Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law Volume 1: The Transnationalisation of Commercial and Financial Law and of Commercial, Financial and Investment Dispute Resolution. The New Lex Mercatoria and its Sources [Sixth edition] 9781509907007, 9781509907458, 9781509907441, 2016010061, 1509907009, 1509907440

Table of contents :
Table of Contents......Page 8
Table of Cases......Page 20
Table of Legislation and Related Documents......Page 30
1.1 Introduction......Page 46
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......Page 121
1.3 The Origin and Evolution of the Common Law. Its Approach to Law Formation and to the Operation of Private Law......Page 180
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......Page 220
1.5 Cultural, Sociological and Economic Undercurrents in the Formation of Transnational Commercial and Financial Law (Modern Lex Mercatoria). Different Legal Orders, their Manifestation, and the Competition Between them......Page 299
2.1 Modern Private International Law......Page 342
2.2 The Modern European and US Approaches to Conflict of Laws......Page 357
2.3 Interaction of Private International Law and Uniform Law......Page 388
3.1 The Lex Mercatoria, Interrelation with PrivateInternational Law, Legitimation......Page 394
3.2 The Hierarchy of Norms from Different Legal Sources in the Modern Lex Mercatoria: Elaboration of the Positive Law......Page 408
3.3 Operation of the Lex Mercatoria. Objections......Page 431
1.1 Introduction......Page 442
1.2 The Process of Legal Transnationalisation. The Operation of the Modern Lex Mercatoria. Transnational and Domestic Public Policy Considerations in International Arbitrations......Page 479
1.3 International Arbitration: Initial Steps and Complications......Page 498
1.4 The Conduct of the Proceedings and the Award......Page 516
1.5 The Role of National Courts......Page 523
1.6 The New York Convention. International Recognition and Enforcement of the Awards......Page 527
2.1 Introduction......Page 532
2.2 Building Blocks of Private Law in International Finance. The Applicable Law and its Transnationalisation......Page 539
2.3 Public Policy Concerning Financial Instruments. Remedies......Page 572
2.4 Complications in International Financial Arbitrations......Page 588
2.5 The Emergence of P.R.I.M.E.......Page 595
3.1 Introduction......Page 604
3.2 The Basic Foreign Investment Protections. Direct Investors' Claims and the Role of Investment Arbitration......Page 616
3.3 The Applicable Law in Foreign Investments......Page 618
3.4 Proprietary and Non-Proprietary Takings......Page 631
3.5 The Transatlantic Trade and Investment Partnership (TTIP) The EU 2014 Questionnaire and Subsequent Action......Page 648
4.1 Introduction......Page 664
4.2 A Proper Perspective......Page 696
4.3 Conclusions......Page 704
Index......Page 708

Citation preview

DALHUISEN ON TRANSNATIONAL COMPARATIVE, COMMERCIAL, FINANCIAL AND TRADE LAW VOLUME 1 This is the sixth edition of the leading work on transnational and comparative commercial and financial law, covering a wide range of complex topics in the modern law of international commerce, finance and trade. As a guide for students and practitioners it has proven to be unrivalled. The work is divided into three volumes, each of which can be used independently or as part of the complete work. Volume one covers the roots and foundations of private law; the different orientations and structure of civil and common law; the concept, forces, and theoretical basis of the transnationalisation of the law in the professional sphere; the autonomous sources of the new law merchant or modern lex mercatoria, its largely finance-driven impulses; and its relationship to domestic public policy and public order requirements. This new edition adds a chapter on the transnationalisation of commercial, financial and foreign investment dispute resolution. It explains the more limited nature of international dispute resolution through arbitration as compared to dispute resolution in the ordinary courts, the powers of international arbitrators, the expansion of these powers when they speak for the public interest, and the need in that case for proper supervision. All three volumes may be purchased separately or as part of a single set.

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

Jan Dalhuisen Professor of Law, Dickson Poon School of Law King’s College London Miranda 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

OXFORD AND PORTLAND, OREGON 2016

Hart Publishing An imprint of Bloomsbury Publishing plc Hart Publishing Ltd Kemp House Chawley Park Cumnor Hill Oxford OX2 9PH UK

Bloomsbury Publishing Plc 50 Bedford Square London WC1B 3DP UK

www.hartpub.co.uk www.bloomsbury.com Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA www.isbs.com HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published 2016 © Jan Dalhuisen Jan 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. Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen’s Printer for Scotland. Any European material reproduced from EUR-lex, the official European Communities legislation website, is European Communities copyright. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: HB: 978-1-50990-700-7 ePDF: 978-1-50990-745-8 ePub: 978-1-50990-744-1 Library of Congress Cataloging-in-Publication Data Names: Dalhuisen, J. H. (Jan Hendrik), author. Title: Dalhuisen on transnational comparative, commercial, financial and trade law / Jan Dalhuisen. Other titles: Transnational comparative, commercial, financial, and trade law Description: Sixth edition.  |  Portland, OR : Hart Publishing, 2016–  |  Includes bibliographical references and index. Identifiers: LCCN 2016010061 (print)  |  LCCN 2016010790 (ebook)  |  ISBN 9781509907007 (hardback : alk. paper)  |  ISBN 9781509907441 (Epub) Subjects: LCSH: Commercial law.  |  Export sales contracts.  |  International finance—Law and legislation.  |  Foreign trade regulation. Classification: LCC K1005 .D35 2016 (print)  |  LCC K1005 (ebook)  |  DDC 346.07—dc23 LC record available at http://lccn.loc.gov/2016010061 Typeset by Compuscript Ltd, Shannon

To my Teachers and my Students

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Table of Contents Table of Casesxix Table of Legislation and Related Documents xxix Chapter 1:  The Transnationalisation of Commercial and Financial Law. The New Lex Mercatoria Concerning Professional Dealings and its Sources1 Part I  The Emergence of the Modern Lex Mercatoria, its Method, Structure and Antecedents. Civil and 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 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 as a Dynamic Concept in Modern Contract and Movable Property 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. Transnational Notion of Professionality, a Separate Legal Order for Professional Dealings 1.1.11 The Role and Status of International Commercial Arbitration 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

1 5 16

21 29

32

46 52 53

60 65

70 74

viii  Table of Contents



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 1.2.3 Classical Roman Law and the Corpus Iuris Civilis 1.2.4 The Revival of Roman Law in Western Europe: The Ius Commune 1.2.5 The Ius Commune and its Relationship to Local Law, Including Newer Commercial Law 1.2.6 The Early Evolution of the Notion of Natural Law in Europe 1.2.7 The Emergence of the Secular Natural Law School: Grotius’s De Iure Belli ac Pacis, its Approach and Impact 1.2.8 The Status of State Law in the Philosophies of Grotius, Hobbes, Locke, Kant and Hegel. The Impact of the Age of Enlightenment and the Road to Codification of Private Law in France 1.2.9 The German Historical and Romantic Schools. German Idealism and the Road to Private Law Codification in Germany 1.2.10 The Civil Law National Codifications and their Coverage 1.2.11 Nationalism and System Thinking. The Question of the Continued Relevance of the Civil Law Codification Idea 1.2.12 Modern Policy Arguments in Favour of a Statist and Static Attitude Towards the Formation of Private Law. Deficiency in System Thinking. Misunderstandings Concerning Democratic Legitimacy and Certainty 1.2.13 Interpretation and System Thinking in Civil Law: Begriffs- and Interessenjurisprudenz, Freirechtslehre and Wertungsjurisprudenz in Germany. Modern Hermeneutics and the Role of Precedent in Civil Law 1.3 The Origin and Evolution of the Common Law. Its Approach to Law Formation and to the Operation of Private Law 1.3.1 Common Law and Equity 1.3.2 The Common Law Approach to Scholarship 1.3.3 The Common Law Approach to Precedent, Legislation or Codification, and Statutory Interpretation 1.3.4 Intellectualisation and Conceptualisation in Common Law. Modern American Academic Attitudes Towards the Law and its Development: Legal Formalism and Realism

76 76 78 81 86 89 93 96

101

106 116

119

125

128 135 135 141 143

151

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1.3.5 Post-realism or Legal Functionalism in the US: The ‘Law and …’ Movements 1.3.6 The Progress So Far 1.3.7 The Quest for Modernity, the Problems in the Post-modern Era. The Attitude to and Effects on 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 1.4.1 Statutory and Other Sources of Law. Nationalism and System Thinking in Civil and Common Law 1.4.2 Fact and Law Finding in Civil and Common Law 1.4.3 The Revival of the Traditional Sources of Law Through Liberal Interpretation Techniques in Civil Law. The Changing Status and Role of Precedent 1.4.4 Survival of Transnational Legal Sources in Commercial Law. EU and Public International Law Attitudes 1.4.5 Autonomous Legal Sources: Fundamental Principle 1.4.6 Autonomous Legal Sources: General Principle 1.4.7 Autonomous Legal Sources: Custom and Practices 1.4.8 The Competition Between Custom and Statutory or Treaty Law. The Issue of Desuetude and the Relation to the Good Faith Notion in Contract 1.4.9 Autonomous Legal Sources: Party Autonomy 1.4.10 Autonomous Legal Sources: Treaty Law 1.4.11 Uniform (Treaty) Law and Private International Law 1.4.12 Domestic Laws as Autonomous Residual Source of Transnational Law 1.4.13 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 1.4.14 Treaty Law and its Own Concept of its Place Among the Other Sources of Private Law 1.4.15 The Concept of Natural Law and the Legal Status and Force of Fundamental and General Principle in the Modern Lex Mercatoria 1.4.16 An End to the Confining Views of Legal Positivism, Formalism, and Nationalism in the Professional Sphere 1.4.17 Dispute Prevention or Dispute Resolution? Law in Action or Law in Litigation 1.4.18 The Development of the Modern Lex Mercatoria and Role of National Courts and of International Commercial Arbitration

157 162

169

175 175 180

185 189 193 199 201

209 211 212 215 217

217 223

224 229 234

236

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1.4.19 Agents of International Convergence and Harmonisation: The Role of UNIDROIT, UNCITRAL, the ICC, The Hague Conference, the EU, and the American Law Institute and Commissioners on Uniform State Laws in the US 1.4.20 EU Attempts at Harmonising Private Law 1.5 Cultural, Sociological and Economic Undercurrents in the Formation of Transnational Commercial and Financial Law (Modern Lex Mercatoria). Different Legal Orders, their Manifestation, and the Competition Between them 1.5.1 The Concept of Legal Orders, their Manifestation 1.5.2 Law as Cultural Manifestation 1.5.3 Law as a Political Organisational Tool. The Importance of Diversity, Group Autonomy, Democracy, Rule of Law and Human Rights 1.5.4 The American Experiences and the Effect on Law Formation 1.5.5 The Revival of Legal Universalism in Professional Private Law 1.5.6 Sociological and Economic Considerations in the Law 1.5.7 The Formation of Non-Statist Law in Modern Social and Economic Theory 1.5.8 The Competition Between Transnational Law and Mandatory State Laws or National Public Policies and Public Order Requirements. The International 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

240 243

254 254 258

262 265 268 271 277

279

286

291

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 Conflict of Laws 2.2.1 Refinement of the European Model of Private International Law

297 297 304 305 312 312

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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 the Dutch Proposals 2.2.5 The Role of Practitioners. Emphasis on the Facts Rather than on the 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. Competition Between Transnational and State Laws Revisited 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 Law 2.3.2 The Situation with Regard to EU Directives of a Private Law Nature

313 317 319

323

326 332

335 340 343 343 344

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, Legitimation349 3.1.1 The Background to the Revival of the Lex Mercatoria 349 3.1.2 The Concept of the Modern Lex Mercatoria as a Hierarchy of Norms 353 3.1.3 The Major Protagonists of the Lex Mercatoria and their Views: Legitimation 361 3.2 The Hierarchy of Norms from Different Legal Sources in the Modern Lex Mercatoria: Elaboration of the Positive Law 363 3.2.1 Fundamental Legal Principle and Implementing Custom Support. Transnational Rules of Contract Formation and the Normative Interpretation Technique 363 3.2.2 Fundamental Principle and Implementing Custom Support. The Notion of Transnational Ownership. A Dynamic System of Modern Movable Proprietary Rights368 3.2.3 Eurobonds, Trade Receivables and Transnational Proprietary Coverage. Fundamental Principle and Implementing Custom Support 373

xii  Table of Contents





3.2.4 Fundamental Principle and Implementing Custom Support in Procedural Matters 3.2.5 Mandatory Custom and Practices. The ISDA Master Agreements 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 3.2.7 Domestic Laws, Private International Law: Mandatory Provisions and Public Policy or Regulatory Issues 3.3 Operation of the Lex Mercatoria. Objections 3.3.1 Operation of the Lex Mercatoria and Direct References to it 3.3.2 Objections to the Lex Mercatoria Approach 3.3.3 Application and Enforcement of the Lex Mercatoria

376 377

380 384 386 386 391 394

Chapter 2:  The Transnationalisation of Commercial, Financial and Investment Dispute Resolution 397 Part I  International Commercial Arbitration 1.1 Introduction 1.1.1 The Problems and Challenges of Dispute Resolution 1.1.2 Arbitration and its Nature 1.1.3 The Importance of Defining the Dispute in Arbitrations and the Special Role of the Pleadings of the Parties. Law as Fact 1.1.4 Other Forms of Dispute Resolution: Experts Decisions, Amiable Compositeurs, Shortened Proceedings, Mediation and ADR 1.1.5 Institutional and Ad Hoc Arbitrations 1.1.6 The International Dimension 1.1.7 When is a Dispute an International Commercial Dispute? The Operation of the International Commercial and Financial Legal Order. International Commercial Arbitrations and the Difference from a Domestic Commercial Arbitration 1.1.8 The Notion of the Seat in International Arbitrations and the Delocalisation Model 1.1.9 The Major Consequences of Delocalisation. Attitude of the New York Convention and the Model Law. The View of Article 16(4) of the LCIA Rules (2014) 1.1.10 Powers, Status and Activity of International Commercial Arbitrators. Areas of Arbitral Autonomy. The Applicable Arbitral Law 1.1.11 Is International Arbitration Judicial or Contractual? Is it Adversarial or Inquisitive?

397 397 401

402

404 406 408

410 413

416

419 422

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1.1.12 Legitimacy, Transparency and Accountability. Independence and Impartiality. Supervision of International Commercial Arbitration and the Operation of an International Commercial Court 426 1.1.13 International Moot Competitions, Modern Literature, and the Concept and Meaning of International Arbitration 429 1.2 The Process of Legal Transnationalisation. The Operation of the Modern Lex Mercatoria. Transnational and Domestic Public Policy Considerations in International Arbitrations 434 1.2.1 The Transnationalisation of the Arbitration Clause and of the Law Applicable to the Arbitral Process. The Residual Role of the Arbitration Law of the Seat 434 1.2.2 The Transnationalisation of the Applicable Substantive Law. The Modern Lex Mercatoria as the Substantive Law. Sources of Law and their Hierarchy. Differences Between International Arbitrations and Proceedings in the Ordinary Courts 437 1.2.3 The Representation of the Public Interest at the Transnational Level. International Minimum Standards and the Relationship to Local Policies and Values 442 1.2.4 Public Order and Parallel Legal Orders 444 1.2.5  Ius Curia Novit? Do International Arbitrators Know the Law and Apply it Autonomously? 446 1.2.6 Autonomous Private Law Trends in Transnational Law 449 1.2.7 Principles of Transnational Contract and Movable Property Law 451 1.3 International Arbitration: Initial Steps and Complications 453 1.3.1 Introduction. Submission and Arbitration Agreements. The Requirement of a Writing. What does the Arbitration Agreement Cover and Who can be Party to the Arbitration? 453 1.3.2 When is there a Dispute? Statute of Limitations 456 1.3.3 Ousting of the Ordinary Courts. Article II New York Convention458 1.3.4 Interface of International Arbitration and the Ordinary Courts in the EU Under Regulation 44/2001 (Brussels I) and the 2012 Amendments 460 1.3.5 Establishment of the Arbitral Tribunal. Selecting Arbitrators, Qualities. Arbitrator Fees 461 1.3.6 Challenges of Arbitrators 464 1.3.7 The Jurisdiction of International Arbitrators and Challenges to Jurisdiction 465 1.3.8 The Issue of Arbitrability in International Arbitrations 466

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1.3.9 Other Early Incidents: Preliminary Issues and Protections 467 1.3.10 Procedural Order No 1 469 1.3.11 Terms of Reference? 470 1.3.12 The Status of Early Decisions 470 1.4 The Conduct of the Proceedings and the Award 471 1.4.1 Pleadings and Discovery 471 1.4.2 Witnesses and Hearing 472 1.4.3 The Conduct of Multi-party Arbitrations. Class Arbitrations? 474 1.4.4 The Award 475 1.4.5 Effect of the Award and Potential Impact on Third Parties 477 1.5 The Role of National Courts 478 1.5.1 Support 478 1.5.2 Supervision and Challenges 481 1.6 The New York Convention. International Recognition and Enforcement of the Awards 482 1.6.1 The Coverage of the New York Convention 482 1.6.2 Recognition and Enforcement. Article V of the New York Convention483 Part II  International Financial Arbitration 2.1 Introduction 2.1.1 Special Problems in International Financial Arbitrations 2.1.2 Special Arbitration Needs in International Finance 2.2 Building Blocks of Private Law in International Finance. The Applicable Law and its Transnationalisation 2.2.1 Assignments and Securitisations 2.2.2 Set-off and Netting 2.2.3 Secured Transactions, Finance Sales and Related Structures 2.2.4 Investment Securities and their Modern Holding in Electronic Entitlement Systems 2.2.5 Segregation, Ranking and Constructive Trusts 2.2.6 Transactional and Payment Finality 2.2.7 How do We Transfer an International Commercial and Related Cash-Flow and How do We Rank Proprietary Interest Holders Transnationally? 2.3 Public Policy Concerning Financial Instruments. Remedies 2.3.1 Public Interest in Financial Products 2.3.2 Conflicts of Public Policy. The Jurisdiction to Prescribe, International Minimum Standards and the Spokesperson’s Function in Respect of the Public Interest 2.3.3 The Impact of Insolvency Laws 2.4 Complications in International Financial Arbitrations

487 487 489 494 494 498 504 513 518 521

525 527 527

534 537 543

Table of Contents  xv





2.4.1 The Reasoning of International Financial Arbitrators and their Powers to Intervene in the Dispute 543 2.4.2 Is there a Need for New Treaty Law and for Supervision of International Financial Arbitrations by an International Commercial Court to Stabilise International Financial Arbitration and Enhance its Credibility? 545 2.4.3 International Financial Arbitration and the Position of Ordinary Judges Compared 546 2.5 The Emergence of P.R.I.M.E. 550 2.5.1 Special Needs of International Financial Arbitration. The Emergence of P.R.I.M.E. 550 2.5.2 The Applicable Law Clause in the P.R.I.M.E. Rules 551 2.5.3 P.R.I.M.E. Preliminary Issues 552 2.5.4 P.R.I.M.E. Status, Powers and Operation of Arbitrators. Arbitrability553 2.5.5 P.R.I.M.E. Procedural Issues 554 2.5.6 P.R.I.M.E. Contractual Issues 554 2.5.7 P.R.I.M.E. Proprietary Issues 555 2.5.8 P.R.I.M.E. Regulatory Issues 555 2.5.9 P.R.I.M.E. Taxation Issues 555 2.5.10 P.R.I.M.E. Bankruptcy Issues 556 2.5.11 P.R.I.M.E. Applicable Law Issues and Parties’ Choice of Law 556 2.5.12 P.R.I.M.E. Legitimacy of the Award. Supervision, Recognition and Enforcement Issues 557 Part III  Foreign Investment Arbitration

3.1 Introduction 3.1.1 Proceedings Against States 3.1.2 Foreign Investments and their Protection. Host Country Investment Statutes and Investment Agreements. The Calvo Doctrine. The Washington Convention and BITs 3.1.3 Bilateral Investment Treaties 3.1.4 The Concept of Foreign Investment and Foreign Investor. The Jurisdictional Issue 3.1.5 The Complications Deriving from the Nature of the International Flows, the Overlap Between Trade and Foreign Investments Laws. Different Dispute Resolution Techniques 3.1.6 Powers of Foreign Investment Arbitrators 3.1.7 The Supervision of Foreign Investment Arbitrators. Annulment Proceedings Compared

559 559

561 565 567

568 570 571

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3.2 The Basic Foreign Investment Protections. Direct Investors’ Claims and the Role of Investment Arbitration 3.2.1 Investment Agreement and Treaty Law Protections 3.2.2 Concurrent Investment Agreement and BIT Arbitration Jurisdiction 3.2.3 The Issue of Compensation 3.3 The Applicable Law in Foreign Investments 3.3.1 Introduction 3.3.2 The ICSID and NAFTA Approaches Distinguished 3.3.3 How far does a Choice of Law by the Parties Reach? 3.3.4 The Characterisation Issue: Contract, Administrative Agreements and Treaties 3.3.5 Public Law and Private Law 3.3.6 International Law 3.3.7 The Applicable Law in the Absence of an Investment or Arbitration Agreement 3.3.8 Conclusion 3.4 Proprietary and Non-Proprietary Takings 3.4.1 Introduction 3.4.2 Takings and Expropriation 3.4.3 Public Welfare and Non-Expropriatory Takings 3.4.4 Incidental Government Takings as Non-Expropriatory Takings 3.4.5 Lawful and Unlawful Expropriations. Non-expropriatory Takings 3.4.6 Remedies 3.4.7 The Public Interest Discounted in the Quantum of the Damages? 3.4.8 Conclusion 3.5 The Transatlantic Trade and Investment Partnership (TTIP) The EU 2014 Questionnaire and Subsequent Action 3.5.1 Introduction 3.5.2 The Dispute Resolution Options (ISDS) 3.5.3 The EU Questionnaire 3.5.4 What Protections are Justified and How do They Relate to Evolving Public Interest Concerns of Host Governments? Investor-State Dispute Settlement (ISDS) 3.5.5 Investment Arbitration and the Suitability of Investor State Dispute Settlement (ISDS) Through Arbitration 3.5.6 The EU Concept Paper of May 2015, Overall Assessment 3.5.7 The November 2015 EU Proposal for Investment Protection and Resolution of Investment Disputes

571 571 572 572 573 573 574 575 577 580 582 584 585 586 586 588 590 594 596 599 602 602 603 603 605 610

611 614 616 617

Table of Contents  xvii

Part IV  The Reasoning of International Arbitrators 4.1 Introduction 4.1.1 The Importance of Legal Reasoning 4.1.2 Formal and Substantive Aspects of Legal Reasoning 4.1.3 Modern Theories on Legal Reasoning 4.1.4 Sources of Law and Interpretation 4.1.5 The Narrowing Concept of Codification in Civil Law 4.1.6 Law as a System 4.1.7 Normative Interpretation. The Meaning of Good Faith. Consumer Law Influences in the Professional Sphere 4.1.8 Objectivity in Interpretation. The Effect of Public Policy, Public Order and Values 4.1.9 Sources of Law in Transnational Professional Dealings 4.1.10 The Powers of International Arbitrators 4.1.11 The Issue of Consistency and the Meaning of Precedent 4.1.12 Relevance and Materiality of Evidence 4.2 A Proper Perspective 4.2.1 Conclusions so far 4.2.2 The Situation in Foreign Investment Disputes 4.3 Conclusions

619 619 620 625 627 630 632 635 637 640 644 648 650 651 651 655 659

Index663

xviii 

Table of Cases Australia Esso/BHP v Plowman (1995) 11 Int’l Arb 235������������������������������������������������������������������������ 383, 400 IATA v Ansett [2005] VSC 113, [2006] VSCA 242, [2008] HCA38������������������������������������������������������������������� 35, 284–85, 444, 492, 518, 542, 553

Austria Supreme Court ICC Case No 3131, (1984) IX Yearbook Commercial Arbitration 159�����������������������������������������������������������������������������������388, 390, 438–39, 644 Norsolor (18 Nov 1982, 34 ICLQ 727 (1984), IX YB Com Arb 159 (1984)������������������������������������������������������������������������������������������������ 238, 390

Belgium Tribunal de Commerce of Brussels, 16 November 1978����������������������������������������������������������������� 191

Canada Quebec Supreme Court, Case 2008 5903���������������������������������������������������������������������������������������� 448

European Court of Human Rights Bosphorus Hava Yollari Turism ve Ticaret Anonim Sirketi v Ireland, 45036/98 (2005) Series A, no 440 para 304������������������������������������������������������������������������� 446 Gasus Dosier und Foerderintechnik v Netherlands ECHR 23 February 1995, Series A, vol 306B para 53���������������������������������������������������������������������������������������������������� 290 Iatridis v Greece App no 31107/96, ECtHR, 25 March 1999, para 54�������������������������������������������� 290 Inze v Austria ECHR 9 December 1987, Series A, vol 126, para 38������������������������������������������������ 290 Marckx v Belgium (1979) Series A, vol 31, para 63������������������������������������������������������������������������� 290 Mazurek v France, ECtHR, 1 February 2000����������������������������������������������������������������������������������� 290 Pressos Compania Naviera v Belgium ECHR 20 November 1995, Series A, vol 332, para 31������������������������������������������������������������������������������������������������������ 290 Stran Greek Refineries v Greece ECHR 9 December 1994, Series A, vol 301B, para 61������������������������������������������������������������������������������������������������������������������ 290 Van Marle v Netherlands ECHR 26 June 1986, Series A, vol 101, para 41������������������������������������� 290

European Court of Justice Case 26/62, Van Gend & Loos [1963] ECR 3��������������������������������������������������������������������������� 294, 347 Case 6/64 Costa v ENEL [1964] ECR 1203������������������������������������������������������������������������������ 294, 347 Case 14/68 13 February 1969 Walt Wilhelm [1969] ECR 1���������������������������������������������������� 294, 347 Case 62/70 Coditel v Ciné-Vog Films [1980] ECR 881������������������������������������������������������������������� 593 Case 36/74 Walrave v Wielerbonden [1974] ECR 1405������������������������������������������������������������������ 195 Case 43/75 Defrenne v Sabena I [1976] ECR 547��������������������������������������������������������������������������� 195 Case 12/76 Tessili v Dunlop AG 1976 ECR 1473����������������������������������������������������������������������������� 192 Case 13/76 Dona v Mantero [1976] ECR 1333������������������������������������������������������������������������������� 195 Case 33/76 Rewe v Landswirtschaftskammer fur das Saarland [1976] ECR 1989���������������������������������������������������������������������������������������������������������� 195, 643 Joined Cases 83/76 and 94/76, 4/77, 15/77 and 40/77 HNL and Others v Council and Commission [1978] ECR 1209������������������������������������������������������� 201 Joined Cases 110/78 and 111/78 Van Wesemael [1979] ECR 35���������������������������������������������������� 592 Case 279/80 Re Alfred John Webb [1981] ECR 3305���������������������������������������������������������������������� 592

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Case 102/81 Nordsee Deutsche Hochseefisherei GmbH v Reederei Mond Hochseefischerei Nordstern AG [1982] ECR 1095�������������������������������������������������� 445 Case 14/83 Von Colson and Kamann [1984] ECR 1891, 10 April 1984����������������������������������������� 347 Case 205/84 Commission v Germany [1986] ECR 755������������������������������������������������������������������ 592 Case 222/84 Johnson v Chief Constable of the Royal Ulster Constabulary [1986] ECR 1651������������������������������������������������������������������������������������������������������������������ 198 Case 89/85 Alstrom v Commission (Woodpulp case) [1988] ECR 5193�������������������������������������� 331 Case C-180/89 Commission v Italy [1991] ECR 709���������������������������������������������������������������������� 593 Case C-190/89 Marc Rich Co AG v Societa Italiana Impianti PA (1992)�������������������������������������� 460 Case C-353/89 Mediawet [1991] ECR I-4069��������������������������������������������������������������������������������� 593 Case C-361/89 De Pinto [1991] ECR I-1189����������������������������������������������������������������������������� 63, 245 Joined Cases C-6/90 and C-9/90 Francovich and Others [1991] ECR I-5357������������������������������������������������������������������������������������������������198, 201, 347 Case C-30/90 The Commission v The UK [1992] ECR I-858�������������������������������������������������������� 372 Case C-47/90 Delhaize v Promalvin and AGE [1992] ECR I-3669������������������������������������������������ 340 Case C-204/90 Bachman [1992] ECR 249��������������������������������������������������������������������������������������� 593 Case C-91/92 Faccini Dor [1994] ECR I-3325�������������������������������������������������������������������������������� 347 Case C-275/92 Schindler [1995] ECR I-1039���������������������������������������������������������������������������������� 593 Case C-55/93 Van Schaik [1994] ECR I-4837��������������������������������������������������������������������������������� 593 Case C-384/93 Alpine Investments BV v Minister van Financien [1995] ECR I-1141��������������������������������������������������������������������������������������������������������������� 593 Joined Cases C-430/93 and C-431/93 Van Schijndel [1995] ECR I-4705�������������������������������������� 347 Case C-55/94 Reinhard Gebhard v Consiglio dell’ Ordine degli Avvocati e Procuratori di Milano [1995] ECR I-4165����������������������������������������������������������������������� 592 Case C-272/94 Guiot [1996] ECR I-1095���������������������������������������������������������������������������������������� 593 Case C-3/95 Reisebüro Broede v Gerd Sandker [1996] ECR I-6511���������������������������������������������� 592 Case C-261/95 Palmisani [1997] ECRI-4025���������������������������������������������������������������������������������� 347 Case C-391/95 Van Uden Maritime v Deco-Line (1998)���������������������������������������������������������������� 460 Case C-126/97 Eco Swiss v Benetton [1998] ECR I-3055�����������������������������������������������339, 347, 445, 447, 461, 485, 606 Case C-38/98 Regie nationale des usines Renault SA v Maxicar SpA and Orazio Formento [2000] ECR I-2973�������������������������������������������������������������������������� 445 Case C-281/98 Angonese v Cassa di Ripsparmio di Bolzano, 6 June 2000������������������������������������ 195 Case C-464/01Gruber [2005] ECR I-439���������������������������������������������������������������������������������� 63, 245 Case C-144/04 Mangold [2005] ECR I-19981���������������������������������������������������������198, 440, 630, 643 Joined Cases C-295/04–298/04 Manfredi/Lloyd/Adriatico������������������������������������������������������������ 195 Case C-168/05, Elisa Maria Mostaza Clarov Centro Movil Milenium SL [2006] ECR I-10421������������������������������������������������������������������������������������������������������������� 445 Joined Cases C-402/05P & C-415/05P Kadi and Al Barakaat International Foundation v Council and Commission [2008] ECR I-6315�������������������������������������������� 446 Case C-47/07 Masdar v Commission [2008] ECR I-9761�������������������������������������������������������������� 198 Case C-94/07 Raccanelli v Max Planck Gesellschaft [2008] ECR I-5939�������������������������������������� 195 Case C-185/07 Allianz SpA and Another v West Tankers Inc (2009)��������������������������������������������� 460 Case C-205/07 Gysbrecht/Santurel [2008] ECR I-9947������������������������������������������������������������������ 245 Case C-555/07 Seda Kucukdeveci/Swedex [2010] IRLR 346���������������������������������������������������������� 198 Case C-40/08 Asturcom Telecommunicationes SL v Cristina Rodriguez Nogeira [2009] ECR I-9579������������������������������������������������������������������������������������������������� 445 Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA a.o [2009] ECR I-9823����������������������������������������������������������������������������������������198, 440, 630, 643 Case C-115/08 Land Oberoesterreich v Cez [2009] ECR I-10265����������������������������������198, 440, 643 Case C-196/09 Miles and Others v Ecoles Européennes (2011)����������������������������������������������������� 445

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Case C-282/10 Maribel Dominguez v Centre Informatique���������������������������������������������������������� 195 Case C-171/11 Fra.bo v DVGW, 12 July 2012��������������������������������������������������������������������������������� 195 Case C-426/11 A v Parkwoodlemo-Heron�������������������������������������������������������������������������������������� 195 Case C-604/11 Genil 48 SL and Comercial Hostelera de Grandes Vinos SL v Bankinter SA and Banco Bilbao Vizcaya Argentaria SA, 30 May 2013������������������������������ 537 Case C-470/12 Pohotovost v Vasuta, ECJ 27 February 2014���������������������������������������������������������� 195

Finland Supreme Court, Werfen Austria v Polar Electro, KKO 2008:77������������������������������������������������������ 448

France Cour de Cassation 5 November 1991, Bull Civ IV, no 328 (1992)����������������������������������������������������������������������������� 191 7 May 1963, Dalloz 1963, 545������������������������������������������������������������������������������������������������������� 417 14 October 1981, Semaine Juridique II 19815 (1982)���������������������������������������������������������������� 191 BKMI and Siemens v Dutco, 7 January 1992 Bull Civ 1 (1992)������������������������������������������������� 456 Compania Valenciana de Cementos Portland SA v Primary Coal Inc Cass Civ (1) 22 October 1991, 1991 Bull Civil I, no 275��������������������������������390, 438, 644 Fougerolle (France) v Banque de Proche Orient (Lebanon), Cour de Cass 9 December 1981 (1982) Revue de l’Arbitrage 183�������������������������������� 389 Norsolor (XXIV ILOM 360, 1984)����������������������������������������������������������������������������������������������� 238 Req 28 Oct 1903, DP 1.14 (1904)��������������������������������������������������������������������������������������������������� 57 Ste PT Putrabali Adyamulia, Cour de Cass. Civ 1, 29 June 2007������������������������������������14, 68, 212, 414, 430–31, 645 Ste SNF SAS c/ Ste Cytec Industries BV, Cass Civ, 4 June 2008, Bull Civ I no 162, Gaz Pal No 52������������������������������������������������������������������������������������� 445 Paris Court of Appeal 18 November 2004, Case no 2002/60932 (Thalès) JCP G 2005 II 10038����������������������������������� 339 22 October 1983 [1984] Revue de l’Arbitrage 98.l���������������������������������������������������������������������� 456 29 March 1991, Ste Ganz, Revue de l’Arbitrage (1991) 478������������������������������������������������������� 285 30 March 1999������������������������������������������������������������������������������������������������������������������������������ 489 Engel Austria GmbH v Don Trade, 3 December 2009, RG 08/13618���������������������������������������� 448 Tribunal de Commerce de Paris, 8 March 1976������������������������������������������������������������������������������ 191 Versailles Court of Appeal, decision of 6 February 1991 [1991] Rev Crit de Dr Intern Privé 745������������������������������������������������������������������������������������������� 320

Germany BGH 11 July 1985 [1985] NJW 2897����������������������������������������������������������������������������������������������������� 501 22 February 1956, BGHZ 20, 88���������������������������������������������������������������������������������������������������� 33 38 BGHZ 254 (1962)�������������������������������������������������������������������������������������������������������������������� 501 Supreme Court, 1 March 2007, III ZB 7/06, 25 ASA Bulletin 2007, 810���������������������������������������� 400

International Cases ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary (ICSID Case No ARB/03/16)����������������������������������������������������������� 600 ADF Group Inc v USA (2003) 18 ICSID Review���������������������������������������������������������������������������� 598 AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary, ICSID Case No ARB/07/22 (23 September 2010)������������������������������������������������������ 446, 593 AES v Argentine Republic, ICSID Case No ARB/02/17������������������������������������������������������������������ 658 Alex Genin, Eastern Credit Ltd, Inc v Republic of Estonia, Award ARB/99/02 (ICSID)������������������������������������������������������������������������������������������ 582, 598 Amoco International Finance Corp v Government of the Islamic Republic of Iran [1987–1988] Award 310-56-3 and 27 ILM 1314 (Iran-US CTR)�������������������������� 590

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Asia Corporation and others v Republic of Indonesia Arb/81/1 Resubmission (Amco II)������������������������������������������������������������������������������������������������������ 657 Asian Agricultural Products Ltd v Republic of Sri Lanka [1990] Award Case ARB/87/3 (ICSID)������������������������������������������������������������������������������������������� 573 Autopista Concesionada de Venezuela, CA v Bolivarian Republic of Venez [2003] Award, Case ARB/00/5 (ICSID)������������������������������������������������������������������������������� 573 Azurix Corp v Argentina [2006] Case ARB/01/12 67 (ICSID)����������������������������������������573, 601, 656 Barcelona Traction Case (1970) ICJ Rep 3������������������������������������������������������������������������������ 329, 535 Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania [2007] 464 Case ARB/05/22 (ICSID)���������������������������������������������������������������������������������� 589 BP Exploration Company (Libya) Limited v Government of the Libyan Arab Republic [1973 and 1974] 53 ILR 297��������������������������������������������209, 564, 586 BP Exploration Company (Libya) Ltd v Government of the Libyan Arab Republic [1979] 53 ILR 297 (Trib Arb)���������������������������������������������������������������������� 578 Bureau Veritas; Inspection, Valuation, and Control, BIVAC BV v Republic of Paraguay, ICSID Case No ARB/07/9��������������������������������������������������������������� 658 Ceskoslovenska Obchodni Banka AS v The Slovak Republic, ICSID Case No ARB/97/4, IIC 49 (1999)���������������������������������������������������������������������������� 568 CMS v Argentina [2005] (ICSID)�������������������������������������������������������������������������������������������� 573, 601 Compañía de Desarrollo Santa Elena SA v Costa Rica [2000] Award 39 ILM 317 para64 (ICSID)����������������������������������������������������������������������������� 573, 591 Czech Republic BV (the Netherlands) v Czech Republic Partial [2001] IIC 61�������������������� 562, 598 Daimler Financial Services AG v Argentine Republic, ICSID Case No ARB/05/1������������������������ 658 DOW Chemical France v ISOVER Saint Gobain, ICC 4131/1982, (1983) 110 Journal du Droit Internationa l899������������������������������������������������������������������ 456 Duke Energy Electroquil Partners v Republic of Ecuador [2008] Award Case 04/19 (ICSID)�������������������������������������������������������������������������������������������������� 573 Eastern Sugar BV v Czech Republic, Stockholm Chamber of Commerce no 088/2004 (2007)�������������������������������������������������������������������������������������������������������� 445–46 EDF International v Argentine republic, ICSID Case No ARB/03/23�������������������������������������������� 658 Emilio Agustin Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, IIC 85 (2000)������������������������������������������������������������������������������������������������������������������������ 572 Enron Corp & Ponderosa Assets, LP v Argentina Republic [2007] Award Case ARB/01/3 paras 206–09 (ICSID)��������������������������������������������������������������������� 573 Enron v Argentina, ICSID Case No ARB/01/3, IIC 92 (2004)�������������������������������������������������������� 572 Ethyl Corporation v Canada [1999] 38 ILM 708���������������������������������������������������������������������������� 602 Eureko BV v Slovak Republic, PCA Case no 2008-13������������������������������������������������������������� 446, 593 Generation Ukraine, Inc v Ukraine [2005] Award Case ARB/00/9 44 ILM 404 (ICSID)�������������������������������������������������������������������������������������������� 597 Glamis Gold Ltd v United States of America [2009] NAFTA/UNCITRAL Award������������������������������������������������������������588, 597–98, 607, 621, 632 Government of Kuwait v American Independent Oil Company (Aminoil) [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976���������������������������������������������������������������������������������������200, 563, 577–78, 582, 586 Hilmarton Ltd v Omnium de Traitement et de Valorisation (1997) XXII Yearbook of Commercial Arbitration 696��������������������������������������������� 431, 481 Himpura California Energy Ltd v PT (Perrsero) Perrusahaan Listruik Negara, Arbt’l Award1999 (2000) XXV Yearbook of Commercial Arbitration���������������� 448 Himpurna v Indonesia, TDM 2 (2004)������������������������������������������������������������������������������������������� 481 ICC Case 1110 (1994) 10 Arbitration International 286���������������������������������������������������������������� 448 Lanco v Argentina, ICSID Case No ARB/97/6, IIC 148 (1998)������������������������������������������������������ 572

Table of Cases  xxiii

LESI SpA et ASTALDI Spa v People’s Democratic Republic of Algeria, ICSID Case No ARB/05/3, IIC 205 (2001)�������������������������������������������������������������������������� 568 LFH Neer and Pauline Neer (USA) v United Mexican States [1926] 4 RIAA 60 21 AJIL (1927) 555 (US–Mexico General Claims Commission)��������������������� 598 LG&E v Argentina [2006] Award on Damages Case ARB/02/1(ICSID)����������������������������������������������������������������������������������562, 573, 582, 599–601 Maritime International Nominees Establishment v Republico of Guinea [1989] Decision on Annulment Case ARB/84/4 (ICSID)��������������������������������� 573 Marvin Roy Feldman Karpa (CEMSA) v United Mexican States [2003] Case ARB (AF) 99/1, 42 ILM 625 (ICSID)�������������������������������������������������������������� 592 Merrill & Ring Forestry LP v Government of Canada, ICSID Administered Case, 31 March 2010��������������������������������������������������������������� 463, 597–98, 660 Metal-Tech Ltd v Uzbekistan, ICSID Case No ARB/10/3, 4 October 2013������������������������������������ 448 Metalclad Corporation v Mexico [2001] Case ARB(AF)/97/1 40 ILM 36 (ICSID)������������������������������������������������������������������������������������������������591, 597, 601 Methanex Corp v United States of America [2005] Award 44 ILM 1345���������������������������������������������������������������������������������590–91, 597, 602, 658 Micula v Romania, ICSID Case No ARB/05/20, Award of 11 December 2013����������������������������������������������������������������������������������������������������������� 446 Middle East Cement Shipping and Handling Co v Egypt [2002] Case ARB/99/6���������������������������������������������������������������������������������������������������������������������� 600 Mihaly International Corporation v Sri Lanka, ICSID Case No ARB/00/2, IIC 170 (2002)������������������������������������������������������������������������������������� 568 MINE v Guinea, ICSID Case N°ARB/84/4 Decision on Annulment, 22 December 1989�������������������������������������������������������������������������������������������������������� 545, 654 Mobil Oil Iran, Inc v Government of the Islamic Republic of Iran [1987] Award 311-74/76/81/150-3 (Iran-US CTR)������������������������������������������������������������ 590 Mohsen Asgari Nazari v Islamic Republic of Iran (24 August 1994)��������������������������������������������� 655 MTD v Chile [2004] (ICSID)��������������������������������������������������������������������������������������������������� 573, 601 Nicaragua v US (Merits) para. 29 [1986] ICJ Rep. 24������������������������������������������������������448, 544, 628 Norsolor (Pabalk Ticaret Sirketi (Turkey) v Ugilor/Norsolor SA, ICC Case 3131 26 October 1979(1984) IX Yearbook Commercial Arbitration 109����������������������������������������������������������������238, 388, 390, 438, 644 Panevezys-Saldutiskis Railway (Estonia v Lithuania) (1939) PCIJ Reports Series A/B 76�������������������������������������������������������������������������������������������������� 560 Patrick Mitchell v Democratic Republic of the Congo, ICSID Case No ARB/99/7, IIOC172 (2006)����������������������������������������������������������������������������������� 568 Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi (ward in the Matter of an Arbitration between) (1952) 1 Int’l & Comp LQ 247, 18 ILR 144 (1951)���������������������������������������������������� 200, 576 Pope & Talbot Inc. v Canada [2000] Interim Award 122 ILR 316 s 102 (UNCITRAL)���������������������������������������������������������������������������������������� 589, 598 Ronald S Lauder v The Czech Republic, UNCITRAL Rules, IIC 205 (2001)���������������������������������������������������������������������������������������������������������������������� 572 Saluka Investments BV v Czech Republic, UNCITRAL Rules Partial Award, IIC 210 (2006)�����������������������������������������������������������������������568, 589, 594, 597 Saudi Arabia v Arabian Am Oil Co (ARAMCO) 27 ILR 117, 164 (Arb Trib 1963)������������������������������������������������������������������������������������������������������ 563, 578 SD Myers v Canada [2000] (NAFTA)�������������������������������������������������������������������������������582, 597, 602 Sedco, Inc v National Iranian Oil Co [1985] 248–75 (9 Iran-US CTR)���������������������������������������� 589 Sedelmayer v Russia, Award of 7 July 1998, Chamber of Commerce Stockholm������������������������� 600

xxiv  Table of Cases

Sempra Energy International [2005] Case ARB/02/16 (ICSID)�������������������������������������������� 573, 589 SGS v Pakistan (2003) 42 ILM 1290���������������������������������������������������������������������������������������� 334, 579 SGS v Philippines (2003) 42 ILM 1285�������������������������������������������������������������������������������������������� 334 SGS v Philippines, ICSID Case No ARB/02/6, IIC 224 (2004)����������������������������������������������� 572, 579 SPP (Middle East Ltd) and South Pacific Projects v Egypt and EGOTRH [1988] LAR 309�������������������������������������������������������������������������������������������� 342 Tecmed v Mexico [2006] Case ARB (AF)/00/2 10 ICSID Reports 54 para 115���������������������������������������������������������������������������������������������562, 568, 589, 591, 599 Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v The Gov’t of the Lybian Arab Republic (1979) 4 YB Com Arb 177�������������������������������������200, 563, 578 Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic [1977] 53 ILR 389�������������������������������������������������������������������������564, 586, 600 Tippetts, Abbett, McCarthy, Stratton and TAMS-AFFA Consulting Engineers of Iran v Islamic Republic of Iran [1984] 219–25 (6 Iran-US CTR)����������������������������������������������������������������������������������������� 588 Tokios Tokeless v Ukraine, ICSID Case No ARB/02/18, IIC 258 (2004)��������������������������������������� 568 Too v Greater Modesto Insurance Associates [1989] Award 378 (23 Iran-US CTR)���������������������������������������������������������������������������������������������������������������� 589 TSA Spectrum de Argentina SA v Argentine Republic, ICSID Case No ARB/05/5, IIC 358 (2008)������������������������������������������������������������������������������������� 568 UK v Iceland (Merits) [1974] ICJ Rep 9, para 17���������������������������������������������������������������������������� 544 Vivendi Universal SA v Argentine Republic [2007] Case ARB/97/3�����������������������������������������������������������������������������������������541, 573, 588, 656–58 Wena Hotels Limited v Egypt, ICSID Case No ARB/98/4, 8 December 2000�������������������������������������������������������������������������������������������448, 573, 582, 600 World Duty Free Co Ltd v Kenya, ICSID Case No ARB/00/7, 4 October 2006��������������������������������������������������������������������������������������������������������������������� 448

Netherlands HR 1 February 1985, NJ 698 (Piscator, 1985)��������������������������������������������������������������������������������� 322 HR 9 April 2009 (UPC/Land), JOR 179 (2010)������������������������������������������������������������������������������ 636 HR 19 January 2007 (PontMeyer), NJ 575 (2007)�������������������������������������������������������������������������� 636 HR 19 May 1989 [1990] NJ 745������������������������������������������������������������������������������������������������������� 503 HR 25 September 1992 [1992] NJ 750�������������������������������������������������������������������������������������������� 320 HR 29 June 2007 (Derksen/Homburg), NJ 576 (2007)������������������������������������������������������������������ 636

New Zealand Gallway Cook Allen v Carr [2013] NZCA 11���������������������������������������������������������������������������������� 399

Spain Audiencia Provincial de Barcelona, Seccion 15a, Auto de 29 Abr 2009, Rec. 708/2008������������������������������������������������������������������������������������������������������� 538

Switzerland Federal Supreme Court Case 4A-254/2010������������������������������������������������������������������������������������������������������������������������� 448 Case 4A-400/2008������������������������������������������������������������������������������������������������������������������������� 448 GSA v SpA 118 Arrêts du Tribunal Federal [AFT] II, 193 (28 April 1992)������������������������������������ 339 KS AG v CC SA, XX Yearbook of Commercial Arbitration 1995, 762������������������������������������������� 486

United Kingdom Abu Dabi Gas Liquefication Co Ltd v Eastern Bechtel Co [1982] 2 Lloyd’s Rep 425������������������������������������������������������������������������������������������������������������������ 474 Amin Rasheed Shipping Corporation v Kuwait Insurance Company [1983] 1 WLR 228, [1984] AC 50���������������������������������������������������������������������������� 70–72, 237

Table of Cases  xxv

Balearis, The [1993] 1 Lloyd’s Rep 215�������������������������������������������������������������������������������������������� 404 Bank of Baroda v Vysya Bank [1994] 2 Lloyd’s Rep 87������������������������������������������������������������������� 320 BCCI v Ali [2001] 2 WLR 735���������������������������������������������������������������������������������������������������� 42, 150 Bechuanaland Exploration Co v London Trading Bank [1898] 2 QBD 658�������������������������������������������������������������������������������������������������191, 373, 514 Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38���������������������������������������������������������������������������������������������� 548 Bloom v Pensions Regulator [2011] EWCA Civ 1124��������������������������������������������������������������������� 548 Bloom v Pensions Regulator [2013] UKSC 52�������������������������������������������������������������������������������� 548 British Airways Board v Laker Airways Ltd [1985] 3 WLR 413, [1985] AC 58 (HL)������������������������������������������������������������������������������������������������������� 335, 476 British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390������������������������������������������������������� 35, 285, 492, 502, 542, 553 Bulmer v Bollinger [1974] Ch 401��������������������������������������������������������������������������������������������� 42, 149 Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334����������������������������������������������������������������������������������������������������������������������� 200 Compania de Neviera Nedelka SA v Tradex Internacional SA, The Tres Flores [1974] QB 264�������������������������������������������������������������������������������������� 49, 522 Dearle v Hall (1828) 3 Russ 1����������������������������������������������������������������������������������������������������� 34, 139 Denis v Johnson [1979] AC 264������������������������������������������������������������������������������������������������������� 150 Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v Ras al-Khaimah National Oil Co [1987] 3 WLR 1023��������������������������������������������������72, 238, 390, 424, 439, 441, 490, 622, 644 Dolling-Baker v Merret [1990] 1 WLR 1205����������������������������������������������������������������������������������� 400 Donoghue v Stevenson [1932] AC 562�������������������������������������������������������������������������������������������� 143 Eagle Star v Yuval [1978] 1 Lloyd’s Rep 357���������������������������������������������������������������������390, 439, 644 EI du Pont de Nemours v Agnew [1987] 2 Lloyd’s Rep 585������������������������������������������������������������� 72 Eves v Eves [1975] 1 WLR 1338������������������������������������������������������������������������������������������������������� 139 Fiona Trust & Holding Corp v Yuri Privalov [2007] UKHL 40��������������������������������������������� 417, 455 Gallie v Lee [1969] 1 All ER 1072����������������������������������������������������������������������������������������������������� 145 General Insurance Corp v Forsakringaktiebolaget Fennia Patria[1983] QB 856������������������������������������������������������������������������������������������������������������ 204 Goodwin v Roberts [1876] 1 AC 476��������������������������������������������������������������������������������������� 191, 368 Government Stock v Manila Rail Co [1897] AC 81������������������������������������������������������������������������ 139 Halpern v Halpern [2007] EWCA Civ 291�������������������������������������������������������������������������������������� 439 Harlow and Jones Ltd v American Express Ban Ltd & Creditanstalt-Bankverein [1990] 2 Lloyd’s Rep 343����������������������������������������������������������� 192 Hassneh Insurance v Mew [1993] 2 Lloyds Rep 243��������������������������������������������������������������� 383, 400 Hazell v London Borough of Hammersmith and Fulham and Others [1991] 1 All ER 545����������������������������������������������������������������������������������� 207, 378 Hill v Tupper [1863] 2 Hurlst 7 C 121��������������������������������������������������������������������������������������������� 138 Holman v Johnson (1775) 98 ER 1120�������������������������������������������������������������������������������������������� 335 Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2003] 1 Lloyd’s Rep 571���������������������������������������������������������������������������� 49, 522 ICS Ltd v West Bromwich BS [1998] 1 WLR 896������������������������������������������������������������������������������ 42 Illingworth v Houldsworth [1904] AC 355������������������������������������������������������������������������������������� 139 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433���������������������������������������������������������42, 127, 139, 354, 635 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896������������������������������������������������������������������������������������ 150 K/S Norjarl A/S v Hyundai Heavy Industries Co Ltd [1991] 1 Lloyd’s Rep 260������������������������������������������������������������������������������������������������������ 463

xxvi  Table of Cases

Keppell v Bailey [1834] ER 1042������������������������������������������������������������������������������������������������������ 138 Kuwait Airways Corp v Iraqi Airways Co [2001] 3 WLR 1117��������������������������������������������������������� 71 Lehman Brothers International (Europe), Re [2009] EWCA Civ 1161����������������������������������������� 548 Lehman Brothers International (Europe), Re [2009] EWHC 2545 (Ch)�������������������������������������� 548 Lehman Brothers International (Europe), Re [2010] EWCA Civ 917������������������������������������������� 548 Lehman Brothers International (Europe), Re [2011] EWCA Civ 1544����������������������������������������� 548 Lehman Brothers International (Europe), Re [2012] EWHC 2997 (Ch)�������������������������������������� 548 Lehman Brothers International (Europe), Re [2012] UKSC 6������������������������������������������������������� 548 Lehman Brothers International (Europe) v Lehman Brothers Finance SA [2013] EWCA Civ 188���������������������������������������������������������������������������������������������������� 548 Lister and Others v Forth Dry Dock and Engineering Co Ltd and Another [1989] 1 All ER 1134�������������������������������������������������������������������������������������� 346 Lomas & Ors v JFB Firth Rixson Inc & Others [2012] EWCA Civ 419��������������������������������� 546, 548 London Tramways v LCC [1898] AC 375���������������������������������������������������������������������������������������� 143 Luke v Lyde 2 Burr R 883����������������������������������������������������������������������������������������������������������������� 288 Magor & St Mellons RDC v Newport Corp [1952] AC 189����������������������������������������������������������� 151 Mareva Compania Navietra SA v International Bulk Carriers SA [1975] 2 Lloyds Rep 509����������������������������������������������������������������������������������������� 139, 188 Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 [1935] 52 L1 LR 16���������������������������������������������������������������������������������������390, 439, 644 Occidental Exploration and Production Co v Republic of Ecuador [2005] EWCA Civ 1116, [2005] 2 Lloyd’s Rep 707����������������������������������������������������� 238, 333 Orion v Belfort [1962] 2 Lloyd’s Rep 251 (QB Com Ct)�������������������������������������������������390, 439, 644 Oxford Shipping Co v Nippon Yusen Kaisha [1984] 3 All ER 835����������������������������������������� 383, 400 Pepper v Hart [1993] 1 All ER 42����������������������������������������������������������������������������������������������������� 150 Perpetual Trustee Co Ltd, Belmont Park Investments PTY Ltd v BNY Corporate Trustee Services Ltd, Lehman Brothers Special Financing Inc [2009] EWCA Civ 1160����������������������������������������������������������� 284, 548 Picker v London and County Banking Co[1887] 18 QBD 512 (CA)������������������������������������ 191, 368 Pillans v Van Mierop [1765] 97 ER 1035, [1765] 3 Burr 1663��������������������������������������������������� 17–18 Pinochet [2000] 1 AC 61�������������������������������������������������������������������������������������������������������������������� 71 Power Curber International Ltd v National Bank of Kuwait SAK [1981] 2 Lloyds Rep 394, [1981] 3 All ER 607���������������������������������������������������� 192, 223 Product Brokers Co Ltd v Olympia Oil & Cake Co Ltd [1916] 1 AC 314������������������������������������� 204 Regazzione v KC Sethia (1944) Ltd [1958] AC 301������������������������������������������������������������������������� 335 Rhodes v Allied Dunbar Pension Services Ltd [1987] 1 WLR 1703������������������������������������������������� 34 Salomon v A Salomon & Co Ltd [1897] AC 22������������������������������������������������������������������������������� 139 Sheldon v Hently [1681] 2 Show 160������������������������������������������������������������������������������������������������� 18 Three Rivers District Council and Others v Governor and Company of the Bank of England [2000] 2 WLR 1220����������������������������������������������������� 489 Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209�������������������������������������������� 42 Trustees of Lehman Brothers Pension Scheme v Pensions Regulator [2013] EWCA Civ 751����������������������������������������������������������������������������������������� 548 Unterweser Reederei GmbH v Zapata Off-shore Company [1968] 2 Lloyd’s Rep 158 (CA)�������������������������������������������������������������������������������������������� 337 Vallejo v Wheeler [1774] 1 Cowp 143 (KB)������������������������������������������������������������������������������ 49, 522 Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277��������������������������������������������������� 340 Walford v Miles [1992] 2 WLR 174������������������������������������������������������������������������������������������� 39, 366 Yorkshire Woolcombers Associations Ltd, Re [1903] 2 Chap 284������������������������������������������������� 139 Zahnrad Fabrik Passau GmbH v Terex Ltd 1986 SLT 84���������������������������������������������������������������� 504 Zermalt Holdings SA v Nu-Life Upholstery [1985] 2 EGLR 14����������������������������������������������������� 404

Table of Cases  xxvii

United States Asahi Metal Industry Co Ltd v Superior Court (1987) 480 US 102����������������������������������������������� 330 Austern v Chicago Board Option Exchange 716 F Supp 121 (SDNY 1989)���������������������������������� 422 Babcock v Jackson 240 NYS 2d 743 (1963)������������������������������������������������������������������������������������� 336 Banco do Brazil, SA v AC Israel Commodity Comp Inc12 NY 2d 371 239 (1963)���������������������������������������������������������������������������������������������������������� 335 Bevill, Breslett and Schulman Asset Management Corporation and SS Cohen v The Savings Building and Loan Co, In the matter of USCA 3rd Cir, 896 Fed Rep 2d, 54(1990)����������������������������������������������������������� 506 Bonny v Lloyd’s of London 3 F3d 156 (7th Circ 1993)������������������������������������������������������������������� 338 Bremen (The) et al v Zapata Off-shore Co 407 US 1 (1972)�������������������������������������������337, 443, 537 BulovaWatch Co Inc v K Hattori & Co Ltd (1981) 508 F Supp 1322�������������������������������������������� 331 Chromalloy Airoservices Inc v Arab Republic of Egypt, 937 FSupp 907 (DDC 1996)�����������������������������������������������������������������������������������68, 431, 481 Clearfield Trust Co v US 318 US 363 (1943)����������������������������������������������������������������������������������� 288 Cohen v Army Moral Support Fund (In re Bevill, Breslett and Schulman Asset Management Corp) 67 BR 557 (1986)����������������������������������������������������� 506 Commonwealth Coating Corp v Continental Casualty Co 393 US 145 (1968)���������������������������� 427 Corporación Mexicana de Mantenimiento Integral, S de RL de CV v Pemex-Exploración y Producción, No 10 Civ 206 (AKH), 2013 US Dist LEXIS 121951 (SDNY 27 August 2013)������������������������������������������ 481 Daimler AG v Bauman 134 S Ct 746 (2014)������������������������������������������������������������������������������������ 486 Delagi v Volkswagenwerk AF of Wolfsburg 29 NY 2d 426 (1972)������������������������������������������������� 331 Deutsch v West Coast Machinery Co 80 Wash 2d 707 (1972)�������������������������������������������������������� 330 Erie v Tompkins 304 US 64 (1938)�������������������������������������������������������������������������������������������� 287–88 Filartiga v Pena-Irala 630 F2d 876 (Second Circuit)����������������������������������������������������������������������� 210 Green Tree Financial Corp v Bazzle 539 US 444 (2003)��������������������������������������������������475, 492, 647 Guinness v Miller 291 Fed 768 (SDNY 1923)��������������������������������������������������������������������������������� 317 Hall Street v Matell, 552 US 576 (2008)������������������������������������������������������������������������������������������ 399 Hartford Fire Insurance Co v California 509 US 764 (1993)��������������������������������������������71, 329, 535 Helicopteros Nacionales de Colombia, SA v Hall 446 US 408 (1984)������������������������������������������� 330 Intel Corp v Advanced Micro Devices, Inc, 542 US 214 (2004)����������������������������������������������������� 479 International Shoe Co v Washington 326 US 310 (1945)��������������������������������������������������������������� 330 Johnson v Whiton 34 NE 543 (1893)����������������������������������������������������������������������������������������������� 138 Jonas v Farmers Bros Co (In re Comark) 145 BR 47, 53 (9th Cir, 1992)��������������������������������������� 506 JSC BTA Bank, Debtor in a Foreign Proceedings, In re, 434 BR 334 (2010)��������������������������������� 542 Kioble v Royal Dutch Petroleum Co 133 SCt 1659 (2013)������������������������������������������������������������� 210 Koehler v Bank of Bermuda Ltd 12 NY 3d 533 (2009)������������������������������������������������������������������� 486 Laker Airways Ltd v Sabena Belgian World Airlines 731 F2d 909 (DC Circuit 1984)������������������������������������������������������������������������������������������������������������������ 70 Landoil Resources Corp v Alexander & Alexander Services Inc (1990) 918 NYS 2d 739�������������������������������������������������������������������������������������������������� 331 Lauritzen v Larson 345 US 571 (1953)�������������������������������������������������������������������������������������������� 416 Lawrence v Texas 539 US 588 (2003)��������������������������������������������������������������������������������������� 157, 159 Leasco Data Processing Equipment Corp v Maxwell (1972) 468 F2d 1326���������������������������������� 335 Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Ltd Case no 09-01242 (Bankr. SDNY) 25 January 2010�������������������������������������� 284 Lombard-Wall, In re 23 BR 165 (1982)������������������������������������������������������������������������������������������� 506 Lombard Wall Inc v Columbus Bank & Trust Co, No 82-B-11556 Bankr. SDNY 16 Sept 1982�������������������������������������������������������������������������������������������������� 506 Mannington Mills Inc v Congoleum Corp (1979) 595 F2d 1287�����������������������������������329, 331, 535

xxviii  Table of Cases

Marbury v Madison 5 US (1 Cranch) 137 (1803)������������������������������������������������������������������� 149, 154 McCarthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988)������������������������������������������������������������������������������������������� 49, 522 Micula et al v The Government of Romania, N0 15 MISC 107, 2015 WL 4643 180 (SDNY 5 August 2015) United States�������������������������������������������������� 446 Ministry of Defense of the Islamic Republic v Gould, Inc 887 F 2d 1357 (9th Cir, 1989)���������������������������������������������������������������������������������������� 238 Missouri v Holland 252 US 416, 433 (1920)����������������������������������������������������������������������������������� 154 Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc 473 US 614 (1985)���������������������������������������������������������������������337–38, 445, 485, 537, 606 Nebraska Dept of Revenue v Loewenstein 115 SCt 557 (1994)����������������������������������������������������� 506 Oriental Pac (USA) Inc v Toronto Dominion Bank 357 NYS 2d 957 (NY 1974)��������������������������������������������������������������������������������������������������������� 192 Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002)���������������������������������������������� 50, 522 Piper Aircraft Co v Reyno 454 US 235 (1981)��������������������������������������������������������������������������������� 337 Poe v Ulman 367 US 497 (1960)���������������������������������������������������������������������������������������������� 210, 631 Prima Paint Co v Flood Conklin Manufacturing Corp 388 US 395 (1967)���������������������������������� 417 Pritchard v Norton 106 US 124, 131 (1881)������������������������������������������������������������������������������������ 298 Robinson v Commonwealth Ins Co (1838) 20 Fed Cas 1002��������������������������������������������������������� 288 Roper v Simmons 125 S Ct 1183 (2005)���������������������������������������������������������������������������������� 157, 159 Scherk v Alberto-Culver Co 417 US 506 (1974)��������������������������������������������������������������337, 443, 537 Sharon v Sharon (1888) 75 Cal 1����������������������������������������������������������������������������������������������������� 148 Simula, Inc v Autoliv 175 F3d 716 (9th Circ 1999)������������������������������������������������������������������������� 338 Sonatrach (Algeria) v Distrigas Corp 1995 (US District Court Mass), XX Yearbook of Commercial Arbitration 1995, 795���������������������������������������������������������� 486 Sosa v Alvarez-Machain 542 US 692 (2004)������������������������������������������������������������������������������������ 210 Southern Pacific Transportation Co v Commercial Metals Co 456 US 336 (1982)���������������������������������������������������������������������������������������������������������������� 288 Swift v Tyson (1842) 41 US 1����������������������������������������������������������������������������������������������������������� 288 Teacher’s Ins & Annuity Ass’n v Butler 626 F Supp 1229 (SDNY 1986)�������������������������������������������������������������������������������������������������������������������������� 43 TermoRio SA ESP et al v Electranta SP, et al, 487 F3d 928, 939 (DC Cir 2007)����������������������������������������������������������������������������������������������������������������������� 481 Texas Industries v Radcliff Materials Inc (1981) 451 US 630��������������������������������������������������������� 288 Timberlane Lumber Co v Bank of America (1976) 549 F 2d 597������������������������������������������ 329, 535 Tooker v Lopez 301 NYS 2d 519 (1969)������������������������������������������������������������������������������������������ 336 Union Carbide Corp, Re, 809 F2d 195 (1987)��������������������������������������������������������������������������������� 337 United States and Guarantee Company v Guenther 281 US 34 (1929)����������������������������������������� 259 United States v Aluminium Company of America (Alcoa) 148 Fed 2d 416 (1945)�������������������������������������������������������������������������������������������������� 329, 535 United States v Imperial Chemical Industries (ICI) 105 F Supp 215 (1952)������������������������������������������������������������������������������������������������� 329, 535 United States v Standard Oil of California (1947) 332 US 301������������������������������������������������������ 288 Volkswagenwerk AG v Klippan, GmbH 611 P2d 498 (1980)��������������������������������������������������������� 331 Western Union Telegraph Co v Call Publishing Co (1901) 181 US 92������������������������������������������ 288 Zimmerman v Continental Airlines, Inc 712 F2d 55 (3d Circuit 1983)���������������������������������������� 538

Table of Legislation and Related Documents Austria Allgemeines Bürgerliches Gesetzbuch (ABGB), 1811��������������������������������100, 117–19, 122, 185, 349 Art 7����������������������������������������������������������������������������������������������������������������������������������������������� 120

Belgium Moniteur Belge 28.934 [1998], Art 30��������������������������������������������������������������������������������������������� 515

Brazil Civil Code 2002��������������������������������������������������������������������������������������������������������������������������������� 125

China Arbitration Act, Art 19���������������������������������������������������������������������������������������������������������������������� 647

European Union Amsterdam Treaty, 1998����������������������������������������������������������������������������������������������10, 213, 243, 247 Brussels Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters, 1968�������������������������������192, 213, 238, 243, 285, 320, 322, 331, 354, 409 Art 5(1)������������������������������������������������������������������������������������������������������������������������������������������ 320 Art 16(5)���������������������������������������������������������������������������������������������������������������������������������������� 504 Brussels I, see European Union, Regulation (EC) 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I) 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�������������������������������������������������������������������������� 246 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���������������� 246 Directive 77/91/EEC on coordination of safeguards���������������������������������������������������������������������� 246 Directive 77/780/EEC (First Banking Directive)����������������������������������������������������������������������������� 489 Directive 78/660/EEC on the annual accounts of certain types of companies������������������������������ 246 Directive 78/855/EEC concerning mergers of public limited liability companies������������������������ 246 Directive 82/891/EEC on the division of public limited liability companies�������������������������������� 246 Directive 83/349/EEC on consolidated accounts���������������������������������������������������������������������������� 246 Directive 84/253/EEC on the approval of persons responsible for carrying out the statutory audits of accounting documents���������������������������������������� 246 Directive 85/374/EEC on the approximation of the law of the Member States concerning liability for defective products������������������������������������� 245 Directive 85/577/EEC to protect the consumer in respect of contracts negotiated away from business premises�������������������������������������������������������� 245 Directive 86/653/EEC on the co-ordination of the Member States relating to self-employed commercial agents����������������������������������������������������������� 246 Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit��������� 245

