle and implementing custom are the main sources of the rules in the transnational commercial and financial legal order, supplemented by party autonomy, as discussed more extensively in the preceding sections. Reasonable reliance is then itself a strong argument and condition for the binding force of these rules or rule patterns unless there are overriding public policy or public order requirements against it. It was noted in this connection that such reliance is not merely a contractual notion but also transpires in new proprietary structures and notions of set-off and netting, see section 1.4.10 above. International sales are a case in point as we shall see in Volume 3, Part II. There are obvious extra risks attached to the sale and transfer of assets internationally in terms of their transportation, proper delivery, quality and title for the buyer, and payment for the seller. Without some clear rules in these respects, it would require an excess of optimism to sell and send goods across the world. At the practical level handling agents are a great help. They may be warehouse operators or carriers of the goods who will take the goods from the seller with the sole purpose of delivering them to the buyer. They have no interest of their own in the transaction except for their agreed reward and the goods are therefore in independent, professional and safe hands after having left the seller, who has lost physical control and can no longer interfere with them. That is an important safeguard for the buyer. On the other hand, the seller will be concerned about the latter’s payment and will not want the handling agents to deliver the goods to the buyer without such payment. These agents, when warehousing or transporting the goods, may issue warehouse receipts or bills of lading without which the goods could not then be reclaimed. Possession of these documents therefore allows the buyer to claim the goods, but, for the protection of the seller, they may and will often be given to a bank as another independent agent in this circuit, with the instruction not to release them to the buyer except against payment upon arrival of the goods. That is the concept of (documentary) collection. It may even be that the bank (upon instructions of the buyer) will pay upon receipt of the bill of lading and becomes as such a guarantor of payment. That is the concept of the (documentary) letter of credit. These structures never derived from great legal thought but suggested themselves in the practicalities of international trade and were only further perfected to enhance that trade. Bills of exchange had a similar origin and motivation. So had the protection of bona fide purchasers, who may claim a better title to the goods (or documents) than the seller could. It is the issue of liquidity and finality. These rules develop all the time and should not be constrained in their application by pre-existing black-letter laws. It is true that much nineteenth- and twentieth-century codification in this area left that impression but it is not a correct reflection of the applicable commercial law and the way it evolves. Here the importance of custom or industry practices can be clearly demonstrated and better understood. By referring to them and their importance in this connection, we in fact underline more than anything else the dynamic nature of the applicable law itself. The Blockchain may well show us how new directions may be taken instantaneously and how the law will (have to) follow as and when new facilities become available.

Volume 1: The Emergence of the Modern Lex Mercatoria 311 Again, it means that customs and practices are not static, are not territorial by necessity, and do not require long-standing usage for their validity either. As has been shown before, they can change overnight with the nature and rationality of the business and so the law changes with them; see section 1.4.8 above. It suggests that in this area, perhaps more than in any other, both the relevant law and the relevant facts must always be found and articulated together in each case. The one cannot be found without the other and there can be no question of a sharp separation between norm and fact, either in the origin of the rule or in its application, or in the collection of the facts that may be considered legally relevant under it. It follows that at least in international cases both must be proven and their relationship explained. Even if commercial law remains in the perception of many still largely in the clutches of domestic legal systems—on the European Continent often in nineteenth-century codified form—while even in England it lost its independence in the eighteenth century as we have seen, it now reasserts its own character at the international level, through the globalisation and liberalisation of the commercial flows and the dramatic increase in their size. However, it needs the help of legal theory, of legal history, and comparative law to regain its proper place and credibility.662 662 The most important early advocate of the new lex mercatoria was B Goldman, see B Goldman, ‘La lex mercatoria dans les contrats et arbitrage internationaux: réalité et perspectives’ (1979) 106 Journal du Droit Internationale 475; B Goldman, ‘Lex Mercatoria’ (1983) 3 Forum Internationale 1; TE Carbonneau (ed), Lex Mercatoria and Arbitration: Discussion of the New Law Merchant (Dobbs Ferry, NY, 1990); B Goldman, ‘Nouvelles réflexions sur la Lex Mercatoria’ in Etudes de droit international en 1’honneur de Pierre Lalive (1993) 241. The long-standing relative popularity of the lex mercatoria in France may be seen in the light of the earlier development in that country of the notion of the ‘international contract’ operating under its own internationalised rules. It was particularly relevant for the validity of gold clauses that were upheld in these international contracts (but not in domestic French contracts) in the 1930s. See GR Delaume, Transnational Contracts (1989) 119. See for the early interest in the notion of the new lex mercatoria in England, C Schmitthoff, ‘International Business Law: A New Law Merchant’ (1961) Current Law and Social Problems 129; C Schmitthoff, ‘International Trade Law and Private International Law’ in Vom deutschen zum europäischen Recht, Festschrift Hans Doelle, vol 2 (Tübingen, 1963) 261; C Schmitthoff, The Unification of the Law of International Trade [1968] Journal of Business Law 109. See for a compilation of his most important writings on the subject, Chia-Jui Cheng (ed), C Schmitthoff, Select Essays on International Trade Law (Dordrecht, 1988). In the UK, Mustill LJ has been particularly critical of the lex mercatoria as a transnational legal system and wonders where this new law could come from. See LJ Mustill, ‘The New Lex Mercatoria’ in M Bos and I Brownlie (eds), Liber Amicorum Lord Wilberforce (Oxford, 1987) 149; LJ Mustill, ‘Contemporary Problems in International Commercial Arbitration’ (1989) 17 International Business Law 161. The lex mercatoria found early support in Germany. See N Horn, Das Recht der internationalen Anleihen (Frankfurt-am-Main, 1972); N Horn, ‘A Uniform Approach to Eurobond Agreements’ (1977) 9 Law and Policy in International Business 753; N Horn, ‘Uniformity and Diversity in the Law of International Commercial Contracts’ in N Horn and C Schmitthoff (eds), The Transnational Law of International Commercial Transactions (Deventer, 1982) 3. See in Denmark, O Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747. There is a fair amount of other early literature reflecting on the topic. See E Langen, Studien zum internationalen Wirtschaftsrecht (1963); P Kahn, La Vente Commerciale Internationale (München, 1961); P Kahn, ‘Lex mercatoria et euro-obligation’ in F Fabritius (ed), Law and International Trade (Frankfurt a. M., 1973) 215. See further also Lowenfeld (n 47) and R Goode, ‘Usage and its Reception in Transnational Commercial Law’ (1997) 46 ICLQ 1; LY Fortier, ‘The New, New Lex Mercatoria, or, Back to the Future’ (2001) 17 Arbitration International 121; ME Basile et al, Lex mercatoria and Legal Pluralism: A Late Thirteenth Century Treatise and its Afterlife (Cambridge, MA, 1998); H Mertens, ‘Lex Mercatoria: A Self-applying System Beyond National Law?’ in G Teubner (ed), Global Law Without a State (Aldershot, 1997) 31; Emmanuel Gaillard, ‘Transnational Law: A Legal System or a Method of Decision Making?’ (2001) 17 Arbitration International 59. But cf Pierre Mayer, ‘Reflections on the International Arbitrator’s Duty to Apply the Law’ (2001) 17 Arbitration International 235. For a more comprehensive elaboration in France, see the work of P Fouchard, in particular P Fouchard et al, Traité de l’Arbitrage Commercial International (Paris, 1996). See also P Fouchard, L’Arbitrage Commercial International (Paris, 1965); E Gaillard and J Savage (eds), Fouchard, Gaillard and Goldman on International Commercial Arbitration (The Hague, 1999). For a recent overview, see KP Berger, The Creeping Codification of the Lex Mercatoria (1999, 2nd edn, The Hague, 2010). For an earlier sceptical analysis, see F De Ly, International Business Law and Lex Mercatoria (Amsterdam, 1992).

312 Volume 1: The Emergence of the Modern Lex Mercatoria Legal theory proves its importance in all periods of great change and must provide a vision and guidance. That is the traditional task of jurisprudence in the US. It does not necessarily provide instant clarity. The American modern ‘law and …’ movements such as ‘law and morality’, ‘law and sociology’, ‘law and economics’, ‘law and psychology’, ‘law and aesthetics’ and so on, show great differences in emphasis, although they also demonstrate that, in the evolution, explanation and application of the law, external or non-legal considerations play an important role. When and how they do so remain a matter of study, and how they can all be distinguished and connected is an epistemological question that has to do with the nature of our perceptions and the acquisition and meaning of our knowledge. It is clear that the prevalence of private law doctrinal thinking is ebbing,663 and these questions have received renewed attention, especially in the major law schools in the US, where the need for a better understanding of what is going on is acutely felt. It has also led to more empirical research. Again, it must be admitted that this American jurisprudential interest has not yet been greatly extended to the study of the law-creating forces in international legal orders (see sections 1.3.6 and 1.5.6 above), but it may ultimately well show its true importance in that context as it is clear that legal theory has a particular contribution to make to our subject of globalisation of commerce and finance and of the effect this has on the applicable law, its formation and application. Such a contribution may in particular concern the method and the contribution of public international law in this regard, see section 1.4.5 above. It may also cover the concept and operation of distinct legal orders664 that may be separated from or transcend national legal orders.

For a fuller elaboration and academic discussion of the subject and in particular of the development of a hierarchy of sources of law within the modern lex mercatoria, see s 1.4.14 above, and for a more sociological approach, see G Teubner, ‘Global Bukowina: Legal Pluralism in the World Society’ in G Teubner (ed), Global Law Without a State (Aldershot, 1997) 3. See also G Teubner, ‘Breaking Frames: The Golden Interplay of Legal and Social Systems’ (1997) 45 American Journal of Comparative Law 149; G Teubner (ed), Autopoietic Law: A New Approach to Law and Society (Berlin, 1988), see further also n 267 above. The matter has so far received relatively less attention in the US. But see above the contribution of AF Loewenfeld and further FK Juenger, ‘Private International Law or International Private Law?’ [1994–95] King’s College Law Journal 5; FK Juenger, The UNIDROIT Principles of Commercial Contracts and Inter-American Contract Choice of Law (Universidad Nacional Autonoma de Mexico—Universidad Panamericana 1998) 229–36; FK Juenger, ‘Conflict of Laws, Comparative Law and Civil Law: The Lex Mercatoria and Private International Law’ (2000) 60 Louisiana Law Review 1133. See more recently, JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers University Law Review 1. It is also largely neglected in the more functional approaches to the law. But see R Cooter, ‘Structural Adjudication and the New Law Merchant: A Model for Decentralisation’ (1994) 14 International Review of Law and Economics 215; R Cooter, ‘Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant’ (1996) 144 University of Pennsylvania Law Review 1643. See further also JE Rauch, ‘Business and Social Networks in International Trade Law’ (2001) 34 Journal of Economic Literature 1177; Y Dezalay and B Garth, ‘Merchants of Law as Moral Entrepreneurs: Constructing International Justice from the Competition for Transnational Business Disputes’ (1995) 29 Law & Society Review 27. Another issue is how this law should be taught, see Cesar Argonia et al, ‘What Law for Transnational Legal Education’ (2015) 6 TLT 253, see also the handbook of M Heidemann, Transnational Commercial Law (London, 2018). 663 Cf also Goncalo de Almeida Ribeiro, The Decline of Private Law. A Philosophical History of Liberal Legalism (Oxford, 2018). 664 See s 1.5.1 above. Julius Stone, although a positivist in the Hart tradition, was concerned with legal orders, but since he concluded that law could not be defined, it was also impossible in his view to define legal orders although both could be described to some extent; see Legal Systems and Lawyers’ Reasoning (Palo Alto, CA, 1964) 178ff. Other modern thinkers mention legal orders or systems, but it was already noted that as such it is not a major area of study in modern legal thought. The concept traditionally received more attention in public international law, see N MacCormick, Questioning Sovereignty (Oxford, 1999), especially chs 1 and 5, and also in EU law; see

Volume 1: The Emergence of the Modern Lex Mercatoria 313 Legal theory may thus help in the identification of the international commercial and financial legal order (as of any other), the various sources of the law in that order, and their relationship and use. It may also show that, although the necessary means of enforcement is still through national courts barring voluntary compliance, they may and should apply these new transnational rules in professional dealings. Alternatively, compliance could be through international arbitrations or other international fora, the rulings of which should be supported by all courts of modern commercial nations. It was mentioned before that this may be considered of prime self-interest of such nations (assuming they want to continue to participate in the international flows of goods, services, information, technology, capital and payments) and such support should be quickly and efficiently forthcoming, again unless domestic public order concepts manifestly intrude, although they may themselves be increasingly transnationalised in transnational minimum standards. Legal history is here also a help in showing that various sources of private law always operated side by side, and that the attempted monopolisation of private law creation by modern states, particularly in civil law countries through codification, is a recent phenomenon, was never entirely successful, and is probably an aberration.665 It may also show that much in the law developed in a haphazard way, was coincidental or was transplanted from other legal systems. Indeed, in many countries much of private law has no national root at all. Comparative law, finally, gives us a feel for our legal environment, provides us with a mirror and ideas at the practical level, and gives us an inventory of common problems and solutions.666 It may also give us an insight into the general or core principles that could suggest an international normativity, as such in private law potentially of great relevance in the hierarchy of norms within the modern lex mercatoria. But that could only be so if the international commercial practice recognises itself in the result. That is the limit of comparative law and of its importance in international trade and finance and also of the relevance of the sets of contract and other principles, such as the European (PECL) and UNIDROIT Principles of Contract Law, which are now proffered at the more academic level. The same goes for the DCFR in the EU. The comparison may be all the more subtle and valuable if the different legal orders from which the various rules hail are more fully understood and their own dynamics (and their limitations) better articulated. Traditional comparative law had little eye for these aspects and remained wedded largely to black-letter laws and statist notions of the sources of law. This has come in for some important criticism667 even if it does not altogether do away with the usefulness and need for comparative law studies in a functional sense.668 It will show that, especially in the West, mythical or more mysterious origins

the seminal Case 26/62, Van Gend & Loos [1963] ECR 3, Case 6/64 Costa v ENEL [1964] ECR 1203, Case 14/68, Walt Wilhelm [1969] ECR 1, and any current EU law handbook on the subject. See further also the discussion on legal plurality in nn 603 and 604 above. 665 See for a reconsideration of legal history and its role at least in common law research in the twentieth century, KJM Smith, ‘History’s Living Legacy: An Outline of ‘Modern’ Historiography of the Common Law’ (2001) 21 Legal Studies 251. Cf also Goncalo de Almeida Ribeiro, The Decline of Private Law, a Philosophical History of Liberal Legalism (Hart Publishing 2019) for the civil law private law doctrine offering a reconstruction of liberal legalism since the middle of the nineteenth century following the law’s politisation and the more modern anxiety about its quality and the sufficiency of legal expert knowleddge. 666 Cf also Mathias Siems, ‘The End of Comparative Law’ (2007) 2 J Comp L 1323 and for the lack of interest in Germany, n 56 above. 667 See, for a discussion of the critiques and a re-evaluation, A Peters and H Schwenke, ‘Comparative Law beyond Post Modernism’ (2000) 49 ICLQ 800. See further also G Samuel, ‘Comparative Law as a Core Subject’ (2001) 21 Legal Studies 444. 668 A more structuralist approach assumes on the other hand an immanent legal model against which national laws or even transnational law can be tested. This gives another important meaning to comparative law, which is

314 Volume 1: The Emergence of the Modern Lex Mercatoria of the law in a national psyche are largely unsupported, at least in commerce and finance, and are arguably being replaced by greater openness and rationality.669 It can only be repeated in this connection, and comparative law shows it also, that much present property and contract law is in its origin not nationalistic but rather Roman, Germanic or feudal, while, at least in commerce and finance, much modern law in its development now at the transnational level is practical, technical, and problem solving in ways that do not suggest greatly different needs from country to country, where the often considerable legal differences still obtaining domestically seem mostly more coincidental than fundamental or are caused rather by the fitting in of newer structures in antiquated systems or frameworks. Whereas in other areas of the law, diversity may be of value and could be cherished, in international commerce and finance this is only disruptive and costly. In this area, it was submitted, diversity operates more properly at the level of different sources of law subject to a clear hierarchy. not, however, directly relevant in the context of this book in which no such model is assumed. In this book a mere black-letter approach is generally avoided in the search for substantive transnational law, which search is perceived in terms of a probing attitude and an investigation into different sources of law, in which domestic laws are tested for their usefulness in an international context as they may still be an expression of a potentially broader normativity in the dynamics and further development of modern international commerce and finance. Domestic laws may also prove useful to show the legal issues that need to be dealt with in the formulation of the new lex mercatoria and for which the traditional solutions need not a priori be rejected. Rather, they must be retested for their validity in an internationalised context as general principle. For example, in international sales it may be useful to find in this manner a number of features that require particular attention. This may be so even in international finance where there is traditionally little communality. One may refer to set-off and netting, assignments of receivables (or of contractual rights more generally, especially important in securitisations), floating charges, finance or conditional sales and reservations of title, trusts and especially constructive opr resulting trusts in terms of segregation of assets, and to book-entry systems concerning investment securities entitlements. At least these are matters well known in many domestic legal systems and this may provide useful guidance, at least as a list of issues that need to be dealt with transnationally and which we recognise even if the solution at the transnational level might be less clear. 669 Not much further attention can be given here to the aims of comparative law and its objectives. Some look for a common core in the law (while rejecting any mythical search or permanent features) such as RB Schlesinger, ‘The Common Core of Legal Systems, An Emerging Subject of Comparative Law Study’ in KA Nadelmann, AT von Mehren and JN Hazard (eds), XXth Century Comparative and Conflicts Laws. Legal Essays in Honor of Hessel E Yntema (Leyden, 1961) 65ff. It leads to a search for universal, non-structural principles common to all legal systems. This may be of some use particularly in international commerce and finance. See for a discussion in Germany, J Esser, Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts. Rechtsvergleichende Beiträge zur Rechtsquellen- und Interpretationslehre, 4th edn (Tübingen, 1990), where the emphasis is particularly on the role of principles common to all legal systems in the further development of national laws; so also E Rabel, ‘International Tribunals for Private Matters’ (1948) The Arbitration Journal 209. In T Weir (trans), Zweigert-Kötz, An Introduction to Comparative Law, 3rd edn (Oxford, 1998) 40, there is even a presumption of similarity (praesumptio simultudinis), at least in the less politically driven areas of private law because the needs the law serves are considerd to be very similar everywhere. That would suggest the general principle is implied. However, it remains a fact that, even in commerce and finance, there are great differences, especially in the law of property but also in equity concepts, such as trusts, beneficial ownership interest, conditional ownership rights, or security interests and floating charges where any common core may become so general or superficial that it has hardly any distinctive or guiding meaning. Even in contract law, there is a more objective attitude in common law where what may have been meant or who is to blame is less of a defence or excuse against the written text which receives a more literal interpretation at the same time, see further the discussion in s 1.1.6 above. It may be noted that much of the search for common principles by these authors took place in a somewhat different context and tended to be directed towards showing that the differences between common and civil law are not as great as sometimes assumed. In this book, the emphasis is primarily on legal issues that commonly arise in different legal systems, therefore on an inventory of problems that normally arise in more advanced economies in respect of certain commercial and financial legal structures, such as, for example, security interest, floating charges, conditional and beneficial ownership, set-off and netting, or investment securities entitlements, rather than on common solutions, as in international commerce and finance these solutions are more likely to be dictated by the evolving needs in their legal order than by examples in existing national laws.

Volume 1: The Emergence of the Modern Lex Mercatoria 315 But even in this connection, it may be repeated that domestic laws may still be useful to show the legal issues that need to be dealt with in the formulation of the new lex mercatoria. As to policies, the conclusion so far has been that, in commerce and finance, modern public policy considerations of a domestic nature play a lesser role in a globalised world to the extent that countries want to participate. Again, the true challenge is to formulate transnational minimum standards to balance the international marketplace, see the discussion in section 1.5.8 above and further section 2.2.6 below.

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Part II The Nature, Status and Function of Private International Law 2.1. Modern Private International Law 2.1.1. The Underlying Concept of Modern Private International Law For the reasons already explained in section 1.4.13 above, in this book, private international or conflicts law, resulting ultimately in a national law governing international transactions, is relegated to a back seat in the hierarchy of norms of the transnational lex mercatoria, although that does not make it irrelevant in areas where transnational law has not yet developed or is slow to do so. This means that in the modern lex mercatoria domestic law remains the residual rule and allows it in this way to operate as a full system for those who still look for this in order for such transnational private law to be functional. However, even in those areas where transnational law does not yet present a clear normativity, the residual role of private international law would have to be tested for its results in international cases and must shed its purely domestic peculiarities. Thus, it was posited that the application of a domestic rule and the result thereunder would still need to be evaluated in the light of business realities and the dynamics of international trade, commerce and finance. In fact, it was argued that in this manner the domestic law so applied becomes part of the transnational law merchant itself and loses its domestic status. The conclusion was that domestic law applied domestically is therefore likely to be different from it being applied in international cases. In the last generation, a more widespread unease with the traditional methods and results of private international law or conflict of laws doctrine had already become evident.670 It centres on the applicability of (only) domestic law in international cases for which it is seldom written. It also poses the more troubling question how a multitude of domestic laws being applicable to different parts of a transaction in the international flows, probably in each part still different for contract and proprietary or enforcement issues, could ever produce an efficient and reliable legal framework for such transactions. For one thing, the dynamics are likely to be quite different in international dealings, both for contract and property: see also section 1.1.6 above. It is not only

670 See for a discussion, eg FK Juenger, ‘Private International Law or International Private Law?’ [1994–95] 5 King’s College Law Journal 1; FK Juenger, The UNIDROIT Principles of Commercial Contracts and Inter-American Contract Choice of Law (Universidad Nacional Autonoma de Mexico—Universidad Panamericana 1998) 229–36; FK Juenger, ‘Conflict of Laws, Comparative Law and Civil Law: The Lex Mercatoria and Private International Law’ (2000) 60 Louisiana Law Review 1133. See, however, for German orthodoxy, H-P Mansel, ‘Private Law Doctrine and Private International Law’ (2019) Chinese Yearbook of Private International Law 2017 21.

318 Volume 1: The Nature, Status and Function of Private International Law the size but also the nature of the international flows that must then be considered. This was demonstrated before with reference to a floating charge which may be needed to obtain working capital and would have to cover the supply and distribution chain as such and could not then cope with different domestic legal regimes when goods in their manufacturing and distribution phases go backwards and forwards between countries at the different stages in this process. It might mean loss of security interests or at least of rank or a possible transformation of these charges in something else in every phase and it would be unlikely that the sum total of such ever changing domestic regimes would add up to a sensible legal cover for the secured transaction as a whole. Other issues are which public policy or value systems prevail in such situations. It will be shown that the present idea of private international or conflicts law barely has an answer to these questions. In the meantime, a most important technical difficulty has become that in an ever more virtual environment that is much services, information and technology-oriented, the proper contact with a relevant state law is ever more difficult to establish. That had already been problematic for intangible assets like monetary claims. Since private international law leading to the application of a domestic legal regime in international cases remains the starting point for most, never mind its increasing irrationality, it remains important to see what the traditional private international law is, what it meant to achieve, and how it operates. The fundamental underlying concept of modern private international law remains indeed that all legal relationships have a basis or seat (Sitz) in a national law or national legal system and are thus all domestic in nature. This was a new insight or paradigm at the time. It became axiomatic; there is no longer any concept of international legal orders (except the one between states). There was no longer universal private law and also no longer any transnational commercial law. This view is associated with the teachings of FC von Savigny (1779–1861) in the German Historical School of the early nineteenth century,671 who saw all law as territorial, which followed from his view that law was culturally determined: see section 1.2.9 above. Within this approach, von Savigny proceeded to formulate a set of (in his view) objective conflicts rules aimed at reaching automatically the relevant applicable national law in cases with international aspects, therefore in cases that could conceivably be covered by more than one domestic law. Such law would then have to be applied by any court wherever in preference to its own law (lex fori). The original objective of this approach was that the application of foreign law was rule based and no longer dependent on the co-operation of or recognition by states and their courts (in terms of comity, discretion or otherwise) and could therefore be applied without bias in favour or against any of them. In this view, finding the applicable law was considered neutral and not dependent on the outcome but it was always domestic, and private international law no longer had any transnational substantive law element in it. It could still be argued that its principles were themselves still transnational, but that was soon also ignored. Again, this new approach was an important and logical by-product of the nineteenth-century notion that all law was national and territorial per se and that there were no longer universal legal concepts, principles or rules. Thus, private international law was not international either but became solely a local conduit to other national legal systems whose operation was thus licensed in other countries by virtue of their local private international law rules. ‘Conflicts of laws’ is then the better term.

671 F von Savigny, System des heutigen römischen Rechts VIII, no 360, 108 (Berlin, 1849). See for this School, s 1.2.9 above. The term ‘seat’ was first used in this context in the US in the Supreme Court decision of Pritchard v Norton 106 US 124, 131 (1881). It is unusual now to use this terminology but there is an important remnant in international arbitration, which, in the minds of many, is still controlled by the lex arbitri as law of the seat. It is in fact a strange concept that stands for a political choice, see further the discussion in Vol 2, s 1.1.8 below.

Volume 1: The Nature, Status and Function of Private International Law 319 In the absence of much regulatory law at the outset, this approach focused primarily on private law. In it, the conflicts rules were originally considered simple and in essence few in number, the most important ones being the lex rei sitae or lex situs for proprietary issues, the lex (loci) contractus for contractual issues, and the lex loci delicti for tort issues. These rules were not in themselves new, as we shall see in the next section. However, used in this manner, they replaced earlier notions of: (a) acquired rights, which had been more interest or fact rather than rule based; and (b) comitas, which had been more concerned with the extraterritoriality of local rule patterns and the validity of and conditions for their application elsewhere to cases with foreign elements, in which connection the lex situs, lex contractus, and lex loci delicti had served as sub-rules or guidelines but not as a set of hard and fast rules to determine conflicts of (domestic) laws more objectively; see section 2.1.2 below. The older comitas approach had left ample room for the consideration of foreign state interests, even for overriding notions of a more substantive nature derived directly from rationality, logic or fairness and therefore from a more universal system of (often received Roman or natural) law as prevailed on the European Continent at that time. In view of perceived subjective or case-sensitive elements in this approach, this was what von Savigny sought to eliminate, but the real problem was nationalism, especially in commercial law, coupled with the fact that domestic private law had become much more diverse after the civil law codifications. There was no longer much of a common denominator, as Roman law had once been or the natural law had provided even though in von Savigny’s approach, illogically, these conflict rules themselves still claimed a more universal reach.672 As already mentioned, they soon became pure national law too and varied therefore from state to state, especially in their elaboration. The consequence was that the application of a foreign law became an issue of the domestic lex fori, which had to authorise it through its own rules of private international law. The modern proponents of transnational substantive law (which could, but, like fundamental principle and international custom, need not be, treaty law) and more recently the supporters of the modern lex mercatoria approach in international trade and finance are more likely to insist that, in the international sphere, legal relationships are by their very nature delocalised and therefore denationalised and that application of a national law, even if the most proper one can still be found, could be potentially distorting, if only because domestic laws are seldom made for them. On this view, a set of (often considered rough, automatic and neutral) hard and fast conflicts rules, like those just mentioned (lex rei sitae, lex contractus, lex loci delicti and so on) pointing to a particular domestic legal system as a whole was unlikely to deal satisfactorily with the problems arising from the international setting itself and therefore unlikely to take properly into account the particular nature of the relationship between the parties as developing in that context and to balance properly the parties’ legitimate interests at that level. No less important, the cutting up of international transactions into domestic pieces would itself appear unfeasible, if not also arbitrary and in an increasingly virtual world even impossible. In its more radical form, in this sceptical view, application of domestic private laws could even be seen as the truly alien and disturbing element in international transactions and the private law applicable to it.673 Rather, these transactions should always be governed by their own transnationalised law subject to proper public policy or public order conditions, which could themselves

672 See von Savigny (n 671) 27. 673 See JH Dalhuisen, Wat is vreemd recht? [What is Foreign Law?], Inaugural Address Utrecht (Deventer, 1991) 27.

320 Volume 1: The Nature, Status and Function of Private International Law become transnationalised, unless all the elements of a transaction could be attributed to one country, in which case the transaction would hardly be international any longer. One may think of the sale of real estate between persons from different countries. In any event, serious problems arose in this conflicts of laws approach. First, in its further development, it led to such detail and intellectual refinement in rules and sub-rules that the rationality of the whole exercise became severely stressed. Confusion, therefore uncertainty, in the applicable law, and lack of credibility were the result. Even more important perhaps was that private international law of this sort is unlikely to be able properly to take into account the everincreasing legitimate interests of the parties’ own states or those of any other that might be directly or indirectly concerned with the transaction and have some valid governmental interest in the implementation and enforcement of their own rules, at least to the extent that the international transaction plays out on their own territory. Thus, local public policy, usually regulation, may intervene most obviously in the area of foreign exchange or in trade restrictions (still important in the arms trade and in the trade of forbidden substances), or in environmental or competition issues. The application of the lex rei sitae, lex contractus or lex loci delicti was hardly relevant in that context as these were not private law matters. Like under competition law, such regulatory laws could even affect the validity of a contract (at least in the country of the prohibition and in its fora), which, according to the applicable lex contractus (if of another country), could otherwise be perfectly valid. Whether the contract would be upheld could thus still depend on the place where the case (for example, for delivery or payment) arose or was brought. In international cases, the courts of such a place could not then avoid balancing the various interests of the parties and of the governments involved for which there was no pre-set rule in private international law and which proved difficult especially when it came to displacing their own rules, which were likely to be still preferred. It would seem therefore that the older comity approach, which had left courts discretion in the application of foreign laws, was dispensed with too soon, or at least too radically, especially where rules had a regulatory content or public policy or public order or otherwise mandatory character. As far as such public interests were concerned, which could even be meant to prevent the transaction, as in the case of boycotts or tariff and foreign exchange restrictions or under competition laws, it was clear that in such instances—increased dramatically through the rise of governmental intervention, even in aspects of private law—the von Savigny model was hardly adequate, thus quite apart from the more fundamental sceptical view presented in this book that domestic private law was unlikely to be meant or to have been written for international transactions or situations in the first place, which may have a different dynamic. Moreover, there are now also ample public policy rules showing particular governmental concerns with the protection of certain classes of interested private parties, such as consumers, workers or small investors, the effectiveness of which could not solely depend on the contacts approach of private international law either, such as the place of the contract or tort. We enter here the modern mandatory protection or public policy aspects of private law itself, for which in the case of conflicts the traditional private international law rules also had no real answer. Thus consumers and small investors may now be particularly protected against rapacious sellers of goods or products, but that is usually under their own law, whatever the applicable contract law under the lex contractus rule of private international law. In short, also in these areas of extra private law protection, even though expressed in terms of private law remedies, there could still be a problem in the search for the most appropriate rule in the case of conflict. Again, the original lex contractus could not then prevail automatically nor could it result in the application of a domestic law (for example, that of a foreign seller of financial products), which, from

Volume 1: The Nature, Status and Function of Private International Law 321 the perspective of the law of the residence of the consumer buyer would be wholly inadequate to protect it or could create injustice for small investors when guided by foreign brokers in foreign transactions. In the traditional conflicts of laws or private international law approach, it was thus difficult to take into account and assess the increasing impact not only of foreign regulatory requirements and the public interest in the country where the transaction had an impact, but also the special but nevertheless justified interests of harmed parties as recognised by their own states. In fact, it was difficult in such cases to weigh the foreign element per case, as comity had once tried to do, not least to consider (a) local public order requirements in places where through conduct or effect international transactions came onshore or (b) the different social or political setting in which the parties operated, and to honour the requirements of justice and social peace (or even efficiency), which could be very differently perceived wherever this setting became an issue. It can be said that von Savigny had noted these issues but had not been greatly concerned in an era of limited government intervention beyond tariffs and fewer international transactions (except in colonial trade between main country and colony, where the law tended to be the same, or in international staple markets subject to their own customs). On the other hand, it must also be admitted that, even while applying transnational law or the modern lex mercatoria, courts or arbitrators may still have to consider these special governmental interests or social concerns, and must then also decide on their relevance in the light of the nature and dynamics of the international transaction, but at least there is not then any longer the further complication of the choice of a private law. Nevertheless, this transnational law or modern lex mercatoria (which derives from fundamental principle, custom, treaty law, general principle or party autonomy in the manner discussed in section 1.4 above) while being applied (by the courts or in arbitrations), must also consider and no less take into account these special interests to the extent they may internationally be considered justified and correct the modern lex mercatoria. It has already been said that the modern lex mercatoria is deferential to these policy issues, at least to the extent that conduct and effect of an international transaction play out in the territory of a particular state concerned; see also section 1.5.8 above. This may indeed be an issue of the international public order itself, or a matter of transnational minimum standards, sometimes still referred to as (international) comity. In such cases, the relevance of these policies depends on the circumstances and ultimately remains a matter of appreciation per case, in which connection the degree of conduct and/or effect of the international transaction in the territory of the relevant state plays an important role, assuming that in an ever more virtual world of rights and obligations such a state can still be identified. Various national (governmental) interests may also compete and may need balancing; again, there may now also increasingly operate transnational minimum standards; see the discussion in section 1.5.8 above and further sections 2.2.6ff below. But even in purely contractual interpretation, extra-legal elements of an ethical, social or efficiency nature could create further problems when the lex contractus and the laws of the parties most directly involved differed greatly, which may well go beyond the protection of weaker groups. In the private international law approach, it was not possible to use internationalised concepts here either, so that altogether justified expectations in an international transaction risked being ignored. In the national approaches there are often nothing other than state-recognised values, in particular in civil law codification countries as we have seen. In international transactions, that now raises the question of transnational values (conceivably beyond public order considerations and international minimum standards), which could be quite different especially in the professional sphere. These values may not then always mean more protection.

322 Volume 1: The Nature, Status and Function of Private International Law As we have seen, in international professional dealings there may be less good faith as a correcting higher-value concept, and as a consequence, fewer pre-contractual disclosure duties, and fewer post-contractual renegotiation duties than domestic leges contractus more generally dictate; see again section 1.1.6 above, and also the more extensive discussions on the subject in Volume 3. In this context, the role of party autonomy also needs to be clarified: see more particularly sections 1.4.9 above and 2.2.9 below. That includes the right to spell out the applicable legal regime or to choose a national system that appears more appropriate than the one resulting from the applicable conflicts rules (or even the lex mercatoria, which in the view of many may now also be chosen); see further the discussion in section 1.4.13 above. It creates a form of legal unity and is often considered a basic rule of private international law that parties may choose any other law they prefer as being applicable, but such a choice is not absolute in its reach. This freedom generally exists only in matters at the free disposition of the parties, which are in essence those matters that raise no public interest and do not affect third parties or challenge mandatory rules. They only concern the contractual default rules. That notably excludes proprietary rights or the contractual infrastructure, such as issues of contractual validity, legality, or capacity. They can hardly be determined by the parties themselves and depend on a more objective law, whichever it may be. Social values and protections that otherwise obtain can also not be eliminated in this manner. Where a public policy matter of a particular state may be involved, such a choice may still be possible in favour of the law of the country which has the more obvious interest in the case, but even then this may not avoid the need to weigh (in the appropriate forum) any conflicting governmental policies or interests of any other state to precede the acceptance of party autonomy in this area. When party autonomy is exerted to choose an applicable law, there is therefore always a question of how far parties by common consent can opt out of the laws of the legal system or policy rules otherwise more properly applicable. Again, consumer protection presents a good example, showing the limits. If a consumer is protected against unfair contract terms in his or her own country but buys products in a country that has no such rules or has other rules in this respect which might be less favourable to consumers, parties (including the affected consumer) choosing the law of the latter country or of a third country might not find it to be controlling in the matter, and a more objective balancing of the policy issue may precede the application of the rule so chosen especially if the courts of the country of the affected consumer have jurisdiction to decide the issue. It can only be repeated in this connection that, in the absence of such a contractual choice, the application of the traditional conflicts rule, like the lex contractus in the sense of the law of the place where the contract was concluded or had its centre of gravity or closest connection, might not (or no longer) decide the issue either. Thus, while opting for the law of a particular state, there remains the question of how far party autonomy goes, and of how far parties may in this manner avoid the application of laws (especially of a public or semi-public regulatory or mandatory nature) normally applicable in the given territory for any conduct and effect in it of international transactions. Regulatory and tax laws may present other vivid examples. Obviously, parties cannot opt out of regulatory and tax laws and create their own regulatory and tax regime in this manner. They have no such power unless conceded by the relevant state, which is generally unlikely. On the other hand, a contractual choice of another law may not mean the application of the mandatory or regulatory rules of the law so chosen either, especially if the case has no real contacts with the country of that law. Choosing the law of England to apply to a contract does not mean also adopting the UK taxation regime or the English regulatory regime if the transaction has no contact with England in terms of conduct and effect. Thus, by choosing a law, there is not only the question of which law parties have opted out of, but there is also the question as to the coverage of the law that parties have

Volume 1: The Nature, Status and Function of Private International Law 323 opted into. The public or semi-public law rules of that country are in such cases hardly likely to apply or be affected. Assume, for example, an English and a French resident agree to sell Indian jute in the international markets. Let us assume that India declares illegal the selling of such jute in the international markets outside its foreign exchange controls. Parties cannot change this by choosing another law although it is a prohibition unlikely to be upheld in foreign courts in respect of jute already outside India and not destined for it. Another example is in the choice of English law in a contract concerning the sale of mineral water from France to Germany. Mandatory English water quality standards are unlikely to apply. The German rules in this connection will claim priority in order to protect the German mineral water-drinking public regardless therefore of the contractual choice of law, although the choice of English law could still have a meaning in terms of conform delivery. It is a matter of horizontal application of regulatory standards between private parties and they can opt for this effect, which may then also go to the issue of damages although it is otherwise a difficult question of interpretation how far this horizontal effect exists and goes in the circumstances. The same may happen in connection with tax laws. Their horizontal effect between private parties is not per se excluded; it depends on the situation and it is conceivable, for example, that parties will choose one of them to bear the tax burden and make the necessary reimbursements on the basis of the applicable tax laws, which then find indirect horizontal application through election by the parties. Contractual choice of law clauses thus often require interpretation and may not even then mean the application of the more eccentric provisions in the private law so chosen, as, for example, in the case of the application of the doctrine of consideration in a contract between a German and a Swiss made subject to English law.674 As has been mentioned before, it could be seen as a structural or mandatory rule not applying to contracts not having any contact with England (or other common law countries) at all. Perhaps in that context parties could opt for English law, yet exclude at the same time its consideration doctrine. Should they not have done so (and it is most uncommon), the doctrine may still not be upheld in respect of them as they may not be deemed to have contemplated its application if leading to the non-existence of an agreement or amendment (eg, concerning a price concession) they clearly wanted. English lawyers asked to advise generally on the contract under English law may not flag the problem because they will not understand where the continental lawyers come from. Here a comparative law background in several legal systems becomes urgent for counsel. Furthermore, it was submitted all along that in international transactions, even a valid choice of a local law in international transactions, still needs to be put in the context of the operation of all other sources of law of the modern lex mercatoria as corrected by overriding value issues or relevant public policy and public order concerns. These are important issues already briefly discussed above in section 1.5.8 and more fully to be covered in sections 2.2.6 to 2.2.8 below, while the concept of party autonomy in matters of choice of law will be revisited in section 2.2.9 below. 674 In this connection, it may also be relevant that the CISG abandoned the consideration doctrine. So did the European and UNIDROIT Contract Principles and the DCFR. Indeed, it may well be the demonstration of a general principle in modern transnational contract law that has done away with the doctrine in international cases, even if in this book the requirement of an investment in the contract before a claim can be made under it is generally proposed for transnational contract law; see s 1.1.6 above. Excluding the doctrine would be a vivid expression of domestic law being applied differently in domestic and international situations, see further in particular JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619.

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2.1.2. Earlier Approaches The earlier comity approach referred to in the previous section, which von Savigny sought to replace, had resulted from Dutch seventeenth-century scholarship (Huber and Voet) and prevailed until the nineteenth century as a refinement of the even earlier statutist approach. To prevent local courts always applying their lex fori, the statutist approach developed in the Middle Ages, first between the city states in Northern Italy. It became relevant where Roman law or natural law did not apply as a universal standard but purely local (commercial) laws developed. The statutist approach was mainly concerned with the sphere of application of these special laws or complexes of rules meant to govern certain situations or relationships only: hence the personal statute for the law concerning the person and its capacity, the property statute concerning real property and its status, and so on. In such cases, under the personal statute, for example, a person would take his own personal laws with him wherever he went. His status and capacity were thus determined by his own personal laws. The applicable property law, on the other hand, would be that of the place where the assets could be found. The personal statute notably determined the legal and marital status of persons, where as a consequence extraterritoriality came in, which is to say that the relevant personal rules would travel with the person and be recognised and upheld in courts elsewhere. Real estate, on the other hand, could not travel and would be governed solely by the law of its location (lex rei sitae) as the property statute, which was therefore not personal (or extraterritorial) but remained purely territorial. It was not assumed that issues concerning it could arise in foreign courts. Contract was governed by the law of the place of its formation, and not as such considered extraterritorial either, even if parties came from different countries and moved about. It sounds simple but it required a distinction to be made in each case between extraterritorial and territorial statutes, which did not always prove easy, for example where the law concerning movable property was concerned when it was transferred abroad. The trend was in the direction of ever greater territoriality, exercised in state courts always with a prevalence of the lex fori covering everything that happened in the territory of the court or could be found there. Foreign law was thus little considered except in personal matters concerning foreigners. In order to avoid the constraints of this model to the extent it was considered territorial, acquired rights and comitas notions later concentrated on the recognition of the ensuing rights elsewhere. As we have already seen in the previous section, they introduced a discretionary element as to the applicable law (as no state was considered to be bound by the laws of any other state) and were fact or issue-related. In an international sale and transfer of goods, rights acquired in a movable asset created at its place of origin could thus be recognised at the place of destination, for example, security interests or usufructs. Another way was to recognise the foreign law as a matter of comity in which notions of lex situs and lex contractus or lex locus delicti were used as sub-rules. It followed, however, that there was no automaticity in the application (or refusal) of foreign law (except for the personal statute). This was very much the seventeenth-century approach as developed in the Netherlands by Voet and Huber, largely followed by Story in the US as late as the nineteenth century. More universal law like Roman or natural law or the lex mercatoria of those days and the exigencies of international commerce themselves were then also invoked to resolve the conflicts and to reduce the discretionary element. All the same, it resulted in a lack of certainty. That was meant to be cured in the new approach advocated by von Savigny. Although it still used statutist and comity language in referring to the lex rei sitae, lex contractus, lex locus delicti, and later to the lex societatis in company law matters, the issue was no longer a question of personal or territorial statutes or the determination of the extraterritorial effect of certain laws (or acquired rights thereunder) depending on the situation,

Volume 1: The Nature, Status and Function of Private International Law 325 but rather the automatic application of a domestic law with reference to the seat of each legal relationship, which was on all occasions to be found in a particular country. The new approach was thus more rational but also fundamentally nationalistic. To identify objectively the relevant country (of the seat of the legal relationship) became its objective. So, the perspective moved from the nature of the laws to the nature of the connection between a transaction and a country, later widened to a closest contact or connection approach, as we shall see.

2.1.3. Drawbacks of the Modern Conflicts Rules The essence of the approach of von Savigny, especially as later elaborated by his student Ludwig von Bar,675 was the nationalisation of all international legal relationships (of private law) with reference to their seat in a certain jurisdiction. As such, it was a typical product of nineteenthcentury nationalistic thinking in the German Historical School and supplemented the codification approach, although it was at first balanced by a liberal market sentiment and the free movement of (most) goods, services and money, so that at least the disturbing factor of governmental interests derived from regulation or trade and currency policies was not so likely to arise (except in tariffs). Thus, the presumed neutrality of the new conflict’s rules could be fairly convincingly sustained. In the absence of much other mandatory (or regulatory) law at the time, it also left ample room for the parties to determine their own legal regime, supplemented by any national law of their choice, although there were always problems with the law of property, which, while affecting third parties, could not be truly chosen by the parties. Here the lex situs dominated, although it created problems of its own with intangible assets and assets meant to move internationally like ships and aircraft as there was hardly a clear situs in respect of them. But even in contract, parties had no power over their own capacity or over the validity and legality of their agreement. Here there was an obvious need for a more objective law to apply and determine these issues, even locally. As already mentioned, the principal aim of the new method was to produce some objective clear-cut conflicts rules from which the applicable law would automatically follow, regardless of any outside interests in the outcome, notably of states. For this purpose, legal relationships were primarily understood in terms of their underlying legal characterisation as proprietary, contractual, delictual, corporate or procedural. Importantly, like the basic rules themselves, these characterisations were originally also perceived as essentially universal, intrinsically unchangeable and, even in the Historical School, probably independent of a state. The rules applicable to these legal relationships could obviously still vary, depending on the expression of them in the applicable local law, especially in the details. This gave rise to the conflicts in the first place, but that was originally not thought a great problem as the differences were in essence expected to be in the detail only, not in the essential structures, and therefore relatively less important. The new approach was therefore intended for a situation in which the perceived conflicts were considered fairly insubstantial while the international flows were limited in value. The conflicts rules and the adjustments they required to the application of the lex fori were thus also believed to be incidental and minor and were few, the most important of which have already been mentioned: the lex rei sitae or lex situs for property issues; the lex locus delicti commissi for tort issues; the 675 L von Bar, Das internationale Privat-und Strafrecht (Hannover, 1862).

326 Volume 1: The Nature, Status and Function of Private International Law lex locus contractus for contract issues; the lex societatis for company issues; the lex fori or locus actus for procedural issues. As such the new approach was a rule rather than an interest- or factoriented method of conflict resolution. Yet this new approach soon proved naïve and started to face a number of more fundamental problems. First, the notion of the seat of legal relationships proved too narrow and could be difficult to pin down. So even in the Savignian approach, the notion of the seat of the legal relationship in a structural sense shifted to the notion of the centre of gravity of the relevant legal relationship in a non-structural sense,676 while the automatic link between the applicable law and this presumed centre became the closest connection. However, all three (centre of gravity, relevant legal relationship, and closest connection) proved poly-interpretable and subject to an appreciation per case resulting in a measure of discretion for the courts, thus also in renewed uncertainty. Subsequently, and equally importantly, the environment in which these conflicts rules were meant to operate changed dramatically in the twentieth century as a result of much greater diversification in the rules and more governmental intervention in private law; see sections 1.5.8 and 2.1.1 above. As noted in the previous section, this highlighted more in particular the difficulty of using the new conflicts approach to contend with a rapidly increasing number of different mandatory or peremptory national policy rules particularly those protecting weaker parties (for example, workers), but later also those protecting consumers and smaller investors providing services or buying products or investments in other countries. As also already mentioned, von Savigny had noted this problem and allowed exceptions on the basis of public policy but thought that the problems would diminish over time. The opposite proved to be the case. Another problem was that in practice, different legal regimes in respect of the same transaction resulted where it had to be divided up in different local pieces because various parts of a production cycle took place in different countries. It was already demonstrated that different legal regimes could then result in respect of different aspects of the transaction even in each local part of an international transaction, for example, in contractual and proprietary matters. This was compounded by different characterisations of the legal aspects of the same transaction in terms of property or contract law, contract law issues resorting under the laws of one country, the proprietary aspects under the laws of another. But even the more basic structures themselves could not always be so easily defined in terms of, for example, property, contract, tort, restitution, company or procedure. Further characterisation problems thus arose. They became especially complicated in tripartite relationships with contractual and proprietary aspects such as agency and trusts, but also in documents of title and negotiable instruments; in such cases, there was often no obvious and certainly no single conflicts rule that could point to a solution in one domestic law. So, it was for letters of credit or in assignments of monetary and other claims (see for assignments Volume 4, section 1.9.2). Through so-called dépeçage, different conflicts rules had then to be devised for different aspects of the same transaction. It was already demonstrated how this ruled out in practice the operation of a floating charge in international supply and distribution chains. A complicated conflict of laws structure is now often invoked in these instances, even in Hague treaties, which seek uniformity in conflicts rules between ratifying states through treaty law. Important examples are in agency and trust (see section 1.4.20 above and Volume 3, section 3.2.2 and Volume 4, section 1.8.5). In practice, even treaty rules of this nature may be subjected to further (public policy) corrections of the end result by the forum, which may then be explained as still other facets of conflicts rules. The result thus often proved not to be transparent or predictable, although the true problem always was that the private international law or conflicts of law 676 H Batiffol, Les conflits de lois en matière de contrats (Paris, 1938) 3.