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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�������������������������������������������������������������� 246 Directive 89/667/EEC on single-member private limited-liability companies����������������������������������������������������������������������������������������������������������������������������� 246 Directive 90/314/EEC on package travel, package holidays and package tours����������������������������������������������������������������������������������������������������������������� 245 Directive 93/13/EEC on unfair terms in consumer contracts������������������������������������������������ 195, 245 Directive 97/5/EC on cross-border credit transfers������������������������������������������������������������������������ 245 Directive 97/7/EC on the protection of consumers in respect of distance contracts������������������������������������������������������������������������������������������������������������ 245 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������������������������������������������������������������������������������������������������������������ 245 Directive 98/26/EC concerning settlement finality����������������������������������� 51, 213, 219, 246, 248, 373, 516, 518, 523, 532–33 Art 3(1) and (2)���������������������������������������������������������������������������������������������������������������������������� 516 Directive 98/27/EC on injunctions for the protection of consumers’ interests��������������������������������������������������������������������������������������������������������� 245 Directive 2000/31/EC on Certain Legal Aspects of Electronic Commerce in the Internal Market��������������������������������������������������������������������������������������� 245 Directive 2000/35/EC on combating late payment in commercial transactions��������������������������� 246 Directive 2001/86/EC on employee participation��������������������������������������������������������������������������� 246 Directive 2002/47/EC on financial collateral arrangements����������������������������������� 37, 46, 51, 74, 213, 219, 246, 248, 250, 348, 373, 503–4, 511–12, 516, 532, 548 Art 9����������������������������������������������������������������������������������������������������������������������������������������������� 516 Directive 2002/65/EC concerning the distance marketing of consumer financial services��������������������������������������������������������������������������������������������� 245 Directive 2002/87/EC on e-commerce, Art 3(4)����������������������������������������������������������������������������� 245 Directive 2003/58/EC amending Directive 68/151/ EEC as regards disclosure requirements in respect of certain types of companies������������������������������������ 246 Directive 2003/6/EC on market abuse��������������������������������������������������������������������������������������������� 246 Directive 2003/71/EC as regards information contained in prospectuses����������������������������� 213, 246 Directive 2003/72/EC on employee participation��������������������������������������������������������������������������� 246 Directive 2004/25/EC on takeover bids������������������������������������������������������������������������������������������� 246 Directive 2004/39/EC on Markets in Financial Instruments (MiFID)���������������������������������������������������������������������213, 246, 348, 533, 536–37, 548, 593, 609 Directive 2004/109/EC on the harmonisation of transparency requirements������������������������������������������������������������������������������������������������������������������������� 246 Directive 2005/56/EC on cross-border mergers of limited liability companies����������������������������������������������������������������������������������������������������������������������������� 246 Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies������������������������������������������������������������������������������������ 246 Directive 2008/48/EC on credit agreements for consumers����������������������������������������������������������� 245 Directive 2011/61/EU on alternative investment fund management (AIFMD)�������������������������������������������������������������������������������������������������������� 533 Directive 2011/83/EU on consumer rights�������������������������������������������������������������������������������������� 245

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Draft Common Frame of Reference (DCFR)�������������������������������� 7, 12, 22–23, 25–26, 33, 35, 37, 39, 42–43, 45, 65, 74, 120, 122, 126, 132, 168, 171, 174, 190, 197–99, 201–2, 206, 213–14, 226, 228, 247, 249–52, 256, 263, 289–90, 295, 303, 346, 350, 355, 357, 366–67, 373, 392, 440, 450, 510–12, 523, 526, 630, 636 Art I-1:102������������������������������������������������������������������������������������������������������������������������������������� 197 Art I-1:102 (b)������������������������������������������������������������������������������������������������������������������������������� 197 Art I-1:102(3)(c)��������������������������������������������������������������������������������������������������������������������������� 523 Art I-1:103������������������������������������������������������������������������������������������������������������������������������������� 206 Art II-1:102����������������������������������������������������������������������������������������������������������������������������������� 211 Art II-1:104����������������������������������������������������������������������������������������������������������������������������������� 206 Arts II-2:101ff������������������������������������������������������������������������������������������������������������������������������� 197 Art II-7:212����������������������������������������������������������������������������������������������������������������������������������� 523 Arts II-7:301ff����������������������������������������������������������������������������������������������������������������������� 197, 201 Art II-7:302����������������������������������������������������������������������������������������������������������������������������������� 197 Art II-7:303����������������������������������������������������������������������������������������������������������������������������������� 523 Art II-8:102(1)(c) and (f)������������������������������������������������������������������������������������������������������������� 206 Art II-9:101(1)������������������������������������������������������������������������������������������������������������������������������ 206 Art III-1:110������������������������������������������������������������������������������������������������������������������������������������ 41 Art III-5:104���������������������������������������������������������������������������������������������������������������������������������� 495 Art III-5:118(2)����������������������������������������������������������������������������������������������������������������������������� 523 Art III-5:121������������������������������������������������������������������������������������������������������������������������������������ 34 Art IVA-2:101�������������������������������������������������������������������������������������������������������������������������������� 523 Art VII-2:101(2)���������������������������������������������������������������������������������������������������������������������������� 523 Art VIII-2:202������������������������������������������������������������������������������������������������������������������������������� 523 EC Treaty, Art 81������������������������������������������������������������������������������������������������������������������������������� 339 EU Treaty, Preamble������������������������������������������������������������������������������������������������������������������������� 269 Human Rights Charter��������������������������������������������������������������������������������������������������������������������� 195 Art 16��������������������������������������������������������������������������������������������������������������������������������������������� 195 Art 21(1)���������������������������������������������������������������������������������������������������������������������������������������� 198 Art 38��������������������������������������������������������������������������������������������������������������������������������������������� 195 Art 47��������������������������������������������������������������������������������������������������������������������������������������������� 195 Art 47(1)���������������������������������������������������������������������������������������������������������������������������������������� 198 Art 52��������������������������������������������������������������������������������������������������������������������������������������������� 195 Art 52(5)���������������������������������������������������������������������������������������������������������������������������������������� 195 Lugano Convention on Jurisdiction and Enforcement of Judgments����������������������������������� 238, 322 Maastricht Treaty, 1992�������������������������������������������������������������������������������������������������������������� 25, 249 Proposal for a Regulation concerning a Common European Sales Law (CESL)���������������������������������������������������12–13, 22–23, 25, 61–62, 65, 74, 126, 199, 214, 249, 251–53, 256, 289–90, 295, 344–45, 350, 367, 392, 440, 450, 643 Regulation (EEC) 2137/85 on the European Economic Interest Grouping (EEIG)���������������������������������������������������������������������������������������������������� 246 Regulation (EEC) 295/91 establishing common rules for a denied-boarding compensation system in scheduled air transport���������������������������������� 245 Regulation (EC) 2027/97 on air carrier liability in the case of accidents�������������������������������������� 245 Regulation (EC) 1346/2000 on bankruptcy�������������������������������������������������������������538, 541, 547, 556

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Regulation (EC) 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I)���������������������������������������������������������������������� 213, 238, 244, 322, 331, 389, 394, 408–9, 483, 541, 547 Art 1(2)������������������������������������������������������������������������������������������������������������������������������������������ 460 Art 5����������������������������������������������������������������������������������������������������������������������������������������������� 331 Art 5(1)������������������������������������������������������������������������������������������������������������������������������������������ 320 Art 5(1)(b)������������������������������������������������������������������������������������������������������������������������������������ 320 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 321 Art 8����������������������������������������������������������������������������������������������������������������������������������������������� 321 Art 22(5)���������������������������������������������������������������������������������������������������������������������������������������� 504 Regulation (EC) 2157/2001 on the Statute for a European Company (SE)���������������������������������������������������������������������������������������������������������������������� 246 Regulation (EC) 1435/2003 on the statute for a European co-operative society (SCE)��������������������������������������������������������������������������������������������������� 246 Regulation (EC) 2201/2003 on the Recognition and Enforcement of Judgments in Civil and Commercial matters, 2008 (Brussels II)�������������������213, 389, 409 Regulation (EC) 864/2007 on the Law Applicable to Contractual Obligations (Rome II)���������������������������������������������������������������������������������������������������������� 213 Art 4(1)������������������������������������������������������������������������������������������������������������������������������������������ 537 Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I)�����������������������������������������21, 24, 34, 50, 213, 222, 244, 283, 310, 312–13, 316, 319, 322, 343, 393, 425, 507, 642 Art 3��������������������������������������������������������������������������������������������������������������������������������284, 312, 322 Art 4��������������������������������������������������������������������������������������������������������������������������������������� 310, 312 Art 4(1)������������������������������������������������������������������������������������������������������������������������������������������ 310 Art 4(2)������������������������������������������������������������������������������������������������������������������������������������������ 310 Art 4(3)���������������������������������������������������������������������������������������������������������������������������310, 312, 320 Art 6��������������������������������������������������������������������������������������������������������������������������������� 311–12, 322 Art 6(2)������������������������������������������������������������������������������������������������������������������������������������������ 341 Art 8��������������������������������������������������������������������������������������������������������������������������������� 311–12, 322 Art 9�������������������������������������������������������������������� 283–84, 308, 313, 329, 337, 341, 393, 424–25, 535 Art 12(1)(d)���������������������������������������������������������������������������������������������������������������������������������� 501 Art 13��������������������������������������������������������������������������������������������������������������������������������������������� 310 Art 14��������������������������������������������������������������������������������������������������������������������������������������������� 497 Art 14(1) and (2)���������������������������������������������������������������������������������������������������������������������������� 34 Art 23��������������������������������������������������������������������������������������������������������������������������������������� 345–46 Preamble 6��������������������������������������������������������������������������������������������������������������������������������������� 50 Preamble 13��������������������������������������������������������������������������������������������������������������21, 220, 313, 343 Preamble 16������������������������������������������������������������������������������������������������������������������������������������� 50 Regulation (EC) 1060/2009 on rating agencies������������������������������������������������������������������������������� 537 Rome Convention on the Law Applicable to Contractual Obligations, 1980��������������������������������������������������������������������� 34, 72, 213, 216, 220, 243, 284, 310–13, 316, 319, 329, 340, 342–43, 497, 501 Art 1����������������������������������������������������������������������������������������������������������������������������������������������� 342 Art 2��������������������������������������������������������������������������������������������������������������������������������������� 284, 340 Art 3����������������������������������������������������������������������������������������������������������������������������������������������� 342 Art 4����������������������������������������������������������������������������������������������������������������������������������������������� 319 Art 4(2)������������������������������������������������������������������������������������������������������������������������������������������ 310 Art 4(5)������������������������������������������������������������������������������������������������������������������������������������������ 310

Table of Legislation and Related Documents  xxxiii

Art 5����������������������������������������������������������������������������������������������������������������������������������������������� 311 Arts 5, 6 and 7��������������������������������������������������������������������������������������������������������������������������������� 72 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 311 Art 7��������������������������������������������������������������������������������������������������������������������������������������� 329, 342 Art 10(1)(d)���������������������������������������������������������������������������������������������������������������������������������� 501 Art 12(1) and (2)���������������������������������������������������������������������������������������������������������������������������� 34 Preamble��������������������������������������������������������������������������������������������������������������������������������������� 340 Preamble 13����������������������������������������������������������������������������������������������������������������������������������� 343 Treaty of Rome, 1957, Art 222���������������������������������������������������������������������������������������������������������� 372 Treaty on the Functioning of the European Union (TFEU)�����������������������73, 244, 247–49, 252, 289 Art 18��������������������������������������������������������������������������������������������������������������������������������������������� 445 Art 19��������������������������������������������������������������������������������������������������������������������������������������������� 198 Art 34��������������������������������������������������������������������������������������������������������������������������������������������� 195 Art 36��������������������������������������������������������������������������������������������������������������������������������������������� 592 Art 52��������������������������������������������������������������������������������������������������������������������������������������������� 592 Art 62��������������������������������������������������������������������������������������������������������������������������������������������� 592 Art 81��������������������������������������������������������������������������������������������������������������������������������������������� 247 Art 101����������������������������������������������������������������������������������������������������������������������������������� 195, 201 Art 114��������������������������������������������������������������������������������������������������������������244, 247–49, 252, 289 Art 169(2)�������������������������������������������������������������������������������������������������������������������������������� 247–48 Art 267������������������������������������������������������������������������������������������������������������������������������������� 73, 346 Art 340(2)�������������������������������������������������������������������������������������������������������������������������������������� 201 Art 344������������������������������������������������������������������������������������������������������������������������������������������� 445 Art 352������������������������������������������������������������������������������������������������������������������������������������������� 247

France Bankruptcy Act����������������������������������������������������������������������������������������������������������������������������������� 36 CCP, Arbitration Law Art 1496 (old)������������������������������������������������������������������������������������������������������������������������������� 342 Art 1504��������������������������������������������������������������������������������������������������������������������� 69, 411–12, 414 Art 1511����������������������������������������������������������������������������������������������������������������������������������������� 342 Code Civil���������������������������������������������������������������������������������������������������������������36, 114, 116–19, 211 1804������������������������������������������������������������������������������������ 92, 100, 107, 116, 118–19, 185, 203, 349 Art 1������������������������������������������������������������������������������������������������������������������������������������������������� 93 Art 5������������������������������������������������������������������������������������������������������������������������������������������������� 93 Art 1������������������������������������������������������������������������������������������������������������������������������������������������� 93 Art 5����������������������������������������������������������������������������������������������������������������������������������������� 93, 149 Art 1134����������������������������������������������������������������������������������������������������������������������������������������� 196 Art 1135��������������������������������������������������������������������������������������������������������������������������������� 196, 203 Art 1202������������������������������������������������������������������������������������������������������������������������������������������� 57 Art 1341������������������������������������������������������������������������������������������������������������������������������������������� 57 Art 1354����������������������������������������������������������������������������������������������������������������������������������������� 211 Arts 2011-2031�������������������������������������������������������������������������������������������������������������������������������� 37 Arts 2333-2366�������������������������������������������������������������������������������������������������������������������������������� 37 Arts 2367–2372������������������������������������������������������������������������������������������������������������������������������� 36 Arts 2372-1–2372-6������������������������������������������������������������������������������������������������������������������������ 37 Art 2372-3��������������������������������������������������������������������������������������������������������������������������������������� 37 Arts 2488-1–2488-6������������������������������������������������������������������������������������������������������������������������ 37 Code de Commerce 1807����������������������������������������������������������������������������������������������������������������������������� 54, 58, 118–19 Art 631��������������������������������������������������������������������������������������������������������������������������������������������� 57 Books I and II���������������������������������������������������������������������������������������������������������������������������������� 59

xxxiv  Table of Legislation and Related Documents

2000��������������������������������������������������������������������������������������������������������������������������������������54, 57, 59 Art L 110-1�������������������������������������������������������������������������������������������������������������������������������������� 57 Art L 121-1�������������������������������������������������������������������������������������������������������������������������������������� 57 Code Monetaire et Financier, 1999���������������������������������������������������������������������������������������������� 36–37 Arts L 214-43–L 214-49������������������������������������������������������������������������������������������������������������������ 37 Arts L 313-23–L 313-35������������������������������������������������������������������������������������������������������������������ 36 Arts L 432-12–L 432-19������������������������������������������������������������������������������������������������������������������ 37 Constitution, 1791���������������������������������������������������������������������������������������������������������������������������� 117 Coutumes de Beauvais������������������������������������������������������������������������������������������������������������������������ 87 Coutumes de Paris������������������������������������������������������������������������������������������������������������������������ 87, 92 Déclaration des droits de l’homme�������������������������������������������������������������������������������������������������� 114 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 117 Art 8����������������������������������������������������������������������������������������������������������������������������������������������� 117 Decree No 80-345������������������������������������������������������������������������������������������������������������������������������� 66 Decree No 81-500������������������������������������������������������������������������������������������������������������������������������� 66 Decree No 2007-404 concerning some aspects of real estate mortgages����������������������������������������� 37 International Arbitration Law 2011, Art 1511��������������������������������������������������������������������������������� 237 Law of 2 July 1966 on the credit-bail������������������������������������������������������������������������������������������������� 37 Law of 13 June 1866 concerning commercial usages���������������������������������������������������������������������� 203 Law of 19 July 1928 concerning the relevance of usages in the settlement of employment disputes�������������������������������������������������������������������������� 203 Ordonnance de Commerce de Terre, 1673���������������������������������������������������������������������������������������� 58 Ordonnance no 2006-346 relative aux Sûretés of 23 March 2006��������������������������������������������������� 37 Ordonnance sur la Marine, 1681������������������������������������������������������������������������������������������������������� 58

Germany Civil Code (Bürgerliches Gesetzbuch/BGB), 1900����������������������������������������������26, 33, 45, 58–60, 83, 100, 109, 112, 114, 116–17, 134, 186, 203, 229, 630 s 157����������������������������������������������������������������������������������������������������������������������������������60, 196, 203 s 241(2)�������������������������������������������������������������������������������������������������������������������������������������������� 45 s 242����������������������������������������������������������������������������������������������������������������������������������������� 60, 196 s 280������������������������������������������������������������������������������������������������������������������������������������������������� 45 s 311(3)�������������������������������������������������������������������������������������������������������������������������������������������� 45 Code of Civil Procedure, s 599(1)���������������������������������������������������������������������������������������������������� 650 Gerichtsverfassungsgesetz, 1877��������������������������������������������������������������������������������������������������������� 59 Handelsgesetzbuch (HGB), 1900����������������������������������������������������������������������������54, 58–60, 116, 203 s 25��������������������������������������������������������������������������������������������������������������������������������������������������� 58 s 346����������������������������������������������������������������������������������������������������������������������������������������������� 203 s 354������������������������������������������������������������������������������������������������������������������������������������������������� 58 Private International Law Statute, 1986������������������������������������������������������������������������������������������� 321 Prussian Criminal Code 1851���������������������������������������������������������������������������������������������������������� 112 Prussian Landrecht, 1794��������������������������������������������������������������������������������������������������������� 117, 185

International 1964 Hague Conventions����������������������������������������������������������������������������������������������������������������� 354 AAA Rules Art 20(6)���������������������������������������������������������������������������������������������������������������������������������������� 650 s 21������������������������������������������������������������������������������������������������������������������������������������������������� 468 s 22(1)�������������������������������������������������������������������������������������������������������������������������������������������� 473 Aminoil Concession Agreement, 1979������������������������������������������������������������������������������������� 200, 576 Andean Investment Code 1969�������������������������������������������������������������������������������������������������������� 379

Table of Legislation and Related Documents  xxxv

ASEAN Agreement for the Promotion and Protection of Investments����������������������������������������� 566 Basel Accords on Capital Adequacy���������������������������������������������������������������������������14, 191, 231, 242, 363, 499, 533 Benelux Convention on Private International Law, 1951��������������������������������������������������������������� 310 BIS Code of Conduct on Large Risks����������������������������������������������������������������������������������������������� 242 BIS Declaration of Principle on Money Laundering���������������������������������������������������������������������� 242 BIS Recommendations for Public Disclosure of Trading and Derivatives Activities of Banks and Securities Firms���������������������������������������������������������� 242 Brussels Convention (Hague Rules), 1924������������������������������������������������������������������������������� 286, 354 Cape Town Convention on International Interests in Mobile Equipment 2001���������������������������������������������������������������������������� 27, 46, 74, 219, 224, 241, 380, 509, 511 Aircraft Protocol��������������������������������������������������������������������������������������������������������������������������� 219 Art 5����������������������������������������������������������������������������������������������������������������������������������������������� 224 Preamble��������������������������������������������������������������������������������������������������������������������������������������� 224 Energy Charter Treaty 1994�����������������������������������������������������������������������������������������������446, 566, 588 European Convention on Human Rights, 1950���������������������������������������������������������������������� 290, 446 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 357 First Protocol, Art 1���������������������������������������������������������������������������������������������������������������������� 290 General Agreement on Tariffs and Trade (GATT)�������������������������������������������������������������������������� 274 Geneva Conventions, 1930 and 1932����������������������������������������������������������������������������������������������� 354 Hague Convention of 1955 on the Law governing the International Sale of Goods���������������������������������������������������������������������������������������������������������������� 216, 310 1986 revision, Art 8����������������������������������������������������������������������������������������������������������������������� 310 Hague Convention on Choice of Court Agreements, 2005������������������������������������������������70, 72, 236, 394, 409, 547 Hague Convention on Maintenance Obligations������������������������������������������������������������������� 312, 321 Art 5����������������������������������������������������������������������������������������������������������������������������������������������� 311 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 311 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary, 2002�������������������������������� 374, 504, 515–16 Hague Convention on the Law Applicable to Dispositions of Securities held through Indirect Holding Systems��������������������������������������������������������� 243 Hague Convention on the Law Applicable to Trusts and on their Recognition 1985��������������������������������������������������������������������������������������������������� 510 Hague Conventions concerning the Uniform Laws on the International Sale of Goods of 1964�������������������������������������������������������������216, 240, 243, 310 Art 17��������������������������������������������������������������������������������������������������������������������������������������������� 216 Hague-Visby Rules for bills of lading�������������������������������������������������������������������������������������� 354, 378 IAIS Model Principles for Insurance Supervision, 1997����������������������������������������������������������������� 242 IAIS Recommendation Concerning Mutual Assistance, Cooperation and Sharing Information, 1995��������������������������������������������������������������������� 242 IBA Rules on the Taking of Evidence in International Commercial Arbitration Art 3����������������������������������������������������������������������������������������������������������������������������������������������� 472 Art 9��������������������������������������������������������������������������������������������������������������������������������������� 472, 650 Art 9(1) and (2)���������������������������������������������������������������������������������������������������������������������������� 473 Art 9(2)������������������������������������������������������������������������������������������������������������������������������������������ 650 Art 9(5)������������������������������������������������������������������������������������������������������������������������������������������ 650 ICC Arbitration Rules������������������������������������������������������������������������������������������������221, 237, 342, 356 Art 13(3) (old)������������������������������������������������������������������������������������������������������������������������������ 238 Art 17(1)���������������������������������������������������������������������������������������������������������������������������������������� 342

xxxvi  Table of Legislation and Related Documents

ICC Incoterms������������������������������������������������������������������������������������� 21, 27, 191–92, 207–8, 220, 231, 241, 354, 381–82, 384, 450 ICC Rules����������������������������������������������������������������������������������� 221, 237, 356, 420, 456, 470, 474, 476 Art 33��������������������������������������������������������������������������������������������������������������������������������������������� 619 Art 222������������������������������������������������������������������������������������������������������������������������������������������� 420 ICC Uniform Rules for Collection (URC)���������������������������������������������������������192, 241, 381–82, 384 ICC Uniform Rules for Contract Guarantees (URCG), 1978�������������������������������������������������������� 241 ICC Uniform Rules for Demand Guarantees (URDG), 1992�������������������������������������������������������� 241 International Currency Options Market Terms������������������������������������������������������������������������������ 502 International Foreign Exchange Master Agreement����������������������������������������������������������������������� 502 IOSCO Principles and Objectives of Securities Regulation, 1998�������������������������������������������������� 242 ISDA Swap Master Agreements, 1987/1992/2002�����������������������������������������������31, 166, 191, 218–19, 377, 379, 441, 451, 490–92, 499, 502–3, 546–48 LCIA Arbitration Rules��������������������������������������������������������������������������� 67, 237, 403, 405–7, 418, 432, 454–56, 458, 461, 463, 465, 470, 476, 483, 661 Art 14��������������������������������������������������������������������������������������������������������������������������������������������� 420 Art 14(5)���������������������������������������������������������������������������������������������������������������������������������������� 237 Art 16(4)�����������������������������������������������������������������������������������������������������������������416, 419, 422, 435 Art 20(6)���������������������������������������������������������������������������������������������������������������������������������������� 473 Art 22(1)(viii)������������������������������������������������������������������������������������������������������������������������������� 456 Art 22(3)���������������������������������������������������������������������������������������������������������������������������������������� 342 Art 25��������������������������������������������������������������������������������������������������������������������������������������������� 468 Art 26(2)���������������������������������������������������������������������������������������������������������������������������������������� 475 Art 26(8)���������������������������������������������������������������������������������������������������������������������������������������� 475 Art 32(2) (old)������������������������������������������������������������������������������������������������������������������������������ 475 MERCOSUR Treaty�������������������������������������������������������������������������������������������������������������������������� 566 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958���������������������������������������������������������35, 66, 68–74, 209, 212, 236–38, 284–85, 332, 338–39, 394–95, 400, 405–6, 408–10, 413, 415–16, 418–20, 422, 425–26, 431, 434, 436–37, 443–44, 453–54, 457–60, 466, 468, 470, 472, 476, 480–84, 492, 536, 538, 540, 543, 547, 557, 566, 617–18, 624, 651–53, 655–57, 661 Art I��������������������������������������������������������������������������������������������������������������������������������������� 482, 484 Art I(1)���������������������������������������������������������������������������������������������������������������������������411, 419, 431 Art I(3)�����������������������������������������������������������������������������������������������������������������������������69, 411, 419 Art II���������������������������������������������������������������������������������������������454, 458–60, 466–67, 480, 483–85 Arts II-V���������������������������������������������������������������������������������������������������������������������������������������� 482 Art II(1) and (2)��������������������������������������������������������������������������������������������������������������������������� 466 Art III�������������������������������������������������������������������������������������������������������������������������������������������� 483 Art IV�������������������������������������������������������������������������������������������������������������������������������������������� 483 Art V�����������������������������������������������������������������������������������������������������������459, 466–67, 480, 483–86 Art V(1)(a)�������������������������������������������������������������������������������������������������419, 458–59, 466, 484–85 Art V(1)(b)������������������������������������������������������������������������������������������������������������������������������������ 485 Art V(1)(c)���������������������������������������������������������������������������������������������������������������������������� 466, 485 Art V(1)(d)�������������������������������������������������������������������������������������������������������������419, 466, 474, 485 Art V(1)(e)�������������������������������������������������������������������������������������������������������������414, 419, 483, 485

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Art V(2)��������������������������������������������������������������������������������������������������������������������������������� 483, 485 Art V(2)(a)������������������������������������������������������������������������������������������������������������������������������������ 466 Art XVII(I)������������������������������������������������������������������������������������������������������������������������������������ 468 Art XVII(J)������������������������������������������������������������������������������������������������������������������������������������ 468 North American Free Trade Agreement (NAFTA)����������������������������������������������333, 566–67, 574–75, 580, 582, 584–86, 596–97, 603, 607, 610 Art 30��������������������������������������������������������������������������������������������������������������������������������������� 574–75 Art 1105����������������������������������������������������������������������������������������������������������������������������������� 596–97 Art 1110����������������������������������������������������������������������������������������������������������������������������������� 596–97 Art 1130����������������������������������������������������������������������������������������������������������������������������������������� 574 Art 1134(1)������������������������������������������������������������������������������������������������������������������������������������ 600 Overseas Securities Lenders Agreement������������������������������������������������������������������������������������������ 502 Principles of European Contract Law (PECL), 1998�������������������������������������� 39, 43, 45, 63, 190, 244, 249, 252, 295, 303, 340, 366–67, 384, 388 Principles of Trust Law��������������������������������������������������������������������������������������������������������������������� 244 PSA/ISMA Global Master Repurchase Agreement, 1992/1995�������������������������������191, 219, 371, 379 Statute of the International Court of Justice����������������������������������������������������� 4, 13, 23, 77, 102, 180, 192, 200, 232, 352, 420 Art 38(1)������������������������������������������������������������������������������������������������������ 4, 13, 23, 28, 73, 77, 180, 192–93, 200, 232, 352, 358, 576, 630, 637, 642, 655 Art 59������������������������������������������������������������������������������������������������������������������������������143, 423, 639 TBMA/ISMA Global Master Repurchase Agreement������������������������������������������������������������� 451, 502 UNCITRAL Convention for International Bills of Exchange, 1988�������������������������������������� 240, 354 UNCITRAL Convention on Independent Guarantees and Standby Letters of Credit�������������������������������������������������������������������������������������������������������������������� 240 UNCITRAL Convention on the Assignment of Receivables in International Trade, 2001������������������������������������������������������������������ 27, 34, 191, 380, 383, 512 Art 7����������������������������������������������������������������������������������������������������������������������������������������������� 224 UNCITRAL Convention on the Carriage of Goods by Sea������������������������������������������������������������ 240 UNCITRAL Hamburg Rules, 1974������������������������������������������������������������������������������������������ 354, 378 UNCITRAL Model Law on Cross-border Insolvency, 1997����������������������������������������������������� 27, 240 UNCITRAL Model Law on Electronic Commerce������������������������������������������������������������������������� 240 UNCITRAL Model Law on International Commercial Arbitration, 1985������������������������������������������������ 27, 66, 148, 150, 231, 238, 240, 342, 388, 391, 399, 407, 410–11, 416, 418–20, 426, 430–31, 436–38, 453–54, 467–69, 475, 479–83, 491, 538, 540–41, 547, 556, 653 Art 1(1)�������������������������������������������������������������������������������������������������������������������������������������������� 66 Art 1(3)������������������������������������������������������������������������������������������������������������������������������������ 66, 410 Art 9����������������������������������������������������������������������������������������������������������������������������������������������� 469 Art 11��������������������������������������������������������������������������������������������������������������������������������������������� 480 Art 13��������������������������������������������������������������������������������������������������������������������������������������������� 480 Art 17������������������������������������������������������������������������������������������������������������������������������������� 468, 553 Art 17(2)���������������������������������������������������������������������������������������������������������������������������������������� 475 Art 17A������������������������������������������������������������������������������������������������������������������������������������������ 468 Art 17C������������������������������������������������������������������������������������������������������������������������������������������ 468 Art 17C(5)������������������������������������������������������������������������������������������������������������������������������������� 468 Art 17F(4)(c)��������������������������������������������������������������������������������������������������������������������������������� 468 Art 17H����������������������������������������������������������������������������������������������������������������������������������������� 480

xxxviii  Table of Legislation and Related Documents

Art 17I������������������������������������������������������������������������������������������������������������������������������������������� 480 Art 28��������������������������������������������������������������������������������������������������������������������������������������������� 391 Art 28(1) and (2)�������������������������������������������������������������������������������������������������������������������������� 580 Art 28(2)�������������������������������������������������������������������������������������������������������������������������������� 238, 388 Art 28(4)���������������������������������������������������������������������������������������������������������������������������������������� 388 Art 31(2)���������������������������������������������������������������������������������������������������������������������������������������� 619 Art 34(2)(b)(i)������������������������������������������������������������������������������������������������������������������������������ 467 Art 36(b)(i)����������������������������������������������������������������������������������������������������������������������������������� 467 UNCITRAL Model Law on the Procurement of Goods and International Credit Transfers�������������������������������������������������������������������������������������� 240 UNCITRAL Rules������������������������������������������������������������������������������� 237–38, 407, 463, 465, 471, 562, 566, 572, 598, 605, 617, 661 Art 17(1)���������������������������������������������������������������������������������������������������������������������������������������� 420 Art 27(4)���������������������������������������������������������������������������������������������������������������������������������������� 650 Art 32(2)���������������������������������������������������������������������������������������������������������������������������������������� 475 Art 32(3)���������������������������������������������������������������������������������������������������������������������������������������� 426 Art 32(5)���������������������������������������������������������������������������������������������������������������������������������������� 619 Art 33��������������������������������������������������������������������������������������������������������������������������������������������� 238 Art 35��������������������������������������������������������������������������������������������������������������������������������������������� 238 Art 39��������������������������������������������������������������������������������������������������������������������������������������������� 476 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration���������������������������������������������������������������������������������������������������� 661 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 427 UNICTRAL Convention on the Limitation Periods in the International Sale of Goods������������������������������������������������������������������������������������������������������������������������ 240 UNIDROIT Convention on Agency in the International Sale of Goods��������������������������������������� 241 UNIDROIT Convention on International Factoring��������������������������������������������������������������������� 241 Art 4����������������������������������������������������������������������������������������������������������������������������������������������� 224 UNIDROIT Convention on International Financial Leasing��������������������������������������������� 241, 508–9 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 224 UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects���������������������������������� 241 UNIDROIT Convention on Substantive Rules for Intermediated Securities 2009������������������������������������������������������������������������27, 224, 241, 517 Art 11��������������������������������������������������������������������������������������������������������������������������������������������� 517 Art 31(3)(c)����������������������������������������������������������������������������������������������������������������������������������� 517 UNIDROIT Convention on the Assignment of Receivables in International Trade�������������������� 240 Ann Arts 1 ff�������������������������������������������������������������������������������������������������������������������������������������������� 35 Arts 6 ff�������������������������������������������������������������������������������������������������������������������������������������������� 35 Arts 9 ff�������������������������������������������������������������������������������������������������������������������������������������������� 35 Art 8, Art 8�������������������������������������������������������������������������������������������������������������������������������������� 34 Art 27����������������������������������������������������������������������������������������������������������������������������������������������� 35 Art 42����������������������������������������������������������������������������������������������������������������������������������������������� 35 Arts 22 and 30��������������������������������������������������������������������������������������������������������������������������������� 35 UNIDROIT Principles for International Commercial Contracts, 1995�������������������������������������������������������������������������������������������������39, 63, 244, 295, 303, 366–67, 384, 388 Art 1.6�������������������������������������������������������������������������������������������������������������������������������������������� 367 Art 1.7�������������������������������������������������������������������������������������������������������������������������������������������� 367 Art 1.7(2)��������������������������������������������������������������������������������������������������������������������������������������� 367 Art 1.8�������������������������������������������������������������������������������������������������������������������������������������������� 367 Art 2.14������������������������������������������������������������������������������������������������������������������������������������������ 367

Table of Legislation and Related Documents  xxxix

Art 2.19�������������������������������������������������������������������������������������������������������������������������������������������� 42 Art 3.17������������������������������������������������������������������������������������������������������������������������������������������ 367 Art 3.2�������������������������������������������������������������������������������������������������������������������������������������������� 367 Arts 3.4ff���������������������������������������������������������������������������������������������������������������������������������������� 367 Arts 4.1ff���������������������������������������������������������������������������������������������������������������������������������������� 367 Art 5.2�������������������������������������������������������������������������������������������������������������������������������������������� 367 Art 5.3�������������������������������������������������������������������������������������������������������������������������������������������� 367 Art 5.5�������������������������������������������������������������������������������������������������������������������������������������������� 367 Art 6.2�������������������������������������������������������������������������������������������������������������������������������������� 41, 367 Art 7.1.6������������������������������������������������������������������������������������������������������������������������������������������� 42 Art 7.1.7����������������������������������������������������������������������������������������������������������������������������������������� 367 Art 7.4.13����������������������������������������������������������������������������������������������������������������������������������������� 42 UNIDROIT Uniform Sales Laws 1964�������������������������������������������������������������������������������������������� 213 Uniform Customs and Practice for Documentary Credits (UCP)������������������������������21, 27, 191–92, 207–8, 220, 222, 231, 241, 354, 381–82, 384, 450 Art 1����������������������������������������������������������������������������������������������������������������������������������������������� 382 Vienna Convention on the International Sale of Goods (ICSG/CISG), 1980�������������������������������������������������������������� 22, 27, 30, 39, 45, 62, 202, 205–6, 215–16, 219–20, 223–24, 240–41, 252–53, 286, 303, 334, 343–44, 354, 364, 380, 382–84, 388, 440, 450, 482 Art 1(1)(a)������������������������������������������������������������������������������������������������������������������������������������� 344 Art 2����������������������������������������������������������������������������������������������������������������������������������������� 62, 343 Art 3(2)������������������������������������������������������������������������������������������������������������������������������������������ 343 Art 4�������������������������������������������������������������������������������������������������� 62, 202, 206, 213, 216, 223, 643 Art 6����������������������������������������������������������������������������������������������������������������������������������������������� 224 Art 7�������������������������������������������������������������������������������������22, 62, 213, 223, 364, 388, 482, 637, 643 Art 7(1)������������������������������������������������������������������������������������������������������������������������������������������ 216 Art 7(1) and (2)���������������������������������������������������������������������������������������������������������������������������� 382 Art 7(2)������������������������������������������������������������������������������������������������������������������������������������������ 216 Art 9��������������������������������������������������������������������������������������������������������������������22, 62, 213, 223, 643 Art 9(1)������������������������������������������������������������������������������������������������������������������������������������������ 205 Art 9(2)������������������������������������������������������������������������������������������������������������������������������������������ 205 Art 12������������������������������������������������������������������������������������������������������������������������������219, 359, 380 Art 17��������������������������������������������������������������������������������������������������������������������������������������������� 216 Art 25����������������������������������������������������������������������������������������������������������������������������������������������� 62 Art 28��������������������������������������������������������������������������������������������������������������������������������������������� 384 Art 50����������������������������������������������������������������������������������������������������������������������������������������������� 62 Art 79����������������������������������������������������������������������������������������������������������������������������������������������� 39 Arts 85ff������������������������������������������������������������������������������������������������������������������������������������������� 62 Vienna Convention on the Law of Treaties 1969������������������������������������������������������������������������������ 23 Art 31����������������������������������������������������������������������������������������������������������������������223, 482, 625, 637 Art 53��������������������������������������������������������������������������������������������������������������������������������������������� 357 Washington (ICSID) Convention of 1965 in respect of foreign investments disputes and awards��������������������������������������� 158, 266, 272, 330, 332, 379, 406, 410, 445, 448, 465, 471, 546, 559, 564–65, 567, 571, 574, 580, 603, 606, 617, 626, 657–58, 661 Art 25������������������������������������������������������������������������������������������������������������������������������� 567–68, 611 Art 25(1)���������������������������������������������������������������������������������������������������������������������������������������� 565 Art 25(2)(b)���������������������������������������������������������������������������������������������������������������������������������� 568

xl  Table of Legislation and Related Documents

Art 42�����������������������������������������������������������������������������������������������������������������������437, 566, 574–75, 580, 607 Art 42(1)���������������������������������������������������������������������������������������������������������������������������������������� 342 Art 48(3)�������������������������������������������������������������������������������������������������������������������������619, 623, 657 Art 49(2)���������������������������������������������������������������������������������������������������������������������������������������� 657 Art 52����������������������������������������������������������������������������������������������������������������������� 565–66, 571, 624 Art 52(1)(e)����������������������������������������������������������������������������������������������������������������������������� 656–57 Art 54������������������������������������������������������������������������������������������������������������������������������������� 332, 600 World Bank (IBRD) Guidelines on the Treatment of Foreign Direct Investment, 1992������������������������������������������������������������������������������������� 379

Italy Civil Code������������������������������������������������������������������������������������������������������������������������������������������ 117 Private International Law Statute, 1995������������������������������������������������������������������������������������������� 321

Luxembourg Grand Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions����������������������������������������������������������������������������������������������������� 515

Netherlands CCP Art 8(1)������������������������������������������������������������������������������������������������������������������������������������������ 322 Art 429������������������������������������������������������������������������������������������������������������������������������������������� 322 Art 1054��������������������������������������������������������������������������������������������������������������������������������� 238, 388 Civil Code�����������������������������������������������������������������������������������������������������������119, 125, 184, 187, 393 Art 3 (old)������������������������������������������������������������������������������������������������������������������������������������� 203 Art 3(12)���������������������������������������������������������������������������������������������������������������������������������������� 196 Art 6(2)������������������������������������������������������������������������������������������������������������������������������������������ 203 Art 6.2(2)��������������������������������������������������������������������������������������������������������������������������������������� 321 Commercial Code����������������������������������������������������������������������������������������������������������������������������� 119 Draft Introduction Statute to Private International Law 1992, Art 8����������������������������������������������������������������������������������������������������������������������� 313, 321–22 2002, Art 12����������������������������������������������������������������������������������������������������������������������������������� 321 Instruction Court of Holland, 20 August 1531, GPB II, 703, Art 81������������������������������������������������ 91

Poland Private International Law, 1965, Art 31(2)�������������������������������������������������������������������������������������� 320

Portugal General Private International Law Statute, 1965, Art 45(3)����������������������������������������������������������� 320

Spain Siete Partidas��������������������������������������������������������������������������������������������������������������������������������������� 91

Switzerland Arbitration Act 1987, Art 181����������������������������������������������������������������������������������������������������������� 458 Civil Code������������������������������������������������������������������������������������������������������������������������������������������ 122 Art 1����������������������������������������������������������������������������������������������������������������������������������������������� 120 Private International Law Statute, 1987 Art 15��������������������������������������������������������������������������������������������������������������������������������������������� 321 Art 15(1)���������������������������������������������������������������������������������������������������������������������������������������� 320 Art 132������������������������������������������������������������������������������������������������������������������������������������������� 322 Art 133(2)�������������������������������������������������������������������������������������������������������������������������������������� 320 Art 148(2)�������������������������������������������������������������������������������������������������������������������������������������� 501

Table of Legislation and Related Documents  xli

United Kingdom Act of Union���������������������������������������������������������������������������������������������������������������������������������������� 84 Arbitration Act 1996������������������������������������������������������������������������������������������� 66, 148, 150, 238, 407, 412, 419, 435, 438, 479 s 14������������������������������������������������������������������������������������������������������������������������������������������������� 458 s 34����������������������������������������������������������������������������������������������������������������������������������������� 437, 650 s 35������������������������������������������������������������������������������������������������������������������������������������������������� 474 s 44������������������������������������������������������������������������������������������������������������������������������������������� 468–69 s 44(4)�������������������������������������������������������������������������������������������������������������������������������������������� 469 s 44(5)�������������������������������������������������������������������������������������������������������������������������������������������� 469 s 46����������������������������������������������������������������������������������������������������������������������������������388, 439, 580 s 46(1)(b)�������������������������������������������������������������������������������������������������������������������������������������� 238 s 46(3)�������������������������������������������������������������������������������������������������������������������������������������������� 238 s 69(2)�������������������������������������������������������������������������������������������������������������������������������������������� 638 s 74������������������������������������������������������������������������������������������������������������������������������������������������� 422 s 107����������������������������������������������������������������������������������������������������������������������������������������������� 539 Bankruptcy or (now) Insolvency Acts 1824, 1849, 1861, 1869, 1883, 1914, 1985 and 1986,1994, and 2000������������������������������������������148, 519, 539, 542, 549 Bills of Exchange Act 1882�������������������������������������������������������������������������������������������������� 147–48, 373 s 83������������������������������������������������������������������������������������������������������������������������������������������������� 373 Bills of Lading Act 1855�������������������������������������������������������������������������������������������������������������������� 147 Bills of Sales Acts 1854, 1866, 1882, 1890 and 1891������������������������������������������������������������������������ 147 Carriage of Goods by Sea Act (Cogsa) 1971 and 1992������������������������������������������������������������������� 147 Carta Mercatoria of 1303������������������������������������������������������������������������������������������������������������������� 17 Civil Procedure (Amendment) Rules 2000, r 6.20�������������������������������������������������������������������������� 331 Common Law Procedure Act 1854�������������������������������������������������������������������������������������������������� 147 Companies Acts 1844, 1856, 1862, 1948, 1967, 1986, 1989, 2004 and 2006���������������������������������� 148 Enterprise Act 2002��������������������������������������������������������������������������������������������������������������������������� 148 Factors Acts 1823, 1842, 1877 and 1889������������������������������������������������������������������������������������������ 147 Interpretation Act 1889�������������������������������������������������������������������������������������������������������������������� 150 Interpretation Act 1978�������������������������������������������������������������������������������������������������������������������� 150 Judicature Acts,1871, 1873 and 1875��������������������������������������������������������������������������17, 140, 147, 398 s 25(11)���������������������������������������������������������������������������������������������������������������������������������� 141, 147 Law of Property Act 1925����������������������������������������������������������������������������������������������������������������� 148 Magna Carta, 1215�������������������������������������������������������������������������������������������������������������������� 136, 141 Maritime Insurance Act 1906����������������������������������������������������������������������������������������������������������� 147 Partnership Act 1890������������������������������������������������������������������������������������������������������������������������ 147 Sale of Goods Act 1893������������������������������������������������������������������������������������������������������351, 361, 631 Sale of Goods Act 1979��������������������������������������������������������������������������������������������������������������������� 147 Second Statute of Westminster, 1285����������������������������������������������������������������������������������������������� 136

United States Alien Tort Statute 1789��������������������������������������������������������������������������������������������������������������������� 210 Bankruptcy Code��������������������������������������������������������������������������������������� 146, 164, 316, 506, 519, 528 ch 15���������������������������������������������������������������������������������������������������������������������������������������������� 538 s 363(b), (c) and (f)���������������������������������������������������������������������������������������������������������������������� 519 s 510����������������������������������������������������������������������������������������������������������������������������������������������� 521 s 547����������������������������������������������������������������������������������������������������������������������������������������������� 528 s 555����������������������������������������������������������������������������������������������������������������������������������������������� 532 s 559����������������������������������������������������������������������������������������������������������������������������������������������� 532

xlii  Table of Legislation and Related Documents

COGSA, 1936������������������������������������������������������������������������������������������������������������������������������������ 286 Commodity Futures Modernization Act 2000�������������������������������������������������������������������������������� 530 Constitution�������������������������������������������������������������������������������������������������154, 238, 266, 286–87, 315 Art II, s 8, cl 3�������������������������������������������������������������������������������������������������������������������������������� 286 Art III, s 1�������������������������������������������������������������������������������������������������������������������������������������� 287 Employee Abuse Prevention Act 2002��������������������������������������������������������������������������������������������� 528 Federal Rules Enabling Act, 1934����������������������������������������������������������������������������������������������������� 287 Federal Rules of Civil Procedure������������������������������������������������������������������������������������������������������ 287 Foreign Sovereign Immunity Statute����������������������������������������������������������������������������������������������� 332 Judiciary or Rules of Decision Act 1789, s 34���������������������������������������������������������������������������� 287–88 Model BIT�����������������������������������������������������������������������������������������������������������575, 580, 584, 587–88, 590, 595–96 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��������������������������������������������������������������������������� 286 Restatement (Second) Conflict of Laws, 1971�������������������������������������������������������������������24, 283, 315, 318–19, 336 s 6�������������������������������������������������������������������������������������������������������������������������������������24, 283, 309, 315, 336 s 145��������������������������������������������������������������������������������������������������������������������������������������� 315, 336 s 188��������������������������������������������������������������������������������������������������������������������������������������� 315, 336 Restatement (Second) of Contracts, 1981, s 205������������������������������������������������������������������������������� 43 Restatement (Third) of the Foreign Relations Law of the United States, 1987������������������������������������������������������������������������ 24, 70, 283, 309, 319, 336–37, 393, 592 s 401����������������������������������������������������������������������������������������������������������������������������������������������� 582 s 402��������������������������������������������������������������������������������������������������������� 24, 283, 309, 329, 336, 393, 443, 535, 582, 642 s 403����������������������������������������������������������������������������������������������������������� 24, 70, 283, 309, 329, 336, 393, 443, 535, 642 Sarbanes-Oxley Act 2002������������������������������������������������������������������������������������������������������������������ 531 s 401(c)������������������������������������������������������������������������������������������������������������������������������������������ 529 s 705����������������������������������������������������������������������������������������������������������������������������������������������� 530 Uniform Commercial Code (UCC)�����������������������������������������������������6, 20, 26–27, 35–36, 43, 54–56, 62–63, 116, 122, 126, 148–51, 154, 156, 163–64, 181, 188, 191–92, 204–5, 214, 224, 233, 242–43, 252–53, 262–63, 286–88, 314, 319, 344, 351, 361, 367, 376–77, 381, 390, 392–93, 439, 503, 506, 508, 510, 520, 524, 528, 547, 634, 641, 644 Art 1������������������������������������������������������������������������������������������������������������������������������������������������� 55 Art 2����������������������������������������������������������������������������������������������������������20, 54–55, 62–63, 192, 376 Art 2A�������������������������������������������������������������������������������������������������������������������20, 55, 63, 243, 506 Art 3������������������������������������������������������������������������������������������������������������������������������������������������� 55 Art 4������������������������������������������������������������������������������������������������������������������������������������������������� 55 Art 4A�������������������������������������������������������������������������������������������������������������������������55, 63, 243, 376 Art 5����������������������������������������������������������������������������������������������������������������������������55, 63, 192, 381 Art 6������������������������������������������������������������������������������������������������������������������������������������������������� 55 Art 7������������������������������������������������������������������������������������������������������������������������������������������������� 55 Art 8����������������������������������������������������������������������������������������������������������������������20, 55, 63, 376, 506

Table of Legislation and Related Documents  xliii

Art 9������������������������������������������������������������������������������������������������������������� 20, 55, 63, 138, 243, 316, 319, 376, 392–93, 495, 506, 510, 531 s 1-103��������������������������������������������������������������������������������������������������������� 6, 20, 151, 288, 351, 361, 390, 439, 453, 631, 644 s 1-103(a)�������������������������������������������������������������������������������������������������������������������������������������� 154 s 1-103(a)(2)����������������������������������������������������������������������������������������������������������������������������������� 56 s 1-103(a)(2)��������������������������������������������������������������������������������������������������������������������������������� 287 ss 1-103(a)(2) and (b)������������������������������������������������������������������������������������������������������������������ 181 s 1-109(a)(13)��������������������������������������������������������������������������������������������������������������������������������� 63 s 1-131������������������������������������������������������������������������������������������������������������������������������������������� 287 s 1-201(19) old�������������������������������������������������������������������������������������������������������������������������������� 43 s 1-201(a)(20)��������������������������������������������������������������������������������������������������������������������������������� 43 s 1-201(b)(20)��������������������������������������������������������������������������������������������������������������������������������� 43 s 1-301������������������������������������������������������������������������������������������������������������������������������������������� 319 s 1-301(f) and (g)������������������������������������������������������������������������������������������������������������������������� 319 s 1-302����������������������������������������������������������������������������������������������������������������������������197, 250, 367 s 1-303������������������������������������������������������������������������������������������������������������������������������������������� 204 s 1-304��������������������������������������������������������������������������������������������������������������������������������������������� 43 s 2-103(1)(b)����������������������������������������������������������������������������������������������������������������������������������� 43 s 2-103(1)(j)������������������������������������������������������������������������������������������������������������������������������������ 43 s 2-104��������������������������������������������������������������������������������������������������������������������������������������������� 54 s 2-110��������������������������������������������������������������������������������������������������������������������������������������������� 34 s 2-202(a)�������������������������������������������������������������������������������������������������������������������������������������� 204 s 2-208������������������������������������������������������������������������������������������������������������������������������������������� 204 s 2-210����������������������������������������������������������������������������������������������������������������������������������� 191, 375 s 2-302��������������������������������������������������������������������������������������������������������������������������������������������� 43 s 2-402������������������������������������������������������������������������������������������������������������������������������������������� 319 s 2-603��������������������������������������������������������������������������������������������������������������������������������������������� 43 s 2-615��������������������������������������������������������������������������������������������������������������������������������������������� 43 ss 2A-105 and 2A-106������������������������������������������������������������������������������������������������������������������� 319 s 3-103(a)(4)����������������������������������������������������������������������������������������������������������������������������������� 43 s 3-103(a)(6)����������������������������������������������������������������������������������������������������������������������������������� 43 s 4-102������������������������������������������������������������������������������������������������������������������������������������������� 319 s 4A-108������������������������������������������������������������������������������������������������������������������������������������������� 63 s 4A-507����������������������������������������������������������������������������������������������������������������������������������������� 319 s 5��������������������������������������������������������������������������������������������������������������������������������������������������� 148 s 5-102 (9)(b)���������������������������������������������������������������������������������������������������������������������������������� 63 s 5-102(a)(7)����������������������������������������������������������������������������������������������������������������������������������� 43 s 5-116������������������������������������������������������������������������������������������������������������������������������������������� 319 s 5-116(c)�������������������������������������������������������������������������������������������������������������������������������������� 381 s 8-102��������������������������������������������������������������������������������������������������������������������������������������������� 43 s 8-110������������������������������������������������������������������������������������������������������������������������������������������� 319 s 8-502������������������������������������������������������������������������������������������������������������������������������������������� 524 s 8-503(e)�������������������������������������������������������������������������������������������������������������������������������������� 524 s 8-510������������������������������������������������������������������������������������������������������������������������������������������� 524 s 9-102 (a) (43)������������������������������������������������������������������������������������������������������������������������������� 43 ss 9-301–9-307������������������������������������������������������������������������������������������������������������������������������ 319 s 9-404������������������������������������������������������������������������������������������������������������������������������������������� 191 s 9-406(d)�������������������������������������������������������������������������������������������������������������������������������������� 375

xliv 

1 The Transnationalisation of Commercial and Financial Law. The New Lex Mercatoria Concerning Professional Dealings and its Sources Part I  The Emergence of the Modern Lex Mercatoria, its Method, Structure and Antecedents. Civil and 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 and trade law, has long had 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 practice 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, but also their changing nature, which hardly allow them still to be meaningfully split up and allocated to particular countries or territories. It still leaves us with the questions of how this new transnationalised and unified law operates and can be known 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. In Volume 2 the discussion will be narrowed

2  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

to contract and movable property law as it is developing in the t­ransnationalised ­professional environment or global legal order. In Volume 3 the discussion will be extended to international financial dealings in their private law and regulatory aspects. In this discussion, international finance is considered the true focus of present-day international commercial activity rather than the more traditional mercantile aspects often associated with the sale of goods, their transportation and insurance, bills of ­lading, bills of exchange or promissory notes and letters of credit. To demonstrate what is at issue, an example 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. 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 sales proceeds and bank balances, joined by services, often delivered on the web, or types of technology and information supply or instructions that are increasingly virtual. These assets are no longer individualised but appear in bulk or are 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 exactly in the flows, their composite nature, and their constant transformation. Once the asset comes to rest with a consumer and is unpacked in a particular place, it is second hand and substantially loses its value; indeed there is no greater value destruction than unwrapping under a Christmas tree. This is of legal interest as, with the loss of value, the asset becomes at the same time 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 real estate. It is submitted that in order for us to remain legally relevant in our legal assessment in commerce and finance, we must place ourselves firmly in these international flows and respect their integrity and state of transformation. This has not been the legal attitude since the nineteenth century. First the assumption is that all law is national and thus also governs international transactions assessed or allocated per country. In this traditional 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 and property), which provide the conduit to finding the most appropriate national legal system to apply for each part. Second, these domestic laws commonly concern themselves only with situations at rest, while the proprietary system, in particular, is based on the idea of individualisation, identification and location of existing assets (the Bestimmtheitsprincip in Germany) under national laws only. Third, the expectation is 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. This was perhaps realistic when international transactions were few and concentrated on finished physical products but now that the total value of the international flows

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 3

far exceeds the GDP of even the largest countries1 and constant ­transformation is the essence of these flows, which can hardly any longer be localised or at least not for long, this approach is artificial and likely to be insufficient. 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, while in international transactions these 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 are now joined by services, technology and other information. There is 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 activity. Can the entire flow be given as security? 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. It 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 at the level of the state, was an aberration in need of correction, at least 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 order. Legal transnationalisation is not then 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 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 the result of i­mmanent or spontaneous bottom-up law formation in that order in which fundamental p ­ rinciple,

1  To give some figures: the sum total of the cross-border trade in goods was in 2014 put at about US$ (equivalent) 15 trillion; in services at about US$ (equivalent) 5 trillion. Compare this to the GDP of the US at about US$16 trillion, of the EU a little more, total world GDP being in the region of US$60 trillion in 2012. 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. 2  The problem finds its most acute present-day expression in taxation, now that the location of activities, added value and profits becomes increasingly obscure in these international flows. It unnerves politicians and agitates the public but is an unavoidable 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. 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 the harbinger of a much more deep-seated problem that affects the law applicable to all of these flows and the activities in them, including regulation. In any event many national laws so found to be applicable may not add up and may not even have a proper answer in respect of the parts allocated to them. In the following the floating charge will repeatedly be used as a most obvious example.

4  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

custom and practices, treaty law, general principle and party autonomy play the ­defining roles. This is reminiscent of a similar approach to law formation in public international law (Article 38(1) of the Statute of the International Court of Justice) and indeed reintroduces the unity in law formation in both areas that obtained until the nineteenth century. As will be argued in section 1.1.6. below and throughout Volume 2, at the practical level, this new law introduces and supports the idea that in professional dealings the law of contract and movable property acquires a different meaning 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. More difficult is the identification of the public interest as a motivating and correcting force in the international market place and the formulation of transnational minimum standards, eg in competition, environmental and financial issues.3 Here the absence of institutions such as states (or local 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 so it must be left to the public debate in civil society. The role and formulation of public policy at the transnational level, particularly transnational minimum standards of behaviour, are perceived in this book as the greatest challenge in transnational law formation and application. It will be argued that in appropriate cases, they may be joined by extra-legal considerations of justice, social peace and efficiency if sufficiently pressing. In practice, in dispute resolution, international arbitrators may function as major spokespersons for this new order,4 but more work in this regard may be done in the large law departments of international companies that manage legal risk on a daily basis. They must make the business work from a legal point of view and then also consider the public interest as it evolves and concerns, foremost, the world of emerging transnational minimum standards. To the extent international transactions come demonstrably onshore, assuming this can still be identified, local regulatory laws and values also remain important (or within the European Union (EU) its public policy standards in areas of its competency). They may conflict, but 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 international standards, assuming they can be identified. All the same, to the extent that commercial and financial law can still be considered national, therefore in particular in domestic transactions, the evolution of the civil and common law, their origins and their differences, remain relevant in discussing the 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 including the notion of preferences (eg in set-off) and in 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 market place itself against market abuse, anti-competitive behaviour, money laundering, insider dealing, and other forms of corruption. 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 these issues autonomously, see the discussion below in s 1.1.11 and in ch 2, ss 1.1.10 and 2.1.15.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 5

nature and application of this law at the local level and that is for many still the starting point even if these differences may create more particular problems if these national laws are applied to international transactions. But even 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, 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 approach) is followed or favoured, or whether a different approach altogether should prevail. 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 outlined in sections 1.1.2 and 1.1.3 below.

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 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 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. 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 also 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 207 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 based on this principle as it grew in an 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 is here on predictability which is here deemed enhanced the closer the law is (in this case not to a system but) to practical needs and realities. It indeed sets out two very different approaches but in both predictability takes centre stage, see also s. 1.1.7 below.

6  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

This attitude is essentially rule oriented and formal. 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 ultimately also determining the relevant values. Other sources of law, notably custom and practices, are subservient to this law and even values depend on government recognition. It also follows that this law is territorial in nature. Since the system and its coherence are considered of primary importance, states are then likely to rely in their codification efforts on academic advice to preserve intellectual rigour and consistency—at least that is the idea. The application of this law is subsequently seen mainly as a technique which has logic as its core. The system is closed, extraneous sources of law are irrelevant, especially fundamental and general principles (unless underlying the system) but also custom and party autonomy can 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. Even if modern more liberal interpretation may have weakened the original resolve, as we shall see, and reintroduces in fact these other sources of law which had been removed from law formation, it remains in essence in place and is the basic attitude in codification countries. This approach was the result of three nineteenth-century paradigm shifts that did do away with the law’s universalism and bottom-up formation. It changed the private law on the European Continent completely and subsequently also affected commercial and financial law. The result was the modern civil law differentiating it henceforth fundamentally from the earlier universal Roman law, which had often been perceived as the product of innate rationality and superior custom, 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; and (c) these texts present or aspire to present an intellectual framework or system which is internally coherent and complete, and reflects by definition the reality of human relationships. As we shall see, in the EU projects for private law unification, there continues an unarticulated combination of these various paradigms as there is in the United Nations Commission on International Trade Law (UNCITRAL) and 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. It claims exclusivity for its texts, which are meant to control all private law in the areas covered, including in contract potentially the contractual content. There are no other values and even party autonomy operates here only by licence of the state.8 Private law is nationalised and even treaty law is in this view 8  A dynamic forward-moving force in the law is not denied, but it is not autonomous and depends on a liberal interpretation within this more static, abstract system, cf n 250 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 also text at n 36 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 and 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, subject only to public order and policy requirements, as indeed there was on the European continent before the nineteenth century.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 7

no more than national law adopted by the Contracting States, but it cannot be repeated enough that all of this is mere paradigm, as reversible as was their introduction. It remains nevertheless the basic approach in formal private law unification, which is top down and to which the Draft Common Frame of Reference (DCFR) and its progeny as models for codification at the level of the EU also testify.9 It follows that there is no real need for empirical research, interdisciplinary thinking and legal ­globalisation. This law and its approach and method are not fundamentally questioned, for example, as to their continuing fairness or morality, efficiency or responsiveness to social or ­economic needs.10 They are assumed to result from the system itself and the choices that have been made through it. It is technique. Because it is the law, it 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 have, or indeed how poor the intellectual back-up may prove to be or to have become in reality. This is the civil law expression of legal positivism (and formalism) and still the mainstream of its thinking,11 even if in interpretation there may now be some flexibility at the edges while the other sources of law return through this back door, potentially also allowing for amplifications and corrections on the basis of justice, the need for social peace or on the basis of efficiency or utility considerations including, conceivably, the need for growth. These considerations become extraneous forces supplementing the system although the facade of interpretation could still suggest that they are no more than an expansion of the positive law so that the attitude can remain legalistic, doctrinal and formal. In this approach, it is explicit that commercial (and financial) law is 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. It is thus equally national and intellectual, and must be made to fit. It is not independent, but merely lex specialis or refinement. Even international commercial transactions are covered by, and must find a solution for their problems in, these national laws, for there is no other, the This is also reminiscent of the old common-law tradition, although the English may now be somewhere in the middle. See text at n 33 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. The English courts so far remain pragmatic, have always dealt with fragmented legal sources, and are comfortable with them 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 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). 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 probably remain the key distinguishing elements between common and civil law (of the German variety in particular). The legal certainty that codified systems crave for and expect from them is not then similarly expected in common law. 9 

See s 1.4.20 below. Although the question of whether morality in particular would be automatically served in this manner remained important 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. 11  For the modern form of legal positivism in private law formation and application, see s 1.4.16 below. 10 

8  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

proper one then being found through conflicts rules or rules of private international law, as already noted, based on the idea that for each part of an international transaction the approximate local contact and local law can be found. In this mindset, legally an international transaction does not exist as such. Hence the need to chop up the international flows into domestic pieces, never mind efficiency and rationality in the hope that all different legal pieces present a satisfactory legal regime for the transaction in question. These rules of private international law are not transnational either— in fact there is nothing international about them—but 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 s. 1.4.19 below) through which the most appropriate proper (national) law is 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. It follows, first, that the further development of this 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 made and imposed, not found, even if it may be based on an 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. Second, 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 codified private law 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 even in economic rationality, efficiency or market acceptance, 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. Third, as in codification countries the national private law regime is perceived as one intellectual statist system that monopolises the field, it follows that commercial and financial law is considered part of, and captured in, that system. It is not perceived to be independent from it but is merely lex specialis as already mentioned. These specialised areas have, therefore, no separate place in the law and cannot evolve independently. Commercial and financial law must fit the system and is then confined in its evolution to what that system recognises and allows. Fourth, this monopolisation of the law formation function at the level of the state 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. 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

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 9

per se.12 This 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. Fifth, the result is that this law is 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 policy-oriented nationalistic outlook remained the focus, assuming foremost for its further development governmental insight (through its academies) into what was necessary in terms of updating and adaptation. Commercial and financial law shows, however—as does regulation—that such insight may not be forthcoming and that autonomous law-creating forces therefore remained necessary to keep private law functional and living. 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 as we shall see. Sixth, in case of doubt or when situations were not explicitly covered or were new, and thus where the formal law lagged behind, it is true that even in civil law there had always been some greater interpretational flexibility but it was based on an extrapolation of rules from existing legislation and its system or implementing case law. It could also mean inductive or otherwise analogical reasoning, but, although in this approach in modern times a more liberal teleological interpretation technique was also allowed to provide greater flexibility, while even pressing ethical, social and efficiency considerations might be admitted in the interpretation process, this was still mainly done to support and complete the national system, its tenets and especially its credibility. 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 thus perceived as remaining formal and closed in principle.13 Seventh, this nationalistic attitude also fundamentally affected international transactions, 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 cut up per country in the hope that the totality of the 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 also reflected broader needs and a bigger world. It thus became

12  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 2, ch 1, 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. 13  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.

10  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

­ ecessary to search for the more appropriate, but always national, laws in the above n sense under applicable conflict of laws (or private international law) rules in international cases leading to the application of the domestic law considered the most closely connected with the transaction in question, even if it became increasingly difficult and artificial to define or identify the connection, more especially now that many of the international flows are in constant transformation, often intangible (services or even receivables) or virtual while through derivatives risks are separated from assets and allocated elsewhere. Eighth, a more liberal interpretation technique creating some flexibility at the edges, as we have seen, could have led to the extrapolation and expansion of the lex fori into international cases, especially taking into account the foreign elements of the case and increasingly also other more transnational sources of law so that a form of transnationalisation would result in the interpretation of domestic laws. It is an approach that gained some ground in the US also (interstate) as we shall see14 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 was even denied. Ninth, quite apart from the problems of identifying the closest connection, particularly in factual situations with many 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 in international cases as well. This was hardly any longer feasible in an ever more globalising world and economy, nor was it rational to continue to expect it. Tenth, regulation, which remained mostly domestic, also increasingly became a ­problem in international transactions as it often had to be established which governmental interests prevailed in this connection and in what aspects if they were conflicting. This raised, first, the issue of the proper jurisdiction to prescribe—as the Americans call it—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. It assumes a higher rule, which could then also transnationalise the applicable regulatory laws. In the EU, this may happen at the level of its Founding Treaties, eg since the 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 rule (or the public interest) if not embodied in treaty law, and more particularly who speaks for the public interest as correcting force when (private and regulatory) law is transnationalising without treaty law (which in any event only applies in the Contracting States).

14  See s 2.2.3 below. Even in the traditional conflicts of law approach, this may well reflect what actually happens in practice.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 11

Returning to our above example of an international car manufacturing company that needs financing for which its business flows 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? Indeed, it was never more than a nineteenth-century paradigm; only 50 years earlier people had held exactly the opposite view, considering 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 in the direction of universality; to repeat, it is hardly any longer a matter of dogma or philosophical thought, but simply one of efficiency, greater rationality and better sense. There is more. At the intellectual level, the civil law approach, in particular, assumes that 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. 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. Indeed, 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 one rational system, it should have particular difficulty in explaining why much of it is still national and cultural, therefore territorially different. This remains the underlying assumption but why should the law of assignment or set-off, for example, be culturally determined in commerce and finance? And if it nevertheless is, then at least it should be accepted that international transactions may acquire their own transnationalised legal regime that might operate quite differently and have a culture or rationality of their own, meaning that exclusively applying national legal ­systems to them, which requires the international flows to be broken up along artificial lines, implies a contradiction. Rather one should accept a transnational commercial and financial legal order to operate here besides those of states, 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 of the past 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. The idea is that ‘truth’ in human relations and how these relationships work can be established in this manner, that this reality can thus be discovered and formulated in an academic model, and can hence be correctly guided, for which the nation state with its power of rule imposition continues to be the superior channel. For those who think in 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.15 15  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

12  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

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. The subsequent need for a liberal interpretation technique meant, indeed, that other sources of law—which in a globalising world were also not necessarily territorial— revived, not least in international 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 even for international dealings. 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 system and its credibility. All the rest is only considered to confuse and to deviate from the proper state-ordained path or order. 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), is the latest expression of this thinking. In that sense, the DCFR and CESL are concerned mainly with remaking the past in a territorial manner, now at the level of the EU (see further s 1.4.19 below and more particularly Vol 2, ch 1, s 1.6 and ch 2, s 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. To repeat: in civil law orthodoxy, there is little room for autonomous commercial and financial law at the national level, let alone transnationally. Newer globalising ­tendencies and needs thus continue to be ignored, even in commerce and finance. The DCFR and its progeny are in fact a product not of transnationalisation but of national codification thinking, now at EU level, along a nineteenth-century model. There is ­little understanding of the emergence of a transnational commercial and financial legal order with its own 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

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 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.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 13

­merchant.16 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. As we shall see, this suggests at least in part a bottom-up, dynamic process of law formation and application and in method goes back to pre-codification days. It is also more akin to that of the common law, although it might allow for more academic thought. As just mentioned, the lack of newer thinking is also reflected in the CESL (see for a critique Vol 2, ch 1, s 1.6.13)17 and covers a subject (sale of goods) that in common law traditionally belongs to the area of commercial law. Indeed, there is no whiff of a transnational approach. Worse, the methodology was never properly considered; the civil law codification idea was assumed to be natural and uncontentious. Although ­limited to cross-border dealings within the EU, the operation of the modern lex ­mercatoria is ignored; as an opt-in instrument, the only alternative remains here national law. There are still no other sources of law admissible in international professional dealings, although it may be questioned whether there is 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 it is the real issue. Quite apart from its other defects and pretentions, nationalistic system thinking of this nature around pre-existing hard and fast local rules 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, even domestically, thus not only in international commercial and financial dealings. In more modern terms, it has particular difficulty with the legal response to a globalising world and cannot cope with its dynamism (see also s 1.1.6 below). It cannot support it for 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 if we want to retain our present lifestyle 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

16  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. 17  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.

14  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

the old Soviet Union of low (but sturdy) quality. It makes us better off and capable of producing better products to exchange. 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 off—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. Importantly, in this kind of world, finance or liquidity with the attendant services also becomes accessible beyond what domestic markets might be able to provide in domestic savings and the inflow of foreign capital may then be considered a good thing too. This was very much behind the total reinvention of finance in the 1980s, which became substantially transnationalised and was able to do away with local foreign exchange and other controls, first in the eurobond markets (and its repos) and later more broadly through the swap markets. Investment securities can be traded anywhere in the form of security entitlements in book-entry systems. Whatever the pros and cons in terms of financial stability and the deregulatory ethos, in banking, as is especially clear in the aggressive lowering of capital adequacy standards through the Basel I and Basel II Accords (see Vol 3 ch 2, s 2.5) the international flows of finance, financial instruments and related services were encouraged and borders were opened to it, even unilaterally. This indeed became an autonomous process18 and allowed the offshore eurobond market (which has nothing to do with the euro currency) to become the largest capital market in the world, celebrating its 50th anniversary in 2013;19 see further section 3.2.3 below and volume 3, chapter 1, section 2.1.2. This was not without consequence for the law applicable to these flows, which became substantially transnationalised. It may be posited that nationalistic system thinking in the above manner is the reason why modern civil law has been particularly wanting in international commerce and finance, why it may have increased legal risk in these areas, and why it may well be driving vital markets away to London, New York, Hong Kong and Singapore, all common law jurisdictions.20 As already mentioned, a more liberal transnational interpretation might be used to save the domestic systems but the techniques mostly remain national-system-bound and are in any event contentious in

18 

See s 3.1 below. 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. 20  We shall see, however, that increasingly there is acceptance of a more transnational approach, particularly in France where it is demonstrated in particular in the attitude to international arbitration, recently 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. As we shall also see in the text at n 41 below, it may be less strong in other codification countries. 19 

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 15

property law. This will be further explained in Volume 2. 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, see more particularly the discussion in section 1.4 below.21 It was not always thus, and may no longer be the way of the future, but it is the nineteenth-century inheritance of the civil law, 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 superseded the received Roman law, which 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 more universal,22 although particularly in commerce and finance it was supplemented by a myriad of local laws and practices.23 In fact, there were multiple sources of law that

21  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. 22  See ss 1.2.4/5. This Roman law was still subject to competing local laws. 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 see s 1.4.9 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 also s 1.2.9 below. Subsequently, modernism conspired to see the state as the true motor of society and its continuous transformation, see also 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 the commercial law was henceforth lex specialis to the national, state-created, system of private law as there was no longer anything else. Whatever international legal unity there still was depended 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. 23  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, O ­ rigins 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 not in legal uniformity per se but in the bottom-up response to practical needs. When 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.

16  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

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 at the time a variety of judges,24 the judicial function often being private, and they would use their own knowledge of custom and practices to facilitate the proceedings, as specialised arbitrators may still do today.25 Enforcement was also often private and therefore conducted within the commercial communities themselves. Law formation and enforcement were not the natural province of states, except in criminal cases, but most certainly not in commerce unless public order was engaged, as was considered the case in bankruptcy, and it was otherwise exceptional. The expulsion from the trade or guild was as effective. Where texts were produced, they were even then normally regional or city compilations of existing customs gathered mainly to provide greater transparency and to promote trade more generally (in which local government often had a taxation interest, which also explains the eagerness to provide order in market places and 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).

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, 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. 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 at least in equity. It has avoided the grip of the academic model and its claim to 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, 24  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. 25  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 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. This 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 purely contractual, see further ch 2, s 1.1.4.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 17

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.26 This also affected the commercial law’s international status in England. It became there also substantially territorial. In fact, in England by the eighteenth century, commercial law had been incorporated into the common law and had lost its true independence27 although it was not completely subsumed and it retained some special place, in particular through the

26  As to general principle as another other source of law, the common law had always been wary of it, as on the whole the English dislike generalisation, see s 1.4.6 below. Worse, perhaps, was that even custom became subject to the law of precedent, depending as such on court recognition, see text at n 31 below. 27  In England, there was some statutory law from early on and 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, 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 and their laws were originally more particularly connected with fairs and the maritime activities in the ­Channel ports, where participants were peripatetic merchants or maritime transporters, including foreigners, which required prompt justice to be enforced either against the person of the debtor, if still present at the fair, or, particularly in his absence, against his 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 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 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. The common law judges eventually took the view that the older commercial and admiralty courts only operated by franchise 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 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 environment.

18  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

endeavours of Lord Mansfield.28 But as its courts were overtaken by the common law jurisdiction, this restricted the further independent development of commercial law.29 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, which 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 custom30 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 s 1.3.3 below) and to a large extent they lost their status as a dynamic source of law.31 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

28  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 but always within the confines of the common law and its courts. As we shall see, this left, however, some room for commercial custom and practices as distinct sources of law but it did not re-establish independence. In Pillans v Van Mierop (n 27), 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 but always 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. Nevertheless, even domestically, commercial law is not incidental or mere lex specialis, and it clearly covers whole areas of the common law in full in a distinct fashion and the general aversion to system thinking allows this to continue. 29  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 remained, 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, a situation further promoted by the preponderant impact of British colonial trade, which was not considered to be different. But pragmatism remained and continued generally to support business, especially from the perspective of the London markets. 30  Not, therefore, very different from the Roman law on the European Continent, see s 1.2.5 below. 31  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.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 19

also in finance, a facility now often taken over by legislation, although the equitable ­jurisdiction is not completely exhausted as we shall also see.32 More recently, especially in England, academia has become more active in the law and has subsequently 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,33 more so than in the US where this struggle is now often cast in terms of legal realism versus legal formalism as we shall see.34 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),35 and underscores the point that integration between common law and commercial law does still not fully exist in common law countries. This being said, the distinction between law and equity (discussed in s 1.3.1 below), which initially each had their own courts, may be more important, and also cuts through what may still be considered commercial and modern financial law, equity

32 

See more recently for the important Lehman cases, ch 2, s 2.4.3 below. 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. 34  See more particularly s 1.3.4 below and for the UCC approach, also n 36 below and accompanying text. Legal formalism is 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, a mechanical process of application, which is 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. 35  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 some 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. In fact, 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 contract and does not endow each with its own special contractual 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. In fact, in the nineteenth and twentieth centuries, these areas of law developed more strongly and separately in England as a trading nation than they did on the European Continent. 33 

20  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

notions having become a particularly important support (despite the confining nature of the rule of precedent). Here we find company and bankruptcy law, the law of trusts, including related structures like constructive trust and segregation, tracing and tracking facilities, floating charges and conditional or finance sales, assignments and set-off, indirect or undisclosed agency, and fiduciary duties. Largely substituting in modern times for this equity jurisdiction, there is now in common law countries, as just mentioned, also substantial legislation in the field of private law, which may also extend into commercial and financial law. Indeed, legislation often superseded the corrective powers of the equity judges. While they had often looked for 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. It does not aspire to systematic thinking or overarching intellectual conceptualisation that seeks recognition in its application and eliminates in the process 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 interpreted so as to leave as much room as possible for the common law, equity, custom, the law merchant and party autonomy.36 Even though it calls itself a ‘code’, it is therefore not a code in the civil law sense because it does not seek to monopolise the field and eliminate other sources of law,37 and, although undoubtedly looking for structure, it is also not systemic in the civil law manner,38 nor intended to be interpreted in that manner. This represents the more traditional common law approach, which still finds an equivalent in England in the mostly literal and therefore restrictive interpretation of statutory private law texts,39 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 for custom), even if increasingly construed and perceived academically as one national coherent system. On the other hand, the p ­ redominantly

36  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. 37  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. 38  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. 39  See s 1.3.3 below.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 21

nationalistic approach to private law formation and operation, although still ­different from the civil law approach, 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 connection, 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, as we shall see in sections 2.2.2 to 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, even though it would benefit English practitioners most and appears to fit the common law tradition much better than that of the civil law.40 It appears more welcome in France where greater transnationalism is now often more acceptable in these matters.41

1.1.4  The Transnationalisation of Commercial and Financial Law: Common or Civil Law Approach? Methodology and Definition. 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. One may think of the law concerning bills of lading; negotiable instruments, in more ­modern times especially eurobonds and euromarket practices including clearing and settlement; the law of letters of credit (UCP) and trade terms (Incoterms). It may also concern the important and connected issue of finality of title transfers and payments. It may even affect the law of assignment, of set-off and netting in international finance. The International Swap Dealers Association’s (ISDA) Master Agreement for international swap dealing stands out as the more recent example of transnational custom formation and is highly significant in this connection (see ss 3.2.2. and 3.2.5 below and Vol 2, ch 1, s 3.2.5; for the issue of finality see Vol 2, ch 2, s 1.4). It is clear that it concerns here the key legal infrastructure of the international market place itself, which 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

40  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). 41  See n 20 above.

22  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

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 the previous section. 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 and its application in that manner that truly distinguishes 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. 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 resolved and affects in particular the appropriateness of codification in the civil law manner (through treaty law or, in the EU, possibly through Regulations as proposed for a CESL of private law at the transnational level, in terms of law formation, especially in its top-down approach and potential elimination of all other sources of law and the denial of 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 is traditionally more suited to a common law than a civil law environment, common law being more ‘­bottom up’ and developing from case to case. 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 of UNCITRAL and UNIDROIT without much further discussion. Such a system may not easily admit other competing independent sources of law, especially overarching fundamental principle, custom and general principle, or party autonomy,42 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 as well, 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 are now being 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 have already been mentioned. They also cover, by way of their unitary approach,

42  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 2, ch 1, s 2.3.7, confirmed in many other UNCITRAL and ­UNIDROIT projects, see s 1.4.12 below.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 23

­ rofessional dealings (although limited in the CESL to transactions that involve at p least one small and medium sized enterprise (SME) and thus also the areas of international commerce and finance and the operation of the international market place to the extent operating in the EU. The fuller implementation of the DCFR (and CESL) would then also affect its centre in London, and may result in a version of commercial and financial law which is very different from the one that currently obtains there. In the EU, this approach through legislation (treaty law or Regulation) 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 as we shall see. In the view presented in this book, the new, immanent lex mercatoria is preferred for all professional dealings 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 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 a higher mandatory international 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, systemic, 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, recognised as such in Article 38(1) of the Statute of the International Court of Justice (ICJ) as already mentioned for peremptory norms supported by Article 53 of the Vienna Convention on The Law of Treaties. 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 further chapter 2, section 1.3 below. As we shall see in section 1.4.13,43 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).44 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 public order requirements. 43  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 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. 44  See for the residual rule of domestic law in particular, s 1.4.12 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.

24  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

As the new transnational law itself is private law, as such it does not mean to c­ ircumvent 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 very transnational public order considerations developing in the transnational commercial and financial legal order itself from which the modern lex mercatoria issues and in which it operates.45 In international transactions and their dispute resolution facilities, especially 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. This is an important development and is outside the development of new lex mercatoria proper. It may correct it although this may also come from within the modern­ lex mercatoria through the manifestation of such standards in 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 of the public interest transnationally. International arbitrators may be first in line, but the problem is more fundamental and perceived here as a key issue in the transnationalisation process to which we must constantly return (see further also the discussion in s 1.5.7 below). The international market place needs balancing at the national but increasingly also at the transnational level, especially now much of international trade is virtual and can no longer be easily located. It is a civil society issue. It has already been argued 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. This is the perspective of this book. 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 the whole second volume is devoted. They are both seen as becoming risk management tools in a much more dynamic and fluid environment. This 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. This may have immediate repercussions, for example in the way concepts of reliance or 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 2, chapter 2 and Volume 3,

45  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).

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 25

chapter 1, this may be particularly relevant for financial structures involving movable assets of professional parties seeking funding in more creative ways transnationally, which structures may be much less suitable for consumers domestically. The distinction between professional and consumer dealings becomes fundamental here (see further s 1.1.10 below), the former being legally increasingly transnationalised (in structure even if these transactions are on occasion still purely domestic), the latter remaining domestic in a legal sense; the former being subject to immanent law creation forces, the latter being essentially regulated and therefore increasingly statutory, based on repeat transactions and the need for public protection of weaker participants under national laws.46 The result 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 but familiar to common law, which was always more apt to think in terms of relationships as we shall see in particular in Volume 2, chapter 1, section 1.1.1. It may well be that in the EU, the DCFR with its codification approach and generally more prescriptive statist attitude is relatively suitable in the area of consumer law from which it comes, and this may also be borne out in the CESL, but its fundamental problem is its lack of distinction in this regard with the result that consumer law concepts and domestic notions of protection in this area constantly spill over into the professional sphere. This is also demonstrated in the CESL and is wholly inappropriate,47 quite apart from the fact that the contract and movable property model it still uses and which is anthropomorphic nineteenth century, are unresponsive, it will be argued, to professional operations in the international market place and the risk management needs in this regard. It has already been suggested that at least the general attitude in international dealings, therefore in the professional area, is becoming more like that of the traditional common law, at least if the move towards a new lex mercatoria for these dealings is properly understood. That is not surprising because of the traditionally more pragmatic attitude and gradual approach of the common law to law formation and its bottomup nature. Common law influence is apparent first 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 (and 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 more comfortable with multiple legal sources. It may thus be more responsive to new trends and needs and may adapt sooner.

46  The EU has legislated fairly extensively in the area of consumer law, see s 1.4.19 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. 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. 47  JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299.

26  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

Again, the common law is not given to confining system thinking, whatever the ­ odern academic tendencies in England. It can therefore look with more confidence m 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 lacks. In fact, the common law’s traditional mistrust of intellectual sophistication gives it flexibility, in the US further backed up 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. 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 rules that is statist and territorial, the same in principle for consumers and professionals. It also poses the question of the status of the other sources of law. In professional dealings, it further excludes the views and needs of all other countries. The US and Japan, but also modern emerging countries, 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 in the EU. The DCFR approach presents not only a statist, but also an inward-looking mentality, which seems distrustful of and is 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 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 2, chapter 1, section 1.6 and chapter 2, section 1.11. In the meantime the German Academic Council has started to criticise legal academia in ­Germany for its extreme ‘positives Norm- und Applikationswissen’ and demands much more attention for internationalisation tendencies and empirical and multidisciplinary investigation in legal studies.48

48 

See its Prospects of Legal Scholarship in Germany (English translation, November 2012).

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 27

As a minimum, such an effort at EU level would appear to require a much more ­extensive discussion of the true underlying issues and methodology. Earlier, ­UNIDROIT and UNCITRAL initiatives ran along similar lines, although in narrower areas (including the Vienna Convention on the International Sale of Goods) but were never ­particularly successful; they had not been asked for by the business community either.49 In Europe, only the work of the International Chamber of Commerce (ICC), particularly in Incoterms and UCP,50 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 important 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 abandoned 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 market place. The cry is here often for certainty but it may be very difficult to obtain even under English law as the recent Lehman cases in the London courts have shown.51 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, which is a more limited concept but easier to achieve. In the meantime some desire to define transnational law has become apparent in 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.

49  Thus even the best known of these treaties, the 1980 Vienna Convention on the International Sale of Goods, see Vol 2, ch 1, 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. The UNIDROIT Mobile Equipment Convention (see Vol 3, ch 1, 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 2, ch 2, 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 an sufficient conceptual grasp of newer 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 2, ch 2, s 1.5.13 and Vol 3, ch 1, ss 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. 50  See the discussion in s 1.4.7 below. 51  See ch 2, s 2.4.3 below.

28  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

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 s 1.4.16). At least as a working hypothesis one may see that it concerns here, first, law beyond states and its conceptualisation and, second, its emergence as an autonomous (bottomup) 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, historically, 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.

This is hardly a definition but underscores nevertheless the close connection between public international law and transnational (private and perhaps also administrative) law formation, probably suggesting similar sources of law and expanding Article 38(1) of the Statute of the ICJ also into the private sphere as indeed was the approach at the time of Grotius52 whose resumption is advocated in this book. This is the ius gentium which was then the law of all people and not only of states, much as it had been in the Justinian compilations, and covered both public and private law formation. It is 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 market place subject to evolving public policy or transnational minimum standards. This is then also the approach of this book, which sees legal transnationalisation as a process and way of thinking characterised by the operation of autonomous nonstatist 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 public policy concepts and requirements, which, depending on the facts of the case, compete with relevant domestic legal orders in the manner explained in more detail in sections 1.4 and 1.5 below. It also has its own dispute resolution technique or facility, mainly through international arbitration, see section 1.1.11 and chapter 2 below.

52 

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

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 29

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 and from the measure of independence this law may still claim in either system, but there is also a difference in coverage. In common law countries, commercial law is normally associated with the sale and transportation of goods (which in the English terminology are 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 such as FOB and CIF, and with bills of lading, bills of exchange, promissory notes and other methods of payment. 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, therefore also the transfer of ownership and any secured interests in these assets, for example to protect payment or raise finance, 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 primarily by a general system of property law (on which the common law traditionally lays less stress anyway). 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, which in commercial and financial law is especially relevant in the area of asset-backed financing, leading in movable property to floating charges, conditional or temporary ownership rights, and in the area of the assignment and ­payment of receivables to bulk assignments of present and future claims, and in the payment area to liberal set-off and netting facilities as we have 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 2, chapter 2, summarised in the next section.53 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

53  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.

30  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

this law is now largely statutory. Equity in this sense conferred a further 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 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 way and narrower in another. 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 in terms of lex specialis, and major topics in the commercial law area remain part of the general law or legal system. This particularly concerns the proprietary aspects (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. 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 not only in so far as method (see the previous sections) but also in so far as coverage is concerned, the common law approach provides the starting point. This means that the sale of goods, or rather the operation of international market place, 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. In other words, this new law is primarily o ­ riented towards the international market place. 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 an important part of it and are increasingly driving it. Here we also move into the coverage of certain classes of intangible assets such as receivables. Euromarket products and practices are then e­ specially indicative54 but no less relevant are transnationalised assignment, payment, set-off and

54  See, for the autonomy of the international capital markets and for the operation of the eurobonds market Vol 3, ch 2, ss 2.1.1–2.1.2.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 31

netting notions, especially the practices under the ISDA Master Agreements. While the international market place remains at the centre of developments, there is an important move towards products and services, therefore with respect to the latter 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 products. 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 3. Thus, so far as shares and bonds are concerned, the traditional (bearer and other) investment securities are increasingly being replaced by securities entitlements in paperless book-entry systems, see Volume 2, chapter 2, ­section 3.1, and are no longer transferred through physical delivery but rather through a system of debits and credits in securities accounts, a system that resembles to a large extent modern payments through bank transfers, which move here to the centre and will be extensively discussed in Volume 3, chapter 1, 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 such 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. This is the subject of Volume 3. It also affects the notions of transactional and payment finality in international transactions. 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. Financial law thus becomes the core of commercial law. As already mentioned, this also means a move into the direction of services and ever newer products and proprietary structures especially in asset-backed financing, including those using intangible assets, notably receivables or even entire commercial and related cash flows. As we shall see, they may in a modern transnationalised environment be structured at will by professional parties (subject to mere description of the assets which could be any as long as there is some demonstrable value) while the proprietary rights operating therein may be freely created but only work against certain classes of third parties, mainly the same professional insiders and not therefore outsiders like the general public. This is supported by overriding public policy requirements of which transactional and payment finality are important aspects, meaning that the purchaser in the ordinary course of business of ­commoditised p ­ roducts buys them free and clear of any such charges. The ordinary

32  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

commercial flows are protected. It is a question of liquidity as we shall see in the next section and in greater detail in Volume 2, chapter 2.

1.1.6  Legal Dynamism as a Key Notion in Transnational Commercial and Financial Law. Law as a Dynamic Concept in Modern Contract and Movable Property 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 systemic form of reasoning and law formation or application. 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 source of law among the others,55 and affects the notions of both the contract and movable property. It is therefore not strictly to be associated with the freedom to contract but also concerns the creation of proprietary rights operating against others although still subject to public policy or public order considerations, which themselves are then likely to be transnationalised as we shall see. 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 market place, which may subsequently fold into practices 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 section that this more modern transnational attitude combines a more dynamic approach to law formation, which recognises different sources of law with a more pragmatic approach to coverage, although it is centred on the operation of the international market place now extended into the direction of international finance and professional services more generally. 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, 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

55 

See for this concept and its autonomy s 1.4.9 below.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 33

of proprietary rights (the idea of the numerus clausus).56 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 stronger 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 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 2, chapter 2, section 1.10. It is a question of transactional and payment finality. This may be considered as increasingly customary in professional circles 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

56  As will be discussed more extensively in Vol 2, ch 2 and Vol 3, ch 1, s 1.1.9, 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 creation. That is the most important safeguard and constraint. It follows that in that (equitable) system, bona fide purchasers or assignees 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 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. See for 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. As we shall see in Vol 2, ch 2, s 1.3.9, it denies the strong 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. Nevertheless, there is increasingly strong evidence of a more flexible use of proprietary rights in international finance. 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 2, ch 2, 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 3, ch 1, 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 in the Netherlands, see Vol 3, ch 1, 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 that the DCFR follows here entirely in German footsteps and has been incapable of ­formulating newer insights; see the discussion in Vol 2, ch 2 s 1.6.

34  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

through evolving transnational practice. Public order, in particular, here protects the commercial flows in the international market place 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, 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 to become a prime risk management tool, especially clear in asset-backed funding where floating charges and conditional or temporary ownership rights (more particularly demonstrated in investment securities repos) 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 2, chapter 2, section 1.10. 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 leasing and repo financing and in the area of receivables and their transfer and in the interests57 that may be created in them.58

57  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 2, ch 2, s 1.9.2 and Vol 3, ch 1, s 1.1.10. In Dutch case law, for example, in proprietary aspects of assignments, the law of the underlying claim and in other cases the law of the assignment 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 2, ch 2, s 1.9.4. Although the greater flexibility it brings even in civil law systems may be treasured, it is limited to claims. 58  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 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 3, ch 1, 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 2, ch 2, s 1.11.3. The 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade suffered from a lack of conceptual clarity and innovative spirit, see Vol 3, ch 1, 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 for a uniform notification regime (or its waiver) and in its documentation or formalities regime (or their waiver). This was unfortunate, especially in

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 35

Moreover, for assets located in different countries, even now one technique is i­ncreasingly 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). It still requires recognition of such interests, in the case of monetary claims at the place of their collection, however mostly the place of the debtor, also clear in enforcement. That means that the uniformity of the legal regime cannot be maintained throughout, even 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 explained,59 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 chapter 2, section 2.4.3 below. It is the force of transnational practice that makes the difference, imposing its own logic and ultimately entering, as we shall see, domestic legal regimes also, even in bankruptcy where it is especially important, in this area buffeted by evolving mandatory transnational custom and general principle,60 and potentially supported by the New York Convention in arbitrations, and increasingly even by the transnational

the context of bulk assignments, all the more so as under Art 27 it is 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 a system based on registration of an assignment (Arts 1ff of the Annex). But 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, they 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 will result in some of the most important aspects of assignments. 59 

See for receivables, n 57 above. See for this technique more generally Vol 3, ch 1, s 1.1.10. Indeed, the final test of such newer (prospectively internationalised) proprietary structures is in bankruptcy. Precisely because bankruptcy has hitherto been purely a matter of domestic law, this area is likely to encounter the greatest problems with transnationalised property rights and other new structures. The idea of autonomy requires that in this area, too, 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 least in a non-financial CCP (central counterparty, see also Vol 3, ch 1, s 2.6.4) 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 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 3, ch 1, s 3.2.3 in connection with novation netting and its limitations in bankruptcy in England. 60 

36  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

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 in terms of transnational practice or custom. Again, it assumes and confirms a greater degree of party autonomy, even in proprietary matters, but it is also more objective, that is, 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; 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 2, chapter 2, 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, 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,61 still lacks the

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 3, ch 1, s 3.2.7. 61  See Vol 3, ch 1, 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 3, ch 1, s 1.1.9); (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),

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 37

detail and also clear academic support as to what is necessary to make such a fractured system function properly, notably in terms of party autonomy and the protection of commercial flows.62 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 pragmatic and 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 system of private law 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 2, chapter 2, sections 1.7.9 and 1.11.4. It all comes down to the legal power over future commercial and related cashflows 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 2, chapter 2, 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 and 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 which even other sources of law may resurface. That is likely to become ever more apparent at the transnational level, it is submitted, where in this area there are

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. 62  No less ‘damage’ to traditional civil law system thinking in this area came with the EU Collateral Directive, see Vol 3, ch 1, 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.

38  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

no preconceived systemic constraints either. Even pressing moral, social and especially ­efficiency considerations may then find readier acceptance in a more modern interpretation technique. That is indicative of newer perceptions, although 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 goes further and is more fundamental. It questions (as in movable property) the validity of the present model. 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 recognising 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.63 The more modern approach increasingly accepts a progression in commitment during the entire contract period,64 in which conduct and

63  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 seventeenthcentury 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 the will of the parties, typical for those days (see Vol 2, ch 1, s 1.2.1), which led to more refined offer and acceptance theories. In common law, as we shall see in Vol 2, ch 1, s 1.2.2, there is no similar emphasis on consensus or a meeting of minds 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 doctrine of consideration, which is the notion 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, and goes mainly to the issue of when the contract was concluded. 64  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.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 39

reliance,65 disclosure duties,66 a commencing of performance,67 and acceptance of risk of future developments68 also figure.69 It is possible to move even 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 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 of bargain and consensus. 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 here largely irrelevant. It more generally poses the question of when reliance by others becomes justified and starts binding that 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. The purely executive contract may thus not be a sufficient basis for a claim; there may need to be some investment or a commencing of performance. 65  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 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 thus 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. 66  In later phases of the contract, too, new rights and obligations emerge, although, as for pre-contractual disclosure 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 2, ch 1, s 1.6. As for these contractual negotiation duties, see Vol 2, ch 1, ss 1.3.12ff. Modern contract theory differentiating between the types of parties in this instance may explain the English case 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. 67  In particular, 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 enforceability than the immanent transnational law may have and the common law traditionally also has. 68  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 a risk which may be considerable, 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 2, ch 1, 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—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 force majeure concept, which, as it here concerns professional sales, may be unsuitable. As a minimum, it may still have to be interpreted restrictively. 69  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.

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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. At least professionals may be able to formulate them. In this connection, importantly, they may also insist on a more literal interpretation of their contract if not already implied in a good faith approach, especially where the contract functions as a road map and risk management tool between them.70 In terms of contract law evolution, we must then first consider the question of whether the professional (duration) contract is still based on intent (consensus) or rather on conduct and (detrimental) reliance, meaning 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. 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 concept remained typically anthropomorphic, geared towards individuals and their concerns. In modern times, this often implies a consumer law bias with strong public protection elements. The transnational law of contract, when properly understood, rejects this. It suggests two different cultures largely embodied in common and civil law respectively. It is true that offer, acceptance and intent language wafted 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, at the same time, more fitting for the corporate situation.71 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. Furthermore, as in the common law professional contract interpretation is literal and does not 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 70  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. This is sometimes called the normative interpretation technique, which goes well beyond a mere teleological one; see also Vol 2, ch 1, s 1.1.6. 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). 71  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.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 41

operating within 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 is a clear-cut defence. This is also likely to be the approach transnationally in the professional sphere, one reason being that among professionals the problem of one party 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 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 until 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 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. This 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:72 it is part of the structure of the common law of contract, supplemented by fiduciary duties and notions of reliance, and sometimes natural justice. On the other hand, 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 2, chapter 1. 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,73 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,74 which in professional dealings is not likely to occur soon. 72 

See for the different common and civil law approaches in this regard, Vol 2, ch 1 s 1.3. 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 now out of place for professional dealings in a largely corporate environment. See also n 221 below. See for the more modern idea of party autonomy and its present-day meaning and operation, s 1.4.9. below. 74  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 good faith language, Art III.-1:110. 73 

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It has already been noted that good faith but also market practices now often o ­ perate as a front behind which legal dynamism is rekindled, at least in contract. It will be argued later that in civil law, 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.75 Good faith case law can often be analysed in this manner76 and the more modern civil law literature is aware of these developments.77 Some of these ideas can also be identified in England78 although they are expressed differently.79 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? 75  In countries such as Germany, Austria, Switzerland and the Netherlands, in contract law, the modern, more dynamic approach is now 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. The problem is that consumer law thinking quickly spills over into professional dealings. This is also true of the DCFR. 76  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 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. 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, cooperation 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 2, ch 1, s 1.3.4. 77  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). 78  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 S­ tiletto 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. 79  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

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 43

They are clearer in the US, where they are closely connected with legal realism.80 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. 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 in a psychological sense leading also to the idea that a contract and its rights and obligations still have a fixed origin in time. It is followed by a prescriptive consumer law ethos which makes these texts altogether unsuitable for professional dealings and reflects a nineteenth-century model adapted to a twentieth-century consumer protection ethos, still meant to operate for all. This is a serious mistake. a case in point. Good faith notions in civil law do not reach as far as fiduciary duties traditionally do in common 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 2, ch1, s 1.3.7. 80  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 2, ch 1, 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 here 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.

44  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

To repeat, for professionals, the contract itself is likely to be primarily a roadmap and risk management tool. Good faith interpretation does not then always provide more rights; 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 while good faith corrections recede in importance. This being said, it can easily be maintained and accepted that good faith underlies all contract interpretation, including professional contracts. 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 and should move to the centre of the good faith concept itself and the liberal interpretation facility it embodies. Thus civil law still has some way to go in this respect.81 In modern contract theory, the notion of party autonomy is then recast, primarily in terms of initiative and organisation.82 It is no longer psychological and is therefore 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). In this vein, the commercial contract will often be interpreted literally. Good faith itself requires it; in such situations it may mean fewer rights, not more. Modern contract theory83 generally underwrites a more dynamic concept of ­contract law (see Vol 2, ch 1, s 1.1.4), accepted at least in more ambitious domestic ­academic writing, although in practice the notion of good faith is by no means everywhere

81 

More recent Dutch cases law appears to have relented, see Vol 2, ch 1, n 4. 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 including 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. 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. 83  For modern contract theory, see especially Eisenberg (n 80) 1743, 1747, and earlier S Macauley, ‘­Non-contractual­Relationships 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). 82 

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 45

s­ imilarly 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.84 Again, transnational commercial and financial law is here more likely to be responsive and ultimately to lead in a different way. 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 2, chapter 1, section 1.6 for contract, and chapter 2, 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 the commercial realities. 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

84  Thus German academics typically look for system everywhere, even in more open-textured 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 (Munich, 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, but also good faith’s modern multifaceted nature and its importance as an interpretation tool rather than as an objective behavioural standard, see n 75 above.

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understood as 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.85 It makes the civil law approach adapt to more modern realities, 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 or temporary or conditional ownership rights.

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 s 1.4.13 below), that is the law of international professional dealings, is less systematic and more pragmatic, particularly in its method, coverage and responsiveness. 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. The resulting law is less concrete and cannot avoid some flux if only because it is still in its formative stage and is particularly 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) and subject to a good deal of party autonomy, although of a more objective nature as explained in the previous section. But the new lex mercatoria also espouses firm notions of finality especially for payments and title transfers as we shall see below. 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 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—but for the social sciences this attitude or ideal and its idea of certainty have been fundamentally questioned, not only by Popper and his followers.86 One may also recall in this connection the reference 85  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 79 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 61 above, while in particular the EU Collateral Directive of 2002, discussed more fully in Vol 3, ch 1. s 1.1.8, may give some indication of what is to come. So may the 2001 ­UNIDROIT Mobile Equipment Convention, see Vol 3, ch 1, s 2.1.8. 86  See n 233 below.

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of Jerome Frank to the childish dread of uncertainty and unwillingness to face legal realities.87 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 easily accepted and can also be more easily handled through the use of party autonomy in choosing or amending the applicable rules, 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 even 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. Law is then seen primarily as the result of a constant dialogue in society or in the legal order it concerns, which stresses its policy-oriented nature rather than its aims of an objectively rational system that finds its main justification in its logical coherence. It can never be fully known. This is especially clear in public order or public policy considerations, 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. There is more movement and this is now more readily understood, especially by the so-called ‘legal realists’ in the US,88 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 application of both statute and precedent. Again, there is no closed system of rules or legal norms. Ever evolving values, policies and needs then 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 abuse and fraud may be overriding. But cost/benefit considerations may also become important in the operation of this law and its application, especially where it is regulatory. Although this perspective was first articulated in the US in the 1930s (see s 1.3.4 below), it has also been accepted (albeit often reluctantly) in one form or another in countries such as Germany, Austria and the Netherlands, which, in the civilian law tradition, still work in essence with a statutory text and its system. This is so 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 indeed is then used mainly to keep the existing system operative and credible.

87  88 

J Frank, Law and the Modern Mind (London, 1930) 41 and 159. See n 34 above.

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Civil law has much further to go here. Rather there are strong re-systemising t­endencies in academia at the domestic level, also already noted.89 In Europe, especially, this has underpinned a strong culture of legal positivism and confinement, which increasing has problems with legal innovation and globalisation. It has already been said that it is forced to show 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. There is here considerable tension in civil law and there still continues to operate a belief in national academic models adequately capturing and guiding reality,90 even for international transactions in respect of future fact patterns. As we have seen, 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 an often excessive concern with the practice of the law in existing models and academics see themselves here as surrogate practitioners. It has already been noted that even the German Academic Council is complaining of this attitude in academia.91 Greater fluidity in the rules raises 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 often requires international transactions to be cut up into domestic parts 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 based on the notion of law as pure technique or a logical framework, which, when properly applied, always arrives at the correct answers in respect of past, present, and future. 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 for professional parties through extended and objectivated notions of party autonomy to chart a course through the risks of their international transactions,

89 

See n 84 above. For the connected problems see s 1.2.12. below. 91  See text at n 48 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. 90 

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on both the contractual and proprietary side, in the manner that was discussed in the previous section, where it was also noted that their contract is then likely to become a roadmap needing literal interpretation. Even good faith may require that in those circumstances. That is the beginning of transnationalisation. It has further been pointed out that their proprietary structures, especially in international finance in asset-backed products, also become in this way tools of risk management that may be extended trans-border, supported by industry practices and subject to a more sophisticated protection of the ordinary course of business against hidden charges. There are also tax and regulatory complications and their management to be considered, even if parties may be able to do little about them when their transaction comes demonstrably onshore 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 that the virtual nature of much of the international flows makes it increasingly uncertain where these international transactions can still be spotted or located. It makes the search for international minimum public policy standards all the more urgent, although it is still less clear how this may also be applied eg to taxation, which remains national by its very nature, although international minimum standards of behaviour may also increasingly extend to transnational tax avoidance schemes. In the absence of a proper supranational legislator, and given the insufficiency and often backward-looking spirit of 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. As we have seen, this suggests, in particular, a greater role for industry practices or custom and party autonomy, even in proprietary matters, always subject to the requirements of the commercial flows and their promotion and to legitimate public policy and public order concerns, particularly in terms of market abuse but probably also in terms of labour and consumer protection, which concepts are then likely to be increasingly transnationalised in professional dealings 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 for the international transaction as a whole, it is submitted that from a private law perspective the emphasis should rather be on finality of title transfers and payments, therefore on transactional certainty,92 which 92  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

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is a much narrower but also much clearer concept,93 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 assumes rationality and sensibility. It rests on the idea of law as sufficient guidance for parties to determine their behaviour and for arbitrators and judges to reach a conclusion in dispute resolution. It is a concept different from 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, is upon interpretation in view of the relevant facts all opinion. This idea of certainty is unrealistic, often even undesirable, inimical especially to newly developing values and needs. One could thus argue that it is also antisocial. Predictability, on the other hand, assumes 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. It is increased by the ever greater internationalisation of trade and commerce, 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.94 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. See also Pero’s Steak and ­Spaghetti House v Lee 90 SW 3d (Tenn 2002). 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 market place 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. They are nationalistic academic fabrications. The 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. 93  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 following n 56 and more particularly Vol 2, ch 2, s 1.4.6. 94  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 45. 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.

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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 larger reliance on (transnational) custom and practices and, further, a greater degree of party autonomy at that level 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 the 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 wrong rule.95 Indeed, it appears that professionals can normally handle these risks, aided by an ability to devise better structuring and protection schemes among themselves. 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 promoted by their clients’ (a) 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).96 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 and better controllable. Perhaps we should also better understand that law is not merely about what should not be done but is mostly a facilitating force: how things can be done better. 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 noted 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 95  96 

For the notion of professional, see s 1.1.10 below. See also n 62 above.

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and is being transformed to better support international transactions and to provide a reasonable degree of predictability and 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.97 This is an important distinction. Finding structure is a dynamic forward-moving process. 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 s 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 but always assumes an existing intellectual model or system that can 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. It is closed. The new law merchant rejects this and 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 law of assignment or set-off and netting may be an example among 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 section 1.4.13 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 this law and may even try to push it forward, but 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 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 the ­argument for codification and system thinking in that manner, an issue that will be further d ­ iscussed 97  See also the reference to the work of Max Weber in n 7 above. 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.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 53

in section 1.2.11 below. It must be doubted, however, whether this is the correct perspective. In any event, 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 not possibly be so characterised. Where through legislation social values are incorporated into private law, there is clearly much to be said for democratic support, but social values enter through case law just as much. So they do in the daily legal practice and that has proven to be very necessary. Rather, codification in the German manner had intellectual coherence and system thinking at its core, 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. As has already been said, in this view, the state speaks then primarily through its academies and rubber-stamps their efforts, which derive their legitimacy from the academic effort itself and its search for ‘truth’ in that sense and its models to represent it. It should be clearly understood that legitimacy in this approach does not come primarily from the democratic process itself. Other strong claims to legitimacy may derive from law as a community product and therefore, especially in customary law, from being more truly participatory. The key argument is here that democracy does not only come in a very stylised and formal manner; there are much better ways of participating. It has already been noted also that efficiency considerations may further underpin the legitimacy of this type of immanent law formation. Although in the academic perceptions custom and practices are often declared inferior or primitive, nothing suggests that they are so in their operation. They have much to do with the infrastructure of the market place. They stand for a more diverse society and for a multifaceted and more dynamic system of law formation. They denote society’s routines, which are vital for its survival. See further the discussion in section 1.4.7 below. The view has already been expressed that the modern lex mercatoria is in essence based on a number of non-territorial 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. This will be elaborated below in section 1.5 on the operation of the international commercial and financial legal order, its autonomy and law formation powers. It may thus be seen that some of the rules as well as the structure of this new law are based on fundamental values or on more universal public order requirements; others on societal and efficiency needs; and yet others on statist action, either through a legislature or through the court system. That is the simple consequence of having different sources of law and legal diversity in that sense, a theme that will be elaborated throughout this book and about which there is nothing per se undemocratic or illegitimate.

1.1.9  The Traditional Civil and Common Law Notions of Commercial Law. The Notion of Commerciality The previous sections have looked at the different notions and coverage of c­ ommercial law in both civil and common law, and at commercial law formation at the t­ ransnational

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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 do not best serve the transnationalisation concept, which depends rather on the notion of professionality (see s 1.1.10 below). The search is then on for a substantive criterion in which the more traditional notions of commercial law need not be completely d ­ iscarded. 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 H ­ andelsgesetzbuch (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. As regards the coverage of commercial law, which differs markedly 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, it may produce limitations; the concept of commercial law may be narrower and more service-oriented in civil law as already noted. In France, there is particular importance in the distinction as commercial disputes are still brought before separate commercial courts. On the other hand, in the absence of a clear commerciality notion or concept in the modern common law, there is no single overriding criterion at all that determines the coverage of commercial law. It traditionally covers the sale of goods, use of cheques, and yielding security interests in personal property. Importantly, non-merchants engaged in these activities are covered as much by commercial law as are merchants and this is borne out by the UCC in the US.98 However, in so far as the contract 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. In England, movable property equally had its origin in commerce and is characterised thereby, finding further support in equity as we have seen in section 1.1.6 above and it then also manifests itself primarily as a risk management 98  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.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 55

tool. As such it may be less suitable for non-merchants or consumers and they may need special protections, eg against security interests created in this manner. For the common law, it was noted that there is also a difference in the approach to custom, which has a broader and more independent meaning in commercial law going conceivably beyond mere contract terms and therefore also operating in other areas such as movable property. It has already been said that 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. 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),99 covers in this connection only a number of products, specifically negotiable instruments, bills of lading and warehouse receipts, and letters of credit as well as the sale of goods. 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 payment systems and 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.100 As mentioned, in civil law countries that still have a separate commercial code, there is usually a more substantive criterion of commerciality and therefore at least in theory 99  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). 100  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 also K Llewellyn, ‘Problems of Codifying Security Law’ (1948) 13 Law and Contemporary Problems 687.

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a clearer view of what is commercial. In France, this is provided by the notion of the ‘commercial act’; in Germany by 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 fundamental distinctions have become much less relevant here also, and the coverage by the commercial codes is in both France and Germany often incidental, if not 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. 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 market place, 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 custom oriented, 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. 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. There are no longer any autonomous courts. In the US, the UCC reflects an especially accommodating approach to custom, which could 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 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 harsher 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,

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 57

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 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 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.101 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. 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 of course for the activities it covers. Here, the term ‘merchant’ remains largely undefined, however, though case law looks for an element of independence, of business activity, and of repetitiveness of the activity. Thus 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

101 

Cour de Cass Req 28 Oct 1903, DP 1.14 (1904).

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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.102 In Germany, as in France, the substantive law effect of commercial acts between merchants is thus 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 (s 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 (s 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. 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 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 laws concerning transportation on land, bills of exchange and bankruptcy.103 These 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.

102  See CW Canaris, Handelsrecht, 22nd edn (Munich, 1995) 8ff, cf also K Schmidt, Handelsrecht (Cologne, 1999) 5. 103  See, for the history of French bankruptcy, Dalhuisen on International Insolvency and Bankruptcy, vol 1 (New York, 1986) 1–60.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 59

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 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. The commercial courts hear the commercial cases, including matters of company and bankruptcy law regarding merchants. The proceedings are 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 a 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 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.104 104  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

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1.1.10  Old and New Commercial and Financial Law. 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, especially not in common law, but if, as in France and G ­ ermany, 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 gain and therefore an activity between professionals or businessmen, 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. For domestic activities, one may conclude, however, as many have, that the distinction between business (or professional) and private (or non-professional) activity as such has gradually become less important for the law. This is further promoted by deemphasising or ignoring the role 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 relevant, 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 for others, especially consumers. 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 r­ elationship 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).

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the ­protection of weaker parties but may still be much less relevant for professional ­dealings: see section 1.1.6 above and in particular Volume 2, chapter 1, section 1.3.3. It has already been said that in civil law, the good faith notion may thus 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 2, chapter 1, section 1.1.1. As we have seen, the result may be less protection for professionals. The notion of good faith in civil law 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. It has already been noted also (in s 1.1.5) 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. Again, this is particularly relevant for professionals. 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 further introduced as another 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. The additional reason is transnationalisation. Under the pressures of financial innovation and internationalisation, 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 from the rest of private law in its domestic variants. This is the new 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. As will be discussed in greater detail below, this law and its new 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 law and of its separateness from the rest of private law and may be connected also with the operation for them increasingly of a distinct new commercial and financial legal order which is transnationalised, see section 1.5.5 below. In any event, special (but not necessarily better) treatment of professionals has always remained more important in international dealings, of which the international sale of goods is perhaps still the best example, even if financial dealings may have exceeded them in importance or at least in legal attention. Even if the new 2011 EU proposal for a Regulation on a CESL may well have a different 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

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sales have indeed 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 Vol 2, ch 1, ss 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 now likely to be more consumer protection oriented.105 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 part-codification of the applicable directory law and is meant as a uniform law. As we shall see (in Vol 2, ch 1, s 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, the old-fashioned offer and acceptance language in Part II, which is still directed towards spot sales between private individuals, and 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 2, chapter 1, section 2.3.2. 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; see also the draft EU Regulation for a CESL) and the rendering of connected cross-border services. However, 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 of care 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 2, chapter 1, part II.

105  See for the concept of merchant and its importance in Art 2 of the UCC, n 98 above. As just mentioned, domestically its importance is now often de-emphasised, but internationally it is being revived.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 63

As just mentioned, much more obvious is the professionalisation in connection with modern financial dealings, even domestically, which is particularly dependent on the law of movable property. 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). 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. That is also true 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 (s 4A-108) on electronic payment, consumers are explicitly excluded. They are also excluded in Article 5 from the practice of issuing letters of credit (s 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 PECL. According to the Preamble, they apply only to international commercial contracts, a restriction not contained in the 1998 (Lando) 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 2, chapter 1, section 1.6. Thus, in these various areas, the distinction between professional and other dealings has become important, at least transnationally.106 A more radical approach altogether is the distinction 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

106  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, the notion of consumer 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 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.

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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.107 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) make it their business to do so; (b) regularly engage in that activity; and (c) are sufficiently expert in it.108 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 are s­ ummarised in section 1.1.6 above and which will be dealt with more extensively in Volume 2. 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 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 system of rights and obligations has no natural abode or situs. The result of the underlying flows being internationalised is thus a unitary legal approach for all operations in the professional sphere conducted

107  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. 108  Another feature here is 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, but it also means that these issues primarily arise between parties that are aware of and used to taking some risk and are apt to handle it professionally.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 65

in these flows in which internationality need no longer be defined. Neither needs commerciality. Arbitrary distinctions in this connection may thus be avoided.109 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, 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, but 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 is supported in international commercial arbitrations.

1.1.11  The Role and Status of International Commercial Arbitration 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 also proving to have 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.110 109  The considerable confusion 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 2, ch 1, 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 untenable in the professional sphere. 110  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 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 ch 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

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This is itself increasingly contentious and not sustainable, a fundamental issue dealt with in greater detail in chapter 2 below. In practice, in the laws of arbitration, a special approach to international professional dealings must now increasingly taken.111 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 different arbitration rules apply 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 2006.112 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 accepted in several common law countries including some States of the US, 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. The distinction leads increasingly 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 contract, which notion finds its true legal basis in transnational law or in the international commercial and financial legal order, its practitioners and public order themselves. (b) The meaning and extent of party autonomy in this connection and of the ­arbitration clause are then also covered by that law (unless expressly stated by 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. 111  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 115 and ch 2, s 1.1.8 below. See for the leading 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 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. 112  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 is covered.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 67

(c)

(d)

(e) (f)

(g)

(h)

(i)

(j)

(k)

the parties otherwise, which risks the arbitration becoming domestic). The law declared applicable to the rest of the contract does not control the arbitration, nor does the lex arbitri of the seat unless specifically so chosen.113 Transnational law thus ultimately also determines the jurisdiction of arbitrators, activated to that effect by the arbitration clause but not created thereby. This activation itself is then also a matter of transnational law and so is the power of arbitrators to determine their own jurisdiction in this respect (Kompetenz Kompetenz). The status, role and powers of international arbitrators are then equally founded in the transnational legal order and covered by its laws and public order requirements and may, as will be submitted later at least for proprietary and status matters, compare more particularly to the role of equity judges in common law jurisdictions.114 The same may be said for the related concept of arbitrability, which now also ­covers competition, securities and other public policy issues. It is equally the platform 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. Upon proper analysis, this hierarchy also applies to the transnationalisation of the applicable arbitration law itself with issues of a proper hearing and equality of parties at the top as a fundamental (due process) principle which may also affect the legitimacy of arbitrators in terms of their independence and impartiality, and the transparency of their activity and accountability for their action. ­Subsequently we have international customs and practices of arbitration law, general principles and the arbitration clause itself. In order for the arbitration to retain its international character, any domestic lex arbitri specifically chosen by the parties is also part of this transnationalisation process and that law is then no longer purely local either but preceded and varied by the mandatory and public policy provisions of the transnational law and adjusted further to support the internationality of the arbitration. This transnational status is also the cause of 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. This also applies to the reasoning of international arbitrators, which is ­determined by the international arbitration practices themselves, which leave it to these arbitrators. It leads further to the limitation as a matter of transnational public order of the impact of lex arbitri of the seat which in international arbitrations basically acquires a support function, does not supervise (except where the arbitration

113  Under the new LCIA Rules of 2014, this choice is deemed implied if the arbitration clause does not make a different choice, see for a critique ch 2, s 1.1.9. 114  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.

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in conduct and effect demonstrably comes onshore and that may be in several countries including those of enforcement), and is irrelevant as to the international status of the ensuing award. (l) 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. (m) 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.115 Thus on a better view, these awards and the arbitration agreements on which they are based, 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 derive their international currency.116 International arbitration is not then 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 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

115  This is the French position culminating in the Putrabali decision of the French Cour de Cassation (n 20), 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 the US, it is considered a matter of domestic US public policy (which generally favours arbitration) whether a foreign annulled award can still be recognised and enforced in the US. US courts exercise their discretion under the New York Convention in this manner, see further ch 2, s 1.6 below. The key is, however, 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. Support may be necessary in many countries. In fact, recognition and execution is only one example of it. Like the latter, this support is usually not necessary in the country of the seat where there are mostly no relevant asserts or activities. 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 eventualities, but even such measures have no force 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. 116  See for the Putrabali case, nn 20 and 115, see further ch 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. See further the discussion in s 1.5.5 below.

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what is happening and to guide the process of international arbitration in respect of commercial and financial dealings between professionals in our times and which will be the subject more properly of the next chapter of this volume. 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 goes much 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. 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 (Art 1.3). First, there is the reference to ‘foreign’ awards and abolition of the double exequatur, meaning the 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 commercial awards (the ‘commercial reservation’).117 The New York Convention thus limits itself 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.

117  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.

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1.1.12  International Arbitration and the Role of Ordinary Commercial Courts Compared. Need for an International Commercial Court? As has already been noted in the previous section, in international arbitrations, the transnationalisation of modern commercial law is often dealt with informally. International arbitrators tend to enjoy great freedom in conducting these proceedings and in finding the applicable law, although they are limited to the representation of the parties and their submissions and the way these parties define their dispute on either points of fact or law. Within these limits, they commonly assume greater flexibility in fashioning the rules of procedure and evidence and the applicable private international law rules wherever they may still be considered relevant. In finding or developing the applicable substantive law, they may also rely on transnational custom or principle where pleaded or appropriate and may operate with a different concept of party autonomy, which may even extend into the proprietary area, as we have seen. This is the area of the modern lex mercatoria with its various legal sources and their hierarchy, which then also covers the role and powers of international arbitrators. It was suggested in this connection, however, that especially in proprietary and status matters, as well as in policy corrections, the role of international arbitrators may become more akin to that of equity judges in a common law sense before the latter’s role became much curtailed in England after the eighteenth century when legislation took over as the more normal corrective of the common law.118 Importantly, international arbitrators may now also 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 chapter 2, sections 1.1.10 and 1.2.5 below. They are also in charge of their own reasoning in this regard. In international commercial cases, it is submitted, national courts should assume the same freedoms, but often hesitate.119 This is again an issue of powers.120 To support the new transnational law in the professional sphere, it would therefore not be a bad idea, 118 

See n 114 above. 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 but has been signed by the US and the EU. The difference remains, however, in the attitude to the applicable law, where arbitrators may be able to exercise greater freedom. 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 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). 120  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 122 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 within the explicit rejection of the balancing test of para 403 of the Restatement (Third) of the Foreign Relations Law of the United States (1987), even though a reasonable link 119 

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 71

nor too far-fetched a proposition,121 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.122 Judgments of these courts should then become universally enforceable, much as international arbitration awards are under the New York Convention

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. 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, as an international commercial arbitration tribunal, which undoubtedly has an international status, would 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. 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. 121  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 place 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. 122  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

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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 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 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, see eg DW Rivkin, ‘Enforceability of Arbitral Awards Based on Lex Mercatoria’ (1993) 9 Arbitration International 67. 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 110ffr above, see further ch 2, s 1.1.8 below and also A Redfern and M Hunter, Law and Practice of International Commercial Arbitration, 5th edn (Oxford, 2009) 188ff, somewhat softened in the 6th edition of 2015, see ch 2, s 1.1.13 below. ICSID arbitrations notably do not operate in a national arbitration framework. 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 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 to them, 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.

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of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards or as in rem judgments are habitually enforced 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 may 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 these courts may be little geared to international business and its legitimate concerns and needs. Such 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. That would remain a substantial difference. 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 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). This 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, 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. 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 ss 1.4.13 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. A similar system could be

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e­ nvisaged in matters of procedure and evidence where any domestic lex arbitri would thus be preceded by other rules, especially by the practices and customs of international arbitration. 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.123 In particular it could strengthen the public interest and its formulation and recognition in international cases. Although, as has already been noted, 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.124 Below in chapter 2 section 3.5, it will be argued that the Transatlantic Trade and Investment Partnership (TTIP) may provide a channel to move in that direction.

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 little 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 (s 1.2 for civil law and s 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 version. 123  See for practitioners’ input in limited areas the UNIDROIT Mobile Equipment Convention of 2002, Vol 3, ch 1, s 2.1.8 and the EU Financial Collateral Directive, Vol 2, ch 2, 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 1.4.19 below. 124  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 she 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.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 75

In section 1.4, the sources of the modern lex mercatoria will be discussed more e­ xtensively 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 greater universalism (at least in international business dealings). This will lead to a fuller introduction to 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 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 she or 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. The first chapter of 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 expresses the impact of the public interest in public policy and public order in ways which may increasingly be different from those exhibited by domestic courts. As to the applicable 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, eg the notion of offer and acceptance, conduct and detrimental reliance, 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 Vol 2, ch 1). In personal property, it concerns eg the rules pertaining to assignments (in connection with receivables financing and securitisations), leases and repos (as example of modern finance sales), or floating charges in secured transactions (in Vol 3, ch 1). 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 broader 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 changes or other proprietary interests that may have been so created.

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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 my view, be covered in some depth to have meaning. The focus is therefore on the laws in the major i­ ndustrial, 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 s 1.4 below) to move forward and respond to the special needs and challenges globalisation and the size and nature of the transnational commercial and financial flows now pose for the law to remain responsive at that level.

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. 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,125 even though

125 

See n 27 above.

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 77

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 and as such was 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 it took the nineteenth-century codifications to eliminate. 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. 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 fundamental separation from consumer law that is likely to remain purely domestic for longer. It has become more public policy oriented and prescriptive and remains as such also more nationalistic. 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.126 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

126  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 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, and s 1.5.5 below.

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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 basics127 and it still has meaning today.128 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.129 According to some they never really existed. However, there are many precise references to them in the later literature. Reconstituted but fragmentary and often speculative texts have been produced since the ­sixteenth 127  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 (Cologne, 1964); M Kaser, Römisches Privatrecht, 14th edn (Munich, 1986); WJ Zwalve, Hoofdstukken uit de Geschiedenis van het Europese Privaatrecht [Chapters on the History of European Private Law] (Groningen, 1993). 128  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. 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 by the plebs, 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). 129  According to the story, the Tables were produced in order to better protect the plebs who 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.

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century.130 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.131 There were soon interpretation questions concerning the XII Tables. New actions (legis actiones) were increasingly deduced from them, but these were kept secret by the caste of priests that had started to occupy itself with the judicial function. This situation is also reported in the much later Digests (see s 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).132 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 as well. From then on, for the most part, Roman private law no longer developed through the 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 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 his 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).133 It all shows that, like the later English common law, Roman law was 130 

The most widely used is Schoell, Legis XII tabularum reliquiae (1866). 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 real origin among prisoners of war (ius servitutis bello introductum). 132  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. 133 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. 131 

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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 s 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. Eventually a special praetor was appointed for foreigners (perigrini), the so-called praetor 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,134 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 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 constitutit, D.1.1.9), it became applicable also to dealings between Romans as supplementary law. Ultimately, it became the 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 where 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. 134 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.

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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)135 of sale, rental, deposit and loan legally binding (D.2.14.7).136

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 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.137 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

135  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). 136 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. 137  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.

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of law (D.1.2.2.49). In Rome, 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 P ­ apinianus, Ulpianus, Paulus and Gaius, are found in the later Justinian Digests as part of the C ­ orpus 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 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 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 the so-called 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 surrendered138 but his powers in the West were in truth at an end. 138  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

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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.139 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 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.140 The Corpus Iuris was not guided by any set of overriding legal principles and141 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

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. 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 also proved important for the status of Roman law as we shall see. 139  The most used English translation of the Corpus Iuris (Digests) is Alan Watson, Digests (Philadelphia, 1985). 140  The search for these so-called interpolations became a favoured activity in nineteenth- and twentiethcentury scholarship although it was not new, see also n 144 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 Latin texts, where surviving, were often not 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. 141  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 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. In fact 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.

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did not mean to supersede but rather gathered in one text.142 In that 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 a number of broader 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 guarding against wrongdoing; and that the Empire was in this respect one trained hierarchy of functionaries, including judges, who answered to the Emperor alone. 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,143 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.144 The fiction was that there was no contradiction in them and that it presented 142  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 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. 143  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’. 144 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 among 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

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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.145 Yet one still finds in the Digests the 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 Codex146 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. 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 s 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,147 who in this sense had already replaced the praetor much earlier, as we have seen. 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 imperfection and lack of coherence. The textual changes necessary to achieve some cohesion are now called interpolations, see also n 140 above, and have mostly been traced. 145 

See Koschaker (n 5) 128. 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. 147 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. In fact, 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, 146 

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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 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). Secondly, 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 bestknown 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 from the beginning of the sixth century AD. Thirdly, 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) in southern France and Spain (there the Fuero Juzgo), the Lex Ribuaria of the Ribuaric Franks (around 700) 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, and this was the principle 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.

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.

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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 was revived, 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.148 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 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.149 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.150 148  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. 149  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. 150  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!

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This happened at a time when society began to feel the need for better laws. The impact of the Corpus Iuris, especially the re-found Digests, which concerned itself mainly with private law, was enormous, although at first only at the academic level. Irnerius came to be called the lucerna iuris, the lantern of the law.151 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. It was imposed in the manner of modern legislation as, unlike the newly revived Roman law, it was officially promulgated (by the Pope). This Canon law was mainly 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. This 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 anywhere (except much earlier in 554 AD in some parts of Italy) and since there was in any event no single (or indeed any) legislator competent to enact Roman law, 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 bits and pieces of it everywhere 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.152

151  152 

See Odefredus, Lectura super digesto veteri at D.1.1.6. See text at n 143 above.

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1.2.5 The Ius Commune and its Relationship to Local Law, 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.153 Again it should always be remembered that this revived Roman law was never 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.154 It is true that the Digests themselves (D.1.1.9) had stated

153  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. 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 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. 154  See Paul Koschaker, Europa und das römische Recht (Berlin, 1947, reprinted 1953) 191.

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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 law, 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 law, therefore the problem of priority of the various sources of law.155 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, this was not necessarily believed to apply to new statutory law,156 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 ignored.157 That became the rule even beyond the reach of the Canon law in most parts of Europe

155  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. 156  There was a problem in that originally the Emperor, who was German, was 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 154) 141. This maxim belongs with another: quod principi placuit vigorem legis habet. It is the paradigm that any sovereign can make law, see further also nn 165 and 185 below plus accompanying text. 157  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 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.

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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,158 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, but 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 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.159 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.160 There was another aspect to this development. Even where local law prevailed, at least as long as it was 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

158 

See also Instruction Court of Holland, 20 August 1531, GPB II, 703, Art 81. The German writer and philosopher 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. In modern times it is reminiscent of the caseload of the Human Rights Court in Strasbourg. 160  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 167 below. Like Bartolus, they started to look at specific legal structures such as contract and property, as such followed by Donellus before Grotius. 159 

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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 also in commercial law where there were many city 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.161 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 Code Civil in these areas.162 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 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 laws and

161  See also the practical eighteenth-century treatise of Bourjon, Le Droit Commun de la France et la Coutume de Paris Réduit en Principes. 162  See n 178 below.

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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 (Art 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 (Art 5).

1.2.6  The Early Evolution of the 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. 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 1.4.14 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.163 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 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 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

163  The sophists only 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 acquires a divine meaning in terms of beauty and goodness of which there was intuitive knowledge, although 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. Only in Plato’s philosophy do beauty and goodness rise to the notion of 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 remains, however, the polis that is the expression of this higher idea and presents a way of life outside which there can hardly be virtue. The concept of polis rises here to a religion or an all-life experience that had in this view a tendency to descend into chaos. It must save what can be saved in order to maximise virtue in its citizens. Private law also had that function and does not then 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 always came first and had the last word.

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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 had already been the essence of the Greek philosophy of the Stoa, which was the first to abandon the central idea of polis and expounded the notion of rationality of Socrates.164 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. 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 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 as well and 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. There was, however, agreement with the Stoa in so far as 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.

164 

See the previous footnote.

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In Roman times, there had been several more basic ideas as noted in section 1.2.3 above, but one dominant religious force had never been 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. It has already been mentioned that in the Justinian Digests, the ius gentium becomes the universal (private) law and is 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). The more fundamental notion of natural law was used to broaden and develop this ius gentium as universal law further, was considered superior, and believed to be itself 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 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 scholastic 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, 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 impact 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

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and property. Aquinas’ Human Law was the rest, including Canon law and the Corpus Iuris, as well as domestic laws,165 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 to have universal application and was considered directly effective. It 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, but had also received strong support in some scholastic writings, especially in Spain, although then still driven by

165  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 156 above and 185 below plus accompanying text.

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religious fervour.166 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 mostly expressed as directly applicable fundamental and general legal principle (see s 1.4.15 below) may no longer be perceived as immutable, even in its fundamental principles, for example in terms of human rights and other social values, it remains key in all more fundamental 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 1625,167 was that all people had a similar inner understanding of what was good or evil168 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.169

166  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 (Cologne, 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. 167  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. 168  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. 169  See n 166 above.

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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.170 It led to a preference for the 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 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 criticism plus, eventually, the addition of general principle found in domestic laws.171

170  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, 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. They 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 a wife and children; (c) the right over one’s property; and (d) the right to claim against others. Even so, 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). 171  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.

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The ­separation from theology altogether was achieved in this school by Pufendorf in Germany, who came 50 years later; 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.172 This was the time of the Vernunftrecht, the logical–mathematical deduction or mos geometricus of the law. It achieved a degree of abstraction in rule formulation that was 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 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 commonsense 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.173 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 n ­ atural 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 expansion. 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,174 but also in local laws.175 This proved a vital departure and allowed for the development of an intellectually 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,176 published in 1631 but written (in Dutch) during his captivity

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. 172 

See Paul Koschaker, Europa und das römische Recht (Berlin, 1947, reprinted 1953) 249. It solved the problem of the ranking of state-imposed law: see s 1.2.8 below. 174  See also n 153 above. 175  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 (1621) [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). 176  RW Lee (trl), Introduction to Roman-Dutch Law, 2nd edn (Oxford, 1953). 173 

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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,177 Domat and Pothier in France,178 and by German rationalists like Wolff, who, as just mentioned, increasingly espoused a logical mathematical approach.179 The price was ever-increasing 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, but 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 Pandectist offshoot eventually led to the German Code of 1900 (the BGB). However, by that time 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. Natural law revival of this nature tends to stand at the beginning 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 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.180 In this book the term ‘fundamental and general principle’ is 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 1.4.14 below.

177 

S Pufendorf, Ius naturale et gentium. J Domat, Les lois civiles dans leur ordre naturel, and R-J Pothier, Traité des obligations. 179  C Wolff, Ius naturae, methodo scientifica pertractum; see also text at n 172 above. 180  See also s 1.4.14 below. 178 

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Another particular achievement of the natural law school, which 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. In the articulation of the relevant norm, the configuration of the facts themselves plays 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 ss 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’.181 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, 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 some discussion of the ascent of state power in private law formation, first to achieve specific political objectives, but ultimately on the European Continent to nationalise all private law formation through codification. As mentioned in the previous sections, in the approach of Grotius, who wrote his major works when the devastating Thirty Years War was waged 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. It applied to private citizens and states alike and did not therefore fundamentally distinguish between public and private law. Natural law contained the basic principles. In Grotius’s approach, positive law could be more confined but also more expansive than natural law or order. That was the area of the ius gentium or voluntary law based on rationality and utility meant 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

181 See Respectfully Quoted, A Dictionary of Quotations Requested from the Congressional Research Service of Congress (1989) 191 (from a Yale lecture of 1921).

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very much reminiscent of present-day public international law (Art 38(1) of the Statute of the International Court of Justice) and in the approach of this book of modern lex mercatoria law formation. It posed, however, the question to what extent the state could override the ius ­gentium or even the natural law.182 We may think first of local laws and custom. The latter were in principle subject to this higher natural or rational law, as we have seen, but state law especially could go against it and it was then likely to be localised. This raised the issue of its true legal status 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 is 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. It is closely connected with the extent of state power, nationalism and territorialism in the law, and then also affects 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 of eighteenth- and nineteenth-century thinking on the European Continent. It was 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 democracy, rule of law and human rights. 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 authorised 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 depends on statutory licence and description. Fundamental and general principle (or natural law) is also ignored unless especially authorised to operate, most likely in contract interpretation but not elsewhere, notably not in property, tort or unjust enrichment. That became part of the codification ethos.183 Thus fundamental principles (international or other), custom 182  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 173 above. 183  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 148 and 155 above, but it became a more fundamental scientific German academic ideal in the nineteenth century and ultimately a political issue. It ignored all other law formation and sources of law or considered them inferior. As we shall see, through their academies, states are here 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 here: 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.

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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 existed no concept of a state being the fountain of all law. 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, as we have seen.184 But in private law, such intervention of the state was thought only to be facilitating or dictated by public policy or order requirements, and was relatively rare at the level of the sovereign, although there were city ordinances of all sorts especially also in commerce as noted before. 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 also 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. This confined a sovereign’s power in law making considerably, although there was even then the idea that in truth only sovereigns could validate laws, precisely because of their divine right.185 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 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 (cf De Iure Belli ac Pacis II, 2.5); and more importantly (b) unless the public interest required otherwise. In that case,

184  See n 156 above. Even in medieval thinking, states could impose the Human Law, see n 165 above, although they seldom did. 185  cf W Ullmann, The Medieval Idea of Law as represented by Lucas de Penna (London, 1946); see further the comments in nn 156 and 182 above and n 240 below.

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there was no sanction against a state that behaved contrary to natural law (cf 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 in that of Grotius’s successor in the natural law school: the German writer Samuel Pufendorf (1632–94).186 In Hobbes’ view, rather than there being a natural instinct of people wherever they were or 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).187 To constrain the right of the strongest, people had to impose laws upon themselves. These became the sole sources of justice, which could only operate through a state (after the natural condition had been abandoned).188 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. 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. Natural law has a meaning only if it has become positive law upon the order of the sovereign.189 International law, as the law between states, has no autonomous place in this system either. Hence its struggle for legitimacy ever 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,190 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, centred on notions of freedom or autonomy, equality and 186 

De Iure Naturae et Gentium (Libro Octo). 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. 188  De Homine X.5. 189  See n 186 above, at VIII.9.5. 190  J Locke, Two Treatises of Civil Government (1690). 187 

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ownership. 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 even 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.191 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 other dominant nineteenth-century­ ­philosopher, Hegel (1770–1831),192 confirmed this view, in which law could be no more than positive (statist) law.193 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 ­prevailing over natural law to the notion that, ultimately, all law emanates 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.194 ­Montesquieu (1689–1755) had still thought that private law was connected with regions, climate and customs,195 but the Philosophes of that time, who were at the 191  I Kant, Metaphysik der Sitten (1797) 340, 341; Mary Gregor (trans), The Metaphysics of Morals (­Cambridge, 1991) 148. 192  G Hegel, Grundlinien der Philosophie des Rechts (Berlin, 1821) paras 211ff; TM Knox (trans), Hegel’s ­Philosophy of Right (Oxford, 1967) 136. It should be noted, however, that Hegel was no supporter of von Savigny and in the same book repeatedly rejected the teachings of the Historical School as atavistic, unworldly and ignorant of present-day needs and interests; see also 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 notes the conservative, mystical and even reactionary traits 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. 193  Vattel, writing in 1758, ultimately considered the state not bound by the will of anyone else 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 1.4.15 below. 194  See G Bruun, The Enlightened Despots (New York, 1967) 32; see further also G Himmelfarb, The Roads to Modernity (New York, 2005) 181ff. 195  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.

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heart of the French Enlightenment (and Encyclopedie) movement thought differently and supported the search for universal (intellectual) principle.196 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 ’197—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,198 defined by the social contract which made citizens outside it antisocial.199 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.200 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.

1.2.9  The German Historical and Romantic Schools. 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 196  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. 197 Sieyes, Qu’est-ce que le tiers état? (1789, republished New York, 1979) 10. 198  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 of the sovereign. 199  J-J Rousseau, The Social Contract, Vol IV(G Cole trans) (Chicago, IL, 1952) ch 8, 439. 200  Lettres a ses commettans (Paris, 1792) II, 55.