Volume 1: The Nature, Status and Function of Private International Law 327 approach did not take into account the underlying objective or logic and dynamics of the particular legal structure in its international context and refused to make them ultimately decisive. But the basic notions themselves also had to be further considered. Thus, the principle of the lex contractus had left open the important question whether it was the law of the place where the contract was concluded (in any event problematic when parties came from different countries) or where it had to be performed. The reference to the lex locus delicti commissi left open the question whether the applicable tort law was the law of the place where the wrongful act was committed or where it had its effects. Under it, both French and Dutch law could be applicable in the case of the pollution of the river Rhine in France, causing serious damage downstream to horticulture in the Netherlands. The lex societatis, which later became the basic conflicts rule concerning company law, could then mean the law of the country of incorporation (siège social), generally the view in common law countries, Switzerland and the Netherlands, or the law of the country of the main activity of the company (siège réel), generally the German and French approach. As for the lex situs rule, in proprietary matters concerning movables, it was likely to resolve nothing, as problems arose mainly when, in an international sale, these assets had to move across borders, leaving a choice between the law of the country of origin and of destination in respect of the transfer of title; both could lead to impractical results When assets moved between countries, the answer could much sooner be in the reasonable acceptance of the proprietary rights acquired at the original situs, subject to a measure of adjustment to the equivalent interests (if any) in the country of destination to fit these rights into the latter’s proprietary and, in the case of security interests, priority regime (see more particularly Volume 4, section 1.8). But this merely reintroduced a variation on the old acquired rights theme and allowed an unavoidable measure of discretion, which was precisely what the conflicts system, built upon von Savigny’s ideas, had sought to avoid, as we have seen. In other areas of property law, it was even less clear how anyone national law could deal with the differing complications that derived from the international setting of the case itself, such as in bulk transfers of assets located in different countries, when it was unlikely that one domestic legal system could satisfactorily cover this legal structure even in a contractual sense, unless one assumed that for applicable law purposes all assets were always located at the place of the owner. The protection of debtors in various countries under bulk assignments equally did not appear to be capable of a solution by application of one single domestic rule or it had to be that of the creditor but in enforcement it was more likely to be for each debtor its own law). To repeat, in these cases, a discretionary element (instead of an automatic conflicts rule) had of necessity to be maintained when rules of this nature were invoked before the courts of other countries. At least for regulatory rules that was recognised in Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I). The notion of directly applicable unilateral public policy rules in respect of all that takes place in the territory of a state (règles d’application immédiate in French or Eingriffsnormen in German),677 is an issue covered in the US by section 6 of the Restatement (Second) of Conflict of Laws (1971) for interstate conflicts and by sections 402 and 403 of the Restatement (Third) of Foreign Relations Law (1986) for international conflicts (see more particularly sections 1.5.8 above and 2.2.6 and 2.2.8 below). 677 In Europe, the direct application of mandatory rules of this nature (without reference to conflicts rules), especially those with a social or public policy objective, was noted in modern times early by Ph Francescakis, ‘Quelques précisions sur les lois d’application immédiate et leurs rapports avec les règles de conflits de lois’ (1966) Revue Critique de Droit International Privé 17. A Pillet, Principes de droit international privé (Paris, 1903) 265, had distinguished between laws protecting private and social interests; the former protect the individual against the state, the latter the state against the individual. He considered these respectively extraterritorial and territorial in nature.

328 Volume 1: The Nature, Status and Function of Private International Law Again, this case-specific discretion is reminiscent of the old comity approach (here limited, however, to rules with a clear public interest element to them), an approach which nineteenthcentury private international law had so carefully sought to avoid. As we shall see in section 2.2.2 below, much of the American conflicts revolution has revolved around it, focussing policy, also in private law, on differences between foreign countries or States of the Union. It may indeed be seen as a retreat into the older method, but also as a starting point for internationalisation of the conflict of laws rules through the formulation of substantive transnational rules, especially in private law from which in trade and commerce the modern lex mercatoria is then an important progression. Thus, for private law aspects, there results a search for transnationalisation in the substantive law around fundamental principle and customary law, in property law sustained by the overriding notion of acquired rights, while for governmental interests balancing guidelines and comity rules re-emerge. They may be relevant also in the more traditional approach in the area of statutory penalties and statutes of limitations, which also have some clear public order overtones, in the case of conflict not satisfactorily to be resolved through mere rules of private international law either. In any event, even in the approach of von Savigny, the end result under the application of the standard conflicts rules (such as the lex situs, lex contractus and so on) was always considered in light of its suitability and, if necessary, corrected on so-called public order grounds. This was especially important where different ethical and social standards or values obtained. The discretionary element was thus never entirely lost with the consequence that less progress was made through modern conflicts rules than was at first expected. So, we see that: (a) at least in movable property matters, the old acquired rights theory was revived; while (b) in public policy-connected issues the old comity approach survived; and (c) domestic public order was always allowed to function as a correction of the result of any conflicts of law rules on the basis of local values. Whatever the objectives of the new approach to private international law, from the beginning the new conflicts rules thus proved less clear cut and less automatic than was suggested on their face. The unavoidable result was that the selection of the country assuming jurisdiction to resolve the issue began to make a difference leading to forum shopping. This raised the important matter of adjudicatory jurisdiction where, at least in the English version, a measure of discretion also lurked, including forum (non) conveniens notions. Thus, the prospect of forum shopping became an important issue in the conflict of laws approach to finding the applicable law, further promoted by the fact that these conflict rules frequently failed to cover common ground and could in fact differ greatly, as became evident especially in areas where the method itself proved less clear, as in matters of characterisation and in the definition of the closest relationship or connection. This presented a particular problem in international arbitrations where there is no natural lex fori and therefore also no naturally applicable set of conflicts rules, and raised the question whether there were at least some common principles or standards of conflicts of law resolution to preserve the pretence of certainty, objectivity, and unity of the system, ultimately always still based on national laws. A need to develop common conflicts rules consequently arose. However, even the development and formulation of these common rules, since 1893 promoted by the Hague Conference (see section 1.4.19 above), although sometimes also in bilateral or (more recently) EU contexts, remained marred by differences in view. The criteria used or proposed were often uncertain. Thus, the Benelux Convention on Private International Law of 1951 (never ratified, and withdrawn in 1976) referred, in relation to sales, to the law of the country with the ‘closest connection’. The Hague Convention of 1955 on the Law governing the International Sale of Goods (not to be confused with the Hague Conventions concerning the Uniform Laws on the International Sale of

Volume 1: The Nature, Status and Function of Private International Law 329 Goods of 1964) referred to the law of the residence of the seller as the basic conflicts rule in sales. The EU 1980 (Rome) Convention on the Law Applicable to Contractual Obligations returned to the notion of the ‘closest connection’, but presumed this to be the place of the residence of the party that must effect the most characteristic performance (Article 4(2)). It left substantial flexibility in the interpretation of this term with the additional facility to ignore the resulting law if it proved inappropriate (Article 4(5)). This was followed in the successor EU Regulation of 2008, which now uses a list approach first (Article 4(1)) as a consequence of which the law of the residence of the party that must perform the most characteristic obligation became the residual rule (Article 4(2)), even though the list itself does not normally point in a different direction. In any event, under Article 4(3), a different law may still result if the contract is manifestly more closely connected with another country. In the meantime, Article 8 of the Hague Conference text of 1986, superseding the one of 1955, also uses the notion of the most characteristic performance for international sales. It leads mostly to the applicability of the law of the residence of the seller, but with a number of specific exceptions in favour of the law of the residence of the buyer. It was already said that, notwithstanding von Savigny’s emphasis on the independent nature of each legal relationship and regardless of some modern-day relaxation, private international law still tends to use the legal relationship principally in terms of classification or qualification as proprietary, contractual and tortious (and even then it may run into serious problems),678 therefore as formal structures. In this connection it should perhaps also be noted that there is less concern with the specific needs and interests to be protected (including governmental interests) and the special requirements and dynamics of the situation. Lesser responsiveness to practical needs and objectives is therefore implied in this approach, which is rule based and uses the conflict notions mainly as technique. It is as such a typical by-product of legal positivism in the statist approach to law formation and application. This also affects the social aspects of a case, which may require a more incidental solution as well. It was already mentioned in section 2.2.1 above, but may also need some further clarification. Locally, a solution is often provided, at least in contractual matters, by the application of good faith notions or through common sense and established practices in the commercial sphere. In an international professional context, however, these practical considerations and social needs may acquire an independent meaning, which local laws can hardly discount or express. They may have a substantive law impact with which private international law cannot always adequately deal. For example, in international professional dealings, there may be much less need for good faith adjustments than local laws may assume, but it is not clear how choice of law rules aimed at finding the appropriate local law can deal with such an independent international requirement. We see here transnational policy or value requirements opposing domestic laws of a similar nature. Either way, the traditional private law conflicts rules are left behind. Some of this is acknowledged, and modern developments in Europe have led to some amendments of the traditional conflicts approach. As we shall see, the changes have been more profound in the US. For example, the newer European approach allows consumers and workers the protection of their own law as a matter of non-choice (of law), compare Articles 5 and 6 of the EU Rome Convention 1980 on the Law Applicable to Contractual Obligations, now Articles 6 and 8 of the EU Regulation of 2008 (see also section 2.2.1 below), and gives maintenance creditors the benefit

678 eg, when determining whether particular aspects of a case are contractual, tortious or proprietary—as in the formalities and validity of bulk assignments, including trans-border receivables. See for the difficulties in this respect under Art 13 of the EU Regulation of 2008 (Rome I), Vol 4 s 1.9.3 and Vol 5, s 2.4.5.

330 Volume 1: The Nature, Status and Function of Private International Law of the best rule for them, compare Articles 5 and 6 of the Hague Convention on Maintenance Obligations (see also section 2.2.1 below). More universal substantive principles of fairness and reasonableness are increasingly applied more directly and the need for a sensible outcome is also more readily acknowledged. This is more particularly so in the US in interstate conflicts; see section 2.2.2 below. These principles may lead to new and uniform substantive rules at the transnational level, which therefore apply before the more traditional choice of law rules. One can see that this by itself would ultimately lead to adopting the lex mercatoria approach in international commerce and finance with its different transnational sources of law and their hierarchy (derived in method from public international law, see section 1.4.5 above). The substantive law approach through uniform treaty law may then be seen as another consequence of this insight even if the result may still be only partial coverage and even then be unsatisfactory (see more particularly section 1.4.11 above). In any event, as was submitted, this treaty law needs still to be put in the context and hierarchy of the other sources of transnational law. It is indeed the position of this book that in the end in international trade, commerce and finance, the lex mercatoria approach provides the more satisfactory alternative. It is particularly inspired by the freeing of the commercial flows and their nature or the globalisation of the markets in the professional sphere and the independent legal order there created. Under it, the traditional conflicts rules and the national laws they introduce play only a residual role (see sections 1.4.13 and 2.1.1 above and section 3.2.5 below). What happens here is that the number of substantive transnational rules in terms of fundamental and general principle, custom and practices, and party autonomy are ballooning under pressure of the globalisation of the commercial flows and apply before conflicts’ rules become necessary, thus reducing local laws to a residual role, although in areas where transnational law is not yet developing, they may still have a substantial impact assuming that the result makes sense in terms of the needs and dynamics of international commerce and finance. To that effect, it was submitted, these residual domestic rules are shorn off their local peculiarities and become part of the transnational law itself. Within the modern lex mercatoria approach, fundamental principle, custom and practices, general or common rules thus take precedence over private international law or conflict of laws rules in the hierarchy of norms. This approach of ‘conflict removal’ was early on identified as unavoidable, even by conflicts specialists, and is the essence of the modern development in conflicts resolution, at least in the law of property and obligations.679 It still requires, however, a view on the treatment of governmental interests or policies and values at the transnational and domestic level, a matter more broadly discussed in section 2.2.6 below.

2.2. The Modern European and US Approaches to Conflicts of Law 2.2.1. Refinement of the European Model of Private International Law As we have seen, private international law or conflicts law as it developed in the nineteenth century tended to be rule-, not fact-, interest- or protection-oriented, and automatically assumed

679 cf KH Nadelmann, ‘Marginal Remarks on the New Trends in American Conflicts Law’ (1963) 28 Law and Contemporary Problems 860; and G Kegel, ‘The Crisis of Conflict of Laws’ (1964) 112 Recueil des Cours 260.

Volume 1: The Nature, Status and Function of Private International Law 331 the appropriateness of the application of a national law to international transactions and a satisfactory outcome to the international dispute under the domestic law whose applicability was derived in this manner from the application of its conflicts principles. However, further refinement proved necessary and even in the traditional European mould, there is now everywhere an increasing search for a more refined private international law approach allowing for: (a) the separation of the various aspects of a legal relationship (dépeçage) so that for different aspects different domestic laws may be appointed: see Article 3 of the EU Regulation of 2008 on the Law Applicable to Contractual Obligations (Rome I); (b) the unavoidable consequence was the breaking up of the legal regime in domestic parts and the risk that the sum total of these parts did not add up to an adequate legal regime of the whole; (c) reliance on concepts such as the centre of gravity, closest connection and most characteristic obligation with the flexibility they provide; compare Article 4 of the EU Regulation; (d) open or exception clauses allowing for the application of a different (domestic) law altogether if another law in the circumstances as a whole is manifestly more closely connected (Article 4(3) of the EU Regulation); (e) more substantive rules, often mandatory especially in the area of the protection of consumers and workers (see Articles 6 and 8 of the EU Regulation) frequently allowing them the protection of their own law, even though still fashioned as a conflicts rule rather than overriding public policy,680 while sometimes the most favourable rule could also apply as in the case of maintenance creditors under the Hague Convention on Maintenance Obligations; (f) adjustments of the results, for example in the case of the recognition of foreign proprietary rights and security interests to the nearest equivalent in the lex fori in assets that move to other countries or figure in a bankruptcy elsewhere; (g) abandonment of conflicts rules altogether and the (discretionary) acceptance of (a degree of) extraterritoriality in the case of foreign public policy and similar mandatory rules (or règles d’application immédiate) (Article 9 of the EU Regulation); (h) the result obtained under the conflicts rule generally being tested on its appropriateness; compare Article 8 of the previous 1992 Dutch draft of the Introductory Statute Law concerning Private International Law amended in 2002, discussed in section 2.2.4 below, allowing for adjustment within or even outside the concept of public order (or local values); and (i) the possibility of the choice of a non-statist law, such as in commerce and finance the modern lex mercatoria (see Preamble (13) of the EU Regulation), although it might still not be applied more directly (by the ordinary courts) without such authorisation by the parties (it could be different in international arbitration). The end result has been a substantial refinement of the method of von Savigny and his successors. Even if the system remains based on a number of hard and fast rules, they are more flexible. Yet in essence, the idea of the applicability of (an appropriate) domestic law to international dealings and flows is fundamentally maintained. It nevertheless marks the increased unease with the traditional conflicts notion, even in Europe, although not the ready acceptance of the transnational law alternative, even for the international professional sphere, unless perhaps when preferred by the parties as their choice of law.

680 See also CGJ Morse, ‘Consumer Contracts, Employment Contracts and the Rome Convention’ (1992) 41 ICLQ 1, and TM de Boer, ‘The EEC Contracts Convention and the Dutch Courts, A Methodological Perspective’ (1990) 54 Rabels Z 24.

332 Volume 1: The Nature, Status and Function of Private International Law Many still see the law, even commercial law, as anchored in sovereignty rather than in social and economic realities. In such an atmosphere, even transnational notions of good faith cannot develop in international contracts. Social policies and values also remain national. Transnational values or minimum standards cannot exist. Another consequence of this approach is that it remains in essence rule based rather than interest-, fact- or protection -oriented. Even though (surprisingly) also greatly popular in England, it shows its nature more in particular as corollary to the civil law codification approach.

2.2.2. Developments in the US In the US, since the 1930s, unease with the nineteenth-century conflicts rules has led to a substantially different approach, at least to interstate conflicts and it spilled over also into international conflicts although not necessarily to the same extent. This example later also tended to liberate the European attitude to some extent, as was shown in the previous section but the flexibility it brought remained more limited. The new European attitude remains basically cast along the lines of the propositions enumerated in the previous section, which were substantially embodied in the 1980 EU Rome Convention, succeeded by the 2008 EU Regulation on the Law Applicable to Contractual Obligations. It remains rule and is not interest or policy oriented. In the US, conflicts law has lost its hard and fast, rule-oriented character altogether and has become no more than an aid to what is believed to achieve a more rational and acceptable result. That does not strictly speaking require the application of a particular state law. It could be an adaptation or mixture or rather an application of a more fundamental legal or rational principle. It could even suggest an adaptation of local rules (lex fori) to the nature of trans-border transactions, the result of which could in fact be the application of a transnational rather than a national rule as a matter of expansive interpretation of the lex fori in international cases. It is important in this connection to appreciate that the earlier developments in the US towards flexibility took place against a somewhat different background, in interstate rather than in international cases. It should be understood that other influences were at work here also. First, in the US interstate, the area for conflicts of private law is reduced through the existence of the common law, which, with the exception of Louisiana and some nineteenth-century Spanish influence via Mexico in the southern and western States, essentially led to a fairly homogeneous system of civil and commercial law throughout the US. Although the common law is unavoidably fractured by State intervention through statutory, more policy-oriented laws, for example in the area of product liability, this diversion may in modern times be counterbalanced by the UCC in other areas, particularly in commerce. Yet some divergence remains unavoidable, particularly because of the mandatory protection- or own interest-inspired policy enactments (leading to specific governmental or regulatory interests) of the various States. States may thus have differing and outspoken policies on insurance protections, on liability for passengers (guest statutes), on product liability, and in environmental matters. On the other hand, much policy is exerted at the federal level so that policy issues are more likely to figure as an issue in international conflicts cases than in interstate conflicts cases, as for example, in competition matters, boycotts, embargoes, and so on. Second, it demonstrates that legal differences are usually policy-oriented and that became very much the American perception. In the common law tradition, no sharp distinction is made here between the public and private law aspects of such intervention. Putting the emphasis on government intervention itself or more generally on policy (whether in public or private law),

Volume 1: The Nature, Status and Function of Private International Law 333 this tends to reduce the area for true private conflicts of law even further. They are often ignored, unless they can be limited to a mere difference in policy. In this manner, in the US in interstate conflicts, all conflicts of law enter the ambit of what in Europe are called the règles d’application immédiate (see section 2.2.1(f) above), where for governmental action or mandatory laws a form of comity or judicial discretion also continues to rule in civil law countries as we have seen. It is less surprising in the US if one realises that in the nineteenth century, Story had maintained the Dutch comity approach to all private law conflicts in the US. This tended to result in an interest-driven approach across the board, even in the more traditional areas of private conflict of laws as in contract, tort and property. The American approach thus remained more comfortable with judicial discretion all round and highlighted at the same time the importance of (adjudicatory) jurisdiction (rules). It ultimately put particular emphasis on the lex fori and its interpretation techniques in accommodating foreign (sister state) interests, both of a public and private nature, which, as just mentioned, are in common law in any event not so clearly distinguished, while the effect and impact of the latter are much reduced through the operation of the common law in most states and of uniform law as noted. Section 6 of the Restatement (Second) of Conflict of Laws (1971) reflects this attitude and introduces a flexible conflicts rule which explicitly rejects any rigidity or automaticity. It allows a court to apply its own mandatory rules on choice of law in the absence of which a number of factors are provided for consideration. They centre on the needs of the interstate system, the relevant policies of the forum, the relevant policies and interests of other States in the determination of the issue, the basic policies underlying the particular field of law, the certainty, predictability and uniformity of the result, and the ease in the determination of the law to be applied. Again, it should be kept in mind that in the US, this approach to interstate conflicts is often distinguished from the approach to international conflicts and the domestic attitude may not automatically be extended to the latter, although it is unavoidable that the approach to international conflicts is becoming similar.681 In interstate conflicts, the accent is in fact primarily on a satisfactory solution with regard to the interests to be protected in the particular case in the light of all rules potentially applicable in order to achieve the application of ‘the better law’.682 Again it may mean a more direct and substantive law approach. One of the early leaders of this new movement (regardless of its many variants), Professor Brainerd Currie from Chicago,683 who adopted an interest analysis, saw in it essentially a return to the true method of the common law and a denial of the continental European approach of von Savigny (although this German approach acquired and still has particularly deep roots in England). In more modern terminology, it may perhaps be said that facts and needs rather than rules dominate. That is indeed the common law inheritance. The idea of clear conflicts rules as essential conduits to reach a domestic law is here abandoned. In interstate conflicts in the US, the applicable law may be reached by other means, either through a reinterpretation of the lex fori in the light of the foreign elements of the case or more directly through reliance on general principles, especially of due process and fairness under the relevant provisions of the US Constitution. It is thus possible to weigh the various opposing interests independently of any particular conflicts law or even domestic law. The search

681 See AA Ehrenzweig, Private International Law, A Comparative Treatise on American International Conflicts Law, including the Law of Admiralty, General Part (Leyden, 1974). 682 A term particularly used by R Leflar, American Conflicts of Law (Indianapolis, IN, 1977) 205. 683 B Currie, ‘The Verdict of Quiescent Years’ in Selected Essays on the Conflict of Laws (Durham, NC, 1963) 627.

334 Volume 1: The Nature, Status and Function of Private International Law for objective, rule-oriented elements of conflicts laws, so prevalent in the traditional European conflicts approach, is here abandoned.684 Even though the Americans often continue to use private international law terminology (compare, for example, the reference to the most significant relationship in section 188 of the Restatement (Second) of Conflict of Laws for contracts and in section 145 for torts (both subject to the already mentioned section 6, however), they appear to gravitate ultimately to directly applied substantive principles of reasonableness and fairness. Domestic laws are mere guidance. In this connection, the constitutional due process and full faith and credit clauses, as just mentioned, may provide a more specific base for these higher principles in certain cases. Under them, the arbitrary application of individual State law and the automatic rejection of the law of other States is unacceptable while a system of pure conflicts rules is discouraged at the same time. This attitude is further buttressed by the important facility to litigate in the federal courts in disputes where there is a diversity of citizenship (and a certain minimum amount at stake), even if state law remains in principle applicable. To the extent conflicts of law arise in bankruptcy cases, these are also handled in federal courts under the federal Bankruptcy Code, which may concern many issues under Article 9 UCC. European criticism of the American approach centres on the high level of judicial discretion allowed and the supposed lack of predictability. It is also considered too dependent on the forum and its own laws, in turn leading to considerable dependence on the rules of (adjudicatory) jurisdiction, which may promote forum shopping, it was already mentioned.685 The lack of rules is clearly felt. This is somewhat strange in countries which now often use a very flexible good faith approach and liberal interpretation technique. Nevertheless, in practice, there is approximation between the European and American approaches, of which, as was shown, in Europe the earlier EU Rome Convention and now the EU Regulation are the clearest examples and of which Article 8 of the previous Dutch proposals for a new private international law statute (completing its 1992 recodification) were the culmination, allowing the applicable law derived from the conflicts rules to be set aside if the result was inappropriate, unreasonable or unfair (see section 2.2.4 below). There is in any event little doubt that the European conflicts approach—as indeed the general approaches under national laws, especially where imbued with the good faith ethos—is becoming gradually more sensitive to the nature of the parties’ relationship, the interests to be protected, the nature and objectives of their deal in its (international) context, the application of general principles of fairness, market and business requirements and practices, and of directly applicable substantive rules either of a mandatory or protection nature. It allows the fairest or most favourable domestic rule to prevail, although in this context use is often still made of pseudo-conflict language. Given this gradual change in attitude, however, one may also expect a greater receptiveness to substantive transnational rules, therefore in commerce and finance to the modern lex mercatoria for professional cross-border dealings.

684 See for an up-to-date case book DP Currie, HH Kay, L Kramer and K Roosevelt, Conflict of Laws, Cases, Comments, Questions, 7th edn (Mineapolis, 2006). It sets the tone in the Preface: ‘Law comes from many sources. In an ideal world, the authority of these sources would be clearly defined and neatly demarcated … but such is not our world.’ 685 See notably G Kegel, ‘The Crisis of Conflict of Laws’ 112 Recueil des Cours 95 (Hague Lectures, 1966), and ‘Paternal Home and Dream Home: Traditional Conflict of Laws and the American Reformers’ (1979) 27 American Journal of Comparative Law 615; R De Nova, ‘Historical and Comparative Introduction to Conflict of Laws’ 118 Recueil des Cours 443 (Hague Lectures, 1966); P Lalive, ‘Tendances et méthodes en droit international privé’ 155 Recueil des Cours 1 (Hague Lectures, 1977); E Vitta, ‘Cours general de droit international privé’ 162 Recueil des Cours 9 (Hague Lectures, 1979).

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2.2.3. The Various Modern US Conflicts Theories As we have seen in the previous section, in US interstate conflicts the accent has been increasingly on the evaluation, acceptance or rejection of so-called governmental interests or policies, understandable because most differences in the applicable law derive in the US from the legislative governmental intervention of the various States with clear policy objectives. This approach leads on its own to a predominance of the lex fori if the forum State has a particular interest in the application of its law in respect of everything that happens on its territory. If not, the law of the other interested State is applied and if there are more States with an interest, the court may revert to its own law or apply what is in its view the superior policy. Whether or not this leads to a balancing of these interests proper is contested. It would seem unavoidable but courts have sometimes been thought to be ill-suited for it. This at least was the view of Professor Currie, who started the new thinking, in which courts were never to apply another law but their own, except where there was a good reason for doing so under the rules just mentioned.686 This form of rigidity is now not generally followed,687 but there is here a strong element of a lex fori (or homeward trend), which returned in the US in all the newer theories, most generally so in that of Professor Albert A Ehrenzweig of the University of California at Berkeley688 unless there were settled rules of choice that had worked satisfactorily, such as the application of the lex situs in the proprietary aspects of physical assets that do not move. As already noted in the previous section, in this lex fori approach, the accent is not then merely on governmental interests, but the application of the lex fori in this sense becomes principally a matter of interpretation of the forum’s laws, including its private laws, aiming at the accommodation of all foreign elements of each case within it. In this lex fori approach, the attention naturally shifts to the proper forum applying the proper (own) law of the forum, as may be adjusted (lex propria in foro proprio), with the resulting emphasis on proper jurisdiction rules based on substantial contacts, which itself also suggests a discretionary element or at least some flexibility. Conflicts of laws in the traditional sense do not arise here. It was already said that all foreign rules (even of private law) then operate like règles d’application immédiate in a European sense, in their application subject to the evaluation of their relevance by the forum as an expression of its

686 See B Currie, ‘A Critique of the Choice of Law Problem’ (1933) 47 Harvard Law Review 173 and also his Selected Essays (n 683) 119, 621. A governmental interest is here defined as a governmental policy and the concurrent existence of an appropriate relationship between the State having the policy and the transaction, the parties, or the litigation. 687 Besides aversion to balancing and the consequential preference for the lex fori in the case of conflict, there are two other important aspects to the interest analysis in the manner of Prof Currie. It is in this approach first necessary to determine the governmental interests as they may appear from numerous statutory texts and case law. This requires purposive interpretation and may introduce a considerable degree of uncertainty while the attribution of a purpose may become fictitious or unrealistic and may also lead to a special protection of forum residents, see eg, L Brilmayer, ‘Interest Analysis and the Myth of Legislative Intent’ (1980) 78 Michigan Law Review 392. In the process, interests other than State interests may easily be ignored. Closely related is the question whether there is a true or false conflict. The latter arises primarily when both ‘conflicting’ laws would yield the same result; see on this issue D Cavers, The Choice of Law Process (Ann Arbor, MI, 1965) 89. 688 AA Ehrenzweig, ‘The Lex Fori—Basic Rule of the Conflicts of Laws’ (1960) 58 Michigan Law Review 637. The local law theory can be traced to Judge Learned Hand in Guinness v Miller 291 Fed 768 (SDNY 1923) and to WW Cook, ‘The Logical and Legal Basis of the Conflict of Laws’ (1924) 33 Yale Law Journal 457. Here the idea is that instead of foreign vested rights, there are only rights created in the forum state even though often in the form of recognition of foreign rights, which then may be adjusted.

336 Volume 1: The Nature, Status and Function of Private International Law own social policy.689 Again, it is an expression of the American view that law is in essence policy, see the discussion in section 1.3.5 above. In this way, we seem to be back entirely in the comity approach, although with a more conscious effort to develop some rules (see also section 2.2.6 below). On this view, there is, however, only one applicable law possible, which is the law found in this manner and tailored to the case. It is strongly fact-oriented and as such more typical for the common law although as such no longer so perceived in England. In contract, it results in the application of the law that best supports its true meaning given the situation in which it is to operate, but it could still mean respect for performance and foreign exchange or investment restrictions in the country where the performance should take place, especially if that is the country of the forum, assuming the contract still makes sense. If not, it could be at an end. In the case of a tort, it could mean respect for foreign limitations on liability, but the lex fori’s own views on reasonable protection of victims and equitable distribution of unavoidable loss in the circumstances would ultimately prevail. Under the influence of Professor Willis Reese of Columbia University, the Restatement (Second) Conflict of Laws (1971) adheres more to the ‘centre of gravity’ approach.690 Earlier, Professor David Cavers of Harvard had proposed a method with outright emphasis on the most satisfactory result through the interpretation of rules and policies,691 but he still allowed some principles of preference to develop and to be taken into account, notably protecting weaker parties and party autonomy in contract.692 The theory of Professor Leflar (Choice-influencing Considerations or Factors) came close to an elaboration of this approach, although seemingly more receptive to foreign interests.693 His choice of influencing factors were predictability of result, maintenance of the interstate or international order, simplification of the judicial task, advancement of the (individual) state’s governmental interests, and the application of the better rule of law requiring courts to undertake some more objective evaluation. Von Mehren and Trautman in their ‘functional approach’694 finally sought a balance or accommodation between the domestic interests and those individual and state interests which became relevant in multistate situations. If such an accommodation failed, promotion of interstate activity, the parties’ intent, or judicial economy and simplicity was to prevail.695 One could criticise all these theories and indeed no less the traditional approach of von Savigny to the conflicts of laws, on the basis that they do not define any clear objective, except that in the American approach the forum’s support of its own system and especially policy, whatever their merit, is often unashamedly clear, at least if there is some relevance in the case. Only in the approach of Leflar was this somewhat different but it lacked the elements of evaluation. Ultimately, these elements merge in the application of better or more just laws, which implies a substantive law approach around a difficult value judgement that often leads to the application of the forum law. That is the homeward trend, but it need not be so. At least the forum law could be recast to take care of the foreign elements in the case. In that event, for commercial

689 See Ehrenzweig, n 681 above, 92ff. 690 See also W Reece, ‘Conflict of Laws and the Restatement Second’ (1963) 27 Law and Contemporary Problems 679. 691 See D Cavers, ‘Critique of the Choice of Law Problem’ (1933) 47 Harvard Law Review 173. 692 See D Cavers, The Choice of Law Process (Ann Arbor, 1965). 693 See R Leflar, American Conflicts of Law 3rd edn (Boston, 1977). 694 A Von Mehren and D Trautman, The Law of Multistate Problems (Boston, MA, 1965) 304. 695 See for a more recent discussion and evaluation of the American approaches in particular, E Vitta of Florence, ‘The Impact in Europe of the American “Conflicts Revolution”’ (1982) 30 American Journal of Comparative Law 1 and the important contributions of other authors in the same issue of that journal.

Volume 1: The Nature, Status and Function of Private International Law 337 transactions there could also be an element of efficiency and cost to consider, which is perhaps easier to evaluate. This substantive law approach may also be the more receptive to the lex mercatoria, and therefore to broader considerations of uniform law.696 It has already been said that law and economics are also likely to support such an approach, although this is not so far its focus in the US. The American approach to conflict of laws is clearly more sensitive to substantive law considerations than the European approach, but it is true that the legal criteria often remain elusive, although there is a large body of case law. All the same, the notion that domestic laws may altogether be inappropriate to deal with international legal relationships remains also under-explored here. Special problems with this homeward approach, to the extent existing in the US, result in international commercial arbitrations that have no natural forum law and are therefore forced into balancing policies more acutely, whether they like it or not, see further the discussion in Volume 2, section 1.2. It depends foremost on the pleadings of the parties but the Restatement (Second) of Conflict of Laws and the Restatement (Third) of Foreign Relations Laws may provide at least some guidance: see more particularly section 2.2.6 below.

2.2.4. The European Approach: Exception Clauses, Reasonable and Fair Solutions in Dutch Proposals In Europe, more particularly in civil law countries, the American approach has not gone unnoticed, and, as we have seen in section 2.2.1, its flexibility has elicited a response of which there was some tangible evidence in the 1980 Rome Convention on the Law Applicable to Contractual Obligations, now succeeded by the 2008 Regulation (Rome I). Thus, it referred in Article 4 to the applicability of the law of the country with the closest connection with the contract, and presumed this to be the country in which the most characteristic performance took place. Subject to a list approach, that system has been maintained in the 2008 Regulation. It left room for another law if the circumstances as a whole suggested that the contract is more closely connected with another country, maintained in the present Article 4(3).697 This approach remains principally wedded to the application of domestic laws only. In this connection, problems often arise when delivery and assembly of goods take place (by the seller) in the country of the buyer, while the seller’s most characteristic performance is presumed to take place at its residence, pointing to its own law as the most appropriate. The problem can be particularly pressing in the construction industry, where all kinds of local rules at the site may in any event prevail as semi-public or mandatory law.

696 cf also F Juenger who, in Choice of Law and Multi-State Justice (Dordrecht, 1993) 45, 190, notes the type of transaction and its requirements. Note also the approach of the UCC in s 1-301 to the extent that the uniform law still creates conflicts of law. It relies on a ‘reasonable relationship’ and allows parties to elect the law assuming that that relationship exists. In other areas, the contractual choice of law is explicitly limited or excluded as in s 1-301(f) and (g). More specifically at issue here are the rights of creditors in sold goods (s 2-402), leases (ss 2A-105 and 2A-106), bank deposits and collections (s 4-102), funds transfers (s 4A-507), letters of credit (s 5-116), investment securities (s 8-110), and the perfection provisions of Art 9, ss 9-301–9-307. One may recognise here proprietary issues that are not usually at the free disposition of the parties in view of their third-party effect. 697 See for the first English application, Bank of Baroda v Vysya Bank [1994] 2 Lloyd’s Rep 87 in a letter of credit case.

338 Volume 1: The Nature, Status and Function of Private International Law Use of selling agents in the other country may also complicate the picture, but does not necessarily shift the balance of the contract towards the other party under the Regulation.698 The problem of the place of the most characteristic performance or closest connection also arose in connection with Article 5(1) of the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, which ties jurisdiction in contractual matters to the place of performance of the contract rather than the residence of the performer, now replaced by Article 5(1) of the EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters of 2000, effective 1 March 2002, which is more specific in Article 5(1)(b) for the sale of goods and the rendering of services by opting for the place of delivery in the first instance and the place where the services are or should be rendered in the second.699 Thus, the place of performance rather than the residence of the performer may sometimes be more relevant. Exceptions may thus be made, hence this technique of the so-called exception clauses, as a further modification to the traditional conflicts approach in Europe. In statutory conflicts law, in tort, one sometimes sees similar corrections to the lex locus delicti, in that case in favour of the law of the forum (usually that of the tortfeasor as defendant) if both parties to an accident, which took place elsewhere, are resident in the same country, see, for example, Article 45(3) of the Portuguese General Private International Law Statute of 1965 and Article 31(2) of the Polish Private International Law statute of the same year. This may also result in the law of the forum (of the defendant) being always considered more closely connected, such as under the open adjustment possibility of Article 15(1) of the Swiss Statute of 1987, not applicable, however, if the tortfeasor could have foreseen that the result of his action would be produced in another country (see Article 133(2)). As mentioned above, social considerations such as the protection of consumers and workers have given rise to the setting aside of traditional conflicts rules altogether, in such cases in favour of their own laws (Articles 6 and 8 of the EU Regulation). It may still be seen as a conflicts approach of sorts, but only in the sense that it ultimately points to a domestic law. In truth, it is an exception clause and there is really no choice of law at all. As pointed out before, the Hague Convention on Maintenance Obligations gives maintenance creditors the benefit of the best rule for them. They thus have a choice. This is not a proper choice of law or conflicts rule either but again an exception clause. Dutch law in its 1992 draft Introduction Statute to Private International Law (Article 8) extended the common public order exception to the application of a conflicts rule, and allowed considerations of reasonableness and fairness always to affect the result. In this connection, it did not suggest the application of the law of any other country (with a closer connection), although according to some this was still implied. The rule was more properly a sequel to Article 6.2(2) of the new Dutch CC, which submits all applicable private law, be it statutory or customary, to the requirements of reasonableness and fairness, and allows at least in the law of obligations the necessary corrections in the result as an autonomous function of the forum. In the area of conflicts

698 See in the Netherlands, HR 25 September 1992 [1992] NJ 750, which interpreted Art 4(5) restrictively and in case of doubt found for the presumption of Art 4(2). The Court of Appeal of Versailles was much more forthcoming in favour of a rebuttal of this presumption, see its decision of 6 February 1991 [1991] Revue Critique de Droit Intern Privé 745. 699 See the Dutch case cited in n 700 below, and further also Dicey and Morris on the Conflict of Laws, 14th edn (London, 2012) r 223, 1820 and r 35, 478.

Volume 1: The Nature, Status and Function of Private International Law 339 laws proper, this is closer to the modern American approach than may be found anywhere else in Europe, and was to be welcomed. Arguably, this autonomy was still an aspect of the lex fori, although it could also be seen as an aspect of the transnational public order. For conflicts, this approach received little support, however, in Dutch private international law scholarship, which is still on the lookout for clarity and certainty under some domestic rule. A new draft of 2002 was therefore more modest, and removed the references to reasonableness and fairness from the public order exception (Article 12). The notion of public order remained undefined in this connection, however, and could therefore still cover some fundamental legal principles maintained by the forum, regardless of conflicts law or theory. They may (but need not) derive from international agreements or from EU legislation concerning, for example, market manipulation, money laundering and the protection of the environment or cultural objects. Thus, it would appear that, within the public order exceptions, compelling Dutch notions of fairness and reasonableness may still be used to test the result of the application of conflicts rules, even though this is no longer expressly stated. Of course, this may also be done elsewhere, but in the Netherlands it would be supported by the general approach of Article 6.2(2) Dutch CC. The discussion of a draft bill of 2009, codifying the conflict of laws rules in the last book (10) of the new Dutch Civil Code, since adopted, did not provide much further clarification. Notably, the German Statute of 1986 and the Italian Statute of 1995 did not introduce similar flexibility. Also, Article 15 of the Swiss law does not go so far, and remains well within the proximity approach and traditional conflict of laws solutions. Again, the ultimate question remains whether the application of any domestic law continues to be appropriate in international cases, especially if playing themselves out in the international professional sphere in manners and forms that have no domestic equivalent and were never considered by national laws. The corrections to the applicable (domestic) law through exception clauses may not apply to situations where the parties have made a contractual choice of law, but there are even then exceptions in the case of consumer and workers’ contracts in order to protect the weaker party under Articles 6 and 8 of the EU Regulation (Rome I) as we have seen. Moreover, it can only be repeated that a contractual choice of law is not always fully effective, certainly in matters which are not at the free disposition of the parties to regulate among themselves, as in private law is often thought to be the case in proprietary matters, therefore in respect of any third-party effect. In contractual matters, mandatory rules of a country with which all elements relevant to the situation are connected (at the time of the choice) cannot be set aside either (Article 3 of the EU Regulation). Also, in tort matters the freedom to choose an applicable law is not always unrestricted: it is limited to the lex fori in Switzerland (Article 132), see for the discussion on a contractual choice of law and its meaning also section 1.4.13 above. Finally, corrections to the conflicts rules and applicable laws thereunder may also result indirectly from forum non conveniens considerations in the applicable jurisdiction. However, this concept, which is of Scottish origin and now generally adopted in common law countries, remains alien to continental European thinking and does not figure in the Brussels and Lugano Conventions on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters either, nor in the 2002 EU Regulation replacing the Brussels Convention (Brussels I). In domestic law, the forum non conveniens notion, where known, is sometimes restricted to a correction of the choice of jurisdiction by the parties, see Article 5(3) of the Swiss law of 1987, which allows rejection of the choice of Switzerland if neither party has a domicile, residence or establishment in that country. Article 429 of the (old) Dutch CCP rejected the election if neither party had a sufficient contact with Dutch public order, while case law required an interest (which could exist if Dutch law was applicable, the Dutch language was used, or a specialty of Dutch

340 Volume 1: The Nature, Status and Function of Private International Law courts such as shipping matters in Rotterdam, was involved).700 It could be seen as an expression of the forum (non) conveniens doctrine in continental terms. New Dutch legislation concerning international jurisdiction confines itself to the criterion of foreign parties being able to show an interest: Article 8(1) CCP. The European response to the modern American theories is significant, but, as shown above, remains incidental, and is thus often expressed in terms of corrections to the prevailing proximity rules by substituting another conflicts principle. A more open system based on the acceptability of the results remains exceptional, and is not even now the law in the Netherlands or likely to be accepted without much further discussion elsewhere.701

2.2.5. The Role of Practitioners. Emphasis on Facts Rather than on Rules: The Nature of the Relationship of the Parties and the Nature of the Transaction Distinguished. The Effects of Transnationalisation The difference between the classical and more modern approaches to conflict of laws is often dictated by temperament and practical experience. This difference pervades the approach to all law and its formation and application generally, but is of particular interest in attitudes to conflicts of law and no less to the new law merchant or lex mercatoria. In fact, it may also be seen in modern foreign investment law as part of public international law, which—with its dependence on customary law, general principle and treaty law—has much the same structure as the modern lex mercatoria. What we are talking about in the more modern approaches is: (a) a search for predictability in the behavioural patterns of the participants and peer group (and their transactional structuring) rather than in a set of hard and fast super-imposed rules of whatever nature supposed to bring ultimate clarity; (b) a degree of suspicion towards artful rules that provide an appearance of certainty but solve nothing;702 (c) a level of comfort with and acceptance of a measure of flexibility in respect of the applicable (black-letter) law in order to facilitate (d) a search for better, fairer or more sensible and practical results, thus substituting a normativity which accepts that in appropriate cases transnational law will apply in which reliance on legitimate expectations under accepted practices can figure high; 700 See also HR 1 February 1985, NJ 698 (Piscator, 1985). 701 See for the subject of the exception clauses and forum non conveniens also the reports to the 14th International Congress of Comparative Law in Athens, and especially the general report of D Kokkini-Iatridou, Les Clauses d’ Exception en Matière de Conflits de Lois et de Conflits de Jurisdiction [Exception Clauses in Conflicts of Laws and Conflicts of Jurisdictions—or the Principle of Proximity] (Dordrecht, 1994) 3. The author proposed—with reference to JG Castel, ‘Commentaire sur certaines dispositions du Code civil du Québec se rapportant au droit international privé’ [‘Commentary on certain rules of the civil code of Quebec concerning private international law’] (1992) Journal du Droit International 630–02—a second phase in the openness debate and, while criticising Art 8 of the Dutch proposals of 1992, suggested that, exceptionally, the traditional conflicts rules should not be applied if in all the circumstances it would be better to apply the law of another state, thus returning to the application of a particular domestic law with an emphasis on rules rather than on interests and results, the proximity notion being exceptionally abandoned, however. It is unlikely to be more satisfactory than the other exception clauses looking for better domestic laws to apply in international cases. 702 See for the more convoluted results, even by conflict of laws standards, particularly the approach in tripartite situations such as agency, Vol 3, s 3.2; bills of lading, Vol 4, s 2.1.9; bills of exchange, Vol 4, s 2.2.10; and assignments, Vol 4, s 1.9.

Volume 1: The Nature, Status and Function of Private International Law 341 (e) allowance, including in international cases, for ethical, social, economic (efficiency) and environmental considerations to be taken into account, which are not necessarily of a national character either but respond to international values and transnational public policy (in which connection reference may also be made to the transnational public order or transnational minimum standards). There is always tension in these aspects in view of the facts of the case, the interests to be protected, the needs of the parties in this respect, and the impact of public policy, and thus between more positivist and teleological or normative approaches, aggravated where the conflict rules themselves are contrived or remain uncertain and contested as in the proprietary aspects of many modern financial transactions and set-off facilities. It is true that practising lawyers often continue to rely on a domestic law (preferably their own and otherwise on hard and fast conflict rules) in a mistaken search for certainty and clarity in this manner. In this connection, they are often also oblivious to the limited or potentially adverse impact of a contractual choice of domestic law (even their own), which might prove entirely unsuitable in the circumstances. For example, domestic good faith considerations may play out very differently in international transactions as has already been noted. In a highly regulated environment, a choice of law by the parties may in any event cover much less ground than is often believed and it must then be established how far these contractual choice of law clauses reach. It has already been said that they can only affect issues that are truly at the free disposition of the parties to settle the way they choose. They cannot therefore easily concern proprietary issues either, which, by their very nature, involve third parties as competing interest holders or creditors of the transferor. They cannot avoid consumer and small investor protections. They cannot circumvent tax and regulatory law. Even when chosen in international transactions, the applicable law must still find its place among the other sources of law operating at the transnational level and itself becomes only one of them. This was discussed in section 2.1.1 above, and this discussion will be resumed in section 2.2.9 below. Many practitioners do not like to consider these issues at the time of the formation of the contract. It is against their instinct and it could also mean that the contract might have to be handled by lawyers from other jurisdictions. More generally, the suitability of the chosen law is difficult to judge by lawyers who are mainly educated in one legal system only (their own).703 Of course, the more the concept of transnational law or the modern lex mercatoria starts to prevail, the quicker the monopoly of the lawyers who like to hide behind their own law would disappear. The legal profession itself would then be opened up in the handling of international cases, which would no longer be exclusively subject to any party’s domestic legal regime and rules. It is becoming increasingly apparent that the better result is likely to be obtained under the evolving rules of the legal order in which the transactions take place, such as in trade and finance, the international commercial and financial legal order and its new law merchant or lex mercatoria as will be shown more in detail in Part III below. This realisation alone may more readily produce corrections to the prima facie applicable domestic law in international cases, at least in the professional sphere, where parties are used to some uncertainty while often taking greater risks. That does not mean that they will not try to unbundle legal risks and seek better to protect against these risks in the structuring of their transactions. In fact, it has already been said that transnationally the major law firms and probably now even more so the in-house law departments, which are more used to managing legal risk, may prove to be the foremost spokespersons for the

703 See also text following n 674 above.

342 Volume 1: The Nature, Status and Function of Private International Law new order, see section 1.4.18 above. They created the legal framework for the Eurobonds and helped formulate the market practices concerning them. They drafted the swap and repo master agreements, broadened the notion of set-off in the process, and may well also find new ways in the clearing and settlement of non-standardised products. That is what transaction lawyers do and if proper analysed, they then use a combination of developing market practices, general principles and party autonomy to move things forward and stabilise new legal environments. Although obviously more difficult in international transactions, there is nothing to prove that the present legal flux, especially at the transnational level, is largely unmanageable, certainly if the approaches suggested in section 1.1.6 above for contract and movable property are better understood, but it takes imagination both of structuring lawyers and adjudicators to reduce legal risk at this level through legal transnationalisation or globalisation. It is clear that in the case of disputes, a more sensible (and quicker) solution for professionals is ultimately always more valuable than the pretence of legal certainty or clarification, based on old concepts, potentially leading to low-quality law. Again, it can hardly be produced on the basis of the application of domestic laws that were never meant for international transactions and are often entirely out of date. Indeed, in the professional sphere, corrections to any prima facie applicable domestic law (on the basis of the traditional conflicts rules) or its disapplication in the circumstances are likely to be based principally on what makes better sense and was as such expected or even relied upon by all. Transnational law or the modern lex mercatoria in the manner here explained has the advantage of being predictable in that sense and then also of being more responsive and even more precise. It has already been pointed out in this connection that for professionals this basic approach might mean rougher justice, with less, rather than more, refinement in the legal concepts used or protections afforded compared to whatever domestic law may otherwise be deemed applicable, see also the discussion in section 1.1.6 above. A more literal interpretation of the text may result, especially if the contract is meant as a roadmap and risk management tool. This was demonstrated especially in connection with good faith protection. At the transactional level, there may thus be an extra reliance on the precise wording of an agreement or letter of credit, and therefore on a more literal interpretation, compared to the civil law tradition, which otherwise may depend on a more teleological or good faith approach. A lesser acceptance of specific performance than is usual in civil law countries may also follow at the transnational level, because it is less disruptive of the commercial flows. The return of title in the goods upon default, even if the contract provides for it, may then be deemed also to go against these flows; so, under modern law, may be any contractual restrictions on assignments of receivables. Transactional and payment finality is always favoured here. Thus, for professional participants there is emphasis on certainty but rather as industry practice geared to specific situations and then reinforced, and not on certainty as a general expectation, irrationally expected from rule conformity. In fact, a more teleological and normative interpretation may itself lead to these results. The emphasis is thus on the identification and (teleological and normative) interpretation of all legal rules and principles that are in varying degrees potentially connected with the case and on the determination of their relevance in the circumstances. No rule or principle, whether or not purely domestic, has any absolute value or force in that approach while even the fundamental principles (or the ius cogens) are always subject to interpretation in the light of the circumstances of the case. Yet there are situations, as just demonstrated, where for professionals the law will cut out argument and especially sophistry in legal reasoning. The facts of the case especially in terms of: (a) the nature of the relationship of the parties; (b) the interests to be protected therein; and (c) the particular dynamics and logic of each transaction, are then likely to play a preponderant and potentially decisive role, barring overriding public policy or order requirements. This is here

Volume 1: The Nature, Status and Function of Private International Law 343 seen as the inheritance of the traditional common law approach and technique to finding and applying the applicable law. Internationality and professionality may here also acquire a special meaning, and may indeed suggest a different legal order, then called the transnational commercial and financial legal order, with its own laws (lex mercatoria), which was largely the gist of the discussions in this Volume. To put it in a more extreme form: if a rule of whatever nature does not fit the facts, it will not apply, as it cannot have been meant for them. Again, this may be more apparent where there is an attempt to extend the reach of domestic rules through private international law also to cover international situations for which they were never made and which may hardly fit. In modern times we think in any event less in terms of grand designs or systems of law—like that of the civil law or any other—but are forced to become more pragmatic, which means paying more attention to the configuration of the facts per case. This is even so at the national level, but more apparent transnationally. Emphasis on the nature or type of the relationship of the parties and their own rational requirements is now more prevalent and has also become an aspect of the notion of good faith in civil law countries, but it still remains undervalued in civil law; see the discussion in Volume 3, section 1.1.1. As will be shown there, this was always an aspect of the common law, at least in contract. It points the way, even domestically, but more so transnationally, and suggests different legal rules that might apply per relationship or existing rules that will need to be adapted to allow for any differences. That is indeed the essence of the developing transnational law merchant or modern lex mercatoria, which was earlier perceived as a hierarchy of norms among different sources of law that are all conceivably applicable, and among which domestic laws continue to figure but only as the residual rule with different degrees of prominence depending on the facts of each case, while higher transnational law will increasingly emerge on the basis of fundamental legal principle, custom, to some extent uniform treaty law (or EU Directives or Regulations), and otherwise common legal principles or party autonomy; see more particularly sections 1.4.13 above and 3.1.1 below. Domestic law found residually through the traditional conflict rules will still figure here but only as part of this transnational law itself; it must find its role therein, and will be adjusted accordingly.

2.2.6. The Issue of Public Policy or Governmental Interests and its Impact. The Notion of Comity and its Application. The Development and Operation of International Minimum Standards There can be little doubt that national governmental policies have had an enormous impact on the development of the law in the twentieth century, when it became the state’s special vehicle to effect change. This has not left private law untouched. The issue was raised in more general terms in sections 1.3.7 and 1.5.8 above. It led to many forms of regulation, which can take the form of public or private law intervention. In the first, governments will tell citizens directly what to do. In the second, they may amend private law to give citizens better protections against each other. That may be clear in company law and bankruptcy. But it is also at the heart of the worker, consumer, and investor protection laws. An example may serve as clarification. Governments may directly license and supervise financial intermediaries such as banks and investment brokers and advisors. They may impose conditions and withdraw these licences or impose further conditions in case of bad behaviour. It

344 Volume 1: The Nature, Status and Function of Private International Law is a matter of administrative law, which does not normally give individuals a private action against misbehaving financial intermediaries. Individuals cannot force governments or their regulators to act in these matters; we mostly accept that governments may have their own reasons (within the law) and are then often motivated by concerns about the stability of the financial system as a whole, not about individual protection. However, although normally such governmental policies are likely to regulate and prescribe social and economic behaviour more generally, even this public and regulatory or administrative law may spill over into the application and interpretation of private laws, for example when under competition or securities laws or under export restrictions contracts are invalidated and it is conceivable that there is horizontal effect of government intervention of this nature, meaning that private injured parties may still derive a civil cause of action from such regulation, especially if deeper principles of protection are engaged, but it is rare and remains exceptional, see also the discussion in section 1.4.6 above. The difference will be in the cause of action and type of recourse.704 Rather governments may change the private law to give parties a direct action against misbehaving intermediaries, brokers for example, through tightening agency laws and fiduciary duties. That results in private remedies under private law, which give private parties direct recourse and do not then further involve government or regulators. Conduct of business rules in finance are a vivid example. These protections are likely to result in mandatory private law, which affected parties cannot waive by choosing another system of law. Mandatory private law rules of this nature may thus increase as governments often use private law to achieve their policy objectives, hence the protection of workers, consumers and smaller investors, consumers also through good faith notions, smaller investors often through the extension or amplification of agency and fiduciary duty notions. However, it should be realised and not forgotten that, by using notions of fairness and good faith in contract, for example, in terms of pre-contractual and post-contractual duties, courts rather than legislators have often introduced mechanisms to initiate or broaden similar policies. Here one sees instances where newer social values are not only imposed by governments or the political process but may enter private law in other ways, notably through the court system, often in terms of public order or policy considerations or under overriding notions of justice, social peace, and efficiency, if sufficiently pressing in private relationships. There is here not necessarily a government monopoly, as was already discussed in section 1.2.13 above where it was said that it would be a sad day indeed if citizens had to wait solely for government to take action in these matters. New values or policies thus enter the law all the time, including private law, often in a mandatory fashion, either directly through government intervention or more indirectly through its courts. They may also come about through practitioners dealing and settling legal issues as they will not be indifferent to newer social currents whilst doing so, see also the discussion in section 1.4.18 above. These new imperatives are likely not only to further the demands for justice, social peace and perhaps also the utilitarian and efficiency principle or common-sense notions, in this way updating the living law, but may ultimately also reinforce governmental policies. It goes back to the question how much leeway courts have in this regard or how subservient they remain to the legal system they represent and whose spokespersons they are. As we have already seen, in international cases, such domestic governmental interests or policies, or domestic public order requirements or values, as expressed in local laws, present special problems in the operation of other legal orders in international transactions, in particular of the transnational commercial and financial legal orders, to the extent an international transaction 704 See for this horizontal effect in finance, more in particular Vol 6, s 3.7.19.

Volume 1: The Nature, Status and Function of Private International Law 345 has an effect on the territories of states that are or may be affected or if there is demonstrable conduct in such territories. A purely private lex mercatoria approach to international activity cannot ignore these local concerns or interests, is in fact deferential to them, and must take them into account to the extent relevant, the determination of which then becomes a key issue. It is clear that domestic laws of this nature do not become part of the hierarchy of the lex mercatoria unless they reflect transnational fundamental principle at the same time. Other domestic rules of private law may still do so residually, as we have seen, and become then part of the modern lex mercatoria itself but regulatory rules or local values will likely compete with the lex mercatoria and may change its operation in the relevant territories. They should in principle be well distinguished from fundamental legal principle or similar considerations operating in the lex mercatoria, and therefore in private law itself, even if sometimes they may find expression in them also.705 The impact of governmental interests on the lex mercatoria can perhaps best be considered as competition between different legal orders on the same territory that is competition between the transnational commercial and financial legal order and domestic legal orders, which remain territorial, see also the discussion in section 1.5.8 above. Again, this is especially relevant in respect of international trade conducted in whole or in part upon the territory of the state or government concerned or having an effect there and results in more modern times more in particular from the operation of international production and distribution chains. In American terms, it becomes a question of competent jurisdiction to prescribe the applicable public policy rules. In the EU, the issue has arisen more in particular in foreign investment where accommodation between the EU and Member States policies may be called for, see also Volume 2, section 1.2.4 and becomes indeed an issue of parallel legal orders, barring treaty law or customary international law. The basic principle remains that governments are sovereign in their own territory. On the other hand, they cannot reach beyond their own legal order nor, it was submitted, can they interfere under proper notions of the rule of law within their own borders in other legal orders operating in their territory without showing proper respect, and, in a globalising world, willingness to co-operate in principle; the other side of this coin is that their own public policy or order rules cannot then be legally ignored in other orders either. In fact, in their own territories they still have the last word, but there may increasingly also be international minimum standards superseding these domestic considerations in the international flows to the extent they come on shore and streamlining international cooperation. Another aspect is here that if governments want the benefits of globalisation they cannot disown the order that promotes it when it suits them; it is a matter of participation and cooperation. The fact that governmental interests of a national character cannot be ignored in the operation of the transnational commercial and financial legal order arises first because in the case of disputes, their own courts may be asked to pass on situations that, although originating abroad (or in other domestic legal orders), had an effect in the forum state, so that the forum government’s policies could legitimately impact on them. International arbitrators are not able to avoid these issues either although they may be less inclined and are not forced to solve them under purely domestic laws; they have no lex fori of their own to defend or it should be the promotion of international minimum standards. To determine whether there was sufficient local conduct and effect to invite the application of the regulatory laws of the country in question will depend on the facts, which will normally prove decisive. This is likely to affect private parties in their international dealings and governmental interests of this nature may, in appropriate cases, thus interject their force in the operation of the lex mercatoria, disturbing or suspending its effect, but 705 See for fundamental principle, s 1.4.6 above.

346 Volume 1: The Nature, Status and Function of Private International Law only if the relevant governmental interest can be considered sufficiently dominant or pressing in the particular international case. Arbitrators are likely here to be more sensitive to this state of affairs than local courts and probe or balance these issues upon proper representation of the parties, while local courts may simply favour their national policies. This is another reason why parties may prefer international arbitration. Competition policy has been tested extensively in this connection and has been particularly illuminating. Can it be effective and applied extraterritorially, for example when non-residents organise a cartel elsewhere, which affects prices in the forum state such as in the US or in the EU? In practice, this raises a number of important sub-questions, first whether under the relevant (American or European) competition laws, these laws extend under their own terms to activities abroad. This is often referred to as the issue of extraterritoriality or of subject matter jurisdiction. At least in the US, there is a presumption against extraterritoriality of national laws, but it depends, first, on the intent of the legislator, and subsequently, in the application to foreign situations, also on the court’s considerable discretion in these matters. American and EU competition laws are now considered to have that extra-territorial effect. In fact, discretion in balancing the interests if there are other competing (competition) laws (or governmental interests) is then also assumed by the (American) courts to be quite separate from the legislator’s (presumed) intent and is based on comity, which has fairness at its centre, although it is in such cases still mostly seen as a national rather than an international concept, in which connection reference is now often made to moderation.706 Awareness of the interests of other states is assumed, in which context at least some attention is now commonly paid to international law.707 In Europe the ECJ seems to have greater difficulty with this type of accommodation in respect of the dominance of EU law within the EU in the areas it operates. In this regard, sections 402 and 403 of the Restatement (Third) of Foreign Relations Law of the US (1987) refer to reasonableness and set guidelines. They may lead to a balancing of the interests even in the ordinary courts in the US and are of great interest, need to be carefully considered, and may also be indicative of a more international trend. Note, however, also the shift in emphasis in the draft Fourth Restatement, see footnote 622 above. In Europe, as we have seen, reference in this connection is often made to règles d’application immediate: see Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (replacing the earlier 1980 Rome Convention on the same subject, Article 7). Here the formulation of a conflicts or private international law rule is still preferred, even though it does not concern a private law matter. Reference is sometimes also made to a so-called unilateral conflicts rule giving effect to public policy of forum states in such circumstances.708 Under it, 706 See for this international law principle the Barcelona Traction, Light and Water Company, Ltd (Belgium v Spain) (1970) ICJ Rep 3. See for ss 402/403 Third Restament Foreign Relations and for the balancing principle itself also the observation of Judge Wilkey in n 139 above, and the discussion at n 687 above. 707 See for the extraterritorial application of competition laws in the US the line of cases starting with United States v Aluminium Company of America (Alcoa) (1945) 148 Fed 2d 416 and United States v Imperial Chemical Industries (ICI) (1952) 105 F Supp 215. The creation of a (potentially fraudulent) worldwide patent network and its effect on the US may in this connection also be considered under American tort and competition rules if restricting American plaintiffs’ activities, see Mannington Mills Inc v Congoleum Corp (1979) 595 F2d 1287. What will be considered in this connection is whether the ties with the foreign country are strong enough while ultimately the reasonableness may also be tested, see Timberlane Lumber Co v Bank of America 549 F 2d 597 (1976), in which the relative effect on the US as compared to the effect on others was thought to be an issue and also whether there is another court readily available;, see for a fuller discussion, and for the move from comity to legal guidelines or principles, also Hartford Fire Insurance Co v California 509 US 764 (1993). 708 See for a comparative study also GA Bermann, ‘Public Law in the Conflict of Laws’ (1986) 34 (Supplement) American Journal of Comparative Law 157.

Volume 1: The Nature, Status and Function of Private International Law 347 precedence in the ordinary courts is indeed given to governmental policies when they are more obviously relevant, notably therefore when there is (significant) conduct or effect on the territory of the state concerned, although the courts may always apply the policies and public order requirements of their own forum state first. As already noted, since international arbitrators do not have an own forum state and are in any event not covered by the EU Regulation, it is likely that in international arbitrations these various domestic laws or claims to jurisdiction to prescribe will be more objectively weighed and considered. As long as the same public policy and public order standards are not used everywhere, it may be shown that in this manner the outcome in terms of the applicable mandatory domestic laws and respect for the relevant domestic governmental interest or policies in international cases may at least to some extent still depend on the location or nature of the forum (or on forum selection by the parties or on international arbitration being agreed, see below). This raises at the same time important issues of adjudicatory jurisdiction (as distinct from the jurisdiction to prescribe or subject matter jurisdiction), the question therefore whether the forum in the offended state has sufficient jurisdiction over the international transaction. Here, at least in the US, constitutional considerations of due process, therefore of fairness, are additionally invoked to avoid excessive jurisdiction of the plaintiffs’ chosen courts (preferably their own) even if this has not led to a set of rules of adjudicatory jurisdiction over foreigners that is always entirely clear.709 Generally, the type of activity is considered and the situation carefully explored for adequate contacts with the forum, but in the US a hard and fast set of adjudicatory jurisdiction rules in respect of absent defendants has been increasingly abandoned as unworkable and is in any event not considered in accordance with due process.710 709 See the line of cases starting with International Shoe Co v Washington 326 US 310 (1945) and Helicopteros Nacionales de Colombia, SA v Hall 446 US 408 (1984). 710 The approach used in interstate cases, where there is no true discretion, is by extension also used in international cases where it could be asked whether the discretion that comes with comity plays a more fundamental role or is perhaps the chief consideration (rather than constitutional due process). For example, exporting goods or services from the US is unlikely to result in jurisdiction of the American courts, no matter how large the transaction is, and it may even have some service element attached to it within the US. Obviously it is against the interest of US commerce to act otherwise and the State Department will seek to protect foreign buyers from American jurisdiction through amicus curiae briefs in the respective courts. Keeping a bank account in the US, taking out a loan there, or organising a letter of credit or other type of bank guarantee is likely to be similarly considered. The more important issue is the importation of goods or services into the US and the extent to which this may create a business in the US and therefore adjudicatory jurisdiction of the American courts. That issue has been tested in numerous cases, particularly in product liability situations where various defending importers start cross-claims for contribution against each other in the US (even though foreign themselves) on the basis of the original jurisdiction asserted by harmed American plaintiffs, see eg Asahi Metal Industry Co Ltd v Superior Court 480 US 102 (1987), cf also Deutsch v West Coast Machinery Co 80 Wash 2d 707 (1972). Crossclaims of this nature are, however, unlikely to succeed for lack of sufficient presence in the US, certainly in respect of component suppliers to the importers outside the US. The issue of jurisdiction over importers into the US has also come up where foreign manufacturers such as Volkswagen AG from Germany have tried to organise themselves in such a way that they do not come onshore in the US for jurisdictional purposes, their policy being that if there is to be litigation, they wish to be sued in their own courts (for Volkswagen in Germany). Here concepts of agency, control or de facto amalgamation with the US sales organisations have been tried to establish jurisdiction of the American courts but generally not very successfully. Agency requires the American sales network to be able to legally bind the foreign manufacturer, a situation that is therefore frequently avoided. Full control can be alleged between a foreign parent and American subsidiary, making the former subject to American jurisdiction, but must be proven, a situation also much avoided in this type of scheme, see Delagi v Volkswagenwerk AF of Wolfsburg 29 NY 2d 426 (1972), but amalgamation may be considered to exist when foreign subsidiaries are newly set up and are not yet able to organise themselves, see BulovaWatch Co Inc v K Hattori & Co Ltd 508 F Supp 1322 (1981). A forum selection clause in favour of a foreign court may also be sufficient to avoid jurisdiction of the American courts, see Volkswagenwerk AG v Klippan GmbH 611 P2d 498 (1980). Whether the situation is different

348 Volume 1: The Nature, Status and Function of Private International Law In England,711 the courts assume broader discretion in a reflection of a more obvious comity approach, which is in this area of international adjudicatory jurisdiction (on its face still) mostly avoided in the US. In continental Europe, more traditional hard and fast rules attaching jurisdiction to the place of the tortious effect or to other connecting factors are being used. That is also the approach in the 2002 EU Regulation on the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Article 5), replacing the earlier Brussels Convention, amended in 2012. Acceptability of this approach under common international law standards is often emphasised,712 but suggests a preference for a more certain, less discretionary approach in which potential unfairness may be less of a concern or a concern that is considered to be adequately dealt with in the prevailing hard and fast jurisdiction and conflicts of law rules (the latter always subject, however, to public order considerations).713 The key issue is becoming everywhere whether the application of domestic policy rules in international cases may be tested and balanced under transnational minimum standards, that is to say in the domestic courts under comity notions or in international arbitrations rather under notions of the transnational public order when properly pleaded. This may ultimately also lead to domestic policy objectives being reviewed for their validity and application in international transactions when still coming demonstrably on shore in a particular country. That could mean that transnational public order requirements or fundamental principle take over. This is quite conceivable, for example, in competition cases or for workers’ protection issues or in determining the environmental standards for international operations. Corruption may be taken as an example. There are significant anti-corruption or bribery acts, starting with the Foreign Corrupt Practices Act in the US (1977). Since 2010, there is also the UK Bribery Act. There is further the 1997 OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions and the 2004 UN Convention against Corruption. One may thus detect local statutory laws in significant trading countries as well as treaty law in this area. Money laundering regimes, see Volume 5, section 3.4, may complement the picture. Here again in the transnational legal order, in the methodology of this book, one may start with a fundamental anti-bribery or anti-corruption principle; there could also be mandatory practices or customary law developing; there is treaty law, which, even if not sufficiently ratified, may still be indicative of general principle. Party autonomy may also enter in the sense that it is conceivable that private parties themselves agree some conduct especially how they will react to pressures of foreign officials. Residually there may be the domestic corruption acts which supplement the transnationally developing minimum standards, which may then be adjusted to play their role in these standards after eliminating local particularities. Especially in international arbitration, parties may start arguing along these lines or, if they may not want to raise these issues, international arbitrators might be exceptionally motivated and authorised to do so themselves and attempt to formulate the international minimum standards accordingly, see for these issues further Volume 2, section 1.2.5.

in respect of services and whether in that case, at least when unsolicited, jurisdiction of the American Courts is less likely to result, came up in Landoil Resources Corp v Alexander & Alexander Services Inc 918 NYS 2d 739 (1990), in which the American insurance broker unsuccessfully sued a Lloyds of London syndicate in New York in a crossclaim for contribution. 711 UK Civil Procedure (Amendment) Rules 2000 r 6.20. 712 See Case 89/85 Alstrom v Commission (Woodpulp case) [1988] ECR 5193. In the EU, it does not yet give rise to a balancing of competing interests. 713 There is much increased awareness of the need for rules in the US as well, see, eg, the concurring opinion of Judge Adams in Mannington Mills n 707 above, but they are not necessarily the old rules.

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2.2.7. States as Counterparties de Iure Imperii Where states operate as counterparties with international companies, they are likely to operate as parties in the transnational commercial and financial legal order, at least when engaging in ordinary international commercial or financial transactions (de jure gestionis). The rules obtaining in that order (the modern lex mercatoria) would then also apply to them, although enforcement against and recovery from states may still be complicated and, if sought in other countries, potentially subject to claims of sovereign immunity. This remains a problematic area and it is still difficult to recover large judgments or even arbitral awards against governments, probably more so in their own territory. As a practical matter their own courts may not co-operate or find exceptions, even if required to do so under treaty law, for example under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or under the Washington (ICSID) Convention of 1965 in respect of foreign investments disputes and awards, which under the latter Convention are supposed to be self-executing. As just mentioned, attachment and execution measures in other countries are often still limited under sovereign immunity statutes. They may allow only commercial property of the relevant state to be attached, and often only to the extent that this property has itself been the subject of, or closely connected with, the litigation.714 Where, as under the ICSID or Washington Convention, awards are directly enforceable against Contracting States, under Article 54 they are still treated as no better than ordinary judgments, whose enforcement against states may still remain controversial. A more important issue is that states, while engaging in business, may contend to be doing so solely or substantially in the exercise of a public or semi-public function (de jure imperii). They may, for example, grant oil and gas or other mining or lumbering concessions to foreign enterprises in that capacity. In doing so, however, they may concede at the same time a related foreign investment protection regime, which will usually include a stabilisation of the investment and taxation terms and guarantee the repatriation of the investment and its profits (in hard currency) and of the extracted substances or manufactured goods with the opportunity to retain the sales proceeds abroad. There may also be protection against expropriation or more indirect government (regulatory) takings. Moreover, a foreign legal regime may be made applicable to substantive legal issues or otherwise probably to general principles of law and an international arbitration facility may then normally also be added to decide any disputes; see further the discussion in Volume 2, section 3.4. In entering into such agreements, states may be considered to surrender their absolute monopoly of the rules governing investments on their territory and may no longer be able to claim full autonomy but become subject to the rules of the transnational commercial and financial legal order also, in which they themselves then choose to operate (even as sovereigns). Regardless of the nature of the activity (be it mineral substances extraction, the lumbering of wood, or the selling of local lands or cows), in terms of the thesis of this book, that would imply that they bind themselves by contract under the modern lex mercatoria, therefore under private transnational law. But it is also the approach of this book that this still leaves room for their own domestic public policies in the manner explained in the previous section for conduct and

714 On the other hand, in the US under its Foreign Sovereign Immunity Statute, claims against foreign state entities (such as central banks or governmental trading agencies) may be more easily enforceable, even against bank accounts (in the US) that were not an issue in the litigation.

350 Volume 1: The Nature, Status and Function of Private International Law effect in their own territories. A state cannot bind its sovereignty by private agreement. It would require customary international law or treaty law, which is law between states and traditionally not directed towards the protection of private parties who have no acknowledged standing (in principle) under public international law. Protection of this nature against foreign governments would strictly speaking require the development of an international administrative law and it is a legitimate question how far such law already exists; see further also the discussion in Volume 2, section 3. It also raises the question whether there are peremptory principles still superseding such treaty law protections and in what cases. It may thus be seen that a state may give under transnational private law but take back under its own domestic public policy especially where there is appreciable conduct and effect in respect of the international transaction on its own territory, which in the extracting or manufacturing business will normally be the case. Short of treaty law, this may perhaps be balanced (in international dealings) by more objective considerations of fairness and subject to at least some minimum international tests or standards of protection. There is here a traditional conflict of interests but conceivably also some protection under the administrative domestic law of the host country.715 Increasingly there may also be some protection under transnational (administrative law) principles.716 More importantly, treaty law has come in this area in the form of bilateral investment treaties (BITs). These treaties may also be multilateral, as in North America under the 1992 NAFTA Treaty (chapter 11), other multilateral efforts having failed so far but are in progress, see for the Transatlantic Trade and Investment Partnership (TTIP) Volume 2, section 3.5. The fair and equitable treatment clauses in such treaties spring to mind as a more solid protection, now under public international law. This may raise important characterisation issues. Part of a concession may indeed be merely private contract law, where states are bound as any other private party. Breach of contract then gives rise to an ordinary damages action (under domestic or rather transnational private law). In other aspects, parties may be considered to have entered an administrative agreement, which may still give the host state some scope unilaterally to vary the terms subject always to proper indemnification under the applicable administrative law (its own or perhaps even transnationalised in terms of international public order or minimum requirement),717 or indeed now under treaty law. On closer analysis, what is happening in BITs is that states bind their regulatory or public policy powers, not vis-à-vis the investor directly, as they may do under contractual stabilisation clauses in investment agreements, however enforceable, but vis-à-vis the other Contracting State. As we have seen, contractual stabilisation clauses may not prove strong enough to overcome

715 See for an overview and much respect for sovereignty notions at the expense of the further development of public international law in this area, M Sornarajah, The International Law on Foreign Investment, 3rd edn (Cambridge, 2010) but cf also R Dolzer and C Schreuer, Principles of International Investment Law (Oxford, 2008), who are more investor protection oriented. 716 So the English Court of Appeal in Occidental Exploration and Production Co v Republic of Ecuador [2005] EWCA Civ 1116, [18] and [2005] 2 Lloyd’s Rep 707. 717 The notion of the international administrative contract, although regularly re-emerging as a concept, remains underdeveloped in international law: see, for an important early contribution, A Fatouros, ‘The Administrative Contract in Transnational Transactions’ in E Caemmerer, S Mentschikoff and K Zweigert (eds), Ius Privatum Gentium, Festschrift für Max Rheinstein zum 70. Geburtstag am 5 Juli 1969 (Tübingen 1969) 259. See for an important more recent contribution, HP Loose, ‘Administrative Law and International Law’ in P Bekker, R Dolzer and M Waible (eds), Making Transnational Law Work in a Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 380. Some of these problems were also discussed by Z Douglas, ‘Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex’ (2006) 22 Arbitration International 27.

Volume 1: The Nature, Status and Function of Private International Law 351 claims by a host state to overriding full sovereignty or public order imperatives. But the sovereign and regulatory powers of the host state may be restrained under a treaty with the home state of the investor. Arguably, investors are not, therefore, capable of directly exercising or waiving their rights under these treaties because they are not directly vested in investors. They can only do so in the context of any special arbitration facility commonly offered them (under such treaties) when disputes have arisen. That is now normal and gives investors at least derivative rights of protection under public international law.718 Such treaties are likely to include special provisions for equal treatment with other domestic or foreign investors, a fair and equitable standard of treatment, a formula for awarding damages and an international arbitration regime to which the host state binds itself and of which the investor may take advantage in the case of a dispute. Such a dispute would not be an interstate dispute (although there may also be a separate arbitration procedure for the Contracting States in matters of interpretation of these BITs).719 The area of foreign investment protection and arbitration will be the subject of a much broader discussion in Volume 2, Part III below.

2.2.8. Practical Issues Concerning Conflicting Public Policies: Effect on the Lex Mercatoria and the Importance of the Notion of Forum non Conveniens As we have seen in section 2.2.6 above, in practice conflicts of public policies arise most particularly when, for example, anti-competitive activity is perfectly legal in the countries where it has been organised but not in the countries where it may have an effect. The courts in the countries of the alleged perpetrators may in such cases not wish to consider the offensive effect of the conduct elsewhere (under statutes of the place of the effect, for example in the US) and may not apply the foreign competition rules either. It may be very different in courts of the offended country.

718 Earlier, in s 1.4.11 above, it was suggested that treaty law may figure in the hierarchy of the transnational lex mercatoria. That was in connection with harmonised private law, such as the 1980 Vienna Convention on the International Sale of Goods. It should be appreciated that BITs are not of that nature and only concern (and restrain) the exercise of domestic public or regulatory policies in international investment transactions of an otherwise private law nature. 719 BITs may reinforce concessions, or other types of investment or establishment agreements in so-called umbrella clauses, which aim at ensuring each party ‘the observance at all times of any undertakings it may have given in relation to investments made by nationals of the other party’; cf Art 2(2) of the UK standard text, which states that ‘each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Parties’, and Art 16 of the US standard agreement, which expresses, more negatively, the idea that the treaty shall not detract from ‘any obligations assumed by a Party, including those contained in an investment authorisation or an investment agreement’. This may be especially relevant for stabilisation and arbitration clauses. The meaning of these umbrella clauses has been the subject of much discussion and important case law: see TW Waelde, ‘The “Umbrella” Clause in Investment Arbitration’ (2006) 6 Journal of World Investment and Trade 183, and SGS v Pakistan (2003) 42 ILM 1290, and SGS v Philippines (2003) 42 ILM 1285, both ICSID cases, see also Vol 2, s 3.3.4. Clearly, these umbrella clauses give extra protection only in the manner envisaged by the relevant investment treaty and need in the view of many to be precise and well directed in order to be effective. They do not normally cover any purely private law aspects of any concession or similar arrangement. It would appear that these aspects still have to be litigated under the concession or similar agreement itself and the ordinary court or arbitration dispute facility agreed therein, unless these facilities were themselves abused. At least to that extent, there is no need nor indeed much justification, to create within the treaty set-up (therefore under public international law) a special contract law besides the transnational lex mercatoria.

352 Volume 1: The Nature, Status and Function of Private International Law This may be a particular reason for parties to choose in their contract a neutral court or international arbitration in the interests of achieving a better balance,720 the decisions of which might then still be recognised in the offended country; such recognition will then be a question of its public policy. Similar issues have arisen in the enforcement of (American) securities legislation in respect of offensive acts abroad that affect American investors based in the US, for example in securities fraud (according to American standards) on a foreign exchange or in a foreign issue of new securities.721 Naturally, American courts would apply their statutes in the matter, at least in respect of American investors, if called upon to decide these issues assuming they can demonstrate an intended extraterritorial effect of these American protections. Courts in other countries may not, but even if an American court found itself competent in these matters, remoteness may still be an issue. Not all American investors in foreign markets can expect to be protected by the American securities laws, even in their own courts (assuming these courts accept adjudicatory jurisdiction). There comes a time when even American investors are on their own or must sue in the place of the wrong under the laws of that place, although especially in situations of (US) patent fraud, the American courts might still be more indulgent. More traditional situations concern questions of tariffs, import restrictions and boycotts and their effects on foreign contracts and on the delivery of goods thereunder if offensive to the forum state or any other. There is ample case law on these matters in the US and also some in the UK.722 Cases typically arise where a contract is sought to be enforced in another country—the forum country (for example, delivery or payment is requested therein)—but concerns a trade that goes against tariffs (smuggling) or export restrictions (boycotts) in the original country (the export country) and may as such be void under the law of that country, which is likely to be the one most directly concerned. Its laws may then be upheld in the forum country as a matter of international public order or comity. Yet, especially if a boycott is directed against the forum country, this boycott might not be enforced by that forum and the contract is then more likely to be upheld (which might still give rise, however, to a force majeure excuse on the part of the exporter). Other instances may be where foreigners deal in real estate in another country, which they are not entitled to do under the laws of their home country or for which they need a licence under its laws. In such cases, the courts in the countries where the property is located are unlikely to declare the ensuing contracts and property transfers void. They may consider the undisturbed functioning of their own real estate market and transactional finality in that sense a superior interest. A classic example arises also where a spouse under the law of her home country cannot give valid surety undertakings in respect of the business of her husband, but is prevailed upon to do so in another country. The courts of that country are likely to ignore home country restrictions but if that guarantee is subsequently sought to be enforced in the home country, it might be very different. There is an indication in all these protection cases that the domiciliary principle replaces notions of territoriality (therefore notions of the spatial effect of the law with which conflicts of law rules are more traditionally concerned) in the name of fairness, directly invoked as a substantive law requirement.

720 cf House of Lords in British Airways Board v Laker Airways Ltd [1985] 3 WLR 413. 721 See Leasco Data Processing Equipment Corp v Maxwell (1972) 468 F2d 1326. 722 The base case is often still thought to be Holman v Johnson (1775) 98 ER 1120 (Lord Mansfield), formulating the so-called Revenue Rule. See for a more recent approach the House of Lords in Regazzione v KC Sethia (1944) Ltd [1958] AC 301 and in the US Banco do Brazil, SA v AC Israel Commodity Comp Inc 12 NY 2d 371 239 (1963).

Volume 1: The Nature, Status and Function of Private International Law 353 Another instance arises when, under so-called guest statutes, the liability in respect of the transport of passengers may be limited or extended in some countries. Conflicts of law may result when an accident occurs in such a state but the passengers and driver are both from other states or when the car is insured somewhere else. At least in case law in the US, the more traditional approach pointing to the law of the place of the wrong may then no longer be upheld723 and any defence on the basis of a limitation of liability in the place of the wrong may not be accepted either, at least when the passenger and driver are both from the same (other) state where the insurance policy is held and the suit is brought. Here again, one could see an overriding substantive law element of fairness and justice. As we have seen, in the US, it is more often expressed in a weighing of different policies in which the forum state policy tends to prevail or, under sections 6, 145 and 188 of the Restatement (Second) of Conflict of Laws (1971), the law of the most significant relationship. Again, it allows for a broad range of policies to be considered, but may no less result in the application of forum law (see also sections 2.2.2 and 2.2.3 above). Hence again the importance of adjudicatory jurisdiction and the possibility of so-called forum shopping by plaintiffs to find the (for them) most convenient forum, unless restrained from doing so under forum selection or arbitration clauses. As was shown, the forum non conveniens doctrine may also be relevant here. The US is long used to an interest analysis in interstate conflicts and within that approach a weighing of policies of other countries can easily be accommodated. One could see sections 402 and 403 of the Restatement (Third) of Foreign Relations Law of the US (1987) as a logical sequel to it in cases where public policy or regulatory considerations are more pronounced. It means that in the US, prescriptive jurisdiction (and also act of state notions) are carved out of the more traditional conflict of laws approach and a different treatment is given to governmental interests, which easily fits into an interest analysis, which in the US has now become common in all private law conflicts as public and private law issues are not as fundamentally distinguished as in civil law; see more particularly section 2.2.2 above. As noted before, it fits much less easily into the more conventional European conflicts of laws approach, which has been largely abandoned in the US, first in interstate cases but later also in international cases, exactly because of the weight of these governmental or policy interests, which have also long become evident in private law cases; see more particularly section 2.2.4 above. To repeat, in the 2008 EU Regulation on the Law Applicable to Contractual Obligations, Article 9 covers this type of situation or at least the more traditional and more incidental ones associated with tariffs, boycotts, and foreign exchange restrictions. As has been stated several times before, the lex mercatoria, while operating in its own transnational legal order, cannot be insensitive in its application to these governmental or similar interests deriving from other, notably statist legal orders and it will have to be considered from case to case to what extent the lex mercatoria and its application are to be overruled or adjusted on the basis of such interests when sufficiently connected with the case in terms of conduct or effect in the relevant state territory so that the consideration of such governmental interests may be justified. In courts in the US, the comity approach is used in such cases and concerns the relative relevance of these governmental interests in international cases. It is still considered a domestic American facility although for comity to be more credible, it may become a concept of international and not domestic law, in which connection the balancing factors developed, for example, in American case law as summarised in the Restatement (Third) Law of Foreign Relations Law of

723 See Babcock v Jackson 240 NYS 2d 743 (1963), and Tooker v Lopez 301 NYS 2d 519 (1969).

354 Volume 1: The Nature, Status and Function of Private International Law the US 1987, may still be of exemplary interest. Again, in the absence of a uniform approach, the issue of adjudicatory jurisdiction remains important as it will determine which courts (or arbitration tribunals) will be called upon to identify and, as the case may be, weigh the relevant interests and thus determine the meaning of comity. The impact of forum selection and arbitration clauses must then also be considered. Three American Supreme Court Cases are of fundamental importance in this connection.724 They broadly upheld forum selection and arbitration clauses in international cases even if bearing on American public policy issues, notably securities and antitrust laws, although always subject to forum non conveniens considerations in which the applicable substantive and procedural law normally do not figure,725 but in which (the balance of) public policies may still play a role if these policies are sufficiently strong.726 It is then for the party wanting to sue in an American forum to show that the selected foreign forum or arbitration proceedings are improper. The obvious advantage of a more neutral forum to consider the relevance of public policies is recognised in this regard and in Scherk it was specifically accepted that an arbitration clause ‘obviates the danger that a dispute under the agreement might be submitted to a forum hostile to the interests of one of the parties or unfamiliar with the problem area involved’. The advantage of avoiding the jurisdiction of multiple competing fora in this way was also noted. The risk that such proceedings may affect the application of public policy, as embodied in securities laws of the US, was clearly accepted, assuming, as it was pointed out in Mitsubishi,727 that the combination of a forum selection with the selection by the parties of a foreign law was not intended simply to block strong (American) public policy claims. Recognition of the ensuing decisions under the New York Convention may not then pass the public policy test either, at least not in the US. Here also enters the idea that an arbitration tribunal itself may adopt a forum non conveniens approach in respect of public policy-related issues and, depending on their nature, decide to leave them to the ordinary courts to be decided in parallel proceedings. The phenomenology of the issue may also play a role. What antitrust violation is alleged; is it sufficiently incidental to the case even if not to the particular issue to be decided (such as contract validity)? Are the alleged perpetrators all subject to the arbitration clause and so on? In an intervening bankruptcy of one of the parties to an arbitration, similar issues may arise, for example in terms of proof of claim or suspension of enforcement rights.728 It is therefore not the case that these public policy issues have become irrelevant in international disputes, but the assumption, at least of the American courts, is that they may be competently handled elsewhere. This assumes that the foreign courts or international arbitrators will give these issues sufficient weight on the basis of the connection with the country concerned.729 724 The Bremen et al v Zapata Off-shore Co 407 US 1 (1972); Scherk v Alberto-Culver Co 417 US 506 (1974); and Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc 473 US 614 (1985). 725 See Piper Aircraft Co v Reyno 454 US 235 (1981) and Re Union Carbide Corp 809 F2d 195 (1987). 726 See for a similar approach in England, Unterweser Reederei GmbH v Zapata Off-shore Company [1968] 2 Lloyd’s Rep 158 (CA). 727 See n 724 above. 728 See V Lazics, Insolvency Proceedings and Commercial Arbitration (The Hague, 1998); see also Vol 5, s 1.1.14ff. 729 More ordinary choice of law and conflicts rules will then only become relevant to point to the appropriate law after the issues of reasonableness and remoteness have been separately considered in respect of these governmental interests. It this connection it may be noted that the law resulting as applicable under contractual choice of law clauses may still be allowed to settle the issue when it is one of a public policy protection that may be deemed contractually waivable and was waived by the protected parties, see Simula, Inc v Autoliv 175 F3d 716 (9th Cir 1999) and the earlier Lloyd’s cases; see, eg, Bonny v Lloyd’s of London 3 F3d 156 (7th Cir 1993). However, it would not appear helpful to see this development as an instance of privatisation of public policy, the issues arising thereunder subsequently to be decided under the standard rules of private international law (which have in any event

Volume 1: The Nature, Status and Function of Private International Law 355 In regulatory matters, the key may be increasingly to develop more substantive international rules to restrain the effects of domestic public policies and to determine when they must be given weight. This is the question of transnational minimum standards accompanied by issues of fairness, legitimate contact (through conduct or effect) or remoteness, proportionality and legitimacy of the policy. Domestic case law and standards such as those found in the US foreign relations laws and in similar laws of other countries may serve as examples in this regard and show the way and may then lead to such international minimum standards,730 while in the private law aspects proper, including its own mandatory rules and values, substantive international or transnationalised rules could also derive from the modern lex mercatoria. The important consequence of the American cases also accepting forum selection and arbitration clauses in respect of public policy issues—which were motivated by the recognition that international trade had started to require these forum selection and arbitration clauses to be upheld—is that, in so far as international arbitration is concerned, the arbitrability notion has been greatly expanded. If it was formerly possible to say that public policy issues were not normally arbitrable and therefore had to be moved to the ordinary courts in duplicate or parallel proceedings even in minor cases (so that arbitration panels would not enter into the consideration of governmental interests and their balancing if conflicting), this is now, at least from an American perspective, no longer the position. It signalled a profound change in the nature of international commercial arbitration, which has also had a resonance elsewhere,731 including in the ECJ.732 Although arbitration tribunals at the beginning of the case may in such instances still be ousted by appropriate state courts (for example, if a major antitrust case arises, which may hardly be considered incidental to the litigated contract) at least on the basis of forum non conveniens notions (in the US, and probably also the UK, where this doctrine is also known), awards may still ensue if the panel does not believe the state courts to be the proper venue and does not consider its task finished by their intervention. As things now stand, such an award might still be challenged on the basis of public policy in the place where it was rendered (the seat). Under the New York Convention, it would in any event be subject to a public policy test in the country where recognition is sought and may still entail an important limitation on such issues being determined by arbitration tribunals. Again, an important question in this regard is whether the public policy test itself may be subject to transnationalisation, presenting therefore

little to say on the law applicable in respect of public policy as they were never developed for this complication either). The ultimate consequence would then be that private parties could opt in and out of any public policy they wanted or disliked. They are unlikely to succeed. 730 It should be repeated that in civil law, this type of discretion in the jurisdiction to prescribe and also forum non conveniens considerations do not commonly arise and that relevant arbitration and forum selection clauses are normally upheld as a matter of law except that national courts may not wish to spend the resources necessary to hear cases that have no conceivable contact with the forum (see also s 2.2.4 in fine above). As far as the applicable law is concerned, in the traditional civil law approach, the tension between public policy and private international law rules has proved less easy to resolve, probably also because of the ingrained tendency to bring all under traditional conflict of laws rules, therefore within the purview of private law. 731 See in Switzerland GSA v SpA 118 Arrêts du Tribunal Federal [AFT] II, 193 (28 April 1992), in which the Swiss courts held that an arbitration tribunal wrongly refused to apply the EU competition laws while determining the validity of the contract. See for a further discussion JH Dalhuisen, ‘The Arbitrability of Competition Issues’ (1995) 11 Arbitration International 151. 732 See Case C-126/97 Eco Swiss v Benetton [1998] ECR I-3055, in which it was held that the antitrust provisions of the EC Treaty (Art 81) were matters of public order that could first be raised in setting-aside proceedings (the original agreement had not been properly notified to the EU antitrust authorities and was thus void). See further also Paris Court of Appeal 18 November 2004, Case no 2002/60932 (Thalès) JCP G 2005 II 10038,

356 Volume 1: The Nature, Status and Function of Private International Law an objective international substantive (minimum) standard. One must assume that the trend is in that direction.733

2.2.9. Party Autonomy and Contractual Choice of Law In the foregoing paragraphs, especially at the end of section 2.1.1, the parties’ ability to choose the applicable law was mentioned.734 In that connection, it was pointed out that such a choice itself, which normally means the choice of a domestic law (but might now also mean the choice of the lex mercatoria or in finance even sharia law or European Principles, a facility since 2008 recognised in the Preamble of the EU Regulation that replaced the 1980 EU (Rome) Convention on the Law Applicable to Contractual Obligations) may still raise major questions, especially when public policy issues are involved in the particular country or case. The first one is how far this choice goes, in which matters therefore such a choice may prevail. This issue was already briefly raised earlier. Obviously, it does not mean the application of the tax laws of the country whose laws have been chosen, nor its regulatory laws, for example, those concerning the environment or finance which will be particular to that country. Nor does it mean the adaptation of the bankruptcy laws of the chosen country to determine the effect on the contract when either party is bankrupt. The competition laws of such a chosen legal system are not automatically activated in this manner either.735 It was also noted that there are obvious limits too as to proprietary issues in respect of assets located elsewhere. There is, for example, no way in which a mortgage can be created in real estate in England in the French or German which, however, rejected such an annulment on the grounds that there was no prima facie case and more complex investigation was believed to be beyond the court’s statutory task. The ECJ did not strictly speaking decide whether arbitrators may or must apply antitrust rules ex officio but it seems implied and it would appear that arbitrators may at least raise the matter in oral argument (so as to prevent a later setting aside procedure) and are not then exceeding their mandate, see further the discussion in Vol 2, s 1.2.5. 733 See Vol 2, s 1.6. 734 In England, the Privy Council in Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277 expressly accepted that parties are free to choose a legal system to govern their contractual relationship subject, however, to that choice not being contrary to public policy and it being bona fide and legal. That is a general principle of contractual freedom now also embodied in the EU in Art 2 of the 1980 Rome Convention on the Law Applicable to Contractual Obligations and its successor the EU Regulation of 2002, always assuming, of course, that the legal issues are at the free disposition of the parties in the first place. 735 See JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619. There remain problems, however. If the law of a particular third country is chosen to cover the sale of goods, does that imply a choice of mandatory or regulatory quality standards? They might be entirely irrelevant in the country of importation or exportation, but they could still be relevant in determining whether there was a breach of contract in terms of delivery, assuming the contract itself does not specify the quality. It is a matter of interpretation. Another issue is what regulatory quality requirements in the country of importation mean if the contract itself has defined other standards, assuming these importation restrictions are legal, which may not be so any longer in the EU, see Case 47/90 Delhaize v Promalvin and AGE [1992] ECR I-3669. May there be force majeure? If these restrictions are legal, who would carry out the importation may still be relevant. If the importer was in charge of the transport, it would be buying in the exporter’s country and could not invoke force majeure. Bringing the goods up to the required standard would be at its cost, assuming always that the contractual standard was met. If it was the exporter, who was in charge of the transport, hemay be impeded from importing the goods into the other country and might claim to be excused, at least if the restriction had not been foreseen. Otherwise, the exporter may have to adjust the quality to the demanded regulatory standard to make importation possible, even if this standard is different from the standard defined in the contract, but there may still be a claim for damages in respect of the extra cost.