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thought about the law, and 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 empirical research and interdisciplinary studies, 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 more generally. It has already been noted that in this approach, the law is 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. This is clear especially in interpretation and gap filling and probably clearer still now that we must also think of the law´s transnationalisation. At least in the American idea, law moves with society, the system is open and intent on remaining relevant for the next generation. The previous discussion introduced in this connection the subject of codification of private law in civil law countries, especially in France. Before finally coming to this topic more broadly, the German variant, the German Historical School of the nineteenth century, must be mentioned. It preceded the codification in Germany that came in 1900, about 100 years after the French one. 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. It was intended to develop it further as the living law operating in Germany at that time while even then the Roman law of old had already acquired a more national flavour in the process. The Historical School overlapped but was separate. It became the school 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 1814,201 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),202 the 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, even 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 its system as well as the works of Pothier on which 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 later 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

201  202 

FC von Savigny, Vom Beruf unsrer Zeit für Gesetzgebung und Rechtswissenschaft (1814). FJ Thibaut, Über die Notwendigkeit eines allgemeinen bürgerlichen Rechts für Deutschland (1814).

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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. 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 and was mainly interested in Roman law, which he admired. This was not the ius commune version either,203 even less the work of the Pandectists—it was probably 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.204 The rediscovery of the Institutes of Gaius in 1816 clearly helped in this connection. There were thus some glaring contradictions from the beginning. First, this effort was hardly German or nationalistic.205 It was notably not sociological either, or value and policy conscious. Rather, the true aim appeared increasingly to be the formulation of an intellectually coherent system of law derived from an analysis of the old Roman casuistry. Indeed, intellectualisation along national lines seemed to become the objective in order to raise the law to a higher level, which was then not to reconstruct the original Roman texts either. This led to a second contradiction in that the intellectual 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 of a domestic nature; see for system thinking more particularly also section 1.2.12 below.206 At least in its aspirations, this went far beyond the work of the

203  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. 204  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. These 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. 205  There developed, however, in Germany also a Germanic wing in this movement, led by G Beseler, ­Volksgeist unter Juristenrecht (Leipzig, 1843), and later by O Gierke, Die historische Rechtsschule und die Germanisten (Berlin, 1903). Their argument ultimately centred on the quality of the ius commune and its further progress. It was ridiculed by von Savigny and Puchta, but, in this Germanic wing, the ius commune and the local laws were thought to provide a better basis for German codification than Roman law casuistry. This work also has importance for the development of the modern lex mercatoria as non-statist law because it showed (against Puchta and his statist views) and relied on the autonomy of community law (Genossenschaftsrecht), which was not contractual (as corporations were considered to be) but indeed communal (Associationsgeist). Here the idea of the private law and public interest with its objective (correcting) requirements are founded in the community itself. In a Germanic way, the private and public sphere are then closely related and not necessarily seen as opposites, but the private sphere remains distinct and its law autonomous and diversified. 206  It became the true successor of the Vernunftrecht, see text at n 172 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.

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Pandectists. It was not necessarily practical but pretended to a higher form of r­ ationality. That would have suggested an international reach, as natural law had claimed, but it aimed to be parochial at the same time. It follows that there was a strong intellectual overlay in the German Historical School from the beginning, but also much tension in the underlying concepts. Ultimately this approach became a particular German intellectual exercise as a prelude to the BGB of 1900.207 The science of the law of this type became considered as a national source of law itself and ultimately came to embody another typical nineteenth-century German ideal of law as system and its application as mere technique, not unlike the ­achievements

The philosophical concept of realism assumes here that these a-prioristic abstractions reflect nature, also in the social sciences, meaning in particular that all order that is so found was already there and is intrinsic. 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). It allows for little disproof and whether or not it has meaning in real life is not an issue. Another view is that these academic models remain volatile and are there merely to simplify our perceptions of the world and to increase our ability to improve it but they change all the time. In that sense they may be supported by ‘systemic 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 Decision-Making Processes: Advisors, Decision Makers or Irrelevant Actors? (CUP, 2014) 19. See earlier JG Ruggie, ‘International Responses to Technology: Concepts and Trends’ (1975) 29 International Organisations 557. See for paradigm change also n 232 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 (New York, 2010). The danger is that these communities 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 becomes subjective and communal opinion (seeking), critical of others but uncritical of itself, see, eg, The Intergovernmental Panel on Climate Change (ICPP) often held out as an example of a systemic community. The EU is sometimes identified as another one, but is prone to cliché thinking and deadlock, not capable of rethinking anything. Such communities may easily be hijacked by a small group of insiders who rely on deference to science and pretend to a politically untainted form of credibility or scientific rationality. It remains to be seen whether such a systemic 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. PW Haas himself has noted that despite a veneer of objectivity and value neutrality the findings remain highly political. This discussion is not new and has gone on since medieval philosophy under the name of nominalism and realism. Realism suggests in this connection that the academic model indeed presents truth. Nominalism held the opposite. Although in this 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 was 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 true in the social sciences, including the law, where there may be no discoverable truth 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. These issues are relevant but cannot be discussed here much further. See, for an interesting contribution and the damage the scientific idea of law in this sense may have done, also 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 and also the works by K Popper, cited in n 233 below. 207  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.

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in the natural sciences. This may also be seen as the very product of G ­ erman ­idealism,208 ultimately descending into the idea (not, however, universally held but much followed) that through a scientific model akin to that of the natural s­ ciences, a set of legal rules could be distilled that had validity, reflected reality, and held in it the solution to all 208  German idealism is often 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 commonsense observation and it suggested a speculative feature in this endeavour. It was not merely deductive or analogical and extended into model building. It could become quite experimental. In the Hegelian view it was the progression of the spirit through dialectical reasoning that gave us this insight. This kind of idealism was concerned, in particular, with the development of modern science and its insights, its impact and effect and with our capability of steering newer realities in this manner, which might, however, never be fully known (in Kantian parlance the world of the noumenon). Very 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. The world could in any event be improved by searching for them even if they might never be fully known. This then became the scientific ideal. 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 reveals here the ultimate truth in the real world. If the facts do not fit 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 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. In art, the result was (confusingly) called naturalism, meaning a scientific or academic depicting of reality, see A Hauser, The Social History of Art, vol 4 (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, 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 nominalism (see n 206 above) and Romanticism (see n 216 below), this is not the place further to elaborate on these important ideas or currents 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 eminence 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 48 and 91 above) and started to ask for more transnational, empirical and interdisciplinary research. 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 or, in the law, practitioners` handbooks. Innovation and experimentation became secondary themes; they are deemed speculative and often unacademic. Ultimately this endeavour crystallises around the very question whether there are innate structures in our thinking and 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— 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 perhaps common sense? Is the human mind indeed capable of understanding all or is it too small or limited for this? 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.

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legal problems. It was fair, society promoting and efficient by definition. No further research was necessary.209 It is this intellectual thinking and model creation that was at the heart of the ­German private law codification210 and became much of the codification philosophy

209  Scepticism appeared, especially in the works of Dilthey (besides Nietsche and earlier Schoppenhauer). 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. The concepts behind an intellectually highly 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 still claimed to have all legal answers and to solve all problems. Logic, deduction and analogy remain 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 was the start of this; see also K Larenz Methodenlehre der Rechtswissenschaft (Berlin, 1979) 19n and J Ruckert, ‘Savigny’s Konzeption von Jurisprudenz und Recht’ (1993) 61 Tijdschrift voor Rechtsgeschiedenis 65. Thus in law, the nature of the system and legal system thinking became a more particularly German concern, especially vivid in the early parts of Von Jhering’s Geist des roemischen Rechts (auf den verschiedenene Stufen seiner Entwicklung) (1818–92). It pre-empts 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 discussion in the text preceding n 203 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, see further the discussion in 1.2.13 below. 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 thinking, J Galtung, ‘Structure, Culture, and Intellectual Style. An Essay Comparing Saxonic, Teutonic, Gallic and Nipponic Approaches’ (1981) 20 Social Science Information 817. In this environment, one problem became 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? 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 an intellectual framework, whose origin, foundation and purposes were unclear, see further n 233 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 realism, at least in international commerce and finance and what the role of legal scholarship still was to be, see also section 1.3.6 at n 346 below. Is legal academia still able to fundamentally rethink anything? See further also the discussion in s 1.2.13 for Germany and for modernism and post-modernism also the discussion at the end of s 1.3.7 below. 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. But these e models must constantly evolve, nothing is fixed per se, see also nn 206 above and 233 below. Academia must be innovative and look for ever better ways in a fast-changing environment. Without it, it is nothing, but nothing is absolute. 210  Thus in law, the nature of the system and legal system thinking became a more particularly German concern, especially vivid in the early parts of Von Jhering’s Geist des roemischen Rechts (auf den verschiedenenen Stufen seiner Entwicklung), see n 209 above. The idea is 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 that may still be considered dominant today; see also the reference to Karl Larenz in n 6 above, although in a later phase of his life, von Jhering himself started

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and interpretation based on it not only in Germany but even in countries like France211 and Austria, which had codified much earlier, the idea therefore being (as it were, retroactively) that all these codes presented or were based on a sufficiently clear idea of the reality of human behaviour and endeavour, which could control and guide it completely and thus produce the right answers in terms of justice, social peace, efficiency and growth for the past, present and future.212 The downside was that the law became set in concrete in nineteenth-century models that were given excessive weight and were hard to escape. Since, as there was no proper all-German legal science, the required analysis and ­system (and, even more the ability to create it) was considered lacking in Germany in the early nineteenth century, the moment for a German codification was not then thought to have come. System thinking and analysis, and the creation of a proper ­German intellectual analytical ability to arrive at it, 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).213 At the same time, the German Theodor Mommsen unravelled the Roman constitutional and criminal laws, and sought nineteenth-century conceptual inspiration in them, at least for Germany. In the area 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. As mentioned before, it could not be avoided that in von Savigny’s search for system, the reference to Roman law seemed to contradict the national spirit or Volksgeist which,

to further 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. 211  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, especially 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 232 below. See for the role of empirical research s 13.6 and n 347 below. Rather, it is submitted, the social sciences 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. 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, but it all remains to be seen and one cannot be sure. 212  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. 213  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).

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in the theories of Fichte with his glorification of the active, dynamic and imaginative (Germanic) self (ultimately best realised within a state outside of which individuals could not achieve their purpose or attain their aspirations and freedom),214 came to be seen to be behind any proper legal system, which thus became national. Indeed under Puchta, the Volksgeist idea 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. The Volksgeist started to be concerned with form rather than substance.215 In such a state, the idea of the autonomy of private law was abandoned in favour of state formulation of the basic tenets of all law, even of private law, and 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 matter in as far as formulated by the state. This is the nineteenth-century Romantic216 214 

JG Fichte, Sämtliche Werke iii (Berlin 1845/46) 47/8, and vi 306. The question became whether the Volksgeist was the national spirit (or perhaps an assortment of national spirits), which prevailed autonomously, or was rather 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 an immanent law (even if Roman) 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 the raison d’etat or public policy? Or was it 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 be a Romantic notion that proved to be largely anti-industrial, anti-capitalist, anti-big city, and in that context sometimes even anti-Semitic, see also the comment of Klenner in n 192 above. 216  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 therefore, if properly understood, was in truth rational; see for an introduction Isaiah Berlin, The Roots of Romanticism (Mellon Lectures, 1965–66, edited by Henry Hardy and first published in 1999). Romanticism reacted against this. Naturally, there is here considerable tension in legal matters as all law, as well as legislation, is based on or assumes some sense of order even if it redirects it. To repeat, the key would always appear to be in the true knowledge of reality and how it works and whether such knowledge can be reliably attained. See also the comment at the end of the previous section and in the footnotes above. In romanticism, the true accent is on will or creation, not primarily on knowledge, therefore it is based on the idea that everyone creates their own universe including its values and that is it. It means that 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. Reality 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. In this mindset, the state also becomes a mystical institution, and so is the law that it creates, but it can do so at will and there is, at least as far as human behaviour is concerned, nothing beyond its control and there are no innate rules or limitations. Soon it was thought that there was no other source of law or rationality outside it, nor were there any freedom or values beyond it. Man can only live in society. The origin of these ideas are already in the Aristotelian 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 214) and in Hegel (n 192) 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. The action is not then primarily on knowing society but on recreating 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. Late nineteenth-century private law codification may be seen in that context, especially in Germany, and is not then strictly 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, can be recast and 215 

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and German idealist inheritance and overlay, which often overlapped and in which the Volksgeist itself becomes superfluous except for its nationalism, while 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. The most significant formulation and intellectual underpinning of this result may be found in Hegel’s Philosophy of Rights (1821),217 an extraordinary work that may be deeply admired for its profound fantasies. In Germany, these notions and feelings ultimately came together with those of the German Historical School even though balanced at first by a laissez faire attitude, which did not aim at transformation but rather at reform. That was the background of the German codification in the Bürgerliches Gesetzbuch or BGB of 1900.218 Especially after the unification of Germany in 1870, the need for a national German codification was particularly 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 problems, although the result was ultimately rather conventional219 and, often following Pandectist thinking, not always considered to have been a great improvement.220

systemised at will. As such, it can fully control social realities (whatever they may be) for now and the future. The system of law is then the one we make, and its values are the ones we give it. This is strongly Romantic and remains another dominant strand in the codification ethos besides mere system thinking, and was probably always more truly the aim of German idealism; see n 208 above. 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 could lose out against politics. 217  See also n 192 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. 218  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 Muehlsteinen, 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. Later amendments to the BGB further destroyed any idea of one particular leading concept but the approach remained unitary, one system for all. 219  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 R ­ echtswissenschaft (1878). 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. 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 218) and also the comment of G Teubner in n 208 above on the German dread of legal experimentation after World War II leading to an extreme positivism even in German legal studies. 220  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 either; 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

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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.221 These general notions were thought to operate in all legal 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 text following note 206 above and 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 became closed and was everything.222 This is not objectionable as long as it is empirically tested for its continued self-sufficiency and has some appreciation of the incompatibilities, contradictions and insufficiencies where the 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 was 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 (until formally amended).223 In this world, empirical testing was neither necessary nor relevant; this law was complete and covered 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, 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 third-party 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. Commercial law concepts, developed in the ius commune, were also ignored. They were left to a different branch of the law (so-called Deutsches Privatrecht). It 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. 221  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 216 above. Although the general will embodied in the state was supreme, individuals in the space left to them could create their own environment in any way they wanted. So von Savigny, see Vol 3 System des heutigen römischen Rechts (1840) 257. This emphasis on the will (rather than ratio), often in a personal anthropomorphic sense, already to be 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. The subjective interpretation technique that follows from this notion of ‘will’ subsequently had to be tempered, however, 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 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 2, ch 1, s 1.1.4. 222  See also n 208 above, n 233 below, and s 1.2.11 below. In n 84 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. 223  See also text at n 206 above for the early tensions this created, even in Germany.

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never mind how out of date it might have become—it remained the pretence. 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 local elites, and is the enemy of a dynamic forward-moving world. Whatever the early objections may have been to this system thinking, which eliminated all other 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 s 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. 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. This was increasingly supported by newer ideas about the makeability of society through political action, then always national. Secular natural law, which had first 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, also for the German BGB of 1900, and all others,224 but it was 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 Voltaire, 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

224  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 37.

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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 (Art 8); henceforth it would be the same for all residents (Art 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. 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),225 in Italy in 1942, in Portugal in 1967, in the Netherlands as late as 1992, and in Brazil in 2002. These latter five 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.226 It was all quite different

225  The Law of Obligations was in fact already codified in 1883 and remained separate from the Code but was substantially amended in 1912. 226  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

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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 approach 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 1800,227 although its true impact has never been properly established and was probably exaggerated later. Crucially, ­Portalis stressed that a code of this sort 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 s 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 preset 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 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 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.

l­awyers and of the poor state of the knowledge and administration of the laws in his 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. 227  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 228 below.

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As mentioned before, France and Germany also have commercial codes operating besides the civil codes, always as one part of the same ‘system’, although their contents differ considerably (see s 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, 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. Yet even in France, bankruptcy law was 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. In the Netherlands, 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. As has already been observed, the consequence of nationalism was that civil law as we know it today is not one single family of law. It stands for the codified private law obtaining on the European Continent 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, but so also could be the laws of non-civil law countries. Not even shared ­origin in Roman law and in secular natural law school thinking makes a difference, while general principle or custom also do not bind them closer together. 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. It is not at all uncommon, therefore, 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 rationality, as we have seen, their status and approaches were different. The Prussian Code was 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

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­ ivotal role. The Austrian Code, in its Article 7, allowed in this connection still for p recourse to natural law if there were neither precedent nor other related statutes to resolve the issue. 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,228 although in the discussions it had been observed that Roman law would always continue to have the persuasive force of the raison écrite. 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 is unique, although ostensibly limited to gap filling, assuming here a fundamental difference of interpretation. But this facility is seldom used in Switzerland and has not led to a more dynamic approach to private law formulation. 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, expression of reality that could be so guided and controlled for the greater benefit of all. The basic texts are not 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

228  See Fenet (n 227) xcii–xciii. The views of Portalis are also otherwise interesting, see his ‘Discours ­ reliminaire sur le projet de la commission’, Fenet II 466: Codes are not made but move with the people. The laws P 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.

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analogy 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 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 hardly the original idea in France. In the German manner, it results in a closed system of legal normativity. 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, and Parliament must rubber-stamp these academic efforts and not enter own ideas lest politics destroy the coherence of the system. In this mindset, political input would be tantamount to interfering with the laws of Newton. The needs of the practice of the law take second place. Logic is at the heart of this endeavour and will fill the gaps or missing links. The outcome is not questioned—it is just, promotes social peace and efficiency per se—and empirical testing is not considered decisive. As we have seen, 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 1.4.15 below. It follows that all civil law codification tends to be highly ambitious but may ultimately prove to be unrealistically pretentious. Law becomes professorial. In modern times, especially in the area of personal property and the law of contract, it may have fallen far short of what is now required, see section 1.1.6 above, at least in commerce and finance at the transnational professional level, 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.229 Rather, the challenge of modernity and its progression (see further s 1.3.7 below) is constant renewal and innovation, including in private law, but the existing codified systems, at least for professional dealings, are hardly able to cope. 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. 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. Here we need education to show better ways and to understand that what we have may become a hindrance. This requires a

229  It has already been suggested in the text at n 20 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 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.

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higher level of thinking that may well surpass much present academic thought, which prides itself exactly on that toolbox. Whatever German academic thinking may have produced in nineteenth-century thinking, it was hardly meant to produce that result. It may then be necessary to revisit the whole concept of civil law codification and the methodological approach to law formation and application, especially where a form of unified private law is now considered for the entire EU, including England, even for transnational professional dealings. This would be a proper occasion now that the operation of other autonomous sources of law has become increasingly evident in the international practice and a separate commercial and financial legal order has been spotted, seen in this book as the essential aspects of 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 remain its philosophy. Within the EU, transnationalisation is then still pre-empted by a nationalistic, statist law-formation ethos. It is very different from the approach of the UCC in the US, which promotes legal dynamism and diversity and respects the 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. But this rejection of other more dynamic non-statist sources of private law was never fully accepted, even in civil law,230 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 ethical, social and efficiency concerns, unavoidably re-entered the equation at the interpretational level. So, what was so utterly rejected at the front door returned through the back door. The need for considerable freedom of interpretation to maintain the civil law pretence to completeness led to making use of all these sources, whether or not considered independent or autonomous, regardless of how legal scholarship reacted.231 Secular natural law tendencies thus also survived, but it was seldom admitted that this could happen and system thinking remains paramount, at least in the German tradition. The proper role of academia is—it was submitted—indeed to formulate ever better hypothetical models,232 primarily to order the mass of information that comes to

230 

See also text at n 252. below. See for this reaction especially in Germany also n 84 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. 232  See n 206 above. By what the search for these academic models should be guided is a key problem. ­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 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 (Chicago, 1996), who defines a paradigm as 231 

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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.233 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, London, 2002) was also concerned with paradigm shifts but sees them still as very much 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 very apt to produce cults. The teaching of the positive law or the law as it is may here not 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, and therefore the law of tomorrow, not teaching and expanding the existing ‘system’. 233  See for the relationship with reality, the text at n 206 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. 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 scarcely aware and which are often cultural but may also be generational. Even for academics, these are often not the subject of empirical study. 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, either in law formation or operation. It may also explain the haphazard way some academics opt for one approach, others for another. The effects can often not be predicted and are in any event muddied by unforeseen consequences. It is another way of saying that academics may search for ‘truth’ but they are unlikely to find it. 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 and 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 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, so that it can as such never cover the totality of life (or reality) and its experiences, let alone their ongoing evolution. Facts in an academic sense thus become contextual fictions. It may be argued that only transcending philosophy captures them as they are or at least may be able to demonstrate why we must beware. This being the case it is not surprising that in the law, one particular tension arises here 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, in academic system thinking, we work first and foremost on the norm side and devise models of norms that 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 an entirely different matter. It may be argued that, 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; see also the discussion above in n 77 and in s 1.4.1 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 never elaborated for the law), reference may 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 indeed that we can study the predisposition 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 thus become a moral issue or at least a matter of individual responsibility. Paradigms assume such choices and they may then remain largely hidden. Finally, in Hayek’s work, The Sensory Order (Chicago, IL, 1999) 230, the limits of reason in this context are 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 control. This is Plato, Descartes, Hegel and Marx. The other approach is critical rationalism, which challenges the view that reason is capable of fully ­understanding

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This a­ ctivity may at 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 posited that models of this nature remain 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 should lead to academically induced innovation. It is the task of academia everywhere to test them for their usefulness all the time and improve them. It has already been noted that this is mostly not happening in 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 here. This is an ever more doubtful proposition that diminishes the true role of academia at the same time: academics writing practitioners’ handbooks and taking pride in it! Even research institutes concentrate on rendering opinions about the positive law. In education, the tool box idea prevails and academics behave as if they were practitioners. This is not to suggest that this activity is not important, only that it is not academic. It is also not to say 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, also mostly nineteenth century. Again, a true academic approach looks for new models all the time that may better capture realities 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, it enables us to contemplate alternatives to nationalist codifications, especially the revival of the lex mercatoria as transnational law in the professional sphere, and to suggest its structure and operation. In that context, it is also possible to find room for 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, it may also give us additional tools to respond better to present-day 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.

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 but can come together eg in the market place or in similar environments. The result is a spontaneous unplanned order, which is the best we may be able to hope for. Central planning is bound to fail. There is no way 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 types, while causation acquires a non-automatic, non-mechanical and non-deterministic meaning. Much is random in our social developments and its events.

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1.2.12  Modern Policy Arguments in Favour of a Statist and Static Attitude Towards the Formation of Private Law. Deficiency in System Thinking. Misunderstandings Concerning Democratic Legitimacy and Certainty As was explained before, 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 four 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 this law 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 democratic process; 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 section 1.1.7 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 the same: extrapolation of past experiences, or alternatively developing a view of what is needed in an ever changing world and moving forward with it. 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, that is in private law, develops itself all the time through its different sources, therefore in essence autonomously, although aided and stabilised by legislation or treaty law if there is an obvious and useful need (as well as the required insight). There may also be case law through the judiciary, relevant especially in interpretation and gap filling. This law is further constrained and limited by clear public policy or public order considerations, of which again the legislature and the courts may be spokespersons, although they are not the only ones. 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 cannot 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 hardly catch up. In fact, it has already been said that the whole notion of codification in the civil law sense is in the balance.

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The democratic argument is superficially understandable and convincing, but 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 academic 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 may also lead 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. It never affected national or even international acceptance, for example in private international law. 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 technical and operational insight. How democratic and insightful, for example 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, is or would be if stamped into law at the EU level, may be seriously questioned; see also section 1.4.20 below. The project still proceeds on the basis that academia has the answers and politicians must follow and one must 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.234 At least professionals do not want that kind of law and seem to be very 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 alone 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. That all law is public policy in this sense was nevertheless also 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.235 Indeed, although policy considerations are often crucial in the ­formulation

234  In this connection, it should also 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, but it is true that American students in the major law schools are used from the beginning to 50 jurisdictions operating side by side, plus the federal one, and there is as a consequence some ‘national’ private law in terms of a general common overlay besides the federal legal order. It also 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. 235  Subsequently, 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 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.

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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 important236 and is continuously expressed more particularly through case law, also of a private law nature, and in fact no less in the way the law is explained and applied between practitioners. Economic consideration and efficiency notions may also be relevant in this connection. 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. 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 is largely known to, accepted, and depended upon by professionals,237 and special protections, such as those now often necessary in consumer dealings or 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 already seen, may even 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. As a consequence, much can be left to bottom-up law formation by professional participants. It is in truth as participatory as formal democracy can ever be. It follows that in an advanced decentralised social and political environment, 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 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 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,238 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, true democracy is respectful of diversity

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 will be respectful of domestic public law in this sense if it has a sufficiently close connection to the case in question. See also ss 2.2.6ff below. 236  237  238 

MA Eisenberg, The Nature of the Common Law (Cambridge, MA, 1988) 28. See for a definition of professionals in this connection, s 1.1.10 above. Lord Bingham in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433.

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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 either that states have here the deeper insights in the reality of human relationships, in the needs of society, or in anything else. 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: Begriffs- and Interessenjurisprudenz, Freirechtslehre and Wertungsjurisprudenz in Germany. Modern Hermeneutics and the Role of Precedent in Civil Law When it comes to interpretation, it may be clear that the ius commune had not been able to develop a coherent view of interpretation,239 but it did accept 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, 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 it the most urgent activity, which was certainly also true for the Corpus Iuris, which needed application and interpretation in many different regions and circumstances, the effect of which could not be overseen. A mathematical approach based on pure deduction or syllogism never seems to have gained much ground, 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.240 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. In contract, as we shall see in Volume 2, chapter 1, section 1.3.2, there did not develop a coherent approach to interpretation either, but the literal interpretation was here also avoided while writers like Grotius started to think in terms of aequitas. After the enactment of the nineteenth-century codifications, there was at first much emphasis on literal interpretation of the texts.241 It was indeed supported by the use of syllogism in which a black-letter rule (which could later also be derived from case law) operated as the major and the facts of the case as the minor. For example, if it

239  See also J Schroeder, Recht als Wissenschaft. Geschichte der juristischen Methode von Humanismus bis zur historischen Schule (Munich, 2001). 240  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 156, 182 and 185 above. 241  See also the reference to Aubry and Rau in n 212 above. The original French idea of the role of the judge was indeed that of bouche de la loi. There was no interpretational freedom, interpretation in essence being left to the legislator. This also affected 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.

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were decreed that everyone must drive his or her 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 the fact or the minor. The result is a violation of the law (in this case often the criminal law narrowly interpreted anywhere, but it could also lead to an action in negligence). This is also 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 accepted). Clearly, the weakness is in the choice of the major and the minor: ultimately this technique only deals with form not substance. It creates problems, especially where, in our example, the person in question used a bicycle, which might not have been a ‘vehicle’ in a literal sense. Interpretation through induction,242 in which the higher category is ‘all that moves on wheels or mechanically’, or finally through analogy,243 could then follow. Here reliance on the system as a whole could provide further ‘certainty’. Whatever the appearances, and however logical and perfect the system may have looked, this type of inductive or analogical reasoning was thus not necessarily automatic in its results either 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, if it did not work in the sense that it did not yield a reasonable or sensible result, 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 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 clear contradictions, which arise in any formal system of rules when applied to newer or incongruous facts, and with extra-judicial considerations, such as those of justice, social peace and efficiency, when not directly appearing from the written texts but becoming 242  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 3, ch 1, 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. 243  From the point of view of logic, analogy is a problematic concept, which nevertheless has great importance in legal reasoning. 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 this requirement could be considered to exist in respect of bikes. 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.

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sufficiently pressing in the circumstances. These considerations could ­themselves be contradictory. It is clear that logic is 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 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. It is thus not surprising that in continental Europe the codification notion, with its preset intellectual system of rules and its addiction to logic, became increasingly dependent on more liberal interpretation techniques, at least to support its claim of completeness and of being able satisfactorily to cover all eventualities, including newer fact situations and modern societal developments. This became all the more necessary in the absence of regular formal amendment, which proved to be politically unrealistic to expect. Judges were increasingly left to engage in elaborating and adjusting the system, which started to buckle under its own weight and pretence of completeness. Thus in civil law, legal thought in the twentieth century increasingly started to concentrate on this question of interpretation (and supplementation or gap filling). It translated indeed first into 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 thus started developing and intruding also. Then there was the (horizontal) impact of regulation. As mentioned before, it moved the judge to centre stage, even in civil law, at least in academic discourse, while 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 1.4.17 below. The upshot was that extra-systemic or perhaps even extra-legal considerations increasingly entered the law and concerned in particular these ethical, social and efficiency considerations or practicalities, in essence the question of an open or closed system of legal rules. At least in international dealings it also left room for other sources of law to operate, which codification had meant to subdue. It is at the heart of the development of the modern lex mercatoria as presented in this book—see further sections 1.4 and 1.5 below. In Germany, the need for greater interpretational freedom led at an early stage to the theory of Interessenjurisprudenz, as we have seen. It accepted that extra legal 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 and its system.244 It had its origin in the works of von Savigny and his method and in the earlier approach of von Jhering. 244  See for system thinking the discussion above in s 1.1.2. Paul Koschaker, Europa und das römische Recht (Berlin, 1947, reprinted 1953) 279 attributed it to eighteenth-century thinkers such as Wolff, see n 206 above, but considered the idea abandoned since the free-law-finding movement in early twentieth-century Germany. By 1910, Ernst I Bekker had also been more subtle in his Grundbegriffe des Rechts und Missgriffe der Gesetzgebung, 176ff and 180ff, but it may have been premature; see also n 84 above for the disparate search for system in case law analysis in Germany. See for the attitude of Portalis in France, n 228 above and for the views of Max Weber n 7 above.

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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 century. 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 clarity and order, but it became restrictive and is now often seen as the true expression of system thinking and a form of legal positivism. It retained a large following in Germany and regained massive support after World War II.245 The Interessenjurisprudenz, on the other hand, had its intellectual base in the later work of von Jhering, as we have also already seen,246 subsequently more particularly elaborated by Heck,247 and which received a more sociological expression in the ­so-called ‘free law finding’ movement (Freirechtslehre) often associated with the work of Hermann Kantorowicz248 (a student of Max Weber) and especially Eugen E ­ hrlich.249 Both approaches helped to move adjudication and dispute resolution to the centre of academic attention, even in civil law, 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 1.4.17 below. In this more recent emphasis on litigation or the law’s role in dispute resolution, there is a move from macro to micro thinking, much as there always was in common law. It is submitted that this presented a major shift in the ­academic approach to law in civil law countries, although it did not defeat system thinking, which,

245  G Teubner, ‘Law and Social Theory: Three problems’ (2014) 135 Ancilla Iuris, Synopsis, 182, 193 refers in this connection to the National Socialist dominance of political theory over law; see also n 208 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 is 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. The same sense of immunisation may apply to all foreign influences even after globalisation but means that the German Rechtswissenschaft can hardly be called academic any longer. It is extreme in its nationalism and legal positivism and appears to want to be no more than the producer of practitioners’ handbooks and legal opinions (Gutachten) for the courts. The 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 as such by the German Academic Council, see nn 48 and 91 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, caught in German legal jargon and cliché. The role (and potential lead of) public international law is often ignored or misrepresented even by J Koendgen ‘Die Rechtsquellen des Europaeischen Privatsrecht’ in K Riesenhuber (ed), Europaeische Methodenlehre, 3rd edn (Berlin, 2015) 96, 100. 246  See R von Jhering, Scherz und Ernst in der Jurisprudenz (Leipzig, 1884) and Der Zweck im Recht (Leipzig, 1887), see also n 221 above and accompanying text. 247  Ph Heck, ‘Gesetzauslegung under Interessenjurisprudenz’ (1914) 112 Archiv für die civilistische Praxis 1: see also H Schoppmeyer, Juristische Method als Lebensaufgabe: Leven, Werk und Wirkungsgeschichte Philipp Hecks (Tübingen, 2001). 248  H Kantorowicz, Der Kampf um die Rechtswissenschaft (Heidelberg, 1906). 249  E Ehrlich, Grundlegung der Soziologie des Rechts (Munich, 1913).

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by the later part of the twentieth century, acquired a new lease of life and became system perfection through case law.250 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 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, where typical codification thinking still put the system first, and interpretation is thus rather seen as a way to elevate and complete it.251 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 1.4.15 below.

250  See again n 84 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) and J Esser, 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 und Methode, Grundzüge einer philisophischen Hermeneutik, 6th edn (Tübingen, 1990); K Engisch, Einführung in das juristsiche Denken, 9th edn (Stuttgart, 1997) 80; R Zippelius, Juristische Methodenlehre, 10th edn (Munich, 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 tradition to which most modern German PhDs, theses for professorships, handbooks, and articles testify. Begriffsjurisprudenz, with its emphasis on system thinking, remains very strong in legal practice and education. Most work tends to be descriptive of the German rules and its system, and of the way it operates, and can be (better) used to cover newer eventualities. 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 the self-creating (autopoietic) force of all law but, although accepting the dissolution or disintegration of its system on a continuous basis, Luhmann still insisted on a simplistic bilinear law/non-law matrix that was basically stabilized by states and, one must assume therefore, ultimately also caught in its system thinking. His 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 528 below and as such deserves mentioning, although also Teubner’s approach 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 1.4.19 below and Vol 2, ch 1, ss 1.6.4ff and ch 2, s 1.11) there is no enquiry into true needs nor a review of method and objective. The 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 through statist intervention of this nature 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. 251  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 84 above.

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The more extrovert, freer, socially oriented approach is found earlier in France in the (later) writings of François Geny, in those of 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 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.252 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, social, ethical or even economic or political needs, and that in civil society the law therefore never stands 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. Its 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 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 thus 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.253 Legalism, positivism and ­formalism254 would then appear to be abandoned. This may be supported by widespread redistributory ideas in respect of risk, particularly (but not only) in consumer dealings. There are also employment protection issues and one may even think of all the paraphernalia of the modern welfare state.

252  In this connection, reference may especially be made to H-G Gadamer, Wahrheit und Methode (Tübingen, 1972), English trans Truth and Method (New York, 1975). 253  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 changed 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. 254  See more particularly the discussion in s 1.4.16 below.

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In this connection, special attention may finally also be given to what is in ­Germany called the Wertungsjurisprudenz.255 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 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. The consequence is that the law on the one hand becomes more sensitive to daily requirements and needs, but on the other hand risks becoming more politicised. It should be well distinguished from the nationalisation of all private law formation in codification countries in Europe, which rather suggests historical interpretation and staticism. W ­ ertungsjurisprudenz means legal dynamism, especially in law application/interpretation­. In its policy orientation it may show a specially close connection with American realism in method. In both approaches, the law could thus indeed be seen as the result of the constant dialogue in society about what it is, although the result may differ: in Germany it means 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. This could lead to judicial prejudice in favour of a modern social culture to justify legal dynamism, if necessary against the texts of the laws and earlier case law. As such it is now not widely favoured in German legal practice, but it remains an often hidden but strong undercurrent in German legal reasoning,256 even though, at least on the surface, rigorous system thinking remains the prevailing method. It has already been said that even in respect of new case law, German academia remains keen and sees it mostly as its task to explain it in terms of further perfecting of what already exists.257 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. 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

255  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 Schmitt, Über die drei Arten des rechtswissenschaftlichen Denkens (1938). 256  Esser and Koendgen may be seen as important protagonists of the Wertungsjurisprudenz, see for their work n 250 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 will 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. 257  See also the remarks in n 84 above.

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national system only.258 Again, the hope is that this contributes to certainty in legal outcome, even though new cases multiply all the time, rules become antiquated, and factual situations diverse or ever more unusual in terms of old rules, while globalisation on its present scale may change everything. Here the key is that this attitude leaves little room for experimentation, empirical and interdisciplinarity research or sensitivity to the dynamic forces of globalisation and transnationalisation of the market place. Even in international transactions, there is only concern for local texts and policies. 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 d ­ ifferent sources of law and their hierarchy, see further sections 1.4. and 1.5 below. P ­ ublic policy and values correct in appropriate cases; if still national they may even then have to yield to transnational minimum standards in respect of the operations of those who develop their business internationally and claim the benefits of globalisation.

1.3  The Origin and Evolution of the Common Law. Its Approach to Law Formation and to the Operation of Private Law 1.3.1  Common Law and Equity It is now time to come to the other great original legal system in Western Europe, that of the English common law. It is impossible to thoroughly understand its beginnings without forming some mental picture of the England of the late thirteenth and early fourteenth centuries, when in the time immediately following the death of Bracton,259 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.260

258  See n 6 and further n 255 above. Larenz shows ambiguity. In n 6 above, it was said that he belongs to the school of German system thinkers and articulates its method, but in Methodenlehre der Rechtswissenschaft (Berlin, 1979) 441, he continues to support also his early political sensitivities and law’s politicisation, now in favour of a modern Germany. 259  See n 274 below. 260  HG Hanbury, Modern Equity (London, 1935) 1.

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Nevertheless, the common law developed in a manner very similar to Roman law, that is, action based and originating in the law of procedure.261 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, especially tort. The original idea was that if the King agreed with the request for protection, he would issue the r­ elevant 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. There were still specialised 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 and 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 popular. 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 be granted as of right 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). As the royal courts became the normal venue for these suits, they would hear by no means all types of complaint; it all depended on the 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 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.

261  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.

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This writ system allowed a nucleus of more predictable law to develop while the writs evolved somewhat further and older ones were abandoned. It early brought one national law, although centralisation was at that stage a more outstanding feature than nationalism. This law was original, therefore not Roman, although of Anglo-Saxon or Germanic and feudal origin. It is indeed interesting that no external law was used to achieve this unity in the laws of England. The result was a true English development, which led to a distinctive legal system and culture that was largely procedural, basically practical, and evolved over a long time in a peaceful, constant but also haphazard manner. Eventually under this law, the royal courts started 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 s 1.2.5 above); subsequently they suppressed them or brought them within the common law. In the process, they also subsumed the commercial law or law merchant into the common law (see s 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 although it retained some different status and was not systematically integrated. This may in particular make a difference as to the status of custom and precedent. The same happened to Church law, as we have seen.262 As a further consequence of these developments, from the seventeenth century onwards, the merchant and ecclesiastical courts were merged into the royal courts as the ancient Anglo-Saxon and feudal courts had been earlier. 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 c­ entury 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, the rule under which these precedents had to be followed only 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 its own courts. They acted not on the basis of writs but rather of subpoenas and sat without a jury while their practitioners

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

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were solicitors, although barristers later took over much of the court activity. This was equity, administered by the Courts of Chancery.263 Under it, 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.264 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.265 As a consequence, it became clear that equity was to remain incidental. It 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. Equity managed to fill a number of important gaps or shortcomings, however, and 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. More recently, it allowed notions of reliance or 263  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.’ 264  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, 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 jurisdiction. 265 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.

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promissory estoppel to be substituted for consideration to back up the binding force of contract. Fiduciary duties were introduced to protect inequality of the parties, especially in situations of dependency. Most importantly, 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 ­assignment266 and early in the twentieth century the development of the floating charge267 and much later the Mareva injunction.268 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.269 This shows some similarity with the development of the praetorian law or ius ­honorarium in ancient Rome, although there had already been some similar element in the original creation and expansion of the writs.270 Equity remained more incidental in its relief but early on was particularly active in the area of fraud and breach of confidence;271 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, but both proved in a number of areas 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.272 These differences 266 See

faith.

Dearle v Hall (1828) 3 Russ 1, allowing the first collecting assignee to retain the collections if in good

267  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 3, ch 1, s 1.5.2. 268  Mareva Compania Navietra SA v International Bulk Carriers SA [1975] 2 Lloyds Rep 509. 269  ‘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, reissue (2003) 149. 270  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. 271  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 still suggests 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. 272  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.

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are notably in 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 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. Greater judicial discretion coupled with 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 more incidental and dependent on the facts of the case: see particularly Volume 2, chapter 1, 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 further 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) 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 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 its example. 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

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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 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.273 The 1873–75 Act established that in the case of a conflict between law and equity, the latter prevailed (s 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 s 1.1.2) 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 were hardly any traces left of it 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,274 but this proved an idle, although ­spectacular 273  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. 274  H Bracton, De Legibus et Consuetudinibus Regni Angliae (see also the edition by T Twiss with a nineteenthcentury English translation).

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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 still 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 them, which is of particular interest for beneficial and future interests in these assets. It primarily concerned here trusts and conditional or temporary ownership forms. It resulted in a flexible and open system of proprietary rights in chattels and intangible assets (see s 1.1.4 above and Vol 2, ch 2, ss 1.3.6 and 1.10.2) of which there is no real equivalent in civil law. The practical nature of the common law never combined very easily with the much more intellectual approach of the ius commune. In fact, in England, there was not much academic interest in the law at all. Legal teaching at first took place in the Inns of Court 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.275 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 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 a systematic 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 s 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

275 

W Blackstone, Commentaries on the Laws of England (4 vols 1773).

PART I  THE EMERGENCE OF THE MODERN LEX MERCATORIA 143

at Oxford or ­Maitland at Cambridge) were few. Thus the status of legal scholarship remained subdued. It remained 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.276 Opinions of the Bar (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, economics and psychology, but it still retains a broadly formal (or doctrinal) bias,277 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 thus 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 mentioned before 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,278 but has been adhered to formally only since the end of the nineteenth century.279 It ties a judge to his own decisions as well as to those of all his colleagues at the same or higher level, although it is usually said only to the ratio decidendi of these decision, that is, to the legal principle involved, although this may wrongly suggest 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 so rigorously followed in the US, where there are far too many cases and the Federal Supreme Court and lower federal courts are under the

276 See

Donoghue v Stevenson [1932] AC 562, 567. See also 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) for the differences in this regard between the US and English approaches, the former academically showing some greater resemblance in its formalism and doctrinal attitude to the codification idea. 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. 278  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. 279  It was only formally adopted by the House of Lords in 1898 in London Tramways v LCC [1898] AC 375. 277 

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Constitution at times highly political bodies that must respond to quickly c­ hanging circumstances so that they could hardly be so bound. Still, they respect precedent in principle also, although the US Supreme Court 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 (as eg in bankruptcy), federal courts will apply the law of the State in which they sit, except in federal questions. As we have seen, at least in England, the precedent rule now also applies in equity,280 which, against the original idea, became as a consequence just as rigid as the law, and strictly speaking it applies even to findings on customs and their existence.281 This may have become particularly relevant in commerce and finance after commercial law was integrated into the common law in the eighteenth century and overtaken by it even it retained some independence;. As already mentioned (in ss 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 in this area than in the rest of private law. 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 or 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 civil law system thinking. It is a strand of thought, however, not now uncommon in English academia as already mentioned, much less so in the US where there is scepticism of all such more formal thinking: law is made in society and the result of a constant debate that is never finished; it can never be fully known. That is legal realism as we shall see, where much is (changeable) social policy. However, common law judges remain 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 a new story or narrative will be developed for the particular case in which law and 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. In any event, the senior courts are not so bound (not now in England either as we shall see below) and fact situations can easily be distinguished.

280 

For equity, ossification in this manner dates at least from the early nineteenth century, see n 264 above. It set customary law in concrete, see also n 31 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. 281 

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In civil law, which was already systematic, there is in principle no similar need to f­ollow precedent because of the codification of the law and its specific rules, which often pretended to contain the whole system of the law. Civil law traditionally is not dispute resolution oriented, as we have seen, but was meant to provide a framework to regulate daily life as a whole, make it more rational and easier for all. Litigation is here 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 more generally, again explicable in the absence of a codification of its Roman antecedents. There is convergence here, however, as aging civil law has become much more dependent on interpretation, which manifests itself especially in case law (see also the discussion in s 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 indeed precedent mainly works on the rule side and is meant to move the system forward. Facts and norms are thus 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 much 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 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,282 but that was not to apply to lower courts.283 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.284 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’.285 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. 282 

House of Lords Practice Declaration [1966] 3 All ER 77. Notwithstanding Lord Denning’s dissenting opinion in Gallie v Lee [1969] 1 All ER 1072. 284  There remains 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 entirely 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 and rule based. 285 Obituary, Daily Telegraph, 13 September 2010. 283 

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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 rulebased manner, even though these rules are unwritten. It seeks 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 thus has a tendency, at least 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 nineteenthcentury commercial law statutes in England, does not have coherence as a primary aim either and often therefore 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 as developed in the school of Grotius, but rather on the basis of his well-known utilitarian principle that the legal system should contribute to the greatest happiness of the greatest possible number of people.286 In his view, this primarily 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 surprising requirement of codification of this type 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 should overturn the fruits of the past.287 Bentham’s disciple, John Austin,288 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 has 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.289 Thus law, even private law, only issues from sovereigns and is national per se.

286  ‘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. 287  Reflections on the Revolution in France (1793, reprint Oxford, 1993). 288  See J Austin, Lectures on Jurisprudence, vol 2 (R Campbell ed) (London, 1875) c XXXVII. 289  The nationalistic or perhaps more cultural historical element was thus 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 288) vol 2, 91–103.

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In Burke’s approach, there was here an early vision of a Volksgeist in the d ­ evelopment of the law, much as von Savigny would propound in Germany at much the same time (see s 1.2.9 above) and which one may still find in the US as well.290 But there was no preference for statutory law and none of the theoretical systematic attitude to rule formulation, which von Savigny wanted as a first step to, and a precondition for, codification at national level and which, in typical nineteenth-century 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 sense. 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 in England 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. 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 (s 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 former 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. At the same time, important legislation was introduced in particular areas of substantive private law, as well as 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;

290  See, among those who see American law as embedded in typical American values, eg, R Post, ‘The ­ hallenge of Globalisation to American Public Scholarship’ (2001) 2 Theoretical Inquiries in Law 323, but in C 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.

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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 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 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 is 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 draftsmanship, which, except for the nineteenth-century commercial law statutes, often still remains directed towards special situations and is casuistic in that sense. However, 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, as already observed, was never a true codification in that sense.291 In the US, at individual state level, there had long since been some civil codes (the ­so-called Field Codes, according to some inspired by Benthamite thinking), for ­example in California, in which much of the old common law was written up. However, their nature was always substantially different from that of the European Codes in that they did not overrule the common law either. In essence, they served only to facilitate access to that law.292 There are further the modern Restatements in which various areas

291  As mentioned in n 37 above, it also 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. 292  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.

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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 are regularly updated. Although the Restatements 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.293 It lacks in particular the practitioners’ imput 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. 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.294 In this connection, it is well known that English judges remain wary of teleological interpretation of statutes, more so than their modern American counterparts,295 and will commonly also not consider the preparatory instruments as a guide to (historical) interpretation. They tend towards a literal interpretation technique.296 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 2, chapter 1, section 1.2.4. Although the

293  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 basis 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 codification activity but it soon downgraded its ambitions to more piecemeal proposals for law reform, much of it in a correcting mould. 294  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 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). 295  See for the US s 1.3.4 below. 296  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.

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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.297 Again, this may be different in the US, especially in legal realism as we shall see shortly.298 In that approach, the Americans clearly allow room in appropriate cases for other considerations, including pressing ethical, social and efficiency considerations. In their so-called 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, 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 leaving other eventualities uncovered. It has already been said that the English legal mind is uncomfortable with and remains wary of generalisation. In short, in traditional common law practice, contractual drafting is not conceptual either, rather more practical and often long. This can have advantages but particularly poor 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 before. 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 draftsmen. 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.299 Thus statutes continue to be strictly interpreted in England, a rule, in fact, of long-standing validity (at least since 1343).300 It allows more room for the old common law but there is clearly also

297  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. 298  See for a discussion, RS Summers, ‘Interpreting Statutes: Legislative History’ in Essays in Legal Theory (Dordrecht, 2000) 251. 299  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. 300  See also TFT Plucknett, A Concise History of the Common Law (Boston, MA, 1956) 333.

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a ­modern concern that the judiciary may get too close to legislative activity under the guise of interpretation.301 Under the influence of EU law, which, in the civil law tradition, is much more ­conceptual in its legislative approach, English judges will 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 affects 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 for the operation of law, equity and custom besides statute (as s 1-103 UCC specifically recognises). As we have seen, this is, besides the lack of system thinking, 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 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 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. 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 fashion, as such providing an alternative way of thinking about the law altogether, which potentially became quite different from p ­ ractitioners’ or doctrinal law as an academic model or ideal, meant in particular to guide legal updating and suggesting other ways to reform. It was promoted at first by the coming into being of major national law schools such as those at Harvard, Yale, C ­ olumbia, Chicago 302 and Berkeley and the requirement that all lawyers obtain an academic q ­ ualification in the law. At least in private law, this American legal scholarship remained at first closely connected with the traditional search for legal consistency in rule patterns (whether derived

301  See Lord Simonds in Magor & St Mellons RDC v Newport Corp [1952] AC 189, rebuffing Lord Denning on appeal. 302  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.

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from case law or legislation), which as we have seen continues to be the drift of the English academic approach. This so-called legal formalism (an ­American term only invented later) was thus primarily intent on finding a more coherent system of rules especially in case law. It was closely connected with legal positivism,303 and a reminder to some extent of the rule-based codification approach with its emphasis on intellectual coherence. Indeed, this scholarship 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, it did not necessarily elevate this system to the highest pinnacle or believed it complete and self-sufficient as civil law was more likely to do, although this kind of legal formalism often led and still leads in England to an academic predilection for black-letter or doctrinal law and automaticity in its application as we have seen. For the applications of the rules so found or recast, common law academic research, like civil law, emphasised then also literal interpretation of statutes supported by logical reasoning through syllogism and subsequently inductive reasoning and analogy; see for civil law section 1.2.13 above. 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 before, but the Americans soon became sceptical of such a mechanical approach and were more willing to abandon it altogether.304 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. It means that in appropriate cases, law, even private law, including judicial decisions, came to be seen primarily as instruments not only to guide market forces, but eventually also to promote welfare. Such law and such 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 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 priority 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 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 another impetus: a renewed but more open search for a greater truth behind the law

303  304 

See also s 1.4.16 below. See also R Feldman, The Role of Science in Law (New York, 2009).

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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 better for the future at the same time. This then becomes the real heart of the modern study of the law, therefore especially in academia, which separates itself from the daily practice. It starts in the major law schools and is primarily an academic exercise in terms or re-education­and 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 results) may also be superficial. Yet the effort itself is credible and, at least from an academic perspective, very necessary. European law schools are far removed from this world and in their practice orientation u ­ sually mechanical and hardly academic or innovative in that sense—as already noted in s­ection 1.2.13 above. American academia at the top rather seeks to test the law for its 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 student. 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 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 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.305 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 the system or the existing black-letter rules that are believed to guarantee them in a useful manner. 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 idea of ‘policy’. Indeed, the law is then 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 H ­ egelian dream, but part of the lives of people.306 Legislation (particularly in regulation) and case law try to stabilise it, but it is only a limited effort of a domestic nature that may even then be especially wanting in the international flows. P ­ articularly

305  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). 306  OW Holmes, ‘The Path of the Law’, in Collected Papers (London 1920) 194.

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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 or of the Wertungsjurisprudenz (see also the discussion in s 1.2.13 above), but probably goes well beyond it. 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 (focusing on the fact side), 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 political issue. In this connection, the US Constitution is often said to have in itself ample resources for the changing needs of successive generations.307 Thus from early on, constitutional law was meant to define ‘the whole American fabric’,308 in which connection the courts were thought to speak for the whole experience as a nation and to reinterpret the ­Constitution on the basis of the prevailing American value system as it evolved.309 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 system 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’. 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 and even of contracts, whose interpretation may be no less ‘policy’ oriented in appropriate cases. In the US, a liberal interpretation technique of statutes in this manner is now explicitly accepted in many fields of the law, in private law expressed particularly in section 1-103(a) UCC, as we have seen.310 Similarly, in contract interpretation, mere deductive approaches

307  See notably Felix Frankfurther, Of Law and Life & Other Things that Matter; Papers and Addresses of Felix Frankfurter, 1956–1963 (PB Kurland ed) (Cambridge, MA, 1965) 59. 308  See John Marshall in Marbury v Madison n 294 above. 309  See OW Holmes in Missouri v Holland 252 US 416, 433 (1920). 310  ‘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 1.1.2 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 2, ch 1, s 1.3.7.

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or other forms of legal or logical formalism have been increasingly rejected.311 Legal ­sophistry is here particularly suspect. This is supported by academia in its search for newer ways through its improved models. 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 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.312 Indeed, legal formalism of this nature is then usually associated with the notion that law is rationality personified, to the point of forming a mathematical/logical model, and that its rules are preset 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 as we have seen. In this latter approach, law and 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. As we have seen, it assumes an order of its own, which, if properly applied, leads to the right answers. The realists, on the other hand,313 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.314 Here the idea emerges that the law automatically changes in its application to newer situations while law and fact are not fundamentally separated. Again, in this approach, extra-legal objectives and policy considerations, especially overarching notions of justice, social peace and efficiency, became important in the interpretation of the law.315 The modern study of the law in the US attempts to guide this process better. Legal normativity, if a system at all, is open.

311  See MA Eisenberg, ‘The Emergence of Dynamic Contract Law’ (2000) 88 California Law Review 174. 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. 312  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). 313  See for the modern views of formalism, B Leiter, ‘Positivism, Formalism, Realism’ (1999) 99 C ­ olumbia 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 Harvard Law Review 457 and were authoritatively restated by F Cohen, ‘The Problems of a Functional Jurisprudence’ (1937) 1 Modern Law Review 5. 314  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 313) 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’. 315  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

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Legal realism of this nature316 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 may still not be able to claim a distinctive insight into evolving values and political preferences. In its studies, the realist movement tended to be empirical, while wanting to be scientific and objective at least in this manner, but it 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 a logical and intrinsically consistent manner and black-letter law as such lost much of its lustre in academia and was henceforth often deprecated as ‘doctrinal’.317 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. 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 are we trying to achieve? This being said, in some writings,318 a particular search was made in this connection for fundamental legal principles common to all civilised legal systems to arrive at a more objective and universal notion of fairness and justice in a modern redistributive

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. 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 support of this kind of formalism, 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. 316  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). 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 351 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. 317  As shown in n 315 above, 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, 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. 318  J Rawls, A Theory of Justice (Cambridge, MA, 1971) and Political Liberalism (New York 1996).

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social environment. This suggests natural law undercurrents at the same time.319 In the US, they are never far beneath the surface as may also be seen in the earlier work of Lon Fuller.320 Arbitrariness in rule making by the competent authorities is here ­identified and more fundamentally questioned. 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,321 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. However, the approach of Hart was fundamentally questioned by the American Ronald ­Dworkin,322 his successor at Oxford, in whose view social and policy considerations play an important role and figure in legal principles. 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 became 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 have become 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. 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 has thus become ever more jurisprudential and less practice oriented in nature. Again, its objective is rather 319  Notwithstanding the nationalistic tenor, also in American law, importantly in criminal law, 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). 320  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 rationality). The approach of Rawls, in search of public policy justifications in the law (see n 318 above), was very different but no less naturalistic. 321  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 nonnational sources of law, nor in truth for public international law either, and in this view within England not even much for custom (which in this approach is seen as primitive or regressive law) or legal principle, let alone for a transnational law merchant. 322  R Dworkin, Taking Rights Seriously (Cambridge, MA, 1977).

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the ­development of views that engender renewal and improvement of the law through intellectual analysis, academic critique and a forward-looking attitude: what is needed to keep the law credible and meaningful for the next generation. It has already been mentioned that especially in ‘law and sociology’,323 ‘law and ­economics’,324 and now also in ‘law and psychology’,325 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 are mostly considered matters of opinion, experience, intuition or perhaps (political) wishful thinking. Even if the law and its application are not neutral or objective, but rather more policy oriented, the newer directions mean to bring more objectivity to the discussion, although there was serious criticism from the beginning.326 Excessive focus on dispute resolution is here also avoided.327 There is genuine interest in how the law comes about and functions more generally. The effects of legal change are measured, in ‘law and economics’ especially for its efficiency and effect on distribution. On the other hand, environmental justice and critical race theories (or critical or political legal studies more generally)328 have added an ever stronger political dimension to legal theory. The critique now 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 notion that the law as it is cannot promote justice (or equality in a practical sense) without deep (political) reform. It is probably the reason why the Americans are here less aware of the experiences of others. In its application, it may well be that, at least at

323  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). 324  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. 325  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. 326  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. 327  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? 328  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 315 above and his ‘Liberal Political Theory’ in Hutchinson, ibid, 15, and Duncan Kennedy, A Critique on Adjudication (Cambridge, MA, 1997).

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the academic level, the law as a rational system is increasingly mistrusted in the US. 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 justice’, ‘law as order’ and natural or positive law approaches have receded into the background or are recast in a different mould. Where the positivist or black-letter law approach has been substantially weakened, the search for the true justification behind the law has intensified.329 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.330 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 have largely taken over from Europe as we shall see in section 1.5.6 below.331 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, 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,332 although it

329  This is by no means new, see FS Cohen, ‘Transcendental Nonsense and the Functional Approaches’ (1935) 35 Columbia Law Review 809, ridiculing legal doctrine. Law is social policy. 330  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 R Post, ‘The C ­ hallenge of Globalization to American Public Law Scholarship’ (2001) 2 Theoretical Inquiries in Law 323; see also n 255 above for similar thinking in German Wertungsjurisprudenz. 331  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 RD Cooter, ‘Structural Adjudication and the New Law Merchant: A Model of Decentralised Law’ (1994) 14 International Review of Law and Economics 215, but it remains rarer and has barely affected trade law or transnational law formation more generally, see also text at nn 351 and 527 below. 332  RA Posner, ‘The Decline of Law as an Autonomous Discipline: 1962–1987’ (1987) 100 Harvard Law Review 761. Some care is appropriate, however, and semantics enter easily into the picture. Considering the law intellectually as an individual (philosophical) category, therefore subject to its own structure and normativity,

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is not denied that in its daily application purely doctrinal thinking cannot be avoided. It is submitted, however, that the law, being the prime vehicle for establishing order and balancing conflicting interests in that context, cannot be completely identified with some extra-legal category, be it morality, sociology or economics, but follows its 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 greater 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 is then also a legitimate academic task.333 That is not the approach, however, of much of present-day American academia. 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 now considered more stale. The ‘law and economics’ school remains popular as the more rational and scientific branch of modern legal thought,334

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 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 c­ ohesion there (at present). This may also be relevant in international commercial and financial law, where, it could be argued, there is also 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 phenomenon, while ­utilitarian considerations will be 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. 333 

cf for this discussion s 1.1.7 above and also the discussion at n 232 above. This school has different strands but the one associated with neo-classical economics is the more prevalent, see also n 338 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 selfinterest and respond to prices and pay-offs, including legal sanctions, rationally. The aggregation of their choices is assumed 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 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 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 micro-economic tool to determine the most efficient rule. One important aspect of ‘law and economics’ is 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 334 

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which has attempted to translate and explain many legal structures in microeconomic terms,335 while valuing predictability336 and measuring the law’s (economic) effects.337

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 might be assumed. Clearly, as a (re)distributive concept, justice as a balancing of interests is not an economic concept. It is, however, argued 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 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. 335  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). 336  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. 337  For the legal allocation of social cost, an important tool was produced by the Coase theorem; see Coase (n 324). 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 could 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 then be 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; 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

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1.3.6  The Progress 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 guide to legal reasoning or to the law’s application and therefore remains limited as a legal tool. It may advise on new rules and their likely economic and financial impact but has notably not much advice to give on (re)distributive issues with which the law is mostly concerned.338 Importantly, between economics and law, the shift is often from the rational to the reasonable man. 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.339 More generally, a lack of clear direction in the functional approaches is 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, especially in antitrust matters, in (draft) statutory law, and in newer Restatements. It can be argued that the intellectualisation of legal studies in the US in this ­manner has contributed to a growing divide between academic legal thinking and the legal practice in an environment in which the practical orientation of the living

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, the contribution to efficiency (and reduction of transaction costs) may be even more obvious legally to explain its operation. 338  The neo-classical strand lately 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 good 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; how does this work in a group? 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). 339  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.

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common law itself has hardly changed. This is not different from elsewhere when law becomes academic and is directed towards better understanding and change. But it must still find recognition. As far as law and economics is concerned, in private law, one may see a lack of recognition and therefore a lack of theoretical input even in the regular amendments and revisions of the UCC, where pragmatism prevails. Also the further elaboration of the important federal bankruptcy statutes seems in the end not to have been greatly affected by newer economic theory and thought.340 In evaluating the progress so far, particularly in private law, there is the further ­complication that the emphasis on policy in modern legal realism, particularly in the US, may have shifted attention unduly to law making through legislators or to the courts in terms of public ordering. The essence of private law as a facilitating rather than mandatory force to balance conflicting interests between private participants may thus become misunderstood, distorted or ignored.341 Even private law formulation and operation is then mere public policy. This may be a misconception, although it correctly suggests a close connection between public and private law, but, as was explained in section 1.2.13 above, social policy is as important and may also manifest itself autonomously through different sources of law and the judiciary.342 But not all is social policy either.343 If we finally reconsider legal formalism in the sense of textual coherence and systemic logic, or even as extreme legal positivism, it should not be entirely discounted in this context either. It has already been said that doctrinal law has an important function which academia cannot ignore if only from an empirical point of view as demonstration of 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 prevail and may determine what ought to be done especially relevant if these imposed rules are mandatory manner (eg in competition law), impacting therefore on private actors and their behaviour. 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 applied. Notably contradictions must be minimised. To that extent, not only

340  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. 341  See, for a critique, A Katz, ‘Taking Private Ordering Seriously’ (1996) 144 University of Pennsylvania Law Review 1745. 342  See text at n 236 above. 343  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.

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some common sense but also a measure of systemic formalism is necessary and may be expected. The perspective is here black-letter law but that does not mean that these laws, even if mandatory, should not be put 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 interpretation of these statutes or 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, or environmental requirements. That also goes to mere default rules. Hence the idea, here also, that all is policy and that the system is in essence open, meaning that the relevance of black letter rules may be limited in appropriate cases. At least in contract, civil law ­lawyers may not be far behind in their attitude to interpretation under the good faith approach notwithstanding their general inclination to system thinking. But all lawyers will in normal situations still be constrained in the application of these 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 cases could that be different and would other, extra-legal considerations enter.344 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 approach to interpretation follows from the statutory example. More technical considerations may then still be valid, but practical considerations unavoidably also 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 leads to ethically, socially, or economically unacceptable results. Again, the automaticity in law application looked for in legal positivism has its limits everywhere. It follows that lawyers of all eras while applying the law, will show respect for the doctrinal or positive law, whether statutory or case law, therefore for all black-letter law. 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 also come in. That is in the nature of all interpretation, here seen primarily as the revival of all

344  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).

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traditional sources of law at that level with an extra overlay of public policy or public order requirements. The positive law thus understood is then not merely black-letter law but is constantly reformulated, not only in the US—it is unavoidable everywhere, especially in periods of rapid social and economic change. In that context, the doctrinal nature of much law cannot largely be ignored if legal texts are still to have any meaning at all, and finding the law in newer situations remains, therefore, a cautious, searching process everywhere that is likely to lag behind, even if the American legal scholarship appears at present much keener to close the gap or lead the way. (c) In 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 is 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. 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 the event that disputes should 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 consequences at the transnational level. In international cases, that will be all the more challenging as these lawyers will often have to navigate or structure around atavistic and parochial 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 law clause 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 states most directly concerned, or with public order issues, now at the transnational level.345 A further assessment may thus become necessary in respect of the applicability of the transnational lex mercatoria and its meaning and content, including considering the hierarchy of legal sources it represents, especially if pleaded by one of the parties, 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, and may correct the transaction

345  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 1.4.13 below.

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or seek to do so. It is submitted that international practice, in particular in its ­structuring activity, is probably creating law more than legislatures, judges and arbitrators at that level. One may think of Eurobonds and the entire operation of the eurobond market and of the ISDA swap Master Agreement and the operation of the international swap markets. International law firms, and especially in-house law departments of large firms or banks, thus become important spokespersons for the new transnational order, even if they do not (yet) realise it. Customary law is the result, which may become mandatory and also affect third parties in the process, eg in the proprietary aspects of Eurobonds and the set-off aspects of the netting provisions in swaps under the ISDA Master. As far as dispute resolution goes, the feasibility of the jurisdiction of the ­ordinary courts in whatever countries, arbitration, and other dispute solution techniques will then also have to be considered (see s 1.1.11 above) and especially the role of bankruptcy courts in international finance, which remain domestic. It is clear that legal formalism cannot be the sole guide here either and much will depend on good judgement. Courts have here 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. Unlike judges, international arbitrators have no power to speak for any legal system and clarify it, they are not law makers, although it may increasingly be different when public policy issues are at stake—it is a big issuer discussed further in chapter 2, section 1.2 below. (d) In legal scholarship all is free. Here legal formalism or thinking in terms of blackletter law, systems and their application suggest a fixation with yesterday’s law. 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 endless new ideas. It also 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. Here the concern is that the law retains a meaning for the future and will continue to guide us in an ever more meaningful way. American legal scholarship therefore looks for new paradigms all the time346 and reflects their impact on legal principles and rules and their formulation and operation on a continuous basis. Innovation is here the key to newer academic models to guide the law into the future and to critique the existing positive law or find more structure or purpose in it. The newer functional approaches—especially law and economics—may play that role more particularly. Empirical research becomes here a key issue testing these newer models and then leads to the study particularly of rules that respond to new situations and demonstrate their

346 

See on paradigms text at n 232 above and s 1.3.7 below.

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validity and effectiveness.347 There remains also an interest in more philosophical questions such as the meaning of fundamental principle, systematic thinking and 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. Even if perhaps of lesser interest at the moment, we see it in the interest in cognitive psychology, which is not then far behind. Legal education, at least in the best American law schools, follows and is experimental and free thinking, not doctrinal, thus allowing for flexibility or pragmatism. The positive law is indeed used as an example of how it should be, should not be, or should 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 their own view and students will be exposed from the beginning to great differences in approach. This is considered healthy and to reflect real life. It also allows flexibility and greater creativity in advocacy depending on client needs. 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 another way, 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 noted.348 Neither has the ‘law and economics’ school in international commercial and financial relationships of a private law nature, even in American scholarship,349 and in the reformulation of substantive rules of transnational law at that level, notably in international business law. As a consequence, it has hardly figured in the development of the new transnational law merchant or modern lex mercatoria, although one would assume that it is

347  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 pure amateurism. See DR Hensler and MA Gasperetti, The Role of Empirical Legal Studies in Legal Scholarship, Legal Education and Policymaking: A US Perspective (forthcoming). 348  See, eg, Penner, Schiff and Nobles (eds) (n 338). 349  See exceptionally Cooter (n 331).

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in principle friendly to it as would all legal currents that see group cultures and v­ alues as a determining factor in (bottom-up) law formation.350 In international trade regulation or liberalisation, even 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.351 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 great resonance, either 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,352 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 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 in terms of the functioning of other than formal national legal orders and the sources of law in such 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 is attempted to be recast in this imperative manner, even at the level of the EU, viz the DCFR effort. Although in common law countries, academic support for transnationalisation would be easier to fit, it is at the moment more likely to come from American than from English academic thought, but has no great priority in any of these countries. As international commercial arbitration practice may show, so far progress in terms of legal transnationalisation has probably been greater at the practical than at the intellectual level.