Volume 1: The Nature, Status and Function of Private International Law 357 manner, no matter how much parties might wish it (even if in an assignment of claims against foreign debtors, parties are sometimes thought to have more autonomy over the applicable law, including in its proprietary consequences, which may also apply as to the applicable custodial regime or trusts).736 Applicable public policy rules or mandatory provisions other than the ones already mentioned (in tax, bankruptcy and competition matters) can also not simply be discarded by party choice, unless these rules themselves allow it. Thus, consumer protection will not cease simply by parties having selected a foreign law that does not provide any, compare in the EU Article 6(2) Rome I Regulation 2008. What may also play a role is that a particular mandatory law so chosen may not have extraterritorial effect under its own terms, but that is not always decisive either as, for example, shown by tax, bankruptcy and competition laws (which, from the perspective of the country of origin, are usually applied extraterritorially regardless). Even in contractual matters, especially in respect of the contractual infrastructure, parties may only achieve limited success by choosing a foreign law, for example as to their own capacity and the legality of their actions. In addition, they cannot simply declare a contract valid even if the formation rules are disregarded. These are areas in which the objectively applicable law is likely to speak much louder and is unlikely to tolerate its removal by party autonomy. A contractual choice of law may then simply be ineffective. By choosing a foreign law, therefore, it still remains a question of interpretation what this choice entails, while the objectively applicable law is not necessarily avoided, nor is the law which the parties have opted into necessarily effective in its entirety. Courts and arbitrators might thus have to assess what a contractual choice of law means and how far it must be ignored. Again, by contract parties can only select a specific law in matters at their free disposition. Other issues already mentioned arise when the effect of the contractual choice cannot have been intended by the parties, for example, French and German contracting parties opting for the law of England under which their contract or any later (price) concession thereunder would have been void for lack of consideration, a concept probably not properly understood and considered by either party, let alone its consequences for the validity of their contract (which they obviously wanted).737 Here the chosen law may give the wrong answer, but it could also not give any answer at all—not unlikely in respect of the more advanced modern financial instruments—or answers that are so antiquated as to be useless, for example in the areas of set-off and netting. Of course, one could say that parties should have been wiser at the outset, and it is true that choices of a legal regime are often made without much thought of the consequences,738 but that may also suggest that they were not intended to apply in all their effects and such a lack of considered intent may still matter. In private law matters, the more natural answer in such cases would be to compare the result with that which would obtain under a lex mercatoria approach and see what makes more sense or is more just and reflective of the true needs of participants in the particular trade

736 See also n 67 above. 737 See also the discussion in s 2.2.5 above, and O Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747 and Dalhuisen (n 735). 738 See for the link between the choice of law by the parties and economic realities also G Cordero-Moss, International Commercial Law (Oslo, 2010) 81 and the often entirely irrational motivations in such choices. See further also A Briggs, Agreements on Jurisdiction and Choice of Law (Oxford, 2008) 383, who goes into the parties’ power, the problem of mandatory law in this connection and their direct effect under Art 9 Rome I; and G Ruehl, ‘Party Autonomy in the Private International Law of Contracts’ in E Gottschalk et al (eds), Conflict of Laws in a Globalized World (New York, 2007) ch 9, who illustrates the attitude of evaluation of overall effect and the issues of fairness and due process as overarching notions in choice of law doctrine in the US, particularly in areas of law not at the free disposition of the parties (where different governmental interests may operate) and suggests here a closeness to the European approach, which may not yet exist.

358 Volume 1: The Nature, Status and Function of Private International Law unless international public order requirements are directed against such an approach or even a domestic public policy if it can be shown to be more relevant in the case. At least gaps in the applicable law are then likely to be filled by transnational law. It is a variation on the earlier rejection (in this book) of the (formal legal) notion that domestic laws are always complete in themselves. This may in some fashion still work at the domestic level but is unlikely to do so in international cases for which these local laws were seldom made. In the lex mercatoria approach, with the hierarchy of norms as advocated in this book (see sections 1.4.13 above and 3.1.2 below), party autonomy, including the choice of a domestic law, would in the transnational commercial and financial legal order still be subject to the higher norms derived from the fundamental legal principles (including international public order requirements in terms of ethical, social, economic and environmental considerations as internationalised values, even if the details may have to be left to lower norms), mandatory customary law or industry practices (particularly relevant in the proprietary aspects of these transactions to the extent emerging), and mandatory treaty law in so far as existing (including in the EU its Regulations and Directives), even if it must be admitted that what is mandatory in this connection may still be a matter of interpretation, which in the transnational legal order would, however, be primarily a matter to be determined under the rules of that order. Directory customs or practices, even of an international nature, could, on the other hand, still be overtaken by a contractual choice of law in favour of some domestic system, assuming it is clear what parties intended. So would be any resort to directory general principles, again unless there are clear gaps in the applicable law so chosen or if the result of such a choice of law would clearly be absurd in terms of the dynamics of international commerce and finance. The general principles may also acquire a higher status if they implement fundamental principle or mandatory custom or treaty law.739 It has already been said that the choice may now also be in favour of a non-state law, for example, in appropriate cases the lex mercatoria or sharia law.740 Where parties have not provided for any

739 In the Pyramids case, SPP (Middle East Ltd) and South Pacific Projects v Egypt and EGOTRH [1988] LAR 309, 330, the ICC Tribunal held that even though Egyptian law was the proper law of the contract, it had to be construed so as to include principles of international law and the domestic law could only be relied upon in as much as it did not contravene international principle. The 2014 LCIA Arbitration Rules (Art 22(3), the 2012 ICC Arbitration Rules (Art 17(1)), and the ICSID Convention (Art 42(1)) make it clear that general principles may be considered in international arbitrations. Art 28(1) of the UNCITRAL Model Law is also usually interpreted in such a way that general principle may apply, especially where it refers to ‘rules of law’. That would also cover the lex mercatoria. Only where the reference is more specifically to ‘law’ may it then be thought that a national law is still being meant, see further also M Heidemann, Does International Trade Need a Doctrine of Transnational Law? Some Thoughts at the Launch of a European Contract Law (Berlin, 2012) 2.4.2. French Arbitration law (formerly Art 1496 CCP of 1981 now replaced by Art 1511 CCP as part of a new international arbitration law in France in 2011) sanctions the application of the lex mercatoria, and there is little doubt that arbitrators may apply it, at least when properly pleaded by one of the parties. The new French law refers here to ‘rules of law’, which are considered to cover the point. International arbitrators also may have greater freedom when determining the relevance of domestic public policy considerations per case as we have seen. 740 Earlier, on the basis of Arts 1, 3 and 7 of the 1980 Rome Convention on the Law Applicable to Contractual Obligations, it was sometimes argued in Europe that a choice of law in respect of the lex mercatoria was not possible, in other words that the freedom to choose the applicable law had to result in the choice of a domestic law. The text of Arts 2 and 3(2) appeared to go in another direction, however. The point was in truth not considered at all by the Convention. The underlying idea was here that only statist laws could count as laws while other legal sources could not be considered, a view which must be considered out of date. The 2008 EU Regulation succeeding the Rome Convention conceded the point, at least in Preamble 13, but the relevant language was ultimately removed from the text of the regulation itself, mainly under pressure from Germany. It should be realised that the earlier Convention and present Regulation did not and does not speak to international arbitrators. Yet the dichotomy that is here suggested between the application of the law by arbitrators and

Volume 1: The Nature, Status and Function of Private International Law 359 choice of law clause at all, in international commercial and financial matters their application could still appear appropriate and international arbitrators in particular, upon proper pleading by a party, may be willing in such cases to directly apply transnational law or even sharia law rather than resort to choice of law considerations leading to the application of a domestic law. At least under the EU 2008 Regulation, that may still be more difficult for ordinary judges, but it would appear an undesirable difference. It was argued before that domestic courts could be considered to sit as international commercial courts in the transnational legal order, see section 1.1.12 above, and should apply the modern lex mercatoria not differently from international arbitrators.

2.3. Interaction of Private International Law and Uniform Law 2.3.1. Private International Law and the Application of Uniform Treaty Law Uniform law in the traditional sense is treaty law like the 1980 UNCITRAL Vienna Convention or CISG, and when properly incorporated by the Contracting States in their own law, it is usually applied automatically and directly by their judges as part of the national lex fori, assuming, of course, that the uniform law under its own terms applies to the transaction or situation in question. They may only cover international transactions (or situations) but need not be so limited. The relevant convention may include in this connection a definition of what is considered international. Thus, depending on the subject, it may limit the uniform law to international dealings, but the relevant convention may also apply under its own terms to purely domestic situations or transactions. This raises several issues, one of which was identified above in section 1.4.5 as the re-emergence of other autonomous sources of law besides these texts at the transnational level when the transaction is cross border. If international dealings are covered, traditional conflicts of law specialists may still argue that there always remains a preliminary question of the applicable law to be determined under the private international law rules of the courts of Contracting States so seised. They would in that manner first decide which country’s laws apply, which could but need not be their own, and only if those are of a country that is party to the relevant Convention would the application of the relevant uniform treaty law follow. This is, however, not generally the approach of the uniform treaty laws themselves, which tend to unilaterally determine the field of their application. This is also the approach in the 2011 draft Regulation concerning a CESL. If these texts cover international transactions, they then prevail over otherwise applicable domestic private international law rules, at least in cases brought before the courts of Contracting States. In other words, such uniform law is then considered to have direct effect, at least in Contracting States (even if on the whole still objected to by organisations such as the Hague Conference on Private International Law). In this vein, the CISG applies automatically in Contracting States if both parties to the sale come from different Contracting States (unless they have excluded the application of the Convention (Article 1(1)(a)). Only in Non-Contracting States would the applicable private international law first have to point to the application of the law of a Contracting State for the uniform law to apply, assuming that the other application (or scope) criteria of this uniform law are also met. Another issue arises when such directly effective uniform laws allow for differences in incorporation of that law. In that case, discrepancies between the incorporation texts may still give rise to the question of which state laws prevail in the circumstances, even among Contracting States. This may easily arise under EU Directives to the extent relevant in the area of private law;

360 Volume 1: The Nature, Status and Function of Private International Law see the next section. Such questions might also arise in the US, where the Vienna Convention was ratified by Congress but the proper incorporation and interpretation remains a question of State law (which determines commercial law) unless considered self-executing. If not considered self-executing in all states, the question of the appropriate relationship with relevant state law still acquires relevance to determine which State law is applicable. That is also an issue under the UCC if differently adopted among the various US States: see section 1-301 UCC. In the EU financial Directives following its Action Plan of 1999 (see Volume 6, section 3) we see, on the other hand, that the (uniform harmonisation) rules apply to domestic as well as crossborder financial activity, and no distinction is made between them. However, the distinction remains relevant in another context: the division of labour between a home and host regulator does not apply if there is no cross-border trade proper,741 while the issue of passporting, meaning the possibility of offering products and services in other Member States under home country supervision, does not then arise either. The law of the place where the service is rendered would in that case apply to the transaction. There is no cross-border complication.

2.3.2. The Situation with Regard to EU Directives of a Private Law Nature In the EU under Directives affecting private law in as far as the EU has jurisdiction in these matters (for example consumer law, product liability and conduct of business and segregation issues in investment services), see further section 1.4.21 above, incorporation in domestic laws leaves much scope for differences as no uniform law but only harmonisation is commonly the objective. Questions of applicable law may thus still arise in these areas between Member States regardless of the harmonisation effort, even if in the EU, as we shall see, the implementation and interpretation by each country needs to conform to the wording and purpose of the relevant Directive, see further also the discussion in Volume 6, section 3.7.19. Even when Member State law is still applicable, there may still be a direct harmonising effect under these Directives subject to the ultimate supervision of the ECJ, but in the case of conflict in the details of the implementation, it is still necessary to establish which domestic law applies in trans-border transactions. Again, under conventional private international law rules, this is likely to be a (closest) relationship issue in matters of private law. Following the discussion in the previous section, it raises first the question whether the relevant Directives under their own terms directly apply to cross-border transactions or situations, which will normally be the case; that is why we have Directives, hence also the reference to the promotion of the internal market under Article 114 TFEU as the basis of EU competency, but the relevant Directive may itself still determine more precisely the applicability or reach of the law formulated therein. If trans-border transactions are covered, that would in principle pre-empt the operation of private international law. That is indeed the case for the consumer law Directives (which apply to all transactions in the EU, even to those crossing into non-Member States)742 and also in principle for the relevant banking and investment services Directives. ordinary judges, which both would be dependent on this law being pleaded as fact, is not welcome or convincing. In truth, ordinary judges should take a similar approach in international business cases and are now allowed to do so but only if parties have opted for the lex mercatoria and not otherwise when pleaded by one of the parties. That would appear to remains a substantial restriction in proceedings in the ordinary courts in the EU. 741 See for the definition, Vol 6, s 1.2.1. 742 The scope of the Directives may be even more difficult to determine in respect of transactions or situations with possible contacts in third countries, again especially where the Directive does not go into its scope at all. Is it

Volume 1: The Nature, Status and Function of Private International Law 361 It follows that only if Directives do not apply directly to cross-border transactions would the normal rules of private international law apply to them and they would not be pre-empted by the Directive. If the Directive does apply or is deemed to (also) apply to cross-border transactions, this must then be considered a form of direct application and harmonisation, which, as just mentioned, generally pre-empts the application of domestic conflicts rules. The 2008 EU Regulation on the Law Applicable to Contractual Obligations is in that case postponed under its own terms (Article 23 Rome I). It should be realised, however, that, if there are differences in incorporation and implementation of Directives in the various Member States, this would still have a consequence in terms of the applicable law if the Directives were directly applicable to cross-border traffic, but these conflicts would then primarily have to be resolved within the context of the Directive itself under the ‘Directive-conform Implementation’ concept.743 Its interpretation at EU level would be a matter of European law in as far as it is a conformity issue, rather than a conflict of law issue. At least that would most likely be the position of courts within the EU, which could in case of doubt ask for a preliminary opinion of the ECJ in Luxembourg under Article 267 TFEU. If the matter arose in the courts of non-Member States, however, but still involved the choice of law in transactions between two Member States, the normal conflicts rules of those nonMember States would more likely apply in order to determine the applicable regime as to these implementation differences in the traditional conflict of laws manner. If the result was subsequently the choice of the one or the other law, the Directive’s text itself would then be less likely to be considered in interpretational matters. Of course, the European Court would in such cases not supervise the conform interpretation either. If mandatory private law results from the Directives (as may be the case for example in consumer law issues), the courts in Member States may be more in particular sensitive to its uniform interpretation. The courts in non-Member States, on the other hand, may again stick to

applicable at all? A field of application must be assumed to be inherent in all of them. If not all elements of the case are connected with the EU, the field of application, eg in respect of consumer law Directives, might then have to be determined with reference to the domicile of the consumer being within the EU. Alternatively, as for the Product Liability Directive, the true issue may then be whether the product is being marketed in the EU. The Common European Sales Law project (CESL), now withdrawn, would only have applied to cross-border dealings and would therefore have eliminated private international law issues (in the nature of a Regulation as was proposed, there would be no potential differences in implementation either). 743 An important question remains: which law applies in the case of a different implementation of EU Directives when it is clear that the Directive in principle covers the subject matter and is applicable in cross-border transactions? That remains strictly speaking relevant even if subsequently the competent court must seek a directive-conform interpretation of the local implementation, as it remains to be determined which implementation would in litigation be the starting point for the interpretation of the Directive itself. Assuming that the case is brought in a court in the EU, it raises the question whether that court always starts with its own implementation as a matter of the application of its lex fori, or whether the better starting law might be the implementation in another Member State, eg the one of the State whose laws under prevailing private international law rules are more likely to be otherwise applicable in the case. That would still raise conflict of laws problems at that stage of enquiry. It is indeed mostly assumed that the lex fori applies and that there is therefore no need for courts in EU countries to probe whether another implementation of the relevant Directive needs to be considered first. It would seem to be the most efficient approach as the result ultimately should be the same. The implementation law of other countries will then only be relevant as a matter of interpretation, and may especially be considered if there is a reasonable connection with the case. In international commercial arbitrations, the situation would be different as there is no lex fori per se and arbitrators would most likely start with the implementation law of the country most directly concerned or otherwise perhaps the one of the country of the Respondent (if in a Member State).

362 Volume 1: The Nature, Status and Function of Private International Law the implementation text of the country whose laws it deems applicable under its more traditional conflict of laws rules, subject to their own overriding public policy, in particular if residents of their own country are affected.744 Adjudicatory jurisdiction issues remain important here as well. The House of Lords, now the UK Supreme Court, maintained, for example, a more literal interpretation technique in respect of domestic statutes than, say, the Dutch Supreme Court, and therefore also had more difficulties in referring to the purpose and hence the scope of Directives, although it did find comfort in this regard in the case law of the European Court745 or, if necessary when the issue had not yet been clarified at EU level, in the facility to refer the issue to it for a preliminary ruling. There are a number of other points to make. First there is then the approach of the ECJ itself, which has, since 1984, indeed demanded a directive-conform interpretation of national implementation legislation, as already mentioned. This is simply a result of the legal order of the EU, which in the areas in which it operates is superior to domestic legal orders.746 Domestic courts have here a support function in the system and operate therefore in relevant cases as European courts. An important issue remains, however, the relevance of domestic procedural limitations in the interpretation and the acceptance or rejection of these limitations by the European Court. The accepted objective here is an efficient and real protection which is non-discriminatory and allows the EU objectives to prevail. Local procedural restrictions, although in principle respected, may therefore not frustrate this process, for example in disallowing the testing of directives in some specialised (provisional) procedures or in rejecting punitive damages where the directive’s implementation might require it.747 Second, there is untimely or faulty implementation, which is strictly speaking not a mere interpretation issue. Normally, direct effect of directives may be assumed in such cases provided the directive is itself sufficiently precise. It may as such still operate vertically against the defaulting state, but not between citizens horizontally.748 The directive-conform interpretation is there 744 If the transaction is in the international professional sphere, under the approach advocated in this book, the applicable law, if of a private law nature, would still be subject to the hierarchy of norms of the lex mercatoria, among which these harmonised (domestic) rules (if meant to cover international transactions) would figure like treaty law, assuming they were applicable in the particular case under their own scope provisions. The EU in its DCFR and progeny is not aware of these trends or does not want to consider them. Fundamental principles and mandatory custom and practices particularly would then still prevail over the rules of the Directive even if they were mandatory. Conflicting governmental interests of individual states would have to be separately considered; see also the discussion in ss 1.4.5, 1.4.6 and 1.4.20 above. As far as Member State implementation of the Directive is concerned, international arbitrators might be more readily inclined to go for a Directive conform interpretation asthey generally are now less inclined to be convinced by rules of private international law pointing to a domestic law in cross-border transactions. Within their discretion to determine the applicable law, they may also look at the text of the Directive rather than at the implementation statutes. 745 So indeed in Lister and Others v Forth Dry Dock and Engineering Co Ltd and Another [1989] 1 All ER 1134, in which accordingly a purposive interpretation technique was adopted. 746 See the seminal Cases 26/62 Van Gend & Loos [1963] ECR 3; 6/64 Costa v ENEL [1964] ECR 1203; 14/68 Walt Wilhelm [1969] ECR 1. A prerequisite is that the relevant rule of community law is meant to have direct effect in Member States. Even though Directives are not directly effective in Member States without domestic implementation, this general precedence of EU law provides the facility of direct application of Directives in the interpretation of domestic implementation laws: see Case C-14/83 Von Colson and Kamann [1984] ECR 1891, 10 April 1984. It leaves, however, a question whether this type of interpretation may in fact lead to the de facto adjustment of the implementation legislation if considered defective. 747 See Case C-261/95 Palmisani [1997] ECR I-4025, and W van Gerven, ‘Of Rights, Remedies and Procedures’ (2000) 37 Common Market Law Review 501. 748 Case C-91/92 Faccini Dor [1994] ECR I-3325.

Volume 1: The Nature, Status and Function of Private International Law 363 partly to remedy this latter problem, however, and may be effective especially in the case of incomplete or defective implementation when it will acquire a correcting function. Another more draconian remedy, admitted in case law since 1991, is state liability of the defaulting Member States, which may thus become directly liable for any adverse consequences for citizens when the other two methods fail, which may happen if a state is not otherwise directly liable under the relevant Directive. Domestic courts will thus be able to impose penalties on the defaulting state if a citizen misses a chance or a protection against other citizens as a consequence.749 There is here also the question of the power of domestic judges to invoke the relevant Directive autonomously, therefore without any of the parties having invoked it. This is, in principle, admitted if the EU rules are absolutely mandatory, assuming always that the local judge has the power to apply mandatory rules sua sponte or on its own motion under its own laws,750 which is normally the case but may be very different in international arbitration; see Volume 2, section 1.2.5 below. A last point is that in interpreting EU Directives, the European Court is likely to use Europeanised concepts, even in private law. These are therefore concepts that could be quite different from those which are known to local judges under domestic laws and that are used in the implementation legislation; see also the discussion in sections 1.4.4 and 1.4.6 above. The notion of good faith, especially relevant for the interpretation of the Consumer Directive, may be a case in point: see Volume 3, section 1.3.8. No less dramatic could be the interpretation of the client asset segregation requirement and agency duties in the field of investors’ protection originally under the 1993 Investment Services Directive, succeeded in 2007 by MiFID I, since 2014 MiFID II. So far, they may have received inadequate implementation in several civil law countries in private law, especially in the agency protection aspects (see further Volume 6, sections 3.2.6 and 3.7.19). It concerns here issues of tracing and constructive trust and of relative rights of principals after the disclosure of their interests in a bankruptcy of their broker/agent: see also Volume 3, section 3.1.6, Volume 4, section 1.4.3 and Volume 6, section 1.3.10. The reasons for the discrepancies are that domestic laws in Member States are here far apart and systemic considerations may not allow for easy incorporation, which has affected more particularly the EU Collateral Directive. It may well be that in these types of cases, at EU level, the interpretation that will achieve the best customer or investor protection overall will be preferred by the courts.

749 Joined Cases C-6/90 and C-9/90 Francovich [1991] ECR I-5357. 750 Joined Cases C-430/93 and C-431/93 Van Schijndel [1995] ECR I-4705, 15 December 1995. See for the Eco Swiss v Benetton case, n 732 above.

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Part III The Substance and Operation of Transnational Commercial and Financial Law or the Modern Lex Mercatoria 3.1. The Lex Mercatoria, Interrelation with Private International Law, Legitimation 3.1.1. The Background to the Revival of the Lex Mercatoria In the foregoing, it was explained—and it will be here briefly summarised—that the transnational lex mercatoria substantially disappeared as a consequence of the nationalisation in Europe of all law formation and application from the early nineteenth century onwards. In this climate, even private law, not excluding commercial law, became purely national and territorial also in England, although it did not take there the exclusive form of legislation. It was posited, however, that the idea that modern law, especially private law, is always statist and therefore territorial was only a nineteenth-century theory and political objective ultimately connected with the emergence of the modern state as organisational superstructure and motor of modernity. At least in private law, only 50 years earlier, political philosophy had held exactly the opposite view. This newer idea was never more than opinion or paradigm and to assume henceforth that there could be no other law was always surprising. We saw it in interpretation, even domestically, and the tide may be turning, especially in international commerce and finance where it is no longer tenable and has become destructive. At the outset, it should be repeated that at least on the European Continent, the statist idea of law formation was never greater democratic legitimacy although now often so confused. Rather, it concerned state absolutist tendencies. In Germany, nineteenth-century romantic notions of nationality and of the modern state as the true expression of the human condition and the only legitimate actor in the march of history had seen to that, compare the discussion in sections 1.2.9 ff above. It attributed to state law a superior status. The French and Austrian Codes of 1804 and 1811 had still been more the product of the Age of Enlightenment, meant to clean the law of a myriad of local or regional rules while at the same time providing greater clarity and transparency. Whatever the original idea, henceforth the law could only be national and at least on the European Continent issued from a legislature, never mind whether it was public or private law or meant to apply to a national or international/trans-border transaction or situation, or whether or not that legislature was itself democratic; see also the discussion in section 1.1.8 above. Moving national legislation to the centre of law formation in this manner had the advantage, however, of providing a ready vehicle for legal change and adaptation. Assuming the proper

366 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law insights, it allowed rapid progress and further adjustments and rationalisation, although in practice, at least in private law, after the initial codification spurt, updating was often patchy and increasingly late. The price was doing away with all alternative sources of law, even where they were community based and potentially more participatory, responsive and efficient in terms of practical needs, such as, conceivably, customary law at least in trade and commerce or finance. The idea was rather one national and super-imposed unitary system for all regardless of the nature of the relationships, therefore in modern terms in principle the same for consumer transactions and professional dealings, all at the national level. In the EU, the 2008–2009 DCFR, as an unofficial academic text, aiming at codification of private law EU wide, remains wedded to this basic idea and concept as we have seen in section 1.4.21 above. It is in essence an anthropomorphic nineteenth-century consumer law text, wholly inappropriate for professional dealings in the international flows of goods, services, money, information and technology as we have seen. In this approach, fundamental and general legal principle, earlier captured in natural law notions, were rejected as autonomous sources of law. In contract, party autonomy took a back seat and operated only by legislative authorisation, while customs and industry practices became suspect and at most relevant in contract interpretation and even then by special authorisation of these codes only. They were often seen as regressive legal elements, pushing the modern law back into a cultural environment that was thought to be parochial or atavistic, although especially in modern commerce and finance that may be greatly contested; see the discussion in section 1.4.8 above. Particularly after World War II, this statist attitude became intertwined with the modern notion of regulation and the idea of the welfare state, under which states not only tried to provide a better infrastructure, but also attempted to remake society according to the prevailing political views, often with a strong redistribution element. That became clear in consumer law, earlier in employment law, but, because of the unitary approach, it easily spilled over into professional dealings as well but was often inappropriate in transnational business activity for which it was never written. In private law formation in codification countries, a more particular feature of this movement was that, at least in Germany, private law became an intellectual construct that was supposed to have unity in itself and was then believed to represent, by definition, the reality of human relations and their best balance. That became the idea behind all codifications, whose texts were then considered self-sufficient in the sense that they were thought to have the answer in them to all legal questions, present, past and future, either directly or otherwise through correct interpretation techniques, which had this intellectual system as its base, even more than the text. That was system thinking and it was thus assumed that pure intellectual abstraction could satisfactorily capture the reality of all human relationships and, where needed, govern them properly, see sections 1.2.12/13 above. The law as political choice was ignored and the emphasis was put on the application of texts and the system underlying them, not on how they got there or on the realisation that texts are always a poor expression of the choices that lay behind them, there are not only problems with rationality of this sort but also with the language expressing it (which one sees in official translations that have the force of law as they have notably in the EU). Even though perceived as an intellectual system, it was considered territorial per se, only meant to meet domestic needs, and was therefore no longer intellectual and rational in a universal sense as the secular natural law had been. Not even in international commercial transactions was there room for a more universal normativity, although greater rationality or efficiency would have supported and increasingly dictated it. As we have seen, in England, although not accepting the intellectualisation of private law and its centralisation at the level of the legislature in this manner, the idea also took hold that all law in whatever form must emanate from a sovereign (which could be through the court system):

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 367 see section 1.3.1 above. So, there was no less nationalism in law formation, including private law, although it did not lead to a similar emphasis on legislation as its only legitimate source. There were no overriding systematic considerations either. The common law itself was rather of ‘immemorable usage’, gradually formed in the King’s courts. Eventually it was corrected in equity, when there were obvious shortcomings, later mainly taken over by the state through legislation, although even this is often still believed to be exceptional in private law. In this connection it is relevant that in the eighteenth century, the common law and its courts had already absorbed the commercial law, which as a consequence also became largely territorial, even if it retained some independence. The positive aspect was that equity also became important in commerce and finance and that proved greatly relevant, modern financial products are substantially equitable as will be shown in greater detail in Volume 5. Also, some respect for commercial custom was retained, but it could then hardly be international while it also became subject to the law of precedent, further limiting the flexibility it had once brought. That also happened to equity. At least in England, custom is now often considered an implied condition only and admitted as such, thus limiting its force even further, mainly to the law of contract. It is then no longer an autonomous dynamic source of law unless specifically so authorised, although, again, there may still be some more room for it in commerce as just mentioned—it is unclear what its true status is in England, see again section 1.4.8 above. It was noted, however, that in the US the UCC in section 1-103 takes a clearer view and leaves ample room for other sources of law (as had the Justinian codification in D.1.1.1.6ff) such as equity but also custom, whether national or international, and no less for the law merchant. In fact, it was noted that the UCC is not a codification in the European sense at all, it does not monopolise the field and does also not aspire to laying down an inherently coherent intellectual system that is complete and has all the answers. This was explained in greater detail in section 1.3 above. The consequence was that, both in the civil law and common law, at least of the English variety, even commercial law became national and territorial. On the European Continent it was contained in national commercial codes that served merely as supplements to the civil codes and their intellectual systems and provided only some special additional rules for commercial transactions (as defined). In particular, it left international commercial transactions and the laws applicable to them exposed, as the old lex mercatoria as substantive transnational law was soon abandoned although in England it was still referred to in the first (1893) Sale of Goods Act. It is true that it had never been universal, but where it was still territorial, it was not confined to a national territory. Thus, one law of admiralty had developed on both sides of the English Channel, one law of transport by land between the provinces of Eastern France and Northern Italy, etc. But as of the nineteenth century, the conclusion was increasingly drawn, already by von Savigny as we have seen, that all legal relationships, no matter how international, always had a seat in a domestic law and that this seat and therefore the applicable law could only be identified through the conflict rules of private international law. They were therefore no more than national conduits through which the properly applicable domestic law could be found in international transactions or situations. It seemed the inescapable result once all law had been nationalised and had become only domestic, but it was no less an intellectual presumption and in truth a mystical nineteenth- and twentieth-century pretence, which made little sense as these domestic laws were seldom made for international transactions and could be wholly inadequate or inappropriate for them. The further irony was that these conflicts rules were initially seldom statutory but depended on some principles that were at first often considered customary and universal, therefore not statist at all.

368 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law The subsequent denial of the autonomous force of international commercial custom, of party autonomy (which was thought to operate only by domestic legislative authorisation or licence as we have seen), and of general principles (unless underlying the purely domestic system), was an important consequence, although not to the same extent in the US. The more irrational and disturbing consequence was that all international transactions had to be cut up into local pieces in the hope that the sum total of the legal regimes that so became applicable to the parts added up overall to a legal regime that made some sense and was efficient for the transaction as a whole. Moreover, in respect of each piece, there could still result a different law for example, for their contractual and proprietary aspects. No less destructive was the idea in civil law countries that the applicable domestic laws were self-contained and intellectually complete, for international transactions as well. Certainty was often cited, but in the circumstances could be of such a low quality that it unsettled international transactions, even if one national law of this nature could still be found to cover them. This may now be better shown in modern production and distribution chains and in international financial dealings. It is no wonder, as we shall see, that especially the Eurobond market and the international swap market have risen out of these confines, the one being the largest capital market in the world, the other the largest market of all in value. Yet as we have seen also, there may be less progress in the international production and distribution chains, especially the idea that we could have one floating charge to obtain working capital for these chains still suffers for no obvious reason at all except for entrenched legal nationalism of an irrational sort. Indeed, it is the thesis of this book that there is no rational argument against, rather a strong sociological and economic argument in favour of, the re-emergence of a transnational substantive law for professional dealings, therefore an independent transnational law obtaining between professionals in their international business transactions, as indeed there was before the time of the great European codifications. That is in commerce and finance the modern lex mercatoria. It was identified above as an issue of legal plurality or decentralisation and of the operation of different legal orders, which allows for different sources of law to operate side by side in the same territory, of which statist texts are only one within the hierarchy of the sources of law obtaining in each order. We still recognise this to be so between states in public international law, to which Article 38(1) of the Statute of the International Court of Justice testifies, and it mentions the different sources, supplemented by the notion of peremptory law in Article 53 of the Vienna Convention on the Law of Treaties, and is, it is submitted, also the method that imposes itself in the transnationalisation of private law in the international flows. It is somewhat perplexing that public international law presents here no intellectual problem for its functioning between states (although it was also infested with nineteenth-century sovereignty notions) while a substantive transnational private law operating along similar lines and in a similar manner between private parties still is objectionable in the minds of many. Thus, in private law, the result of newer thinking in this area of professional dealings, therefore mainly in commerce and finance, is the new lex mercatoria, which is not statist, and is therefore not territorial either, but emanates—it was submitted—from the international commercial and financial legal order that business actors maintain among themselves. In civil law, this is a reversion to pre-codification days. At least in international business transactions, private international law or conflicts of law notions come here to their useful end. Although they may remain valid to the extent that domestic law retains a residual function in the lex mercatoria to the extent transnational law has not yet developed (see section 1.4.13 above), they will become ever less important now that in this order fundamental legal principle, custom and industry practices, party autonomy, and international general principle retake their place, all as autonomous sources

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 369 of transnational law. Even where in the ensuing hierarchy of norms at the transnational level, domestic law still retains a residual function, it operates—it was posited—as part of the transnational law, must make sense therein, and is in its application to be reinterpreted and adjusted accordingly, effectively shorn from its local peculiarities. It was also said, however, that the international commercial and financial legal order must respect local statist legal orders to the extent that they may claim a justified interest in the international transaction, which is relevant especially in regulatory or other public policy matters in respect of demonstrable conduct and effect of the international transaction on the territory of the state concerned. Nobody can deny that a state is sovereign in respect of all that happens on its territory, even if non-statist legal orders now also seek room for their operation in such territories and, it was argued, a proper understanding of the rule of law encourages this. It was earlier identified as a question of competition between different legal orders on the same territory and a matter of balance, which is becoming an ever more important issue in commerce and finance: see sections 2.2.6ff above. As part of this balance, local statist legal orders in their enforcement function must recognise the transnational laws and the decisions based thereon (for example, in international commercial arbitrations) to the extent not offensive to their internal public order. In fact, this recognition and acceptance of transnational law was identified above not only as a rule of law issue, but also as a quid pro quo: if a country wants its own people and businesses to operate internationally and to receive reasonable legal protection at that level, it must also offer reasonable protection itself, although in such cases potentially still subject to the public order requirements of the international commercial and financial legal order itself, therefore to international minimum standards.

3.1.2. The Concept of the Modern Lex Mercatoria as a Hierarchy of Legal Sources The challenge in these matters is to move from new ideas about law formation to the practice and develop the positive law, now at the transnational level. To determine the private law applicable to international commercial and financial transactions, the key question is then whether there may exist or may be developing a whole new pattern of substantive transnational law in the professional sphere within a non-territorial, non-statist legal order. It is the contention of this book that there is now such a legal order operating and strong enough in international trade and finance as a natural consequence of the globalisation of the international professional activities in these areas and the freeing of the flows of persons, goods, services, capital, information and technology internationally, and of the scale on which this is now happening; for the introduction of this theme, see section 1.5 above and for the figures, footnotes 1 and 26 above. As a practical matter, it is further supported by the fact that the transnational flows acquire an ever-stronger virtual character and are in any event in constant movement and transformation whilst, also because of their composite service, information and technology content, international transactions are ever more difficult to locate with reference to a territory or national legal system. It was further submitted that this order has now acquired the capacity and energy to move itself forward, formulating its own laws and even creating law-making institutions or facilities such as the ICC committees for Incoterms and the UCP, the ICMA for the Eurobond market, ISDA for the international swap markets, and international commercial arbitrations for dispute resolution purposes (upon proper pleading by the parties or at least one of them). In international sports, there may also be an individual legal order operating with institutions such as the

370 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law International Olympic Committee and FIFA (Fédération Internationale de Football Association), which have even assumed a quasi-criminal jurisdiction over the behaviour of sportsmen and women in international competitions. Originally, it might have been thought feasible and logical to build the new lex mercatoria around a nucleus of uniform treaty laws751 as formulated, for example, in the area of international sale of goods by the 1964 Hague Conventions and subsequently in the 1980 CISG; and in the area of transportation by sea in the 1924 Brussels Convention (the so-called Hague Rules, later amended by the Hague-Visby Rules for bills of lading, especially in their transportation rather than proprietary aspects) or in the 1978 UNCITRAL Hamburg Rules and now also the UNCITRAL Rotterdam Rules combining sea and land voyages; and in the area of bills of exchange and cheques by the 1930 and 1932 Geneva Conventions and later the 1988 UNCITRAL Convention for International Bills of Exchange (and in several other areas by other UNCITRAL efforts such as the one on the statute of limitations). See for the efforts at uniform law of both UNCITRAL and UNIDROIT more particularly section 1.4.20 above. However, once the operation of the international professional legal order is identified, these Conventions cannot remain the nucleus of the new law. They are at best only one source of it. More importantly, they remain in essence statist and territorial, in practice limited to narrowly defined legal areas. Upon the incorporation into national laws, these treaties are often still considered to remain national. They thus remain territorially confined and are in any event limited in their coverage. Under their own terms, there may be further limitations, for example they may apply only to residents of Contracting States. There are other significant drawbacks of uniform treaty law, already spelt out above in section 1.4.10, connected with the often limited and partial coverage of the area of the law these treaties seek to unify, and especially with the difficulty of amending them and keeping them up to date. There is also the point that they are too often the result of a myriad of compromises or trade-offs in domestic legal concepts between academics who have little knowledge of commercial realities in an intellectual system no one truly asked for and these texts may not reflect the dynamics and justified needs of international trade and commerce nor its rationality as it moves forward. There is mostly very limited industry input. In the civil law codification tradition, which favours the intellectual model and which is mostly implicit in these Conventions or texts, this may not truly be considered necessary either. That is notably the German model but it finds support in academia most anywhere else. Yet it may be the reason why the UNCITRAL and UNIDROIT efforts in this area received little traction. As suggested above in sections 1.5.5 and 2.2.5, the new transnational law results in fact primarily from: (a) the nature of the relationship between the (professional) parties;752 (b) their special interests, needs and protection requirements; (c) the nature and logic of their transactions, which are usually market and profit driven and of the legal structures used therein; (d) common sense, rationality or utility, or what participants consider fair and reasonable among themselves or what they need in terms of risk management; and (e) the balancing by public policy, transnationally manifested in international minimum standards. Again, it is driven by the internationalisation or globalisation of the flows in goods, services, information, technology and money, perhaps also people. The evolution of this law should be perceived as a macro or institutional event. It is geared to elevate business and avoid disputes rather than primarily to resolve them in individual cases, dispute resolution in this manner having always remained an imperfect art. The modern

751 This is still the attitude of Roy Goode, ‘Rule, Practice, and Pragmatism in International Commercial Law’ (2005) 54 ICLQ 539. 752 See for this approach in the UK, Bingham LJ in Interfoto v Stiletto [1989] 1 QB 433, 439.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 371 perspective of law as mainly a dispute resolution device here recedes into the background, see section 1.4.18 above and mediation and settlement may become the better perspectives; judicialisation is considered disruptive, see Volume 2, section 1.1.14. Rather, properly to assess each party’s rights and duties in the ordinary course of their business, an analysis of the facts and circumstances of the transaction is central, supported by the terms of the agreement in the areas of the law at the free disposition of the parties; patterns of commerce already established between them and their ever developing usages in terms of industry practices; custom not only in contract but also in the other areas of private law, especially in movable property; uniform treaty law to the extent formulated and applicable under its own terms; and common legal notions (for example, of contract, tort or property) whether or not expressed in international Conventions, such as those just mentioned, or in collections of principles (such as those of the EU and UNIDROIT for contract law—see Volume 3, section 1.6) and now in the EU even in full codification proposals in the 2008–09 DCFR, see Volume 3, section 1.6 and Volume 4, section 1.11). It has already been said that the application of these rules should always be preceded by the application of fundamental legal principles as the basis of the whole system; and any mandatory custom as such usually closely connected with these fundamental principles; or mandatory uniform treaty law (again if applicable under its own terms); and also mandatory general principle as it may develop especially in movable property law and set-off/netting, or in matters of contractual validity and issues of legal capacity. If upon a proper analysis of the facts in the light of the norms that thus become available there is still no solution, these norms would be finally supplemented by the domestic law found under the traditional conflict of law rules. To repeat, this domestic law would then residually function in the transnational legal order itself and be subject to it so that its application would have a discretionary element as the result would have to be fitting as transnational law.753 Pressing considerations of justice, social peace and efficiency supplement this legal framework in this order in individual cases. Again, in the hierarchy of the legal sources of this private law, public policy or public order requirements of a domestic or transnational nature are not discounted, although they may sometimes be reflected in fundamental principle as overarching in commerce and finance, notably to eliminate market abuse or anti-competitive behaviour or to counter other excess. As has been explained before, more normally they compete or correct and cut through the modern lex mercatoria in the manner as described in sections 2.2.6 to 2.2.8

753 In WA Bewes, The Romance of the Law Merchant: An Introduction to the Study of International and Commercial Law (London, 1923, reprinted in 1986) 13, there is an interesting comment where it is explained that the lex mercatoria had its origins in the law of nations as it grew to a great degree out of transactions that took place between different nations (although not necessarily by these nations). Even private international law is here in its origin seen as a branch of the law of nations and closely connected with substantive international or transnational law. The law of admiralty may lay a special claim to this origin in the law of nations as it it closely connected to the law of the sea, perhaps best seen as its private law part. It may be recalled (see s 1.5.9 above) that in the US admiralty is considered to be ‘general maritime law, shared by all nations’, Lauritzen v Larsen, 345 US 571, 577 (1953) and excludes more traditional conflicts rules and references to domestic laws, although this has been interpreted to mean that American courts will only apply their own laws or perceptions of the general maritime law, see AA Ehrenzweig, Private International Law (Leyden, 1967), 196ff, rather than accept its transnationalisation in principle and the uniformity that follows, subject to unavoidable fitting in processes especially of maritime liens into domestic laws and their ranking, necessary even where treaty law also figures besides transnational custom, general principle, and party autonomy, but the bias is then in favour of acceptance with a positive attitude towards the fitting in process. That is better expressed in this book, it is submitted, and its methodology and approach to transnational law or the modern lex mercatoria and its sources and their hierarchy from which the close connection with the methodology and approach of the law of nations follows; it is borrowed from it.

372 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law above. To repeat, at issue here are mostly national regulation or public order requirements or similar national values in respect of international transactions that have some (appreciable) conduct or effect in the territory of states, which states in this manner, may claim a governmental interest, but transnational minimum standards also develop in the transnational commercial and financial legal order itself, and, it was submitted, represent the ultimate true challenge in articulation leading to the balancing of the international marketplace. Again, this is truly a matter of competing legal orders and ultimately a matter of accommodation. In section 1.4.14 above, the multiplicity of the sources of private law at the transnational level and the hierarchy of the norms flowing therefrom were identified as the essence of the modern lex mercatoria, and its details will be further discussed in section 3.2 below, especially in international finance.754 In confirming domestic law as the residual rule, it affirms that this new transnational law or the modern lex mercatoria is not more incomplete than any domestic law and is thus fully operative as a complete system for those who still seek this. The ranking was given as follows: (a) (b) (c) (d) (e) (f) (g) (h)

fundamental legal principle; mandatory custom; mandatory uniform treaty law (to the extent applicable under its own scope rules); mandatory general principle; party autonomy; directory custom; directory uniform treaty law (to the extent applicable under its own scope rules); directory general principles (or default rules) largely derived from comparative law, uniform treaty law (even where not directly applicable or not sufficiently ratified), ICC Rules and the like;755 and when all else fails (i) residually, domestic laws found through conflict of laws rules.756 As to the fundamental legal notions or principles of private or transactional law, which come first and form the basis of the whole system, they have also already been briefly discussed in section 1.4.5 above and are in particular: (a) pacta sunt servanda as the essence of contract law; (b) the recognition, transferability and substantial protection of ownership to be respected by all as the essence of all property;757 (c) liability for one’s own action, especially: (i) if wrongful (certainly if the wrong is of a major nature) as the essence of tort law; (ii) if leading to detrimental reliance on such action by others as another fundamental source of contract law;

754 See originally, JH Dalhuisen, Wat is Vreemd Recht? [What is Foreign Law?], Inaugural Address, Utrecht (Deventer, 1991). 755 These are unlikely to be mandatory but should they be so, as they might in proprietary matters, they would move up above party autonomy (under (d)) but still be subject to mandatory custom or mandatory treaty law. 756 Should domestic law be mandatory, as generally in property law, it then also moves above party autonomy (under (d)), but will still be subject to mandatory customary law or mandatory uniform treaty law and general principle, and therefore be firmly anchored in the transnational law itself. 757 Traditionally, the nemo dat principle was considered to capture the essence of property law but property is now also a human rights-supported notion, particularly in the context of protection against expropriation, see Protocol 1, Art 1 of the 1950 European Convention on Human Rights and s 1.5.8 above, to be respected by governments and (horizontally) by other citizens alike.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 373 (iii) if creating the appearance of authority in others like in the law of (indirect) agency or other instances of apparent authority; or (iv) if resulting in owners’ creating an appearance of ownership in others in the law of property leading to the protection of the bona fide purchaser (setting aside the more traditional nemo dat principle). There may be other fundamental principles in terms of: (d) fiduciary duties leading to special protections of counterparties, notably if weaker or in a position of dependence (including principals against agents, consumers against wholesalers, workers against employers, individuals against the state, smaller investors against brokers), and duties of disclosure in appropriate cases and faithful implementation of one’s contractual and other obligations; (e) the notion of unjust enrichment; (f) respect for acquired or similar rights, traditionally particularly relevant to outlaw retroactive government intervention, but also used to support owners of proprietary rights in assets that move to other countries; and (g) equality of treatment between creditors, shareholders and other classes of interested parties with similar rights unless they have acquired proprietary protection or have postponed themselves; (h) non-discrimination. Then there are: (i) fundamental procedural protections in terms of impartiality, proper jurisdiction, proper hearings and the opportunity to mount an adequate defence, now often related to the more recent (and also internationalised) standards of human rights and basic protections (see Article 6 of the 1950 European Convention on Human Rights (ECHR)); (j) fundamental protections against fraud, sharp practices, corruption, excessive power, cartels, bribery and insider dealings or other forms of manipulation in market-related assets (also in their civil and commercial aspects) and against money laundering; (k) the issue of transaction and payment finality; and finally (l) fundamental principles of the protection of the environment, of public health, and security, of labour, and financial stability, which are increasingly developing transnationally. (m) perhaps the protection of national treasures and their non-tradability. As many of these fundamental principles may be public order or human rights driven, this underscores their absolutely mandatory nature. They may exist as peremptory rules even affecting treaty law, compare Article 53 Vienna Convention on the Law of Treaties. No doubt there are other fundamental principles, which are under constant development, and the above list is not meant to be conclusive. It is often a matter of basic values or fundamentals of our civilisation acquiring the force of law in due course. Although in commercial and financial law there may not be many, the essence is to show that fundamental legal principles are at the heart of all civilised modern legal systems,758 and therefore also operate in trade and finance, whilst others, such as the notion of asset liquidity and transactional and payment finality, may be more closely related to overriding utility and efficiency considerations.