350  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, in which case, transnational minimum standards): see s 2.2.6 below. 351  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 for a more recent comment on this discussion, 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. 352  See n 340 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 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 natural preoccupation of academia, first in the world of the natural sciences, and of the academic model that, through a better insight into 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 found. We can now put someone on the moon and get him/her back. These intrinsic rules of nature are for us to discover and subsequently to find ways to make the best use of them. They are for us a given, as such a closed framework, although that is not the case for the use we can make of our knowledge of them. In the social sciences, on the other hand, we have an open system of needs and values which change all the time and we practise the concept of the makeability of society, allowing us to change the rules of behaviour, at least to some extent, as we go along. Unlike those models we find in the natural sciences, these social or economic rules that we develop can hardly lay claim to universal truths and may not even 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. Much remains opinion mired in endless compromise (by lawmakers), challenged or even corrupted in its application by unexpected side-effects. The rules thus change depending on the situation and their full impact can often not be predicted. All the same, we need the development of some academic m ­ odels that may better guide us, at least for the time being, so as to promote human relationships, social peace and welfare, or to promote efficiency, utility and more or better growth. In modern times states, in particular, seek out these models to advance society and they use the law to enforce them, never mind how temporary or ephemeral these insights or models may be. In doing so we tend to adopt the attitude in the natural sciences even though we are far away from similar certainties, but given adequate m ­ odels, the resulting measures are nevertheless mostly still supposed to be and are presented as objective. They are ultimately even considered self-evident,353 although according to many, the development of economics and sociology as sciences after World War II354 has been 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 crisis, which it can barely explain and even less foresee or resolve with any degree of certainty. It cannot show clear ways to prosperity for all either. New facilities that have

353 

See also n 232 above for comments on these ambitions. 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 sense; see for the work of ­Popper, n 233 above. Earlier, the Kantian tradition had equally sought to preserve the maximum freedom outside the natural sciences out of similar concerns. 354 

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been created, for example paper currencies, even operating at the transnational level such as the Euro, often remain poorly understood in their effect and management. So is the modern function of banks. Academia appears a long way from any definitive insights into reality in these areas and how this new world truly works. One aspect of modernity is all the same the constant remodelling of society by government on the basis of these (limited and changeable) insights for the greater benefit of all. Again it assumes the better insights at the level of the state, whether or not helped by academia, in the latter case assuming the substantial reliability of its models and insight into their effects, and the absence of unintended consequences, although the risk and practical result is often layer upon layer of laudable governmental regulation, however ‘scientific’, itself often not aware that the problem it tried to solve has shifted while potentially stifling society because the effects of this layering itself may not be properly understood and seldom adequately considered. Cost/benefit analysis is supposed to help but the tools and insights to make this work are largely missing too. ­Perversely, it may result in serious threats to growth or in a type of growth that proves to be unsustainable or misguided and thus conducive to serious crises. Compare private law. As we have seen, the codification system in civil law countries is often perceived as an abstract and artificial model that is scientific, as such considered to contribute to a better world beyond a minimum of order. Hence even the increasing accent on private law legislation in common law countries. There is a claim to objective progress in this manner regardless of the realisation that 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 private law, but there is no scientific objectivity or objective guidance per se. One recognises here the struggle and progress of legal realism in the US. While this law seeks to promote justice, social peace, efficiency and growth in this newer environment and therefore goes beyond the pursuit of some basic order, in civil society, it can only respond to these needs as we can perceive and define them from time to time. There are ever changing values and there is hardly any predetermined solution for anything. Much is guesswork in the hope that the result is indeed sustainable improvement, especially in terms of greater justice, greater social harmony or peace, more efficiency and better growth. According to some, as we have seen, law, even private law, has lost its independence or autonomy as a result. Again, this 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 process, in day-to-day realities, we struggle with the articulation in the law of ever changing practical needs and values. For better or worse, it left room for states increasingly to take the lead in law formation but often without much of a compass. This is clearer to discern in regulation but private law formation is not exempt. Importantly, there are here also basic issues of values or morality even of religion to consider. The main question in this connection is then how far states and laws should get involved in the shaping of a more modern moral order or even regulate religion at the same time. 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, religion is left well alone except to counter fanatical excess or the abuses of its organisation, but a question may

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still be asked about morality or our value system. Is it more like religion, where modern states within the limits of public order will respect it for what it is and also accept the guidance of new values when they emerge. 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 that is very much the civil law-style codification attitude to which in Europe the DCFR still bears witness. It is a major issue and favourite debating point in the ethical aspects of modernity.355 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 better ethical standards to promote social morality and make it stick? Is the law also subservient to this objective? Is there statist morality as there is statist law? 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 of society and the lack of 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 social discipline and moral order. It is obvious that states and their powers are a key factor in the promotion of a ­modern and highly artificial society of which they are the central organisers, hopefully for the greater benefit of all. It suggests again a top-down world in which other forces are subdued or controlled. This may then apply not only to market forces and the environment, but also to other bottom-up or more natural processes, including participatory forms of private law formation at that level, such as in practices or custom. Religion, probably morality, and hopefully academia, remain here free, at least in civil society. It nevertheless gives rise to tension and also 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 or artificial without a clear view of the results beyond some hope of some better world among much wishful thinking or political expediency. In this void, the modern state is itself easily hijacked by self-serving insider groups or local cabals and elites, especially in smaller countries. They live by their own political survival instincts in the measures they order, to which the public interest becomes subservient. In larger countries, it may concern the entire political class. It means a lack of competition at the top and an inability of the democratic process to counter these forms of societal monopolisation, which uses the state and its powers to maintain itself,

355  These important issues can here only be flagged, not further discussed, but see 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’.

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often by promising increased benefits for all in terms of welfare. This puts enormous pressure on the modern state and its laws. Redistribution of the cost through the tax system, public borrowing, printing money and devaluations are then considered viable tools to deal with these matters. So are banks, which are—through poorly focused or unenforced regulation—willing, encouraged, or forced to lend to everybody as a kind of human right (considered banks’ ‘social’ function), and also to states, preferably at low interest rates that are then manipulated down by central banks. This is hoped to result in a fairer society, whether or not stable or sustainable, which may then become an issue of tortured morality or of surrender to irrationality. But bankruptcy looms for this kind of modern state, including its citizens and banks, and globalisation exposes the failure of much local government. Yet it is clear that in the West this approach initially promoted welfare considerably. Its achievements are recent and date from the period after World War II and 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. 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 own 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. In this environment, international market forces may remain more than necessary to correct local political cultures and expediency. This proves painful at times and may mean a reversion to the laws of the strongest, but it is the consequence of the modern state having a tendency to overreach, which means losing control and showing that its models are inadequate. The autonomous forces in the markets, in society, but also in the law and in morality, which modernity had sought to diffuse or redirect, thus reassert themselves and establish a new equilibrium. This could even be seen as a healthy and necessary process, the unfortunate consequence of the modern state increasingly being ruled by crises to get back to some form of rationality and discipline and its inclination towards sclerosis and usurpation by local groups. Too much of government or too much of the market leads to societal dysfunctioning and ultimate correction, which is now increasingly directed from non-national legal orders. It has already been pointed out several times that the true issue in globalisation is the reformulation of the public interest at that level, who its spokespersons are, and what the role of domestic public order requirements remains and when they still impinge on international transactions in a situation of conflict between what may be parallel public orders. 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 considered to be entirely steerable, mainly from above, more truly by states, law formation being one of its major tools. Although according to Weber, this would ultimately lead to an iron prison of rationality and bureaucracy, irrationality may have proved to be the greater danger. In any event, the continuing competition between states, market and other forces suggests that this process is by no means complete and that there remain important bottom-up energies that are not fully controlled or controllable in this manner and that may be

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more than necessary to avoid excess. So post-modernity must and does also consider modernity’s collapse and accepts the lack of structure that results. It is forced to live with many contradictions and unsatisfactory explanations. Part of this is indeed the emerging realisation that existing models and processes are not objective and hardly capture what is going on, certainly not in its movement, and that there is little in this artificial world that can lay claim to it, quite apart from it being often superseded by political expediency. 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? It has become clear that paradigms are important and underlie much of our thinking and action, and therefore also the way a fully operative modernist society would work and how it could be compatible with a modern democracy. These paradigms are not themselves state controlled and are to some extent generational, moved also by societal shocks or changes or newer expectations; see also the discussion in section 1.2.11 at n 232 above. But one consequence is that the newer models that so emerge remain disparate and may even severely conflict. Each presents no more than one particular view of or take on reality that 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, empirical research should help but is often a poor check. This is at least in part so because they invoke fact, but in a scientific environment, it may be very unclear what facts are. They can best be captured naively or intuitively; once we start to describe or define them, they tend to fall apart and become abstractions and contextual, often pure opinion.356 First, there is then the perspective 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 about different things from the start, often without realising it. More importantly, even in this simple example all perspectives would seem objective, but none is: 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; 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

356  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. It is interesting that its protagonists 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 earlier German approach in which no empirical research was needed to test the academic model, which was deemed correct or true per se until a newer model came along; see also the discussion at n 233 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 is often self-serving, see also n 347 above.

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the ­perspective of ­different d ­ isciplines. Upon a proper analysis, most discussion breaks down in this way.357 Unrealised, there are different perspectives and people talk about different things. Even within the same discipline such as the law, it can still be asked, for example, whether civil law codification works well. How could it be 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 much less ‘scientific’? That could also be asked of the common law, which has a different tradition. This is relevant if we should now be moving in the direction of some kind of codification of private law in the EU, as the DCFR would want it: see section 1.4.20 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 is fact in this connection or what, indeed, works better, which may remain mere opinion. The conclusion must be that we are here scientifically on less solid ground than is often assumed; there is little certainty in the artificial modernist world. 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 models, if we wish to move forward in order better to understand what is happening and better to provide for the multitude, but we should also understand the limitations, which may have much to do with what the human mind can capture and explain; our capability of discernment may not be unlimited. At least in the social sciences we know far too little to be able to be confident. Competing forces, notably market forces, cannot be fully controlled and may still be necessary to correct. As long as we do not quite understand how to reshape them in more propitious ways, it may even be better to leave them alone unless they obviously offend public order. An abundance of unintended consequences is likely to be the result. With present insights, it is 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. In such a world, the law as pure expression of the statist principle can hardly be ­all-powerful. It has already been noted that the modern state is not in control of our values, rather subject to them. The law’s autonomy may even reassert itself through its inner structures, which may not be fully discarded or perverted without considerable collateral damage, for example the whole notion of contract and property. Lacking better insights, in a modern society, private law is not exclusively guided by statist p ­ rinciple or any other, nor even is public policy, and there remains room for 357  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 this connection 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 are not talking about the same thing or even the same concept of reality and are therefore unlikely to convince each other.

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immanent or spontaneous law formation, especially (but not only) where the reach of ­governments is practically limited, such as in the transnational sphere or international market place, or patently confused: much regulatory law can never work. In a modern world, law even as an autonomous force may remain eclectic and experimental. It may go nowhere in particular and may have no natural compass except to follow society, not necessarily or exclusively its statist superstructure and theoretical models. In a free ­society, this could even be perceived as a good and necessary thing. It is clear that upon present insights, the positive, state-produced law is not perfect and needs competition, also at the transnational level more particularly in the international commercial and financial flows. It was submitted that law properly understood always comes from many sources, which may conflict but also correct. It is ultimately the result of a constant debate in society about its extent and meaning. States (and their courts) may seek to stabilise it but are even locally not all-powerful if in civil society the rule of law is properly understood and the independent progress of our values respected. Also, states do not necessarily have the deeper insights. In a globalising world, the impetus may here increasingly (have to) come from transnational legal orders. It is true that the new millennium, being generally indulgent, is bored with these issues, which do not fit the modernist agenda. However, the student must understand some of this in order to follow the discussions better as they have a major impact on how we look at the law and its formation, operation and interpretation, be it private law (as a kind of scientific, statist, codified system or not) or regulatory law, such as in financial or environmental regulation, competition law or any other, not least also within the EU. The financial crisis that erupted after 2008 and ultimately became a crisis of government debt once more showed the limitations in the modernist agenda and its progress and 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 at least we should be able to predict them and deal with them through government. But there is no preset answer; 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 now that in many areas the effects of globalisation are increasingly being felt.

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, to the point

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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 in this manner, it proved possible to connect them into an intellectual system that was internally coherent, or could at least pretend to be so. Common law, on the other hand, had not developed in this manner and remained in essence action based, still developing from case to case. It was not intellectual and the urge to define subjective rights more abstractly and subsequently to find system in private law came much later, if at all. Even in common law countries legal scholarship was found increasingly to look for it in disparate case law and legal texts, but it was also said that the true task of academia is not finding system in the past, but to find new models for the future. Thus innovation moves to the centre of academic legal activity, which competes with the legal practice for better solutions and shows alternative ways. But it struggled in particular with more autonomous sources of law, like fundamental and general principle, custom and practices, and the role of party autonomy. Was the academic model to be superior? From earlier on, legal scholarship had been the driving force on the European ­Continent. The rules themselves were at first progressively drawn from Roman law (which had never been promulgated but was considered superior custom) but also from Canon and local laws or customs and later also from more fundamental or ­general principles then seen as part of the directly applicable natural law, which itself became secularised. Indeed this was the achievement of the natural law school after the seventeenth century. In finding structure in this manner, the emphasis thus shifted from an inductive to a deductive approach of rule application in the elaboration of which rationality took centre stage and Roman law was no longer believed to be its sole expression. On the other hand, religious and other cultural overtones were increasingly subdued. It left the question whether such a framework of legal norms could be considered closed. This became very much the codification idea, as we have seen, notwithstanding the fact that newer values and ideas of justice, the requirements of social peace, and of efficiency evolve all the time. In any event, everywhere the rules had still to be balanced against newer public policy (regulatory) and public order requirements. It has already been noted also that in an era of globalisation this must now be done increasingly at the transnational level. At least, in what was to become the civil law, it became possible in this manner to formulate general rules of contracts (binding as such) in terms of offer and acceptance, consensus and its defects, enforcement and 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 in respect of each proprietary right, which were clearly defined although small in number (this is the numerus clausus notion). It allowed for some more limited, derivative proprietary rights to develop as well, such as income, user and enjoyment rights through usufructs, easements and some types of long leases in land, and even security interests, but no others. This was considered the simple consequence of these rights being effective against third parties, which remained exceptional.

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More profoundly, these proprietary rights became systematically distinguishable from obligatory rights. 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 set the asset aside or segregate it from the bankrupt estate and take it while those with obligatory rights could not but became common creditors who could recover only pro rata from the proceeds of unencumbered assets of the debtor. Another aspect was the free alienability of these proprietary rights (therefore without consent of the owner of the underlying asset even if these rights were limited, such as usufructs or certain type of leases, and operated in the property of others).358 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 the ­proprietary right in the asset upon transfer released the transferor of all connected duties, which an assignment could not do. It thus became clear that proprietary user, income and enjoyment rights did not undermine the liquidity of the underlying asset, which contractual user, income and enjoyment rights did. This can 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 liable in that case but can no longer perform as he is likely to have lost the possession of the property. It means that the contractual rights impede the transfer facility and thus 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 ones, see the discussion in Volume 2, chapter 2, section 1.1.3. These more intellectual insights emerged relatively early in the study of the law especially in the continental natural law school after the seventeenth century. The codification drive itself, in which on the European Continent 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, but codification was itself 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 uniformity, ­equality and predictability in the exercise of the citizens’ rights at the national level while doing away with antiquated, diverse and often regional rules, but subsequently also to help consolidate these states and to support and confirm their central organising power and view of society. In the former objectives, one recognises the older ideals of the Enlightenment. It required a legislative drive, which in due course also became

358  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.

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an important vehicle perceived to support and even enhance the national social order and its e­ conomy in a more rational and efficient manner by country. Rationality of this nature was then no longer considered universal. While legislation was at first considered to provide a ready and natural vehicle for reform, adaptation and greater efficiency, it was eventually also used to support forms of social engineering. Here the emphasis shifts to the role of the state as such; one may note the German Romantic tradition in which codification takes on a life of its own and private law soon lost its autonomy. Thus the state, its insights and its organisational powers, became all. It was joined by the German academic ideal that abstract rational models of this nature could be devised that were sufficiently reflective of reality to steer and guide society (and the markets) better. These were formulated by the academies or law schools the state itself had organised and law formation at the national level was then their primary and early objective. One could say that in such an environment the true legitimacy of private law was considered to come from a form of self-evident systemic coherence that academia thought it was able to demonstrate and that their governments would underwrite. Society would conform and could thus be guided and improved on the basis of intellectual models that were equated with reality or truth in that sense. Although academic leadership could in this way stimulate and move the law ­forward, the result was that it set law’s development in concrete through legislation which became difficult to adapt. The emphasis then fell on interpretation to save the system from sclerosis and through which the other more traditional sources of law, which legislation had sought to eliminate, returned: fundamental and general principle, customs and practices, and more respect for party autonomy as we have seen. But it remained contested which resistance also impeded the return of the lex mercatoria in international commerce and finance, which was based on these sources of law and their autonomy in the transnational commercial and financial legal order. It also impeded 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. It was possible in this connection to identify three 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, and 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 was nationalised in its creation at the level of the state through legislation, and (c) it became subject to intellectualisation and system thinking. 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. 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 (still by national statutes) as inalienable (human) rights. Internationalism and ­universalism came to an end and an overarching notion of statehood, national communities, national economies and social policies took over. Eventually, in commerce and finance, it was reinforced by all

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nations 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 believed. On the European Continent, positive law of a nationalistic nature thus became ­dominant even in private and commercial law, while increasingly the only recognised true source of the law was the statute (or code), even for law of a private nature that was not meant to be mandatory but rather directory (or the default rule). In this approach, even the default rule became mandatory when not replaced by another through party autonomy. It followed that all legal structures such as contracts and property rights were believed to be dependent on such law, therefore on the state’s insights and its fiat. In this approach, the impact of custom and practices on the law was there also by state authorisation only. At least that became the codification ethos. Private law was no longer believed to be anchored in human civilisation, therefore in fundamental or general principle or in more informal participatory forms of law formation through practices and custom or party autonomy, but rather in a state’s expression thereof and in the coherence of its model so presented. Parties could still deviate by contract as between themselves but only in so far as these codes allowed it. It followed also that communities, if not statist or state recognised, were in their lawmaking capabilities increasingly ignored. The international law merchant could not survive in that environment. International transactions had to be cut up by country to determine the applicable law, 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 states, risked being reduced only to treaty law that was specifically enacted by them and could then also be seen as territorial. On the European Continent, private law codes thus started to exude the pretence of being all-embracing in the areas they meant to cover. The existence of gaps was even denied, and all were considered complete on the basis of their proper interpretation, related statutes, or the system underlying them while case law acquired importance in that context only. This became the attitude in the major civil law codifications, even if the idea was particularly stretched in interpretation: see section 1.2.13 above and also section 1.4.3 below. 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 at best, always subject to the basic ideas of the code. This also included commercial law. Judges were then seen as administrators applying the applicable law as they found it in the codes, related statutes, and their system in a mechanical manner (bouches de la loi). The fiction was that solutions for all legal conflict would automatically follow the logical interpretation of this kind of law. Equality, consistency and legal certainty were considered guaranteed in this manner. The result was just, socially balanced and efficient per se. No empirical research or interdisciplinary study was necessary. Being the law, its outcome could not be questioned, although it could of course still be academically critiqued, but the tendency was increasingly to accept the

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resulting rule system and its formation and operation unquestioningly. Legal studies meant polishing the system and fitting in new developments. Extra systematic considerations were irrelevant; the system was closed. But these truths held only per country and all law was considered territorial as a consequence of the statist idea. Natural cultures were said to support it. There was no law beyond it. There was no universal principle, value or practice left. Civil law thus fell apart and became dysfunctional as a family. For all its limitations and nationalistic confinement, the continental 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 helped by systemic reasoning. It reduced the law’s more subjective and historical elements: at least that was the aspiration and probably also much of its initial effect. But whatever interpretational freedom was still allowed (see s 1.2.13 above), it basically served to complete the system and its claim to unity and full coverage. The price overall was statism and a static view of the law based on the extrapolation of past experiences, assuming that life was in essence repetitive and that its operation could be rationally mapped out and logically explained in an intellectual system that could satisfactorily guide human behaviour (by country) and properly solve its problems for the present, past and future.359 Well into the twenty-first century, it led to an extreme form of legal positivism on much of the European Continent: law as a national technique, an attitude which at the same time proved inimical to transnationalisation in international commerce and finance, never mind globalisation 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.

1.4.2  Fact and Law Finding in Civil and Common Law Whether or not other sources of private law survived or can be revived, at least transnationally or even in domestic interpretation, 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 to Article 38(1) of the Statute of the International Court of Justice for public international law. There is no clear reason why things should be different in private law formation at least at the transnational level. It has already been said that that was the situation until the nineteenth century. Local law may continue still to play a residual role, as we shall see, but is then part of the transnational law and accordingly explained. In international commerce and finance, these sources 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. 359 

For the basic intellectual criticisms, see n 233 above.

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In domestic law, especially of the civil law type, the revival of these sources of law takes the form particularly of: (a) a more factual 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 still allows resort to various sources of law. In these aspects, common and civil law may be separately considered and compared before we go to the subject of transnationalisation itself. It was noted before 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 tax, company, bankruptcy and trust law, even though often still considered remedial only. Moreover, 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 seen, even though this idea is less infested with sovereignty as in the American sensibilities, sovereignty rests with the people while there is a strong ethos of participation in which under legal realism law becomes the expression of life itself. The basic differences 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. 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.360 In truth, civil law in its intellectual system building has considerable problems with facts and therefore with reality. 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; see also 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.361 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 rather than system thinking figures large.

360  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. 361  See for important comments on the differences between common and civil law legal thinking, W Fikentscher, Methoden des Rechts, Vol 2 (Tübingen, 1975). See for an incisive comment on the nature of the common law, MA Eisenberg, The Nature of the Common Law (Cambridge, MA, 1988).

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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 either. 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) and the English do not on the whole like generalities in terms of principle. In the US, this is less problematic, as there is also the political role of the courts, which allows more 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 human rights-related ethos of the Constitution also make a difference to the acceptance of more fundamental and general principle, which may supersede the positive law in appropriate cases.362 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 him. He will spot the relevant facts in the light of these rules and principles, which provide for him a guide from the outset and which he received from education and practice. In Germany this is called Relationstechnik.363 Again, the system plays 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 the particular case. It follows that systematic thinking and suspicion of other sources of law beyond legislation are here lesser issues.364 Indeed, common law is often thought to be primarily inductive on the

362  See also 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). 363  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, ch 2, s 4.1.5 n 367 below. 364  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, while the detail is left for later on in the proceedings; that is for 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 often waived for cost reasons). In this system, the court sits in only one session

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basis of the facts, and civil law deductive on the basis of its rules,365 although modern common and civil law are here often less far apart than they may appear. In the first instance, the difference may be one of procedure, not always one of substance, connected with the operation of the common law with its greater and sometimes excessive emphasis on fact finding (for example, 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 sooner between facts that are or may become legally relevant, and facts that are not. 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.366 However, there may be serious intellectual ­prejudice implied in this codification attitude when it comes to selecting the relevant (new) facts.367 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, as has already been said, pre-contractual duties at first went unnoticed until this became factually untenable and good faith notions introduced them. Liberal interpretation is there to support the dominance of the system especially in Germany, and is meant to complete it. The result is an endless polishing up of the system in academic writing, in which newer developments are made to fit. This then becomes the major academic pursuit.368 More innovative thinking becomes s­uspect. Again the system is closed, new developments are ignored, globalisation is legally ­irrelevant, transnationalisation cannot exist. 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. However, in all law formation, at least that by legislators, some plan or model would seem to be appropriate and implicit everywhere, although to the extent legislation remains remedial it may not go very far. At least in common law, a system thinking and systemic reasoning did not acquire a special

(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. When 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 while 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, even considered inappropriate. 365  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. 366  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. 367  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. 368  See n 84 above.

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­meaning.369 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 facts as such also play an ever greater role in civil law, especially in the law of obligations (such as in good faith contract interpretation and now also in much of 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 may also move from situation to situation or from fact to fact so that both approaches become more similar. In fact, among the most prominent civil lawyers,370 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.371 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 between common and civil law nevertheless remains important. In truth, norm and fact cannot be truly separated. What is legally relevant in the facts depends on the norm but the properly applicable norm can only be found through an appreciation of the facts. They are irretrievably linked. 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.

369  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 3, ch 1. Another systemic weakness arises in particular 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. 370  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. 371  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 an exercise into the past. Academy’s proper task, it was submitted, is finding newer models that provide deeper insights to guide us into the future.

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1.4.3  The Revival of the Traditional Sources of Law Through Liberal Interpretation Techniques in Civil Law. The Changing Status and Role of Precedent It has already been pointed out several times that in civil law the exclusive civil law ­legislative attitude based on system thinking presents a uniquely nationalistic ­nineteenth-century 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 section 1.2.11 above. It has also already been said that later, the true legitimisation was often 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 often overly formal and amounts mostly to rubberstamping academic proposals which claim intellectual objectivity and qualitative superiority. New values come into this law in other ways: see in particular section 1.2.13 above, potentially putting the system under severe stress. Thus the formal democratic legislative process is not the only way in which more fundamental notions or newer social and public order considerations or values progress through the law. Indeed, they can generally 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 even work or might be simply political wishful thinking, more especially in regulation or criminal law, but 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 when fundamental and general principle are unavoidably revived, but it may still be asked whether such fundamental review is the proper task of judges. In any event, how would they come by their wisdom? It has already been noted that the pretence of exclusivity and systemic completeness and the claim that the 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. It unavoidably puts the judge at the centre of legal development, which was not the original idea in civil law at all but indirectly reintroduced into this process also the force of other sources of law, especially legal principle and therefore natural law overtones, which the codes had thought to expunge. Systematic objectivity may also become a less absolute goal as extra-systemic ethical, social, economic and other considerations soon enter the decision-making process and therefore the law, although it may be repeated that they should only do so in more pressing cases where one may assume substantial community support. Otherwise, these considerations could easily lead to conflicting results and more controversy. It has already been noted 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

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but moves and progresses from case to case on the basis of the facts and practical needs, often in an analogical manner. It also 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 are the further development of common law and equity on the basis of changing factual patterns and needs. Civil law, on the other hand, in order to progress, uses its system expansively, at least in some areas, in contract now supported by notions of good faith (see also Vol 2, ch 1, s 1.3) to give it flexibility and the facility to reintroduce at least at the contractual level some principle (of fairness or equality and even social values) and it now also pays more attention to the facts, even domestically: see the previous section. Analogy here becomes another forceful facility, not unlike common law.372 Other sources of law or legal considerations of a different nature are revived here informally, but they remain limited. How much room that may create also for new proprietary structures to develop, for example, may be more uncertain, but it is not impossible either (see s 1.1.6 above): a liberal interpretation technique is not necessarily limited to contract, but in a codified system, unlike in equity in common law jurisdictions, there is only a limited number of proprietary rights, the numerus clauses, as was noted before.373 However, a freer, more practical and less systematic interpretation method could still allow for the development of newer proprietary interests if so demanded by commerce and financial practice. Indeed, to some limited extent, this happened in Germany in the late nineteenth century.374 There are also signs of it in recent case law under the new Dutch Civil Code (see Vol 3, ch 1, s 1.2).

372  Thus if a new type of contract became fashionable, its rules, if not determined by the parties to the c­ ontract, 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. 373  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 2, ch 2, s 1.3.7. 374  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 3, ch 1, 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 the case to deny proprietary execution rights or to readjust seniority and priorities against the rules laid down for them, at least in Germany.

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Here more fundamental principle and practical need may take over. ­Constructive trust, tracing rights and liens shifting into future assets might then also appear,375 subject to the protection of the ordinary commercial and financial flows, all in aid of practical commercial and financial needs or, perhaps on a higher note, to prevent a windfall for others, such as creditors of an agent, who without this redress might become unjustly enriched in their own 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, in section 1.1.6 above, these developments were noted and greater dynamism in professional 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 more formal trust may then not be far away 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.376 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, it acquires a particular importance in the revival of transnational private law. 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 those 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. In any event, the civil law idea remains that, short of legislation, all is extrapolation from the existing system; the inveterate German desire for re-systematisation, even in good faith case law, was noted earlier.377 Again, the common law is not so confined and

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. 375  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 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. 376  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. 377  See n 84 above.

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is more comfortable with case law that develops on the basis of the facts and practical needs rather than of deductive reasoning or analogy in the application of existing rules. In this connection, it was also noted before 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.378 Statutory law of this nature is literally interpreted so that there remains ample room for law and equity to operate beside it unless specifically overruled. Statutory interpretation accepts this and does not go beyond it. There is no teleological or normative interpretation, at least in commercial matters, where contracts are often also literally interpreted. As already mentioned, principle is disliked.379 Yet, here again, the differences from civil law may sometimes appear greater than they are: even in civil law, good faith may 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. However, the distinction between professional and other dealings is still less vivid in civil law. 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 system thinking; see further also Volume 2, chapter 1, section 1.1.1. In contract interpretation, modern continental and American attitudes may more readily converge, even to the point of the Americans becoming comfortable with the good faith notion (see also Vol 2, ch 1, s 1.3.7) but again 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. It has already been pointed out that there is a predilection to a more literal interpretation of texts in the common law concerning professional dealings and that defences and excuses are limited; that is not different in the USA. See again the discussion on the professional contract in ­section 1.1.6 above.

378  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 2, ch 1, 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 2, ch 1, 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 3, ch 1, s 1.5.2. 379  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 often considered also to take into account extra contractual/legal considerations derived from pressing moral, sociological or efficiency considerations. EU legislation and its interpretation force 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 79 above and more particularly Vol 2, ch 1, s 1.3.7.

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Especially in civil and commercial matters, it should not be forgotten, however, that the practical differences between the various advanced legal systems are not always as great as they may seem, all the more so in Western culture where there is everywhere a similar combination of the rule of law with a neo-capitalist economic and social outlook. But the remaining differences are not irrelevant, and may also acquire a competitive aspect in international dealings. 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 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 here 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. This may finally also require further consideration of the evolving role of precedent in civil law. In section 1.3.3 above, it has already been noted that it 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. The unfortunate result was that academics, rather than looking for ever newer and better models to move the law forward, became stuck in the past and acquired a practitioner’s mentality. Common law, which could only be known through case law, has much more experience here and remained more pragmatic. It moves, as we have seen, from case to case to find new ground 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. Although civil law judges, while acknowledging the importance of precedent, still do not feel bound by it, they nevertheless use it increasingly as strong persuasive guidance as they do not want to be seen to be becoming erratic or subjective. By explaining it as perfection of the system, a tilt in the direction of precedent being binding may even be discerned. Earlier, civil law was explained as more like policy at the macro level, intended to make life easier for all; see also section 1.4.17 below. Case law distracts from this and is more micro level oriented, which suggests another orientation. This has created further tension in civil law’s formation and application.

1.4.4  Survival of Transnational Legal Sources in Commercial Law. EU and Public International Law Attitudes Strong nationalism was demonstrated as still being inherent in both modern civil and common law. This is also so in professional dealing even if international. It means that

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there is in either system in principle little room for transnationalisation as overarching law derived from different legal sources in cross-border private law activities. 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 ignore all others.380 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 (on the contract and property side) in an ever more virtual environment and that, second, the result still adds up to some effective legal framework for the transaction overall. Besides, in nationalism of this sort it was noted further that the common and civil law often also combine in the positivist and formal approach, in which, in England, principles are considered too vague (even when fundamental) and custom generally atavistic (although with some greater respect for it in commercial law) and in which, 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,381 but not elsewhere, eg in property law. Here there emerges some communality between both legal systems in Europe, which was earlier identified as having to do with academic rationalisations of statutory and case law in England and a desire for legislation on the part of the E ­ nglish Law Commission, which supports experiments such as the PECL and the DCFR in the EU, and therefore the push for codification in the traditional civil law sense at EU level, even including England, although this is so far not supported by commercial practice and most likely also not by the English courts. In the previous section, it was also 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. 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,382 negotiable instruments, especially eurobonds and euromarket

380  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. These views are not unknown in the US either, see s 1.3.5 above, especially in the more critical legal studies or sociological approaches. 381  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). 382  See W Haak, ‘Internationalism above Freedom of Contract’ in Essays on International and Comparative Law in Honour of Judge Erades (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 the same Essays in Honour of Judge Erades (The Hague, 1983) 196.

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practices including clearing and settlement,383 the law of international assignment,384 of set-off and netting,385 and of letters of credit (UCP) and trade terms (Incoterms).386

383  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’. 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. 384  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 and for a comparative summary Vol 3, ch 1, s 2.2.4. 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 3, ch 1 ss 2.2.4 and 2.4.8. 385  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. 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 3, ch 2, s 2.5. It concerns here so-called soft law but nevertheless a most important international acknowledgement of the concept of netting, although 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). 386  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 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,

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This may also concern the important and connected issue of finality of title transfers and payments.387 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),388 since 1 March 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 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;389 see also sections 1.4.5 and 1.4.6 below for its use of fundamental and general principle, and Volume 2, chapter 1, 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. 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 refers to fundamental and general principle, contract and custom as independent sources of law.390 This approach is also suggested in this book for the formation of private transnational law, returning in this way to the

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. 387 

See nn 92 and 93 above. 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 2, ch 1, s 1.3.8. 389  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. 390  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. 388 

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situation that prevailed on the European Continent before the nineteenth-century era of the great codifications; see more particularly section 1.4.15 below.

1.4.5  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-national sources of law, at least at the domestic level, although always less, or at least less fundamentally in commercial law in common law countries. It shows its more pragmatic and less intellectual character. These sources themselves and their progressive limitation in the civil law and their handling in the common law of the English variety will now be more broadly considered and summarised, as well as their reappearance, first in interpretation everywhere, but more particularly also in commerce and finance in law formation at the transnational level. Indeed it has already been posited that these notions and legal sources always come back in times of renewal. This is now so at the transnational level, particularly because statutory law of the domestic kind is no longer able ­adequately to cover international transactions, more particularly the international flows themselves in view of their size and nature. There is also the increasing inability to spot them clearly from a territorial perspective in an ever more virtual world of rights and obligations and rationally to break them up into domestic pieces in the hope that the sum total of the laws covering the international transaction still makes sense. It is clear that domestic law in this field, especially that of the black-letter type, is challenged in particular by the progressive globalisation of commerce and finance where the idea of ‘closest connection’ as the basic contact with domestic legal systems becomes increasingly moot, and has in any event a different connotation for contract and property creating further complexity. Again, we are concerned here with the autonomous forces of fundamental and general principle, custom or industry practices, and party autonomy, the latter two being the expression of more participatory non-statist immanent law formation, but so may be the progression of fundamental principle and societal values, which are not then any longer the preserve of states in their formulation and recognition either. As we shall see, this is a major issue particularly in private civil law of the codification type. The hierarchy between these different sources of law needs then also to be determined. These are matters that will be discussed further in the next sections. This discussion will be concluded by revisiting the question of legal positivism of the nationalistic type versus legal principle at the transnational level. It has been said before that a key issue is the role of fundamental principle, earlier often cast (together with general principle) in terms of natural law as the basis of the whole system. Indeed law formation and application in this manner could already be found in Grotius in terms of secular natural law.391 That terminology may now be out of date, but fundamental principle remains a pillar of public international law especially the notion of pacta sunt servanda; see Article 38(1) Statute of the International 391 

See more particularly s 1.2.7 above.

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Court of Justice. It is the same in the transnationalisation of private law and there are others. As we shall see, in international commerce and finance, fundamental rights or principles may not be many but they are the foundation of the whole system of the modern lex mercatoria as transnational private law and they remain then also a source of supplementation and even correction of the otherwise applicable law in appropriate cases. This may also result from public policy and public order requirements in the transnational commercial and financial legal order or, when conduct and effect of international transactions still demonstrably come onshore in a particular country, from the public policy and order requirements of that country. They may conflict, however, with other governmental interests affecting the international transaction or indeed with the transnational minimum standards of behaviour themselves. This is the question of the operation of parallel legal orders in the area of public policy or public order, issues which will be discussed further below in section 1.5.8. Fundamental principle in this context denotes first the force of the given word when detrimentally relied upon, but also the obligation to repair damage improperly caused, the notion of private property, and the duty to give back what is not owned. One sees here the essence of the law of obligations, property and unjust enrichment. Again, this is pure Grotius—see further section 3.1.2 below. These principles remained relevant in public international law formation and application and now also in foreign investment law in the latter case in the form of transnationalised administrative law,392 but they are also regaining their role in the transnationalisation of private law, thus escaping the grip of nineteenth-century legal nationalism and statist thinking while allowing for a participatory bottom-up form of law formation, at least in the transnational business sphere. In recent times, even domestically and now also in the EU, at least the impact of human rights on private law formation has been noted. So it has been in the German Constitutional Court. It concerns especially their horizontal effect between private parties in all situations where power is exerted, even privately. This is now also referred to as the constitutionalisation of private law.393 It operates at several levels and may first impact on the power of states to intervene in private law through mandatory rules. Respect for the freedom of contract and to own property are here especially important for business. On the other hand, it may facilitate state intervention in more clearly defined and limited situations, eg in the area of consumers’ and workers’ protection or even present a way of introducing basic values in actions between private parties more indirectly. For smaller parties there may in this connection be a need for special protection against discrimination or where power is exerted against them in situations of dependence. There is also the issue of discrimination. Then there are procedural or due process protections, especially in state courts, potentially now arising no less in arbitrations. 392  See, eg HP Loose, ‘Administrative Law and International Law’ in P Bekker, R Dolzer and M Waibel (eds), Making Transnational Law Work in a Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 380. cf also R Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative Law’ (2005) 37 ­International Law and Politics 953–72. 393  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.

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The horizontal effect of human rights is in this manner an indirect channel through which fundamental principle re-emerges in private dealing also. Yet these are still human rights as expressed in national instruments, therefore state dependent (or in the EU in the Human Rights Charter when sufficiently specific).394 They may also arise from other state laws (and in the EU from EU Directives or Regulations). 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 law the horizontal application of the imposition of standards by governments on companies. 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 or by environmental behaviour of companies in violation of regulatory standards must, however, still be deemed exceptional395 and is not normally considered implied unless perhaps it rises indeed to the level of violation of fundamental principle. The real question is then why these fundamental principles are not self-executing but still 394  The EU Human Rights Charter is not supposed to be directly relevant here unless specific and it distinguishes in this connection sharply between rules and principles (Art 52). This was politics; 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. See in this connection 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 400 below; see also Case C-426/11 Alemo-Heron v Parkwood ECJ 18 July 2013, in which safeguards of employees after a take-over 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. As suggested in the text, other instances of horizontal effect of EU legislation may ensue when, on the basis of EU or implementing legislation directed at Member States, private rights and obligation may be newly created, varied or extinguished, not based therefore on fundamental or general principle directly either, although they may still surface in the interpretation of the relevant rules, 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 more directly, 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 2, ch 2, s 1.8.2. This case law may also be seen in the light of the extension of the Court’s jurisprudence following Case C-33/76 Rewe v Landswirtschaftskammer fur 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. 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. It does not, however, rule out either the horizontal effect of human rights and the impact of the EU Charter (Art 52(5) in particular). Note 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. 395  See for a discussion of this issue of the horizontal effect of financial licence conditions in particular Vol 3, ch 2, n 110.

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depend for their effect on some doctrine of horizontal interpretation of state (or, in Europe, EU) laws, meaning that states or statist action still has the last word here? It may in fact be considered to what extent this so-called horizontal effect (­sometimes) of human rights and perhaps of some regulatory standards, therefore their effect between private parties, is in truth simply one manner of revival of secular natural law notions in a state positivist environment but still limited thereby. Clearly, some analogy presents itself: wherever power is exerted, also between private entities, there may indeed be considered a human rights element. It must be pleaded and explained, it may not be automatically assumed to exist except again if it might be transformed into fundamental principle, which in this approach, still remains dependent, however, on the state for its recognition and effect, be it in the tortured way of horizontal effect of human rights or constitutionalisation. All the same, it may in such cases amount to a redistribution of risk especially in consumer dealings and labour contracts in favour of weaker parties or even smaller investors. Stronger parties, on the other hand, may be less protected in this manner but the imposition of unconscionable reparation duties or damage provisions could still be in the same category. The introduction of overriding values in terms of elementary justice, social peace and efficiency considerations, or of public policy and public order notions in the law’s application in the interpretation, supplementation or even derogation of contract and other terms is of a similar nature but denotes a more open, not state-dependent framework and may at the international level then even amount to the identification of transnational minimum standards of protection.396 This is so to speak the next step up in this argument when fundamental principle comes into its own, meaning as a self-executing autonomous and independent source of law in sufficiently pressing cases. It was said before that even domestically fundamental principle reappeared in interpretation. 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, which may reintroduce in particular fundamental notions of fairness, proportionality or balance. It is true that there is still an argument that invoking good faith itself is acceptable only when it is especially authorised by prevailing codified contract law (see ss 157 and 242 BGB in Germany and Arts 1134 and 1135 CC 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 and proprietary law or, as good morals (bonnes mœurs) or gute Sitten, even in the law of secured transactions, which had no special provisions for it. The new Dutch law (Art 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 fundamental principle is meant here and denotes at least in principle a more open system of legal normativity. But perhaps more importantly, it will be pointed out in Volume II, chapter 1, ­section 1.3.2,

396 

See also the discussion in s 1.2.13 above.

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that good faith stands more generally for a liberal 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 mandatory either. At least in the US professional parties may set standards under s 1-302 UCC as we have seen.397 In Europe, in the EU, the DCFR 2008/9, which now figures as some model for a European private law codification (see Vol 2, ch 1, s 1.6 and ch 2, s 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 the 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 Art I-1:102 DCFR and Volume 2, ch 1, s 1.3.10) still rather 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 principles, except to point out that many provisions of the DCFR are related to them or 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 mention in the text, however, 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.398 In contract law, there is, however, a curious other provision in the DCFR (Arts 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. At least in contract law, this seems to suggest the application of a higher EU public order principle derived from the laws of Member States in the nature of general principle but only to the extent recognised by them. Again, it should be noted that 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: there are no common EU values per se, but apparently we can nevertheless have a common EU private law.399 There is considerable tension here. However this may be, the DCFR conforms in this manner to the traditional codification ethos and its formal and positivist attitudes and beliefs in black-letter rule emanating from the state or states, further to be systematically applied as a matter of logic which does not allow for extraneous considerations, see also sections 1.4.15 and 1.4.16 below. Again, only values which it formulates or recognises are relevant. Although the DCFR in its Introduction leaves the ultimate decision here to others and only demonstrates that much fundamental principle is reflected in the text, it still represents the

397 

For the multifaceted nature of good faith, see also the text at n 76 above. See the discussion at n 463 below. 399  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). 398 

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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. It can as such serve any regime as states 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. 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 unless it finds expression in statist texts. This is in vivid contrast, however, to what EU case law itself has been doing. Culminating for the time being in Mangold in 2005400 and in Audiolux in 2009,401 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 not exist’.402 They are generally effective and therefore also underlie private law.403 They may even introduce private law notions, not only of damages, in the determination and enforcement of public law obligations.404 Again, horizontal effect of existing legislation is not the sole carrier of such principle into private law. In fact, these principles have an immediate effect on the interpretation (and supplementation for those who make a distinction here) of all legal EU texts and their implementation in Member States. There may even be a corrective function if such superior principle is invoked, which may also affect the legality of these instruments and will then often be related to the effective operation of EU law or to public order at that level. They may even affect the treaty texts if conflicting with them. New causes of action may follow405 while procedurally there may also be further immanent protections of this nature. Even within the EU, this may put the whole process of the formation of private law in a different light and its statist form is then no longer axiomatic. That would also

400  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 Oberoestereich 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 394 above. 401  Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA a.o [2009] ECR I-9823. 402  See para 40 of the Opinion of AG Trstenjak. 403  See also D Kraus, ‘Die Anwendung allgemeiner Grundsaetze des Gemeinschaftsrecht in Privatrechtsbeziehungen’ in K Riesenhuber (ed), Entwicklungen nicht-legislatorischer Rechtsangleichung im Europaeischen Privatrecht (Berlin, 2008) 54, and A Metzger, ‘Allgemeine Rechtsgrundsaetze in Europa’ (2011) 75 RabelsZ 845. 404  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 below. 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. 405  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.

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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 also applies to its sales carve-out in the CESL: see ­Volume 2, chapter 1, section 1.6. Even now, there is fundamental principle in the EU that goes beyond these texts and may even suggest the relevance of transnational ­minimum standards of behaviour if they can be detected in a bigger world. 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 conflict of laws rules. There is also the all-pervading reach of the Bill of Rights as positive law, not as mere principle. In civil society, fundamental principles of this nature are indeed the foundation of the whole structure of private law, now in transnational dealings reviving particularly in the modern lex mercatoria 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. They are also subject to a hierarchy. The drafters of the DCFR should have understood this but never considered their method. An old-fashioned codification 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.

1.4.6  Autonomous Legal Sources: General Principle In the previous section, fundamental principle was demonstrated to be the superior source of all private law. General principle should be distinguished 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 legal systems,406 but may also relate to rationality, utility and common sense. 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 view that ‘to generalise is to be an idiot’. Even civil law c­ odifications only accepted general principles if they underlay its system although others could never be entirely ignored. Again, general principle is better known in public interna406  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, which contains 130 principles and rules of transnational law with commentary. There is no clear distinction, however, between fundamental and general principle and no hierarchy. Also, there is no distinction between consumer and other dealings but the collection is nevertheless of interest.

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tional law and mentioned in Article 38(1) of the Statute of the International Court of Justice as those principles recognised by civilised nations. In foreign investment law, general principle also tended to be referred to in these terms in investment or concession agreements.407 In modern times, the 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 countries. It may 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’.408 In the transnational commercial and financial legal order as a newly emerging order, 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 already been noted that in this connection it must also be considered what makes better sense or works better in the particular legal order it concerns. In ­international commerce and finance, this concerns the transnational commercial and financial legal order, further elaborated in section 1.5 below. Here the search for principle leaves the domestic scene and comparative law behind, and acquires a more universal utilitarian impetus. Importantly and as already mentioned in section 1.4.5 above, in the case law of the ECJ there are also ‘borrowings’ of private law concepts in the nature of general principle,409 such as the notion of good faith, the notion of contract,

407  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. 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. 408  Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334, 347. 409  See also text at n 404 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

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the notion of tort and causality in that context, of property, of abuse of rights, of force majeure and change of circumstances, 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 a public administrative law context, where the ECJ often develops them, such as, for example, in the administrative contract, the administrative tort and so on. Guidance may then also 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 be one 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.410

1.4.7  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 practices411 also needs to be considered more properly. From the outset it should be emphasised that there is a difference between: (a) custom operating as a separate, autonomous source of law; (b) custom referred to in codifications or statutes when it does not operate autonomously; and (c) custom (or usages/practices) operating as an implied contractual term, when it operates by virtue of the parties’ intent412 (which in codification countries itself may not be independent

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 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). 410  In s 1.4.5 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. 411  The idea that customs are old-fashioned, atavistic and representative of primitive law is here utterly rejected (see also the text at n 418 below) as well as the notion that the force of custom depends on long-serving­usage. 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. 412  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 truly a liberal interpretation facility). Conflicts rules in contract law were for a long time also considered implied conditions until it was found no longer appropriate that their status (and thereby the applicable law), was always dependent on the parties’ intent. These rules also became accepted as objective norms, more like custom. It is a strange feature of private international law that otherwise adheres so much to positive law concepts. The reverse also happens: 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 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, especially 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.

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either). In the latter case, the rules are basically contractual and would have no meaning outside it.413 This is hardly custom in the proper sense. The working definition often used in this connection for custom proper 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 would rather require an industry shift or the other party’s consent to be set aside in an individual case (unless the custom is mandatory as it might be in property matters including negotiable instruments and some other situations, as we shall see). Such custom is traditionally perceived as an independent and autonomous source of law. They are not 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 as we shall see, but it may be misleading. Although immanent law, custom as an autonomous source of law is not contractual but hard law, no different from other sources of law including legislation and case law. It means that it must be applied by judges or arbitrators if its conditions of applicability are met. That was indeed the position in civil law, at least until the nineteenth century, but it was also the original position in the common law. It did not therefore depend on special government or state sanction, either in statute or treaty, or on contract, but spoke for itself.414 Article 4 CISG still seems to leave room for this; at least it does not detract from 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 started to affect the status and legitimacy of custom as a source of public international law. It may be recalled in this connection that the earlier ius commune had been friendly following the Justinian Digest, but it had been concerned with priority in the case of conflict (see s 1.2.5 above) where in Northern France (the area of the droit coutumier) precedence was given to local laws, but notably not in Germany and Italy, except for city laws in trade and commerce, which remained, however, narrowly interpreted. The codifications of the French and

413  It should be clear from the above that not all custom is legally the same. It should, in particular, 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 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 his terms unless the habit becomes an industry practice when a legally enforceable rule may be the result. If in the particular instance the concession was specially relied upon, it becomes a matter of contract law, not custom or practice. This may apply to many habits in the sense that participants may signal their withdrawal when the otherwise applicable law would start to prevail. This is quite different from custom, which can be set aside only when both parties agree and even then only if these customs are not mandatory as they might be in property law, especially in negotiable instruments, or in the law of set-off and netting. As we shall see in the text following n 425 below, custom may also operate as presumption. 414  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.

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German variety both gravitated towards and were ultimately an expression of exclusive statism, and as such monopolised law formation.415 Custom was affected, and at least in private law it became ignored unless statutes specifically referred to it.416 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; and the German BGB section 157.417 Custom’s role was in fact hardly discussed any longer and its status in the rest of the private law, especially in property law, was unclear, but particularly 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 also the discussion in section 1.4.16 below. Common law remained friendlier towards custom, at least in commerce, as we have seen in section 1.3.1 above. In fact, even 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. In England, however, the status of custom in a narrower sense became uncertain, caught up as it was in sovereignty ideas, although it was also rubbished as being primitive and atavistic.418 In the m ­ eantime,

415  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 (Paris, 1827) xcii–xciii, see n 228 above. In Roman law, 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 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 185 above. 416  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. 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. 417  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 also having become absolutely mandatory, see also n 413 above. 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. 418  Even in more modern times this remains the view of HLA Hart, The Concept of the Law, 2nd edn (Oxford, 1994) 95, 106.

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commercial law and practice as well as its courts had already been subsumed in the common law and its judicial system (see s 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.419 Common law judges may thus be forced to distinguish cases more aggressively in commercial disputes in order to overcome the restraints of precedent, and some greater dynamism in the development of commercial customary law in this manner appears to have been accepted. In these circumstances, in Europe, both domestically and transnationally, it proved easier to accept the force of custom, at least in contract, on the basis of an implied contractual term (especially in England)420 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 always remained superior and the ultimate source of the law and that domestic law remained superior in this area too. As in practice, custom is in England thus often seen as an implied contractual condition,421 this posed, as already mentioned, the question whether it can also operate outside contract law. Although the ambivalence towards custom in England leaves more room for it in commerce, it is not certain how much,422 especially when international. It has already been noted that custom figuring as implied contractual condition is in fact not custom proper at all. Only the UCC in the US makes it clear in its section 1-103 that custom, particularly if also law merchant, is favoured 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 abandoned. The UCC otherwise avoids the term ‘custom’, and refers to the ‘course of business’ 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 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. Perhaps another form of custom operates there. Section 1-303 defines the usage of trade in this connection, and also contains a statement as to 419 

See s 1.3.1 above. 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. 421  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. 422  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. 420 

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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’. 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.423

Sensitivity to accepted practices and custom is particularly important in international trade. The CISG avoids a reference to custom, however. In the English tradition, it uses the terms ‘usages’ and ‘practices’ instead and follows the implied term approach in the context of contract law with which the Convention only deals.424 As a consequence, custom of this nature is subjective and has to be proven, but must still be more than a

423  There is a more recent view in the US that the UCC was mistaken in its reliance on custom, course of ­ ealing, course of performance and trade usages and their unifying force, see L Bernstein, ‘Private Commercial d 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 customs when 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 1.4.17 below. Clear rules are needed in all areas where the emphasis is on finality as in payments and property transfers, see also nn 92 and 93 above. But custom and practices will support this too and may even go further and be more precise. It should be noted in this connection that custom and practices may have important effects outside the area of contract, which in the above criticism seems to be the area primarily considered. In international transactions that may be their major importance; 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 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 of transnational law in this sense, see also text below at n 427. 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; 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 University of Chicago Law Review 842. 424  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’.

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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 may derive 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 of the Convention, which leaves custom as such alone. 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. There is a particularity in so far as in the application these usages must 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 c­ ircular. In the interpretation sections, again, there is only a reference to usages and practices (Art II.-8:102(1)(c) and (f); cf also Art 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, although it also appears to consider custom irrelevant in that context. That tallies with its notion of a closed regime of proprietary rights and suspicion of market forces. See further Volume 2, chapter 2, sections 1.10ff. In its essence, custom is an expression of what is understood as normal or best practice in the group or community that it concerns and of what is in that group perceived to be most desirable in terms of rationality, utility, common sense and experience, also when situations change. As such, it is an expression of its routines and resort to custom is engrained in all law and its application. It may as such be relied upon by all. It has already been said that it means that they cannot unilaterally be eliminated eg by giving notice, even if not mandatory. Unless the custom itself dictates otherwise, it requires consent of the other party, just like any default rule. Normality is the true legal default rule and custom is one of its major expressions. 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. Being concerned with and an expression of these routines, it 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. In the elaboration of the rules of contract, property, set-off and procedure (in ­international arbitrations), mandatory rules of custom may even develop, which therefore could not be set aside even if both parties agreed. In contract this may concern legal capacity and contractual validity. 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, and international custom may increasingly oblige.425 425 

See nn 92 and 93 above.

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It should also be re-emphasised that custom or practice may still surface in different ways as mentioned at the beginning of this section. They may serve as autonomous sources of law but could even then still be mere presumptions, such as, among professionals, the presumption of the capacity of the parties. Still, 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 then be increasingly ignored especially in the case of legal entities, although purely domestically they may still remain of the greatest importance.426 More generally, in international commercial matters, local aspects of capacity, but also of illegality, nullity and collapse of title or voidable title, might well become less relevant. International trade and the support of its flows may be considered a more important concept, at least between professionals in the business sphere. Again, this often goes to the issue of transnational and payment finality where transnational custom may be particularly active. It has already been noted that custom or trade or industry practices may also be found in industry-standard terms and may then even be reflected in written compilations, often of private bodies such as the ICC (in Incoterms and the UCP).427 The International Capital Markets Association (ICMA) has already been mentioned for its role in the eurobond market. These codes 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. Custom of this nature should be well distinguished from standard contract terms. The latter are contractual, in essence an organisation technique of a dominant operator covering all or a substantial part of its customers or clients and they are therefore specific to it. As contracts of adhesion and an imposed organisation structure, they must be reasonable in content although this may have less of a meaning and impact in professional dealings. That does not make them custom, however, and only when they become standardised for an industry, either informally or through the operation of trade associations, may they acquire that status, but they normally do not. Another point must also be made and was already implicit in the above. Most authorities suggest a longer process for custom to emerge out of practice. This has already been questioned. The business community itself should grasp the nettle and simply insist on its rules or law merchant to be applied and enforced regardless of other criteria. 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. A key modern insight is that the formation of custom may not be a long process; custom of this nature is dynamic and may change instantly.428 That is the simple consequence of it following and sustaining

426  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 (Lord Ackner). 427  See also n 386 above. 428  See their fluid character, n 412 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

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the commercial and financial practice and flows, its basic nature being a reflection of ever changing routines, often guided by utilitarian considerations. 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 merely because they work, are accepted, and can be identified.429 Again, trade associations like, for example, the ICMA in the eurobond market and the ICC for the Incoterms and UCP may play an important role in moving these rules further forward.430 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.431 It has already been noted that they may even be mandatory, especially where the infrastructure of the law of contract and property is concerned. 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.432 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

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. 429  That was Hart’s view of international law, see Hart (n 418) 227, 231 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 also text at n 418 above, a remnant of Bentham and Austin. 430  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 arbitrators 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. 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. 431  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. 432  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 233 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 a broader 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.

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novit is a well-known civil law maxim, but arbitrators in particular might still require ­elucidation by the party invoking it. It is law but must be pleaded as fact thus parties in an arbitration will normally still have to plead it and prove it, except in areas where arbitrators have acquired autonomous powers, see chapter 2, ss 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, may still be the subject of justified enquiry.433 Arbitrators would in any event be unwise to so invoke custom without inviting further argument by the parties. There should be no surprises on this point in the award. This important aspect will not be discussed here any further.434

1.4.8  The Competition Between Custom and Statutory or Treaty Law. The Issue of Desuetude and the Relation to the Good Faith Notion in Contract As far as the effect of the autonomy of custom is concerned, this customary law will first overrule directory private law, even if statutory, unless parties wish it to be ­otherwise. But it is in the nature of custom that both parties would have to agree unless the relevant custom itself provides otherwise. Without such an agreement, custom is the default rule435 and no single party can opt out on its own and insist on the default rule of the otherwise applicable law, unless again this is in the nature of the relevant custom itself. 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 a matter of contract proper rather than of custom as explained in the previous section.436 Thus statutory and treaty or case law concerning it cannot and does not replace custom of this nature, unless mandatory, but even if relevant treaty on statutory 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,

433  It was queried especially in BP v Lyban Arab Republic (1977) 53 ILR 279, 359, see also the discussion in Vol 3, ch 1, ss 1.1.14ff concerning arbitrators’ status and powers in this connection in financial arbitrations. 434  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 a different type of dispute resolution, however, see ch 2, s 1.1.4 below. 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, even though of great importance in the commodity business. They are often not reasoned either and, if international, may not be covered by the New York Convention. In international commercial arbitrations, this is a dangerous position to take and would suggest leaving facts to the autonomous determination of arbitrators. 435  A competing statutory default rule or such a rule formulated in case law would be of inferior status. However, it may be that the customary default rule in its interpretation would be subject to notions of good faith, especially in contract, like any other default rule but again there might be less room for it in professional dealings. 436  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’ 66 University of Chicago Law Review 781.

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especially relevant for regulation, therefore in situations where governments intend to guide.437 It usually means that the mandatory measure is too far removed from reality to be capable of being or remaining effective, or was wishful political thinking in the first place. In other words, a 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. It is obviously a delicate issue but also relevant in private law formation and may then be conducive especially to the operation of new transnational proprietary rights or set-off facilities, whatever statutory texts, including treaty law say. The written law as a mandatory statutory system may thus be overturned by practices that move forward in more realistic ways. Also here, public policy expressed in terms of support for such systems is not immune. In this connection, it may also be observed that at the transnational level, custom is not territorial while treaty law is. It has already been 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 is whether mandatory good faith notions can prevail over custom in contract, which is doubtful if the custom itself is mandatory also, unless good faith in the particular instance reflects higher fundamental principle, but see for the Dutch ­attitude n 417 above. Again it assumes that good faith is a higher norm, but it was earlier submitted that in truth it means a liberal interpretation technique under which fundamental principle may indeed eclipse mandatory custom, but good faith itself could not then do so: it depends on the type of source of law it introduces in the interpretation of the contract or other type of legal relationship. In international transactions, it must further be considered how far mandatory domestic laws are still relevant and they could only be so to the extent the transaction comes demonstrably onshore in the country of the relevant law and is adverse to its fundamental or public policy content in this connection. 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? (b) can it also be objective and an independent or autonomous source of law in contractual and non-contractual matters? 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 or taxation rules? (d) can it be propelled by trade organisations? (e) can it be invoked and applied by judges and arbitrators upon their own motion? (f) can it supersede mandatory statutory or even treaty law as a demonstration of non-usus of those laws? and (g) is it subject in international transactions to any domestic or international ­public order constraints, including notions of good faith?

437  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 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 in the US has sought to limit its reach, see Kioble v Royal Dutch Petroleum Co 133 SCt 1659 (2013).

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1.4.9  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 and transfer of proprietary rights, which may have contract at their base but are different legal acts. In contract 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 m ­ atter 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, which, as we shall see in Volume 2, chapter 1, is seen as further to require for its binding force 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. It is redolent of the consideration requirement in common law and is considered here the true justification for the binding force of contract and/or for any action based on party autonomy in this sense at the transnational level, further subject of course to relevant public policy and public order requirements of a domestic or increasingly transnational nature in terms of international minimum standards. 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’].438 That was or had become the traditional French view. The text of Article 1354 of the French Code Civil still reflects this: ‘Les C ­ onventions 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.439 However, codification thinking also intruded here, and, in France too, freedom to contract is now often believed to depend on code authorisation, see 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.440 Indeed, the long-standing 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. The concept of party autonomy as an autonomous source of law, at least at the transnational level, was in recent French case law also 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

438 

A Loysel, Institutions coutumières (1607). 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. 440  See GR Delaume, Transnational Contracts (New York, 1989) 119. 439 

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domestic law (lex arbitri usually of the seat).441 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 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 further chapter 2, section 1.1.10 below.442 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 entirely stand alone but remains embedded in the legal order in which it operates and the fundamental principles and customs of that order. They may impose additional requirements for a contract’s validity under transnational law: the requirement of a commencing of compliance by the other party has already been mentioned as a question of investment and detrimental reliance. It is also subject to its requirements of public order, although not, or not necessarily or no longer of a purely statist nature, and there may 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 and not some state-licensed facility. It has already been mentioned that party autonomy in this sense may even enter proprietary laws concerning movable assets operating in the transnational legal order subject to stringent finality requirements; see section 1.1.6 above. It makes property law dynamic and an important risk management tool. 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 1.4.13 below.

1.4.10  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. Among legal positivists, there is still the opinion that only treaty law can truly be a source of autonomous transnational law, never mind its obvious territorial nature.443 441  See Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia available at www.courdecassation. fr/ jurisprudence and see n 20 above. See further P Pinsolle, ‘The Status of Vacated Awards in France: the Cour de Cassation Decision in Putrabali’ (2008) 24 Arbitration International 277. 442  See for this discussion also what was said about delocalised arbitration in s 1.1.11 above and in ch 2, ss 1.1.8 and 1.1.9 below and about the formation of legal orders in s 1.5.3 below. 443  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 15 above.

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It builds on the notion that only states can make law, even private law, and that there are no other sources. The CISG then figures as the most important example of this type of uniform substantive treaty law in the area of private law444 and is 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 idea in this connection. In the absence of a higher norm, the CISG misses, however, the authority to determine its own rank, see also the discussion in section 1.4.14 below. As previously mentioned, at EU level, treaty law translates into Regulations or Directives for the area, even though the latter do not achieve unity in the strict sense and still allow for different implementations in Member States; see further section 1.4.20 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. As we shall see in section 1.4.19 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. In private law, in the EU, Regulations have been used particularly in the area of ­conflict of laws—compare the Brussels I and II Regulations and Rome I and II 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,445 although since October 2011, there has been a draft Regulation CESL for cross-border sales transactions, already mentioned several times. Regulations are sometimes also used to implement Directives in the financial area, such as the Markets in Financial Instruments Directive (MiFID) and the Prospectus Directives (see Vol 3, ch 2, s 3.5) and may in such cases also have (some) private law effect. In the EU, the uniform law so created might only cover interstate or cross-border (therefore international) transactions as in the case of

444  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. The 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 1.4.19 below on the agents of international convergence in private law. 445  It raises important issues of EU jurisdiction in these matters, see s 1.4.20 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.

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the CESL, but it will often be broader and then be intended to affect all transactions (see further s 2.3.2 below) although this raises even more urgently the question of EU legislative authority; see further the discussion in section 1.4.20 below. That is, nevertheless, also the ideal of the DCFR. 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, it being considered one jurisdiction at least for this purpose and treated as if the EU were one country. Unlike for transnational transactions under the modern lex mercatoria, other sources of private law are eliminated in the nature of all civil law codification. Although the proposal for an EU sales law in the CESL is limited to cross-border transactions only, as just mentioned, it still eliminates the other sources of law—at least that is the attempt but it may again be asked whether the EU has that authority under its own Founding Treaties, which do not deal with these ­matters. Whatever the view, there is nothing transnational in this law. 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 within the US all sales of goods. This American uniform law, prepared by private groups in the ALI, is neither federal law nor is it agreed between the ­various States of the union: see section 1.4.19 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 for each State, of which there are some even in respect of the UCC. That is the difference from EU Regulations. As far as suggested 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. These two uniform law approaches, either through treaty/Regulation or as parallel laws are in principle also open to Member States of the EU. Both are to be distinguished from transnationalisation, which would, at least for cross-border transactions even within the EU, consider texts of this nature among the other sources of law, it being noteworthy in this connection and only to be repeated that the UCC in the US explicitly recognises and favours these alternative sources of law even for purely intraState transactions (see its s 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, of which there are only a few so far, it is more practical and also more intuitive to include them as one source of transnational law, but such treaty law must find its place among the other sources of transnational law, therefore within the modern lex mercatoria, and may still be eclipsed, even if mandatory (which it is usually not so far), by fundamental principle and mandatory customary law—see the discussion below in section 1.4.13.

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1.4.11  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 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. 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 for this uniform law was also on treaty law. 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 subject, as UNCITRAL (partially) did in the 1980 CISG and UNIDROIT has also done in other areas as we shall see in section 1.4.19 below. Again, if other sources of transnational law are also accepted as here proposed, the uniform or transnational private law may also emerge from these other sources and treaty law would only be one of them and would have to find its place among them; see the discussion at the end of the previous section. The private international law approach, on the other hand, relies on conflict of laws rules under which ultimately a national law results as the most appropriate law to govern the case. These 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. These rules attempt to find closest connections between an international transaction and different countries. These private international law rules may present very different views as to what the closest connection is and may as such differ considerably from country to country and from case to case. They will be discussed in part II of this chapter. These conflicts rules or rules of private international law may themselves, however, be made uniform internationally, normally also through treaty law. This is very much the remit of the Hague Conference; see again section 1.4.19 below. This Conference drafts uniform conflicts rules to be incorporated in treaties, which should therefore be clearly distinguished from the just-mentioned uniform substantive (treaty) rules. 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 leads to the formulation of substantive transnational rules of private law by way of treaty to be incorporated in the domestic laws of the treaty states. As just mentioned, the 1980 CISG is its most important example. The voie indirecte approach, on the other hand, only leads to the formulation of some uniform conflicts rules as a conduit to reach the most appropriate domestic or national substantive rule. It unifies only conflicts 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,

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especially in the area of family law, but also in trusts and agency, although in the latter area still with few ratifications. There is also one for sales.446 Note that these rules may lead to the application of a domestic law that is itself uniform law under applicable treaty law.447 Beyond the efforts of the Hague Conference in this respect, the 1980 EU 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 also covered not only sales, but also many other subjects.448 Whatever the idea of uniformity in this area, it can still be said that only national law results in this manner. 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 Hague Uniform Sales Laws were agreed, which were the predecessors of the CISG.449 The discussions continued ­thereafter, in the sense that the Hague Conventions on the uniform law of sales were succeeded in 1980 by the CISG. The 1955 Hague private international law Convention on the Law Governing the International Sale of Goods was updated by a new text in 1986.

446  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. 447  In fact, conflict 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. 448  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 itself suggests 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 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. 449  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 reproduces 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 was an attempt at reconciling both approaches, which resulted in a substantial step backwards from an internationalist 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 is 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 2, ch 1, ss 2.3.6–7.

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1.4.12  Domestic Laws as Autonomous Residual Source of Transnational Law It will be argued in section 1.4.13 below450 that in the formative era of transnational private law, domestic law retains residual importance if the other sources of law do not provide the necessary solutions. It may be found through the traditional conflict of laws rules. However, such law then operates in the transnational sphere, must find its place and meaning therein, and will be adjusted accordingly. 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 areas where the law is at their free disposition. It then also must figure within the modern lex mercatoria and its application is superseded by higher rules. Yet it may supersede all lower rules, therefore notably the directory rules of the modern lex mercatoria as we shall see in the next section.

1.4.13  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 s 1.1.10 above) and which is increasingly detached from domestic legal orders (see s 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 traditional legal sources, 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 new law may residually still use private international law rules pointing to a domestic legal system if no transnational rule 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. It is no longer purely domestic. As we shall see, this is in principle no different when parties choose a domestic law to apply to their transnational transaction. When different sources of law potentially apply, the key is to determine the ­hierarchy between them, which in this book is considered the essence of the modern lex ­mercatoria besides the identification of its sources. These sources, although autonomous, 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 and for contract

450  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.

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and property elaborated in Volume 2. It should also be considered in this connection— as already noted several times—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 already be reflected in fundamental principle as part of the modern lex mercatoria as a matter of private law in terms of societal values. It has already been noted in section 1.4.5 above that first, at the top, there are these fundamental basic principles further discussed in section 3.1.1 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 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 fundamental principles—human rights and European law also tell us so, see also section 1.4.5 above—but they are not many in international commerce and finance. All are in essence mandatory or ius cogens and form the basis of the modern lex ­mercatoria. They contain the essence of contract, agency, property, tort (negligence), and restitution law. Second, in the details, one should first look for custom or practices of a mandatory nature, including proprietary protections. They are still 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,451 and mandatory rules have undoubtedly developed internationally among the participants in the financial services industry, where it is often a m ­ atter 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. I­ mportantly, 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 views of the more sophisticated modern financial regulators may provide a further lead here.452 The key is often public policy support, which may thus also play a role directly in private law formation, including customary law. It likely refers to a more fundamental principle of the same type, but, as already mentioned above, public policy will not be exhausted in this manner and may operate separately as a corrective of the modern lex mercatoria (rather than being incorporated in it), see further section 1.5.8 below.

451  452 

See n 383 above. See for the rules between the international capital markets participants, s 3.2.3 below.

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Third, one should subsequently look for uniform substantive treaty law of a ­ andatory nature, at least to the extent that transactions are covered by them. m ­Mandatory treaty provisions of a private law nature are still rare453 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. They could also derive from the Bank of International Settlement (BIS), even though its rules operate so far only through so-called soft law, which could, however, still acquire the form of (mandatory) custom, for example in the area of set-off and netting, or from other international organisations such as the World Trade Organization (WTO). In the proprietary aspects, UNCITRAL’s work on assignments of receivables could prove to be increasingly important, although its 2001 treaty on receivable financing proved a failure; see also Volume 3, chapter 1, sections 2.4.5ff. The UNIDROIT Mobile Equipment Convention may be more successful, at least in the Aircraft Protocol; see Volume 3, chapter 1, section 2.1.8. The essence is that these treaties must still yield to higher laws in the hierarchy of the modern lex mercatoria. 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, 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 1.4.9 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. Although in property law, the power of the parties to create new proprietary rights is generally limited, it has already been pointed out in section 1.1.6 above that one may expect here greater dynamism in transnational law subject to the protection of the ordinary flows of business. This party autonomy also has a place in property law at the transnational level. That 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. 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 section 1.4.9 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

453 

An example is Art 12 of the 1980 Vienna Convention on the International Sale of Goods.

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context.454 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 ‘consideration’, ‘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. That would be unusual. 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 s 3.1 below) because of the multiple terms and ­conditions it often incorporates (which goes against the English concept of ­negotiability). However, it is generally assumed that it is so according to international practice in the market place if concerns, m ­ aking 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 2, chapter 1, section 3.2.2. Again, the likely result is that a local law functions differently locally than in an international setting or in the international marketplace. 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 now 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. It 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. 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 the parties; see section 1.1.12 above.455 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 1.4.19 below. Seventh, subsequently one should look for uniform treaty rules 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

454  See JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in ­ ommerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation C of the Law (Oxford, 2009) 619. 455  See further the cases in ch 2, nn 38 and 39 below.

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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 have some meaning here. 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. 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.456 Here the lex situs traditionally prevails and is then mandatory, assuming that it can still be found in the international flows of assets.457 Again, traditionally, party autonomy and the directory sources of law have no meaning here 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 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

456  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 2, ch 2, 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 international 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 3, ch 1. 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 arise, especially in the proprietary position and protection of the prospective owner of the assets and its creditors. 457  See for the traditional views and schemes in this connection in particular H-P Mansel, Staudinger BGB Art 4–46 EGBGB Internationales Sachenrecht (Munich, 2015).

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l­ ocation of which is much more difficult to establish.458 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 d ­ ifferent countries.459 In the hierarchy of norms as here explained, there is in this application of domestic law through conflict of laws rules in any event a discretionary element; these rules are 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 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 overcomes the argument, frequently heard, that the new lex mercatoria cannot operate because it is not a fully operative system for those who seek it. What is happening is, however, that 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. Finally, as an example, it may be of interest briefly to consider at this stage the discussion of the impact of this hierarchy approach within the lex mercatoria for 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,460 but if they are incorporated they achieve a higher ranking in the hierarchy of norms in this manner, as just explained, and may well in such cases continue to prevail also 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 often 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 logic, to look at general principles commonly applied to them in the most important commercial countries, and only as a last resort to apply a national law via conflicts rules, in the manner here explained,

458  459  460 

See Vol 2, ch 2, ss 1.8.2 and 1.9.2. See n 57 above. See n 385 above.

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therefore always with some discretion, including the facility of ­transnationalisation of the result. That would seem to be the better and more realistic approach.461 Thus any domestic laws still applied become part of the transnational lex mercatoria and figure therein, therefore no longer as domestic laws. This is a key insight here.

1.4.14  Treaty Law and its Own Concept of its Place Among the Other Sources of Private Law It is of interest to note in this connection also what treaty law makes of its status where it attempts to assess its own place among all sources of law (within the modern lex ­mercatoria and its hierarchy, see s 1.4.13 above), especially also fundamental principle and customary law. It is not up to it alone to determine its own rank (except to postpone itself) and it could never do so dispositively, although it could still recognise the situation and the hierarchy for what it is. Rather than doing so directly, treaty law of this nature usually deals with these issues only 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 II, chapter 1, 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 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 and derives from Article 31 of the (other) 1969 Vienna Convention on the Law of Treaties. In the context of the interpretation of the Convention itself, it could denote more particularly a liberal interpretation technique through which the other sources of law revive—it is not clear. The reference to internationality could 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 either (but under Article 9 is limited to the interpretation of the contracts concluded under the Convention where it is basically considered an implied condition; see also the discussion in s 1.4.7 above).

461  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.

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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) 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 Art 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 did not provide a solution. It would, however, itself become part of this transnational law and be adjusted to make sense in that context. There is also the impact of public policy to consider, at the national level to the extent international sales demonstrably come onshore in the relevant country, and otherwise international minimum standards, which may even supersede the local ones, unless all activity is connected with one country when there would hardly be any international sale at all. Other 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 3, chapter 1, section 2.4. See further Article 4 of the 1988 UNIDROIT Convention on International Factoring (Vol 3, ch 1, s 2.3.7); Article 7 of the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade (Vol 3, ch 1, s 2.3.8); and Article 5 of the 2001 Cape Town Convention on International Interests in Mobile Equipment (Vol 3, ch 1, s 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 approach.

1.4.15  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 status 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 natural law, a term that would probably not have been invented today. It may be backed up by what becomes customary and parties can contribute (party autonomy). Whatever the terminology, the basic issue is the existence and status of law outside the positive, now mostly statist order, often unwritten and in the case of ­fundamental principle of an overarching nature, the question therefore whether we

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have an open or closed system of legal normativity, at least in international business, especially relevant in respect of transnational law formation and application. As we have seen in section 1.2.6, the Romans knew the notion of natural law.462 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 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 all 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 codified. 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 creating any conflict with the positive law, however defined. On the other hand, 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 fact situations, interpretation of the fundamental principles operating behind the positive law may alleviate these problems and tensions, and usually does so

462  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, or the support of an ultimate rule of recognition in the sense of Hart, or an apex norm or Grundnorm in the sense of Kelsen. 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. This law is not necessarily equated with the demands of morality, however, although there is often a close affinity. It is not necessarily immutable either, although many consider it 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, the latter more particularly as the embodiment of fundamental principle also, see the discussion in s 1.4.5 above. Both claim a more universal reach. See 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 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 the 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 more general concepts. In constructing a new lex mercatoria, these attitudes return, as we have seen, and they remain therefore relevant in terms of this book.

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in order to make the law function at all. 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 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 and contradictions in the positive law itself. Nonusus of black-letter laws or desuetude may become the consequence (see also the discussion in s 1.4.8 above), even if this law is statutory and/or mandatory, whose rules may then become legally irrelevant. In fact, many rules and their original meanings are quickly forgotten. Case law is soon forgotten too. This is a continuous process that has not much to do with a perceived natural law/positive law divide, which is in any event not caused by the operation of fundamental or any other principle.463 Positive private law when properly understood is not then merely black-letter and mostly statist law 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 transnationally also treaty law figure. Even national legislation, and its systems may retain considerable significance, if only residually at the transnational level but it is adjusted to make sense in that context and in the process becomes part of the transnational law itself. Especially in academia, but also in case law, this reference frame is constantly developed and explained further or at least should be. In fact, if we may assume that the positive law is simply the applicable law, whatever it may be from time to time and from case to case, it means that in practice there is no clear distinction or borderline between principle and positive law at all; modern private law is in its formulation and application full of (implicit) references to other more fundamental principles or concepts, a situation that even the DCFR in its latest introduction recognises for that type of codification. Many so-called rules, whether or not written, are expressed in abstract principle or in concepts. This is also clear 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, 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. This is a continuing process that is necessary and keeps the law living and responsive to legitimate needs, which are all needs that are not barred by public order considerations. Much law emerges in this manner or becomes in this way part of the positive law. In modern contract law, the notion of good faith and its use are

463  Human rights and environmental protection notions may here increasingly figure as fundamental ­ rinciples as well, therefore even in private law, although they might still be contentious when corrective of more p positive, especially statist rules; see also the discussion on constitutionalisation in s 1.4.5 above.

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particularly indicative and in truth a cover. 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 discounts all sources of law: see section 1.4.3 above. In fact, as we have seen, 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. It follows that in this book no fundamental distinction is made between rules, principles and the positive law; it is all a matter of degree. In any event, even specific blackletter rules are no more than guidance in new or incongruous fact situations. Law, even positive law in this sense is then not, or not necessarily, national or domestic either, or even territorial; only the legislative variant 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 the previous section will take care of them at the transnational level. The independence and universality the applicable law finds in the modern lex ­mercatoria built on fundamental and general principle and supported by customary law and party autonomy are, it will be 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 market place itself, but it may be better to refer here to an individual distinct 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, but also international legal orders like the ones between states, and confederate and federal legal orders, as in the EU and US respectively, potentially operating side by side; see further section 1.5.9 below. There are others 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. It is submitted that all 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 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 1.5.5, 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). Again, this approach to the modern lex mercatoria implies a return to precodification­ times in attitude and method, when law indeed was in principle universal. It is the reason why in the foregoing much attention was paid to them. It could hardly be a return to the ius commune variant of the Roman law itself, however, which

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the secular natural law school had already abandoned,464 or to the approach of the ­German ­nineteenth-century Pandectists. It could hardly mean a return to the nineteenth-century codification practice and its intellectual model building or system thinking, which in Europe would suggest a reconstituted BGB now at European level. This is nevertheless what the DCFR is 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. 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 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 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 understanding of international law and its operation, whether of the public or private law variety, in the latter case normally referred to as transnational law? 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 has already been said repeatedly that that may mean low-quality law and it can be highly destructive of all innovation and the need to move forward. At EU level, newer ideas are mostly lacking, even in connection with the DCFR and there is no proper discussion of the methodology and objectives. At present, unity or uniformity is largely seen as a question of compromise between national legal rules and concepts in the context of treaty or similar EU law in which the German nineteenth-century approach remains

464  One may see some different tenor, however, in the work of H Coing, Europäisches Privatrecht (Munich, 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 Paul Koschaker, Europa und das römische Recht (Berlin, 1947, reprinted 1953) 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. 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.

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dominant, although 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 an anthropomorphic perspective leading to a consumer law bias. The developers of the new lex mercatoria miss a neutral model although they have a method, but must for the rest be guided by newer values and the ever-changing dynamics and requirements of modern commerce and finance. Mere borrowing from existing civil or common law countries, or 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 horse trading.

1.4.16  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 law in terms of black-letter law, statist rule and doctrinal thinking, which is then often contrasted with the natural law approach, and is in modern times closely connected with statutory law or similar written texts, legal precedent, logic and system thinking and then mostly also with nationalism and territorialism and the notion of legal formalism suggesting a closed system of rules, may require clarification, especially in a globalising legal environment. Law became technique, but as we have seen, it was often unclear what this truly meant as a liberal interpretation technique, which it usually incorporated, fatally undermined the concept. Other sources of law, more universal principle or practice re-entered through the back door of interpretation (and supplementation). Yet internationally, this type of statist legal positivism was an important contributory factor to the final demise of the old lex mercatoria and remains the main strand in legal thought in Europe, both on the Continent and in England In the latter country the judiciary may remain largely pragmatic, at least in commerce and finance but it is certainly not internationalist. The consequence was that all international transactions had to be cut up into domestic pieces in the hope that all the local laws that become so applicable to parts of the transaction would add up. There were therefore two problems: the formalistic framework and its insufficiencies generally as well as the inadequacy of the result in international transactions in particular. 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.465 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

465 

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

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at first a study of natural phenomena based on the observation of human (or state) behaviour in an inductive manner. As such, legal positivism could indeed be seen as the opposite of natural law, but much different from the way we contrast it today in the sense that natural law adhered to a more theoretical deductive approach and logical process of rule formulation on the basis of some larger ideas. Positivism of this nature was in origin an acceptance of Hume’s scepticism in this regard. In this approach, ­custom was important and originally highly respected as a source of law. But there was always a problem for more academically oriented observers as to how to bring these inductive results together in some system. This still required some pre-existing notions of logic while in subsequent interpretation a more deductive or analogical approach could not be avoided. More importantly, in law, this concept of positivism soon became sovereignty infested and as a consequence the notion of ‘positivism’ underwent a sea change. Not least because of the just-mentioned problems with and doubts about the original concept, in legal positivism law became in the view of many a state construct, at best based on empirical knowledge but often inspired by pure system thinking although not necessarily devoid of political ideas on what was best in terms of transforming society and rule change on that basis. It was then sharply distinguished from morality, sociology and economics. 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 nationalistic and territorial in nature, 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; (c) this law being possessed of some comprehensiveness in terms of an intellectual system, as such considered effectively to capture reality and being capable of ordering human relationships for the present and the future; this is system thinking; (d) this law being dependent on logic and automaticity in its application with a sharp distinction between norm and fact, and a connected formal or technical approach to the interpretation of legal texts; there is then also a sharp separation from morality, social needs and values, and efficiency considerations; this is legal formalism; (e) application of domestic law in this sense to all 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; and (f) 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 so far as possible all contradictions so as to repolish and complete the system; that is doctrinal thinking.

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In this world, the law is what is on the table, more particularly in terms of statist texts and 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 needs or efficiency. They are deemed to be served by definition. Again, other sources of law are ignored or reduced to the rank of soft law, which is the usual positivist fall-back position.466 These rules are assumed by their very nature to come up with the correct answers. Whatever results, it is the law, it is right, and as such cannot be questioned. All modern legal authors present here some view, although it remains often implicit. Natural law tendencies are the traditional antidote. It has already been 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, whether or not directly applicable as such. It should be clear that the lex mercatoria approach as here explained, therefore with its reliance on fundamental and general principle and customary law as the basis for the whole system, is comfortable with and relies heavily on this direct applicability. It has already been noted that reliance on such principle

466  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 488 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 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 well operate as custom if not so incorporated and are indeed now usually so considered and applied, see n 386 above. The same goes for general principle and especially for fundamental principle. What may confuse is that we also speak of the positive law being all that can be identified at any given time as valid legal norms, see the previous section. In that sense, it may extend, however, far beyond legal texts and cases and may even recognise that ultimately law is the result of the debate in society about its scope and extent. That is legal realism. For those who deny the status of an autonomous source of law to custom, general principle and even fundamental principle, soft law is often an option to give them some meaning, but it is wholly unclear what it could be, cf also 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 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 presented, produces hard law of which market practice and general principle are important manifestations. 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. 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 either; if it is not, it truly has no legal significance at all and is mere opinion.

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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. Legal positivism of the modern black-letter variety can be much more easily explained and accepted in public law, notably regulation, which is substantially formulated by government, subject to political expediency, and to governments’ immediate enforcement power, either through the courts or more indirectly through governmental agencies or regulators (by withdrawing licences and so on). But even here, the law may still have some structure of its own, may not be completely malleable, and might not allow for full monopolisation by the state.467 It has already been said that much may not work and perhaps can never do so. Also there are still extra-positive rules of equality and proportionality to consider in the application. Notions of justice, social peace and efficiency are not banned. This monopolisation of law formation and application was then also applied to private law but was always harder to defend and understand in this law as it developed and moved forward and cannot be the sole source of its legitimacy for which it may need a deeper anchor in society itself. It is important to note in this connection that modern positivist scholars and philosophers often have little knowledge of private law and its functions and hardly understand its operation, its subtlety and its sophistication. After all it goes back in both civil and common law for many hundreds of years. The development of the modern lex mercatoria through the process of transnationalisation of private law in the transnational commercial and financial legal order may be perceived as the clearest demonstration of spontaneous non-statist law formation in modern times. Again, this approach is not new and was more generally promoted by Grotius and his followers, but on the European Continent it was superseded by nationalism and the monopoly of national legislation in private law in the nineteenth ­century. To repeat, the older approach is still intact in public international law (although also much infested and weakened by sovereignty notions) and finds there powerful recognition and expression in Article 38(1) of the Statute of the ICJ as we have seen. Thus transnationalisation breaks with the positivist attitude in many ways and leaves s­ tatist thinking, legal formalism and doctrinal thinking behind. It maintains a dynamic concept of law that moves with the facts unless contained by public policy and public order or pressing overriding notions of justice, social peace and efficiency. The traditional and fundamental Kantian divide between fact and norm and law and morality is abandoned. Rules may be found in fact, as in custom, and the ever-evolving factual situations change the 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). It should be acknowledged, however, 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

467 

J Habermas, Between Facts and Norms (Cambridge, MA, 1996) 428.

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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 be an empty shell. But whatever it is, it remains sharply distinguished from all other normative rule systems, therefore also from morality, social rules or rules derived from efficiency considerations. The view presented in this book is on the other hand that law, private law in particular, always has an extra-legal meaning 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 and this may be meant by the rule of law. Beyond establishing basic order, these are the basic needs modern law serves and it is qualified thereby even though these objectives may be contradictory and do not present a legal normativity by themselves. Again law, private law in particular, operates here through a multitude of sources (fundamental and general legal principle, custom and practices, party autonomy and legislation) and has many spokespersons (legislators, judges, arbitrators and practitioners). It is not nationalistic or territorial per se but serves every particular legal order in ways typical for that order and its participants or members. These orders may be national or transnational. Law of this nature, in whatever order, always moves with it and is dynamic, often uncertain, even contradictory and confusing, and is in its formulation and application heavily dependent on the facts of the case. It 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 very doubtful whether it can make that true. There would be less strife and litigation if it was so. The concept of legal positivism with its nationalistic, statist and static undercurrents 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. It is different in the US, where legal scholarship and the courts are more used to 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 and promotes them as we have seen. In Europe, on the other hand, this form of legal positivism explains the widespread academic hostility towards the modern lex mercatoria and its revival, which attitude is also strongly presented in law teaching and from there also into the legal practice. But it cannot satisfactorily explain how new values and perceptions constantly enter the law, 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 generally 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. Law is formed in many ways. Immanent law formation in the international ­commercial and financial legal order is a fact and, it is submitted, a normal function in any market place. It was never fully eradicated; see also the comments in section 1.4.4 above. We also know from interpretation, even domestically, that it forms itself and can never be fully discovered. Legal texts and cases may give guidance and are conduits

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through which national legislators and courts may try to stabilise the law but unless the facts exactly fit in pure repeat situations, they are not dispositive. It is rejected in this context that the modern lex mercatoria serves merely to supplement contracts, especially duration contracts operating under local laws,468 or to exert a special form of control,469 or to impose a new sense of justice or fairness on business, or to introduce equitable considerations.470 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. Not only judges, but also international arbitrators state on the basis of the law as they find it or in the latter case as it is pleaded. In a modern international setting, this will increasingly be the modern lex mercatoria, which should not then be confused with or be characterised as a semi- or quasi-legal regime. Although arguably arbitrators may even have special (equitable) powers in this regard,471 and may occasionally also speak the public interest which will be discussed further in chapter 2 below (see also s 1.1.11 and 1.1.12 above), their powers do not amount to a general licence to change the rules.

1.4.17  Dispute Prevention or Dispute Resolution? Law in Action or Law in Litigation A last thought may help to complete the 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. But older codes and ever newer fact situations also required adjustment in civil law, and this had to come increasingly from the courts, especially through the vehicle of interpretation.

468  Even the power to supplement 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 (New York, 1990) 143. This view has now been abandoned and supplementation and adjustment may be 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, they may be able to go further. This will form much of the discussion in ch 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 if enough decisions become known, especially in areas where arbitrators have more power, as may be especially the case in investment arbitrations; they may have some other original powers, eg in matters of public policy, to keep markets clean; see on these powers further ch 2, ss 1.1.10 and 1.2.5 below. 469  Wrongly in its generality, it is submitted, proclaimed by AE Farnsworth, G Bonell and A Hartkamp in Tulane Journal of International and Comparative Law (1994) as basic tenets of good faith and fair dealing in the professional area. 470  J Covo, ‘Commodities, Arbitrations and Equitable Considerations’ (1993) 9 Arbitration International 61. 471  See JH Dalhuisen, ‘International Arbitrators as Equity Judges’ in PH Bekker, R Dolzer and M Waibel (eds), Making Transnational Law Work in the Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 510.

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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. The common law courts’ activity 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 and system based in principle, but 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. In contract, that is 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 depend on the facts. This is an important approximation but there remains a difference. First, civil lawyers remain generally less comfortable with handling facts, and continue to view them from the perspective of their system, 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.472 For them, the system, whatever it was or is, still comes first and interpretation is primarily seen as its completion. It was also noted that even in good faith case law, in Germany, a­ cademia strives to find renewed system and continues the pretence that it can solve all problems.473 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. It is in truth not far removed from the old Digest maxim: ius in causa positum, which expressed the same idea. In the more modern ‘law and …’ movements, there is more attention to the rule itself, its origin, operation, sufficiency and meaning, but it moves beyond litigation. Litigation is then only a mopping-up exercise in respect of the past and operates at the micro level. Rather, law becomes a macro event, as a way first and foremost to guide society, provide some 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) became another important field of study here. 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.474 It was also to make life easier for all, clean the slate of a myriad of inconsistent and antiquated local rules, and to simplify human relationships. 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

472  473  474 

See nn 77 and 367 above. See n 84 above. See s 1.2.14 above.

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­ rocess of legal ­evolution that remained as much daily life- as litigation-oriented. It has p 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. 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 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.475

1.4.18  The Development of the Modern Lex Mercatoria and Role of National Courts and of 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 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 in international commercial cases as international commercial courts,476 and this could provide an appropriate alternative to international arbitrations. Their judgments would then also 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 proposed to be recognised under the Hague Convention of 2005 on Choice of Court Agreements. The main difference from international arbitrations would be the potentially greater power of judges to apply such law of their own initiative and clarify it, creating greater stability in the system with a facility for appeal, reasons why such an international commercial court system might conceivably still function as a true alternative dispute resolution facility for parties in international cases. Such a new international dispute resolution facility,

475  In n 423 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 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 judging behaviour, which was earlier prescribed by other rules. It was said before that this is an interesting twist in the operation of private law that may need further thought. 476  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 121 above.

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which would appear to require some treaty support, might even include lay judges, and could have a central highest court to deal with these appeals and from which binding ­preliminary opinions could also be sought, especially in matters of the application of the lex ­mercatoria, the reach of domestic regulation in international cases, and the operation of transnational minimum standards. Except for the appeal function, such a court could also serve in international arbitrations in support and supervision. Importantly, a highest international commercial court in this sense 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 could thus become an important aid to the development of transnational commercial and financial law and more particularly to the public interest balance the international market place requires. At one time in the 1970s, the English commercial courts already thought that they could operate as ordinary international commercial courts.477 In view of what has just been said, this is not as strange as it may sound. All 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 courts in the EU are competent and obliged to apply EU law when appropriate and they operate then as EU courts in the EU legal order subject to a facility to request preliminary opinions from the ECJ. 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.478 Indeed, this situation predominantly prevails for international commercial arbitrators in international arbitrations. 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, a whole organisation and administration of international arbitrations is provided. These sets are regularly updated; the LCIA rules last in 2014 and the ICC Rules in 2012. As far as the applicable law is concerned, they leave great flexibility to the arbitrators (see s 14(5) of the 2014 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 chapter 2, sections 1.1.2 and 1.1.3 below. This leaves ample room for the application of the lex mercatoria and its hierarchy of norms. French arbitration law (Art 1496 CCP of 1981, now replaced by Art 1511 as part of the new French international arbitration law in 2011) and amended Dutch

477  Amin Rasheed Shipping Corporation v Kuwait Insurance Company [1983] 1 WLR 228, 241; see more particularly n 122 above. 478  The English attempt to consider the English courts as international commercial courts was rejected by the House of Lords, however: Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] AC 50; see also n 477.

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arbitration law (Art 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 (s 46(3)). It followed in this respect the UNCITRAL Model Law (Art 28(2)), which was also reflected in the UNCITRAL Rules of 1977 (Art 33), and thus remained more restrictive.479 In the meantime, the UNCITRAL Rules themselves were updated in 2010, leaving the determination of the applicable law to arbitrators (Art 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 (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.

479  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 Schachtbauund Tiefbohrgesellschaft mbH v Ras al-Khaimah National Oil Co [1987] 3 WLR 1023, see also n 122 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 old ICC Rules. See further ch 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 111 above. In England there is the further problem 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 was 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.

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In applying the modern lex mercatoria, it may even become accepted that arbitrators may act in appropriate cases as equity judges in the way English judges have been able to do,480 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.481 It will be argued later in chapter 2 below, that they may have other original powers (see ss 1.1.10 and 1.2.5) and may be able to raise public policy and order issues themselves. They also have original power in procedural and evidential issues 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 does not create them (see further also the discussion in ch 2, s 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.482 This is important as an insight. International arbitrators are notably not there to build legal systems or even 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 but not in professional dealings except perhaps in extreme situations. It also does not allow international arbitrators generally to base themselves on notions of fairness, which would make them amiable compositeurs.483 That is notably not the role of arbitrators under the modern lex mercatoria, which is law, although it is sometimes so confused.484 In any event, considerations of efficiency may be just as important as notions of fairness, especially in the business community, where fair dealing is an unclear concept unless it means the prevention of abuse, deceit or fraud. 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 to apply it autonomously except in those areas where they may have original power, which they should exercise with considerable restraint. It has already been said that the civil law maxim ius curia novit [‘the court knows the law’] does not otherwise 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 applied to the international arbitral process itself. Even then, application of such law without giving parties the opportunity of a proper hearing on it should be anathema to international arbitrators; see further the discussion in chapter 2, section 1.2.5. below.

480 

See Dalhuisen (n 471). It may be recalled that this was the medieval idea of the operation of precedent, see n 278 above. 482  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. 483  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, see Dalhuisen (n 471). 484  See, eg WW Park, ‘Judicial Controls in the Arbitral Process’ (1989) 5 Arbitration International 230. 481 

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1.4.19  Agents of International Convergence and Harmonisation: The Role of UNIDROIT, UNCITRAL, the ICC, The Hague Conference, the EU, 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 Vol 2, ch 2, s 1.9.3 and Vol 3, ch 1, s 2.4). There are Model Laws on International Commercial Arbitration, Crossborder Insolvency, Electronic Commerce, the Procurement of Goods and International Credit Transfers. There are Legal Guides on International Counter-trade Transactions, Electronic Funds Transfers and Drawing up International C ­ ontracts 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,485 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 trade law.486 Important newer

485  It has 56 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. 486  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).

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­ NIDROIT Conventions are the ones on International Financial Leasing, on Factoring, U 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 3, chapter 1, the Geneva Convention in Volume 2, chapter 2. 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. The 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 many others. In the area of international sales, the ICC produced a Model International Sales Contract. These various rules and practices, which are important, are deemed applicable by virtue of contractual incorporation or on the basis of custom only. 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. They often function as customary law within the modern lex mercatoria—see also the discussion in section 1.4.8 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. Besides UNCITRAL, UNIDROIT and the ICC, the 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.487 BIS’s efforts488 in the area of banking

487  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 3, ch 2, 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). 488  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 3, ch 2, 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 3, ch 2, s 2.5.1.

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supervision, especially in respect of capital adequacy requirements, are relevant too, although not amounting to binding texts. The work of IOSCO489 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.490 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.491 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 many times. It resulted from private initiatives, not supported by any agreement among the various States. The National Conference has drafted a number of Uniform Laws for adoption. The most important one is the UCC, which was (exceptionally) a joint project with the ALI.

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 B ­ anking 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 489 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. 489  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. 490  See further Vol 3, ch 2, 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 two decades in Mexico, Russia, Asia, Argentina and Europe). 491  See notably its (failed) project for a Multilateral Agreement on Investment (MAI 1998).

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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. They also 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 particular help of Soia Mentschikoff as Associate Chief Reporter. Others, such as Professor Grant Gilmore of Yale, also had a substantial input, the latter especially on 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, either through treaty law, as parallel laws (in the US), as models, 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 to international transactions, 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 Vol 2, ch 2, s 3.2.2). Others are in the field of trust and agency. Most are suffering from few ratifications. 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 p ­ repared at D ­ iplomatic 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.

1.4.20  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 legal area of private international law became an EU competency and the earlier treaties

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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. 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 EU Founding Treaties. 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 any event only cover trade or other activity between Member States. There are other Articles in the TFEU which may also give some support for the idea as we shall see, but again probably not enough, at least not for a full codification effort of private law, including commercial and financial law, assuming always that the codification civil law style remains valid in the first place. So-called soft law, 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.492 This activity may be worthwhile provided the need for professionals and others, like consumers, are clearly distinguished and reflected. In commerce and finance, such principles depend for their effectiveness foremost on clarity, inspiration and guidance rather than on detailed

492  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 2, ch 1, 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 2, ch 1, s 1.6. At the academic level other principles were also being developed. The Principles of Trust Law, see Vol 2, ch 2, 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.

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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 in the EU. Nevertheless, if sufficiently responsive to practical needs, such principles may not then remain mere soft law but may, in terms of the modern lex mercatoria, start operating as general principle and if generally followed perhaps even 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,493 which can, however, 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 harmonisation efforts that still need ­implementation

493  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 the 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. A new EU 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 new 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 here 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.

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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 popular in respect of employment contracts494 and to achieve some harmonisation of company law.495 Financial Directives may also have a private law impact,496 but in the professional sector, such Directives touching upon private law are otherwise rare. Through Regulations, the EU could impose uniform law directly, 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

494  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. 495  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 s­ afeguards 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. 496  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; 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 and its implementation instruments are especially important as they concern issues of agency in brokerage relationships and mean to protect (smaller) investors, see Vol 3, ch 2, s 3.5. 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 especially relevant. They aim largely at private law harmonisation and within it at uniformity in much narrower specialised fields, see Vol 3, ch 1, 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.

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i­nternational 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 power and jurisdiction as we have seen. However, except for these incidental measures, there is increasingly a call for uniform or at least harmonised texts in all s­ ubstantive parts of private law to be produced at EU level. The essence of these projects is that the EU is then seen as one market that is considered domestic, legally covered by only one text per subject if not full codification in the civil law manner. This is the idea behind the DCFR, mentioned several times already. No special regime is then envisaged any longer for cross-border transactions in the sense that they are considered to operate in the transnational legal order. The EU would be considered one country for these purposes and all private law would become national and t­ erritorial within it. 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 nineteenthcentury 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 considered: 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. 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. 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. 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.497 It means that also

497  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

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in c­ ommercial 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? In any event, 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 be an EU jurisdiction but would have to be achieved through treaty law. It may be recalled in this connection that 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 of its 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. This should also go into the methodology, in particular on whether an effort of this nature should result in a tool box as a set of uniform definitions, restatement, set of principles, opt-in document, full codification civil law style or whatever. This can hardly be decided through the back door of an expansive treaty interpretation in which all is brought under the promotion of the internal market. So generally, the EU has insufficient power to legislate in the area of private law,498 even in the consumer area, except where the issue can be sufficiently closely related to

objective as under Art 114 TFEU the promotion of trans-border business rather than consumer protection 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 493 above. An immediate problem thus 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. 498  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

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the free movement 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,499 it would hardly appear to allow for a full codification of European private law. Private law would therefore normally still operate in the domestic spheres and remain domestic. Even if Article 114 was 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 to authorise codification civil law style. Nevertheless, 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 adoption. The Principles of European Contract Law (PECL)—earlier still drafted in the anthropomorphic and consumer mode, see Volume 2, chapter 1, 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. It supported the strong consumer law perspective in the 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 G ­ erman. Again, these efforts raised fundamental questions. Even beyond the matter of EU jurisdiction to legislate in this manner,500 was this to be the more academic

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 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 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. 499  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. 500  A critique of this nature operates at least at three levels, which 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 carry 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

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and abstract, i­ntellectual and rule-based system approach of civil law codification, or the more p ­ ragmatic fact- and needs-based common law approach? A lexicon or tool box of common terms appeared to have been an earlier preference, but even a common lexicon would assume or even require underlying systemic coherence as it suggests a 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; (b) in the area of movable property, 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, assignments, 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 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; and (c) in transactional law, the issue of transactional and payment finality, suggesting an abstract system of title transfer (see Vol 2, ch 2, 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). 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. (d) 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 much 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 2, ch 1, 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. 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.

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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, for example 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 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. Initial reactions were not favourable, even in Germany. For more extensive comment and critique (also concerning the 2011 project of the Expert Group and the Draft Regulation (CESL), which nobody seems to like either): see Volume 2, chapter 1, section 1.6 and for property law Volume 2, ­chapter 2, ­section 1.11.501 The project 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 to market ­practices—the former against the gist of EU law itself; see the discussion in section 1.4.5 above. It remains wedded to private law as a technique in the sense of applying written texts, which are supposed to present a system that can deal with all eventualities and by definition achieves 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. 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, but that would still assume 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, 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. As already mentioned, 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,

501  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 fur 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 Gemeinsamen Referenzrahmen fur 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 fur die civilistische Praxis 227.

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with distinctions mainly in the area of pre-contractual duties. 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 principle objective of all sales, except to require the seller to transfer the property, and left open how that was to be done. There was thus no full coverage of sales at all, and there remained considerable problems and uncertainties regarding the way title was to be transferred, especially trans-border. Ultimately, in October 2011, the EU published a draft Regulation on a Common European Sales Law (CESL), which was substantially based on the proposals of the Expert Group. It still tries to cover both consumer and professional dealings in a unitary approach and mixed in this c­ onnection—fatally, it is submitted—consumer and professional protection needs (see further Vol 2, ch 1, s 1.6.13) even though professional sales are only covered if including one Small and Medium Sized Enterprise (SME) party (as defined). The project, being based on Article 114 TFEU, is limited to cross-border dealings. It may thus be seen that it has a more limited scope, also being an opt-in instrument, but the adoption of a CESL would still introduce and legitimise a general part of c­ ontract law that is wholly unsuitable for professional dealings, including long-term supply ­agreements with large service elements; see again the discussion, especially on this unitary approach, in ­Volume 2, chapter 1, section 1.7. This project is the thin end of the wedge of something much bigger and that is the true problem. The question of proper EU jurisdiction under Article 114 TFEU was buttressed by the EU Commission through the suggestion that such a uniform sales law promotes 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 remains to be seen whether this will materialise.502 The impediments of crossborder activity are mostly of a very different nature. At the practical level, this sales project suffers from all the same flaws already shown in the 1980 CISG: the concept

502  The claims that were made by the Commission in the CESL in this connection bordered on the delusional. It undermines 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 will 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 has no answer and provides no uniformity. Thus legal differences and impediments substantially remain and there is 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 true 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.

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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 p ­ rincipal ­reasons why commercial practice has rejected the CISG and is likely to reject the CESL as well. In fact, small and medium-sized companies may be even more ­vulnerable to the ­shortcomings for lack of leverage and organisational acumen. Moreover, they will have to face an extra layer of consumer protection. The project is meant as an opt-in facility and one must wonder who would want to be covered by it under the circumstances, except supposedly consumers as buyers, but the consent to the opt-in must also 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 must then find its place among the other sources of law covering transnational dealings (even if only within the EU) and could not exclusively regulate them. Short of the EU becoming one country, which so far is not its legal position and it remains far from reality, these projects cannot be codifications in the traditional civil law sense, whatever their intent. At the practical level, it may be recalled in this connection that even in the US the UCC, in Article I, section 1-103, clearly promotes other sources of law besides it, especially the common law, equity, custom and the law merchant. That was submitted as the correct approach, also purely domestically, but all the more so in transnationalised 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 serious problems with the nature of the project, 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 its diversity, and also has great difficulty in dealing with new needs and in remaining socially and economically responsive; and (d) there is an even more serious danger of consumer law protection notions spilling over into professional dealings and a censorious approach being applied to all business activity. 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 must 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. The hierarchy of norms within the modern lex mercatoria is at present more likely to respond to true needs, at least in international business also 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

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an 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 become involved as well. 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 (but much needed, as in the area of competition and market abuse). It should thus be considered that for professional activity, the typical civil law top-down comprehensive codification ethos should be left behind.

1.5  Cultural, Sociological and Economic Undercurrents in the Formation of Transnational Commercial and Financial Law (Modern Lex Mercatoria). Different Legal Orders, their Manifestation, and the Competition Between them 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 some 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 and operates. 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. It is not new. 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. Other non-statist legal orders may also be identified, as will be shown in section 1.5.9. below. 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 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’s public order. At least to that extent, a case can be and is here often 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 them in appropriate cases unless they become grossly offensive to the community at large, therefore to its public policy or public order requirements.

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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 thing 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 community of those days. Although even later this type of law continued to have its own place within the common law as did Church law, it posed no less the question of the continuing autonomy of this law, which was dented but not fully superseded; it continued to have some 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. That 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. 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 does not or does not necessarily mean the monopolisation of law formation by these states at the same time. At least in international dealings, it may present a situation of overreach and concerns then all the more the important issue of legal plurality.503 It is increasingly understood through globalisation that legal norms have different origins and may have to operate side by side for different communities in the same territory.504

503  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 P 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. 504  See for this legal hybridity also 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 JH Dalhuisen, ‘Legal Orders and their Manifestation’ (2006) 24 Berkeley International Law Journal 129 and further 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.

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In discussions concerning the nature and operation of commercial law, these ­ atters tend to be neglected. It has been said by legal philosophers that ‘We do not m like commerce (because we are largely ignorant of it) and we would prefer not to write about it’.505 For the few modern writers who have shown interest in the subject,506 bottom-up law formation is important. More generally, it is not difficult to maintain that all communities form their own sets of rules.507 For the current discussion, a key factor is to determine which of them have sufficient standing and autonomy to have their rules recognised among their members and accepted as legal rules in the ordinary courts or may even create their own courts in the manner just mentioned (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). Only such communities could be

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 or in its Directives and Regulations, horizontally applied between private parties; see also the discussion on fundamental principle in s 1.4.5 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, also 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 mean to create an EU (national) private law, see the discussion in s 1.4.20 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 D ­ isorder of Normative Orders’ (2008) 6 International Journal of Constitutional Law, 373. This book suggest a structure and method which is derived from public international law formation and application, cf also N Krisch, Beyond Constitutionalism, the Pluralist Structure of Postnational Law (Oxford, 2010). 505  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.’ 506  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. 507  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. See also RM Dworkin, Law’s Empire (Cambridge, MA, 1986) 191 for this realisation that a number of communities reach this stage allowing them to operate their own set of rules, even global standards. So J Raz, The Authority of Law, 2nd edn (Oxford, 2009) 120, who accepts this even irrespective of recognition by institutionalized normative systems.

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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. 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 for international commerce and finance. 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. These questions only now resurface and get their chance mainly through globalisation, as state powers recede and the force of the international flows in people, goods, services, money and knowledge becomes prevalent and no longer manifests itself incidentally. The modern communication revolution supports and amplifies this. Much of the international flows becomes virtual and can no longer be properly located with reference to territories and state powers. 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. In the process, much of the modern idea of legal diversity was lost, at least within each country. However, particularly in an international setting, freed therefore from direct state intervention and benefiting from legislative competition between states, internationally organised communities may re-emerge 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 submitted that the international business community is 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. 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. 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 revolve

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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 1.4.13 above. 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.

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 efficiency-related) natural law tendencies that had also spread in Germany up to that time. In the end, it also replaced the more local ­commercial laws. In the law, the Volksgeist notion is associated with von Savigny and von Puchta, but was more properly an early expression of the age of Romanticism,508 which followed the age of Enlightenment or rationality. As was discussed before, it can be seen as an irrational element that led to (extreme) nationalism even before Germany was unified in 1870, and received strong support in the work of Hegel. It only recognised national laws. As such it had an early equivalent in England in the works of Edmund Burke: see section 1.3.3 above. This subsequently translated into the Austinian view 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.509 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 still considers all 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.

508  509 

See also n 216 above. See n 290 above.

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In this manner, an important cultural dimension in the formation of the law is noted.510 Although this is often conveniently associated with nationality,511 culture— whatever its precise meaning—may just as easily, or perhaps more convincingly, be associated with other important notions, such as religion (for example, Christian, Islamic, or Buddhist cultures); region (for example, Asian, European, American or Western cultures); language (for example, Anglo-American, French, or Russian cultures); political/economic systems (for example, Western democratic/capitalistic/ decentralised, or other more totalitarian cultures); or (more commonly in the German approaches) aesthetic or intellectual endeavours (for example, Aztec, Maya, Roman, Greek, Hellenistic, Renaissance or Baroque cultures). In fact, culture itself is all that mankind achieves, although 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 by 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 when it denotes some communal mindset. But 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). Secondly (although not unrelated), there must also be some strong sense of order and some common values. In terms of law formation, culture should 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.512 It would allow us to deduce from such a group

510  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. 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 section, 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 all suggests some state coercive power but does not explain when this 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. 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 concerns incentives, see for game theory, section 1.5.7 below. 511  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 more soberly C Harlow, ‘Voices of Difference in a Plural Community’, ibid at 199, but cf also N Walker, ‘­Culture, Democracy and the Convergence of Public Law: Some Scepticism about Scepticism’ ibid at 257. 512  The notion of culture and its definitions have perplexed many: see for a discussion GH Hartman, The Fateful Question of Culture (New York, 1997).

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­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. Indeed there is here a strong reliance element and close connection with custom. As just mentioned, national culture is only one expression of culture in this sense and often springs to mind first in terms of support for autonomous law formation. 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 that in modern times makes us look primarily at national cultures, however, 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. Thus 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 is in Western Europe a typical nineteenth-century evolution, in 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 or try to rule through a kind of feudal or similarly layered system. In fact, in connection with the 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, 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 of others 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 one reason why it may cause surprise that states came out on top in the power game in modern times and that law formation subsequently became a state preserve

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and in the mind of many continues to be so. On the other hand, one could 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 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.513 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,514 shorn therefore of much cultural ballast. 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 practical development that rather 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 among hardened nationalists, who could themselves then be seen as a cult).

513  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 produce 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. 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 eg NJ Coulson, A History of Islamic Law (Edinburgh, 1964) 129. 514  See also J Habermas, The Structural Transformation of the Public Sphere, T Burger (trans) (Cambridge, MA, 1991).

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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 thus becomes opportunistic, political or coincidental or 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. This may then also apply to the law that modern states produce, but it may lose credibility or even legitimacy. The political process may on the other hand impose irrational political features of its own and may as such no longer be an expression of increased and better informed rationality, but rather political expediency. It may even seek to alter or correct common values. This has already been discussed in section 1.3.7 above in terms of modernity and post-modernity. It follows first that, in Western society, states and law as a purely organisational tool are likely to be closely connected and figure larger than in more traditional or static cultures, and that the law that is produced in this way is more variable and may become in principle a mechanism for remedial action, social and cultural change, and economic development. Indeed through legislation, law became in Western society an important instrument of public policy or the ever-expanding notion of the raison d’état, in which particularly public law, as the law that concerns itself with a state’s organisation and objectives, acquires an enhanced status. Indeed, in its more practical aspects, the operation of such a state may change overnight, depending on the prevailing political currents. Thus social and budgetary law will vary with each government and to see the impact of deep cultural undercurrents or pure nationalism in this process may become an exaggeration. This is modernity in which nationalism itself ultimately may also flounder, never mind how much invoked as justification. Modern states may then also intervene in private law formation. State intervention in private law and its formulation may become 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 rights) mandatory law to protect against interfering outsiders. That at least was the Enlightenment or French version of codification, as we have seen. This is so not only in codification countries of the civil law, but also in common law countries, of which, in the US, the UCC produced an important example. In civil law countries, this kind of statist private law is now often given a higher status, however, than more traditional

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customary or other law, as states were increasingly seen as the ultimate organisational force and as deriving a legitimacy from this state of affairs, so that even their private laws assumed a semblance of exclusivity, supplemented by strong intellectualisation expressed through system thinking. That was earlier identified as the Romantic and German idealist tradition in codification thinking, where states start claiming deeper insights. They may confirm this kind of legitimacy by using and supporting their academies to provide the necessary models even if this may lead to pure abstraction, see for this codification ethos and its modern justifications and drawbacks, section 1.2.12 above and is notably not the attitude of the UCC in the US (see its s 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 transformation powers in private law, codification may assume further significance and meaning under which, for example, the concept of property itself acquires a more political dimension and the social function of private property may then become more dominant. That is policy but in an organisational and political environment like that of the US, there appeared another strand in thinking. It is in fact 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 values, on very much of which there is unlikely to be any consensus at all. No wonder the 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 an ever closer Union. If we still speak here of a common culture, it is primarily a Western culture of which the US then becomes the primary example, in a very large and highly diversified society, suggesting a culture only in the broadest (a-cultural) sense. 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 can operate and provide added value to society as a whole without becoming all-dominant and suffocating, although that risk is always there. As such, these modern states appear primarily as the expression of societal energy rather than of a communal mindset or culture, an energy which does not allow itself to be fully exhausted by and entirely absorbed in the modern state, but even competes with it, not least in the market place, to the likely advantage and the greater stability of both, even though at times of economic or financial crisis it may seem otherwise. Although such a state has moved into law formation in a major way, both in the public and private spheres, it would then 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 kind of competition in which the lines of competency are never clearly drawn. 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. Indeed, other legal orders operate in parallel in the space so created in international commerce and finance, especially the international commercial and financial legal order, as will be the subject of the following sections. This may be expressed (to some extent) in

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­ onstitutions or similar organisational instruments, which provide a legal f­ ramework C guaranteeing some order and continuity for various groups, but more important is probably that modern Western states 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 distinct cultures may still play a role but do not determine the outcome. Nor does the modern state itself, now in particular because in an age of globalisation it can no longer isolate itself from the world scene, but it was always subject to internal competing forces as well, which it could never fully dominate either or in any event not forever. Again, especially in commerce and finance, the power of the market place springs to mind as a competing force. On the other hand, within the space that so exists in modern states, even those that claim formal democracy, many (especially smaller ones) are taken over by elites that use the democratic process to strengthen their own grip. It follows nevertheless, 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 public policy and order (in a modern sense). This law may even challenge the monopolisation of power by the few, as such a highly necessary process. Especially in private law formation and operation, modern states should 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 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 which supports diversification of power. In the private sphere, this type of decentralist, organisational, individualistic and rather a-cultural or culturally neutral Western ‘culture’ thus allows for organisational autonomy of parties, partnership and groups or communities, at least as long as others are not unduly affected and the public good is not unduly threatened in the territory in question. It will then also allow or 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 at its best 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 assumes a central role in the formulation of private law through legislation, it is still limited, whatever its pretence. This may be clearer in business where its action will be mainly directed at anti-competitive behaviour and other market abuses, or interference in other people’s affairs, or the taking of undue advantage, not otherwise at rebalancing the interests between the affected parties (it may be different in consumer law). In other private areas, such as families, churches, and similar associations, or in partnerships and companies, state intervention will also be directed against excess, such as intolerance and fanaticism, subjugation of gender, or abuse of minorities or children. Again, only if a major public policy issue arises should modern states intervene in these communities or in private relationships through mandatory laws, not otherwise. Even then, they are subject to rule-of-law and

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human rights limitations.515 Where states devise rules for communities beyond these public concerns, they are likely to be merely directory or guidance and can thus be set aside by the parties, groups or individuals concerned. There will also be the competing forces of fundamental and general principle as well as of custom and practice, as we have seen in section 1.4. Whatever the claims of nationalism in this connection, it is here also important and of prime interest to note that these 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. 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 concerned with efficiency and impatient with monopolies of whatever kind (except in respect of state enforcement power, itself considered subject, however, to the rule of law). The function of the modern state as promoter and engine of modernity here reaches limits. In its progress, Western culture in this sense continues to rely heavily on individual exertion but no less on selfrestraint, tolerance, civic sense, and participation at that individual level; on rationality and efficiency in an economic sense; and on flexibility and experimentation in an intellectual sense. Again, none of these is a typical national cultural trait or preserve, even though they may reflect them; they derive from a broader set of human experiences. To repeat, in a modern world, culture, to the extent the term is properly used, is likely to lose many of its more mystical, idiosyncratic and nationalistic features. ­Cultural aspects of the older type are likely to be preserved in modern states 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 rigid social structures not infrequently used, however, by the establishment or local elite to maintain itself.516

1.5.4  The American Experiences and the Effect on Law Formation It has already been mentioned and must be accepted 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 its ultimate 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 ­modern society or indeed of modernity itself.

515  516 

See for the rule of law also the discussion in n 530 below. See for this view in particular, Foucault and other French deconstructionalists.

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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 or enter the public domain unduly (unless prefaced by a reference to tolerance). In fact, in this environment, fanaticism of whatever kind is not accepted but is ­perceived as undemocratic and in that sense as culturally ‘unWestern’. Secondly, 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, they do not carry the day. Thirdly, 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 understands 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 here even though it can never be fixed and is in constant flux. Fourthly, the American experience is determined 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 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 may well have lost its compelling message in Europe and may have acquired an altogether different dimension in the US. It leads to a broad demand and respect for research and learning centred on the great American universities and research institutions (with their strong philanthropic support). This search transcends the cults of Washington, Wall Street, New York’s modern art, ­Hollywood, or Silicon ­Valley, which nevertheless become close second, third, fourth, fifth and sixth elements, 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, 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 be emulated, to convince, and to involve all others to join the 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.

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The true question everywhere is how modern law, its formation and further e­ volution and operation, is caught up in the dynamics of our present situation, this voyage of discovery, openness and national, religious and cultural demystification. Of course 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 shows an unhelpful concern with the past and how it should be remedied, and is intellectually only of modest interest and value.517 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 has already been 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 everevolving environment or society, when and why it finds acceptance at group, national and international level, how it can be known and best complied with, and how its focus may change in this respect over time. 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. Thus the law moves with society, is the result of the constant debate in the groups 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 would be better if it were just and efficient and promoted social peace, and that is the true challenge and also the aspiration and essence of the modern rule of law. There is here an ongoing and never-ending search for new 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 grounded in pop culture or other popular perceptions.518 In business, they are likely to result from technical progress and efficiency considerations, which may change rapidly. 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 positive law 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. It is what it is and not therefore itself any great subject for academic study or intellectual analysis, although finding structure (rather than system and its inclination to staticism) in it remains a legitimate academic pursuit; this was discussed in section 1.1.7 above, but is not or no longer its true vocation. As a consequence professors do not write practitioners’ handbooks, practitioners must do so themselves. It is hardly intellectually challenging but

517  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. 518  See also the discussion in n 232 above.

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rather time-consuming, while tending to be destructive of deeper analysis and newer thought. Law is not perceived here merely as technique in which only the written-up version of it counts; see for this discussion also section 1.4.16 above. Academically, the challenge is not the past; it must look after itself, but to move the law into the next generation for it to remain relevant. That unavoidably has an experimental aspect to it, here perceived as the true nature of the academic effort in law. Interdisciplinary and empirical studies help and we must also be aware of the effects of globalisation. The social sciences are here very different from the natural sciences in that they operate in an environment where social forces themselves change the rules all the time, aided and abetted in modern society by legislators and at least to some extent by judges in case law who try in this manner to stabilise and move the law ­forward, although they do not have a monopoly in its formation and application. There are other sources of law and higher values which develop further all the time and may even produce a notion of the law and the public interest beyond states. The 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 best understood in American legal realism.

1.5.5  The Revival of Legal Universalism in Professional Private Law It may be observed in this connection that the emphasis on economic, social and ­psychological studies in the major universities after World War II meant to be of help, but progress has been slow and often disappointing. We still know little about how society moves since it changes imperceptibly. Models are of little long-term use, we have crises all the time, economics is now called the ‘dismal science’, we may know something about correlations but little about causality. Much of what happens may not be causal at all, rather random. Thus printing money was once thought to cause inflation, but apparently not necessarily, even on the scale on which it was done after 2008. Similarly, we think we know more about banking and its dangers after the crisis and regulate enthusiastically, but we have little idea about the modern need for and role of liquidity in society and in any event society may already have moved on considerably so that all these new rules no longer fit and only mean to prevent a crisis which will never recur in the same way. Perhaps they never did and the adverse consequences may be considerable in terms of liquidity provision and management; see also the discussion in Volume 3, chapter 2. Nobody knows much and only history seems to be able to tell. Thus the latest financial and government debt crisis was not only a failure of capitalism and its regulation, but also of academia, which did not have the foresight to see anything coming and subsequently could not provide a reliable guide on what to do next. Much remains grouping in the dark. Before long everything is manipulated, at least in Western society, and almost everybody is broke: states, banks and consumers except the few. This goes back to the discussion on modernism (see s 1.3.7 above). However this may be, if in Western society the law is now steeped in secular principle, therefore in some basic values of which the rule of law, human rights, and respect

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for individual and group autonomy are indicative,519 or even in some new r­ ationality or utilitarian principle as more particularly identified by the ‘law and economics’ school of thought, this alone would suggest that especially in a globalising society, local, national or statist cultural content in the law will ultimately yield to more universal notions, at least in international professional dealings. Much centres here around the idea of an open society, not merely as a sign of civilisation. It is also economic necessity that demands that all contribute according to capacity and no one is held back, left behind, or excluded by insiders or assigned their roles. The emergence of women’s and other minority rights can be explained as necessity, not as some national ideal or policy. Again, as a minimum, this suggests that in modern Western society the basic tenets of the law have a foundation that is considerably different from mere nationalism or statist activity and leaves room for other ideas or sources of law. 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. In other words, if it is true that the modern democratic state, like the modern decentralised social and economic structures through which individuals and groups or communities may exert their autonomy, has a foundation in a broader Western culture which is not itself statist or nationalistic and as such hardly cultural in that sense, it would suggest 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 should never be forgotten that it was not even so in ­Western Europe until the nineteenth century. The territorial limitation of law, especially of commercial private law, and its statist nature are a recent phenomenon. To repeat, in our part of the world, the law, especially private law, is (like the modern state) primarily Western and only subsequently national or cultural in any other sense and law formation should be considered primarily per group or community it concerns, which are not merely states. At least that would seem a perfectly valid proposition to put forward. Some of this group or community law might be regressive but that need not be so. The new lex mercatoria, for example, emanating from the transnational commercial and financial legal order, is sustained by modern sociological and economic forces and is therefore likely to be forward looking and reforming, probably much more than state law formation through the formal channels can now be. Its dynamics were already demonstrated in section 1.1.6 above for modern contract and movable property law. In terms of sophistication, it goes well beyond most state laws. Even public policy and public order constraints might not remain national in such an environment; transnational minimum standards have already been mentioned several times in that context.

519  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’.

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Finally, 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. In its newer aspects, this law, at least in business, is likely to be mostly technical, utilitarian, and meant to solve newer societal, commercial or financial problems, which in professional dealings are now seldom of a typical national character. In private law, it has already been asked several times, for example, 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 decide these issues rather than deeper considerations, which are often better left behind. This may well be so increasingly for the entirety of commercial and financial law or for most of the law concerning professional dealings, based as it is in the rationality of business. In any event, at least in international commerce and finance, it never found its cultural support in typical national considerations. Even within modern states and their organisational structures, there is hardly 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. These systems present at best models that are still close enough to national reality to steer it better; at worst they are counterproductive and they have little to say about or hardly capture modern international realities (and cannot then steer them very effectively either); see on this thinking the discussion in 1.2.11 above. The practical consequence is that statist thinking of this nature legally 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 the conduit to find the most appropriate local law per piece of the transaction, in the hope that all these local laws together add up to some rational legal framework for the whole transaction. However, it makes little sense in a modern world where much of these flows have become virtual and can hardly be located, as has already been mentioned in section 1.1.6. above, and is a basic concern throughout this book. Even public policy and values may no longer be effective purely locally—one may think of competition, the environment, and financial stability. There is a 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

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another main concern in this book—see further section 1.5.8 below. The international market place needs balancing but how can this be done? To conclude: the new law merchant or lex mercatoria balanced by local public policy or public order requirements when international transactions still come demonstrably onshore in a particular country or otherwise increasingly by international minimum standards is more likely to provide a forward-looking model and legal framework. In fact, it was pointed out in section 1.4.4 above that it was never entirely forgotten in the international market place. At least the renewed search for it is legitimate and necessary. It finds its reason in its own international environment and in the exigencies of its own legal order. As an expression of the needs and logic that prevail in that transnational community, it provides a better steering tool for that community to manage its business and to progress, even though 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 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 is no less true that transnationalisation guides here against excess in state powers and may thus be seen as helping to create a better equilibrium even locally. But there may be conflict, and the interaction between domestic policies and transnational minimum standards is an important issue (see also ss 2.2.6ff below), which in dispute resolution international arbitrators in particular are increasingly meant to deal with. This raises considerable issues concerning their powers, accountability and supervision and will be a main subject in the discussion on international arbitration in chapter 2 below.

1.5.6  Sociological and Economic Considerations in the Law In the previous sections, for Western society, 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 or communities and their functioning. The possibility of competition between legal systems on the same territory was also mentioned520 as well as the operation of parallel

520  See further JH Dalhuisen, ‘Legal Orders and their Manifestation: the Operation of the International ­ ommercial and Financial Legal Order and its Lex Mercatoria’ (2006) 24 Berkeley Journal of International Law C 129 and BZ Tamanaha, ‘Understanding Legal Pluralism: Past to Present, Local to Global’ (2008) 30 Sydney Law Review 375. The competition between different legal orders in the same territory is by no means a modern issue

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legal orders.521 At least in the communitarian view, in which, in the opinion of some,522 the notion of community may claim moral primacy over the notion of states, 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.523 In section 1.5.1, it was posited 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, although not necessarily the most culturally driven. If, as suggested in the previous sections, societal energy is at the heart of all modern state 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 process and enforcement facilities sometimes for the better, at other times for the worse. As a minimum, it gives 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 other communities, even if for enforcement of their rules they may ultimately be dependent on (the same) states as the sole enforcement agencies in the modern world. 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. It means that 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

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, which only operated 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. Where 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 attitudes. In modern times, in a similar manner, Nigerian courts have struggled with the recognition of tribal decisions based on tribal and also sharia law; see MM Akanbi, Domestic Commercial Arbitration in Nigeria: Problems and Challenges (2006, unpublished PhD thesis, King’s College London). 521 

See s 1.5.8 below. See P Selznick, The Communitarian Persuasion (Washington, DC, 2002) 64. 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). 523  RD Cooter, ‘Structural Adjudication and the New Law Merchant: A Model for Decentralisation’ (1994) 14 International Review of Law and Economics 215. 522 

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their own law, and are entitled to have their laws recognised and respected by other legal systems or orders, therefore also by states, which will have to give their sanction to it, much as they do to sister state laws and judgments (subject to a number of conditions which should then 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 states in the law formation function and under what circumstances? Where must we draw 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 are thus likely to have a more objective status and a more independent origin, which as such are or should be identifiable. Even contracts are embedded in and depend for their binding force on a broader legal set-up that is not necessarily voluntary in all its aspects or 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 law that they produce. (a) This would appear to concern first the identification of the relevant circle of participants in a given range of activities or with a particular purpose. (b) There also has to be some sustaining force or motive, as in international commerce and finance there is the force of globalisation with the large increase in the modern international flows of professionals, goods, services, technology and money trans-border, 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 some infrastructure for it. (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 also needs to be some consensus on the basic economic system, which suggests a market approach in which states may nevertheless figure as important balancing or facilitating actors.

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(f) Finally there is an institutional aspect relating to the spokesperson function, which allows for articulation of the rules in which, for example, in international commerce and finance, the ICC, international arbitrators and legal practitioners play an increasingly important role.524 This raises many fundamental issues. If we limit ourselves to international commerce and finance, the relevant circle of participants in a given range of activities is likely to be the professionals in those trades and dealings.525 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, knowledge, capital and payments, 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 pattern 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 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 scurrilities) which local laws may 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.526 S­ eparation 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 as a group 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

524  See further ch 2, s 1.2 below, see also JH Dalhuisen, ‘Globalisation and the Transnationalisation of ­Commercial and Financial Law’ (2015) 67 Rutgers University Law Review 17; see further JH Dalhuisen, ‘­International Arbitrators as Equity Judges’ in P Bekker, R Dolzer and M Waibel (eds), Making Transnational Law Work in the Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 510. 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. 525  See s 1.1.10 above. 526  See R Cover, ‘Nomos and Narrative’ (1980) 97 Harvard Law Review 4, 31.

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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. Others527 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). Here the emphasis shifts from struggle to rationality, consistency and predictability. In ‘law and sociology’ other (supporting) insights have emerged in Europe528 and may be of particular interest.529 It is submitted in this connection that ‘modernity’ and

527  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 none 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. 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. 528  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 seen 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. 529  The views of Luhman may also be of interest in this connection, see N Luhmann, A Sociological Theory of Law (London, 1985) 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 basically stabilized by states. While assuming that only in this way could law be set aside from other normative systems like morality, it undermined at the same time the very basis of law’s self-creation,

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the ‘advanced nature’ of the new legal system might themselves become supporting elements in the context of their international validity and force.530 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 already been mentioned several times that it is better if it is just, promotes social peace, and is efficient. That is what the rule of law stands for and is as such an achievement of civil society, which makes law of this nature the true sovereign. It is not uncommon to refer here 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 channelled, constrained and informed, not only at the national but also at the transnational level.531 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. 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). 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 or be supported by more advanced values either; it has never been a precondition for their operating at national levels,532 even if in a rule of law environment, these become important issues of legitimacy and international (or other) legal orders are not necessarily indifferent to such values in terms of their recognition. They might

which it advocated. More fundamentally, it must be doubted whether the bilinear law/non-law matrix or this type of black and white thinking is for real. In practice, there is much doubt and middle ground. A related aspect in this approach was that individuals are mere bystanders or observers in a social communication system over which they have little control, as 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 Teubner towards the modern lex mercatoria (n 528) 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 233 above. 530  Hence sometimes also the reference to the law of all civilised nations, see n 407 above. The concept of what was civilised in this context underwent a sea change in the meantime. 531  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). 532  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.

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be more difficult to override in that context, at least by states.533 In this connection, it was shown that fundamental principle is at the core of the modern lex mercatoria and it must then also be considered that this law is likely to operate much better if it also fights abuse and excess and extols virtue in its participants.

1.5.7  The Formation of Non-Statist Law in Modern Social and Economic Theory In the previous section, reference was made to law and society and law and economic theory supporting a bottom-up approach to law formation especially in private law.534 In business this is also related to market efficiency considerations and can be more clearly demonstrated in relation to the operation of the international market place upon globalisation where states and state law, especially of a private law nature, cannot or can no longer be considered always to have an adequate response to the problems that may arise in international transactions. 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. This will be the subject of the discussion in the next part of this chapter. The assumption is then 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. Even these local parts could still be covered by different laws in their different aspects, eg contract or property. 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 and is the essence at least of contract law and compliance, which is normally voluntary; no legal system could survive without it. It is therefore not force or the threat thereof but self-interest and the survival instinct that propels private law. Both parties to a contract benefit from complying. But this concept or need is not 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 the equilibrium that has already been achieved. This is now

533  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 wellknown example was the legal effectiveness of the Nazi laws within the German legal order and their voidness per se even within that order after World War II. 534  See for a discussion of the modern functional approaches in the US, s 1.3.5 above.

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the state devising traffic (and many other) rules. This type of rule formation could also happen in the further development of contract and tort law. Again, the organiser might here be the state but there may be other agencies, such as in international commerce the ICC or similar think tanks (see s 1.4.19 above). 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 big problem where there is no third-party enforcement mechanism. This is 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 will be sentenced to one year in prison. If A confesses, but not B, the former goes free 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 while he or she would go free. This would be the hope of either in confessing. 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 and enforcement, in modern times especially through states.535 Also it may become too unclear 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 arbitrators 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 performance. So may standardisation, which supports business because of the efficiency built into it, and legal orders (through its practitioners and their lawyers) 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 and even in property. These thus become important areas for customary law

535  In particular in R Ellickson, Order without Law (Cambridge, MA, 1991), there is this emphasis on smaller groups.

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formation, which can also ensue in contract, concerning particularly its infrastructure in terms of capacity and validity, and affect much larger groups. Law evolves here without states as happened before the modern state emerged in the nineteenth century and it happens—it is submitted—in the international commercial and financial legal order operating around a globalised market mechanism. The value of such law grows as the number of participants increases. But standardisation of this nature has its limits and is not all-controlling, even if routines are key to all societies (language being the foremost example), see the discussion in section 1.4.7 above. Specialisation and the need for tailor-made terms or products or, in business, specific risk management tools, disturb this order536 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 remain mainly repetitive. It has been said before that the future is not captured by the past and its experiences. Efficiency requires us ever to move on. In our time, that results, it is submitted and is demonstrable, in particular in immanent law formation in this newer legal order of a commercial and financial nature. Law departments in large international companies, not judges or even arbitrators or outside law firms, are especially important as spokespersons for the new order, navigating the pitfalls of public order and public policy 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 in place; see further the discussion in section 1.4.17. 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.

1.5.8  The Competition Between Transnational Law and Mandatory State Laws or National Public Policies and Public Order Requirements. The International Minimum Standards The premise in this book is that in a modern environment states and their courts have to recognise law from wherever 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, 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

536  See for the problems in this connection with standardisation of proprietary rights, the discussion in Vol 2, ch 2, s 1.3.9.

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a more tolerant and secular Western environment imbued with notions of the rule of law. Yet, 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; the sports community may now well present another. That is firmly established, although increasingly there may have to be a larger margin for other legal orders to operate in their own way, also upon the territory of nation states, where the local laws should be accommodating, except in more extreme cases, at least if international contact and business are to be promoted. In commerce and finance, this process is also under way in a more modern fashion 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 supporting the transnational order in respect of international dealings unless the foreign rules remain manifestly objectionable. In fact, it should be realised 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. In this connection it might also be considered, however, 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 laws537 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. There is no ­reason why that should not now especially apply to the transnational commercial and financial legal order, especially if it responds to the rule of law. Nevertheless, it was also

537  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 has contributed 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. The traditional view is here that democratic control is best exercised at the level of the participating governments, therefore 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 to profile themselves, acquire credibility and inspire the masses. For the WTO, similar arrangements are 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 talk, 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 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 run into serious problems of diversity.

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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 as valid law from other legal orders operating within it were here discussed in terms of democracy, rule of law, human rights, social policies, transparency, market abuse and corruption, equality and proportionality, lack of which may potentially be affected by public order bars in the recognising country. Within Western society, this allows in particular for a discussion of the ­values of other legal orders (or the absence of such values in them), 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.538 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 chapter 2, sections 1.1.10 and 1.2.5 below. Again, especially in-house law departments also 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 system 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,

538  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 328 above.

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assuming some legal expression can be given to any ensuing political intervention in it.539 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, bookentry 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 material 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 therefore 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. 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 laws 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)540 in which only national law had validity, but conflicts rules pointing to the application of laws from other legal traditions may still be helpful and necessary in a broader context and show a way in terms of centre of gravity of an activity or closest connection. A more advanced view favoured in section 1.1.8. 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 539  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. 540  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.

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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 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 chapter 2, section 1.2.4 below in connection with foreign investment protection. In this connection, we have to consider the issue of the attribution of competences between the various legal orders 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. A key point here, already mentioned, 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 reasonable connection with the case 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, but 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 international minimum standards. These international minimum standards may increasingly suggest a more objective transnational or international regime even in regulation. This could notably affect 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 as such to be respected, at least for operations 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 C ­ onflict of Laws s 6) and Foreign Relation Laws (Restatement (Third) of Foreign Relations ss 402–03) 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 s­ ections 2.2.6–2.2.8 below.

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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 by international ­arbitrators).541 But again if international transactions come demonstrably onshore 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 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 proposed (see s 1.1.6 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. 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. The ultimate test is in bankruptcies, which remain local. Will the bankruptcy judges accept these transnationalised proprietary interests or set-off rights?542 A special aspect here is recognition in such bankruptcies of 541  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). 542  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 (see ch 2, s 2.4.3, n 204 below) 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) (Oxford University Press, forthcoming). 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 543 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.

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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.543 This leaves the last question 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. That 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 but that is a legitimate policy choice. The 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. It is 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 Convention increasingly limited, however, to narrower notions of international public policy544 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. It now requires a ‘manifest’ violation of domestic public policy. To repeat, this means that even if an effect on public policy or

543  Note in this connection the Australian (Victoria) cases in IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008] HCA 38, in which the Australian High Court ultimately accepted that, at least in a non-financial central counterparty 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. 544  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 ch 2, s 1.6 below. 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.