758 See for the EU and ECJ in particular, the cases cited in s 1.4.6 above, which were ignored in the DCFR.

374 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law In modern law, especially of the codified variety, these fundamental principles are often hidden, but they come into their own again especially in times of great change, now in the transnational commercial and financial legal order. It was suggested before that this is what we mean by the rule of law, which does more than simply reinforce order. In civil society, the aspiration is rather an order that is ever more just, and also promotes social peace and efficiency. This idea is not new and was already a key feature of all secular natural law, see Grotius’s principles discussed in section 1.2.7 above. Again, in so far as method is concerned, reference may be made to Article 38(1) of the Statute of the ICJ and Article 53 of the Vienna Convention on the Law of Treaties. It should be realised that these objectives may be contradictory and that civil society must forge an ever new and better equilibrium amongst them. It follows that fundamental principles might in international transactions adjust the balance between the parties on the basis of social or public order considerations of the international legal order itself. They may be supported or still corrected by public policy as a competing rather than inherent force operating in such cases increasingly as transnational minimum standard in the international marketplace like in competition matters or where necessary to keep international markets clean. They are not immutable per se and are in any event likely to acquire a special form and meaning depending on the legal order and type of relationship in which they operate. Another connected point is that the fundamental principle of protection between certain parties, like professionals in certain types of deals, even if mandatory, may not result in the same protection as enjoyed by other (less professional) types of parties in otherwise similar circumstances, for example in a sale of goods to consumers. As was observed before, lesser protection and refinement of the law may result between professionals in transnational commercial and financial matters as an overriding requirement connected with the continuation of the normal commercial flows and the imperatives imposed on all participants in this respect. Where the contract is a roadmap and risk management tool, adjustment is in any event far less appropriate and could only result in extreme circumstances, which will not lightly occur between professionals. It was submitted that good faith in contract, if properly understood, might even require this stricter attitude and then may mean fewer rights rather than more protection. In contract, this confining approach may indeed be expressed in a transnational concept of good faith (which should distinguish sharply between different types of parties) and in property law in a transnationalised notion of liquidity and finality. In this connection, it should be noted that in the foregoing good faith itself was not elevated to the level of fundamental principle.759 It was earlier observed that it is not always fundamental and mandatory. Rather, in professional dealings in the international commercial and financial flows, it was submitted, that it primarily denotes a liberal interpretation technique, in which older norms are restated to reach newer fact patterns or situations. Probably more importantly, it also allows for the reintroduction of the traditional sources of law now through the back door of interpretation. In contract a more literal reading of the text may thus follow between professional participants. It is in any event natural for the law to be sensitive to these differences in requirements, which in contract may also emerge in the form of implied conditions or industry custom. This will be discussed in greater detail in Volume 3, section 1.1.4, and was already mentioned in section 1.1.6 above in the context of the discussion of legal dynamism in modern professional dealings, both in its model of contract and movable property law. As a consequence, the impact of overriding fundamental principle will quite naturally still vary depending on the type of relationship and nature of the transaction and

759 See n 86 above.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 375 will in any event limit itself to the basic legal structures and not extend to details. This is left to the other sources of law. Fundamental principle may thus be further expressed by established custom or practices, which in their supporting and implementing role are then likely also to be mandatory. It means that where these transnational customs are property related, they will prevail over a contractual choice of law. This may often concern questions of transaction and payment finality. Similarly, in negotiable instruments, contractual concepts of consideration do not prevail in common law countries and could not therefore undermine finality, while bona fide purchaser protection was developed early here for similar reasons, whilst the notion of independence was favoured which separated negotiable instruments from the contract out of which the claim (incorporated in the instrument) arose. This is now in particular relevant in the proprietary aspects of more modern international negotiable instruments, such as Eurobonds or increasingly even for all types of trade receivables, and the manner in which they are being held and transferred; see also section 3.2.3 below. But it is also a key element in assignments of portfolios of monetary claims with assignees in other countries and debtors in many.760 Again, transnational custom may increasingly determine the proprietary legal regime, which should then be well distinguished from the contract out of which the proprietary rights may emerge, which may still put a limit to party autonomy in this area. Similarly, where an automatic return of title upon default is demanded in the contract, party autonomy may not prevail in the transnational practice either. It would no less undermine the notion of finality of property transfers and may not prevail in the international legal order, except, perhaps, if couched in terms of a reservation of title. Another issue is here the notion of set-off and netting under the ISDA and Repo Master Agreements, where again customary transnational law may have to come to the rescue as contractual parties cannot decide the effect on third parties, here other creditors, never mind how much parties might try to broaden the set-off facility through netting clauses. In this connection, in section 1.1.6 above, the issue of a modern dynamic movable property law for professionals, especially in their financial dealings, has already been discussed, in which connection party autonomy was found to acquire a special meaning in the creation of new proprietary structures at the transnational level, possible only because it was always subject to the protection of the ordinary commercial flows, again the issue of finality. Even specific performance of sales agreements, normally available in civil law, might be deemed against the commercial flows and hence commercial practice or realities and common sense may rule out this possibility in international commerce unless it is the only realistic alternative. International conventions, such as those on sales, transportation and payment methods, further supplement the fundamental principles and transnational custom. Their incongruous status in the lex mercatoria has been noted several times before as they may still be considered expressions of national and territorial laws upon incorporation into domestic laws. In any event, they sit uneasily between customary law and general principles and it was earlier mentioned (in section 1.4.11) that for their credibility they should preferably expand on what is already customary in the trade and explain or amplify it, or incorporate general principle, of which they may in any event become the expression when there are many ratifications. It would help commercial acceptance, which has failed many UNCITRAL and UNIDROIT projects precisely because the commercial and financial practice did not recognise itself sufficiently in these texts for which it never asked.

760 See Dalhuisen (n 14).

376 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law Unless discarded by the parties to a transaction, these conventions naturally supersede domestic laws in Contracting States in the areas they cover, even if the domestic law was mandatory, which means that a mandatory domestic rule may be replaced by a directory treaty rule. So far private law conventions only occasionally contain mandatory law (see for a rare example, Article 12 of the CISG). This may become different if more progress is made through treaty law in receivable financing, factoring, leasing or mobile equipment where UNCITRAL and UNIDROIT have made some progress as we have seen in section 1.4.20 above (see also Volume 5, sections 2.3 and 2.4). Even then, it is unlikely that they can prevail over fundamental legal principle or mandatory custom in the international legal order. In all of this, there are, of course, in contractual matters also the wording of the contract, types of parties, and the intrinsic logic of the transaction to be considered, if necessary, under transnationalised standards of good faith, as already mentioned, although this is probably less relevant in the commercial sphere, which needs special protection only in more extreme situations. As just noted, even in movable property, the greater impact of party autonomy may have to be considered as well, subject to an extended notion of bona fide purchaser protection. Fundamental legal principle, and mandatory transnational custom or mandatory uniform treaty law, to the extent existing, and mandatory general principle would prevail over it; in fact, mandatory custom and general principle increasingly support it. If as part of the contractual terms a domestic law is chosen as applicable to the transaction by the parties, domestic law then moves up to this rank, but no higher, as it would concern matters of private law not at the free disposition of the parties. Even then, such a domestic law cannot go beyond what makes sense in the international legal order, as we have seen, see section 1.4.13 above, and the domestic law so chosen will be adapted to function properly as part of the transnational law: see further the discussion in section 2.2.9 above. To repeat, such a choice of a domestic law cannot change fundamental principle and mandatory custom or mandatory general principle in the international marketplace. It cannot prevail over mandatory public policy or regulatory rules either. Neither may it cover the public policies and regulatory laws of the law so chosen, at least if they have no relevance in the transaction, especially therefore when that state’s public interest is not engaged, for example if the law so chosen were to contain health constraint that has no meaning or relevance in the place or places where the transaction is likely to impact. The environmental laws of such places would then have to be considered first, regardless of what the contract says on the applicable law. Again, the chosen law cannot exclude relevant domestic public policy laws. General legal principles finally will have a further effect in defining (normally in a directory manner) international legal relationships where the contractual terms, fundamental principles, custom and treaty law fail or need further elaboration. They may be deduced from national laws if there is a broad consensus between them, and from rationality, efficiency and common-sense notions. As was submitted before, especially in property, they could even obtain a mandatory normativity in which case the rule moves above party autonomy but would still be subject to mandatory custom and treaty law. If the applicable transnational private law is still not sufficiently established in this manner, domestic private law may still remain relevant (assuming it had not been chosen as the applicable law when it moves up in the hierarchy to the level of party autonomy). Again, the important point here is that such a domestic law then operates in the transnational legal order and thus becomes part of the transnational law and may be adjusted accordingly to make it fit (not different from when a national law is chosen by the parties). The difference with the situation in which this law is chosen is that directory customary law and general principle take precedence over domestic law.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 377 The result is the hierarchy of norms within the modern lex mercatoria discussed in section 1.4.14 above, the details of which will be further explored in the following sections. This hierarchy is here considered the essence for the time being of the modern lex mercatoria and makes it workable as a fully-fledged system of law for those who still see a system as the essence of all private law (but would hardly expect and require it in regulatory law).

3.1.3. The Major Protagonists of the Lex Mercatoria and their Views: Legitimation It was posited that the search for a better law in international transactions, based on fundamental and general principles, custom or industry practices, and party autonomy, is culminating in the modern concept of transnational professional law or international civil, commercial and financial law, or the new law merchant or lex mercatoria. This is viewed as not merely desirable but as a historical necessity and an event that reverses the nineteenth-century nationalistic order under the pressure of globalisation and the needs of the international marketplace (subject to its own public order and values limitations) and it is accepted as fact that that is happening and can be demonstrated especially in the financial markets. In this book, the concept of the modern lex mercatoria as a hierarchy of norms is not therefore advocated as an article of faith or yet another political theory, but rather as an academic model that better explains what is happening, simplifies the argument, and makes it more transparent and coherent. It may then indicate more satisfactorily what is likely to work in an ever more globalised environment and also presents a model for contract and moveable property operating in the professional sphere. Indeed, in commercial transactions, in the international commercial and financial legal order it represents, this law is now more often referred to as the (new) lex mercatoria,761 a term in modern times particularly associated with Professor Berthold Goldman from France (1913–93), who identified this new legal order based on industry custom and common legal notions, even if not using legal order terminology and the concept of a hierarchy of norms or even fundamental principle.762 As was noted before, the notion of the lex mercatoria or law merchant had existed between the Middle Ages and the eighteenth century and was generally recognised in England, and often referred to in English case law well into the nineteenth century, especially in connection with documents of title and negotiable instruments. It was still mentioned in the UK in Sale of Goods Act of 1893, as it still is in section 1-103 UCC in the US, where it remains good law, except if specifically overruled. Yet there is here an important difference: the new lex mercatoria is at this stage perceived in this book as being in essence a hierarchy of diverse sources of law that operate in a legal order of their own that competes with the local ones conceivably also covering public policy issues or international minimum standards to balance the international marketplace, while the old law merchant was a compilation of largely unwritten uniform customs and

761 This is a form of legal pluralism that received renewed attention since the 1980s, see J Griffith, ‘Legal Pluralism’ (1986) 24 J Legal Plur 1. 762 B Goldman, ‘La lex mercatoria dans les contrats et l’arbitrage internationaux: réalité et perspectives’ [1979] Clunet 475; B Goldman, ‘Lex Mercatoria’ Forum Internationale, no 3 (Deventer, 1983); B Goldman, ‘The Applicable Law: General Principles of Law—Lex Mercatoria’ in J Lew (ed), Contemporary Problems in International Arbitration (London, 1986) 113; B Goldman, ‘Lex Mercatoria and Arbitration: Discussion of the New Law Merchant’ in TE Carbonneau (ed), Lex Marcatoria and Arbitration. A Discussion of the New Law Merchant (New York, Transnational Juris Publications, 1990).

378 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law practices. Naturally the modern contents are also quite different from what they once were, in which connection it was observed earlier that the new law is likely to be driven as much by modern finance as by mercantile considerations. Other authors, like Professor Clive Schmitthoff in the UK, were similarly sensitive to the new development but took a more restrictive view and saw the new lex mercatoria primarily as an elaboration of domestic law,763 while early protagonists such as Professor Norbert Horn in Germany,764 Professor Ole Lando in Denmark,765 Professor AF Lowenfeld in the US,766 and more recently Professor Roy Goode in Oxford,767 are largely pragmatic, although especially in England often still with a considerable national bias. See for a more principled position in the US in favour of this new law in particular the work of Professor FK Juenger.768 Like in the field of conflicts law (compare section 2.1.1 above), from a more academic point of view, there are here, in essence, two schools of thought: the internationalist and domestic. Those who see a new legal order emerging are likely to be found in the internationalist camp. Others, mostly in the positivist tradition, cannot see any legal order outside the context of a state and its pronouncements. This might not prevent international considerations from being taken more directly into account in the interpretation of substantive domestic law, much as in the lex fori approach to interstate conflicts in the US: see section 2.2.3 above. The difference is, however, that, in the latter approach, each country will ultimately go its own way and have its own ‘transnational law’. No true uniformity is likely to result, as the unity of the law in the international legal order is not then more fundamentally recognised and neither is its own law-creating force.769 The issue is See n 662 above for a more comprehensive list of major authors on the modern lex mercatoria. In France the work of P Fouchard should particularly be noted, see P Fouchard, L’Arbitrage Commercial International (Paris, 1965); P Fouchard, E Gaillard and B Goldman, Traité de l’Arbitrage Commercial International (Paris, 1996); and E Gaillard and J Savage (eds), Fouchard, Gaillard and Goldman on International Commercial Arbitration (The Hague, 1999). See more recently in France also E Gaillard, ‘Transnational Law: A Legal System or a Method of Decision Making?’ (2001) 17 Arbitration International 59, but cf also P Mayer, ‘Reflections on the International Arbitrator’s Duty to Apply the Law’ (2001) 17 Arbitration International 235. 763 It forestalled local criticism: see C Schmitthoff, International Business Law: A New Law Merchant, Current Law and Social Problems (University of Western Ontario, 1961) 129; C Schmitthoff, ‘International Trade Law and Private International Law’ in Vom deutschen zum europäischen Recht, Festschrift Hans Doelle (Tübingen, 1963) Vol 2, 261; C Schmitthoff, ‘The Unification of the Law of International Trade’ [1968] Journal of Business Law 109. See for a compilation of his most important writings on the subject Chia-Jui Cheng (ed), Clive M Schmitthoff ’s Select Essays on International Trade Law (Dordrecht, 1988). 764 N Horn, Das Recht der internationalen Anleihen (Frankfurt a. M, 1972); N Horn, ‘A Uniform Approach to Eurobond Agreements’ (1977) 9 Law and Policy in International Business 753; N Horn, ‘Uniformity and Diversity in the Law of International Commercial Contracts’ in N Horn and C Schmitthoff (eds), The Transnational Law of International Commercial Transactions (Antwerp, 1982) 3ff. 765 O Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747. See also for earlier reflections on the phenomenon E Langen, Studien zum internationalen Wirtschaftsrecht (München, 1963) and P Kahn, La vente commerciale internationale (Paris, 1961) and ‘Lex mercatoria et euro-obligation’ in F Fabritius (ed), Law and International Trade, Festschrift C Schmitthoff (Frankfurt a. M., 1973) 215. 766 Lowenfeld (n 47) 133. 767 R Goode, ‘Usage and its Reception in Transnational Commercial Law’ (1997) 46 ICLQ 1. Here we see a dependence mainly on treaty law as the core of the newer developments, see n 23 above. The role of international custom and general principle then remains also largely unclear, see also n 445 above. 768 FK Juenger, ‘Conflict of Laws, Comparative Law and Civil Law: The Lex Mercatoria and Private International Law’ (2000) 60 Loyola Law Review 1133. See for recent writers on the subject, and more theoretically, especially RD Cooter, ‘Structural Adjudication and the New Law Merchant: A Model for Decentralisation’ (1994) 14 International Review of Law and Economics 215 and G Teubner, ‘Breaking Frames: The Golden Interplay of Legal and Social Systems’ (1997) 45 American Journal of Comparative Law 149. 769 See further the analysis of F De Ly, International Business Law and Lex Mercatoria (Amsterdam, 1992). Mustill LJ in the UK has been particularly critical of the lex mercatoria as a transnational legal framework on the basis of his nationalistic views, wondering where this new law could come from: see ‘The New Lex Mercatoria’ in

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 379 always how this new law is operating domestically, either autonomously in as far as public policy permits it or only by government licence which amounts in fact to a denial of all international law. As suggested throughout this book, the key is the acceptance (or rejection) of the own legal order of international trade, commerce and finance, and within that order of the formation of transnational commercial law, based on fundamental legal principles providing the basic core and major protections.770 The second feature is the acceptance in that legal order of transnational custom and party autonomy as autonomous legal sources; and the third the development of often more practical general principles of transnational commercial and financial law as yet another such source. The relegation of domestic laws to residual status automatically follows from the acceptance of these other prime sources of transnational private law to be further discussed in their practical effect in the next section. Again, the conflict between this law and domestic public policies and public order requirements is seen as a special complication, to be resolved outside the hierarchy of norms of the lex mercatoria itself (unless reflected in fundamental principles). To repeat, it concerns here the competition between legal orders and ultimately a balancing of affected public policies or governmental interests against each other, wherever international transactions come demonstrably on shore in conduct and/or effect, and against those of the transnational public order itself as transnational minimum standards. More recently, these issues have obtained more attention,771 also the idea of bottom-up law formation772 and a new transnational legal order,773 but there is still considerable resistance in

M Bos and I Brownlie (eds), Liber Amicorum Lord Wilberforce (Oxford, 1987) 149, and ‘Contemporary Problems in International Commercial Arbitration’ (1989) 17 International Business Law 161, criticised by Lowenfeld (n 47) 123, who thought that the question where the law comes from could particularly be asked for all of the common law. It has already been noted above that this dismissive attitude in England is not necessarily to the advantage of London as international business centre. See for a more recent overview, Berger (n 662) who does not present a theory but looks for black-letter law in the new lex mercatoria and collects these rules; see also Translex.org, Law Research Principles with Commentary (2012) identifying 130 rules. There is here no distinguishing between fundamental and general principles, custom and practices nor between consumer and business rules and there is notably no hierarchy. 770 Goldman himself came to the realisation of the importance of fundamental principles in this respect relatively late, when he started to emphasise them besides his common legal notions (and industry practices), which were mainly derived from comparative law research into the different legal structures and terminologies: see ‘Nouvelles réflexions sur la Lex Mercatoria’ in Etudes de droit international en l’honneur de Pierre Lalive (Basel, 1993) 241. 771 M Heidemann, Transnational Commercial Law (Macmillan, 2018); M Dias Varella, Internationalisation of Law: Globalisation, International Law and Complexity (Springer Verlag, 2014); AP Salonen, Transnational Law of the OTC Derivatives Market (Helsinki, 2019); J Biggins and C Scott, ‘Public-private Relations in a Transnational Private Regulatory Regime: ISDA, the State and OTC Derivatives Market Reform’ (2012) 12 EBOR 309 and ‘Licensing the Gatekeeper? Public Pathways, Social Significance and the ISDA Credit Derivatives Determination Committees’ (2015) 6 TLT 370; GV Rautenberg, and A Verstein, ‘Assessing Transnational Private Regulation of the OTC Derivative Market: ISDA, the BBA and then Future of Financial Reform’ (2013–14) 54 Va J Int’l L 9; Kathryn Collard, ‘Advantages of a Co-regulatory OTC Derivatives Regime’ (2014–15) 46 Geo J Int’l L 877. 772 Janet Koven-Levit, ‘Bottom-up Law Formation through a Pluralist Lens: The ICC Banking Commission and the Transnational Regulation of Letters of Credit’ (2007–08) 57 Emory LJ 1147; ‘A Bottom-up Approach to International Law Making: The Tale of Three Trade Finance Instruments’ (2005) 30 Yale J Int’l L 225; ‘A Cosmopolitan View of Bottom-up Transnational Law Making: The Case of Export Credit Insurance’ (2005) 51 Wayne LR 1193. 773 JH Dalhuisen, ‘Legal Orders and their Manifestation: The Operation of the International Commercial Legal Order and its Lex Mercatoria’ (2006) 24 Berkeley JIL 129; JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers ULR 19; JH Dalhuisen, ‘The New Lex Mercatoria: An Emerging Challenge to Legal Systems in Cross-border Transactions’ Openings Lecture Caribbean Academy for Law and Court Administration Conference (CALCA) (St Marten October 2016); S Deakin, ‘The Evolution of Theory and Method in Law and Finance’ in N Moloney, E Ferran et al (eds), Oxford Handbook of Financial Regulation (Oxford, 2013) 25; JM Smits, ‘European Private Law: A Plea for a Spontaneus Legal Order’ in DM Curtin et al

380 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law local legal environments if not also in academia. It has not only to do with the modern state and its functions and insights, therefore with political power in society, with concerns about legal certainty,774 but also with money, the perceived danger that the international professional legal practice, which is a business in itself, may increasingly move offshore, reducing local law to consumer law and its protections, academia often being subservient and equally conservative. Others wonder how transnationally regulation may arise;775 in this book the true challenge is perceived to be the balancing of the international marketplace by public policy at the transnational level. Others have noted the frequent cooperation between commerce and finance and their regulators.776 Much may be product specific.777 Another issue is how this law may or must be treated in international arbitrations.778 The EU remains here caught in the positivist nationalistic top down tradition and has no less difficulty with then operation of international law within its borders,779 to the detriment of its business.780 So may be its academia but it is one of the paradigms of this book that academia is nothing if it is not innovative and does not help to move society forwards for it to function better, thus furthering justice, social peace and efficiency and it must be responsive in that sense, find new expressions in time, and be critical with that objective in mind. What are the choices? This search is policy-oriented but not necessarily in a local political sense, must explain better what is happening and what needs legal help and clarification, present models that relate closer to newer realities, and where possible simplify the rules to enlighten the political establishment, and make society better manageable. There is too little of it in commerce and finance largely due to ignorance and prejudice. Legal transnationalisation may then be seen as primarily a recognition and enforcement issue,781 the conditions therefore under which national entities will recognise (not license) and

(eds), European Integration and Law (Intersentia, 2006); TC Haliday and G Shaffer (eds), Transnational Legal Orders (Cambridge, 2015); Yong Tao, ‘Spontaneous Legal Order’ (2016) 26 J Evol Econ 467, noting that in an open economy an unplanned economic order may spontaneously arise, see also Claire Cutler, Private Power and Global Authority. Transnational Commercial Law and the Global Political Economy (Cambridge, 2003), but cf also SE Sachs, who at least for the past maintains that no autonomous legal order ever existed in commerce, ‘From St Ives to Cyberspace: the Modern Distortions of the Medieval “Law Merchant”’ (2006) 21 Am U Int’l LR 685. 774 GP Callies, W Konradi, H Nieswandt, FP Sosa and T Dietz, ‘Transformation of Commercial Law: New Forms of Legal Certainty for Globalised Exchange Processes?’ in A Hurrelmann et al (eds), Transforming the Golden Age Nation State (London, 2007). It has been said before that legal cetrtainty may be of such a low quality that it destroys everything and it should not kill innovation. 775 See T Porter, ‘Transnational Private Regulation and the Changing Media of Rules’ (2012) 13 German LJ 1508; O Dilling, ‘From Compliance to Rulemaking: How Global Corporate Norms Emerge from Interplay with States and Stakeholders’ (2013) 13 German LJ 381. 776 HP Glen, ‘The State as Legal Tradition’ (2013) 2(4) CJICL 704; A Meyerstein, ‘Transnational Private Financial Regulation and Sustainable Development’ (2012) 45 NYU J Int’l L&Pol 487; F Cafaggi, ‘New Foundations of Transnational Private Regulation’ (2011) 38 J Law and Society 20; F Cafaggi, ‘The Many Features of Transnational Private Rule-Making, Unexplored Relationships between Custom, Jura Macatorum and Global Private Regulation’ (2014–15) 36 U Pa J Int’l L 875; Annelise Riles, Collateral Knowledge: Legal Reasoning in the Global Financial Markets (Chicago, 2011) 206. 777 See nn 771 and 772 above for derivatives and trade financing facilities. 778 See Th Schultz, Transnational Legality. Stateless Law and International Arbitration (Oxford, 2012). 779 M Acbelj, The European Union under Transnational Law- A Pluralist Appraisal (Oxford, 2018). 780 Dalhuisen (n 14). 781 Cristian Gimenez Corte, ‘Lex Mercatoria, International Arbitration and Independent Guarantees. Transnational Law and how Nation Statesa Lost the Monopoly of Legitimate Enforcement’ (2012) 3 LTL 345.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 381 enforce transnational law of this nature which separates it from its formation and its validity or legitimacy. This recognition and enforcement thus becomes a rule of law issue, the rule of law itself being transnationalised and demanding the local recognition of all law legitimately emerging in its own order unless overriding issues of domestic public order disallow this recognition and enforcement elsewhere, it being understood that enforcement power of this nature remains a typical facet of all sovereignty and remains national in the absence of a recognised international enforcement authority, reason why bankruptcy law in particular has remained national so far.782 It was submitted that this is of prime importance for international production and distribution chains that can hardly be cut up along local lines in the hope that all the legal pieces together will make a proper legal regime for these flows but it is no less a key issue in the operation of modern finance and its products. In practice, it may be observed that transnationalisation may come about in different ways. In this book the direct force of it is supported, meaning the acceptance of the operation of the transnational commercial and financial legal order as such, reducing the issue of the force of its laws to a recognition and enforcement matter locally only in terms of national public policy limitations in respect of transnational activity that in conduct and effect demonstrably comes onshore in the relevant state. Again, fundamental and general principle, custom and practices and a transnationalised notion of party autonomy are then the main sources of law. It may be supported by treaty law which remains territorial but may amount to general principle if sufficiently ratified. Ultimately this law, like any other, must serve justice, social peace and efficiency in the community it concerns. Another way is for national legislations to start to conform, for example, in the acceptance of ISDA set-off and netting rules in their bankruptcies; it may also come through national case law, even arbitral awards under the New York Convention. It seems the preferred route of many; as already mentioned, the difference is that in this way each country develops its own notions of transnationalisation and there is no uniformity. Bottom-up law formation in the international marketplace remains denied. That is the positivist statist tradition now in particular associated with the civil law that remains consumer oriented in its nineteenth-century origin and bias. If globalisation holds, it may be questioned how realistic this still is and it remains inefficient, postBrexit probably a considerable barrier to attract more financial business, which would remain subject to excessive structuring requirements to make it fit. Civil law is not made for business and does not have the experience to do so effectively. It must learn to listen to practical need at least in professional dealings rather than intellectual system building per country which public policy does not require. To repeat, even if ultimately all is interpretation of local laws only, it is unlikely that transnationalisation tendencies can be avoided if only to make international structures and transactions work whilst public policy issues may have to be transferred into transnational minimum standards in countries that wish to have the benefits of globalisation and participate in it.

782 It may be noted in this connection that the Lehman cases in the UK after 2008, see Vol 2, s 2.4.3 below, started to make considerable strides in its ‘purposive interpretation’ approach to accommodate the international practices and accept them in UK bankruptcies, which upon a proper analysis may be seen as an acceptance of transnational custom, practices, and general principle if not also its concept of party autonomy.

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3.2. The Hierarchy of Norms from Different Legal Sources in the Modern Lex Mercatoria: Elaboration in the Positive Law 3.2.1. Fundamental Legal Principle and Implementing Custom Support. Transnational Rules of Contract Formation and the Normative Interpretation Technique In contract, the impact of fundamental legal principle appears transnationally first and foremost in formation and interpretation. The principle of pacta sunt servanda stands out here as the basic norm for all contract law and is supplemented by, but must be distinguished from, the notion of party autonomy, of which contract is a special expression but which also operates in movable property law as we have seen (section 1.1.6 above). Since the natural law school, the principle of pacta sunt servanda in its further elaboration has often been associated with the concept of consensus between parties, later on developed in offer and acceptance notions. It is unlikely, however, that professional contracts depend solely on consensus, promise or intent for their validity and coverage, certainly not in a psychological sense, if only because, at least in business deals of some size, the person who signs the agreement is unlikely to know much of its detail, while no single person will have dealt with the various issues, and the end drafting is often left to outside lawyers who may be the only ones who know but are not party. Indeed, in modern law, it was submitted that there is a more objective concept of contract formation at work, which first and foremost depends on the notion of conduct and detrimental reliance. Offer and acceptance as a kind of theoretical formal model of contract formation here fade into the background and become at best a subcategory of conduct and (detrimental) reliance, while an anthropomorphic idea of contract promises and intent is abandoned; for modern contract theory, see also section 1.1.6 above and Volume 3, section 1.1.4. The concept of conduct and detrimental reliance as the basis for all contractual obligations is in modern times in appropriate cases supplemented by objective pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual re-negotiation duties. Custom and industry practice will be relevant and elaborate. Whilst implementing fundamental (contract) principle, it may be mandatory or structural, for example, in matters of contractual validity or in issues of capacity to contract. Even if only directory, it should be recalled that custom by its very nature can only be changed by consent of all affected parties (not different from directory statutory law). Fundamental legal principle in terms of liability for the justified reliance by the other party on conduct of the first one, and the objective requirements of trade or the course of business expressed in custom and practices, including a commencing of performance as a matter of investment in terms of detriment, is then at the heart of the binding force of an agreement, of the possibility to demand performance thereunder, and of its coverage, and in providing explanations, additions and, in extreme cases, possibly even corrections, to the wording of the agreement. General principle may offer further support. For sales, treaty law such as the 1980 CISG could also be relevant (at least in countries that have accepted it, if not excluded by the parties as is commonly done), but it may also distract and has problems operating as general principle, especially in its paragraphs on formation. In civil law terminology, this more objective approach to contract formation may to some extent be expressed in the concept of good faith, as we have seen, or in the normative interpretation technique of the contractual meaning and content in which the other sources of law

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 383 may be encapsulated: see further Volume 3, section 1.2.1. It would seem a logical approach in transnational law too and could even be read in the reference to good faith in Article 7 of the CISG. Although, domestic law may provide the residual rule, as we have seen in section 1.4.13 above, in contract it may be superseded by transnational notions earlier than the law in other areas, such as movable property, as will be discussed in greater detail in the next section. In this approach, the transnational contract law between professionals is not anthropomorphic but mainly directed towards the business sector. Its more objective approach also fills in contractual gaps, and requires a measure of diligence and fair play in its performance but only in the manner as customary and anticipated or relied upon in that world. It was submitted that in professional dealings it is primarily a risk management tool and road map. In this connection, it has already been pointed out several times that, although this more objective or normative approach to contract formation and interpretation may lead to more refinement, it may also lead to less, particularly in the professional sphere, especially in respect of defects in the consensus or lack of clarity of the parties’ intent. This has an effect particularly on the defences and excuses. Notions of mistake and force majeure or change of circumstances or hardship are then likely to be less important. It was submitted that professional parties are used to risk taking and often make that their business. If they have not dealt with an issue in their contract as a matter of risk management or allocation, they must in principle accept whatever comes except perhaps in extreme situations, which for professionals do not soon arise and would require consideration of the effect (eg, of a change of circumstances) on their overall position, not only the one under the contract. The only true excuse is the other party not performing. In other words, professional contracting parties entering into a commercial relationship take a lot of risk and must accept the consequences except in extreme cases. Where contracts are primarily roadmaps and risk management tools, it follows that they are likely to be literally interpreted; see further Volume 3, section 1.1.6. They are like instruction manuals where one also does not ask what the drafters might have meant. It has already been mentioned that the objective approach itself may lead here to greater reliance on the text of the contract and may interpret the parties’ duties strictly. Good faith in civil law terms may thus extend but also restrict protection depending on the nature of the relationship and type of business. The particular (commercial) nature of business relationships may also curtail special duties or remedies such as disclosure and co-operation duties in the pre-contractual or formation phase; limit protest periods; and discourage transactions from being undone, especially in their proprietary aspects (although claims for damages may still be valid). This concerns the protection and continuity of the international flows and also the issue of transactional and payment finality. As was noted above, that type of finality may itself figure as a fundamental principle or transnational public order requirement, see further the discussion in the next section. Again, also in these areas we may see fundamental principle being supported by the customs, of the international marketplace, which may in such cases well be mandatory, meaning that parties cannot deviate from them in their contract. The deeper reason is that third parties may become affected. Except in extreme cases such as fraud or corruption, the professional nature of the relationship of the parties may also restrict negligence or other misbehaviour arguments to the more obvious cases. Even questions of capacity or ultra vires legal acts may not have the same importance and impact in the commercial sphere, and good faith reliance on the appearance of capacity is now normally enough. It may also mean that an agency may be assumed sooner than might otherwise have been the case. Apparent authority among professionals could even be accepted upon the mere declaration of the agent itself (for example, employees), if the principal has taken that risk, for example by allowing to use a business card with the principal’s name on it.

384 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law The attitude of rougher justice in the commercial sphere, even against the more traditional rules of contract law, in the interest of (a) the flow of commerce, or (b) greater certainties, may also be demonstrated with reference to the status of letters of intent, which are normally preludes to a contract. As intent or the lack of it is not the sole determining factor in establishing a legal relationship and detrimental reliance may in any event be the more fundamental principle, these letters may acquire binding force between the parties but only if acted upon (always to their detriment) in good faith or even reasonably, which may imply a lesser requirement. In the professional sphere, it needs also to be considered that parties are left to their own devices to a greater extent and so should not readily rely; see also Volume 3, sections 1.3.11 to 1.3.14. Thus, until there is reasonable expectation fully justified in the circumstances, taking into account the normal perceptions and practices between the parties or similar parties in like circumstances, professional actors may not be bound in this manner. Again, custom may support this and explain the impact. It is then likely to be mandatory. Although no written documents indicating the state of the negotiations may exist, under the general law there may still be duties to continue the discussions in good faith and an action (in negligence) if these duties are broken. Yet at least among professionals, mere expectation of a favourable conclusion does not in itself give rise to legal rights.783 Again, the key is that the justification may be less obvious in commercial cases. Once there is such justified reliance, however, the other party may be forced to negotiate the full contract in line with reasonable expectations, short of which there may be room for claiming damages. Whether this also covers expectation damages is another issue and they may be limited to situations where clear promises were made. They would not then result from mere breach of pre-contractual disclosure and negotiation duties, contractual cooperation duties, or post-contractual renegotiation duties. German and Dutch law in particular are now more categorical in the imposition of precontractual duties, and hold that late withdrawal from negotiations may impose heavy contractual liability, including damages for lost profits under the contract, but probably always in the context of clearly improper reasons to withdraw, for example, upon misleading representations. It again suggests a lesser concern in the commercial and professional sphere, although as yet German and Dutch law are seldom so analysed.784 Fundamental principle would not appear to go further in professional dealings. It must be admitted that in the UNIDROIT and European Contract Principles and in the DCFR, there is as yet little appreciation of other sources of contractual rights and duties, other than an old-fashioned idea of the parties’ intent as further laid down and defined in these texts, which allow, however, specifically for some pre-contractual and post-contractual duties but without considering the type of relationship: see for more detail Volume 3, section 1.6. In the case of the European Principles and the DCFR, this may derive from the fact that they mean to cover both business and consumer dealings, the latter being increasingly subject to statutory policy requirements. Again, in international transactions that is not a happy situation. Consumer

783 See also the generally more conservative attitude taken by Lord Ackner in the UK in Walford v Miles [1992] 2 WLR 174, in which, at least in commerce, a duty to negotiate in good faith was thought to be unworkable and inherently inconsistent with the position of a negotiating party, as long as there was no detrimental reliance justified by the circumstances of the case. 784 But see also Vol 3, n 4 for more recent Dutch case law. Even a change of circumstances under new Dutch statutory law is not in practice quickly assumed to lead to a renegotiation duty between professionals.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 385 notions (and protections) are then likely to enter the professional sphere. An anthropomorphic or personalised idea of contract is here improperly sustained in all relationships. Unlike the European Principles and the DCFR, the UNIDROIT Principles apply only to international commercial contracts (which remain undefined), but the rules are hardly different. Unfortunately, the closeness of both sets demonstrates that the UNIDROIT Principles are also imbued with consumer law thinking and old-fashioned anthropomorphic notions of contract, being considered principally as commitments between living natural persons. Most of the present comments therefore apply to all of them, but the UNIDROIT Principles will here be principally considered as they were perceived as being relevant for professional dealings only,785 and there would appear to be considerable confusion. It has already been said that in the context of the modern lex mercatoria and its fundamental legal principles, pre-contractual duties, a duty to renegotiate or a duty to continue agreements beyond their termination date must not quickly be assumed and any damages payable upon discontinuation of such negotiations must be considered exceptional and limited to cases of justified reliance, obvious misbehaviour or extreme consequences. The UNIDROIT Principles do not appear to reflect international commercial practice in their (generally strong) support of these duties. Neither does the DCFR. The importance of modern contract theory in the development of transnational contract law has already been stressed in section 1.1.6 above and will be revisited in Volume 3, section 1.1.4. Fundamental principle and modern notions of party autonomy supported by custom and general principle support it but the above sets of Principles seem little aware. The same applies to the DCFR, see for further comment Volume 3, section 1.6.

785 Thus for contract formation, Art 3.2 of the UNIDROIT Principles still seems to rely chiefly on a personalised consensus notion, although subject to reasonableness, established practices and fair dealing and the nature of the contract, but as implied terms only and not as more objective standards (Art 5.2), while Arts 1.6 and 4.1ff also maintain a narrow concept of interpretation and supplementation. The broad and abstract notion of mistake in Arts 3.4ff also testifies to a doctrinal attitude still connected with a psychological understanding of the consensus. In a similar vein, the notion of avoidance of the contract for lack of this kind of intent is broadly upheld, Art 3.17. It is true, on the other hand, that Art 1.7 generally requires each party to act in accordance with good faith and fair dealings in international trade. However, there are no guidelines on its meaning nor is there any apparent sensitivity towards the circumstances of the case in terms of the nature of the relationship, the type of transaction, and outside forces such as market conditions. Nevertheless, good faith is declared a mandatory requirement, Art 1.7(2), without any consideration of whether its requirements are truly fundamental in the circumstances or of lesser urgency in commercial transactions. That is also the attitude in the DCFR: see further Vol 3, s 1.3.10. In the US, s 1-302 UCC is notably more circumspect and allows parties to set the standards of good faith, diligence, reasonableness and care unless they are manifestly unreasonable. That is the better approach. It is also of interest in this connection that in the UNIDROIT Principles the impact of custom may be limited by unreasonableness (not good faith), see Art 1.8, which precisely in the commercial sphere for which these Principles are collected may be less desirable. There is a separate and (very) broad notion of hardship in Art 6.2, while a subjective concept of force majeure is maintained in Art 7.1.7. Both may be a great deal more generous than business requires and depends on: see further the discussion in Vol 3, s 1.3.14. Attendant negotiation duties are determined by the need to avoid bad faith without any guidance on what that may be in business dealings, which may require a narrower concept, Art 2.14, while co-operation duties at the performance stage are expressed in terms of reasonableness: Art 5.3. They seem to be distinguished from the general duty of parties to act in good faith under Art 1.7 and are somewhat better described in Art 5.5. Parties appear able to deviate from them to the extent that these duties may be considered outside the good faith ambit of Art 1.7, but it remains unclear when this may be the case.

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3.2.2. Fundamental Principle and Implementing Custom Support. The Notion of Transnational Ownership. A Dynamic System of Modern Movable Proprietary Rights From the enumeration of the fundamental legal principle in section 3.1.2 above, there follows a notion of ownership in movable assets which reaches across borders. At the more practical level, this has long been clear in the operation of negotiable instruments and documents of title, which depended in their development on a transnational concept of property rights. In modern times, the Eurobond as a bearer instrument (and now a security entitlement of a similar nature) presents another important example; see also the discussion in sections 1.1.6 above and 3.2.3 below. Negotiable instruments are documents of title representing money claims such as bills of exchange or promissory notes (for example, bonds) and cheques. They developed in Europe as early as the fourteenth century under ‘merchant law’, mainly for use in the international payment circuit: see Volume 4, section 2.2.1 and obtained their present form during the first phase of the Industrial Revolution at the end of the eighteenth century as did the bill of lading, which is a negotiable document of title representing goods (movable physical assets): see Volume 4, section 2.1.1. This was closely connected with the evolution of the CIF contract, which was itself also considered covered by ‘merchant law’. In England, modern writers still maintain this lex mercatoria approach in respect of them in the absence of statutory law.786 International bonds as negotiable instruments have acquired a similar status, and were as such revived in the Eurobond market operating since the early 1960s.787 Their replacement by securities entitlements in a book-entry system would not have appeared to change the internationality of these instruments and, even if local law of the register is now widely thought applicable, international practices must still be considered as preceding the application of such domestic laws which appears clearer when adverse local case law is produced in respect of similar domestic instruments.788 These instruments or documents of title, especially if made negotiable (by the insertion ‘to order’ or ‘bearer’), thus acquired an independent proprietary status largely demonstrated by their own manner of transfer normally achieved through physical delivery (with endorsement if issued to order). This was so regardless of domestic laws, see also section 1.4.4 above, even if these instruments were used between nationals or residents from the same country. In further recognition of these instruments or documents operating under a separate law, in common law countries the concept of consideration was never applied to their transfer either. There also followed individual protection of bona fide purchasers/holders notwithstanding nemo dat principles. This extra protection was often applicable even in the case of a bona fide purchase from a thief—in modern times evidenced particularly by stolen banknotes. This is the key issue of finality. It means that there is also an independent transnational framework of limited proprietary rights in these assets, but at first more likely only in their most simple form based on physical possession of the instrument (like a possessory pledge). Any more complicated or non-possessory

786 See, eg R Goode, Commercial Law, 4th edn (London, 2010) 513. 787 See for older English case law, Goodwin v Roberts [1876] 1 AC 476 and Picker v London and County Banking Co (1887) 18 QBD 512 (CA), with emphasis on the financial community treating these instruments as negotiable regardless of domestic laws. 788 Adverse local case law was therefore ignored in Belgium in relation to the operations of Euroclear, see Vol 4, s 3.1.6 in fine.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 387 interests in them, for example under a floating charge, are for the time being still likely to operate under an applicable domestic law, except increasingly modern financial structures based on party autonomy then operating subject to the unhindered continuation of the international flows as we have seen in section 1.1.6 above. For the more traditional negotiable instruments, including Eurobonds, there is also likely to exist an independent approach to the question of the causal or abstract system of title transfer (see Volume 4, section 1.4.6) and therefore to the proprietary consequences of an invalid transfer of the document, particularly relevant for Eurobonds when mistakes were made in the delivery. Again, this then becomes an issue of finality under which bona fide acquisition is a further protection and the flows in these instruments safeguarded. One is likely to see here the bare (and fundamental) principles of (personal or movable) property rights in which physical possession may still figures large. This conforms to the development of common law in this area even though it may be increasingly realised and admitted that in the law we talk about rights and obligations, nothing is physical, not even the notion of possession if properly understood: we can possess claims and the proprietary rights they embody. In the international commercial and financial legal order, any further refinement then becomes a matter of international custom, uniform treaty law, or, failing these, of general principle and ultimately still of domestic laws. Here we have to start thinking in terms of the operation of the entire international marketplace, see also the discussion in section 1.4.4 above. The application of conflicts of law within the lex mercatoria is then limited to these domestic refinements. But again, this domestic law would have to play its role as part of the new transnational law of which it becomes the residual rule in such cases, as explained earlier, see section 1.4.13 above. Thus, in international situations where the basics of property law identified above now tend to reassert themselves at least in tradable assets including negotiable instruments, domestic refinements may then be disregarded altogether if they concerned the core or contradicted the essence of the instrument or its proprietary structure. Indeed, in other international assets, such as bills of lading, we see the operation of similar principles of transfer through delivery, bona fide third-party protection and possessory security operating, and these principles cannot be violated by domestic laws without rendering them ineffective as documents of title, even purely domestically. In bills of lading, the title transfer is commonly considered delayed until the actual handing over of the document, which represents the underlying goods; see more particularly Volume 4, section 2.1.1. In countries such as England and France where title in chattels normally transfers upon the mere conclusion of the sales agreement, this delay is still considered implicit in FOB and CIF terms, even domestically, and a form of delivery is then accepted as an additional requirement. Again, one may view this as emanating from long-standing international practices or from the operations of the international marketplace itself, meaning a return to a more basic form of transfer of ownership based on physical delivery. This practice is the normal one in countries such as Germany and the Netherlands, which still require delivery for title transfer in all movables, although, importantly, it may be constructive. In these countries transfer of the document then substitutes for delivery of the underlying assets where there is a document of title, the difference being that in that case the delivery is always physical and cannot be constructive. There are here clearly more fundamental principles at work supported by practical needs, which may be confirmed by (international) custom that is mandatory in these aspects, lest the basic structure and its main features are lost. Thus, one may ask whether the recognition and further development of an independent transnational movable proprietary regime based on fundamental legal principle and mandatory transnational custom, is then also conceivable for assets other than negotiable instruments or

388 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law documents of title, like commodities, and ultimately also for intangible monetary claims like receivables. It is difficult to see why not, at least for the more common aspects of property rights and their transfer. Especially coming from the English and possibly French approach to title transfer in the sale of goods, it may be possible to let the parties decide. It then becomes an aspect of party autonomy, in transnational law, it was posited, operating as an autonomous source of law in its own right. However, some form of manifestation or publicity traditionally facilitated third-party or proprietary effect, like physical holdership and delivery for title transfer in sales. In terms of international custom, they may remain basic additional requirements or formalities for the international transfers of goods, as they remained so for negotiable instruments and documents of title. A strong bona fide purchaser protection would be the necessary sequel in such a system as it is also for negotiable instruments and documents of title and this concept may then be capable of expansion. In this manner, title transfer in oil installations on the high seas is often achieved only through transfer or delivery of certain documents such as completion certificates, even if such installations may be considered immovable. Exclusive access may be another objective requirement and a sufficient outward sign of ownership in these situations. Clearly, the emphasis here is on a form of control, either in terms of documents, access, or both. In countries such as Germany and the Netherlands, which upon a sale require delivery for title transfer, this would indeed seem normal (although delivery could still be constructive, therefore not physical), but in international situations of this sort the delivery requirement is also found in English contract models. Again, it relates clearly to a more basic model of ownership and its transfer, which still puts emphasis on physical possession, user and disposition rights and their physical transfer and protection (rather than on more theoretical concepts of ownership and legal or constructive possession). Again, protection of bona fide purchasers against nemo dat principles may then follow in internationalised assets, at least if these purchasers also acquired some form of control (though arguably it needs not or no longer be physical). As just mentioned, it is not to be excluded that more advanced proprietary notions may subsequently develop in transnational law. Thus, conditional title transfers in the international commercial sphere may at the same time allow for the creation of beneficial ownership rights and limited proprietary interests in internationalised assets including (substitute) secured interests and floating charges. They could approximate the common law trust construction at the same time. In line with common law (in equity), it renders proprietary rights more contractual in nature, which may be a modern trend everywhere, although always subject to a strong protection of bona fide purchasers and could also become the approach of customary transnational law: see for these developments again the discussion in section 1.1.6 above. As we have seen, an important other root of modern proprietary rights is then in the protection of contractual rights in chattels against successors in interest who know of these rights. Potentially, this concept also operates at the transnational level, where it may be especially revealing and important. Traditionally, it underlaid the proprietary interests recognised in equity in common law countries, as was already mentioned in section 1.1.6 above and will be discussed more extensively in Volume 4, section 1.10. It is another source—much more sophisticated and abstract—of modern proprietary rights and their third-party effect. It follows that these newer rights may ultimately still be cut off in respect of bona fide purchasers or the purchaser in the ordinary course of business of the underlying assets. There will normally not be any search duty in registers or otherwise, meaning that all non-suspecting successors in interest take free and clear of such contractual claims. Only professional insiders such as banks and major suppliers would therefore need to search for older charges if they demand newer ones for themselves in the same assets or asset classes.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 389 Nevertheless, it follows from this line of thinking that more intricate property rights and especially non-possessory security interests may still be more difficult to develop in transnational customary law and may therefore remain the preserve of domestic laws longer, if only for lack of common features and easily understandable structures. Where common structures exist, however, which may well be in international finance (for example, in terms of set-off and netting and in finance sales like repos), they may acquire international normativity also on the basis of general principle, which in such cases is likely to be mandatory as well (and as such moves up in the hierarchy of norms above contract but below mandatory custom and treaty law, if any). International master agreements as drafted by ISDA for swaps and by ICMA for repos (see also section 3.2.5 below) may be a further expression of newer international practices or general principles. They may then also be considered transnational and supported by party autonomy which, however, in proprietary matters and in issues of set-off and netting and the references they may create, requires more objective support for third party effect (here especially on common creditors), indeed from transnational custom or practices or general principles themselves. Incipient transnational ownership rights have also been spotted in other areas such as fishing and mining or drilling rights, in broadcasting and telecommunications and in intellectual and industrial property rights. This evolution is of great importance as it often concerns large investments and major capital goods or productive assets.789 They generally confirm the thesis concerning the operation of transnational property rights just propounded. The development of transnational ownership rights under broader human rights notions was noted in section 1.5.9 in fine to at least protect against seizure and expropriation. No less interesting in this connection is the development of the notion of international investments under public international or private transnational law, now much promoted by the multitude of existing BITs. Here it is clear that ‘international investment’ itself becomes a kind of proprietary right protected under these treaties and earlier (to a lesser extent) under customary public international law against expropriation or more informal forms of taking. The difference is that in treaty law the measure of compensation is normally better clarified, an area where customary public international law remained unsettled. The notion of international investment as a transnational property right develops here regardless of the strong attachments with a host state where the investing companies may be incorporated (usually as subsidiaries of the foreign investor) and where its know-how and patents will require recognition and protection under the intellectual property laws of the host state, which will also determine the kind of authorisations or administrative licences required. Nevertheless, if the supporting capital comes from elsewhere, the investment will qualify as international and will be proprietarily protected accordingly. This is likely to include an entitlement to a minimum standard of treatment and procedural protection. It is still possible in this connection to ask whether this regime is one of public international law or of administrative or private transnational law or whether there is a combination of these. This has not so far been clarified, but, whatever the outcome, there is likely to be a

789 Except to some extent in air and sea transport with the connected bills of lading and negotiable instruments, and now also in international finance, the notion of international property rights remains unexplored, but, again, it may be less unusual in the context of public international law and in intellectual property, see, eg, R Churchill and AV Lowe, The Law of the Sea, 3rd edn (Manchester, 1999); M Roggenkamp et al, Energy Law in Europe (Oxford, 2001) paras 2.01ff; S McCaffrey, The Law of International Watercourses (Oxford, 2001) ch 5; P Birnie and A Boyle, International Law and the Environment, 2nd edn (Oxford, 2002) chs 1, 5, 6, 7 and 10; A Gillies and J Marshall, Telecommunications, 2nd edn (London, 2003) ch 4; C Tritton, Intellectual Property in Europe, 2nd edn (London, 2002) chs 2–6.

390 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law strong transnational private law analogy. In other words, it is unlikely and unnecessary to build an entirely new property law within public international law, where the concept is likely to operate in the manner of an administrative licence, also increasingly transnationalised, see further Volume 2, section 3.1.4 below. The development and recognition of an internationalised concept of ownership in this manner (based either on physical possession implying some form of publicity or even of purely contractual user, enjoyment and income rights in the property to the extent known by outsiders) may at the micro level also facilitate the process of characterisation, recognition and adaptation of proprietary interests when assets are transferred to, surface, or play a role in other countries with different legal systems; see for this recognition and adaptation process more particularly Volume 4, section 1.8.2.790

3.2.3. Fundamental Principle and Implementing Custom Support: Eurobonds, Trade Receivables and Other Transnational Proprietary Structures To demonstrate the transnationalisation of the fundamental ownership concepts further, it may be of interest to return to the modern Eurobond. They have become the standard instrument of the largest capital market in the world. Imperceptibly, transnational ownership notions have been adopted for them in the last 50 years. For the most part, these bonds are made subject by the issuer to a contractual choice of law for the proprietary regime, which is mostly English or New York law, marked as such on the back of the instrument. The question is what this choice of law means. It is clear that a bearer instrument is normally intended, but it is often unlikely that there is negotiability in the strict terms of section 83 of the UK Bills of Exchange Act 1882 because the terms of the bond are not always sufficiently certain, even the payment, which may be subject to all kinds of variations and conditions. It is not different in New York. In fact, an entire framework of rights and obligations may be constructed for the bond. This is counter to the concept of negotiable instruments under English and New York (and most other domestic) laws and especially to the requirement of simplicity traditionally necessary for their operation, including their easy transfer. It isolated the monetary payment right and at best covered closely related obligations only. The Eurobond may go far beyond that, meaning that its transfer includes a whole legal framework deemed to be incorporated in the document.

790 In the meantime, it is doubtful whether within the EU harmonisation of ownership concepts can be attempted. This issue had already arisen in view of the text of Art 222 of the original founding treaty (the Treaty of Rome of 1957), although in the area of security rights some early efforts were made, see Vol 5, n 37, and in matters of patent law the EU has repeatedly been active, sanctioned by the European Court of Justice, see Case C-30/90 The Commission v The UK [1992] ECR I-858. In these cases, the Court held that Art 222 did not allow the Member States to legislate in the area of industrial and commercial property rights in ways which would impact on the free movement of goods. But for the rest, it would appear that the Court is more favourably inclined towards extensions of these property rights at least EU wide than to their limitation to purely domestic concepts. See further also the EU Settlement Finality Directive and Collateral Directive, which touch on the status of payments and some security rights and finance sales such as repos, and on a number of bankruptcy aspects, also in connection with the netting principle, see Vol 5, ss 3.2.5, 2.6.7 and 4.2.4. The DCFR, see Vol 4 s 1.11, presents a full text for a codification including moveable property but is far from being adopted, one issue again being, besides its sense of confinement and its quality, whether the EU has the power to legislate in this area, see s 1.4.21 above and Vol 4, s 1.11.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 391 As we have seen, in practice, the contractual choice of law in proprietary aspects is not decisive. This is so first because of the third-party proprietary effect which cannot be freely created or conferred by parties choosing foreign laws. In any event, it would have to be determined how such domestic law would subsequently function in the international legal order, itself conceivably becoming thereby transnational law and adjusted accordingly as mentioned before. It would thus be possible or even necessary to rely on more fundamental or common proprietary principles to determine the true international status of Eurobonds as negotiable bearer paper. This is in fact what happened, as negotiability in these circumstances is always presumed, regardless of what English or New York law holds in the matter—in fact even English domestic case law is accommodating.791 As mentioned at the beginning of this section, modern book-entry systems for (intermediated) security holdings have changed the basic system of securities holding, and have had to do away with physical paper, as have the bearer Eurobonds, at least at the level of the end investors; see Volume 4, part III. The question is whether this has changed the nature of the international Eurobond investment and has reversed the role of transnational custom in favour of the law of the place of the custodial or brokerage security account (PRIMA). Contractual choice of law is often supposed to play a greater role here as also recognised by the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary, see Volume 4, section 3.2.2. It favours domestic laws but there appears little enthusiasm for the project. Again, the force of transnational custom and practices should not be underestimated. They have been ignored in the discussions on the Hague Convention and a re-nationalisation tendency of the law in this area seemed to be the consequence, but is unlikely to succeed. In other words, where the Convention does not prove effective or is not adopted, international custom will continue to prevail and presents a mandatory framework in proprietary matters. Furthermore, the idea that a custodian would work under a multitude of legal regimes depending on what each of its clients wants is not manageable. In any event, in the lex mercatoria approach of this book, (mandatory) international custom, practice and general principles would prevail over the application of any domestic law in this area resulting under the Convention.792 Practices appear 791 Indeed, it is often said that the negotiability of Eurobonds derives from the force of market custom: see the older English cases on international bonds cited in n 774 above, which relate to Russian and Prussian bonds, and further P Wood, Law and Practice of International Finance (London, 1980) 184. See also Bechuanaland Exploration Co v London Trading Bank [1898] 2 QBD 658, in which it was accepted in connection with the negotiability of bearer bonds that ‘the existence of usage has so often been proved and its convenience is so obvious that it might be taken now to be part of the law’. Modern case law does not, however, exist confirming the point but in England it is still considered good law. See for the explicit reference in this connection to the custom of the mercantile world, which may expressly be of recent origin, Dicey, Morris and Collins on the Conflict of Laws, 14th edn (London, 2006) r 222, 1800, deleted, however, in the 15th edn of 2012. 792 In this connection, it may also be of interest to look rather more closely at the operations of underwriters in the international bond markets (Euromarket). The main concern here is to create a situation where the capital-raising operation is as far as possible detached from local elements, especially in terms of tax, foreign exchange, syndication, underwriting or placement rules. To achieve this, at least in the Eurobond market, the issuing company (often through a fully guaranteed financing subsidiary) traditionally operates from a tax haven base so as to avoid withholding tax payments on interest. The foreign exchange restrictions on payment of interest and principal are likely to be minimised by the creation of paying agents in several countries providing a choice for the investor. Another measure to promote the detached nature of the instrument is the creation of an underwriting syndicate that operates from a country such as England, which does not hinder or regulate the operation unduly and allows placement in other countries (although it may still limit the placement of Eurobonds in its own currency in its own country). To have syndicate members in various countries promotes at the same time the international character of the syndication and placement. These are practical measures an issuer can take to promote the internationality or transnationality of the negotiable instruments issued by him. The documentation surrounding the creation, nature and sale of these instruments such as the subscription, underwriting and selling agreements, may as a consequence acquire a transnational flavour as well.

392 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law to be the decisive factor and are then likely to be transnational, as a transnationalised instrument is concerned here. The mere crediting of the securities account is the essential feature and full ownership results. The bona fide client receives the assets free and clear of any prior charges (unless marked on the entitlement itself which is usually only possible for a pledge) and need not fear that the bookings will be undone because of internal errors or the lack of sufficient asset back-up. Again, this is the issue of finality. In this vein, it is not inconceivable either, as also already suggested, that from a more fundamental ownership perspective, all monetary claims, especially trade receivables, are increasingly considered much like negotiable instruments and thus become internationally transferable in similar ways through transfer to the assignee of the collection right and of the power to give notice to the debtor. Transfer restrictions and debtors’ defences against payment would be de-emphasised. It is the approach that is increasingly favoured in the US at least in respect of sales receivables: see sections 2-210 and 9-406(d) UCC and Volume 4, section 1.5. It is likely, however, that at least the set-off right against the assignor would be kept intact. As was noted in section 1.1.6 above, in asset-backed financing, modern financial law in particular emphasises the movement towards new proprietary rights in an international commercial (professional) context. This is especially relevant for finance sales including repo financing. The modern lex mercatoria serves here as a modern conduit to introduce them transnationally, especially relevant where domestic law cannot accommodate them. But it is also relevant in respect of receivable portfolios with debtors in many countries. It has already been said that the common law example in equity is likely to serve here as the better and more flexible model, including its approaches to finance sales, floating charges, (constructive and resulting) trusts, and bulk transfers or assignments (including these of future assets). That may be especially relevant in civil law countries, which normally practise a closed system of proprietary rights and their creation, protection and transfer. Thus beneficial, conditional and temporary ownership rights in portfolios of present and future tangible or intangible movable assets may become more readily recognised in international commerce or professional dealings. Advanced types of floating charges, bulk assignments even of future claims, or bulk transfers of future goods, repos and leases as conditional sales and transfers may become accepted as well, while domestic bankruptcy laws will also learn to recognise these customary international financial facilities and structures and to respect them. As just mentioned, in common law countries, they found their expression primarily in equity. Civil law never had that facility but in international finance, transnational commercial law may now serve to further develop these structures. It is a most important evolution, supported by the fact that traditional private international law has always had difficulties in dealing with intangible assets or assets that habitually move across borders while its reliance on domestic laws is increasingly unlikely to lead to internationally acceptable solutions in the financial area. In fact, from a common law perspective, one may see these developments as the revival of equity now in a transnationalised context, therefore rationalised and freed from the domestic shackles in which it had become entangled.

Here too, the choice of a domestic law in the documentation may not be controlling and could even be inappropriate as it may disturb the balance between all the elements of transnational law or the lex mercatoria to operate fully. In this connection, the Recommendations of the International Primary Market Association (IPMA) for the issuing activity and initial placement and the Rules of ISMA (earlier the AIBD), since 2005 merged into ICMA, have a natural role to play within the hierarchy of the transnational law. The key here is that they may acquire a mandatory flavour as well, although the former are officially not even binding between the members but intended as guidance only.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 393 Like in equity (in common law countries), the new proprietary model that is to be so admitted or created in the international commercial and financial flows or in the transnational commercial and financial legal order may not immediately present a unitary coherent structure of proprietary rights, although the true underlying theme would be prior knowledge in the acquirer of any type of adverse interest in the asset (whether proprietary or contractual) for it to be maintainable against him, as just mentioned. Initially, modern transnational proprietary rights are more likely to be defined for each structure without regard to an underlying framework, which may only develop later. To repeat, such a more open proprietary system needs fundamental balancing through the notion of protection of bona fide purchasers or rather the buyer in the ordinary course of business of commoditised products, as just explained. That is also the bottom line in common law countries (in equity) that have learnt to be comfortable with this state of affairs, elaborated in modern statutory law in the US notably under the UCC. It is indeed product specific and uses different proprietary concepts and third-party protections in Article 2 for the transfer of title in the sale of goods, in Article 2A for equipment leases, in Article 4A for payments, in Article 8 for investment securities, and in Article 9 for secured transactions. This may be more difficult for civil law lawyers to accept, but whatever their preoccupations may be, there is ample evidence from common law countries that a unitary systematic approach is not necessary, even in proprietary matters. In fact, it may be argued that the absence of it has always been an advantage in common law countries, especially in the further development of new financial instruments and structures. The trust, constructive trust, resulting trust, tracing and set-off concepts, transfers in bulk, temporary and conditional transfers are here perhaps the best demonstration, concepts without which modern financial products and structures could hardly operate. In commerce, there is also the floating charge and the concept of tracing. It shows that there is a whole transnational proprietary framework at work in the international marketplace without which it could not operate but which is so far hardly properly identified.

3.2.4. Fundamental Principle and Implementing Custom Support in Procedural Matters Fundamental legal principle must also be considered in the context of procedure, certainly at the transnational level in international commercial arbitrations, as the main dispute resolution facility in the international commercial and financial legal order. We are concerned here in particular with the equality of all parties and the proper protection of respondents in the composition of the panel, their rights to a fair hearing, presentation of and search for documents, and adequate time for defence. Especially here, the operation of transnational fundamental legal principle or mandatory public order requirements can hardly be denied. Again, customary law is likely to support fundamental principle, here in a structural and mandatory fashion meaning that any agreement to the contrary, including contrary provisions in the arbitration clause or in the institutional arbitration rules that may be incorporated in it, would be ignored or amplified. This may also go to the binding force of the arbitration clause itself, separate from the rest of the agreement, while the concept of severability of this clause, the status, powers and duties of arbitrators, their jurisdiction, and what is arbitrable may have their foundation more properly in the transnational commercial and financial order; see also section 1.1.11 above and Volume 2, sections 1.1.10 and 1.2.5 below. It can thus be argued that institutionally the power of arbitrators derives from the transnational legal order itself, the arbitration clause merely activating it, but itself also deriving its force

394 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law from the transnational legal order, whilst operating amongst the different legal sources in that order and subject to their hierarchy which is held in this book to be the better view. In any event, the power of the lex arbitri of the seat in these matters is here increasingly eclipsed. The developing transnational arbitral practices strongly support this evolution; see further the discussion in section 1.4.19 above.

3.2.5. Mandatory Custom and Practices. The ISDA Swap and ICMA Global Repo Master Agreements In sections 3.2.2/3 above, the supporting role of custom in the elaboration of fundamental principle in contract and for movable property in Eurobonds and in other evolving transnational proprietary structures was noted. As further elaboration of fundamental principle in movable property, these customary rules are likely to be mandatory. It means that they cannot freely be altered by the parties although in movable property the impact of party autonomy was also noted and the limitations identified. The phenomenon of the law-creating force of custom and practices has given rise to much academic discussion (see section 1.4.8 above), its autonomy and especially its mandatory force in property matters sometimes still being doubted. In modern civil law that had to do with the denial of sources of law other than statute, as we have seen. Custom is here often believed atavistic and its recognition a sign of regression, a relapse into cultural particularities inimical to modern progress and the role therein of the modern state as ultimate social organiser and (therefore sole) source of law. It is the reason why a distinction between custom and trade practices is often made. In this view, custom is objective law and to be avoided, at best soft law, while trade practices are implied contractual terms and may as such be acceptable subject to the applicable (national) contract law. This view is strong even in common law countries, particularly in England. It is a sequel to the view that law can only issue from a sovereign, not bottom-up, therefore from industry custom and practice even though the common law leaves more room for them in commerce and finance as we have seen but at least in England it is not quite clear how much. It was shown that the UCC in the US thinks differently and promotes the further development of custom as it does of the law merchant and equity. This is also the approach of this book, and is considered particularly appropriate in the international commercial and financial sphere, where proprietary structures and resulting preferences in a bankruptcy distribution rather than contractual arrangements are often the issue, particularly in asset-backed financing or in set-off and netting agreements. In the international sale of goods and assignment of monetary claims with debtors in different countries,793 we also have the important issue of transactional finality, earlier also identified as proprietary. In fact, custom’s role is of much greater importance outside contract, where new structures cannot be freely created by parties. It is in any event hardly perceptive to call the legal developments in that sphere regressive. In international commerce and finance, customs and practices are likely to be highly sophisticated, much more than state law can be. It was submitted that they concern in essence all that is considered normal by participants and on which they commonly rely in their businesses and markets. It was argued that it basically concerns their routines and perceptions in this regard. It was also said that much of the infrastructure of transnational contract and movable property law including the operation of the Eurobond market is determined thereby. 793 See Dalhuisen (n 14).

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 395 In the modern lex mercatoria approach as a hierarchy of norms derived from different autonomous legal sources, after the fundamental principles which are the basis of the whole system, there follow indeed the customs generally prevailing in each trade if considered mandatory, which is still rare, although at least the Hague-Visby Rules are often so considered where not incorporated by statute.794 Their being mandatory means in this instance that they need not be incorporated in the bill of lading or in any domestic law to be effective. Parties may still attempt to deviate from them, but they risk the result of no longer being a proper bill of lading. The more modern version of this customary law may be found in the Hamburg Rules prepared by UNCITRAL and we now also have the Rotterdam Rules, see Volume 4, section 2.1.8. Indeed, true mandatory custom is more likely to be relevant and emerge in non-contractual aspects, especially in proprietary matters or also in those contractual aspects, which, like issues of validity and capacity, cannot be freely determined or changed by the parties either. It is for international arbitrators and the courts, when asked to rule on them, to acknowledge transnational customs and practices in these areas. The Eurobond was already mentioned. In the elaboration of the rules of contract, property and set-off or netting, further mandatory rules of custom may develop. Again, this could then be so especially in the areas of legal capacity and contractual validity and in the transfer of ownership (in whole or in part, conditionally or temporarily, as usufruct or security) or in the area of the return of title upon default, such as in a reservation of title, or in matters of bona fide purchaser protection or the protection of buyers in the ordinary course of business of commoditised products, otherwise potentially subject to all kinds of charges or finance sales. Similar status may be conferred on the bona fide collecting assignee unaware of any other assignment of the same receivables for whatever purpose. To repeat, this concerns the infrastructure of the law of contract and movable property, and is as such unlikely to be at the free disposition of the parties. These rules are more closely related to, or an elaboration of, the fundamental principles connected with the ownership notion, supported in terms of finality by transnational public order requirements. Transnational custom builds on this and is then likely to be mandatory in the trade it concerns. It was mentioned in section 1.4.8 above that custom or practice may surface in different ways, for example in certain presumptions, such as, among professionals, the presumption of the capacity of the parties. At least in the international commercial sphere, typical legal capacity limitations derived from domestic law, even that of the residence of the party concerned, are then increasingly ignored, especially in the case of legal entities, although purely domestically they may remain of the greatest importance. This was shown in the cases concerning swaps entered into with municipal authorities in the UK.795 Mandatory transnational custom may also affect the rules of adjudicatory jurisdiction. It has been said in this connection that transnational custom is now averse to jurisdiction being exercised by the court of the plaintiff (forum actoris) without any other supporting grounds for such jurisdiction.796 This would be a further incidence of customary law acquiring a mandatory or fundamental flavour at the transnational level. In the swap and repo markets, the ISDA Swap Master Agreements of 1987/1992/2002 and the PSA/ISMA (now ICMA/SIFMA) Global Master Repurchase Agreement of 1992/1995/2000/2011, already mentioned in section 3.2.2 above, acquire a similar status of custom in the areas they

794 See W Haak, ‘Internationalism above Freedom of Contract’ in Essays on International and Comparative Law in Honour of Judge Erades (The Hague, 1983) 69. 795 Hazell v London Borough of Hammersmith and Fulham and Others [1991] 1 All ER 545 (Lord Ackner). 796 See JP Verheul, ‘The Forum Actoris and International Law’ in Essays on International and Comparative Law in Honour of Judge Erades (The Hague, 1983) 196.

396 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law cover, at least in the London and the New York markets where they mainly operate,797 the international swap market being the largest market of all, whilst the repo market has become a large support function in the Eurobond markets. This may be particularly relevant for their close-out and netting provisions. The status of contractual bilateral netting with its enhancements of the set-off principle and its inclusion of all swaps between the same parties, leading to a netting-out of all positions in the case of default at the option of the non-defaulting party and ipso facto in the case of bankruptcy, could otherwise remain in doubt under local laws. It was in fact never a truly contractual matter because of its effect on third parties (here other creditors). This is indeed particularly relevant in bankruptcy, because of the substantial impact of netting on the rights of other creditors while an important and broad indirect extended preference is created, see further the discussion in Volume 2, sections 2.2.2 and 2.3.2. Transnationally, the acceptance of the set-off principle in this manner may well become customary, if it is not already so, and may then also impose itself on domestic bankruptcy laws as a mandatory principle, sew further the discussion on set-off and netting in Volume 5, section 3.2. It may help in this connection that international regulators favour this limitation of risk in the financial system, as demonstrated by the 1996 amendment to the Basel Accord; see further also Volume 6, section 2.5.5. In the area of foreign direct investment, international agencies have also attempted to define certain principles and set certain standards which may also be reflective of international practices or initiate them.798 Less developed countries have seen here possibilities of abuse, while investors held out for more protection. The former sentiment held sway in the later 1960s and 1970s and gave rise to the OECD Guidelines of 1976 (following the 1969 Andean Investment Code for the Latin American Region). They were not legally binding and often thought still to represent the views of only the richer countries. In this climate, the World Bank (IBRD) tried to help, as it had earlier taken a leading role in the formulation of the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States, presenting an institutional framework (through the International Centre for the Settlement of Investment Disputes or ICSID) for disputes between foreign investors and home states through arbitration under investment agreements. It also came up with Guidelines on the Treatment of Foreign Direct Investment in 1992.799 They cover four areas, ranging from admission, treatment and expropriation of foreign investments to the settlement of disputes in respect of them, and consist of general principles to guide governmental behaviour towards foreign investment, and purport to reflect generally acceptable international standards for the promotion of foreign investment.800 These Guidelines were based on a study of the then current practices as reflected in international investment treaties, national investment codes, writings of international law experts and a host of arbitral awards mainly emanating from the ICC, ICSID and the Iran–US Claims Tribunal. 797 See n 438 above and for swaps more in particular AP Salonen, Transnational Law of the OTC Derivatives Market (Helsinki, 2019); J Biggins and C Scott, ‘Public-private Relations in a Transnational Private Regulatory Regime: ISDA, the State and OTC Derivatives Market Reform’ (2012) 12 EBOR 309 and ‘Licensing the Gatekeeper? Public Pathways, Social Significance and the ISDA Credit Derivatives Determination Committees’ (2015) 6 TLT 370; GV Rautenberg and A Verstein, ‘Assessing Transnational Private Regulation of the OTC Derivative Market: ISDA, the BBA and then Future of Financial Reform’ (2013–14) 54 Va J Int’l L 9; Kathryn Collard, ‘Advantages of a Co-regulatory OTC Derivatives Regime’ (2014–15) 46 Geo J Int’l L 877. 798 Foreign direct investment is here commonly defined as a long-term interest with an active management role in an enterprise or utility operating in a country other than that of the investor; see also s 3.2.2 above. 799 The climate changed in the 1990s when Bilateral Investment Treaties (BITs) started to become popular, superseding the need for these Guidelines: see for these Treaties also s 2.2.7 above and for the protection of foreign investments (as defined thereunder), s 3.2.2 above, see further the discussion in Vol 2, s 3.1. 800 See also the Report to the Development Committee on the Legal Framework for the Treatment of Foreign Investment (1992) 31 ILM 1368.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 397 These guidelines are extensive and, although no more than guidelines, their standard and norm-creating effect has been noted from early on, which also suggests international custom.801 Although it would be custom under public international law, not under the modern lex mercatoria, it shows the process. It is not impossible that while becoming customary law they become mandatory at the same time and could as such become serious compilations of compulsory international practices.

3.2.6. Mandatory Uniform Treaty Law, Mandatory General Principle, Party Autonomy, Directory Custom or Trade Practices, Directory Uniform Treaty Law and General Legal Principles Following what was said in sections 1.4.14 and 3.1.2 above, in the context of the modern lex mercatoria and its hierarchy, after (a) the fundamental legal principles, and (b) the mandatory customs and practices, there follows (c) uniform treaty law to the extent applicable under its own rules and mandatory. Thereafter, there figure (d) general principle to the extent mandatory, and (e) party autonomy, or, in contractual matters, the contractual provisions themselves. They are supplemented in descending order by (f) directory trade practices, (g) directory uniform treaty law (if applicable under its own terms), (h) common legal notions and, if all else fails, finally by (i) domestic laws identified under the private international law rules of the forum if the issue is not yet decided under the higher rules. It was mentioned earlier that mandatory uniform treaty law is rare, but Article 12 of the Vienna Convention is an example. It allows Contracting States to demand written international sales agreements. If the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade were to be widely adopted, there would be a great deal more of these mandatory provisions in Contracting States, particularly in the formalities and proprietary aspects of international bulk assignments of receivables. There are also some in the 2001 UNIDROIT Mobile Equipment Convention. Mandatory general principle must equally be deemed rare for the moment, but may derive from Conventions of this nature, if not themselves adopted, to the extent that they represent the international business consensus and are then likely to be closely connected with custom or industry practice. They may also further implement or supplement fundamental principle and custom also in transnational proprietary matters. Subsequently, the contract itself may of course set important rules—that is the question of party autonomy—but as already pointed out several times (see section 2.2.9 above) these contractual rules can in principle only prevail in contractual matters, and bind only the parties to the contract, and even then only in matters that are at the free disposition of the parties, which may not be the case as to their own legal capacity, the binding force and legality of the agreement, and in the matter of remedies, especially in the case of error or fraud. Also, parties would not be able to address in their contract matters regarding third parties, and therefore especially not proprietary issues, even if in matters of assignment of contractual rights there is a modern tendency to allow parties greater freedom transnationally (see more particularly Volume 4, section 1.9.2).

801 See I Brownlie, ‘Legal Effects of Codes of Conduct for Multinational Enterprises; Commentary’ in N Horn (ed), Legal Problems of Codes of Conduct for Multinational Enterprises (Deventer, 1980) 41 and N Horn, ‘Codes of Conduct for Multinational Enterprises and Transnational Lex Mercatoria’ in the same volume, 52.

398 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law It was also pointed out above in connection with mandatory custom and general principle, that the civil law idea of a closed system of proprietary rights is increasingly under pressure and that a measure of party autonomy has entered the world of movable property structures, subject to a better bona fide purchaser protection, see section 1.1.6 above. It shows that party autonomy is not merely a contractual matter and is then likely to be handled differently. Party autonomy can also not be used the defeat structural issues. In letters of credit, for example, doing away with their independence, or their primary payment obligation, or strict compliance requirement may still allow them to be guarantees. It is not that party autonomy cannot bring change but these instruments are then no longer letters of credit proper. After party autonomy, we have the directory customs and practices. Much has been said about them which needs no repetition. As to these directory customs and practices, the work of the ICC is here particularly illustrative and the status of the UCP, URC, and Incoterms are of special interest, although it should be remembered that not all of their rules are directory. Again, there are key structural issues which are mandatory notably for the letter of credit to retain its character and cannot be undermined by party autonomy without it losing its basic nature. It concerns notably the concept of independence, the primary payment obligation and strict compliance. The latest version of the Incoterms dates from 2012. The UCP are the Uniform Customs and Practice for Documentary Credits compiled by the ICC since 1933, the latest version being from 2007. They are in the nature of a private codification of some of the most important rules concerning letters of credit, and have gained worldwide acceptance. It shows that in the transnational commercial and financial legal order, institutionally organisations may arise as spokespersons for its rules which may push customary law forward even in its structural parts. It does not distract from it but enhances it. Even in countries like the US, where State law deals through Article 5 UCC with letters of credit, the latest amendments of section 5-116(c) UCC assume derogation if the UCP is explicitly made applicable to a letter of credit. The UCC and UCP thus became complementary sources of law for letters of credit in the US.802 Nevertheless, the status in law of the UCP has remained in doubt where the letter of credit does not contain a reference to them and the subject matter is not dealt with by an applicable statute. Many see them as transnational custom, however,803 subject to regular adjustments by the ICC, and as such part of the objective international or transnational commercial law, even though the ICC itself is not a legislative body but only a compiler of international customs and practice but in the international commercial and financial legal order, it may be considered an authentic spokesperson. The status of their rules as international custom means that for their effectiveness they need no longer be incorporated in the text of the arrangements concerning the issuance of letters of credit or characterised as implied conditions. It must be said, however, that the formulation of the UCP does not help. In the 1974 version, Article 1 considered the UCP binding in all circumstances except if parties agreed otherwise which would appear the better approach. That is the true recognition of customary law status. In 1983 the impression was created, however, that the UCP were mere implied contract terms. Since 1993, the UCP require incorporation in the documents and have deleted the earlier language of 1974, although there is a second sentence which suggests otherwise (‘They are binding on all parties thereto, unless otherwise expressly stipulated in the credit’). This indicates a contradictory 802 See JF Dolan, The Law of Letters of Credit, Commercial and Standby Credits (Boston, MA, 1999) 4.06 [2] [l] and for further references, Gao Xiang and RP Buckley, ‘The Unique Jurisprudence of Letter of Credit; Its Origin and Sources’ (2003) 4 San Diego Int’l LJ 91, 108. All the same, they still do not see the UCP as law as it issues from a non-governmental institution (ICC), p 112. 803 See n 439 above.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 399 sentiment in the drafting. In any event, their legal force as custom or other source of law cannot be predetermined by the UCP themselves and is a matter of the objective law. The approach in case law has therefore not changed: the Incoterms are similarly treated and often considered custom, at least in the commodity trade in Europe. The UCP, UCR and Incoterms are partial informal codifications only and, even if accepted as customary law, do not cover the whole field and are in any event subject to interpretation and supplementation, as is the partial uniform law contained in the Vienna Sales Convention. The first rule here must be that they are to be explained on the basis of their international character and the general principles of these compilations themselves, but more important is to place them properly in the hierarchy of principles and rules constituting the lex mercatoria, as here explained. In the case of letters of credit that goes in particular to their structural aspects which are not purely contractual but are only activated by the contract, therefore their independence from the relationship out of which they arise (which is the contract), much like in negotiable instruments, as well as their primary payment obligation, and the issue of strict compliance. That is to say that they are to be interpreted, explained and even superseded by the fundamental principles of law and any mandatory or structural custom or treaty law (if any, and applicable under its own terms). Thereafter, there are to be considered the wording of the relevant contract itself, the notions of good faith in the application of the contract terms (which may also refer back to more fundamental notions), the logic and nature of the transaction, other (directory) custom, uniform directory treaty law like that of the Vienna Convention (especially for the Incoterms), and common legal notions. Finally, if still no solution has been found, there remains to be considered the choice of law rules identifying a national law, but only on a result-oriented basis,804 while these domestic laws themselves are thus transnationalised.805 Another elaboration of directory customs and practices might be found in the confidentiality of arbitrations. It was said before that, in international contractual matters, party autonomy determines in the first instance the applicable regime (unless there is other mandatory law or principle) supported by implied conditions and ultimately industry practices and uniform treaty law to the extent existing. One may see here a progression from explicit contractual term to industry custom. It was noted earlier, however, that the reverse may also happen, and established custom may lose its autonomous status and acquire at best the status of an implied term to be proven by the party relying on it or even lose that status and then require for its continuous effect explicit agreement between the parties. The principle of confidentiality in arbitrations was given as an example.806 804 See for this approach also MN Boon, De Internationale Koop en het Documentair Accreditief ingevolge de UCP 1993 [The International Sale and the Documentary Letter of Credit under the UCP 1993] (Deventer, 1998) 7 and 425, and MN Boon, Book Review, RA Schütze, Das Dokumentenakkreditiv im Internationalen Handelsverkehr (1996) [1998] European Business Law Review, 331. 805 One should note here the difference from the language of Art 7(1) and (2) of the 1980 CISG, copied in much of the newer uniform treaty law, which uses some of these sources of law but does not manage to set them in a hierarchy; see further the discussion in Vol 3, ss 2.3.5ff. 806 The discussion in this respect was initiated by a decision of the High Court of Australia in Esso/BHP v Plowman, see (1995) 11 International Arbitration 235. The question of confidentiality of arbitrations often arises in the context of the joining of different but connected arbitrations when one of the parties objects because it may violate the privacy of the proceedings, see Oxford Shipping Co v Nippon Yusen Kaisha [1984] 3 All ER 835, in which the confidentiality argument was upheld. It also arises where orders are issued to reveal particulars of other arbitrations, see Dolling-Baker v Merret [1990] 1 WLR 1205, in which such orders were set aside, or where particulars are disclosed to reinsurance companies likely to be sued for recovery of the amount lost in the arbitration, see Hassneh Insurance v Mew [1993] 2 Lloyds Rep 243, in which such disclosure was limited to the mere finding and the reasoning had to remain confidential.

400 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law After directory (or default) customary rules and practices we have the directory (or default) rules of uniform treaty law but only in Contracting States and if applicable under their own terms. As we have seen for the CISG, which is the most important example, normally these Conventions only present partial codifications. Only the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade appeared to present a fuller regime for international bulk assignments, but is in its proprietary aspects mandatory and therefore, if it were sufficiently ratified, likely to be of higher rank within the lex mercatoria, as it would also be if followed as general principle: see the earlier discussion. Subsequently we have the directory general principles or common notions. These common notions may emerge and further support or supplement customary law, for example, in the area of offer and acceptance, duress, misrepresentation, negligence, liability without fault, proprietary rights, damage mitigation and computation, force majeure and hardship,807 exceptio non adimpleti contractus or anticipatory breach, set-off and other remedies including specific performance (compare also Article 28 of the Vienna Convention), statute of limitations, and the like, all forming the normal infrastructure of the law of contract. European and UNIDROIT Contract Principles could help here if they had been less consumer-oriented and anthropomorphic. There are also procedural questions, such as burden of proof, evidence and disclosure issues, to be

In the 1995 Australian case of Esso/BHP v Plowman quoted above, it was the State of Victoria which wanted to find out certain information concerning cost, price, volume and revenue given to a gas utility by Esso in one arbitration, in order for the State to use it in another. The High Court of Australia found no confidentiality rule (or custom) or even an implied term requiring the protection of confidentiality. It only accepted the privacy of the hearings, while documents compulsorily produced could not be used for any other purpose than the arbitration. Short of a specific confidentiality undertaking in the arbitration clause itself, it found no obligation of confidentiality, and noted in this respect that the results of arbitrations are commonly divulged while witnesses could in any event not be held to secrecy. It was probably always clear that where a public interest was involved, as in disputes concerning the use of public property or possibly in consumer arbitrations, awards could be disclosed. This may be all the more the case in foreign investment disputes, see the ICSID and NAFTA practices. However, it appears that the disclosure possibility now goes much further and may affect ordinary commercial arbitrations. Thus, apart from exceptional cases, confidentiality seems no longer guaranteed in commercial arbitration, at least not if the Australian case reflects modern thinking. Of the original three main justifications for arbitration (viz, speed, confidentiality and expert handling) at least confidentiality appears to have lapsed for all but the privacy of the hearing itself and the protection of confidential information presented therein. This may be because arbitrations have increasingly become pseudo-judicial proceedings. They have also lost much of their informal character. The awards are now also often published, at least by the ICC and ICSID, or in the Yearbook of Commercial Arbitration, even if in a sanitised form to render them more anonymous. In such procedures, confidentiality has clearly taken a back seat. Alternative dispute resolution (ADR) may, on the other hand, have retained more informality and may as a consequence also enjoy greater secrecy protection. 807 The problems concerning force majeure and hardship will be discussed more extensively in Vol 3, ss 1.4.6–1.4.8. There is no consensus, and it may well be asked whether there is one unitary notion of force majeure, including hardship considerations. The defence of force majeure appears to depend much on the nature of the parties (professionals in their relationship to each other, consumers or states), on the time span of the contract (spot or duration), and on its very nature and objectives (therefore quite different in concession agreements, long-term supply or service agreements). There are other problems: are we only concerned here with external events such as wars, earthquakes and the like, leading to absolute impossibility to perform, or also with more subjective considerations such as unconscionability, economic impossibility/hardship and how they need to be defined? Is there something like a contractual balance that is or should be maintained all along? May reasonably foreseeable events be included if giving rise to a severe imbalance? What are the consequences for the contract: suspension, termination or adjustments/renegotiations? While in supply agreements there is also the notion of the transfer of risk (asking which party bears the risk of force majeure), has this notion of risk allocation also a meaning outside supply agreements, especially where subjective considerations are invoked?

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 401 considered as well. Contractual provisions in particular may also be supplemented by notions of intrinsic logic, common sense or efficiency at this level of general principle. These common notions often derive from comparative law research, in the sense that, where similar rules are found in the domestic laws of the more advanced nations, they may enter into the lex mercatoria at this level, assuming that they capture the dynamics of modern business. Rules of uniform treaty law may also be considered in this connection, even outside Contracting States. The UCP, UCR and Incoterms could also figure at this level, if not already included at higher levels such as the contractual one (if incorporated in the contract) or as directory custom or practice.

3.2.7. Domestic Laws, Private International Law: Mandatory Provisions and Public Policy or Regulatory Issues Finally, in the hierarchy of norms in the modern lex mercatoria, there is domestic law to consider, and there are the private international law rules of the forum in this regard to choose the proper law if the issue has not yet been resolved under the higher rules as just described. The rules of private international law are even then unlikely to be applied as hard and fast conflicts rules, if as such still practised in the law of property and obligations.808 As pointed already out in sections 1.4.13 and 3.1.2 above, they are too residual in the whole hierarchy of norms here proposed to operate in that manner. However, they may indicate the closer contact and thus the domestic laws more particularly affected and to be considered. It is possible to think here in particular of the status of proprietary rights and the ranking of security interests in the country of destination of the goods in which these interests are vested, or in a bankruptcy initiated in a third country. A hard and fast conflicts rule does not work here because the recognition of these proprietary rights elsewhere often entails adaptation if assets move to other countries, or if their status needs to be assessed in a foreign bankruptcy of the owner/debtor (see the discussion in section 2.1.2 above). A simple reference to the (new) lex situs is then inadequate, if at all relevant, see also Volume 4, section 1.8.2. More fundamental overriding notions of acquired rights of beneficiaries or security interest holders may play a more important role besides the practical question of how the recognising country can incorporate the foreign proprietary right into its own system to give it adequate protection, particularly in its own bankruptcies. As a consequence, the conflicts rules and their application will have to take into account other relevant considerations, the evaluation of which is not necessarily a matter of the application of one legal system alone. It was also observed that, more generally, the application of a domestic law in an international transaction transnationalises that law, which may thus always be adapted. The crucial point to understand here is that English law, for example, even when elected by the parties, may not function the same way in an international transaction as it does in English transactions. That may particularly affect the consideration requirements in the case of nullity or amendment and the needs for documentation and other formalities;809 see further the discussion in section 2.2.9 above. If parties choose a domestic law, the consequence would appear to be that it moves higher, to the level of party autonomy, but it must no less function in the transnational law and may be

808 See for the more flexible American approach, s 2.2.2 above. See for the direct application of considerations of cogency and moral data, even in conflict laws, either under the guise of public policy or natural law, Ehrenzweig, above n 681, 77ff. 809 O Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747.

402 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law adjusted accordingly to make sense therein. The effect is, however, that directory custom, treaty law and general principle do not then prevail over this domestic law. In international cases, the adjudicating court or arbitration tribunal will also have to decide what force, if any, it must give to domestic public policies or public order requirements as contained in local law. It was said earlier that this law is not part of the modern lex mercatoria (unless also reflected in fundamental legal principles of private law and the customary law based on them) and does not figure in its hierarchy; they are not then private law and compete. It is an important issue more developed in the US, often identified there as the jurisdiction to prescribe. It was more fully discussed in section 2.2.6 above; see for international arbitrators, also the discussion of their powers to raise this issue autonomously in Volume 2, section 1.2.5. It was already said repeatedly that these local public policy considerations or governmental interests and public order requirements may play an important role in international transactions when there is (appreciable) conduct and effect on the territory of the state in question. The modern lex mercatoria is in such instances deferential to such policies, which may be even more readily accepted transnationally if they are connected with or an expression of the transnational public order and are then no longer purely domestic in nature (although the elaboration is still likely to be). In the transnational commercial and financial legal order, they could find an echo in international minimum standards developing in the transnational public order itself, which may thus restrain domestic interference in international transactions, particularly if overbearing, arbitrary, discriminatory, disproportionate, or vindictive. There is ample demonstration in investment dispute case law of these constraints, see Volume 2, section 3.4.5. Beyond this, domestic public policy bearing on international transactions may also be evaluated for reasonableness or rationality and weighed or balanced against the public policies of other governments that also have a legitimate interest in the international transaction. It can only be repeated, see sections 2.2.6 ff above, that conduct under and effect of the international transaction on the territory of a concerned state gives its government a legitimate regulatory interest but the outcome will still depend on how much conduct and effect there is on its territory and on the nature of the measures it has taken and on its measured response under standards of governmental behaviour that must be considered increasingly international as well. There are issues in particular of equality and proportionality. It was further stated that international arbitration may be here more objective than local courts can be in respect of their own country’s policy objectives.

3.3. Operation of the Lex Mercatoria. Objections 3.3.1. Operation of the Lex Mercatoria and Direct References to it It was submitted that in a globalising world in international business transactions, practitioners, courts and arbitrators may be better guided in matters of the applicable substantive private law by the hierarchy of norms of the modern lex mercatoria resulting in the application of substantive transnational law than by application of private international law rules (even if it is clear which ones) that point to a domestic law which is unlikely to have been designed for international transactions and cover their dynamics, is often atavistic or parochial, likely to be fixed in time, and a given, in which context interpretive freedom is mostly considered limited and unable to stretch in order to adjust and restate the applicable domestic law properly and to discount the foreign elements in the case. Were such adjustment nevertheless to become the approach under local

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 403 laws, it would likely introduce the lex mercatoria through interpretation, but each national legal system would still do it in its own way so that uniformity would remain elusive. Private international law has many other drawbacks. To summarise and repeat, first it may apply different domestic laws to the same transaction depending on the characterisation of the various aspects of the transaction, for example, its contractual and proprietary features. Perhaps more importantly, it requires the international flows to be cut up into local parts, which can hardly do transactions in them justice and is likely to continue to distort the applicable law for the transaction overall. The most vivid example is the need for floating charges in the international flows to finance the transactions in them, which is in the nationalistic views not possible, see also the discussion in Volume 2, section 2.2.7. Indeed, the stress that the application of local laws to international transactions causes has become particularly clear in modern international finance, but it was always unlikely that the ever-larger international flows of goods, services, information, technology and money could continue to be adequately guided and protected by some national law especially in international production and distribution chains, and this for no good reason. Again, the more fundamental question is why all private law must be domestic per se and find its origin solely in the modern state. It would seem an irrational and unnecessary presumption; it was shown that it was never more than political philosophy and a nineteenth-century paradigm. In the present day it can hardly be maintained at the practical level if only because the internationality and professionality of the transaction necessarily introduce non-national considerations into the application of any law. The cause of the problem is the continuing modern predilection for legal positivism of the statist and static type and an uncritical academic attitude in that regard, which was discussed more extensively in section 1.4.17 above. It also means that academia, at least in Western Europe, often remains unusually hostile to the revival of the modern lex mercatoria as non-statist law. It has even been argued that the positive (national) law is exactly there to prevent informal norm change and that that is one of its major functions. The principal function of law is then seen as a massive project of norm standardisation that does not favour change and innovation.810 However, in a post-modern outlook, where even in the field of the natural sciences time and place have become less absolute while the notion of causality has also suffered re-evaluation, territorial and temporal confines of the law and its static character or systematic nature may more confidently be questioned, while a functional, dynamic, and self-propelling approach in law formation and application may regain an important place. Logic and automaticity in the application, predicated on the notion that all human activity, if properly understood, is repetitive and predictable, are then rightly also questioned and seen merely as a form of intellectual neoclassicism in law. It has already repeatedly been said that the search for certainty necessarily acquires another dimension and urgency here while issues of quality arise. It was noted before that certainty of this type may be low quality law and may have too high a cost. Globalisation, with its ever-larger movements in goods, services, information, technology, capital, investments and payments, needs a (new) legal framework that is more aware of and adaptive to newer and ever-evolving needs, at least in professional dealings. In scientific terms, social activity and consequences may be more random. As submitted before, certainty comes here not merely and automatically from pre-conceived rules, but from the self-discipline of the community in which they operate,

810 For standardisation see also s 1.5.8 in fine above. See for a reference to state law squeezing out rival forms of social control, R Ellickson, Order Without Law (Cambridge, MA, 1991) 276.

404 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law although there are areas as in transactional and payment finality where it plays a special, elevated role. It was never otherwise but these insights are now reinforced at the transnational level, as we have seen.811 It also emphasises the important role of voluntarism in compliance (and the incentive structure to achieve it), on which a modern society is utterly dependent.812 The idea that (private) law is there mainly to determine disputes is then abandoned in favour of the view that it is chiefly a facility to make life easier for all concerned, operates primarily at that level, and that such is its principal task, see section 1.4.18 above. The conclusion is that, at least intellectually in the transnational commercial and financial legal order, there is now more room for transnational private law that is not territorial, preconceived or static in the above sense. Nor can it be applied on the basis of logic only. It is dynamic in nature, sensitive to ever changing fact situations, needs and values as was demonstrated in section 1.1.6 above both for contract and movable property law. Nevertheless, because of the ambivalence on the subject and probably the lack of a clear idea what the modern lex mercatoria truly is and how it functions (as a hierarchy of norms from diverse autonomous legal sources), direct references to the lex mercatoria remain rare and are on the whole also still avoided in arbitration statutes or official commentary (except in the Netherlands)—it is sometimes deemed implied and fully contained in a reference to transnational custom813—while courts and arbitrators often prefer to use different terminology and (rightly) like to limit theoretical controversy.814 Equally, a contractual choice of law in favour of the lex mercatoria remains uncommon, and has even been thought to render the contract void.815 This must now be considered an extreme view, in any event likely to be limited to England, where there remains more generally reluctance to accept what are considered extra-legal standards, sometimes, it would seem, still in international arbitrations.816 It has been said before that this is not necessarily to the advantage of the legal profession in England, which would stand to gain greatly from a more open attitude. The

811 See the discussion in s 1.1.7 above and for finality n 105 above. 812 See RD Cooter, ‘Three Effects of Social Norms on Law: Expression, Deterrence and Internalisation’ (2000) 79 Oregon Law Review 1. 813 Art 28(4) of the UNCITRAL Model Law allows the arbitral tribunal in all cases to decide in accordance with the terms of the contract and to take into account the usages of the trade applicable to the transaction. This is not dependent on the parties’ authorisation and precedes any application of conflicts rules, Art 28(2), but may not cover the whole of the lex mercatoria as here explained. One must assume that in international cases, the fundamental legal principles will always be applied if considered ius cogens, that international custom and then most likely common legal principles will also be applied, while the interpretation and supplementation of the contract increasingly acquire the status of an autonomous function, confirmed in international sales by the Vienna Convention (Art 7). In fact, in the absence of a clear view of what the modern lex mercatoria is, there is some ground to assume that a reference to international custom is in fact tantamount to a reference to the modern lex mercatoria. The Dutch (in Art 1054 CCP) follow the UNCITRAL Model Law in international cases without clearly describing what is meant by the usages of the trade. However, the Dutch official comment at the time referred to the lex mercatoria in this context and allowed its application without discussing exactly what it was. The English 1996 Arbitration Act, in s 46, copies to a large extent the UNCITRAL Model Law, but notably deletes the reference to the usages of the trade applicable to the transaction. It may mean that the parties would still have to authorise any considerations to be taken into account other than the ones resulting from the applicable domestic law under the conflict of laws rules the arbitrators deem applicable. In this sense, it could be concluded that the English Act, in particular, is unfriendly to the modern lex mercatoria. This is regressive. 814 But cf ICC Case No 3131, 26 October 1979 (Bernardo Cremades, President) (1984) IX Yearbook Commercial Arbitration 109, which was probably the first major international arbitration in which the modern lex mercatoria was applied. See the main text below for more recent instances. 815 See Mustill LJ, ‘Contemporary Problems in International Commercial Arbitration’ (1989) 17 International Business Lawyer 161ff. 816 But see also the case law in n 141 above and n 820 below.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 405 possibility of the application of the lex mercatoria is suggested in the UNIDROIT and European Contract Principles (PECL), which both make a reference to the modern lex mercatoria, although not expressing any views on what it is or how it works.817 The DCFR omits any such reference, as it is concerned with old-fashioned codification, now at EU level, which still means to exclude all other sources of law. It was already noted that the 2008 EU Regulation on the Recognition and Enforcement of Judgments in Civil and Commercial Matters, in its Preamble (13) makes an indirect reference, while clarifying that parties may choose a non-statist law. The relevant text in the body of the regulation was ultimately still omitted under German pressure, but it was also noted that the German Academic Council itself is starting to criticise this attitude in academia.818 Indeed, not choosing any (domestic) law may become a viable option and the best alternative, although a contractual choice of law clause in favour of some domestic law is for many still an article of faith, never mind how little it may cover, especially in proprietary and public policy matters: see also the discussion in section 2.2.9 above. Without such a clause in favour of a national law, courts or international arbitrators in particular may feel freer to decide the issues fit on the basis of a multiplicity of norms, whether or not within the context of the hierarchy of legal sources of the modern lex mercatoria, although the latter would be preferred in the view of this book. At a practical level, not choosing the applicable (domestic) law may even now be the preferred option if there is a cluster of contracts involving performance in several countries, while problems may only arise years after the signature of the contracts in circumstances and places that could hardly be predicted and choosing domestic laws is not a good alternative. In any event, it should be clear from the above that a contractual choice of a domestic law in international cases may upset the hierarchy and balance between the various principles and rules implied in the lex mercatoria as explained before and could therefore prove a dangerous and unbalancing manoeuvre. It appears now to be increasingly accepted that arbitrators may apply the modern lex mercatoria when properly pleaded at least if the contract is silent on the applicable law and this is not deemed any longer against public order.819 But even if there is a choice by the parties in favour of a domestic law, it was maintained all through that international arbitrators, upon proper pleading by the parties, must put this choice within the context of the operation of the lex mercatoria and its hierarchy of norms as here explained. It would mean in particular that mandatory transnational fundamental principle, custom and general principle, including transnational public order requirements and proprietary law, would prevail over such a choice of a domestic law, but directory transnational fundamental principle, custom and general principle would still be trumped by it; see also section 1.4.14 above. As just mentioned, the 2008 EU Regulation now clarifies the issues in the sense that at least a non-statist law may be chosen, including therefore the lex mercatoria, although that does not determine what it really is nor its reach. Under the Regulation, there remains also the question whether the lex mercatoria may be deemed impliedly applicable if no law is chosen by the parties or indeed whether the absence of such a choice (of a domestic law) may automatically mean application of the lex mercatoria in international cases. It would not appear problematic with regard to the application of fundamental legal principles as ius cogens and of mandatory customs. From this, the application of the rest of the lex mercatoria would logically appear to follow. 817 See for early comments on the UNIDROIT Principles, the ICC Publication, The UNIDROIT Principles for International Commercial Contracts: A New Lex Mercatoria? (ICC Dossier of the Institute of International Business Law and Practice, 1995). 818 See nn 56 and 104 above. 819 Fougerolle (France) v Banque de Proche Orient (Lebanon), Cour de Cass 9 December 1981 (1982) Revue de l’Arbitrage 183.