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order in the r­ ecognising 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 either and the UCC was adapted in each State separately and autonomously, often with some differences. That was the case from the beginning. 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 not an official requirement. 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 (Art II, s 8, clause 3). This is a narrow concept but 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 Vol 2, ch 2, s 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 Vol 2, ch 2, s 2.1.10). The ratification of the Vienna Convention or CISG may provide another example in the area of international sales, although here there may primarily be reliance on any direct effect under state law. At one stage, there was a broader, more general attempt made to create federal commercial law for all interstate commercial transactions. It was not unlike the creation

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of federal jurisdiction in cases where there was diversity of citizenship. It would have been similar to the de-nationalising process, as we now see globally. In the US, 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. In fact, the attempt at further federalising commercial law failed in its generality; 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. To better understand this broader movement towards federalisation of commercial law within the US and its ultimate defeat, although never entirely, one has to take a step back and consider first the picture of the applicable law in interstate cases, 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 (Art III, s 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 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). In diversity of citizenship cases, the issue then also 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 1938,545 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 state conflict of laws rules; see, for example, s 1-131 UCC, which refers in this connection to the law of the State that bears an appropriate relationship to the case). There had always been a strong foundation for this restrictive attitude in the Judiciary or Rules of Decision Act 1789 (s 34) even though the US Supreme Court had at first

545  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.

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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 by the federal courts from early on, followed later by the law concerning negotiable instruments and interstate common carriers, even in diversity cases, and this continues.546 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 indeed shift the law-creating force to another more efficient legal order, in the case of the US to the federal order always 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 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, which could be broader. 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.547 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 and their further development.

546  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. 547  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).

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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.548 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 s 1.4.20 above) and where applied so far 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 E ­ uropean Sales law or CESL. 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 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 would be important manifestations besides statutory texts such as the DCFR or CESL, or any other, see below. Again, this is also suggested by the American example. 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 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. 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. This 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.549 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 law, appears to be well established in the EU. This movement is supplemented or potentially superseded by the efforts leading to the DCFR, including the 2011 Draft Regulation on a CESL (see again s 1.4.20 above)

548  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 blackletter 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. 549  See also T Tridimas, The General Principles of EU Law (Oxford, 1999) 313.

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as EU codification efforts in the traditional civil law manner, excluding therefore any other sources of law, in the case of the DCFR (not CESL) 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 also in respect of professional dealings trans-border within the EU. But it has already been said 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 1.4.5 and 1.4.6 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 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.550 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 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 connected551 but notably not limited to physical goods. There is here an emphasis on economic realities also covering beneficial rights.552 From a jurisprudential point of view, the importance is indeed that possession, ownership or property need not be connected with a national legal order but may acquire a t­ ransnationalised

550  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). 551 See Marckx v Belgium (1979) Series A, vol 31, para 63. 552 See Gasus Dosier und Foerderintechnik 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 551). 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.

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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 are 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. These international legal orders are not territorial and may all come onshore at different times 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 orders. Even then, they could still be declared irrelevant, as 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. It is quite possible here for the internationalisation of sports to be another guide for future developments in its relationship to domestic legal orders.

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 here inherent forces at work, whether or not considered 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. 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 or otherwise rely on these customs and practices. In this manner, fundamental 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 itself here 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. International sales are a case in point as we shall see in Volume 2, chapter 1, part II. There are obvious extra risks attached to the sale and transfer of assets i­nternationally

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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 here. 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, safe and professional hands having left the seller, who has lost 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. 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. 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 properly 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. Again, it means that these 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 logic of the business and so the law changes with them; see section 1.4.7 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 here 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. 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 nature at the international level, through the globalisation and liberalisation of the commercial flows and the dramatic increase in

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their size. However, it needs the help of legal theory, of legal history, and comparative law to regain its proper place.553 Legal theory proves its importance in all periods of great change and must provide a vision. That is the traditional task of jurisprudence in the US. It does not necessarily 553  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 C C dominicé (ed), Etudes de droit international en 1’honneur de Pierre Lalive (Basle, 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 (New York, 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 (Munich, 1961); P Kahn, ‘Lex mercatoria et euro-obligation’ in F Fabritius (ed), Law and International Trade (1973) 215. See, further also AF Lowenfeld, ‘Lex Mercatoria: an Arbitrator’s View’ (1990) 6 Arbitration International 133, 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). 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 1.4.13 above and Dalhuisen (n 518) 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 245 above. The matter has so far received relatively little 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 C ­ ontract Choice of Law (Universidad Nacional Autonoma de Mexico—Universidad Panamericana, 1998) 229–36; FK Juenger,

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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, e­ xternal or non-legal considerations play an important role. When and how they do so remains 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. These questions have received renewed attention, e­ specially 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 further ss 1.3.6 and 1.5.6 above), but ultimately it may well show its true importance in that connection 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. Such a contribution may in particular concern the concept and operation of distinct legal orders554 that may be separated from or transcend national legal orders. 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, 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 to 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. ‘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 U ­ niversity 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. 554  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 writers mention legal orders or systems, but it is as such not a major area of study in modern legal thought. The concept has received some more attention in public international law, see N MacCormick, Questioning Sovereignty (Oxford, 1999), especially chs 1 and 5, and certainly also in EU law; see 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 503 and 504 above.

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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.555 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. 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 commercial practice recognises itself in the result. That is the limit of comparative law 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 and the proposals for a CESL 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 criticism556 even if it does not altogether do away with the usefulness and need for comparative law studies in a functional sense.557 It will show that, especially in the West, mythical or more mysterious origins of the law in

555  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. 556  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. 557  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 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 a search for 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 constructive trusts, 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.

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a national psyche are largely unsupported, at least in commerce and finance, and are being replaced by greater openness and rationality.558 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 is practical, technical and problem solving in ways that do not differ a great deal from country to country, except sometimes in the detail, where the differences seem often more coincidental than fundamental or are caused by the fitting in of newer structures in antiquated systems. 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. There it operates more properly at the level of different sources of law subject to a clear hierarchy. 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. The challenge rather is to formulate transnational minimum standards to balance the international market place. In this connection, domestic laws may be particularly useful to show the legal issues that need to be dealt with in the formulation of the new lex mercatoria rather than the traditional solutions, which need also not be rejected a priori.

558  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) 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 most certainly be of some use in international commerce and finance. See for a discussion in Germany, J Esser, Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts. Rechtsvergleichenden Beitraege zur Rechtsquellenund Interpretationslehere, 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 considered 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 section 1.1.6 above. It should 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 legal structures, such as, for example, security interest, conditional and beneficial ownership, 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.

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 fully 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.559 It centres on the applicability of (only) domestic law in international situations 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 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 the size but also the nature of the international flows that must then be ­considered. 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 559  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.

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law barely has an answer to these questions. But perhaps the most important technical difficulty has become that in an ever more virtual environment, the proper contact with a relevant state law is ever more difficult to establish. It had always been problematic for intangibles (like monetary claims). It nevertheless 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 F von Savigny (1779–1861) in the German Historical School of the early nineteenth century,560 who saw all law as territorial, which followed from his view that law was culturally bound: see ­section 1.2.9 above. Within this approach, 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 eliminated. Again, this new approach was an important and logical by-product of the nineteenth-century notion that all law was national per se and that there were no longer universal legal concepts, principles or rules. Private international law was not international at all 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. In the absence of much regulatory law at the outset, this approach focused on private law. In it, the conflicts rules were originally considered simple in essence and 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 s­ ection. ­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 v­ alidity 560  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 ch 2, s 1.1.8 below.

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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 s 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) 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 conflicts rules themselves still claimed a more universal status.561 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 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 could 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 is 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. Rather, these transactions should always be governed by their own transnationalised law subject to proper public policy or public order conditions, which could themselves 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.562 One may think of the sale of real estate between persons from different countries. 561 

See von Savigny (n 562) 27. See JH Dalhuisen, Wat is vreemd recht? [What is Foreign Law?], Inaugural Address Utrecht (Deventer, 1991) 27. 562 

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In any event, serious problems arose in this conflicts law 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 domestic 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 ever-increasing 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. 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 is no preset rule in private international law and which is especially difficult when it comes to displacing their own, which are likely still to be 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 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—which 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. There are now also 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

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appropriate rule in the case of conflict. The original lex contractus could not then prevail automatically or could result in the application of a domestic law (for example, that of a foreign seller of financial products), which, from the perspective of the law of the residence of an investor (the buyer) would be wholly inadequate to protect it and could create injustice for the investor. In the traditional conflicts of law or private international law approach, it was thus difficult to take into account and assess the increasing impact not only foreign regulatory requirements in the country where the transaction had an impact, but also the special but nevertheless justified interests of the 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, 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. 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 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 (which derives from fundamental principle, ­custom, treaty law, general principle, or party autonomy in the manner discussed in s 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 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 m ­ inimum standards; see again the discussion in section 1.5.8 above and further sections 2.2.6ff below. 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 law of the parties most directly involved differed greatly. In the private international law approach, it was not possible to use internationalised concepts here either, so that ­altogether justified expectations 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

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question of transnational values (besides public order considerations and international minimum standards), which could be quite different. These other values may not always mean more protection. 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 II, chapter 1. 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 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 certainly 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 or do not affect third parties. They are 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. 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

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r­ egulatory 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 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 opted into. The public or semi-public law rules of that country are in such cases hardly likely to apply. 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 c­ annot 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 how far it 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 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.563 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.

563  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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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 (say 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, 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.

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 and 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 was 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 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

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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. 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 oriented. 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. 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 s­ tatute). 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. 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, 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 s­ tudent Ludwig von Bar,564 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 nineteenth-century nationalistic thinking in the German Historical

564 

L von Bar, Das internationale Privat-und Strafrecht (Hannover, 1862).

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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 conflicts 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 believed to be incidental and minor. The conflicts rules developed in this approach were also 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 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 fact-oriented 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,565 while 565 

H Batiffol, Les conflits de lois en matière de contrats (Paris, 1938) 3.

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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) still proved poly-interpretable and subject to an appreciation by case resulting de facto 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 governmental intervention in private law; see sections 1.5.7 and 2.1.1 above. As noted in the previous section, this highlighted the difficulty of using the new conflicts approach to contend with a rapidly increasing number of different mandatory national policy rules, particularly those protecting weaker parties (for example, workers), but 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 into different local pieces because various parts of a production cycle took place in different countries. Different legal regimes could also result (even in respect of each local part of an international transaction) from different characterisations of the legal aspects of the same transaction in terms of property or contract law, contract law issues arising under the laws of one country, or the proprietary aspects under the laws of another. But even the 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 Vol 2, ch 2, s 1.9.2). Through so-called dépeçage, different conflicts rules had then to be devised for different aspects of the same transaction. Indeed, 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 agency and trust (see also s 1.4.19 above and Vol 2, ch. 1, s 3.2.2 and Vol 2, ch 2, s 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 conflict of laws 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. 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 p ­ arties came

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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 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. In proprietary matters, 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 Vol 2, ch 2, s 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 any one 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 also 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 (except for each debtor their 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),566 is an issue covered in the US by section 6

566  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, primarily 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. Earlier, 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.

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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 ss 2.2.6 and 2.2.8 below). 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 nineteenth-century 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, spotting policy also in private law 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 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, 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 forum shopping became an important issue in the conflict of laws approach to finding the applicable law, further promoted by the fact that these conflicts 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

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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 s 1.4.19 above), although also 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 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 (Art 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 (Art 4(5)). This was followed in the successor EU Regulation of 2008, which, however, uses a list approach first (Art 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 (Art 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 has already been 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),567 therefore as formal structures. In this connection it should perhaps also be noted that there is less concern here 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 product of legal positivism in the statist approach. 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

567  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 2, ch 2, s 1.9.3 and Vol 3, ch 1, s 2.4.5.

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some further elucidation. 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 important 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 s 2.2.1 below), and gives maintenance creditors the benefit of the best rule for them, compare Articles 5 and 6 of the Hague Convention on Maintenance Obligations (see also s 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 particularly so in the US in interstate conflicts; see more particularly 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. The substantive law approach through uniform treaty law may 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 s 1.4.10 above). It is 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 globalisation of the markets in the professional sphere and the independent legal order there created. Under it, the traditional conflicts rules play only a residual role (see ss 1.4.12 and 2.1.1 above and s 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 before conflicts’ rules become necessary, thus reducing them to a lesser place, 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. 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

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and obligations.568 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 Conflict of Laws 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 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) 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; (c) 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 (Art 4(3) of the EU Regulation); (d) more substantive rules, often mandatory especially in the area of the protection of consumers and workers (see Arts 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,569 while sometimes the most favourable rule could also apply as in the case of maintenance creditors under the Hague Convention on Maintenance Obligations; (e) 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;

568  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. 569  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 RabelsZ 24.

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(f) 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) (Art 9 of the EU Regulation); (g) 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 (h) 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 (in 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 notions, 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. 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 nationalistic. 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 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 in Europe. 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 based, not interest or policy based. 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

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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, to wit in interstate rather than in international cases. It should be understood that other influences were at work here. 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, 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. Secondly, 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 either 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), 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 s 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. It is less surprising if one realises that in the nineteenth century, Story had maintained the Dutch comity approach to all private law conflicts in the US. This already 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.

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Section 6 of the Restatement (Second) of Conflict of Laws (1971) reflects this a­ ttitude 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 field, although it is unavoidable that the approach to international conflicts is becoming similar.570 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’.571 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,572 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 for objective, rule-oriented elements of conflicts laws, so prevalent in the traditional European conflicts approach, is here abandoned.573 Even though the Americans often continue to use private international law terminology (compare, for example, the reference to the most significant relationship, both in s 188 of the Restatement (Second) of Conflict of Laws for contracts and in s 145 for torts (both subject to the already mentioned s 6, however), they appear to ­gravitate

570  See AA Ehrenzweig, Private International Law, A Comparative Treatise on American International Conflicts Law, including the Law of Admiralty, General Part (Leyden, 1974). 571  A term particularly used by R Leflar, American Conflicts of Law (Indianapolis, IN, 1977) 205. 572  B Currie, ‘The Verdict of Quiescent Years’ in Selected Essays on the Conflict of Laws (Durham, NC, 1963) 627. 573  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 (Minneapolis, MN, 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.’

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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 in that approach. It is also considered too dependent on the forum and its laws, in turn leading to considerable dependence on the rules of (adjudicatory) jurisdiction, which may promote forum shopping, as was already mentioned.574 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 (to complete its new 1992 codification) 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 s 2.2.4 below). There is in any event no 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-conflicts 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.

574  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.575 This form of rigidity is now not generally followed,576 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 Berkeley,577 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 merely on governmental interests (and certainly not on the prevalence of rules), 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 d ­ iscretionary element or at

575  See B Currie, ‘A Critique of the Choice of Law Problem’ (1933) 47 Harvard Law Review 173 and also his Selected Essays (n 572) 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. 576  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. 577  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.

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least some flexibility. Conflicts of laws in the traditional sense do not arise here. 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 own social policy.578 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 s 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. 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.579 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,580 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.581 The theory of Professor Leflar (Choice-influencing Considerations or F ­ actors) came close to an elaboration of this approach, although seemingly more receptive to foreign interests.582 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’583 finally sought a balance or accommodation between the domestic interests and those individual and state interests which became relevant in multi-state situations. If such an accommodation failed, promotion of interstate activity, the parties’ intent, or judicial economy and simplicity was to prevail.584 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

578 

See Ehrenzweig (n 571 above) 92ff. See also W Reece, ‘Conflict of Laws and the Restatement Second’ (1963) 27 Law and Contemporary ­Problems 679. 580  See D Cavers, ‘Critique of the Choice of Law Problem’ (1933) 47 Harvard Law Review 173. 581  See D Cavers, The Choice of Law Process (Ann Arbor, MI, 1965). 582  See R Leflar, American Conflicts of Law, 3rd edn (Boston, MA, 1977). 583  A Von Mehren and D Trautman, The Law of Multistate Problems (Boston, MA, 1965) 304. 584  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. 579 

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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 emerge 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 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.585 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. Here 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 the 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

585  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.

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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).586 This approach remains, however, 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. 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.587 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.588 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 socalled 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 G ­ eneral 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)).

586  See for the first English application, Bank of Baroda v Vysya Bank [1994] 2 Lloyd’s Rep 87 in a letter of credit case. 587  See in the Netherlands, HR 25 September 1992 [1992] NJ 750, which interprets Art 4(5) restrictively and in case of doubt finds 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. 588  See the Dutch case cited in n 587, and further also Dicey and Morris on the Conflict of Laws, 14th edn (London, 2012) r 223, 1820 and r 35, 478.

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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 (Arts 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 (Art 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 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 (Art 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. 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

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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 saw. 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 (Art 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 (Art 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 courts such as ­shipping matters in Rotterdam, was involved).589 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.590

589 

See also HR 1 February 1985, NJ 698 (Piscator, 1985). 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, 590 

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2.2.5  The Role of Practitioners. Emphasis on the Facts Rather than on the 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 conflict of laws 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;591 (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 of a different sort which accepts that in appropriate cases transnational law will apply in which reliance on legitimate expectations figures high; (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 conflicts 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

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. 591  See for the more convoluted results, even by conflict of laws standards, particularly the approach in tripartite situations such as agency, Vol 2, ch 1, s 3.2; bills of lading, Vol 2, ch 2, s 2.1.9; bills of exchange, Vol 2, ch 2, s 2.2.10; and assignments, Vol 2, ch 2, s 1.9.

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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, the applicable law must always find its place among the other sources of law operating at the transnational level and itself becomes 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).592 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 clear 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, who are more used to managing legal risk, may prove to be the foremost spokespersons for the new order. They created the legal frame work 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 properly 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

592 

See also text following n 563 above.

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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. 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 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 seen as the inheritance of the traditional common law approach

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and t­ echnique to finding and applying the applicable law. Internationality and professionality may here acquire a special meaning, and may indeed suggest a different legal order, here called the transnational commercial and financial legal order, with its own laws (lex mercatoria), which was largely the gist of the discussions in the first part of 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 rules 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 by 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 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 2, chapter 1, 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 conflicts 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. Competition Between Transnational and State Laws Revisited 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 they 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 1.5.7 above. They 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

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be clear in company law and bankruptcy. But it is also at the heart of consumer and investor protection law. An example may serve as clarification. Governments may directly license and ­supervise financial intermediaries such as banks and investment brokers and advisors. Governments may withdraw these licences or impose further conditions in case of bad behaviour. It is a matter of administrative law, which does not normally give individuals a private action against misbehaving financial intermediaries. Individuals cannot force governments to act; we mostly accept that governments may have their own reasons (within the law). Although normally such governmental policies are likely to regulate and prescribe social and economic behaviour more directly, 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. Again, the difference will be in the cause of action and type of recourse. It is also conceivable that there is horizontal effect of government regulation especially if deeper principles are engaged, but it is rare and remains exceptional, see also the discussion in section 1.4.5 above. Rather governments may give private parties a direct private 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. These protections are then likely to result in mandatory law, which affected parties cannot waive by choosing another system of law. This is to avoid undue pressure. Mandatory private law rules of this nature may thus increase as governments often use private law to achieve their policy objectives, for example in the protection of consumers and smaller investors, the first also through good faith notions, the latter often through the extension or amplification of agency and fiduciary duty notions as just mentioned. However, it should be realised and never forgotten that, by using notions of fairness and good faith, in contract, for example, in terms of pre-contractual and postcontractual duties, courts themselves have often introduced mechanisms to initiate or broaden similar policies. Here one sees instances where newer social values are not only imposed by governments 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 the courts. They 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 also reinforce governmental policies. 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

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extent an international transaction has an effect on the territories of states that are or may be affected or if there is demonstrable conduct or effect of the transaction 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 justified, 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, but regulatory rules or local values will likely compete with the lex mercatoria and, even if public order based, should in principle be well distinguished from fundamental legal principle or similar considerations operating in the lex mercatoria, and therefore in private law itself, and are for international transactions, it was submitted, of a transnational nature.593 The impact of governmental interests on the lex mercatoria can perhaps best be considered a 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. 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. 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 particularly in foreign investment, where accommodation between the EU and Member States’ policies may be called for (see ch 2, s 1.2.4 below) and becomes 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 in principle reach beyond their own legal order nor, it is 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 also, 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, especially if operating on their territory. In fact they still have the last word. 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 They arise in many different ways, and to determine whether there was sufficient local conduct and effect to invite the application

593 

See for fundamental principle, s 1.4.5 above.

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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 g­ overnmental 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 only if the relevant governmental interest can be considered sufficiently dominant in the particular international case. Arbitrators are likely here to be more sensitive to this state of affairs than local courts, which may be more likely to favour their national policies, is another reason why parties may prefer international arbitration. Competition policy has been tested more 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 subquestions­, 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 as a question 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, however.594 Awareness of the interests of other states is assumed, in which context at least some attention is now commonly paid to international law.595 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 are of great interest, need to be carefully considered, and may also be indicative of a more international trend. 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, Art 7). Here the formulation of a conflicts or private international law rule is

594  See for this international law principle the Barcelona Traction, Light and Water Company, Ltd (Belgium v Spain) (1970) ICJ Rep 3. 595  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).

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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.596 Under it, precedence 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), 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.597 ­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.598

596  See for a comparative study also GA Bermann, ‘Public Law in the Conflict of Laws’ (1986) 34 (Supplement) American Journal of Comparative Law 157. 597  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). 598  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 through 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). Cross-claims 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

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In England,599 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.600 That is also the approach in the 2002 EU ­Regulation on the Recognition and Enforcement of Judgments in Civil and C ­ ommercial Matters, amended in 2012. Acceptability of this approach under common international law standards is often emphasised,601 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).602 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. This may ultimately also lead to domestic policy objectives being tested for their validity and application in international transactions when still coming demonstrably onshore 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.

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 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. 599 

UK Civil Procedure (Amendment) Rules 2000 r 6.20. See as the main example Art 5 of EU Regulation No 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, entered into force 1 March 2002, replacing the ­similar Brussels Convention of 1968. 601  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. 602  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 595 above, but they are not necessarily the old rules. 600 

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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 international legal order, especially 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.603 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 g­ overnment (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 chapter 2, section 3.4 below. 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

603  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.

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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 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 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 chapter 2, section 3.3. below. 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 laws, 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.604 Increasingly there may also be some protection under transnational (administrative law) ­principles.605 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) chapter 2, section 3.5 below. 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 the 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 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 r­ equirement),606 or indeed now under treaty law. 604  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. 605  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. 606  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),

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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, but vis-à-vis the other Contracting State. As we have seen, stabilisation clauses may not prove strong enough to overcome 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 and 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 offered them (under such treaties) when disputes have arisen. That is now common and gives investors at least derivative rights under public international law.607 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 d ­ ispute (although there may also be a separate arbitration procedure for the C ­ ontracting States in matters of interpretation of these BITs).608 The area of foreign investment protection and arbitration will be the subject of a much broader discussion in c­ hapter 2, part III below.

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. 607  Earlier, in s 1.4.10 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. 608  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 ch 2, s 3.3.4 below. 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.

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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. 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,609 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.610 Naturally, American courts would apply their statutes in the matter, at least in respect of American investors, if called upon to decide these issues. Courts in other countries may not, but even if an American court found itself competent in these matters, remoteness is still 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 in situations of (US) patent fraud, the American courts might still be more indulgent. More traditional situations are 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.611 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 may still give rise, however, to a force majeure excuse on the part of the exporter). Other 609 

cf House of Lords in British Airways Board v Laker Airways Ltd [1985] 3 WLR 413. Leasco Data Processing Equipment Corp v Maxwell (1972) 468 F2d 1326. 611  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). 610 See

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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 as a substantive law requirement. 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 laws 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 no longer be upheld in such cases612 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 ss 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 has long been 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 the 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 612 See

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

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European conflict 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 international 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 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.613 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,614 but in which (the balance of) public policies may still play a role if these policies are sufficiently strong.615 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, however, 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

613  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). 614 See Piper Aircraft Co v Reyno 454 US 235 (1981) and Re Union Carbide Corp 809 F2d 195 (1987). 615  See for a similar approach in England, Unterweser Reederei GmbH v Zapata Off-shore Company [1968] 2 Lloyd’s Rep 158 (CA).

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of public policy, as embodied in securities laws of the US, was clearly accepted, assuming, as was pointed out in Mitsubishi,616 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.617 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.618 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,619

616 

See note 613. above. See V Lazics, Insolvency Proceedings and Commercial Arbitration (The Hague, 1998); see also Vol 3, ch 1, s 1.1.14ff. 618  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. In 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 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. 619  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 apply 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. 617 

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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 were 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,620 including in the ECJ.621 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 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. An important question in this regard is whether the public policy test itself may be subject to transnationalisation, presenting therefore an objective international substantive (minimum) standard. One must assume that the trend is in that direction.622

620  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. 621  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, 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 ch 2, s 1.2.5 below. 622  See ch2, s 1.6 below.

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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.623 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 E ­ uropean 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, eg 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.624 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 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).625

623  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. 624  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, he may 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. 625  See also n 57 above.

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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, cf 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. Other issues already mentioned arise when the effect of the contractual choice cannot have been reasonably 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).626 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,627 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 m ­ atters, 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

626  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 624). 627  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.

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more just and reflective of the true needs of participants in the particular trade 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 ss 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.628 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.629 Where parties have not provided

628  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 perfectly 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. 629  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.

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for any choice of law clause at all, in international commercial and financial matters their application could still appear appropriate and international arbitrators in particular 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 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 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

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, 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 ordinary judges 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. That remains a substantial restriction in proceedings in the ordinary courts in the EU.

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to unilaterally determine the field of their application. This is also the approach in the 2011 draft Regulation concerning a CESL. If they 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 mostly 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 in the area of private 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 so considered, the question of the appropriate relationship will still acquire 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 Vol 3, ch 2, s 3) we see, on the other hand, that the (uniform harmonisation) rules apply to domestic as well as cross-border 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,630 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 (for example consumer law, product liability and conduct of business and segregation issues in investment services), incorporation in domestic laws leaves much scope for differences as no uniform law but only harmonisation is 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 630 

See for the definition, Vol 3, ch 2, s 1.2.1.

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to conform to the wording and purpose of the relevant Directive. There is therefore 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 Directive under its own terms directly applies to cross-border transactions or situations. The Directive may itself clearly determine 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 and even to those crossing into non-Member States631 and also in principle for the banking and investment services Directives. 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 (Art 23 Rome I). It should be realised, however, that, if there are still differences in implementation in the various Member States, this would 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 with reference to the Directive itself (the ‘Directive-conform Implementation’)632 and its interpretation at EU level as a 631  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 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 CESL, if it became law, would only apply to cross-border dealings and would therefore eliminate private international law issues (in the nature of a Regulation as proposed, there would be no potential differences in implementation either). 632  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.

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matter of uniform European law, rather than through a conflict of law approach. At least that would most likely be the position of courts within the EU, which could in case of doubt ask for an 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 between two Member States, the normal conflicts rules of those non-Member States would more likely be applied 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 questions. Of course, the European Court would in such cases not supervise the uniform interpretation either. If mandatory private law results from the Directives (as may be the case in consumer law), the courts in Member States may be particularly sensitive to its uniform interpretation. The courts in non-Member States, on the other hand, may again stick to the implementation text of the country whose laws it deems applicable under the more traditional conflict of laws approach, subject to their own overriding public policy, in particular if residents of their own country are affected.633 It follows from the foregoing that the determination (directly or indirectly) that the scope of EU Directives also covers cross-border transactions within the EU would make them also prevail over uniform conflicts rules derived from EU texts: compare again Article 23 of the EU Regulation (Rome I). Adjudicatory jurisdiction issues remain important here as well. The House of Lords, now the UK Supreme Court, had, for example, a much 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 Court634 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.

In international commercial arbitrations, the situation would be different as there is no lex fori per se and a­ rbitrators 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). 633  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 as they 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. 634  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.

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There are a number of other points to make. First there is the approach of the ECJ itself, which has, since 1984, 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.635 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 would require it.636 Secondly, 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.637 The Directive-conform interpretation is there 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.638 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,639 which is normally the case but may be very different in international arbitration; see chapter 2, section 1.2.5 below.

635  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. 636  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. 637  Case C-91/92 Faccini Dor [1994] ECR I-3325. 638  Joined Cases C-6/90 and C-9/90 Francovich [1991] ECR I-5357. 639  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 621 above.

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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 2, chapter 1, 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. So far, they may have received inadequate implementation in several civil law countries in private law, especially in the agency protection aspects (see further Vol 3, ch 2, s 3.2.6). 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 2, chapter 1, section 3.1.6 and chapter 2, section 1.4.3 and Volume 3, chapter 2, section 1.3.10. The reasons for the discrepancies is 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.

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 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 there it did not take 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 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. Here the tide is 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. 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; see the discussion in sections 1.2.9ff above. It gave 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 and meant to apply to a national or international/trans-border transaction or situation, or whether or not that legislature was itself democratic; see also section 1.1.7 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 insights, it allowed rapid progress and further adjustments and rationalisation, although in practice, at least in private law, updating was often patchy and increasingly late. The price was doing away with all alternative laws, even where

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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. 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 1.4.20 above. So does the 2011 draft EU Regulation for a CESL (see further Vol 2, ch 1, s 1.6), which is a DCFR carve-out and is in essence an anthropomorphic consumer law text. In this approach, fundamental and general legal principle, earlier captured in natural law notions, is 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 in these codes. 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 further the discussion in section 1.4.7 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. 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 relationships and their best balance. That became the idea behind all later 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, p ­ resent, past and future, either directly or otherwise through correct interpretation techniques, which had the intellectual system as its base, even more than the text. 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 and 1.12.13 above. But even this intellectual system 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, even if greater rationality or efficiency would have supported or 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): 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

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legislation or the state 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 by the state through legislation, although 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 then also became important in commerce and finance and that proved greatly relevant. Many modern financial products are equitable as will be shown in greater detail in Volume 3. Also, some respect for commercial custom was also 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 mainly as such, thus limiting its force even further, mainly to the law of contract. Custom 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. 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. Thus the UCC is not a codification in the European sense at all; it does not monopolise the field and also does not aspire to laying down an inherently coherent intellectual system that is complete and has all the answers. This was explained in greater detail above. The consequence was nevertheless 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 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 be identified through the conflicts rules of private international law. They were therefore no more than 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

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t­ wentieth-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. 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 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. Moreover, in respect of each piece, there could still result a different law eg 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 international financial dealings. 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. It was identified above as the 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 and 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. 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. In private law, the result of newer thinking in the 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 conflict of laws notions come to their useful end here. 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 s 1.4.12 above) they will become ever less important now that in this order fundamental legal principle, custom and industry practices, party autonomy,

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and international general principle retake their place, all as autonomous sources 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. 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 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 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 ­internationally, 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 Norms 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 an non-territorial, non-statist legal order. It is the contention of this book that there is now such a legal order operating 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 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, notes 1 and 19 above. As a practical matter, it is further supported by the fact that the transnational flows acquire an ever stronger virtual character and that because of their 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 i­ nstitutions

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or facilities such as the ICC committees for Incoterms and the UCP, the ISDA for the international swap markets, and international commercial arbitrations for dispute resolution purposes. In international sports, there may also be an individual legal order operating with institutions such as the International Olympic Committee and FIFA (Fédération Internationale de Football Association), which have even assumed a quasicriminal 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 laws,640 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 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 1.4.19 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 remain national and limited in reach. Under their own terms, there may be further limitations, for example they may apply only to residents of Contracting States, although they may also reflect more general principles and industry practices and could also be expressions of non-territorial law. 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 and 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 is not truly considered necessary either. 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;641 (b) their special interests, needs and protection requirements; (c) the nature and logic of their transactions and of the legal structures used therein; and (d) common sense, rationality or utility, or what participants consider fair and reasonable among

640  This is still the attitude of Roy Goode, ‘Rule, Practice, and Pragmatism in International Commercial Law’ (2005) 54 ICLQ 539. 641  See for this approach in the UK, Bingham LJ in Interfoto v Stiletto [1989] 1 QB 433, 439.

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themselves or need in terms of risk management. Again, it is driven by the internationalisation or globalisation of the flows in goods, services, information, technology, and money. 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, which has always remained an imperfect art. The modern perspective of law as mainly a dispute resolution device here recedes into the background—see section 1.4.17 above. To properly 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 or 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 for contract law of the EU and UNIDROIT—see Vol 2, ch 1, s 1.6) and now in the EU even in full codification proposals in the 2008–09 DCFR and its progeny; see Vol 2, ch 1, s 1.6 and ch 2, s 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 perhaps 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.642 Again, in this hierarchy, 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

642  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). Thus 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.

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lex mercatoria in the manner as described in sections 2.2.6 to 2.2.8 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, in this manner, may claim a governmental interest. Again, this is truly a matter of competing legal orders and ultimately of balance or a matter of accommodation. In section 1.4.13 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.643 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 seek this. The ranking was given as follows: (a) fundamental legal principle; (b) mandatory custom; (c) mandatory uniform treaty law (to the extent applicable under its own scope rules); (d) mandatory general principle; (e) party autonomy; (f) directory custom; (g) directory uniform treaty law (to the extent applicable under its own scope rules); (h) 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;644 and, when all else fails, (i) residually, domestic laws found through conflict of laws rules.645 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 particularly: (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;646 (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; 643  See originally, JH Dalhuisen, Wat is Vreemd Recht? [What is Foreign Law?], Inaugural Address, Utrecht (Deventer, 1991). 644  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. 645  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. 646  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.

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(ii)

if leading to detrimental reliance on such action by others as another ­fundamental source of contract law; (iii) if creating the appearance of authority in others as in the law of (indirect) agency; 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 are other fundamental principles in terms of: (d) apparent authority, 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. Then there are: (h) 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)); (i) fundamental protections against fraud, sharp practices, 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; (j) the issue of transaction and payment finality; and finally (k) fundamental principles of the protection of the environment, of labour and financial stability, which are increasingly developing transnationally. As many of these fundamental principles may be public order or even human rights related, this also underscores their absolutely mandatory nature. They may exist as peremptory rules even affecting treaty law, see Article 53 Vienna Convention on the Law of Treaties. No doubt there are other fundamental principles, and the above list is not meant to be exhaustive. It is often a matter of basic values 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,647 and therefore also operate in trade and finance, where others, such 647 

See for the EU and ECJ in particular, the cases cited in s 1.4.5 above, which were ignored by the DCFR.

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as the notion of t­ ransactional and payment finality, may be closely related to overriding utility and e­ fficiency ­considerations. In modern law, especially of the codified variety, these fundamental principles are often hidden, but they come into their own again, especially in the international 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, promoting 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. Thus these 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 even corrected by public policy as a competing rather than inherent force operating in such cases as a transnational minimum standard as in competition matters or where necessary to keep i­ nternational 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 also far less appropriate and could only result in extreme circumstances, which will not often occur between professionals. In contract, this confining approach may indeed be expressed in a transnational concept of good faith (which distinguishes sharply between different types of parties) and in a transnationalised notion of finality in property law. In this connection it should be noted that in the foregoing good faith itself was not elevated to the level of fundamental principle as it had been earlier identified as a multifaceted concept.648 It is not always fundamental and mandatory. As we shall see, it often 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 more detail in Volume 2, chapter 1, section 1.1.4, and was mentioned in section 1.1.6 above in the context of the discussion of legal dynamism in modern professional dealings, both in contract and movable property law.

648 

See n 76 above.

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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 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 directed by established practices or ­custom, which in their supporting role are then likely also to be mandatory. For ­example, where these practices or customs are property related, they will prevail over a contractual choice of law. In negotiable instruments, contractual concepts of consideration did not prevail in common law countries either and could not therefore undermine finality, while bona fide purchaser protection was developed early here for similar reasons, and the notion of independence was favoured from the contract out of which the claim (incorporated in the instrument) arose. This is now also 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 3.2.2 below. 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, always subject to the protection of the ordinary commercial flows. Similarly, where an automatic return of title upon default is demanded in the contract, party autonomy may not prevail in practice. 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. Also, 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. It does not rule out declaratory findings either, but suggests nevertheless a confining transnational custom. International conventions, such as those on sales, transportation and payment methods, with uniform law further supplement the fundamental principles and ­ ­transnational custom. They 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. 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. These Conventions so far only occasionally contain mandatory law (see, for e­ xample, Art 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 1.4.19 above (see also Vol 3, ch 1, ss 2.3 and 2.4). Even then, it is unlikely that they will 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 and the intrinsic logic of the transaction itself to be considered, if necessary under transnationalised standards of good faith, as already mentioned, although this is

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probably less relevant in the commercial sphere, which needs special protection only in more extreme situations. As just noted, even in movable property, the impact of party autonomy may have to be reconsidered as well, subject to an extended notion of bona fide purchaser protection. Only fundamental legal principle, and mandatory international custom or mandatory uniform treaty law, to the extent existing, and mandatory general principle would prevail over it, but at least 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, 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. 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 an environmental 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 international 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. The result is the hierarchy of norms within the modern lex mercatoria discussed in section 1.4.13 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 the system as the essence of all private law.

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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, has culminated 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 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). In this book, the concept of the modern lex mercatoria as a hierarchy of norms is not 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 also indicate more satisfactorily what is likely to work in an ever more globalised environment. Indeed in commercial transactions, in the internationalised professional sphere or in the international commercial and financial legal order it represents, this law is now more often referred to as the (new) lex mercatoria, 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.649 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 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, while the old law merchant was a compilation of largely unwritten uniform customs and practices. Naturally the modern contents are also quite different from what they

649  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, 1990). See n 554 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.

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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,650 while early protagonists such as ­Professor Norbert Horn in Germany,651 Professor Ole Lando in Denmark,652 Professor AF Lowenfeld in the US,653 and more recently Professor Roy Goode in Oxford,654 are largely pragmatic. See for a more principled position in the US in favour of this new law in particular the work of Professor FK Juenger.655 As in the field of conflicts law (cf s 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 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 then its own law-creating force.656

650  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). 651  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 (Antwerp, 1982) 3ff. 652  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 (Munich, 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, 1973) 215. 653  AF Lowenfeld, ‘Lex Mercatoria: An Arbitrator’s View’ (1990) 6 Arbitration International 133. 654  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 15 above. The role of international custom and general principle then remains also largely unclear, see also n 422 above. 655  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. 656  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 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 653) 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.

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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.657 The second feature is the acceptance in that legal order of international custom and party autonomy as autonomous legal sources; and the third the development of general more practical principles of international 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 the 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 and against those of the transnational public order requirements as transnational minimum standards themselves.

3.2  The Hierarchy of Norms from Different Legal Sources in the Modern Lex Mercatoria: Elaboration of 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 (s 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 See for a more recent overview, KP Berger, The Creeping Codification of the Lex Mercatoria, 2nd edn (The Hague, 2010), 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. 657  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.

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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. Indeed, in modern law, there is a more objective concept of contract formation at work, which first and foremost depends on the notion of conduct and reliance. In appropriate cases it is 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. While implementing fundamental principle it may be mandatory or structural, eg in matters of contractual validity or in issues of capacity to contract. Even if only directory, custom by its very nature can only be changed by consent of all affected parties (not different from directory statutory law). Offer and acceptance as a kind of theoretical formal model here fade into the background and become at best a subcategory of conduct and (­detrimental) reliance, while an anthropomorphic idea of contract promise and intent is abandoned; for modern contract theory see also section 1.1.6 above and Volume 2, chapter 1, section 1.1.4. 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, may then become more important in establishing the binding force of an agreement, the possibility to demand performance thereunder, and subsequently 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), but it may also distract and has problems operating as general principle especially in its paragraphs on formation. In civil law terminology, the more objective approach to contract formation may to some extent be expressed in the concept of good faith or the normative interpretation of the contractual meaning and content in which the other sources of law may be encapsulated: see further Volume 2, chapter 1, 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 law, as we have seen, 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 the next section. 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. In this connection, it has already been pointed out several times that, although this 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, therefore also 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.

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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 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 take a lot of risk and must accept the consequences, except in extreme cases. Where contracts are primarily roadmaps and risk management tools, they are likely to be literally interpreted; see further Volume 2, chapter 1, section 1.1.6. 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. Custom and industry practices will back this up, as general principle is also likely to do. It was always the approach of specialised commercial courts, which also had quicker procedures and lay (or peer group) input, as they still have in France. As already suggested in section 3.1.2 above, it shows that even fundamental principle, like the binding force of agreements or of obligations resulting from detrimental reliance on someone else’s action or conduct, is not insensitive to commercial needs and in any event functions differently in different relationships and transactions, as it does in different legal orders. 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 market place, which may in such cases well be mandatory, meaning that parties cannot deviate from them in their contract. Except in extreme cases such as fraud, the special 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 assumed upon the mere declaration of the agent itself (for example, employees), if the principal has taken that risk, for example by allowing him to use a business card with the principal’s name on it. 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

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determining factor in establishing a legal relationship and detrimental reliance may in any event be another fundamental principle, these letters may acquire binding force between the parties if acted upon in good faith or even reasonably, which may imply a lesser requirement. But in the professional sphere, it also needs to be considered that parties are left to their own devices to a greater extent and so should not readily rely on these concepts; see also Volume 2, chapter 1, sections 1.3.11 to 1.3.14. Thus, until there is a substantial degree of detrimental reliance or 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 and 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 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.658 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 against the party wrongfully terminating the negotiations. Whether this also covers expectation damages is another matter and they may be limited to situations where clear promises were made. German and Dutch law in particular are now more categorical in the imposition of pre-contractual 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 substantial reliance or because of other improper reasons to withdraw. It again suggests a lesser concern in the commercial and professional sphere, although as yet German and Dutch law are seldom so analysed.659 Fundamental principle would not appear to go this far in professional dealings unless there was a sufficient measure of reliance. 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 2, chapter 1, 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 combination. Consumer

658  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. 659  But see also Vol 2, ch 1, n 4 for more recent Dutch case law.

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notions (and protections) are then likely to enter the professional sphere. An anthropomorphic or personalised idea of contract is here 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 all sets demonstrate 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.660 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 or obvious misbehaviour. 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 2, chapter 1, section 1.1.5. 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 and now also to the CESL, see for further comment Volume 2, chapter 1, section 1.6.

660  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 2, ch 1, 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 2, ch 1, 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 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 2, chapter 2, section 2.2.1. They 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 2, chapter 2, 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.661 International bonds as negotiable instruments have acquired a similar status, and were as such revived in the eurobond market, operating since the early 1960s.662 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 law which appears clearer when adverse local case law is produced in respect of similar domestic instruments.663 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, 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 661 

See, eg R Goode, Commercial Law, 4th edn (London, 2010) 513. 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. 663  Adverse local case law was therefore ignored in Belgium in relation to the operations of Euroclear, see Vol 2, ch 2, n 524. 662 

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a­ pplicable 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 follows that there is also an independent transnational framework of limited proprietary rights in these assets, but only in their most simple form based on physical possession of the instrument (like a possessory pledge). Any more complicated or nonpossessory 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 but 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 Vol 2, ch 2, s 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. This then also becomes an issue of finality under which bona fide acquisition is protected and the flows in these instruments safeguarded. One is likely to see here at first the bare (and fundamental) principles of (personal or movable) property rights in which physical possession still figures large. This conforms to the development of common law in this area. 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 market place; 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. 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 would 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 2, chapter 2, 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 practice or the operations of the international market place itself, meaning a reversion to a more basic form of transfer of ownership based on physical delivery. This practice is confirmed in countries such as Germany and the Netherlands, which still require delivery for title transfer in all movables. In these countries transfer of the document then substitutes for delivery of the underlying assets where there is a document of

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title. The ­difference is that this delivery is always physical and cannot be constructive. It would seem to be a further recognition of international practice, which local law cannot ignore in the creation of these documents without them losing their character. 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. Indeed, one should ask whether the recognition and further development of an independent transnational proprietary regime in this manner, based on fundamental legal principle and mandatory transnational custom, is also conceivable for assets other than negotiable instruments or 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 operating as an autonomous source of law in its own right. However, some form of manifestation or publicity traditionally facilitated thirdparty 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 are for negotiable instruments and documents of title. A strong bona fide purchaser protection would be the necessary sequel of such a system, as it is also for negotiable instruments and documents of title. This concept may 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 still on a form of physical 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 more 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). Protection of bona fide purchasers against nemo dat principles may then equally follow in internationalised assets, at least if these purchasers also acquired some form of control (though arguably it need 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

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purchasers and could conceivably also become the approach of customary transnational law: see for these developments the discussion in section 1.1.6 above. Indeed, an important other root of modern proprietary rights is 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 underlay the proprietary interests recognised in the law of equity in common law countries, as was mentioned in section 1.1.6 above and will be discussed more extensively in Volume 2, chapter 2, 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 unless they are professional insiders such as banks and major suppliers who would therefore need to search for older charges if they demand newer ones for themselves in the same assets or asset classes. 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 longer remain the preserve of domestic laws, 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), 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 PSA/ISMA for repos (see also s 3.2.5 below) may be a further expression of newer international practices or general principles, which may then also be considered transnational and supported by party autonomy which, however, in proprietary matters and in issues of set-off and netting, appear to require more objective support, indeed in such custom or practices or 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.664 They

664  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.

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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 1.5.8 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 an international or transnational property right develops here regardless of the strong attachments with the 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 decided, but, whatever the outcome, there is likely to be a 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 chapter 2, s­ ection 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 2, chapter 2, section 1.8.2.665

665  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 3, ch 1, n 30, 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 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 in a transnational sense than to their limitation to purely domestic

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3.2.3  Eurobonds, Trade Receivables and Transnational Proprietary Coverage. Fundamental Principle and Implementing Custom Support To demonstrate the transnationalisation of the fundamental ownership concepts ­further, it may be of particular 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 in the circumstances. 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 still be subject to all kinds of variations and conditions. In fact, an entire framework of rights and obligations may be constructed. This is counter to the concept of negotiable instruments under English (and most other domestic) law and especially to the requirement of simplicity traditionally necessary for their operation, including their easy transfer. It emphasises the monetary payment right and may at best cover 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. However, 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 choosing foreign laws. In any event, it would have to be determined how domestic law would subsequently function in the international legal order, itself conceivably becoming thereby transnational law and adjusted accordingly as mentioned before. It would then 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 law holds in the matter—in fact English domestic case law is accommodating.666

concepts. See further also the EU Settlement Finality Directive and Collateral Directive, which touch on the status of p ­ ayments 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 3, ch 1, ss 3.2.5, 2.6.7 and 4.2.4. The DCFR, see Vol 2, ch 2, 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 1.4.20 above and Vol 2, ch 2, s 1.11. 666  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 662 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.

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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 2, chapter 2, 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 2, chapter 2, section 3.2.2. It favours domestic laws but there appears little enthusiasm left for the project. Again the force of international custom and practices should not be underestimated. They have been ignored in the discussions and a re-nationalisation tendency of the law in this area seems to be the consequence, but may not succeed. In other words, where the Convention does not prove effective or is not adopted, international custom will continue to prevail. 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.667 Practices appear to be the decisive factor and are then likely to be international or transnational, as an internationalised 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 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.

667  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. 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. They 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.

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As suggested in the previous section, this may indeed be based on the absence of knowledge of third parties with respect to pre-existing rights in the property. On the other hand, it may provide enough protection against them in such cases or simply their trading in the ordinary course of business. The commercial flows, here of investment securities, will then be protected against any such charges or defects, which will only affect insiders such as banks or other brokers who may know or should find out. Others have no search duty. In this vein, it is not inconceivable either, as also already suggested, that from a more fundamental ownership perspective, 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 2, chapter 2, section 1.5.3. It is likely, however, that at least the set-off right against the assignor would be kept intact (supplemented by one against the assignee). 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 d ­ ebtors 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 those 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 development, inspired 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.

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As in equity (in common law countries), the new proprietary structures that will be so admitted or created 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 the interest 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 system, which can only develop later. To repeat, such a more open proprietary system needs fundamental balancing through the notion of protection of bona fide purchasers or 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. Indeed, it 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, but whatever their feelings and 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 the common law, 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.

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 would be ignored. 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 public order; see also ­section 1.1.11 above and chapter 2, sections 1.1.10 and 1.2.5 below.

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It can thus be argued that institutionally the power of arbitrators derives from the transnational legal order itself, the arbitration clause merely activating it and that 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 1.4.18 above.

3.2.5  Mandatory Custom and Practices. The ISDA Master Agreements In sections 3.2.2 and 3.2.3 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. They cannot freely be altered by the parties although in movable property the impact of party autonomy was also noted and the limitations demonstrated. The phenomenon of the law-creating force of custom and practices has given rise to much academic discussion (see s 1.4.7 above) with the possibility of its autonomy sometimes being doubted. In modern civil law that has had to do with the denial of sources of law other than statute, as we have seen. Custom is then often believed atavistic and its recognition a sign of regression, a relapse into cultural particularity 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, to be avoided, while trade practices are implied contractual terms and may as such be acceptable. This view still exists in common law countries, particularly in England. It is a sequel to the view that law can only issue from a sovereign, not 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. This is also not the approach of this book, and it seems particularly inappropriate in the international commercial and financial sphere, where proprietary structures and resulting preferences 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, 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 ever be on its own. They concern in essence all that is considered normal by participants and on which they commonly rely in their businesses and markets. It basically concerns their routines and perceptions in this regard. It has already been said that much of the transnational contract and movable property rights, including the operation of the Eurobond market, is determined thereby.

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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 the Hague-Visby Rules are sometimes so defined where not incorporated by statute.668 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 deviate from them, but they risk the result 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. As already noted, true mandatory custom is more likely to be relevant and emerge in non-contractual aspects, especially in proprietary matters or also in 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. In guidelines for foreign direct investment, there may even be a transnational public policy element to custom, which might then also become mandatory. Thus, in the elaboration of the rules of contract, property and set-off, further mandatory rules of custom may develop, especially in the areas of legal capacity and contractual validity and more particularly of 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. 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 likely to be closely related to, or an elaboration of, the fundamental principles embodied in transnational public order requirements. Custom builds on this. Still, custom or practice may here 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 increasingly ignored, however, 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.669 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

668  See W Haak, ‘Internationalism above Freedom of Contract’ in Essays on International and Comparative Law in Honour of Judge Erades (The Hague, 1983) 69. 669  Hazell v London Borough of Hammersmith and Fulham and Others [1991] 1 All ER 545 (Lord Ackner).

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grounds for such jurisdiction.670 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 Global Master Repurchase Agreement of 1992/1995, already ­mentioned in section 3.2.2 above, might acquire a similar status of custom in the areas they cover, at least in the London and the New York markets where they operate.671 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. 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 chapter 2, sections 2.2.2 and 2.3.2 below. 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. 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 3, chapter 2, section 2.5.5. In the area of foreign direct investment, international agencies have attempted to define certain principles and set certain standards which may also be reflective of international practices or initiate them.672 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 agreement. It also came up with Guidelines on the Treatment of Foreign Direct Investment in 1992.673 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 670  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. 671  See n 385 above. 672  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. 673  The climate changed in the 1990s when Bilateral Investment Treaties (BITs) started to become popular, superseding to some extent the need for these Guidelines: see for these Treaties also s 2.2.7 above and for the p ­ rotection of foreign investments (as defined thereunder), s 3.2.2 above. See further the discussion in Ch 2, s 3.1 below.

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international standards for the ­promotion of foreign investment.674 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. These guidelines are extensive and, although no more than guidelines, their standard and norm-creating effect has been noted, which also suggests international custom.675 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 1.4.13 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) g­ eneral 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 said earlier that mandatory uniform treaty law is rare, but Article 12 of the Vienna Convention was mentioned as 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 674  See also the Report to the Development Committee on the Legal Framework for the Treatment of Foreign Investment (1992) 31 ILM 1368. 675  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.

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s­ upplement fundamental principle and custom, especially 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 s 2.2.9 above) these contractual rules can in principle only prevail in contractual matters, 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 Vol 2, ch 2, s 1.9.2). However, 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. 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 may be of special interest. 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. 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.676 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, but677 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. In the process of compiling these it also develops them further. 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

676  See also JF Dolan, The Law of Letters of Credit, Commercial and Standby Credits (Boston, MA, 1999) 4.06 [2] [l]. 677  See n 386 above.

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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. In 1983 the impression was created, however, that the UCP were mere implied contract terms through the addition of a sentence requiring incorporation in the documentation. 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 suggests a contradictory 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 probably more important is to place them properly in the ­hierarchy of principles and rules constituting the lex mercatoria, as here explained. That is to say that they are to be interpreted, explained and even superseded by the fundamental principles of law and any mandatory 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 these contract terms (which may 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,678 while these domestic laws themselves are thus transnationalised.679 Another elaboration of directory customs and practices might be found in the confidentiality of arbitrations. It was said above 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

678  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 Schuetze, Das Dokumentenakkreditiv im Internationalen Handelsverkehr (1996) [1998] European Business Law Review 331. 679  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 2, ch 1, ss 2.3.5ff.

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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.680 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 of 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

680  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. 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.

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majeure and hardship,681 exceptio non adimpleti contractus or anticipatory breach, ­set-off and other remedies including specific performance (cf 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 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 decided 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.682 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

681  The problems concerning force majeure and hardship will be discussed more extensively in Vol 2, ch 1, 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, longterm 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? 682  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 (n 571).

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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 anyway, because the recognition of these 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 s 2.1.2 above). A simple reference to the (new) lex situs is then inadequate, if at all relevant. 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 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;683 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 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 on their powers to raise this issue autonomously, in chapter 2, section 1.2.5 below. It has already been 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 will in such instances be deferential to such policies, which may be even more readily accepted transnationally if they are connected with or an expression of 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

683 

O Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747.

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i­nternational minimum standards developing as a matter of 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. 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 may also have a legitimate interest in the international transaction. It can only be repeated that conduct under and effect of the international transaction on the territory of a concerned state obviously 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. It was further stated that international arbitration may here be 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 that 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 to adjust and restate the applicable domestic law properly to discount the foreign elements in the case. Were such adjustment nevertheless to become the approach under local 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, first it may apply different domestic laws to the same transaction depending on the characterisation of the various aspects of the transaction, eg its contractual and proprietary features. ­Perhaps more importantly it requires the international flows to be cut up into local parts, which can hardly do it 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 chapter 2, section 2.2.7 below. 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.

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To repeat, 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, and it was shown that it was never more than political philosophy. 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 nonnational 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 1.4.16 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.684 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 neo-classicism 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 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 flexible and 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, 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 reinforced at the transnational level, as we have seen.685 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.686 The idea that (private) law is there mainly to determine disputes is here 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 1.4.17 above.

684  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. 685  See the discussion in s 1.1.7 above and for finality n 93 above. 686  See RD Cooter, ‘Three Effects of Social Norms on Law: Expression, Deterrence and Internalisation’ (2000) 79 Oregon Law Review 1.

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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, 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 custom687—while courts and arbitrators often prefer to use different terminology and (rightly) like to limit theoretical controversy.688 Equally, a contractual choice of law in favour of the lex mercatoria remains ­uncommon, and has even been thought to render the contract void.689 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.690 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 possibility of the application of the lex mercatoria is suggested in the UNIDROIT and European C ­ ontract 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.691 The DCFR omits any such reference, as it is concerned with old-fashioned codification, now at EU level,

687  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. 688 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. 689  See Mustill LJ, ‘Contemporary Problems in International Commercial Arbitration’ (1989) 17 International Business Lawyer 161ff. 690  But see also the case law in n 122 above and n 693 below. 691  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).

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which still means to exclude all other sources of law. It has already been 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.692 Indeed, not choosing any (domestic) law may become a viable option and the best alternative here, 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 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 as they think 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 better in the view of this book. At a practical level, not choosing the applicable 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.693 But even if there is a choice by the parties in favour of a domestic law, it was submitted that international arbitrators may or even 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 1.4.13 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. 692 

See nn 48 and 91 above. Fougerolle (France) v Banque de Proche Orient (Lebanon), Cour de Cass 9 December 1981 (1982) Revue de l’Arbitrage 183. 693 

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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.694 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 ­chapter 2, section 1.1.4 below, does not necessarily mean a reference to the lex mercatoria (as is often suggested), although it may come close, see also the earlier discussion in s­ ection 1.4.16 above. The two types of arbitration may, however, be more similar than is often assumed.695 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 (in principle always subject to the submissions 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 although they are no less bound than ordinary international arbitrators by fundamental principles and implementing 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, although public policy rules of a national system that clearly affect the case may not be ignored either and 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 law696 but the difference from ordinary international commercial arbitrators is that they may not be strictly

694  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 111 above and ch 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 Schachtbauund 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 122 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. 695  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 (2010) 510. 696  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.

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bound by the hierarchy of norms as they find them in the modern lex mercatoria. In all cases, it is therefore still necessary to determine under applicable law what parties intended arbitrators to do, and 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.697

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. 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 international 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. 697  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.

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The true 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 the business community of 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 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 and its sales carve-out in the CESL. There are also serious quality issues: 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, quite unlike the drive behind the UCC in the US. The DCFR, in particular, is unaware of the operation and needs of a 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 submitted that this is not the right approach and 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 worldwide 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. The 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 Vol 3, ch 1, s 1.6.3). But by then, at least, the true needs had become apparent. 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

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to result from inappropriate (domestic) rules. In proprietary law, local rules may even present a serious risk, such as those attempting the abolition of the fiducia, as in the new Dutch Civil Code (see Vol 3, ch 1, s 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 Vol 3, ch 1, s 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 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 clearcut 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. 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 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 s 3.1.3 above), it was in modern times in the Netherlands foreshadowed in the writings of Professor D Josephus Jitta (1854–1924),698 the successor of Professor Asser as first Chairman 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 s 2.2.2 above) even if in the US the modern developments in conflicts law are not 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.

698  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.

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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 they do the same even if the arbitrations are limited to the submission of the parties and, it was submitted, the ensuing 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 court 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, 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 said for international commercial law decisions in ordinary state courts in the above manner to be recognised elsewhere in the manner of the New York Convention. It was further argued in section 1.1.12 above that a central highest international commercial court699 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 and impartiality, while creating a forum for accountability, (d) set the terms for or take over the challenges to international arbitrations at their seat, if still ­considered a ­useful

699  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.

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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 to (g) 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 most 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 a sufficient insight into what is needed is also mostly still missing.

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2 The Transnationalisation of Commercial, Financial and Investment Dispute Resolution Part I  International Commercial Arbitration 1.1 Introduction 1.1.1  The Problems and Challenges of Dispute Resolution A credible dispute resolution facility is an important aspect of business operations. Although dispute avoidance is in the greatest interest of all parties, disputes do arise and it is then of prime importance that they can be handled efficiently and promptly in order to limit the damage. The existence of such a dispute resolution facility will at the same time also serve as a deterrent for a recalcitrant party and thereby promote compliance and support for the rule of law. Domestically, the ordinary courts were created to provide the necessary facility. They do so in a formalised manner embedded in strict procedures where professional judges may determine very different disputes from family matters to business problems, from private disputes to disputes with governments and their agencies, from contract and property matters to negligent, fraudulent and criminal cases. They attend also to r­ egulatory, tax and insolvency matters. Sometimes they operate even as judges in constitutional courts. They are not necessarily experts in any of these fields. The law of p ­ rocedure is meant to keep them on track, provide objective standards to regularise this adjudication process and to avoid undue criticism. The consequence is often a great deal of attention to procedure meant to lead to proper results but also a ­propensity for lengthy proceedings in which the substance of the dispute may even be forgotten, a situation further complicated if there are also appeals on procedural and other points of fact or law. Review of this nature is supposed to work better justice and to support the credibility of the system but who is to say whether the opinion of the courts of first instance is less accurate than the one of the superior courts? The higher judges have more power and probably more experience but not necessarily the better insights and often much less feeling for the facts. The undesirable side-effects are not only that obtaining ultimate

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justice may take considerably longer, but also that lower judges tend to live in fear of being corrected on appeal, which further increases formalism and procedural rigidity, thus the length and cost of the proceedings. In any event, on appeal, the true concern is often not better justice at the level of the litigating parties. There are other considerations: superior judges being asked not primarily to administer the law better in the particular situation, but to clarify it for the future or to resolve contradictions in the lower courts. Appellate judges do not then merely decide the case at bar but also mean to contribute to the resolution of others from the past, in the present or in the future. It suggests the perfection of the system, a particular concern in countries that prize systematic unity as civil law codification countries commonly do in private law while working in appeals mainly on the norm or rule side: see chapter 1, section 1.2.11 above. In such countries it becomes a particular aspect of the judicial activity and raises the question of the law formation power of judges. This may be useful as a public service but has a high cost for the actual litigants, not only in terms of efficiency and expense, but also in terms of time lost and therefore finality and emotional energy all in the name of justice, now at some higher abstract level for all, but it must remain a matter of opinion whether this is helpful. At the individual level, it should be realised that justice that cannot be done within a reasonable time frame—say a few years at the most—is no justice at all and to keep the conflict alive has considerable social, economic and emotional costs. Litis finiri oportet is the old saying and it is fundamental: litigation must come to an end but it is often forgotten in appeal facilities and poses a severe challenge to the rule of law. We shall see that one of the primary aims of arbitration is to do away (a) with procedural formalism and (b) the facility of appeal. Professional parties, who are usually the litigants in arbitration, do not need or want them and do not see in them a guarantee for better dispute resolution or greater justice. For them, efficiency may be a more urgent consideration. It is an important pointer that the whole traditional process of litigation and appeal in the ordinary state courts and the philosophy behind them are defective, at least for modern ecommerce and finance, even in foreign investment; it has become a matter of legal credibility. In many countries there is a serious gap and a case for fundamental reform. To this may be added the fact that domestic legal systems seldom work well, never mind all these facilities, because the insiders do not want to be held accountable and lawyers benefit from the confusion. In a better world, at least in civil litigation, professional parties should be able to control court proceedings to a much greater degree and exclude appeals but that is often considered against public policy so that attempts at greater party control of the process are not effective in the ordinary courts. One of the side-effects is that even bad judges continue their profession and the feelings of the parties they serve become irrelevant in this regard. In this view, courts do not merely provide a service, but stand for the state and the enforcement of its order without qualification. Some countries like England are traditionally more circumspect and commonly require in the ordinary court system for at least some leave to appeal (and largely exclude it on points of fact). When the whole system was reviewed at the time of the Judicature Act in 1871, even the (second) appeal to the House of Lords was abandoned

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and was only retained after a change in government. It is a pointer in the same ­direction: unlimited appeal is destructive of the proper functioning of the law. In fact, in a good system, all smaller (consumer) claims should go to an ombudsman-type facility for these issues to be decided finally, essentially on the basis of what is reasonable and makes sense. Collection should go to special collection judges and enforcement agencies. In cases where there is a more fundamental argument and difference in the lower courts, appeals on points of fact and law should only be allowed in the public interest to be started by public authorities probably without any effect on the outcome of the particular case, not even therefore in respect of mistakes on point of fact and law except in prima facie cases involving obvious deficiencies. The cost of such appeals or revision should be borne by the public. Beyond that, all mistakes are in the eye of the beholder: law is not a natural science where mathematical efficiency can do much; there is no mechanical approach to law application, whatever lawyers try to pretend. Law and its application is not mere technique. In family and criminal matters, the situation may still require a different attitude, although especially in the former a case can equally be made for the earliest possible termination of disputes—it is better as litigation often makes things worse and more intractable at the personal level. In these emotional cases, the loser will never be convinced, rather will consider him- or herself ever more the victim of systematic injustice. But at least in the major business cases, ordinary courts should sit in one instance with three judges, substantially in charge of all procedural issues and with considerable discretion, subject to direction by the parties if they are professionals and in agreement, who can also exclude appeals. Only thus, it would appear, have ordinary courts a chance to continue to operate usefully in dispute resolution, at least domestically in ordinary contractual and property claims between professionals. If that cannot be achieved in ordinary litigation, in arbitrations it will be. That is its principal aim. But it should also be considered that this resort to arbitration deprives the ordinary courts of an important impetus to develop the law for all and it risks becoming mere consumer law—this is much more real than often realised. Judges do not then speak any longer for the legal system and society as a whole, which undermines them and the credibility of the law they administer even further. Their precedents become suspect and increasingly irrelevant for professional dealings, even in countries where they are considered binding. In all dispute resolution, speed and cost are key issues and should be recognised for what they are. It is part of the proper administration of the rule of law. Efficiency counts, also in an emotional sense. In this connection it is not that arbitration is necessarily more efficient or quicker and cheaper per se but since there are no procedural excesses or appeals, it becomes so. Indeed, it is increasingly held that early finality is the aim of all arbitration, and appeals, even when introduced by the parties in the arbitration clause, are increasingly considered counter to it and against the arbitral order.1 There may still be some flexibility if parties insist, but to maintain a possibility 1  Thus the US Supreme Court in Hall Street v Matell, 552 US 576 (2008) held that such clauses were an i­nadmissible extension of court review on arbitral awards, so also the New Zealand Court of Appeal in Gallway Cook Allen v Carr [2013] NZCA 11. Art 35 of the Model Law is sometimes invoked in support as being mandatory by imposing the binding force of an award, supported by Art 34, which also limits recourse to a setting-aside

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of appeal on all points of fact and law would now appear to be unenforceable, at least in international arbitrations; more minor forms of supervision and review may still be acceptable. Another issue is the one of confidentiality. Most people do not wish to wash their linen in public. More to the point, there may in business also be issues of protection of sensitive business information or intellectual property rights, again issues harder to deal with in the ordinary courts where transparency and publicity are rightly important issues although judges might have some room to help. Nevertheless it could be asked, and again it is not clear, why parties in agreement should not be free to exclude publicity in the ordinary courts in commercial matters. Not all need to filter into the public and much is of no public interest at all. It remains an important handicap in ordinary litigation. Again, arbitration is able to deal with this issue even if confidentiality may be more difficult to retain where public interests become involved and this has led—correctly—to more publicity, particularly in foreign investment arbitrations.2 Also in challenges or recognition proceedings in the ordinary courts, much is likely to come into the open.

application, although it may not be absolute and there may still be some room for the parties to require a review. The German Supreme Court at least held so on 1 March 2007, III ZB 7/06, 25 ASA Bulletin 2007, 810, although this may be indicative of a more domestic attitude towards international arbitration, appeals being much more common locally. Reviews can still be built into the arbitration clause, at least if it does not involve the ordinary court system. Especially in foreign investment arbitrations, there may be a trend back to greater supervision, perhaps even an appeal facility: see section 3.1.5 below. 2  The question of confidentiality of arbitrations may arise foremost 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. Of course, in recognition proceedings of the award before the ordinary courts, if contested in set-aside proceedings or under the New York Convention, much could also come out. 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. That also applies in foreign investment; see ICSID awards, which are commonly published. However, it appears that the disclosure possibility now goes much further and may affect ordinary commercial arbitrations. In the 1995 Australian case of Esso/BHP v (1995) 11 International Arbitration 235, the State of Victoria 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 regard that the results of arbitrations are commonly divulged while witnesses could in any event not be held to secrecy. See for this issue of confidentiality in international arbitration also the discussion in chapter 1, section 3.2.6 above. Thus, apart from exceptional cases, confidentiality no longer seems 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, unless there is a confidentiality clause. One may see here the danger of arbitrations increasingly becoming pseudo-judicial proceedings losing 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 an approach 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 confidentiality protection.