406 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law Ultimately, there remains the question of enforceability of any judgment or award based on the lex mercatoria notion. It still depends on the jurisdiction where enforcement is sought but many will now allow it.820 An arbitration clause allowing arbitrators to decide ex aequo et bono or as amiables compositeurs (which two forms of arbitrating are not here distinguished), see Volume 2, section 1.1.4, does not necessarily mean a reference to the lex mercatoria (as is sometimes suggested), although it may come closer, see also the earlier discussion in section 1.4.16 above. The two types of arbitration may, however, be more similar than is often assumed.821 On the one hand, international arbitrators state on the basis of law but under the modern lex mercatoria have considerable freedom in finding the applicable substantive (and procedural) law although still subject to the submission of the parties. On the other hand, arbitrators ex aequo et bono operating in the international commercial and financial legal order, are in principle not stating on the basis of any law but they cannot ignore fundamental principles and implementing mandatory custom as well as international public order requirements obtaining in that order, although not necessarily by the other components of the lex mercatoria. Indeed, the arbitration ex aequo et bono suggests beyond these fundamental principles greater discretion, but public policy rules of a national system that clearly affect the case still have to be given their due weight. It should also be considered whether property issues can be decided by them outside the mandatory framework of property law. At least there may not be third-party effect of such proprietary or ranking findings. It would thus appear incorrect to assume that arbitrators finding ex aequo et bono state entirely outside the law822 but the difference from ordinary international commercial arbitrators is that they may not be strictly bound by the hierarchy of norms as they find them in the modern lex mercatoria unless they are mandatory. In all cases, it is therefore still necessary to determine what their role exactly becomes if they are allowed to decide ex aequo et bono or as amiable compositeurs, their powers under these facilities not being entirely settled.823 820 The French Cour de Cassation allows it, see Compania Valenciana de Cementos Portland SA v Primary Coal Inc Cass Civ (1) 22 October 1991, 1991 Bull Civil I, no 275; and earlier Pabalk Ticaret Ltd Sirketi (Turkey) v Norsolor SA (France), (1984) IX Yearbook Commercial Arbitration 109. So did the Austrian Supreme Court earlier and after much soul searching on 18 November 1982 in the ICC Case No 3131, (1984) IX Yearbook Commercial Arbitration 159; see also AJ van den Berg, The New York Arbitration Convention of 1958 (Deventer, 1981) 29, who accepts the enforceability of a-national awards under the Convention provided the awards are themselves not detached from a national arbitration law. This is in itself increasingly contentious, see n 127 above and Vol 2, s 1.1.8 below. The English courts, after having consistently rejected awards based on equity until 1978, see Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 [1935] 52 L1LR 16 and Orion v Belfort [1962] 2 Lloyd’s Rep 251 (QB Com Ct), changed their attitude thereafter: Eagle Star v Yuval [1978] 1 Lloyd’s Rep 357. Application of general principles may now be acceptable in England: see Deutsche Schachtbau- und Tiefbohrgesellschaft [1987] 3 WLR 1023, in which the Court of Appeal under Sir John Donaldson held unanimously that at least international arbitrators could rely for the applicable law on internationally accepted principles, see also n 134 above, thus accepting not only general principle as a source of law but allowing international principles and customs to operate in that connection also. In the US, US arbitrators have less trouble in applying the modern lex mercatoria in international commercial disputes and this is not normally challenged, see DW Rivkin, ‘Enforceability of Arbitral Awards Based on Lex Mercatoria’ (1993) 9 Arbitration International 67. It is also reflected in the UCC explicitly recognising the force of custom, see s 1-103 UCC. 821 See JH Dalhuisen, ‘International Arbitrators as Equity Judges’ in PH Bekker, R Dolzer and M Waibel, Making Transnational Law Work in the Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 510. 822 If it should be felt that this is different for amiable compositeurs, who (according to some) may be distinguished and are in this view under a greater duty than arbitrators ex aequo et bono to find a sensible solution in the manner they deem fit while working out some compromise, in doing so, even they are not able to ignore fundamental principle and duly applicable mandatory law or public policy. 823 Art 28 of the 1985 UNCITRAL Model Law on International Commercial Arbitration allows the arbitrators to find ex aequo et bono or as amiable compositeurs (without definition of this concept), but only if the parties have expressly authorised them to do so. There is no reference to the lex mercatoria in this connection.

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 407

3.3.2. Objections to the Lex Mercatoria Approach The objections to the transnational or lex mercatoria approach, also in the manner of a hierarchy of norms as here explained (in which domestic law remains the residual rule even if such law then starts to function as transnational law in the international legal order and must recognise in its application higher transnational rules), are both of a fundamental and practical nature. As we have seen, fundamentally it is sometimes still believed that no law can develop outside the framework of a state or that at least a state cannot provide a sanction for laws that are not essentially its own or authorised by it. This is largely the present positivist framework and perspective, see section 1.4.17 above. At the practical level, the new approach is usually considered to provide too little legal certainty, a reproach very similar to that affecting the newer attitudes to conflicts law as well, see section 2.2 above. Also, here the objections are likely to come down to questions of temperament and practical experience. It should never be forgotten that the dynamics of the law leading to its autonomous development at the transnational level are by no means new in their discovery, and remain recognised in public international law while the recognition of the independent status of the lex mercatoria in the manner here explained is particularly relevant where potentially applicable domestic laws result that are incomplete, old-fashioned, fractured or wanting, and have nothing to contribute when seen from the perspective of the globalisation of trade—which is now taking place on a scale never seen before. Probably as importantly, it does not lead to one legal regime for transactions in the international flows. Unavoidably, there is less certainty as a result, as always at the beginning of new developments. This issue has been discussed several times before. To repeat, the certainty that is here often praised as the ultimate objective and to which national laws are then supposed to contribute may be of a very low quality, especially in international transactions, prevent us moving forward and may in fact destroy everything. At least it must be weighed against the suitability of the application of these domestic laws, which are unlikely to be written or developed to co-ordinate and support new (now often internationalised) transactional (commercial and financial) patterns and needs, particularly among professionals, and against the ever-greater uncertainty in the applicable conflicts rules themselves and the feasibility and efficiency to apply a multitude of laws to one transaction. The real issues were identified earlier as predictability and transactional finality, the latter in particular being a narrower but more important concept than that of certainty; see section 1.1.7 above. In a dynamic legal environment, legal certainty, also in the domestic variety, is always relative and can only be achieved when new ideas and notions sufficiently crystallise and are tested over time. This also means that we need more experience. Only then is it possible to consider to what extent states should more generally intervene through facilitating or correcting treaty law or codifications provided always that the international community feels that need or that public policy or order require it. The present urge to present all kinds of sets of principles, now even the DCFR in the EU, often as an academic exercise is as such undoubtedly of some interest, but vitally lacks industry backing and therefore credibility, at least in the professional sphere. It also refuses to consider methodology and still assumes that all law is imposed from above and does not require participatory frameworks and demonstrated need. This assumption is still behind the idea that the texts of this nature may properly serve as a model for domestic or perhaps EU legislation. This applies in particular to the DCFR. There are also serious quality issues: it was submitted that all these efforts are in mentality consumer driven and do not accept other sources of law, even in cross-border dealings. There is nothing forward-moving in them either, quite unlike the drive behind the UCC in the US. The

408 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law DCFR, in particular, is unaware of the operation and needs of the transnational commercial and financial legal order in international commerce and finance that operates besides statists’ legal orders including that of the EU itself. It was argued in this connection that this is not the right approach and rational way forward, at least for professional dealings. In the meantime, it must be admitted that the development of new law in the transnational professional sphere is unavoidably haphazard. For the time being only a hierarchy of norms in the sense of the modern lex mercatoria can provide order, but, as was submitted, the residual role of domestic law means that the new lex mercatoria as here described is not incomplete and is a full legal system for those who seek this, although it is not systematic in the codification sense, finding structures (not system) having been identified earlier in section 1.1.7 above, as the more important issue. The difference is that this domestic law is preceded by other transnationalised norms or sources of law, and residually functions as transnational law itself. Conceptually, that is all. On the other hand, it should not be overlooked that much is settled law and not even now really contentious. Disputes that require outside resolution in courts or through arbitrators are always exceptional; in commerce and finance, it is in the interest of all to minimise them. Yet, especially in the area of proprietary rights and security interests in movables and intangibles, there may be a need for more international action. This applies also to the set-off. Evolution through case law can be rapid, but may ultimately also result in confusion, as the development in the US showed earlier, when notions of conditional sales developed under state law, giving rise to the later consolidation in the UCC, Article 9 (see Volume 5, section 1.6.3). But by then, at least, the true needs had become apparent. It was also submitted that particularly in contract, where most rules are in any event directory or default rules, the professional sphere used to risk taking is probably better able to deal with a degree of uncertainty associated with normal developments than with any certainty believed to result from inappropriate (domestic) rules never written for international transactions. In proprietary law, local rules may even present a serious risk, such as those attempting the abolition of the fiducia or security transfer as in the new Dutch Civil Code (see Volume 5, section 1.2.2), or the automatic conversion of conditional sales into security interests, as under Article 9 UCC in the US in a serious and thoughtless challenge even to financial leases and repurchase agreements (see Volume 5, section 1.6.2). Similar arbitrary governmental interventions in domestic legal systems may create unexpected uncertainties and obstacles, only compounded transnationally by the application of inflexible conflicts rules, again for no obvious reason. Even in questions of finality of transactions and payments, national laws may be weak. This was also discussed in section 1.1.7 above. The concept of finality may in fact be considerably enhanced in transnational law, as it should be, where commercial needs may be taken into account more specifically and the old law of negotiable instruments (which was a product of the old lex mercatoria) may serve as a ready example. In the professional commercial sphere, modern legal thinking requires a greater degree of imagination and, at least in the private law aspects, a willingness to think more in terms of legal guidance and peer group experiences than in terms of clear-cut academic rules and a corrective intellectual legal framework. Again, domestic public policies remain relevant and should be tested in a comity approach based on models as provided to some extent in Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I) and better in sections 402 and 403 of the Restatement (Third) of Foreign Relations Laws in the US, now under further review. That was discussed in sections 2.2.6ff above. In such an environment, more precise legal concepts can and will develop within the modern lex mercatoria. As mentioned earlier, it may even include a more dynamic approach to movable property law in which party autonomy will have a role to play, subject to a better protection of

Volume 1: The Substance and Operation of Transnational Commercial and Financial Law 409 the commercial flows, see section 1.1.6 above, and also a stronger concept of transaction and payment finality as mentioned. Although the transnational law approach combined with a rejection of automatic conflicts rules is often believed novel since it was signalled, particularly in France in the 1960s and 1970s by Professor Goldman (see section 3.1.3 above), it was in modern times in the Netherlands foreshadowed in the writings of Professor D Josephus Jitta (1854–1924),824 the successor of Professor Asser as Chair of the Hague Conference. This approach has also become much more understandable through the critical attitude in the US towards interstate conflicts rules since the 1930s (see section 2.2.2 above) even if in the US the modern developments in conflicts law are not commonly analysed in terms of a newly emerging transnational law, but rather as interpretations of its own law (lex fori), although at least in interstate conflicts often fed by uniform overriding substantive notions of justice, while in the application of domestic public policy the trend is mostly liberal and also internationalist; see section 2.2.6 above.

3.3.3. Application and Enforcement of the Lex Mercatoria Finally, not much more need be said on the application and actual enforcement of the lex mercatoria. This subject has been covered throughout. Its application will be a matter for both the ordinary courts and international arbitrators. It is often assumed that the latter have broader powers in this connection, even if it is not quite clear why ordinary courts should assume a lesser role. The rule of law, if properly understood, requires that the ordinary courts do the same (or even more as arbitration is strictly limited to the parties’ submissions, especially also on points of law) and, it was submitted, the ensuing court decisions or awards should also be similarly recognised elsewhere, either under treaty law or otherwise under the normal rules in each country, to be enforced therefore through the ordinary judicial system everywhere only upon a minimum review that is geared to proper jurisdiction having been exercised to avoid obvious irregularities, and also to evaluating public policy and other confining public order requirements of the recognising country at least if manifestly violated. Here again, the use by the recognising and enforcing courts of international minimum standards in weighing the different interests helps in the recognition and enforcement process, while the public policy bar to such recognition in each country could itself also be considered increasingly to be the subject of an international standard. It was stated before, particularly in section 1.1.12 above, that state courts operating in international cases should be seen here as agents of the international commercial and financial legal order itself, therefore as international commercial courts in appropriate cases, no less than international commercial arbitration tribunals, and their decisions should then be seen as rendered in that order, subject to similar recognition if their enforcement in (other) state legal orders is necessary under the residual rules just mentioned. Standards set under the 1958 New York Convention in respect of international arbitrations, under the 2002 EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I), under the Hague Convention of 2005 on Choice of Court Agreements, and under the (1998) Draft Hague Convention on Jurisdiction and the Recognition of Judgments, may provide here important guidance, even in situations where they do not directly apply. Indeed, there is much to be

824 DJ Jitta, Internationaal Privaatrecht (Haarlem, 1916). It is an idea whose time has now come but had not in 1916, although it also found expression in France in the works of Pillet.

410 Volume 1: The Substance and Operation of Transnational Commercial and Financial Law said for international commercial law decisions rendered in ordinary state courts in the above manner to be recognised elsewhere in the manner of the New York Convention even if we admit that courts have a broader remit than arbitrators who are ordinarily confined to the submissions of the parties as they define their dispute and do not speak for any legal order or system. This will be much of the subject of the next volume. It was further argued in section 1.1.12 above that a central highest international commercial court825 could usefully be set up to further (a) guide the development of the lex mercatoria; (b) develop the criteria for balancing governmental interests (or domestic public policies); (c) supervise international arbitrators in terms of their independency, impartiality, whilst creating a forum for accountability, (d) centralise the support functions of local courts and set the terms for or take over the challenges to international arbitrations at their seat, if still considered a useful facility; and (e) guide the recognition and execution facilities under the New York Convention especially in respect of the public policy bar. This court could (f) even function as the normal appeal court in respect of decisions taken in the ordinary local (commercial) courts in first instance. It would not otherwise be an appeals or review court, but would be limited (g) to giving preliminary opinions on points of transnational law or public policy only when asked by commercial courts or arbitration tribunals or by the parties if in agreement on such a request to do so. This may present a helpful and significant development, not far-fetched at all, and at this moment probably more important than codifying or rather restating the new transnational law merchant itself, for which the necessary method is unlikely to be sufficiently agreed and for which an adequate insight into what is needed is also mostly still lacking.

825 See JH Dalhuisen, ‘The Case for an International Commercial Court’ in KP Berger et al (eds), Private Law and Commercial Law in a European and Global Context. Festschrift für Norbert Horn zum 70. Geburtstag (Berlin, 2006) 893.

INDEX Introductory Note References such as ‘178–9’ indicate (not necessarily continuous) discussion of a topic across a range of pages. Wherever possible in the case of topics with many references, these have either been divided into sub-topics or only the most significant discussions of the topic are listed. Because the entire work is about ‘transnational law’ and ‘commercial law’, the use of these terms (and certain others which occur constantly throughout the book) as entry points has been minimised. Information will be found under the corresponding detailed topics. abandonment 63, 80, 119, 331 absolutism, state 58, 105, 108, 128, 365 abstract models 188 abstract system 269, 387 abstraction 102, 111, 127, 152, 168, 183, 281, 366 abuse of rights 215, 308 academia 51–52, 124–27, 158, 160, 169–71, 177–78, 285–87, 380 academic models 114, 117, 119, 127, 131, 157–58, 177, 184 academies 11, 57, 120, 128, 179, 188, 281 acceptance 39–41, 98–99, 196–97, 340, 342, 379, 382, 396 language, see offer and acceptance language accountability 75, 240, 289, 291, 410 Accursius 94 acquired rights 202, 319, 324, 327–28, 401 Acquis group 268 actes de commerce 62 activism, judicial 147 adjudicatory jurisdiction 328, 347, 352–54, 362, 395 administrative contracts 215, 308 administrative law 121, 215–16, 308, 344, 350 administrative state 140, 178, 182, 185 administrative tort 215, 308 admiralty 78, 171, 305, 367 ADR, see alternative dispute resolution agency 39, 233, 236, 259–60, 262, 296–97, 326, 363 indirect 39, 373 undisclosed 23, 39 agents 197, 259, 310, 373, 383, 409 aircraft 325 airline claims, mutual 39 alternative dispute resolution (ADR) 256, 400 American academic attitudes 157–63 American courts, see United States, courts American Law Institute (ALI) 259 amiable compositeurs 20, 258, 406

analogical interpretation 12, 133, 135 annulment 73, 228, 356 anthropomorphic attitude 8, 12, 14, 16, 29, 43–44, 186, 268 anti-competitive behaviour 236, 283, 371 apparent authority 236, 383 appeals 77–79, 143, 171, 256, 410 appellate judges 258 appellate jurisdictions 169, 174 appetitus societatis 102, 107 applicability 52, 73, 173, 202, 217, 329, 331, 337 applicable domestic law 5, 239, 318, 320, 341–42, 367–68, 387, 402 applicable law 75, 78, 173–74, 324–28, 333–36, 338–39, 356–61, 405 applicable private international law rules 75, 359 applicable private law 81, 338, 376 applicable substantive law 75, 306, 402 arbitrability 72, 258, 355 arbitral awards 27, 78–79, 349, 381, 396 international 256, 303 recognition and enforcement of international awards 74, 78, 257, 303, 349 arbitral jurisdiction 72 arbitration 20, 70–72, 78–80, 225, 256, 259, 399–400, 406 agreements 74 clauses 71–72, 74, 228–29, 237, 353–55, 393, 400, 406 commercial 62, 70, 79–80, 257, 337, 369, 393, 400 confidentiality of 399 international 71–75, 78, 208–9, 255–57, 259, 346–48, 402, 409–10 panels/tribunals 78–79, 354–55, 402, 410 arbitrators 71–72, 74–75, 225, 238–39, 256–58, 356–57, 393, 404–6 commercial 257 ex aequo et bono 406

412 Index international, see international arbitrators jurisdiction 72 powers 72, 229, 393 Aristotle 98–100, 102, 107, 114 asset-backed financing 29, 33, 37, 236, 392, 394 assets 2–4, 32–35, 37–40, 141, 187, 327, 386–88, 392–93 individualisation 4, 12 intangible 33–34, 61, 141, 148, 199, 318, 325, 392 liquidity 217, 373 movable 28, 32, 34, 68, 229, 324, 386, 392 physical 34, 335, 386 segregation 39, 314 underlying 187, 387–88 assignees 38, 375, 392 bona fide 38 assignments 25, 33, 38–39, 128, 130, 146, 326–27, 397 bulk 33, 38, 327, 392 equitable 146, 199 international 38, 142, 201, 397, 400 assignors 38, 392 Associationsgeist 111 Augustine, St 99–100, 102 Austin, J 22, 153, 163 Australia 288, 400 Austria 51, 103, 116, 120, 123–24 authorisation 228, 267, 331, 366, 368, 389 automaticity 157, 172, 249, 324, 333, 403 inbuilt 54 autonomous legal sources, see autonomous sources of law autonomous powers 75–76, 225, 258 autonomous sources of law 58–59, 216–17, 225, 227–29, 234, 237, 366, 368 custom and practices 216–26 fundamental principle 206–14 general principles 214–16 transnational 24, 26 autonomous status 20, 58, 131, 140, 212, 399 autonomy 52–55, 188–90, 226–29, 273–76, 291, 322–23, 356–58, 375–77 group 280, 283 party 35–37, 49–54, 227–29, 235–37, 239–40, 321–23, 375–77, 397–99 awards 72–74, 226, 228, 349, 355, 400, 406, 409 bad faith 45, 211–12, 245 bailment 22, 148 balance 4, 98, 127, 129, 178–79, 284–85, 289, 369 Baldus 157 banking 18, 39, 62, 64–65, 261, 287, 360 bankrupt estates 187 bankruptcy 20, 38–39, 172–73, 303–4, 334, 357, 396, 401 courts 174 foreign 401 France 64, 122 Germany 122

international 71 intervening 354 law 23–24, 33, 64–65, 121–22, 147, 356, 381 domestic 392, 396 Netherlands 122 banks 37, 174, 178, 181, 269, 302, 310, 343 Bartolus 96, 103, 107, 157, 219 basic order 179, 254 Begriffsjurisprudenz 135, 137 behaviour, human 14, 50, 117, 129, 248 Belgium 64, 121 Benelux Convention on Private International Law 328 Bentham, J 22, 152–53 bilateral investment treaties, see BITs bilateral netting 396 billing practices 169, 174 bills of exchange 2, 32, 62–64, 259, 267, 370, 386, 390 bills of lading 22, 32, 34, 305, 307, 310, 386–87, 395 binding force 43, 150–51, 236, 291, 382, 384, 393, 397 binding precedent 29, 150–51, 199, 206 BITs (bilateral investment treaties) 93, 350–51, 389 black-letter law/rules 157, 159, 172, 174, 244–45, 247, 249, 286 Blackstone 149 bona fide assignees 38 bona fide purchasers 23, 32, 36, 60, 224, 386, 388, 393 protection 375–76, 395 bonds 34, 67, 238, 386, 390; see also eurobonds book-entry systems 17, 238, 300, 314, 386 boycotts 320, 332, 352–53 Bracton, H 143, 148 Brazil 8, 62, 66, 120, 122, 140 breach 146, 168, 350 Breviarium Alaricianum 91 Brexit 10, 18, 26, 140, 142, 200, 263, 266–67 brokerage 210 brokers 210, 344, 373 bulk assignments 33, 38, 40, 327, 392, 397, 400 international 38, 397, 400 bulk transfers 40, 327, 392–93 burden of proof 400 bureaucracies 183 Burke, E 152–53, 277 business community 30–31, 224, 231, 276, 278 buyers 67–69, 267, 269, 271, 302, 310, 393, 395 Byzantium 87–89 Canada 175, 288 Canon law 92–95, 99–100, 102–3, 144, 146, 149, 246, 273–74 capacity 50, 217, 224, 324–25, 371, 382–83, 395, 397 limitations 217, 395 capital 28, 34, 289, 292, 309, 313, 318, 368–69 adequacy 18, 261 markets 18, 34, 223, 368, 390 working 3, 289, 318, 368

Index 413 Cardozo 104 case law 62–63, 87, 129–32, 135–36, 157–59, 171–72, 199–200, 306; see also Table of Cases causality 98, 133, 215, 287, 308, 403 CCP (Central Counterparties) 39, 257, 340 centralisation 86–87, 143–44, 366 centre of gravity 322, 326, 331, 336 certainty 49, 52–54, 128, 324, 339, 341–42, 403, 407–8 CESL (Common European Sales Law) 15–16, 26, 29, 67–68, 129, 231, 270–72, 361 CFR (Common Framework of Reference) 268 charges, floating 33, 37–40, 66, 68, 146, 148, 387–88, 392–93 Charlemagne 88 chattels 33, 148, 199, 387–88 law of 33, 148 cheques 60–63, 65, 267, 307, 370, 386 China 30 choice of law 323, 329, 331, 333, 338, 341, 358, 361 clauses 173, 341, 359, 405 contractual 173, 215, 322–23, 339, 341, 356–58, 390–91, 404–5 Christians 182, 278 church law, see Canon law Cicero 98, 100 CIL, see customary international law CISG, see Vienna Convention on the International Sale of Goods civil codes 15, 33, 39, 64, 82, 122, 140, 154 civil law 24–26, 33–34, 39–40, 80–83, 120–25, 146–49, 154–57, 186–200 approach 5, 14, 17–18, 24–25, 32, 44, 150 codes 121, 123, 153 codification 120, 123–25, 128, 153–54, 157, 160, 319, 321 national 9, 14, 113, 119–23 codifications 93, 124–25, 153–54, 214, 269, 307, 319 in commerce and finance 6–20 countries 10, 39–40, 61–62, 123, 128–29, 140, 176, 197–98 judges 139, 151, 199 lawyers 172, 192–93, 254, 393 precedent in 131, 199 civil society 4, 56, 58, 128–29, 131, 178–80, 251–52, 374 clearing 25, 34, 201 closed systems 49, 51, 117, 124, 243, 248, 392, 398 co-operation 42, 295–96, 318 duties 382–83 Coase, RH (Coase theorem) 168 Codex 89 Codex Theodosianus 91 codification 26–27, 30, 88–89, 120–25, 133–35, 152–55, 193–94, 266–69 after Brexit 140–42 approach 13–14, 29, 80, 154, 325

civil law 120, 123–25, 128, 153–54, 254, 269–70, 319, 321 countries 8, 11, 122, 138, 216, 281, 366 ethos 6, 8, 106, 153, 218, 222, 281 France 62, 121, 124 Germany 65, 111, 117–18, 120, 218, 269 national 9, 14, 113, 119–23 nineteenth-century 82, 132 partial 171, 240, 399–400 and precedent 151 private 398 of private law 109–10, 128, 184, 266, 366 thinking 46, 64, 137, 157, 194, 228, 281 and von Savigny 111 coercive powers 106, 293 cognitio 86, 90 coherence 6–7, 103, 124, 133, 152, 173, 188, 269 intellectual 57, 137, 157, 194 cohesion, group 278, 280 Colbert 64 collateral 173, 267 Directives 55, 230, 236, 263, 267, 269, 363 Collins, L 77 Comitia 86 comity 173, 318, 321, 324, 333, 343, 346, 352–54 approach 320, 324, 328, 336, 348, 353, 408 commentators 94, 105, 176, 204, 223 commercial acts 61–63 commercial and financial legal order 27, 246, 288–89, 297, 308–9, 343–44, 368–69, 408–9 commercial arbitration 62, 70, 79–80, 257, 337, 369, 393, 400 international, see international commercial arbitration ordinary 400 commercial arbitrators 257 commercial codes 24, 59, 61, 63–66, 119, 121–22 commercial courts 60–61, 63–65, 75, 77–79, 143, 256, 273, 409–10 international 75, 77–80, 255, 359, 409 commercial flows 35, 37–40, 53, 55, 60, 269, 330, 374–75 commercial law 20–24, 32–34, 59–67, 82, 198–200, 273, 275–77, 304–7 commercial practices 20, 22–23, 62, 142, 171, 200, 375, 385 commerciality 59–61, 68, 70, 74 Commissioners on Uniform State Laws 259, 261 commoditised products 35, 37, 224, 239, 302, 393, 395 common creditors 187, 197, 223, 389 Common European Sales Law, see CESL Common Framework of Reference (CFR) 268 common law 20–27, 43–44, 59–62, 80–83, 143–45, 148–57, 190–94, 196–200 approach to precedent, legislation or codification 150 approach to scholarship 148–50 in commerce and finance 20

414 Index countries 20, 22–24, 32–33, 48–49, 59–60, 65, 386, 392–94 courts 144, 253, 273 and equity 24, 143–49, 196 judges 151, 220, 254 jurisdictions 18, 21, 73, 123, 191, 196 modern 60 old 154, 156 tradition 1, 24, 159, 186, 246, 332 common legal principles 343 common sense 99, 102–3, 115, 238, 243, 247, 370, 375 common values 278, 280, 295 company law 33, 61, 64–65, 71, 122, 172, 199, 211 comparative law 122, 215, 309, 311–14, 372 compensation 389 competencies 5, 13, 147, 262, 265–66, 282, 294, 360 competing forces 178, 283 competition 181, 183, 207–8, 272–73, 275–76, 289–90, 300–1, 344–46 between custom and statutory or treaty law 226 between transnational law and mandatory state laws 298–304 issues 75, 320 laws 185, 302, 320, 346, 356–57 completeness 10, 25, 125, 134–35, 191, 206 conceptualisation 31, 154, 157 concession agreements 214 concessions 217, 226, 350, 357 conditional ownership, rights 49, 236 conditional sales 314, 392, 408 confidential information 400 confidentiality 80, 399–400 conflict of laws approach 232–33, 328, 353 conflicting public policies 356 conflicts, interstate 305, 327, 330, 332–33, 351, 353, 378, 409 conflicts of law(s) 302, 332–33, 336, 387; see also private international law conflicts rules 232–33, 239–40, 249, 319, 325–28, 330–31, 334, 338–39 hard and fast 24, 319, 341, 401 modern 328 drawbacks 325–30 traditional 52, 295, 305, 322, 330, 338, 342–43 conscience 108, 145 consensus 43, 103, 107, 166, 291, 294, 376, 382–83 consimili casu 144 consistency 6, 72, 151–52, 157, 159, 190, 291, 293 search for 159 consolidation 153, 408 Constitutio Tanta 90 Constitution, United States 150, 159–60, 258, 284, 305–6, 333 constitutional principle 165, 208, 213 constitutionalisation 208, 210–11 constitutions, imperial 86–88, 90, 99 constructive possession 388

constructive trusts 23, 33, 39, 141, 146, 196–97, 300, 363 consuls 84, 86, 121 consumer bias 49, 191 consumer dealings 44, 47, 62, 130, 134, 138, 270, 272 consumer ethos 16, 46, 122 consumer law 28–29, 122, 131, 133, 140–41, 186, 189, 245–47 consumer protection 53, 66–67, 69, 267, 271–72, 322, 331, 338 consumers 28, 66–68, 263–64, 266–72, 320, 322, 338–39, 373–74 contract law 33, 40–41, 46–48, 211–12, 219–21, 227–28, 270–71, 371–72 modern 35, 41, 66, 245 principles 268, 384, 400, 405 private 350 contract terms, see terms 60, 240, 399 contract theory, modern 44, 47, 119, 382, 385 contracts administrative 215, 308 duration 41, 44, 47, 253 employment 202, 265 formation 41, 43–44, 382–83 international 43, 228, 259, 332 interpretation 47, 106, 130, 156, 160, 198, 200, 219 professional 28, 40, 47, 141, 228, 382 contractual choice of law 173, 215, 322–23, 339, 341, 356–58, 390–91, 404–5 and party autonomy 356–59 contractual rights 42, 119, 314, 384, 388, 397 contractual validity 220, 224, 229, 322, 371, 382, 395 contractualisation 223 Convention on the International Sale of Goods, see Vienna Convention on the International Sale of Goods (CISG)/ICSG convergence 259 international 259 Cooter, RD 168, 295, 312 Corpus Iuris 85–92, 94, 99–100, 111, 132 corruption 72, 182, 283, 348, 373, 383 counterparties 44, 69, 297, 349, 373 states as counterparties de iure imperii 349–51 country of destination 327, 401 country of origin 327, 357 courts, see also individual countries and court names ecclesiastical 144, 273 local 78, 324, 346, 402, 410 ordinary 60, 62, 78, 273, 275, 346–47, 354–55, 409–10 coverage 32, 32–35, 49, 59–61, 63, 110, 189, 382 civil law national codifications 119–23 partial 67, 330, 370 credibility 12, 15, 18, 134–35, 169, 172, 195, 199 credit, letters of, see letters of credit creditors 4–5, 187, 197, 327, 341, 373, 375, 396 common 187, 197, 223, 389

Index 415 maintenance 329, 331, 338 secured 187 criminal law(s) 84, 91, 106, 108, 117, 120, 149, 155 critical legal studies 158, 161, 163, 166, 169, 171 critical rationalism 127 cross-border services 68 cross-border transactions 16, 68, 82, 231, 266, 271, 360–61, 407 crypto currencies 178 cultural manifestation, law as 276–80 culturalism 284–85 cultures 14, 163, 165, 180, 185, 278–80, 282–84, 286 group 165, 176, 279–80 national 278–79, 281, 283, 288 curia regis 97, 143 currencies 178, 189, 349 custodians 391 custom(s) 20, 216–17, 220, 224, 240, 310–11, 382–83, 394–95 definition 217 directory 238–40, 283, 358, 372, 376, 397–402 mandatory international 27, 376, 387 support 382–94 transnational 223, 225, 375–76, 379, 387, 389, 391, 395 customary international law (CIL) 108, 218, 345, 350 customary law 224, 226–27, 239, 241, 375–76, 393, 395, 397–400 mandatory 232, 358 damages 63, 114, 213, 215, 308, 323, 351, 383–85 DCFR, see Draft Common Frame of Reference De Iure Belli ac Pacis 100–1, 103, 107; see also Grotius, H debtors 4, 38, 187, 197, 239, 327, 392, 394 decentralisation 106, 180, 285, 290, 312, 368 default rules 50, 170, 172, 222, 226, 229, 235, 281 defences 28, 43–44, 81, 141, 198, 373, 383, 392–93 defendants 143, 338 unwilling 78 deference 27, 212, 289, 299, 301–2, 321, 345, 402 delivery 23, 68–69, 310, 320, 323, 337–38, 352, 387–88 physical 34, 386–87 democracy 56, 98, 106, 108, 129, 131, 280, 282–83 formal 56–59, 128–29, 131, 195, 282–83, 294 democratic legitimacy 56, 128, 299, 365 democratic process 10, 56–57, 59, 128–29, 181, 194–95, 283 Denning, Lord 146 dependency 44, 60, 146–47, 236–37, 244, 269 depositors 130, 141 derivatives 2, 12, 128 Dernburg, H 117 desuetude 226–27, 244 detrimental reliance 42, 81, 228–29, 236, 244, 372, 382, 384 Dicey 78, 149

Digests, Justinian 84, 87–89, 92, 94, 97, 99, 218, 254 direct effect 137, 208, 359, 362 directory customs and practices 238–40, 283, 358, 372, 376, 397–402 directory law 50, 67, 281 directory treaty law 397, 399 disclosure 42, 130, 363, 373, 383 pre-contractual 322, 384 discovery 193, 285–86, 407 discretion 33, 144–45, 147, 318, 320, 326–28, 333–34, 346 discretionary elements 239, 324, 327–28, 335, 371 discrimination 209, 211–12 disposition rights 388 dispute prevention v dispute resolution 253–55 dispute resolution 20, 31–32, 70–71, 74, 133–37, 169, 171–72, 253–54 facilities 27, 81, 256, 297, 393 international 82, 289 v dispute prevention 253–55 distribution 58, 99–100, 130, 164, 168, 223 chains 2, 141–42, 171, 289, 318, 326, 345, 368 diversity 58, 251–52, 272, 274, 280, 283, 306, 314 cases 306 of citizenship 305–6, 334 cultural 279, 283 Divine Law 100, 102, 106–7 doctrinal law 23, 134, 157–58, 171 doctrinal thinking 133, 160, 163, 165, 247, 249, 251, 312 documents of title 37, 60, 67, 223, 326, 377, 386–88 Domat, J 96 domestic bankruptcy laws 392, 396 domestic courts, see national courts domestic laws 232–35, 239–40, 317–20, 337–39, 375–76, 391–92, 401–3, 405 applicable 5, 239, 318, 320, 341–42, 367–68, 387, 402 application 232–33, 239, 249, 337, 342 as autonomous residual source of transnational law 234 domestic legal orders/systems 229, 235, 309, 311, 314, 319, 327, 345 domestic private law 130, 319–20, 376 domestic public policies 283, 304, 309, 349–50, 355, 358, 402, 408–10 domestic regulation 54, 80, 256, 301 Donellus, H 94, 103 double exequatur 74 double regulation 18 Draft Common Frame of Reference (DCFR) 8, 15, 29–30, 211–14, 230–31, 268–70, 308, 384–85 droit coutumier 95, 218 droit écrit 94–95 due process 72, 160, 170, 207, 209, 214, 333–34, 347 duration contracts 41, 44, 47, 253 Dutch law 103, 211, 327, 338–39, 384

416 Index duties of care 68 fiduciary 23, 39, 44, 146–47, 199, 244, 269, 344 post-contractual 44, 344, 384 pre-contractual 41, 193, 270, 384–85 dynamic concepts of law 4, 35, 41, 47, 111, 227, 251, 254 dynamic sources of law 367 dynamism, legal 35–49, 54, 67, 104, 119, 125, 191, 197 ecclesiastical courts 144, 273; see also Canon law ECJ, see European Court of Justice economic considerations 192, 289 economics, law and 83, 137, 164–65, 167–69, 290, 295, 312 edicta 84 edictum perpetuum 85 effectiveness 50, 87, 104, 161, 175, 208, 264, 300 efficiency 8–10, 50–51, 133–34, 136–37, 167–70, 244–45, 249–52, 283–84 considerations 11–12, 40, 135, 139, 156, 210, 249, 286 Ehrlich, Eugen 136 eighteenth century 82, 89, 145, 149, 273, 276, 377, 386 electronic payments 68, 262 eleventh century 92–93 empirical research 110, 114, 127, 158, 164, 175, 183–84, 190 employees 383 employment contracts 202, 265 enforceability 78, 180, 406 enforcement 19–20, 72–74, 256–58, 303–4, 338–39, 348–49, 380–81, 409 facilities 74, 290 function 20, 74, 369 international 79, 303 powers 251, 274, 381 England, see United Kingdom enjoyment 187, 390 Enlightenment 102, 104, 109, 120, 277, 281, 365 enrichment, unjust 90, 106, 146, 236, 244, 308, 373 environmental issues 13, 179, 181, 207, 300–1 EPCL (European Principles of Contract Law) 203, 356, 384–85 equality 58, 62, 98, 100–1, 108, 188, 190, 393 equilibrium 142, 178–79, 185, 283, 285, 293, 296, 299 equitable assignments 146, 199 equitable interests 33, 199 equitable jurisdiction 22, 196 equitable relief 147, 258 equitable treatment 350 equity 22–24, 36–39, 141, 145–51, 153–55, 157–58, 367, 392–94 and common law 24, 143–49, 196 judges 23, 73, 78, 146–47, 258 and law 23, 147–48, 153, 155, 158, 191, 198, 220 law of 147

errors 54, 127, 392, 397 EU (European Union) 26, 230–31, 246, 256, 265–66, 304, 360–62, 371 Directives 156, 265, 343, 360; see also Table of Cases harmonisation attempts 262–73 Regulations 327, 329, 331–32, 334, 338–39, 346, 348, 405 Eurobonds 18, 25, 223, 236, 238, 386–87, 390–91, 394–95 markets 17–18, 25, 34, 223–25, 368–69, 386, 394, 396 European Continent 8, 82–83, 104, 106, 139–40, 159, 188, 365 European Contract Principles 384, 405 European Court of Human Rights 304, 308–9 European Court of Justice (ECJ) 202–3, 212, 215, 267–68, 308, 346, 355–56, 360–63 European Principles of Contract Law (EPCL) 203, 356, 384–85 European Union, see EU evidence 73, 75, 119, 184, 205, 258, 393, 400 exception clauses 331, 337–39 exclusionary rule 155 exclusivity 8, 20, 191, 195, 236, 243, 281 exequatur, double 74 expansive interpretation 332 expectations justified 42, 321 reasonable 43, 66, 384 expediency, political 183, 251, 280 experimentation 66–67, 115, 139, 177–78, 253, 279, 284, 287 expertise 20, 65–66 experts 69, 89 expropriation 308, 349, 389, 396 expropriatory takings, see expropriation extended set-off rights 302 extra-legal considerations 135, 172–73, 240 extrapolation 12, 48, 55, 117, 124, 128, 133, 175–76 extraterritorial effect 324, 346, 357 extraterritoriality 74, 319, 324, 331, 346 fact and law finding 190, 192 fact situations 124, 134, 151, 171, 244–45, 253–54 factoring 260, 376 facts, relevant 54, 104, 127, 192–93, 254 fair and equitable treatment (F&E) 350 fairness 144, 146, 333–34, 338–39, 344, 346–47, 350, 352–53 F&E, see fair and equitable treatment federal courts (United States) 150, 160, 306, 334 federal law 231, 272, 304–6 fees 63 feudal law 143, 148 Fichte, JG 111, 120 fiduciary duties 23, 39, 44, 146–47, 199, 244, 269, 344

Index 417 finality 25, 49, 53–55, 374–75, 383, 386–87, 392, 408–9 payment 31, 34–35, 37, 222, 267, 269, 373, 375 transactional 32, 67, 310, 352, 394, 407 finance international 1, 25, 36, 52, 174, 237, 389, 392 leasing 37 sales 23, 81, 195, 389, 392 financial crisis 117, 186, 282 financial dealings 38, 40, 67, 70, 74, 253, 368, 375 financial directives 265, 360 financial flows 1, 3, 49, 54, 81, 182, 197, 251 financial instruments 18, 34, 357, 393 financial law 1, 5–6, 8–11, 22–23, 25–26, 32–35, 81–83, 365–410 financial markets 34, 49, 377 financial practices 10–11, 55, 196, 375 financial products 34, 39, 49, 125, 197, 236, 238, 320 financial regulation 34, 134, 159, 236, 261 financial services 39, 156, 236 financial stability 18, 207, 261, 289, 373 financial transactions 30, 37, 52, 70, 139, 235, 341, 349 fintech 178 flexibility 134 procedural 73 floating charges 33, 37–40, 66, 68, 146, 148, 387–88, 392–93 fluidity 49–50, 52 force majeure 43–44, 46, 67, 81, 122, 215, 271, 308 foreign bankruptcies 401 foreign direct investment 396 foreign elements 13, 155, 319, 321, 333, 335–36, 402 foreign exchange 320, 336, 352–53 foreign interests 336 foreign investments 5, 27, 81, 345, 396 arbitration 76 disputes 349, 400 protection 301, 351 foreign investors 351, 389, 396 foreign law 75, 174, 223, 225, 318–20, 324, 354, 357 foreign proprietary rights 174, 331, 401 forfeiture 146 formal democracy 56–59, 128–29, 131, 195, 282–83, 294 formalism 157, 162–63, 169, 171, 173–74, 247–49, 251, 253 formalities 227, 388, 397, 401 formation of law, see law formation forum 10, 322, 326, 328, 333–36, 338–40, 347, 351–54 private international law rules 249, 397, 401 selection 347, 353–55; see also choice of law shopping 328, 334, 353 state 335, 345–47, 352–53 forum (non) conveniens 340 Fouchard, P 378

fourteenth century 92, 143, 386 France 39–40, 56–57, 61–66, 91–96, 109–10, 120–24, 228, 377–78 arbitration law 257 bankruptcy 122 codification 62, 109, 121, 124 commercial acts 62 Northern 91, 95–96, 218 Southern 91–92, 95 fraud 43, 51, 72, 146–47, 236–37, 352, 373, 383 Frederick the Great 121 free disposition 223, 225–26, 229, 234, 339, 341, 395, 397 free movement of goods 176 freedom 10–11, 35, 37, 98–99, 101, 108, 112, 116 Freirechtslehre 131, 136 functional approaches 168–70, 176–77, 179, 253, 312, 336 functional methods 171 functionalism 163 functions 147–48, 255–56, 282, 292, 335–36, 338, 358–59, 401 autonomous 338 judicial 19, 84, 87, 97, 135 fundamental principles 170–72, 205–14, 235–38, 241–47, 371–77, 382–87, 393, 405–6 elaboration 225, 394 fundamentalism 280 Gaillard, E 378 Gaius 87, 90–91, 111 Institutes of 111 game theory 168, 293, 295–96 gardening metaphor 182 GATT 292 gender 158, 164–65, 208–10, 273, 283 general legal principles 53, 101, 215, 247, 252, 276, 366, 376 general principles 205–8, 214–16, 229–32, 238–40, 242–45, 307–10, 375–77, 396–402 application 334 mandatory 237, 371–72, 376, 397 Genossenschaftsrecht 111 German Academic Council 30, 52, 115, 137, 405 German Historical School 103, 108, 110–11, 114, 116, 120, 318, 325 German idealism 110, 115, 120, 158 Germany 9–10, 61–66, 94–96, 109–11, 115–20, 122, 128, 135–39 Civil Code 30, 66, 120 codification 65, 117–18, 120, 218, 269 Northern 96 globalisation 17, 139, 181–83, 185–86, 274–75, 282–84, 298–300, 311–12 globalised world 315 globalising world 13, 15, 17, 74, 185, 241, 283, 345 glossae 94, 131

418 Index Glossators 111, 187 Goldman, B 377–78, 409 good faith 43–48, 202–3, 211–12, 226–27, 245, 269, 341–44, 382–84 case law 45, 197, 254 civil law 48, 66, 269, 343 protections 44, 47, 269, 342 Goode, R 378 government(s) 56, 178–82, 185–86, 251, 253, 281–82, 343–45, 402 governmental interests 79–80, 301, 325, 328–30, 335–36, 343–47, 353, 355 governmental intervention, see intervention Grotius, H 82, 89–90, 94, 97, 100–7, 109, 203, 205 natural law school of 100–4, 157, 243 group autonomy 280, 283 group cohesion 278, 280 group cultures 165, 176, 279–80 guarantees 258–60, 285 guesswork 178–79 guest statutes 332, 353 Habermas, J 295 Hague Conference 10, 233–34, 259, 262, 328–29, 359, 409 hardship 383, 400 harmonisation 31, 259, 265, 267, 306, 360–61 private law 202, 268 Hart, HLA 163, 252 health 177, 179, 181, 185, 289 hearings, proper 259, 373 Hegel, GWF 104, 108, 117, 120, 127, 277 hierarchy of norms 79–80, 238–40, 255, 257, 377, 379, 401–2, 404–8 from different legal sources 402 lex mercatoria as 369–77 hierarchy of sources of law 56, 173, 186, 232, 235–40, 253, 312, 368–69 higher norms 160, 227, 230, 245, 358 historical interpretation 132, 134, 138 Historical School, German 103, 108, 110, 116, 120, 246, 318, 325 Hobbes, T 102, 104, 107 holdership 90, 187, 388 Holmes, OW 159–60 home states/countries 351–52, 396 honesty 182, 291 horizontal application 209–10, 323 horizontal effect 170, 208–13, 236, 323, 344 Horn, N 228 host countries 13, 350–51, 389 House of Lords 77, 152, 362 Huber, U 89, 94, 324 human behaviour 14, 50, 117, 129, 177, 248 Human Law 99–100 human relationships 109, 117, 124, 128, 131, 248–49, 254, 366

human rights 205, 208–12, 280, 283, 285, 287, 308–9, 373 Humanists 94 IBRD, see World Bank 396 ICC (International Chamber of Commerce) 31, 224–25, 257, 259–60, 296–97, 396, 398, 400 Rules 237–38, 257, 372 ICJ (International Court of Justice) 26, 32, 79, 82, 203–5, 256, 368, 374 ICMA (International Capital Market Association) 28, 142, 224, 369, 389, 392 ICSID (International Centre for Settlement of Investment Disputes) 78, 349, 396, 400 idealism, German 110, 114–15, 120, 158, 188 illegality 217 IMF (International Monetary Fund) 39, 261, 300 immanent law 28, 56–57, 109, 184, 207, 214, 217, 222 immunity, sovereign 349 impartiality 373, 410 imperial constitutions 86–87, 90, 99 imperium 84, 86–88 implementation 26, 47, 101, 202, 213, 230, 265, 360–61 legislation 363 implied terms 205, 216, 220, 227, 394, 398–400 impossibility 56, 121 in-house law departments 169, 174, 300, 341 inalienable rights 98, 107–8 inbuilt automaticity 54 incentives 167, 179, 293, 296, 404 income rights 390 incorporation 108, 231, 240, 305, 359–61, 363, 370, 375 Incoterms 25, 31, 202, 224–25, 238, 260, 398–99, 401 independence 59, 63, 82, 144, 147, 151, 367, 398–99 independent sources of law 26, 60, 123, 203, 211, 217–20, 240 India 30, 323 indirect agency 39, 373 individualisation 2, 4, 12, 269 individualism 182, 189, 279–80, 282 induction 132, 156, 189 inductive reasoning 219 industry practices 52–53, 64, 67, 366, 368, 371, 397, 399 informality 400 infrastructure 41, 50, 57, 220, 225, 291, 297, 394–95 injunctions 23, 145, 147 innovation 17, 39, 115, 125, 128, 134, 159, 175 Inns of Court 144, 149 insiders 35, 37, 236, 269, 288, 302, 373, 388 insolvency 31, 33, 39, 147, 154, 156, 259, 263; see also bankruptcy Institutes of Gaius 111 institutional power 133, 139, 205 insurance 2, 32, 61, 64–65, 67, 122, 348, 353

Index 419 intangible assets 33–34, 61, 141, 148, 199, 318, 325, 392 integrity 2, 299 intellectual framework 8, 50, 116, 186, 249 intellectual prejudice 10, 30, 119, 169, 193, 254 intellectual systems 119–20, 128, 134, 186, 189, 194, 366–67, 370 intellectualisation 20, 29, 113, 115, 133, 157, 166, 168–69 intent 12, 16, 41–43, 46–47, 147, 150, 346, 382–84 Interessenjurisprudenz 131, 135–36 interference 309, 402 interim measures 79 intermediaries 68, 209, 343–44, 391 internal market 129, 208, 251, 263, 266–67, 271, 292, 308–9 internalisation 254, 279 international arbitral awards 256, 303 international arbitration 71–75, 78, 208–9, 228–30, 255–57, 346–49, 351–52, 409–10 international arbitrators 72–77, 79, 258–59, 300, 347–48, 359, 405, 409–10 powers 72, 75 reasoning 73 status 74 international assignment 38, 142, 201, 397, 400 international bankruptcies 71 international bills 259, 370 International Capital Market Association, see ICMA International Centre for Settlement of Investment Disputes, see ICSID International Chamber of Commerce, see ICC international commerce 12, 14, 81–82, 189–90, 282, 291–92, 295–96, 330 international commercial and financial legal order 246, 256, 368–69, 377, 398, 402, 406, 409 international commercial arbitration 31, 62, 70–71, 78–80, 257, 259, 369, 378–79 practice 55, 78, 176 role and status 70, 255 international commercial courts 75, 77–80, 255, 359, 409 international commercial disputes 79 international community 205, 407 international conflicts 327, 332–33; see also interstate conflicts international contracts 43, 228, 259, 332 international convergence 259 International Court of Justice, see ICJ international courts 4, 26, 77, 79, 82, 105, 190, 203; see also individual courts international dealings 14–15, 25, 28–29, 202–3, 274, 297, 299, 359 international enforcement 79, 303 international finance 1, 25, 36, 52, 174, 237, 389, 392 international flows (goods, services, etc.) 2, 207, 245–46, 272–73, 275, 291–92, 317–18, 403

international legal orders 237, 246, 300–1, 309, 312, 318, 374–76, 378 international legal relationships 232–33, 325, 337, 376 international marketplace 4, 25–26, 28–29, 31–32, 34–35, 37, 57–59, 376–77 international markets 25, 34, 220, 225, 323, 374 international minimum standards 5, 13, 208, 300, 302, 343, 345, 369–70 International Monetary Fund, see IMF international normativity 313, 389 international orders 72, 302, 304, 336 International Organisation of Securities Commissions, see IOSCO international practices 26, 125, 171, 174, 238, 248, 386–87, 396–97 International Primary Market Association (IPMA) 392 international professional dealings 15–16, 31, 49, 67–68, 252, 297, 321–22, 329 international promissory notes 259 international public order 173, 304, 321, 350, 352, 406 international recognition, see recognition international sales 67–68, 232–34, 242, 259–60, 324, 327–29, 394, 397 International Securities Market Association (ISMA) 392, 395 international status 20, 73, 78, 218, 391 International Swap Dealers Association, see ISDA international trade 28, 30–31, 38, 41, 259–60, 317, 319, 369–70 international transactions 2–5, 12–14, 52–55, 189–90, 232, 319–23, 367–69, 401–3 internationalisation 28, 32, 54, 66, 78, 283, 309, 328 internationalism 165, 189, 272, 378, 409 internationality 13, 65, 68, 70, 72, 74, 239, 242 interpretation 123–25, 128–33, 135–39, 155–56, 159–60, 188–92, 194–98, 360–63 analogical 12, 133, 135 contracts 47, 106, 130, 156, 160, 198, 200, 219 expansive 332 historical 132, 134, 138 liberal, see liberal interpretation literal 41, 43, 47, 52, 119, 131–32, 138, 342 logical 162 normative 134, 198, 211, 245, 342, 382 purposive 119, 156 restrictive 24, 156, 190 techniques 40, 84–85, 119, 135, 137, 162, 202, 333; see also liberal interpretation, techniques teleological 12, 119, 131, 133–35, 155–56, 245, 341–42 uniform 361 interpretational freedom 124, 135, 151, 189 interstate conflicts 305, 327, 330, 332–33, 335, 351, 353, 378 intervening bankruptcy 354

420 Index intervention 105–7, 109, 142–43, 145, 320, 326, 332, 408 statutory 24, 85, 144 investment securities 17, 34, 61, 66, 68, 142, 292, 300 Investment Services Directives 360, 363 investments 33–34, 42–43, 141, 214, 228–29, 349, 382, 389 TTIP (Transatlantic Trade and Investment Partnership) 80, 350 investors 209–10, 320–21, 326, 344, 350–51, 363, 391, 396 IOSCO (International Organisation of Securities Commissions) 261 Irnerius 92 irrationalities 165, 181, 183 ISDA (International Swap Dealers Association) 25, 28, 34, 236–37, 369, 375, 389, 394–95 issuers 147 Italy 62, 64, 66, 90–92, 94, 96, 120, 122 Northern 91, 95–96, 324, 367 ius civile 85–86, 89, 94, 107 ius cogens 28, 206, 236, 238, 342, 405 ius commune 82, 90, 92–94, 96–97, 110–11, 118–19, 218–19, 276 and local law 93–97 ius curia novit 225, 259 ius gentium 85–86, 89, 91–92, 94, 99, 102–3, 105, 107 ius honorarium 85, 89, 146 ius in causa positum 254 ius voluntarium 102–3; see also voluntary law Iustinian Digests, see Justinian Digests Japan 30 Judicature Acts 147, 153 judicial activism 147 judicial discretion, see discretion judicial function 19, 84, 87, 97, 135 Juenger, FK 312, 378 juries 75–76, 143, 145, 158 jurisdiction 78, 80, 173–74, 266–68, 338–39, 347–48, 395, 409 adjudicatory 347–48, 352–54, 395 arbitral 72 exclusive 79 proper 13, 373, 409 jurisprudence constante 205, 241 jus cogens rules, see ius cogens justice 8–10, 98–99, 160–62, 164–65, 179, 244–45, 249–53, 344 natural 44, 269 rougher 342, 384 justified reliance 382, 384–85 Justinian Digests 87–90, 92, 94, 97, 99, 121, 131, 218 Kant, I 104, 108, 114 Kelsen, H 244, 252 knowledge 10, 19, 28, 50, 69, 92, 113, 115

Lando, O 68 Landrecht 120–21 language 75, 114–15, 138, 160, 184, 278, 294, 297 Larenz, K 139 Latin America 121 law and economics 83, 137, 164–65, 167–69, 290, 295, 312 law and equity 23, 147–48, 153, 155, 158, 191, 198, 220 law and sociology 163–64, 293, 312 law as a political organisational tool 280–84 law as a system 24, 70, 287 law as cultural manifestation 276–80 law-creating forces 307, 312, 378, 394 law formation 3–4, 16–17, 32, 56–59, 103–6, 125, 131, 278–79 function 11, 57, 291, 296 powers 58–59, 146 transnational 4, 243 law makers 5, 75, 134, 174, 240, 258 law-making powers 59, 84, 107, 171, 290 law merchant 22, 24, 196, 198, 220, 272–73, 377, 380; see also lex mercatoria law of obligations 51, 194, 207, 254, 276, 338 law schools 115, 128, 130, 149, 157, 163, 174, 286 LCIA (London Court of International Arbitration) 237, 257 leases 39–40, 61, 66, 68, 81, 187, 197, 392–93 leasing 260, 376 Leflar, RA 336 legal capacity,’ see capacity legal dynamism 35–49, 54, 67, 104, 119, 125, 191, 197 legal education 92, 175, 253 legal formalism, see formalism legal functionalism, see functionalism legal history 309, 311, 313 legal nationalism 103, 203, 249–50, 368 legal orders 273–76, 289–92, 294–95, 297–301, 307–9, 343–45, 368–69, 374–79 domestic 25, 229, 235, 299, 309, 311, 327, 345 independent 22, 276, 330 national 176, 307, 309, 312 new 69, 246, 253, 288, 292, 377–78 operation in private law 304–9 separate 74 legal positivism, see positivism legal principles 88, 150, 163, 175, 195, 211, 215, 220 common 343 general 53, 101, 215, 247, 252, 276, 366, 376 legal reasoning 114, 119, 128, 133, 160, 167, 194, 199 legal relationships 227, 232–33, 238, 318–19, 325–26, 329, 331, 337 international 232–33, 325, 337, 376 legal rights 168, 384 legal risk 5, 67, 125, 173, 300, 341–42

Index 421 legal scholarship 149, 163, 167–69, 174, 186, 191, 240, 252–53 American 83, 157, 163, 173–75 modern 83, 175 legal sources, see sources of law legal theory 163–64, 170, 309, 311–13 legal transnationalisation 1, 3, 32, 59, 67, 282, 289, 296 legality 50, 213, 217, 224, 322, 325, 357, 397 leges 84–86, 94 Leges Barbarorum 91 Leges Romanae 91 legitimacy 10, 56–59, 129, 169, 188, 248–51, 279–81, 294–95 democratic 56, 128, 299, 365 legitimate expectations 340 legitimate interests 319, 402 legitimation 365, 377 letters of credit 198, 202, 238, 240, 259–60, 307, 310, 398–99 lex arbitri 72–73, 228, 394 Lex Citandi 87 lex contractus 319–22, 324, 327–28 lex fori 12, 318–19, 324–26, 328, 331–33, 335–36, 339, 345 natural 328 Lex Hortensia 84 lex loci delicti 319–20, 324–25, 327, 338 lex locus contractus 326 lex mercatoria, see also Introductory Note application and enforcement 409 approach 251, 319, 330, 357–58, 386, 391, 407 background to revival 365–69 direct references to 406 as hierarchy of norms 369–77 major protagonists 377–79 objections to approach 407 old 248, 367, 408 and private international law 365 transnational 173, 239–40, 259, 298, 317, 365 Lex Romana Visigothorum 91 Lex Salica 91 lex scripta 94–95 lex situs 38, 238–39, 319, 324–25, 327–28, 335, 401 lex societatis 324, 326–27 lex specialis 9, 11, 22, 33, 63, 65, 122, 140 liability 63, 236, 332, 336, 353, 372, 382, 384 product 168, 332, 360 state 363 liberal interpretation 11–12, 15, 26, 45, 48, 211, 242, 245 techniques 11–12, 15, 17, 26, 194, 196, 211, 245 liberalisation 176, 311 licensed concepts 10, 58, 140, 229 licensing 209–10 liens 196, 199, 223 liquidity 17, 35, 141, 187, 287, 310, 374 assets 217, 373

literal interpretation 41, 43, 47, 52, 119, 131–32, 138, 342 litigation 52, 134, 136, 151, 168, 170, 204, 252–55 living law 89, 110, 159, 163, 168, 222, 282, 344 Llewellyn, K 154, 160, 262 loans 86 local courts 78, 324, 346, 402, 410 local law(s) 90–91, 93–97, 237–39, 288–89, 292, 323–25, 329, 402–3 and Ius Commune 93–97 local public policy 4, 212, 289, 301, 320, 402 local values 58, 328, 331, 345 localisation 3 location 2–3, 38, 70, 239, 300, 324, 347 Locke, J 104, 108 logical interpretation 162 Lombards 91 London Court of International Arbitration 257 Lord Chancellors 85, 143–44, 147, 152 Louisiana 332 Luxembourg 121, 361 Magna Carta 144 maintenance creditors 329, 331, 338 makeability of society 120, 177 mandatory custom and practices 232, 236, 358, 394, 397, 405 mandatory general principles 232, 237, 371–72, 376, 397 mandatory international custom 27, 376, 387 mandatory law 223, 226, 238–39, 281, 283, 333, 337, 357 mandatory rules 224, 229, 322–23, 331, 333, 339, 355, 363 mandatory uniform treaty law 371–72, 376, 397 Mansfield, Lord 21, 241 market abuse 53, 72, 272, 283, 299, 371 market forces 138, 158, 165–66, 189, 222, 299 market practices 22, 28, 45, 270, 342 markets 180–83, 185, 188, 223, 270, 272, 282, 289 capital 18, 34, 223, 368, 390 eurobond 34, 174, 224–25, 386 financial 34, 49, 377 internal 129, 208, 251, 263, 266–67, 271, 292, 308–9 international 25, 34, 225, 323, 374 repo 395–96 swap 17–18, 174, 368–69 master agreements 25, 174, 224, 236–38, 297, 342, 389, 394–95 mediation 371 methodology 3, 5, 11, 16, 30–31, 203–4, 206, 247 Mexico 312, 332 Middle Ages 94, 99, 106, 324, 377 mini-globalisation 9, 185 minimum standards international 5, 13, 208, 300, 302, 343, 345, 369–70 transnational 4–5, 53, 207–8, 213–15, 289, 295, 298, 302

422 Index misbehaviour 383, 385 misrepresentation 43, 81, 400 models 15, 48, 127, 177–78, 181, 183, 286–87, 407–8 abstract 188 academic 114, 117, 119, 127, 131, 157–58, 177, 184 intellectual 55, 137, 370 newer 128, 158, 175, 183–84 scientific 115, 178, 181, 183 social 127, 182 modern common law 60 modern contract law 35, 41, 66, 245 modern legal scholarship 83, 175 modern private law 245, 288–89 modern society 280, 290, 404 modern state 17–18, 106–9, 117, 128, 180–81, 278–84, 288, 365 modernity 117, 125, 177–78, 180–83, 185, 188, 280–81, 284 monetary claims 38, 141, 318, 375, 388, 392, 394 money laundering 72, 283, 339, 373 monopolies, state 140, 276 monopolisation 171, 181, 189, 191, 266, 274–76, 280, 283–84 morality 9, 98, 102, 166, 180, 182, 249, 252 mos italicus 94 most characteristic performance 329, 337–38 movable assets 28, 32, 34, 68, 229, 324, 386, 392 movable property 4, 35–36, 48–49, 60–61, 141, 236–37, 247, 394–95 law 16, 18, 28–29, 37, 66, 68, 197–98, 200 structures 26, 222, 398 mutual airline claims 39 nation state 14, 20, 108, 288, 298 national codifications 9, 14, 113, 119–23 National Conference of Commissioners on Uniform State Laws 261 national courts 73, 76–79, 81, 203, 223, 225, 255–56, 362–63 national cultures 188, 278–79, 281, 283, 288 national legal orders 176, 307, 309, 312 nationalisation 3, 109, 138, 325, 365 nineteenth century 266, 276 nationalism 19–20, 116–17, 247, 249, 277, 280–81, 285, 288 legal 103, 203, 249–50 and system thinking 123–28, 186 nationalistic system thinking 17–18, 22, 51, 325 nationality 188, 277–78, 365 natural justice 44, 269 natural law 89–90, 97–108, 111, 113, 123, 152, 243–48, 324 principles/concepts 103, 107, 119, 294 school 90, 93, 103–4, 107, 111, 113, 243, 245–46 secular 90, 93, 100–4, 107, 111, 122–23, 126, 246 natural lex fori 328 natural persons 4, 8, 16, 40, 65, 122, 140

natural sciences 50, 114–15, 117, 158, 177 naturalism 165 negligence 51, 132, 153, 187, 194, 236, 383–84, 400 negotiability 238, 390–91 negotiable instruments 22–23, 34, 60–61, 217, 223, 238, 375, 386–88 negotiation 41, 384–85 duties 382, 384 nemo dat rule/principle 386, 388 neo-classical thinking 14, 129 Netherlands 62, 64, 66, 120, 122, 327, 339–40, 387–88 netting 33–34, 217, 232, 234, 236–37, 269, 389, 395–96 agreements 394 bilateral 396 clauses 375 facilities 33, 39, 73, 222 novation 39 neutrality 325 new legal orders 253, 288, 292, 377–78 New York Convention 73–75, 78–80, 252, 255–57, 303, 349, 354–55, 409–10 nineteenth century 62, 64, 82, 152–54, 217–19, 275–76, 324–25, 377 early 276, 365 late 85, 158 models 117 nationalisation 266, 276 nationalism 25, 120 paradigm 14, 248, 403 nominalism 114–15 non-discrimination 207, 362, 373 non-merchants 60–61, 63 non-possessory security interests 389 non-professionals 66, 68 non-statist law 78, 111, 298, 331, 403, 405 formation in modern social and economic theory 295–97 non-territorial law 266 non-usus 226–27, 244 normative approach 119, 135, 172, 341, 383 normative interpretation 134, 198, 211, 245, 342, 382 normativity 107–8, 165, 203, 222, 243, 340 international 313, 389 norms 127, 194, 238–40, 293, 371–72, 377, 401–2, 404–8 hierarchy of 79–80, 238–40, 255, 257, 377, 379, 401–2, 404–8 higher 160, 227, 230, 245, 358 Northern Germany 96 notification 38, 288 novation, netting 39 Novellae 89–90, 92 numerus clausus 33, 36, 140–41, 187, 196 objective approach 63, 119, 382–83 objective law 224, 322, 325, 394, 399 objectivity 133, 164, 169, 204, 300, 328

Index 423 obligations 3, 50–51, 70, 194, 207, 329–31, 390, 400–1 law of 51, 194, 254, 276, 338 Odoacer 87 OECD (Organisation for Economic Co-operation and Development) 28, 53, 261 offer and acceptance language 41, 46, 67, 382 official status 15, 86 onshore, coming 5, 36, 53, 72, 207, 242, 252, 289 open system 38, 148, 177, 194, 211, 269, 340 openness 172, 175, 281, 283, 286, 314 ordinary commercial flows 35, 39, 269, 375 ordinary courts 60, 62, 78, 273, 275, 346–47, 354–55, 409–10 ordinary judges 85, 258–59, 359–60 Organisation for Economic Co-operation and Development, see OECD organisational powers 128, 188, 282, 284 original powers 84, 258, 305 outsiders 35, 390 overriding public policy 35, 58, 290, 304, 310, 331, 342, 362 overvalue 40 owners 3, 38, 140, 187, 327, 373 ownership 32–33, 39, 146–48, 187, 236, 309, 386–90, 392 concepts 390 protection 308, 372 rights 388 conditional 49, 236 temporary 33, 37, 39, 141, 146, 197, 199, 269 temporary, see temporary ownership transfer of 32–33, 39, 387, 395 transnational 386, 389–90 pacta sunt servanda 207, 236–37, 244, 372, 382 Pandectists, see German Historical School Pandects 89 Panel of Recognised International Market Experts in Finance, see P.R.I.M.E. paperless systems 34 Papinianus 87 paradigms 127–28, 158, 160, 183, 251, 253, 286, 288 parallel proceedings 354–55 parochial concepts 270, 292, 366, 402 parol evidence rule 155 partial codification 171, 240, 399–400 participation 5, 31, 57, 191, 223, 284, 291, 294 participatory law making 106, 129, 180, 227, 250, 272, 366 party autonomy 35–37, 49–55, 197–98, 227–29, 235–37, 321–23, 375–77, 397–99 and contractual choice of law 356–59 past experiences, extrapolation of 55, 124, 128, 175–76 Paulus 87 payment finality 31, 34–35, 37, 222, 267, 269, 373, 375 payment obligations, primary 398–99

payments 2, 25, 32, 34, 53–55, 309–10, 390, 392–93 electronic 68, 262 peace 101, 103, 107–8, 169 peer groups 47, 340, 408 peremptory law 4, 28, 204, 368 perfection 179, 199 performance 42–43, 141, 146–47, 336, 338, 342, 382–83, 400 most characteristic 329, 337–38 personal property 40, 50, 60, 81, 96, 124, 146, 195 personal statute 324 personality principle 91 persuasive force 94, 122–23, 151, 155 philosophy 86, 98–100, 102, 105, 107, 115, 121, 124–25 physical assets 34, 335, 386 physical delivery 34, 386–87 physical possession 22, 148, 386–88, 390 pleadings 223, 240, 255, 257, 337, 359, 369, 405 plebiscita 84–85 pledging 386 pluralism 223, 301, 312 points of law 147, 409 Poland 338 police force 279 polis 97–98, 105 political choice 116, 133, 169, 366 political expediency 183, 251, 280 political organisational tool, law as 280–84 political process 56, 130–31, 142, 280, 344 Popes 92, 95, 97 Popper, K 50, 114, 127, 294 Portalis, J-E-M 121, 123 portfolios 239, 375, 392 Portugal 120, 338 positive law 97–102, 108–9, 127, 158–59, 172–73, 175–76, 179–80, 244–47 positivism 124, 135, 137–38, 153, 157, 161, 219, 247–53 modern 243 possession 22, 90, 130, 148, 187, 309–10, 386–88, 390 physical 22, 148, 386–88, 390 post-contractual duties 44, 322, 344, 384 post-modernity/post-modernism 116, 177, 183, 280 post-realism 163 Pothier, R-J 96, 103, 110 powers 74–76, 87, 97, 106–7, 263, 266–67, 278–79, 392–94 of arbitrators 72, 229, 393 autonomous 75–76, 225, 258 coercive 106, 293 enforcement 251, 274, 381 institutional 133, 139, 205 of international arbitrators 72, 75 law-making/law-creating 59, 84, 107, 171, 290 organisational 128, 188, 282, 284 original 75, 84, 174, 258, 305 regulatory 351 state 104–5, 209, 275, 289

424 Index practices 19–20, 52–55, 216–27, 235–38, 240, 310–11, 377–79, 394–400 directory 238–40, 283, 358, 372, 376, 397–402 financial 10–11, 55, 196, 375 local 174, 176, 248 practitioners 30, 115–16, 125, 127–28, 144–45, 172–73, 287, 341 role 340–43 praetor 84–86, 90 praetor perigrinus 85 praetor urbanus 85 pragmatism 49–56 pre-contractual disclosure 322, 384 pre-contractual duties 41, 193, 270, 384–85 disclosure 382 precedence 218, 330, 347, 376 precedent 22–23, 39, 144–45, 150–52, 192, 194, 199, 220 binding 29, 150–51, 199, 206 predictability 31–32, 47, 49, 52, 54–55, 291, 293, 333–34 preliminary opinions 75, 79, 256, 361, 410 pretences 10, 25, 119, 121, 124, 135, 195, 199 PRIMA 391 primary payment obligation 398–99 principles general 205–8, 214–16, 229–32, 238–40, 242–45, 307–10, 375–77, 396–402 legal 88, 150, 163, 175, 195, 211, 215, 220 priority 38–39, 94, 176, 188, 218, 223, 323, 327 privacy 400 private codification 398 private contract law 350 private international law 9–10, 12–13, 232–34, 262, 317–20, 324–65, 367–68, 401 approach 232, 262, 321 developments in US 332 European approach 337 modern 317–30 underlying concept 317–23 modern US conflicts theories 335–37 refinement of European model 330–32 rules 73, 233, 235, 343, 346, 359–60, 397, 401–2 and uniform law 359–63 private law 22–28, 108–11, 128–31, 153–59, 211–14, 230–35, 265–68, 365–69 applicable 338, 376 in civil law countries 140–42 domestic 130, 319–20, 376 early developments 83–86 formation 57, 104, 128, 130–31, 179–80, 188, 190–91, 281 harmonisation 262–72 intervention 131, 343 modern 245, 288–89 nature 130, 175, 233, 236, 360 sources of 22, 82, 190, 313, 372

substantive 82, 154, 263 transnationalisation 251 private parties 43, 209–10, 320, 323, 344–45, 348, 350, 355 private property 40, 92, 102, 180, 281 private relationships 129, 281, 283, 344 private rights 108, 119, 137 procedural flexibility 73 procedural law 82, 94, 354 product liability 168, 332, 360 professional activities 68–69, 272, 301, 369 professional contracts 28, 40, 47, 141, 228, 382 professional dealings 15–16, 26, 28–31, 44–49, 65–69, 140–41, 210–11, 269–72 professional parties 28, 51–52, 54–55, 65–69, 130–31, 342, 374–75, 383–84 professional sphere 29, 52–53, 69–70, 245–48, 330–31, 339, 383–85, 407–8 professionality 59, 65, 303, 343, 403 professionals, see professional parties promises 43, 99, 236, 382 promissory notes 2, 22, 32, 38, 223, 259, 386 proof, burden of 400 property 170–71, 214–17, 222–23, 295–97, 325–26, 371–73, 375–77, 394–95 law 33, 37, 50–51, 223, 226–27, 324–25, 327–28, 373–75 personal 40, 50, 60, 81, 96, 124, 146, 195 private 40, 92, 102, 180, 281 public 400 rights, see proprietary rights transfers 352, 375 proportionality 58, 106, 208–9, 211, 251, 267, 299, 301 proprietary interests 60, 73, 81, 146, 148, 197, 388, 390 equitable 33 proprietary rights 33, 92, 281, 309, 331, 386, 388, 392–93 creation 4, 37, 122 foreign 174, 331, 401 limited 386 modern 388 new 227, 237, 392 systems of 40, 66, 68, 148, 269, 392, 398 proprietary structures 35, 37, 39, 81, 196, 310, 375, 393–94 protection of bona fide purchasers 32, 224, 292, 310, 375–76, 388, 393, 395 special 60, 130, 209, 373, 376 of weaker parties 66, 130, 170, 326, 336, 339 Prussia 111, 120–21, 123, 194 public interest 4–5, 27–28, 58, 80–81, 105, 107, 181–82, 320–22 public international law 26–27, 49, 82, 189–90, 203–7, 245, 350–51, 389–90 public law 149, 177, 185, 251, 281

Index 425 public order 27, 81, 173, 207–8, 227–29, 297–98, 339, 402 concepts 130, 274 considerations 27, 35–36, 129, 131, 301, 304, 344, 348 exceptions 339 international 173, 304, 321, 350, 352, 406 requirements 298–99, 301–2, 347–48, 358, 371–72, 379, 402, 405–6 public policy 79–82, 105–7, 129–31, 170–73, 234–36, 301–4, 318–20, 350–55 bar 252, 409–10 conflicting 356 domestic 349–50, 355, 358, 379, 402, 408–10 issues 54, 72, 74–75, 81, 135, 354–56, 377, 381 local 4, 212, 289, 301, 320, 402 overriding 35, 58, 290, 304, 310, 331, 342, 362 standards 5, 53 test 354–55 publicity 388, 390 Puchta, GF 111, 117, 120, 277 Pufendorf, S 102–4, 108, 157 purchasers bona fide, see bona fide purchasers 23, 32, 36, 60, 224, 386, 388, 393 in the ordinary course of business of commoditised products 35–36, 239, 302, 393, 395 purposive interpretation 119, 156 QCs (Queen’s Counsel) 86 quality 17, 30, 53, 184, 215, 270, 310, 403 raison d’etat 108, 281 ranking 5, 73, 238, 305, 372, 401 ratifications 14, 233, 260, 262, 375 rational law 93, 105, 219 rationalisation 119–20, 179, 200, 295, 366 rationalism 102, 127 rationality 14, 98–99, 101, 108–10, 169, 181–84, 187–88, 276–77 re-education 17, 158 real estate 67, 138, 146, 148, 320, 324, 352, 356 realism 23, 114–15, 130, 156–57, 160–61, 163, 179, 192 reasonable expectations 43, 66, 384 reasonableness 132, 216, 222, 227, 330, 334, 338–39, 346 reasoning of international arbitrators 73 legal, see legal reasoning systemic 159, 189, 193 receivables 31, 33–34, 37–38, 237, 239, 242, 395, 397 financing 34, 39, 81, 269, 376 trade 375, 390, 392 recognition 73–74, 78, 228–29, 256–58, 303–4, 354–55, 389–90, 409–10 state 11, 56, 140, 273, 291, 294

recovery rights 187 redemption 146 registration 38, 69, 71 règles d’application immédiate 327, 331, 333 regularity 221–22, 227, 248 regulation 230–31, 302, 331–32, 337–39, 343–44, 346–48, 356–59, 405 domestic 54, 80, 256, 301 financial 236, 261 regulatory issues 79, 401 regulatory laws 13, 78–79, 81, 227, 319–20, 341, 345, 376–77 regulatory powers 351 regulatory standards 210, 323 relationship thinking 11, 28, 40, 47, 131, 210, 247 relevant facts 54, 104, 127, 192–93, 254, 311 reliance 28–29, 42–44, 222–24, 251, 269, 310, 331, 382–84 detrimental 42, 81, 228–29, 236, 244, 372, 384 justified 382, 384–85 relief 86, 143, 146, 153 equitable 147, 258 religion 98, 106, 163, 180, 185, 278, 280, 284 remoteness 352, 355 renegotiation duties 44, 322, 384 renewal 115–16, 137, 163, 207 repo financing 37, 392 repo markets 395–96 repos 17, 34, 39–40, 66, 81, 141, 389, 392 repurchase agreements 39, 197, 269, 395, 408 rescission 43, 63, 146 rescripts 88, 90 reservations of title 39, 314, 375, 395 residence 217, 321, 329, 337–39, 395 residual rules 56, 59, 235, 239, 383, 387, 407, 409 resources 17, 159, 183 responsa 86–87 responsiveness 9, 49, 133, 137, 249–50 Restatements, United States 154–57, 162, 261–62, 302, 327, 333–34, 336–37, 353 restitution 236, 326 restrictive interpretation 24, 156, 190 rights abuse of 215, 308 acquired 319, 324, 327–28, 401 contractual 42, 119, 314, 384, 388, 397 disposition 388 human 205, 208–12, 280, 283, 285, 287, 308–9, 373 inalienable 98, 107–8 legal 168, 384 ownership, see ownership, rights private 108, 119, 137 proprietary, see proprietary rights segregation 39 subjective 90, 94, 102, 118–19, 186 third party 5, 173, 391 rigidity 8, 119, 144–45, 151, 333, 335

426 Index risk 52, 54, 67–69, 282–83, 341, 383, 395–96, 408 acceptance of 42, 44 distribution 173 legal 5, 67, 125, 173, 300, 341–42 management 29, 35, 37, 43, 47–48, 52–53, 197–98, 310 tools 28, 37, 43–44, 47, 52, 54, 60, 383 roadmaps 43–44, 47, 52, 60, 198, 342, 374, 383 Robespierre 109 Roman Empire 86, 88, 91, 93, 99, 148 Roman law 19, 82–97, 102–3, 110–11, 122–23, 143, 148, 186–88 classical 86–87, 94, 111, 120 influence 90–91, 95 revival 88, 90–94, 102 universal 8, 188 romanticism 18, 57, 109, 115, 120, 277, 281 rougher justice 342, 384 Rousseau, JJ 108–9 rule of law 106, 182, 280, 283, 294 safety 177, 197, 236, 252, 254 sale of goods 32–35, 60–61, 67–68, 70, 270, 272, 388, 393 sales conditional 314, 392, 408 finance 37, 39, 81, 227, 236, 389, 392, 395 sanctions 73, 107–8, 290, 407 state 107, 218, 287 Savigny, FC von 110–11, 135, 137, 153, 318–19, 321, 324–28, 331 Schmitthoff, C 22 science 114, 127, 175, 177–78, 185–86, 249 scientific models 115, 178, 181, 183 Scotland 71, 89, 93, 151 search duty 37, 122, 303, 388 seat 70–74, 78–79, 228, 317–18, 325–26, 366–67, 394, 400 secular natural law 90, 93, 100–4, 107, 111, 122–23, 126, 246 secured creditors 187 secured interests 32, 388 secured transactions 61, 66, 68, 81, 211, 239, 262–63, 304 securities entitlements 17, 34, 39, 66, 68, 314, 386 regulation 158 securitisations 39–40, 81, 314 security interests 33, 37, 39–40, 60, 324, 327, 331, 408 non-possessory 389 segregation 23, 33, 39, 141, 197, 199, 314, 360 rights 39 seizure 389 self-interest 105, 167, 295–96, 313 sellers 2, 42, 67–68, 271, 310, 320, 329, 337 senatus consulta 86 separation 39, 66, 71, 82, 102, 150, 194, 292

services 2–3, 17–18, 33–34, 65, 69–70, 171–72, 291–92, 369–70 set-off 33–34, 39, 222–23, 226–27, 236–37, 341–42, 389, 392–96 extended rights 302 facilities 227, 292, 341, 375 settlement 25, 34, 39, 236, 238, 261, 263, 396 seventeenth century 93–95, 97, 108, 144, 187, 324 Dutch School 94 severability 393 Sharia law 356, 358–59 ships 78, 325 situs 3, 70, 325, 327 sixteenth century 84, 144 slavery 100 social and economic theory 295 social contract 107–9 social costs 17 social developments 127, 169 social models 127, 182 social order 127, 280, 282, 287 social peace 8–10, 50–52, 56–58, 137, 139–40, 179, 244–45, 249–52 social policies 130, 134, 158, 160, 164, 166, 186, 189 social values 56, 101, 130, 173, 180, 212, 244, 250 social welfare state 138 society 57–58, 109–10, 158–59, 161, 163, 177–80, 281–82, 284–87 makeability of 120, 177 modern 57, 180–81, 280, 284, 287, 290, 404 sociological considerations 111, 273, 275–76, 289 sociology 149, 158, 163–64, 166, 178, 249, 293 Socrates 98 soft law 204, 210, 236, 243, 250, 263–64 sophistication 53, 92–93 sources of law 46–47, 80–81, 87–89, 153–54, 190–93, 195–96, 381–82, 394 autonomous 211, 216, 225, 227–29, 395, 404 in civil and common law tradition 186–272 dynamic 367 hierarchy 56, 173, 186, 232, 235–40, 253, 312, 368–77 independent 26, 60, 123, 203, 211, 217–20, 240 multiple 19, 73, 82, 131 private law 22, 82, 190, 313, 372 public international law 218 traditional 24, 80, 139, 173, 188–89, 194, 244, 276 transnational 13, 24, 26, 201, 232, 235 southern France 91–92, 95 sovereign immunity 349 sovereigns 93, 97, 106–8, 276–77, 349, 351, 366, 369 sovereignty 176, 191, 205, 249, 277, 332, 350–51, 381 Spain 2, 91–92, 94, 100, 121 stabilisation 349 clauses 350 stability 78, 261, 282, 300, 302, 344 financial 18, 207, 261, 289, 373

Index 427 standard terms 223, 237, 297 standardisation 187, 297 standards 27, 297, 304, 348, 350, 355, 396, 402 regulatory 210, 323 transnational minimum 4, 32, 36, 211, 213, 215, 289, 321 stare decisis rule 150–52 state absolutism 58, 105, 108, 128, 365 state intervention, see intervention 82, 101, 106–7, 181, 281, 297, 332 state law 104–5, 107–9, 272, 304, 306–7, 332, 334, 359–60 state liability 363 state monopolies 140, 276 state powers 104–5, 209, 275, 289 state recognition 11, 56, 140, 273, 291, 294 state sanction 107, 218, 287 states as counterparties de iure imperii 349, 351 home 351–52, 396 host 350–51, 389 modern 17–18, 106–9, 117, 128, 180–81, 278–84, 288, 365 nation 14, 20, 108, 288, 298 staticism 125 statism 30–31, 80–82, 128, 130–31, 188–89, 243–44, 288–89, 365–69 statist laws 56, 58, 180, 244, 298, 308 status 70–72, 92–94, 218–19, 243, 324, 331–63, 395–96, 398–99 autonomous 20, 58, 131, 140, 212, 399 independent 20, 229, 407 international 20, 73, 78, 218, 391 of international arbitrators 74 official 15, 86 treaty 79 statutes of limitations 370, 400 personal 324 statutist approach 324 statutory interpretation, see interpretation 150, 155–56, 191, 198 statutory intervention 24, 85, 144 statutory law 123–24, 148, 151–55, 157, 191, 207, 211, 382 Stoa 86, 98–100, 102–3, 105 streamlining 153–54, 281, 345 subject matter 68, 71, 231, 306, 398 jurisdiction 346–47 subjective approach 63, 119 subjective rights 90, 94, 102, 118–19, 186, 188 subordination 121 subpoenas 145 subsidiarity 106, 176, 267 substantive law 66, 73, 230, 233, 319, 328, 333, 356 applicable 75, 306, 402 approach 330, 333, 336–37 uniform 262

substantive rules 78, 103, 175, 186, 233, 235, 242, 330–31 substantive transnational law 234, 314, 367, 369, 402 successors 87, 90, 105, 117, 163, 329, 331, 388 supervision 75, 79–80, 143, 256, 289, 360 supplementation 207, 210, 220, 222, 240, 242, 244, 248–50 of contracts 211 support function 3, 50, 240, 362, 410 supremacy 56, 206, 208 swap markets 17–18, 174, 368–69 swaps 34, 174, 217, 224, 269, 297, 389, 395–96 Switzerland 62, 64, 66, 120, 122, 124, 257, 339 syllogism 132, 156 system building 7, 191, 381 system thinking 24–25, 55–57, 123–24, 128, 136–37, 157–59, 191–93, 252–54 academic/intellectual 103, 113, 120, 127 in civil law 131, 151 and nationalism 123–28, 186 nationalistic 17–18, 22, 51, 325 takings 13, 42, 54, 341, 349, 383–84, 389, 407–8 expropriatory, see expropriation indirect, see indirect expropriation tariffs 292, 320–21, 325, 352–53 tax laws 172, 301, 322–23, 356 taxation/taxes 23, 52–53, 134, 143, 173, 182, 308–9, 357 technology 2–3, 5, 245–46, 272–73, 292, 295, 369–70, 403 teleological interpretation 12, 119, 131, 133–35, 155–56, 245, 341–42 temporary ownership 37, 39, 146, 148, 197, 199, 392 rights 33, 37, 39, 141, 146, 197, 199, 269 terminology 29, 65, 104, 121, 148, 242–43, 248, 333 terms 31–32, 39–40, 103–5, 220–24, 247–51, 278–80, 357–61, 370–71 implied 205, 216, 220, 227, 394, 398–400 standard 237 unfair contract 322 territorialism 105, 247 territoriality 188, 250, 324, 352 Teubner, G 115, 137, 294, 312 Theodoric 91 theology 92, 99–100, 102 Thibaut, FJ 110 third countries 322, 401 third parties 35–36, 72, 74, 187, 302–3, 322, 325, 396–97 rights 5, 173, 391 thirteenth century 92, 143–44, 148 Thomism 99, 102 ticking off 51, 169, 248, 251 title 37, 39, 217, 270–71, 326–27, 375, 386–88, 395 documents of 37, 60, 67, 223, 326, 377, 386–88 reservations of 39, 314, 375, 395

428 Index transfer 25, 49, 53, 55, 67, 269–70, 387–88, 393 transfers 49, 53, 55, 217, 227, 269–70, 387–88, 393 tolerance 284–85 tort 90, 153–54, 168, 236, 319–20, 325–26, 333–34, 338–39 administrative 215, 308 tracing 39, 146, 148, 196, 363, 393 trade associations 224 trade-offs 4, 370 trade organisations 224, 227 trade receivables 375, 390, 392 traditional sources of law 24, 80, 139, 173, 188–89, 244, 276, 374 revival 194–99 transaction costs 168, 281 transactional finality 32, 67, 310, 352, 394, 407 transactions 12–13, 236–39, 299–301, 319–22, 325–26, 358–60, 373–77, 403 cross-border 68, 82, 231, 266, 360–61 secured 61, 66, 68, 81, 211, 239, 262–63, 304 Transatlantic Trade and Investment Partnership, see TTIP transferability 236, 372 transfers bulk 40, 327, 392–93 of ownership 32–33, 39, 387, 395 of title 25, 49, 53, 55, 67, 269–70, 387–88, 393 transnational custom 223, 225, 375–76, 379, 387, 389, 391, 395 transnational law formation 4, 243 new 3, 25, 27, 35, 69, 104, 370, 372 private 203, 349, 389 sources 232, 252, 330 substantive 234, 314, 367, 369, 402 transnational legal sources, survival in commercial law 199 transnational lex mercatoria 173, 239–40, 298 transnational minimum standards 4–5, 53, 207–8, 213–15, 289, 295, 298, 302 transnational ownership 386, 389–90 transnational sources of law 13, 24, 26, 201, 232, 235 transnational status 73 transnationalisation 13, 24–26, 31–32, 66–67, 74–76, 190, 200, 250–51 legal 1, 3, 32, 67, 104, 176, 207, 282 process 28, 72, 251 transparency 20, 291, 299, 365 transportation 1, 32, 61–62, 64–67, 305, 310, 370, 375 treaty law 13–15, 26, 206–7, 226–27, 229–33, 239–42, 348–50, 376 concept of place among sources of private law 241–42 uniform, see uniform treaty law treaty status 79 Tribonianus 88 trustees 40

trusts 39–40, 146–48, 197, 262–63, 269, 314, 326, 392–93 constructive 23, 33, 39, 141, 146, 196–97, 300, 363 law of 23, 191 truth 55, 57, 107, 113–14, 168–69, 182–85, 194, 285 TTIP (Transatlantic Trade and Investment Partnership) 80, 350 twelfth century 243 UCP 25, 31, 224–25, 238, 240, 260, 398–99, 401 Ulpianus 87, 99 UNCITRAL (United Nations Commission on International Trade Law) 8, 26, 34, 230, 232, 259–60, 370, 375–76 Model Law on Cross-border Insolvency 31 Model Law on International Commercial Arbitration 31, 71, 259 Rules 257 underlying assets 387 underwriting 238 undisclosed agency 23, 39 unfair contract terms 322 UNIDROIT 68, 247, 259–60, 312–13, 370–71, 376, 384–85, 397 Principles 68, 141, 312–13, 385, 400 uniform interpretation 361 uniform law(s) 61, 64, 152, 154, 231–34, 262, 264–65, 267 and private international law 359–63 uniform private law 231 Uniform Rules for Collection (URC) 260, 398 Uniform Rules for Contract Guarantees (URCG) 260 Uniform Rules for Demand Guarantees (URDG) 260 uniform treaty law 230, 232, 235–36, 238, 359, 370–72, 397, 399–401 mandatory 371–72, 376, 397 unitary approach 8, 11, 26, 140, 247, 269, 271, 308 unitary system 66, 68, 198, 366 United Kingdom 20–24, 81–82, 146–53, 155–59, 190–91, 219–20, 276–77, 365–67 United States Commissioners on Uniform State Laws 259, 261 Constitution 150, 159–60, 258, 284, 305–6, 333 courts 305, 348, 352, 354 Restatements 154–57, 162, 302, 327, 333–34, 336–37, 346, 353 Supreme Court 158, 306 unity 4, 13, 38, 40, 142, 144, 245, 247 universal natural law, see natural law 107 universalism 80, 103, 116, 120, 165, 189, 276 revival 287–89 University of Bologna 92 unjust enrichment 90, 146, 202, 207, 236, 244, 308, 373 unwilling defendants 78 updating 11, 85, 124, 129, 344, 366 URC (Uniform Rules for Collection) 260, 398

Index 429 URCG (Uniform Rules for Contract Guarantees) 260 URDG (Uniform Rules for Demand Guarantees) 260 USA, see United States usage 62, 220–21 usufructs 187, 324, 395 utilitarian principles 152, 288, 344 utility 98, 100–3, 105, 158, 161, 172, 370, 373 vacuum filling 78, 164, 213 validity 249, 251, 270, 273, 311, 314, 319–20, 381–82 contractual 220, 224, 229, 322, 371, 382, 395 values 2, 51–52, 116–17, 130–31, 280–82, 286–90, 294, 297–300 basic 209, 281, 287, 373 changing 27, 179 local 58, 328, 331, 345 social 56, 101, 130, 173, 180, 212, 244, 250 Vernunftrecht 102 Vienna Convention on the International Sale of Goods (CISG)/ICSG 34, 221–22, 232–34, 242, 259–60, 270–71, 359–60, 399–400 Vinnius, A 89, 94 virtual world 207, 299, 319, 321 Visigoths 91 Voet, J 89, 94, 324 Volksgeist 111–12, 117, 120, 153, 164, 276–77 voluntary law 102, 105, 107

von Jhering, R 118, 135–37 von Savigny, FC, see Savigny, FC von warehouse receipts 61, 310 weaker parties 141, 170, 208, 210, 223 protection 66, 130, 326, 336, 339 Weber, Max 136, 179 welfare 3, 17, 158, 177, 181 welfare state, social 138 Wernerius, see Irnerius 92 Wertungsjurisprudenz 131, 138, 159 Western culture 165, 198, 278–80, 282–84, 303 Western Europe 83, 88, 90, 92–93, 119, 143, 278, 286 revival of Roman law 88, 90–93 Western society 58, 279–82, 287, 289, 294, 299 Windscheid, B 117 witnesses 180, 400 Wolff, C 102–3, 157 workers’ protection 131, 209, 348 workforce 17 working capital 3, 289, 318, 368 World Bank 39, 396 World War II, post-war developments 115, 136, 181, 259, 287, 366 writs 143–45, 147, 153 WTO (World Trade Organisation) 28, 237, 260, 292, 300

430