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1.1.2  Arbitration and its Nature Arbitration is generally understood to be a dispute resolution facility that is based on an adversarial type of procedure in which the dispute is decided upon as submitted by the parties (and on no other argument of fact or law) after a full hearing by arbitrators normally appointed by the parties themselves, their arbitral award being final as between them. As such it has many features of ordinary court proceedings except for the appointment of the adjudicators and the manner in which that they decide, while the parties, if in agreement, remain in principle in control of the adjudicatory process, confirming procedural flexibility. It means that arbitration puts the dispute resolution function in the hands of the parties; other (competing) forms of dispute resolution are eliminated while law formation and appeals or other types of revision are commonly avoided. The idea is to resolve the present dispute and no other. One can see a progression. Parties in dispute will try to find a solution. If they cannot, they may appoint mediators but these cannot decide. If this is also not s­ uccessful, the appointment of arbitrators may be next. The essence is that they are given deciding powers in the disputes as presented by the parties. If the parties have so agreed, they may operate in this connection as amiable compositeurs or ex aequo et bono, which means outside any legal framework as presented by the parties (except probably for mandatory laws). Arbitrators on the other hand decide on the basis of the law but only as presented by the parties. Can arbitrators raise legal issues independently? It is a key issue and depends on whether they have acquired autonomous powers in this regard, to be discussed later, especially in procedural, jurisdiction and arbitrability matters and probably increasingly in other public policy such as competition policy, fraud, corruption and similar matters of market abuse. There may also be other public policy concerns and regulatory constraints (see ss 1.1.10 and 1.2.5 below), the impact of which on the parties and their contract may then have to be determined independently of their submissions. It is not, however, the role of arbitration when properly understood. It becomes inquisitional, which creates many problems. As was mentioned in chapter 1, section 1.4.17 above, it is in the daily practice that truly much of the law in international cases is made and applied even if rarely analysed as such by the participants or by academia, which can have little knowledge of it. At least in professional dealings, much strife is dealt with and settled in this environment, therefore in commerce and finance between in-house law departments. Outside law firms may help but it is mostly not their speciality. Here we may find the main legal actors in the business flows and the true legal movers and shakers in the area of legal renewal, especially in international business dealings and dispute resolution. Public policy and public order requirements or social values in their ever moving demands will then also have to be considered in their progression. Nothing is static, little of it can be foreseen or the risks allocated in advance. Blissfully, most problems never come to litigation either in the ordinary courts or in arbitration. Arbitration fits well in that environment and should thus be considered more part of the law in action than the law in litigation. The objective is always speed, limitation of cost, confidentially and neutrality. There may also be an element of simplification and avoidance of legal ­sophistry,

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not least in generally more complex international cases, and of the elimination of procedural argument in which the substance of the case may never be reached. Perhaps there is also a desire to avoid atavism and provincialism, which raises the issue of legal transnationalisation itself, but also the need for greater neutrality especially in regulatory law application, thus taking into account and balancing governmental interests other than those of the country of the otherwise competent domestic court. Generally greater maturity may be assumed in the adjudication process in a more tailor-made litigation environment even though arbitrators should never put their own knowledge ahead of the submissions of the parties, which are subject to cross-examination as ­arbitrators are not. Although there is a tendency, unfortunately, increasingly to see arbitration as a ­judicial substitute that is to copy ordinary court proceedings while awards are often fashioned in that manner also, in the light of the foregoing this must be considered an improper understanding of what arbitration truly is, and it may undermine its very nature and purpose. In section 1.1.7 below, the distinction between domestic and ­international arbitrations will be explored more particularly also in this connection and may present another special feature in this regard, international arbitration operating in a separate legal environment or order under a transnationalised arbitration legal framework with a momentum of its own that answers more particularly to the needs and aims of the international business community. Again, the objective is not necessarily greater justice (except to the extent greater speed itself promotes it); parties are well aware of the risks in this respect and if things get out of hand they will settle, which is in any event normally the better action. It avoids more acrimony and cost and may safeguard a constructive future cooperation: business partners know that they are likely to meet again. That not all business disputes settle promptly has often, at the personal level, to do with pride, unwillingness to admit mistakes or simply a fear of signalling weakness. It may also be tactical as (sufficient) settlement money might not be immediately available, but it is a fact that once the persons most directly connected with the issue move on or management is replaced or retired, the successors often think differently and find the money to end the dispute.

1.1.3.  The Importance of Defining the Dispute in Arbitrations and the Special Role of the Pleadings of the Parties. Law as Fact The emphasis on the submissions of the parties with respect to points of both fact and law demonstrates that arbitration is indeed best seen as a continuation of the discussion between the parties: arbitrators are not judges and do not have a similar status and law formation and clarification function, although this may be increasingly different in matters of public policy and there are now also other areas where international arbitrators may have acquired autonomous powers: see the discussion in sections 1.1.10 and 1.2.5 below. It means that normally they only evaluate the relative strength of the arguments of the parties and bring no other considerations to bear. That also applies to points of law. This is at the same time the reason why their decisions in this regard can hardly have the force of precedent and consistency is irrelevant. It all depends on what

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parties bring to the table; it may be very little, their legal analyses may be wrong, but the task of arbitrators is no more than deciding their disagreements, not to start a new line of argument—in fact a dispute that was never there—as ordinary judges may do. It is a key insight in understanding what arbitration is. In this connection it must in particular be understood that the applicable law must be pleaded as fact. Arbitrators cannot have their own knowledge of it, they do not have a lex fori to defend or explain or it would be transnational law. Thus, except perhaps in the areas where arbitrators have now acquired autonomous powers (see again ss 1.1.10 and 1.2.5 below), they have not or are not supposed to have knowledge of the applicable law and are not there to clarify it or indeed to hold the dispute up against all the rules of the applicable legal regime as judges can do. Legal analysis enters here through the channel of expert opinions on points of law subject to cross-examination. It is not different from arguments on points of fact, eg a technical or construction dispute where expert witnesses have been called. So there will be on points of law and arbitrators will have to decide which arguments are the more plausible. To the extent advocates present their own view, they operate as their own expert witnesses in this connection.3 Arbitrators should not do so, if only for lack of a facility to cross-examine them. They should not put their own views in the place of those of the parties and should also be careful in cross-examining advocates and expert witnesses on points of law; it is not truly their task to do so either. It raises an important further point. In international arbitration, if properly understood, arbitrators need not be lawyers, just as in construction disputes they need not be engineers and legal sophistry should be avoided as much as possible. In international arbitrations there is as a consequence no need for lawyers to monopolise the arbitration function more than necessary, leading invariably to legal argument becoming a large part of the proceedings. This is often self-serving in the legal profession and a misunderstanding of what international arbitration truly is and means to be. Arbitrators are not substitute judges. It leads to a false idea of judiciality, which undermines the credibility of international arbitration and has rightly raised scepticism in its users as we shall also see in section 1.1.11 below. To underline the point, one may start with the arbitration clause itself. Taking the recommended London Court of International Arbitration (LCIA) text, the clause will refer to any dispute arising out of or in connection with the contract, including any questions regarding its existence, validity or termination. That limits the arbitrators’ jurisdiction to these disputes and no others, and it is for the parties to describe and define their differences in this connection in their pleadings. Also when the disputes concern points of law, it is for arbitrators to decide who has the better argument. No more. This notion of dispute is of the greatest importance and becomes central to the resolution process and the arbitrators’ jurisdiction. It follows that even when a legal rule is pleaded under a particular legal system, and the other party pleads another, it is not for arbitrators to decide that the real rule is yet another. They do not have that power. Judges could do so in respect of their own legal system, they may be called to clarify 3  They may have to be members of the relevant bars to give such opinions. In some countries or states, notably also in California, this has led to the conclusion that only members of the local bars (at the seat) can be arbitrators and advocates. Whether in California that also applies in international cases—it is only established in Californian consumer arbitration—may be contested but doubt on the subject has driven international arbitration away from California. Similar problems arise elsewhere. It is often a protection measure of local bars.

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it and apply it as a whole, but that is notably not the role of arbitrators. As to facts, it is commonly accepted that arbitrators cannot initiate their own fact-finding mission. In general, that also concerns the applicable law, which is fact so far as a­ rbitrators are concerned; it notably does not only apply to custom. This may be extra clear in international cases, although it may be asked whether that is always fully observed by international arbitrators in practice. But even among judges in recognition proceedings there may still be confusion. Mustill J in The Chrysalis4 thought the distinction between fact and law still relevant in arbitration and asked first for the facts, then for the law, and thereafter for them being related to each other (which, in this approach, is the moment when a mistake may occur), but recognised also that there may be problems, in which case the ordinary courts will be hesitant to substitute their own judgment for that of arbitrators in recognition and enforcement proceedings. There are other cases in England which also seem to give arbitrators the benefit of the doubt in such situations,5 emphasising the reading of arbitration awards (by recognition judges) in a reasonable and commercial way, and this may also suggest sensitivity to the different role law plays in international arbitrations and how it is ­handled. Simply finding another way to put forward new legal arguments at the recognition stage is also not supported and even less rearranging the facts accordingly.6 But it might have been better to note the different nature of dispute resolution in ­arbitrations altogether, the lack of a distinction between law and fact, and the limited powers of arbitrators in this regard, especially to raise legal (or other) issues independently and to engage in legal argument.

1.1.4  Other Forms of Dispute Resolution: Experts Decisions, Amiable Compositeurs, Shortened Proceedings, Mediation and ADR There are other types of dispute resolution such as the use of amiable compositeurs, already mentioned (also called arbitration ex aequo et bono) and they should be clearly distinguished from ordinary arbitrations. Here there will be adversarial proceedings and hearings, but the decision will not be based on law, rather on what adjudicators consider reasonable and fair (except for mandatory rules of law that these adjudicators cannot waive either). What is reasonable and fair might still have to be pleaded by the parties so that even this type of arbitrator remains constrained in the reasoning. In this connection another observation might be usefully made: it has already been said that arbitrators must decide points of law as fact on the basis of the pleadings of the parties, except where they have autonomous powers, most clearly in areas of procedure and evidence, but perhaps now also in other areas—see section 1.1.10 below. As will be discussed later they might then apply the modern lex mercatoria also in these ­matters (and in public policy matters probably international minimum standards). 4 

The Chrysalis [1983] 2 All E R 658. See eg Lord Bingham in Zermalt Holdings SA v Nu-Life Upholstery [1985] 2 EGLR 14. Cf also Sir Michael Kerry Keating Lecture, ‘Concord and Conflict in International Arbitration’, (1997) 13 Arb Int’l 121. 6  See Steyn LJ in The Balearis [1993] 1 Lloyd’s Rep 215. 5 

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The point to make here is that that does not make them amiable compositeurs as has been suggested.7 The power to apply transnational law (at least if properly pleaded) is not dependent on the introduction of a particular facility, such as amiable composition, in the arbitration agreement. Other distinctive proceedings may be shortened arbitrations, also called fast track arbitrations in response to the exasperation of parties with the length even of arbitration proceedings and the fact that they are becoming too judicial. Under the LCIA and International Chamber of Commerce (ICC) rules, they are in fact an expedited version of the normal (international) arbitration, only the appointment procedure and especially all time limits are shortened. It invariably also affects the time for preparation that each party will be given, but the decisions are ordinary arbitral awards. It is possible to replace the existing procedures altogether by appointing special referees, first introduced by the ICC in 1990 (the Pre-trial Referee). Their decisions do not preempt a full arbitration, however, and are normally limited to preservation or restoration measures, including the retention of evidence, collection measures and orders to implement existing contracts, including the signing or delivery of the necessary documents. They are unlikely to be awards in the sense of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and enforceable thereunder as we shall see. Mediation is different altogether in that the mediators have no decision-making power; they only mean to engineer and facilitate some kind of settlement. To some extent, it resulted from dissatisfaction with arbitration as it has developed and it wants also to avoid its contentious nature, hence also the alternative reference to conciliation. This facility is often advertised as being highly successful but there are few statistics and it does not appear to reach the bigger cases. Reference is sometimes also made in this connection to Alternative Dispute Resolution (ADR). Technically that may be considered to include all that is alternative to ordinary court proceedings and then also covers arbitration, but ADR is now often used in the narrower sense of mediation. The problem with mediation is that if no solution can be found, parties are back to square one, having lost a lot of time and incurred extra cost. The facility may be more appropriate and successful in consumer cases and ordinary courts in England often refer (smaller) cases to this type of dispute resolution mechanism. They now have the power to do so and it is often successful. Arbitration in its various forms must further be distinguished from expert decisions accepted as binding between the parties. This distinction is important and not always obvious. Expert decisions are matters of pure contract, although often confused with arbitration and sometimes erroneously thought to be its predecessor. An example may illustrate the difference: the freshness of tuna is an essential element in the international tuna market and may easily give rise to disputes followed by a special form of dispute resolution. They are often called the ‘see and sniff ’ type of arbitrations, which

7  See for a discussion, AFM Maniruzzaman, ‘The Arbitrator’s Prudence in Lex Mercatoria: Amiable Composition and Ex Aequo et Bono in Decision Making’ (2003) 18 (December) Mealey’s International Arbitration Report 1.

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are particularly efficient in situations where differences of opinion cannot wait to be settled in an adversarial manner and parties may then ask an expert in the peer group instantaneously to decide the issue for them. There will commonly be no submissions of the parties or even a hearing. It is not a question of law but pure fact: is the tuna fresh or not? A binding expert decision will follow: yes or no. There may be no reasoned award either. It all makes a great deal of sense but it is not truly arbitration. There is no award proper and enforcement will be in the nature of the enforcement of an ordinary contract, unlikely under the New York Convention even if the dispute is international (between actors from different countries or the fish being somewhere else). Quality disputes in commodity trading lend themselves in particular to this type of dispute resolution. Commodity arbitration facilities may present some hybrids but the basic distinction should be kept firmly in mind, especially in matters of enforcement.

1.1.5  Institutional and Ad Hoc Arbitrations Arbitration depends on and is initiated under a contractual arbitration clause. The ­arbitration may be institutional and it is the arbitration clause that will make it so. It means that the arbitration is to be conducted under the rules of an existing arbitration body, chosen by the parties, usually in the arbitration clause itself. These institutions may also give administrative support to the arbitration (for a fee). Their rules become an extension of the arbitration clause and subject to the law that applies to it. That is to say that these institutional rules do not present a legal regime themselves. They are contractual although they could also acquire the status of customary law. Domestically there may be special bodies of this nature, as in the Netherlands, famously, the Netherlands Arbitration Institute. There may be others for commodities and shipping. In international arbitrations, it usually means that the arbitration clause will put the arbitration under the rules of the ICC in Paris, the LCIA in London, the Stockholm ­Chamber of Commerce (SCC), or the American Arbitration Association (AAA) through its International Centre for Dispute Resolution (ICDR) in New York. Choosing their rules implies administration of the arbitration by these organisations at the same time (if they offer it). For foreign investments disputes, there is the International Centre for Settlement of Investment Disputes (ICSID) in Washington as we shall see more extensively in section 3 below. It is different in that it operates under the Washington Convention so that the rules are not merely an extension to the arbitration clause, which itself (as well as the arbitral process) is transnationalised under the Convention. This transnationalisation remains questioned for international commercial and financial arbitrations, but it is the normal consequence of delocalisation as we shall see in section 1.1.8 below. The consequence is that it brings the arbitration clause and the institutional rules chosen by the parties indubitably under transnational law. The arbitration may also be ad hoc, which means that it does not benefit from ­institutionalised rules and administrative back-up. The arbitration clause will then

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commonly be longer and will set out especially how the arbitration tribunal is formed and probably also some procedural rules. In this connection a reference may be made to the UNCITRAL Arbitration Rules issued by the United Nations Commission on International Trade Law, in the most recent version dating from 2010. They notably lack an administrative back-up. These Rules are to be distinguished clearly from the UNCITRAL Model Law, which will be mentioned throughout in many other contexts.8 As there is thus no administration by UNCITRAL under their Rules, this means that the Chair arbitrator will have to set up an infrastructure for the arbitration and has to make the necessary arrangements for deposits, the distribution of submissions, and the hearing. This is a great burden and once a dispute arises and the Tribunal is appointed, it is not uncommon for the Chair to ask approval from the parties (who must pay) for established institutions, notably the Permanent Court of Arbitration in the Hague (PCA), to take over the administration for a fee. Even the LCIA and ICC might do so; in such cases their rules would not be applicable to the arbitration. One danger of institutional arbitrations is that these institutions might no longer exist when the dispute arises. This danger is not imaginary in respect of institutions set up in great enthusiasm in newer international business centres that may have to wait for many years for an arbitration to arise (they require first to be selected in an arbitration clause and subsequently need a dispute to arise under such a clause). Like any other arbitration institution, it requires a considerable case load to become financially self-supporting. In the meantime such a new institution must find its financial support elsewhere which may prove to be unreliable. There is therefore a considerable risk for parties in terms of such institution’s continued existence. Usually for a new arbitration institution or centre to get off the ground, there must be a special reason. For instance, the Stockholm Chamber was favoured by the old Soviet Union for international disputes in which its agencies became involved. Because of the pull of London, the LCIA was able to re-establish itself quickly in England after the changes in the English Arbitration Act in 1979. It de-domesticated international arbitration under the Act of 1950, which had made all arbitrations in England domestic and subject to appeal on point of law in the English courts, substantially eliminating London as an international arbitration centre and leaving the LCIA behind. Revival of the LCIA, which had existed since 1892, thus became possible but even that was not easy. This is only to say that the burden for other centres to establish themselves may be even more difficult and time consuming. Again, their continued existence may not be assured and that works against their credibility and reliability and therefore also against the likelihood of their being chosen for future dispute resolution.

8  The Model Law is not a treaty, only a model for local arbitration acts, meaning for the lex arbitri of the seat of international arbitrations, and is significant as an expression of where the arbitration community thinks it is in these matters. This being said, it was always subject to compromise between many schools of thought and is unlikely to embody more advanced thinking (see also the discussion at n 19 below) but it is important in that it has been substantially adopted in many countries and, as already mentioned, has also functioned as important guidance in England and Germany, in particular in the adoption of their present arbitration Acts.

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1.1.6  The International Dimension International arbitration has already been mentioned. There may be all the more ­reason to submit to arbitration in international cases for the resolution of which domestic laws are seldom written and in which domestic courts may not be experienced. M ­ oreover, there may be an innate bias against applying foreign laws, especially in regulatory issues, and there may also be special domestic public policy imperatives weighing on these courts. There may arise other complications when disputes arise internationally. In respect of the ordinary courts, there is first the question of jurisdiction. Which local court is competent to deal with an international case? It may be settled by the parties in a forum selection clause, which is now accepted in most courts. Short of such a clause, there could be several competent courts in different countries, which raises important issues of lis pendens in the event that parties become engaged in similar litigation in different venues at the same time. Even sorting this out under rules where existing (as in the EU under the 2002/2012 Regulation or Brussels I), may take much time, effort and cost. There may also be serious problems with language: all documents may have to be translated into the language of the court and witnesses may have to be heard in translation. The cases may be very large and as a consequence there may be greater anxiety in local judges dealing with them. It has already been noted that it could lead to a form of bias in favour of the court’s own system, especially when public policy is engaged in international transactions that might have important other contacts and other governmental interests to consider as well. Arguments may become longer, speed may suffer as a consequence and the cost of advocacy may spiral out of all proportion, further complicated by appeals. But there is also the important question of enforcement. Can a judgment when finally obtained also be enforced in the country of the defendant if that was not the country of the court? For the international enforcement of ordinary judgments, there is nothing like the New York Convention. In international commercial and financial dispute resolution, consideration of the nature and size of the international business flows and their dynamics puts this type of dispute and its resolution in a special context and gives it its proper perspective. International arbitrators may understand this better than local judges, who may still be inclined or forced to cut international transactions up into domestic pieces in the hope that the sum total of these laws adds up to something workable and efficient in the international flows. As already discussed in chapter 1, section 1.1.6 above, this may also highlight the operation of a more dynamic concept of contract and movable property law, both as risk management tools in these flows. On the public policy and regulatory side, it may concern the formulation of international minimum standards of behaviour balancing the international market place. It will be argued that international arbitrators are likely to be more perceptive in these matters and that this is expected from them, therefore inherent in their appointment. It is the natural point of departure for substantial transnationalisation of the applicable law in this area, even though arbitrators remain first and foremost dependent on the submissions of the parties and international arbitrators would find it difficult to go beyond them unless perhaps

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public policy were engaged or the argument entered other areas where they have acquired autonomous powers (see again ss 1.1.10 and 1.2.5 below). Even if only one party adopts these more modern attitudes in its pleadings, they may find greater understanding and receptiveness in international arbitrators than in local judges. So in international business disputes, largely arising when parties come from different countries; or concerning assets or activities that move from one country to another; or when the transaction involves classes of assets situated in different countries; or when it concerns claims, services or information and technology in the international flows, which can hardly be located (see s 1.1.7 below), we have issues of international jurisdiction in the ordinary courts, while issues of procedural flexibility, issues of speed and cost especially connected with appeals and issues of confidentiality may acquire even greater relevance and urgency. Again, there is also the issue of neutrality or ­objectivity when major local policy interests from different countries are at stake. In respect of ordinary judgments, there are further issues of international enforcement in the absence of any worldwide convention enforcing foreign judicial decisions. On the other hand, the enforcement of international arbitral awards is facilitated under the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. It may be illustrative in this connection that among the States of the US under the Full Faith and Credit Clause of the Constitution, recognition in Sister States is no longer a major issue, including in enforcement. It is also no longer considered a major problem in the EU either where, as already mentioned, we now have a way to provide for recognition and enforcement of domestic judgments elsewhere in the EU under the Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, dating from 2002, followed by an amended text in 2012 effective 2014 and replacing the earlier Brussels Convention (the reason why we still refer to this Regulation as Brussels I. Brussels II covers other types of decisions). The essence is that in the EU (as within the US) there is a lot of trust in the operations and decisions of courts in other Member States, but not in those of others. With an ever larger number of Member States, this may or may not be justified. In the British ­Commonwealth among its Members, there is older UK legislation that provided some relief also; in Europe earlier there were some bilateral treaties, but such treaty law was on the whole rare. These mutual recognition and enforcement facilities of ordinary judgments are therefore still limited and remain regional at best. The Hague Conference has tried for many years to get them going worldwide without much success: there is an early Convention of 1971 on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters with few ratifications; a bigger project has stalled for years. Notably the US has never entered into a treaty of this nature, even with Canada. There is, however, the 2005 Hague Convention on Choice of Court Agreements, although not yet sufficiently ratified. It allows for a simplified enforcement process when parties have chosen a (domestic) forum, but it does not sanction the exclusion of appeals nor facilitate procedural input by the parties, reasons probably why interest in the Convention is not great so far. These aspects of international cases leading to jurisdiction issues, lis pendens problems, procedural complications, length of the proceedings and cost, confidentiality

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and neutrality problems, all favour international arbitration. The fact that for recognition of the arbitration clause (which avoids jurisdiction and lis pendens issues) and the ­facilitation of recognition and enforcement of awards in other Member States, there is the New York Convention of 1958—now ratified by virtually all countries— provides­extra crucial support and also favours neutrality, which can thus be more easily obtained by organising the arbitration well away from the places of the business of the parties and from the direct control by their courts (except ultimately in recognition proceedings under the New York Convention, which, however, limits the grounds for refusal very considerably as we shall see in section 1.6 below). Although the implementation and interpretation of the New York Convention is not without its problems as it is left to each recognition court in enforcement countries to interpret the Convention and apply its own public policy bar, the aim is nevertheless a more efficient and less destructive form of dispute resolution in international business over which the parties have much greater control, and which promotes speed, efficiency and confidentiality while also better guaranteeing the neutrality of the dispute resolution facility, especially where other public policies or the public interest becomes more generally engaged. As such it has been highly successful and potentially also contributes to the transnationalisation of the law in this area better to guide the international commercial and financial flows and reduce legal risk. The discussion in this chapter will concentrate mainly on international arbitration and assume its truly international status. How it operates and achieves its aims in this legal environment will be the subject of the discussion in the remainder of part I. Special features of international financial arbitration will be discussed in part II and the type of international arbitration now prevailing in foreign investment disputes with host governments in part III. It presents the most complete expression of transnationalisation when conducted under the Washington (ICSID) Convention. The reasoning of international arbitrators will be the subject of part IV.

1.1.7  When is a Dispute an International Commercial Dispute? The Operation of the International Commercial and Financial Legal Order. International Commercial Arbitrations and the Difference From a Domestic Commercial Arbitration Since international (commercial) arbitration is now commonly distinguished as a ­different facility, justified, it will be argued, especially in terms of the status and powers of arbitrators and the recognition and enforcement of their awards: see section 1.1.10 below, it must be determined which disputes qualify, or perhaps rather in and for what type of business this type of arbitration operates. ‘Internationality’ and ‘commerciality’ then become important issues, which together potentially lift the dispute and its resolution into a different dispute resolution environment that is particular to international arbitration. These concepts have already been explored above in chapter 1, section 1.1.10. The UNCITRAL Model Law elaborates in its Article 1(3) on internationality. Although this Model Law is not binding—it has already been said that it is not

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in the nature of a treaty but is merely an example of what an international arbitration act may look like in each country that adopts it—the text is authoritative and in its 2006 version denotes what the international arbitration community believes the common standards to be. As such it is often quoted and even if not adopted, it has served as a major example in many countries, including in those that, like England and Germany, have strayed further from its text. Taking a step back, on the contractual side, internationality of the arbitration usually results from the parties living (or having their place of business) in different countries. That is indeed the more traditional attitude as expressed also in the Model Law. On the property or asset side, on the other hand, internationality arises if in the relevant transaction assets have to be moved from one country to another. The same may happen for services, although this aspect (of movement) is found more in the French approach. However, France in its new Arbitration Act of 2011, which distinguishes clearly between domestic and international arbitrations, now simply declares, in Article 1504 CCP, an arbitration international when international trade interests are at stake. It is then for arbitrators to decide whether that will be the case in the particular instance although their views in this respect may be pre-empted by agreement of the parties, who may simply declare international all disputes and arbitration concerning their transaction. The Model Law adds a number of other considerations and also considers the arbitration international when the place of arbitration is outside the states in which the parties have their places of business, or when their main business (in respect of which the dispute arises) is outside the states from which they hail. The Model Law ultimately also leaves the determination to the parties and to their express agreement that the subject matter of the arbitration (agreement) relates to more than one country. Thus even if it does not truly relate to different countries, agreement may still render the arbitration international although not necessarily for the purposes of the New York Convention, which has its own approach that is in fact simpler and more pragmatic. It refers in its title to ‘Foreign Arbitral Awards’ but does not define them. From Article I(1) it transpires, however, that the Convention applies simply if an arbitral award is sought to be enforced outside the country where it was made. There is here no definition of what a domestic arbitration is either. It appears that the country of recognition has the last word in these matters and there are no other objective criteria. As to commerciality, the Model Law contains a list approach in footnote 1 and there is no definition either. The attitude is that one recognises it when one sees it. The New York Convention does not clarify that point either. In Article I(3) it maintains the commerciality exception, meaning that Contracting States can limit the application of the Convention to commercial disputes and awards, but does not define what is commercial and leaves it to the law of the state making the declaration. It was earlier said that when we place ourselves in the international flows of goods, services, money, and information as the new paradigm also in law formation and application in international business, any transactions in them and disputes concerning them are international and that that is the proper perspective from which these matters should now be considered. In chapter 1, section 1.1.11 above, a more

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radical approach was proposed in this connection by distinguishing simply between ­professional (­ business) and other dealings, the first ones now operating primarily in the i­nternational commercial and financial legal order, which is determined by these flows,9 the latter ones still in domestic (or statist) legal orders. It may not be much different from what is now said in Article 1504 CCP in France. It was further added that even if these professional business dealings may continue to be purely domestic on occasion, meaning the subject matter of the dispute not having connections with different countries, in their structure they are increasingly likely still to conform to the practices of the international market place and should then be covered by its laws and dispute resolution facilities as well. Professional business activities in this sense are all those that are between entities that (a) make it their business to engage in them, (b) regularly do so, and (c) are sufficiently expert in them, meaning that they know or may be supposed to know what they are doing. The habitual dispute resolution facility in the international market place is now undoubtedly international arbitration, at least for the bigger cases beyond mere collection. It has already been noted that it sets international arbitration increasingly apart from litigation in the national courts but also from domestic arbitrations. It was noted before that the latter often served, and probably in nature still serve, as a replacement for the court of first instance. As a consequence, there may result a greater concern with formal procedural issues, but it is also likely to mean that there could still be forms of appeal, at least on points of law. As a minimum there would be some supervision of the higher courts. This was very much the attitude of the English Arbitration Act of 1950 amended in this respect only in 1979. The new English Act of 1996 still allows point of (English) law to be referred to the courts in England as a preliminary matter, if not excluded by the parties (an agreement dispensing with reasons for the award being deemed an exclusion). This is now a curiosity when it comes to international arbitrations (which the English Act still does not fundamentally distinguish) but may still spill over to international arbitrations, particularly in countries like England, where there still appears to be a more activist approach in the courts, although it is hardly desirable. It is submitted that parties insisting on their arbitration clause still being subject to a national law (rather than transnational law) thereby risk re-domesticating their arbitration. Emphasising the applicability of the lex arbitri of the formal seat, especially also to the arbitration clause and the arbitration itself, may lead to a similar increasingly undesirable result. This is a choice that can still be made but it may be asked whether, while so doing, parties fully understand the consequences and the very nature of international arbitration, which itself must be seen as transnationalised to reap the true benefit, even if one admits that supervision remains an issue but it needs to be resolved differently; see further the discussion in section 1.1.9 below.

9  See ch 1, s 1.5 above and 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 and JH Dalhuisen, ‘The Operation of the International Commercial and Financial Legal Order: The Lex Mercatoria and Its Application’ (2008) 19 EBLR 985.

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1.1.8  The Notion of the Seat in International Arbitrations and the Delocalisation Model This brings us more particularly to the concept of the seat of an international arbitration and its significance. It is still common to talk about the seat of an international arbitration. It means an anchor in some domestic law. Where this idea comes from is obscure but is reminiscent of Savigny’s proposition that all legal relationships have a seat (see ch 1, s 2.1.1 above). The issue is here the applicable arbitration law: is it the one of the seat, of the place where the dispute arose, or is it rather transnational practice or the modern lex mercatoria itself? The question is simply whether international arbitration is international and operates under transnational law supported by local arbitration acts in all countries where the international arbitration comes onshore or needs support. More to the point may be the question whether international arbitration properly understood remains a variation of domestic arbitrations or whether it is truly internationalised.10 For international arbitration, the notion of seat is usually considered to be formal: where parties say it is or, in the absence of such a choice, where arbitrators determine it to be or where they effectively sit. It is therefore not necessarily connected with the place where the arbitration is mainly conducted or plays out, or where the business in which the dispute arises, or with which the subject matter of the dispute is most closely connected. Indeed, the seat in this formal sense is mostly chosen or results elsewhere in order better to guarantee neutrality in the dispute resolution. The concept of and need for neutrality may thus underpin the formal approach to the seat, although technically the seat could still be in the country of one of the parties or in the place of their business if so selected by them. In international arbitration, this is now on the whole avoided; it would risk making the arbitration even more local and the award might then not qualify for enforcement under the New York Convention either, the seat potentially being at the same time the country of the business, the arbitration, the award and the enforcement. Still, it should be realised that even the neutral or formal concept of the seat risks domesticating the arbitration and may notably render it subject to the control of the courts of the seat, at least so it is often still assumed and is normally also still provided for in the very arbitration laws of the seat (lex arbitri) even when distinguishing between domestic and international arbitrations.11 This may not or may no longer be useful; the issue of supervision of an international arbitration will be discussed later.

10  The notion of the seat is better known in (international) company law, in the nature of domesticating that law. There are two different views: is internationally the company law derived from its formal seat or from the place of its major activities? France and Germany traditionally take the latter view, England and the Netherlands the former. Either choice is believed to lead to extraterritoriality of the relevant domestic company regime, but especially in the formal approach there is less justification and there may be further conditions in third countries. 11  Belgium at one stage did do away with the supervision of international arbitration by domestic Belgian courts but it was reinstated unless the parties expressly agreed otherwise. This reinstatement is often considered a successful rearguard action in favour of the notion of the seat but would appear rather pointless and has not increased the international arbitration activity in Belgium.

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More to the point may be support (not supervision) at the formal seat eg if parties do not manage by themselves to constitute the Tribunal, but support may be needed in many other countries and may be given under its own arbitration or procedural laws, eg to force witnesses to cooperate and to appear or to safeguard assets. As already mentioned, implicit in the idea of the seat was that the whole arbitration was covered by its arbitration law, also for its extra-territorial effect. It was then often thought that the rules of procedure and evidence derived from it also, even the applicable rules of private international law (to determine the applicable legal regime in the substance of the case). It suggested that arbitrators did not depend on the submission of the parties in this regard and that there was no transnationalisation of the applicable legal regime. At least for procedure and evidence, this view is now abandoned in favour of transnationalised concepts, meaning the principles and practices of the international arbitration community themselves. It is one area where international arbitrators have obtained substantial autonomy as will be discussed further in section 1.2.5 below. Even more burdensome in this connection was the view that for an arbitration to obtain international currency, it would first have to be stamped into law by the courts of the seat (subject to its conditions for doing so—this was the exequatur) so that it acquired the form of a local judgment at the seat first, which only thereafter could by recognised and enforced (or not) elsewhere subject to a further review in the place of recognition. This was the theory and practice of the ‘double exequatur’, which made international arbitration a more hazardous undertaking. It was the main purpose of the Geneva Convention of 1927 to create some order in this process and facilitate international recognition but it still accepted the concept. It meant that an award that was not accepted by the courts of the formal seat first had no international enforceability at all. Crucially, the New York Convention broke with this idea and recognises arbitral awards regardless of their fate in the courts of the seat. The Convention was as such an important signpost on the road to the transnationalisation or delocalisation of international arbitrations. Under Article V(1)(e), a foreign award may still be denied recognition and enforcement if set aside or suspended by the courts of the seat, but it is not automatic and especially in France, but also in the US, there are important cases where a foreign award had been recognised after being annulled at the seat.12 In fact the French Cour de Cassation has referred here to a distinct ‘international arbitral order’, which does not derive from the seat and over which the courts of the seat have no control.13

12 

See s 1.5.2 below. See Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia v Société Rena Holding et Société Mnugotia Est Epices, Arrêt n 1021, 207 Revue de l’Arbitrage 507. The new French Arbitration Act of 2011 does not clearly reflect this, nor is it clear how far it goes. It may not go beyond the French idea of the international arbitral order, which therefore remains a French concept and is not truly transnational; see also the comment in ch 1, s 1.1.11 above. One may therefore still ask how far the French legislator has drawn the consequence. Under the new law, international arbitration still seems to be a French concept rather than a question of the recognition of an international facility subject merely to French public policy and public order concerns for the effects in France. Indicative is that the severability of the arbitration clause is fully accepted but it is not put under transnational law, while domestic arbitration concepts are still extended to international arbitration. The latter’s special status may therefore still be in doubt. New French statutory law did not contribute much at the conceptual level in terms of clarification. 13 

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This leads into the delocalisation theory and its meaning. The main consequence is that it places international arbitration (and the arbitration clause upon separation from the rest of the agreement) under transnational law, therefore under the modern lex mercatoria and its different sources of law and hierarchy, which is therefore not only the putative substantive law of the dispute in the case but also covers the international arbitration itself and may even extend to international enforcement as we shall see. This evolution has been spotted at least since the 1980s14 and may now present the clearer model, meaning the model that at this moment is more responsive to what is happening, propelled by the globalisation of the commercial and financial flows, and explains better and simplifies more. In this approach, the lex arbitri of the seat is there only as the residual rule if the other sources of the modern lex mercatoria leave gaps in this area. As such it becomes part of the transnational law and will be adjusted accordingly, thus shedding its domestic features. For the rest it principally supports the international arbitration as do the leges arbitri of all other countries where support may be needed, for example in preliminary preservation measures (where the courts of the place of the business of the parties is likely to be most relevant) or in the country or countries of enforcement (again probably the country of the business of the parties), here with reference to the New York Convention in countries that have ratified it, which are virtually all countries of the world. The courts in these latter countries then more properly exercise the supervision in either giving or withholding their support, therefore in the places of enforcement where it matters most. In this view, the involvement of the courts of the seat supervising international arbitrations only complicates the issues and is dilatory. Of course, the country of the seat may not want to have certain arbitrations conducted on its territory at all, eg to prevent a cowboy culture in arbitration from developing, and in order best to preserve its own reputation as arbitration centre in this connection. That would be a legitimate public policy issue and interest, but all the same only a purely domestic concern that does not affect the international arbitration, which could continue elsewhere. In that view, a challenges at the seat, if successful, has no extraterritorial effect and the status of the award is not affected by it although it is unlikely subsequently to be recognised in the country of the seat. Thus the effectiveness of the award would solely depend on courts in enforcement countries, and would not or no longer be for the courts of the seat to pre-empt.

14  See J Lew, ‘Achieving the Dream: Autonomous Arbitration’ (Freshfield Lecture 2005) (2006) 22 Arbitration International 179 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 for the leading defence of legal nationalism in international arbitration, the denial of the latter’s existence, and the belief in the continuing dominance of the seat and its lex arbitri, FA Mann, ‘Lex Facit Arbitrum’ (1986) 2 Arbitration International 245. It reduces all international arbitrations to local ones with some extra features at best. 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 notably the recognition of awards elsewhere no longer depended on the prior sanction of the law and courts of the seat.

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1.1.9  The Major Consequences of Delocalisation. Attitude of the New York Convention and the Model Law. The View of Article 16(4) of the LCIA Rules (2014) Delocalisation means detaching the international arbitration from local laws but it does not mean putting them in a legal void or vacuum. To the contrary, it activates the operation of transnational law and its sources, in particular transnational fundamental principle and customary (arbitration) law within the context of the modern lex mercatoria15 and its hierarchy of these legal sources as discussed in chapter 1, sections 1.4.13 and 3.1.2 above, here applied to international dispute resolution, in particular arbitration, as its transnationalised lex arbitri. There figure in it fundamental principle (for example due process and other fundamental values and policies, such as the separation of the arbitration clause, the Kompetenz/Kompetenz principle and others as we shall see); customary law (custom and practices), not least in procedural and evidence matters; treaty law (New York Convention); general principles, such as those of the UNCITRAL Model Law; and the arbitration clause as an expression of party autonomy, the latter itself detached from the rest of the contract and placed under transnational law. Local laws, especially the lex arbitri of the seat, will support and the latter may also have a residual function in the modern lex mercatoria concerning the operation of international arbitrations. This was mentioned in the previous section, but the lex arbitri of the seat then becomes part of the transnational law itself, must find its place therein, is subject to the higher transnational sources, and is modified accordingly to make sense and function in the transnational commercial and financial legal order and its dispute resolution facilities. Public policy and order requirements in that order may correct and further shape the arbitration. The essence is that the arbitration is then placed in the transnational commercial and financial legal order, is activated by but not founded in the arbitration clause, and is fully transnationalised. In chapter 1, section 1.1.11 above, the major consequences of delocalisation and placing international arbitrations under international law were identified and may be restated as follows: (a) Institutionally, the international arbitration facility and the dispute resolution authority it implies find their legal basis and legitimacy in the transnational commercial and financial legal order, activated by the transnationalised arbitration clause, not therefore founded in it but supported by it. This activates at the same time the modern lex mercatoria and its sources as the law applicable to the

15  See further the important contribution of Judge James Allsop, ‘The Authority of the Arbitrator’ (2015) 30 Arbitration International 639, 643 also noting the autonomy of the international arbitral order and of its laws, especially with reference to Justice Robert Jackson from the US Supreme Court in Lauritzen v Larson 345 US 571 (1953) identifying a ‘non-national and international maritime law of impressive maturity and universality’ having the force of law not from the extra-territorial reach of national laws, but from acceptance by common consent of civilised communities to foster amicable and workable commercial relations. One may see this especially in the traditional mercantile parts of commercial law, but transnational legal principle and custom may now be seen much more universally in all of commercial and financial law.

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(b)

(c)

(d)

(e)

(f)

(g)

arbitration and the arbitration process. Transnational law then also determines the public policy impact on international arbitration and the extent of party autonomy, the powers of arbitrators, the arbitrability of the dispute, and the ­status of the award. Under this transnational law, the arbitration clause is separated from the rest of the agreement.16 Thus the law declared applicable to the rest of the contract does not control the arbitration clause and the arbitration, nor does the lex arbitri of the seat apply. It also gives international arbitrators the power to determine their own jurisdiction (Kompetenz/Kompetenz) and in principle also the validity and meaning of the arbitration clause,17 as well as arbitrability issues which now also cover competition and securities regulatory matters. They also determine the manner of their reasoning. Legal transnationalisation also gives international arbitrators the power to deal with transactional and payment finality, with the third party impact of set-off and netting, and with priorities or preferences in asset-backed funding where their role may become increasingly comparable to that of equity judges in common law jurisdictions.18 This means that in appropriate cases international arbitrators may deal with ­matters affecting the public at large. That may also include public policy issues such as competition and securities regulatory issues, as already mentioned, but also other measures, notably those necessary to keep the international market place clean, therefore issues of market abuse, bribery, money laundering and the like. It might even cover the identification and formulation of international minimum standards in areas of regulation, notably in matters affecting the environment and financial stability, or in the area of taxation. As we shall see in section 1.2.5 below, this poses the important question whether international arbitrators may raise these issues themselves, therefore independent from the pleadings of the parties, in which case they become more like judges. All the same, it remains a fundamental principle that arbitrators depend on the pleadings of the parties and resolve only the differences as parties have submitted them on the basis of which argument is the more plausible; that in this connection law must be pleaded as fact; and that arbitrators have no autonomous power to clarify the law in any other manner except in those areas where they have acquired powers to raise and decide legal issues themselves, which must be considered to remain exceptional.

16  The notion was first recognised by the French Cour de Cassation as early as 7 May 1963, Dalloz 1963, 545. See for the US Supreme Court, Prima Paint Co v Flood Conklin Manufacturing Corp 388 US 395 (1967). 17  Unless the plea for invalidity was directed especially at the arbitration clause, when local courts asked to take jurisdiction may also decide the issue, see House of Lords in Fiona trust & Holding Corp v Yuri Privalov [2007] UKHL 40. 18  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.

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(h) Under the modern lex mercatoria and its sources, fundamental principle will lead in determining the rules, especially in issues of due process such as a proper hearing and equality of parties, but it also establishes the legitimacy of arbitrators, sometimes even in being able to raise public policy issues themselves, when their independence and impartiality, and the transparency of their activity and accountability for their actions may become other fundamental issues. (i) The separability of the arbitration clause, the notion of Kompetenz/Kompetenz, the authority to deal with arbitrability, the limitation of revision, and procedural flexibility are an expression of and confirm these fundamental principles of international arbitration. Custom and practices will likely deal with the details, especially in procedural and evidential matters. So may treaty law (such as the New York Convention in the international recognition of the arbitration clause and the ensuing awards), and general principle found in local leges arbitri, and more especially in the Model Law. (j) The arbitration clause itself, properly separated and transnationalised, and the institutional rules it may make applicable, such as those of the LCIA and ICC, will further clarify and implement the applicable arbitration law as a matter of party autonomy subject to any higher rules in the hierarchy of the modern lex mercatoria concerning international arbitration and international minimum standards of public policy or public order that may develop in this connection as well. (k) Fundamental principle will also confirm that in this transnationalised approach or model, the lex arbitri of the seat potentially still provides the residual rule but will to that effect become part of the transnational arbitration law and be adjusted accordingly to play its role therein subject to any higher transnational rule or principle. (l) Transnational principle and arbitration custom also give international arbitrators the power to determine the applicable substantive law, which, depending upon the pleadings of the parties, may still result in the application of a domestic law under the rules of private international law or, alternatively, in the application of the modern lex mercatoria and its hierarchy of legal sources to the substance of the case. (m) Where parties still rely on private international law concepts, international arbitrators may determine in that connection which rules of private international law (if in dispute) apply and may refer to non-national or general principles of private international law rather than to those of the country of the seat. (n) Transnationalisation of the arbitration in this manner 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, the latter being implemented by the New York Convention, which itself remains subject in its interpretation to higher principle and custom. (o) Notably the sanction of the courts of the seat is no longer required for the international standing of the resulting 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.

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Indeed, as already mentioned, the New York Convention did do away with the double exequatur and no longer requires an arbitral award to be stamped into its law by the court of the seat before enforcement elsewhere can be obtained. That is transnationalisation, but in many other respects the New York Convention still adheres to the notion of the seat and offers fundamental support for it, see its Articles I(1), I(3), V(1)(a), V(1)(d), and V(1)(e). So does the UNCITRAL Model Law. But the Convention is more than 55 years old, dates from a time when the international flows of goods, services, information and money were modest and can hardly be representative of more current thinking. This may be different for the UNCITRAL Model Law19 but it may be considered that the practitioners who were behind it and its 2006 update were largely educated in the past and still captured by conventional nationalistic thinking in this area.20 Article 16(4) of the LCIA Rules 2014 is here also regressive and surprising. It is unique among modern arbitration rules in bringing the arbitration clause specifically under the lex arbitri of the formal seat as the default rule. Certainty is here invoked, but it is misplaced and is reminiscent of the attitude in the English Arbitration Act of 1950 that made all arbitrations in England local. The result was that international arbitration avoided England for more than a generation. The LCIA risks a similar fate. It is yet another example where invoking certainty may mean low-quality law and is inimical to new perceptions and very necessary innovation and renewal. In any event, it has already been said that in an international arbitration, the lex arbitri of the seat, if still having a (residual) function, should be placed among all other sources of the modern lex mercatoria and their hierarchy, notably the fundamental principles and arbitration practices that have developed transnationally in international arbitrations, and it is subservient to it. Again, within the modern lex mercatoria concerning transnational dispute resolution, the law of the seat is itself transnationalised and adjusted to make sense in the transnational legal order which it must respect and support to still have a meaning and be relevant; see further the discussion of the modern lex mercatoria in this respect in the next section and in section 1.2 below.

1.1.10  Powers, Status and Activity of International Commercial Arbitrators. Areas of Arbitral Autonomy. The Applicable Arbitral Law It was submitted in the previous section that the powers and status of international arbitrators derives from transnational law and its public order requirements, activated by the arbitration clause, which itself is covered by that law also, as is the award unless

19 

See for the Model Law n 8 above. It is of interest that an important practitioners treatise such as that of Redfern and Hunter on International Arbitration, 5th edn (Oxford, 2009) 191–92 cannot make up its mind. In their view, delocalisation goes too far, just as if there were a half-way house, and has run into ‘the ground’. Arbitration is still a matter of local laws. The more academic work of JDM Lew, LA Mistelis and S Kröll, Comparative Commercial Arbitration (The Hague, 2003) is different, but does not draw the consequences in terms of the powers of arbitrators and the applicable substantive law either. 20 

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parties specifically state otherwise, in which case they risk that the arbitration and the award will be domesticated. In section 1.1.2 above, the role of arbitrators and the character of arbitral dispute resolution were explained. It was found that the jurisdiction of arbitrators is in essence a limited one: solving disputes between the parties on the basis of the facts as presented by them, in which connection law must be pleaded as fact also. Arbitrators have no natural lex fori to apply and are not judges representing or clarifying any legal system, otherwise it would have to be the transnational law, although it must also be pleaded. It has already been noted that there are, however, areas where arbitrators have acquired original powers. Procedure and evidence were mentioned, even choosing the default rule if parties have not pleaded the applicable law. Thus also in procedure their original power is relevant, although parties remain in control of their case but such control is not unlimited and the issue arises in particular whether arbitrators may speed up the proceedings or close a discussion when they feel they know enough even if parties (or their advocates) want to go on.21 At least in international arbitrations, the practices suggest that arbitrators now have these powers in appropriate cases and they are significant to achieve one of arbitration’s main aims: speed and efficiency. One could even see them as other fundamental principles of international arbitration. Then there is the question of determining their own jurisdiction, arbitrability and way of reasoning. It has already been mentioned that there may be powers of international arbitrators as equity judges, especially in proprietary matters. It may even be asked whether international arbitrators may now have autonomous powers in public policy issues and may also consider or perhaps even raise notions of justice, social peace and efficiency (albeit often implicitly). It has already been said that leaving the lex arbitri of the seat on one side in this ­manner does not create a legal vacuum but makes international arbitrations truly international, therefore functioning under the traditional sources of international law as they then also operate in international dispute resolution of this nature. They are the same as those for public international law identified in Article 38(1) of the Statute of the International Court of Justice in the following order or hierarchy: fundamental principle (notably due process, impartiality and independence of arbitrators, efficiency of the proceedings but also when arbitrators are deciding about their jurisdiction, arbitrability and their reasoning); the customs of international arbitration (especially in procedural and evidence questions, but also in the implementation of the more fundamental principles); treaty law (such as the New York Convention for recognition and enforcement of awards), general principle (such as the Model law); and the arbitration clause, including any institutional rules (operating under transnational law also). Local laws present the residual rules but become part of transnational law, in the process shedding their domestic features. Corrections may follow from public policy

21  See DW Rifkin and SJ Rowe, ‘The Role of the Tribunal in Controlling Arbitral Costs’ (2015) 81 The International Journal of Arbitration, Mediation and Dispute Management 116. Whether this power to control costs is autonomous or still derives from the arbitration clause and especially institutional rules backing it up (see Art 17(1) UNCITRAL Rules, Art 222 ICC Rules, and Art 14 LCIA Rules) may remain a point of debate in this discussion, the former approach relying on transnational practice being advocated in this book.

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and p ­ ublic order requirements in each country where the transaction comes onshore in terms of conduct and effect, conceivably increasingly superseded by transnational minimum standards. Considerations of justice, social peace and efficiency, again in transnationalised form, may supplement and in proper cases correct if not already part of fundamental principle. Thus, the arbitration laws of the seat and of any other country where support is needed operate as the residual rules, themselves becoming part of this transnational arbitration law and being adjusted accordingly to make sense in the transnational legal order and always subject to the higher sources of law just mentioned. It also follows that this may still be different for the applicable mandatory provisions of the lex arbitri of the relevant country to the extent an arbitration comes onshore in that country in conduct and effect, no more, and there is no extra-territorial effect of such provisions and therefore no power over the rest of the international arbitration.22 This means that mere artificial contact is not enough, and that is what the seat mostly constitutes in international arbitration. Again, this does not exclude that the transnational legal order may itself develop public policy notions in this respect or transnational minimum standards which may conceivably go beyond fundamental principle although they are likely to be closely related. It means, however, that the modern lex mercatoria and its sources may still be corrected by public policy that is not part of it. This conforms to the approach to the lex mercatoria taken in this book, here extended to law applicable to the international arbitration process. In this connection it may be useful to make some distinctions to clarify the issues further. As to the applicable law, we first have (a) (b) (c) (d) (e)

the arbitration clause to consider, then the activation of the dispute resolution process and powers of arbitrators, then the arbitral process, then the substance of the case, and finally the supervision, support, and enforcement functions in local courts.

Delocalisation of the arbitration is a key feature in respect of all of them, therefore, it is submitted, transnationalisation affects the applicable law in all these instances or aspects. For the arbitration clause, as was mentioned before, supports the separability, meaning its transnationalisation, and it then also applies to the power and jurisdiction of arbitrators and the issue of arbitrability. Hence the application of the different sources of law as we know it from the lex mercatoria and its hierarchy. This will be further discussed in section 1.2 below. Again, it means that even an explicit choice by the parties of the law of the seat applying to the arbitration clause must be put in the

22  A sovereign and its laws must be respected in its own territory but in others it requires proper recognition, which may be conditional; it goes to the possible extraterritorial effects of the lex arbitri of the seat, which, as already said, no longer automatically follows. Upon a proper analysis it probably never did; the awards were in any event subject to recognition elsewhere. Local arbitration laws can forbid these arbitrations from being effectively conducted at the seat, eg because the law of the seat is concerned about the culture developing in arbitrations. It can even set aside awards, but it is clear that there is no extraterritorial effect and the arbitration can continue and awards can be upheld elsewhere. Thus the law of the seat does not have or no longer has authority over an international arbitration as a whole.

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context of the hierarchy of norms of the modern lex mercatoria, so must the default rule of Article 16(4) LCIA Rules (2014), and such a choice is subject to any mandatory higher or public order principle in the international commercial and financial legal order concerning international arbitration and any practices developed in this regard, unless parties indeed wish to localise their arbitration, which is not then any longer international. Another important consequence is that even the New York Convention must be put in this transnational context, operates among other sources of law, and is then also subject to higher transnational principle and practice. It thus evolves further and develops while finding its place among the other sources of transnational law also (of which the Convention is only one) and their hierarchy within the modern lex mercatoria, although local enforcement courts may have greater difficulty than international arbitrators in picking this up. Especially developing transnational customary law is important in this regard, as may be the law applied in other countries as general principle (even though lower in the hierarchy). In this connection, in many countries under the New York Convention, at least a notion of transnational public order is developing and replacing local public order bars to recognition, although, as we shall see, it is often still a domestic concept of transnational public order, therefore not a truly transnationalised concept and it will still differ from country to country. In this aspect, therefore, there is still no uniformity unless it results from firmly placing the New York Convention in its transnational context and making local courts understand this.

1.1.11  Is International Arbitration Judicial or Contractual? Is it Adversarial or Inquisitive? As to its status, the question arises how judicial the arbitral dispute resolution, especially international arbitration is, or whether it is merely contractual, a mixture or something else altogether. This issue was raised in section 1.1.3 above in connection with the role and powers of international arbitrators and the enquiry into any judicial function. The issue is often cast as a narrower one and tended to arise especially in connection with arbitrators’ liability for their behaviour. May they claim immunity as judges mostly can or are they liable at least for gross misconduct? That would then be a matter of breach of contract. Indeed, once an arbitrator accepts an appointment, it may be considered a contract for the supply of services and implies good faith execution, at least in civil law perceptions. It is often thought that in respect of the immunity issue, arbitration in common law countries is considered more of the judicial type, in civil law countries more of the contract type.23 However, in modern times there is another more important and urgent aspect to this discussion. Are arbitrators judges also in other aspects? That would appear to affect their powers, perhaps especially in international arbitrations, and could confirm that 23  Leges arbitri are often specific, see s 74 English Arbitration Act 1996. See for case law Austern v Chicago Board Option Exchange 716 F Supp 121 (SDNY 1989) extending the immunity to arbitral institutions.

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these powers are not essentially contractual and founded in the arbitration clause but rather in the transnational legal order itself, only activated by parties through their arbitration clause. This was discussed in section 1.1.9 above in connection with the delocalisation issue. But that still does not necessarily make them judges, even if it extends their powers and may also affect their reasoning, perhaps also their attitude to precedent and particularly their potential involvement in law application beyond the submissions of the parties and particularly their power to raise public policy issues autonomously (see s 1.2.5 below). Practically speaking, it is undeniable that even international commercial arbitrators have become more judicial in their approach, although this is often considered an improper perception of their task and a bad development.24 Ever longer awards, which take ever more time to write and seldom enhance quality, and may testify to serious misconceptions in this regard. Especially professorial arbitrators seem to think that they must contribute to precedent or a jurisprudence constante and to that end may particularly indulge in points of procedure and law as if arbitration concerned an appellate jurisdiction. But the rule of precedent was never accepted in civil law nor in international cases, and this is so for very good reasons: it assumes some system or systematic coherence in case law, which in international cases may not be there at all25 and which in any event it is not the task of international arbitrators to seek out and to clarify for the future. Most importantly, as they are limited to the submission of the parties, at least in principle, it is not for them to test any other legal arguments which may be more appropriate. Hence the concepts of consistency and precedent become moot except potentially in those limited areas where international arbitrators may have obtained autonomous power (see the discussion in sections 1.1.10 above and 1.2.5 below), which now may also increasingly include public policy and public order considerations. Consistency is traditionally an issue for ordinary judges who work in domestic systems and have a clear lex fori to apply and defend, especially on appeal. It may perhaps also apply to the International Court of Justice (ICJ) in so far as public international law is concerned. Even though its decisions still have no precedent value (see in this connection also Art 59 of the Statute of the ICJ) they provide important guidance. Following this lead in arbitration could, however, undermine the entire concept of international arbitration, which is fact finding and solution oriented, and does not (in principle) go beyond the dispute as presented by the parties. The relevant findings as to the applicable law might not therefore be based on a full evaluation of the legal issues. Even if upon proper academic analysis of the cases there may still be some line in them, it is not for arbitrators to find or sustain and academics may be handicapped if they do not know the full submissions. Arbitrators are not meant to build or enforce any legal system or it would be transnational law in areas where they indeed have original authority. The basic attitude should be that international arbitrators are not to take 24  RB Lillich and CN Brower (eds), International Arbitration in the Twenty First Century, Towards Judicialization and Uniformity (New York, 1993). 25  See also WM Reismann, ‘“Case Specific Mandates” versus Systemic Implications. How Should Investment Tribunals Decide?’ (2013) 29 Arbitration International 131.

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upon themselves more than they can and should handle or parties wish them to do and to pay for. Again, arbitrators are not (appellate) judges and do not have a law-making function. Where arbitrators may seek to enhance their credibility by emulating judges, this seems to be quite counter-productive.26 Arbitrators are there to decide a dispute and resolve a problem, albeit in an adversarial context, but only on the basis of the facts as presented and the law as pleaded by the parties, no more. Arbitrators state which arguments they prefer but do not ask for or impose others. It has already been said that for them deciding on a point of law after having heard expert opinion is not different from deciding on construction issues. It follows that there is a fundamental difference and disconnect between the ordinary courts and international arbitration. There is a true alternative. This not only affects procedure and appeal, but more importantly also the applicable substantive law, and indeed the role of precedent, consistency and certainty. Not having a lex fori to defend may enable international arbitrators also to consider other approaches to the law, at least when pleaded, such as, notably, the modern lex mercatoria and its various sources of law, therefore not only as to procedure but also as to substance.27 Whether this is desirable or not, one must accept that courts remain largely local institutions, including in international cases when assuming (international) jurisdiction. That is their perspective and they look then for local substantive laws, primarily their own (not limited by the pleadings of the parties) or, through their (own) rules of private international law, sometimes for foreign law, but again primarily of a domestic nature, never mind whether the international flows can still be properly cut up along such national lines.28 Additionally, especially in regulation, they are likely normally to apply their own laws and will not balance foreign governmental interests or give them precedence except perhaps in very obvious cases. International arbitrators do not have these confines and local judges should not have them either but in the EU, at least the Rome I Regulation of 2008 still embodies this attitude: see its Article 9 (while it only gives an opening to application of the modern lex mercatoria as non-statist private law in the Preamble). That remains mostly the accepted wisdom and attitude of local courts in Europe. It reduces their role in international dispute resolution at the same time, hence the

26  The distinguished international arbitrator and litigator Lucy Reid has become particularly vociferous on this issue of arbitrators having a prime duty to advance the arbitration, no more: see ‘More on Corporate Criticism on International Arbitration’, Kluwer Arbitration Blog, 16 July 2010. The problem is not confined to the US. 27 In Deutsche Schachtbau- und Tiefbohrgesellschaft [1987] 3 WLR 1023, the English 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 allowing international principles and customs to operate in that connection also. This was not considered to be against English public order and a bar to recognition of the ensuing award in England. This is now widely accepted also elsewhere, but creates an unfortunate dichotomy between arbitrations and the operations of the ordinary commercial courts which are left behind, stuck in a more parochial environment, even in England, but it may be the unavoidable consequence of the institutional back up of either facility, which is very different for international arbitration when seen as founded in the transnational legal order. It may means, amongst others, that the precedents in local commercial courts loose much of their force transnationally, further handicapped by the fact that most business disputes are determined in international arbitrations. Local law shrivels up, becomes consumer law, and is no longer representative for all society’s activity. 28  In this approach it is indeed also mostly assumed that foreign law must be proven as fact (see s 1.2.6 below) which may make it subject to the pleadings of the parties even in the ordinary courts.

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r­ elative popularity of international arbitration, but arbitrators subsequently adopting a judicial attitude at the transnational level undermine their position and are prone to get lost in legal formalism. As the EU Regulation does not apply to international arbitrations, it does not bind arbitrators, including when the seat is in an EU country. This may seem a simple policy choice but it is more fundamental: it re-emphasises that international arbitrators under transnational law indeed go their own way and are allowed, perhaps also expected, to do so. Even if national laws at the seat of the arbitration (in the EU) go against this, it would not make a difference: the courts of recognition and execution would provide the ultimate test and are not allowed to go into these matters under the New York Convention except where they give rise to issues of arbitrability or public policy. Again, issues of precedent, consistency or even legal certainty, although much talked about even in international arbitration, must be considered in a different light.29 It is submitted that these are overrated concepts in international arbitration and may signify that its true nature and limitations are still not properly understood. There is not likely to be a full legal picture. In any event, disputes that come to an international arbitration may be very different, the fact situations being new, international, or otherwise a-typical Why litigate otherwise? If one nevertheless still emulates ordinary judges in international arbitrations, one useful pointer might be the role of the judges in commercial courts in countries such as France that have them and where the idea still is that the peer group sits in judgment. Often proceedings in these courts are more direct and pragmatic, indeed geared towards quicker results,30 although it does not go as far as dispensing with appeals (to the ordinary appeal courts). These judges might have some greater understanding of business while rougher justice is often better for commercial partners than the length of time it would take for greater legal refinement to prevail. Commercial parties are used to risk and must move on. Speed again is of the essence: long drawn-out battles are debilitating, destructive of relationships, expensive, and take too much management time. Specialised commercial courts are likely to be aware of this and so should be international commercial arbitration. To remain helpful, it needs to be even more to the point and capable of cutting knots while avoiding legal sophistry. This is not to deny that international arbitration remains at least to some extent judicial but such a judicial character acquires a distinct meaning, at least in international arbitrations, which needs further exploration. It has a particular bearing on the hearing, which is adversarial. It also has a bearing on enforcement, which is not by way of

29  It should thus be considered that what we see as precedents in ordinary courts, reached on the basis of what they consider their task, might not be proper precedents in the international flows at all and international arbitrators may see this better. Nor can consistency be a decisive factor; Lord Bingham thought it even a ‘vice in [ordinary] judges’, let alone in international arbitrators (see also the discussion in s 4.1.11 below), and it cannot be more strongly put. Certainty is also often mentioned in this connection, but as all depends (in principle) on how parties have presented their case, there is no independent role to play for the law. In any event, legal certainty in a fast-moving world is a fraught concept, rather law must be responsive; at most we can hope for some predictability. On the other hand, we must insist on transactional and payment finality, but it is quite different and a proprietary issue, see ch 1, s 1.1.7 above. 30  See chapter 1, section 1.1.9 above for the development and operation of these courts in France.

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contract action but is indeed more in the nature of ordinary judgments. This is borne out by the New York Convention with its (implicit) views of what an (international) arbitration is in this connection. It may also go to the need for a reasoned opinion, only sometimes capable of being waived (see Art 32(3) UNCITRAL Rules) although lack of it is no ground for refusing enforcement under the New York Convention either as will be more extensively discussed in section 1.6 below. It has already been said that in all of this, it may also be different where arbitrators acquire the power to raise public policy issues autonomously: see section 1.2.5 below. At the more practical level, what arbitrators typically lack, and judges have, is the power to order coercive action, at least in their own territory, and also the power to bind third parties, for example when it comes to the proprietary consequences of their decisions (who owns what?), the ranking of security interests, and the consequences of a set-off. These are important issues, especially in financial litigation, as we shall see in part II below, again closely connected with the issue of arbitral power and even arbitrability, where the interaction between arbitration and bankruptcy courts is likely to create further challenges. As will be argued later, in private law, international arbitrators may acquire here some features of equity judges in common law countries,31 while in regulatory law, they may start to formulate transnational minimum public policy standards.32

1.1.12  Legitimacy, Transparency and Accountability. Independence and Impartiality. Supervision of International Commercial Arbitration and the Operation of an International Commercial Court In the previous sections, it was posited that in international commercial arbitration fundamental principle and the public order requirements and values, its custom and practices or general principles and notion of party autonomy in the transnational commercial and financial legal order or international market place determine ultimately the nature and conditions of the arbitration and also the powers and status of international arbitrators. Their legitimacy, especially in terms of their impartiality and independence, is also determined by such fundamental principle as is the need to preserve the appearance of impartiality and independence at all times. The same goes for the transparency of their actions and their accountability, which are other major issues in preserving the credibility of this type of dispute resolution. Procedural protection for the parties derives here from fundamental principle as well: equality of the parties and their entitlement to a hearing (unless waived). They are essential, also reflected in the Model Law and in most modern legibus arbitri. 31 

It again suggests an approximation to the judicial function but it remains area specific, see Dalhuisen (n 18). J Paulsson, ‘International Arbitration is not Arbitration’ (2008) 2 Stockholm International Arbitration Review 1, in which international arbitrations are thought not to be arbitrations at all, but it depends on what they are compared with. They are not domestic arbitrations or a variety of this type of arbitration as they often still are considered to be among those who see them as covered by the lex arbitri of the seat. See for the delocalisation issue s 1.1.8 above. 32 

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Although it might cogently be argued that arbitrators in so far as appointed by the parties still continue the latter’s discussion (see s 1.1.2 above), so that at least partyappointed arbitrators need not be independent and could remain advocates at the level of the deliberations of the tribunal, this is not now the approach in international arbitrations. It would put the Chair in the central position as the ultimate decision taker. It may remain the attitude in domestic arbitrations in the US (unless the arbitration clause specifically determines otherwise) and may by agreement also remain so in international arbitrations although it is now uncommon.33 In this connection, some distinction is often still made between the notion of impartiality and independence. In this approach independence goes to the relationship with others and impartiality refers then rather to the inner disposition of arbitrators but the terms are now mostly used together and if the emphasis turns on appearance, the distinction is less relevant and probably difficult to maintain as standards differ. This principle of independence and impartiality in all international arbitrators remains, however, to some extent artificial and has created many problems while favouring challenges which can be very destructive. It also limits the pool of eligible candidates for an arbitrator’s position. Any contact with third parties involved with the parties in dispute, notoriously even with any other partner in a law firm who may have or may have had such an involvement, may then disqualify an arbitrator. It imposes heavy investigation, disclosure and information duties on arbitrators. This has compelled some to argue for the abolition of party-appointed arbitrators.34 But parties would feel less involved with the case and the argument could also be seen as self-serving for the insiders. Ever fewer new faces would appear. The answer may be rather in the relaxation of the impartiality and independence rule for party-appointed arbitrators, a rule which emphasises in particular the judicial nature of an arbitrator’s activity (see s 1.1.11 above) and may well be overdone unless major public policy issues arise, when indeed the arbitration may become more judicial certainly where arbitrators raise these issues themselves. Indeed, this judicial characterisation may be more appropriate in foreign investment disputes where the public interest is heavily engaged,35 and it may suggest an extra emphasis on independence and impartiality as also applies to ordinary judges.

33  In the US the Supreme Court case of Commonwealth Coating Corp v Continental Casualty Co 393 US 145 (1968) is often cited, in which a sharply divided court held that at least the chairman must be objectively impartial and any connection with one of the parties is an impediment, even if no obvious partiality results. The judicial analogy was strongly emphasised in the majority opinion. In the concurring opinion it was believed that prior disclosure may excuse the relevant arbitrator. 34  See J Paulsson, ‘Moral Hazard in International Dispute Resolution’ (2010) 25 ICSID Review 339 and AJ van den Berg, ‘Dissenting Opinions by Party-Appointed Arbitrators in Investment Arbitration’ in M ­Arsanjani, J Cogan, R Sloane and S Wiessner (eds), Looking to the Future: Essays on International Law in Honour of W Michael Reisman (2011), noting that in ICSID arbitrations dissenting opinions mostly come from arbitrators appointed by the losing side, but see also CN Brower and CB Rosenberg, ‘The Death of the TwoHeaded N ­ ightingale: Presumption that Party Appointed Arbitrators are Untrustworthy is Wrongheaded’ (2013) 29 A ­ rbitration ­International 7. 35  In terms of transparency of the arbitral process, UNCITRAL published Rules on Transparency in Treatybased Investor-State Arbitration in 2014. It aims in particular at publicity of the hearings (Art 6). They are meant to apply only to arbitrations under new BITs (as from 1 April 2014) unless otherwise agreed therein.

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The question of impartiality and independence is further complicated by the fact that there is in practice often little distance between the arbitrators and law firms effectively choosing and appointing them for their clients and the desire of partners in the same firms to sit as arbitrators also, sometimes in the same case. Arbitrators may also have important connections to related companies where they act as board members and especially to banks that may have any of the parties as clients or who may have a participation in them through custodial accounts or otherwise. Obvious problems arise where the same arbitrators have multiple appointments through the same law firms or even from the same party. But there may also be problems when arbitrators have sat in similar cases or have published their opinions in similar legal areas of contention. Investigation, disclosure and information duties often remain poorly ­established and even controversial and they may not always be taken sufficiently ­seriously by ­international arbitrators, but innocence as a result of not investigating properly is notably no excuse. An important compilation of principles and rules was formulated in this connection by the International Bar Association (IBA) in its Guidelines on Conflicts of Interest in International Arbitration also called the ‘IBA guidelines on Conflict of Interest of 2004’ amended in 2014. In the same year (2004) the American Bar Association issued its Code of Ethics for Arbitrators in Commercial Disputes or the ‘ABA Code of Ethics 2004’. These rules are indeed no more than guidance and in individual situations much will depend on the circumstances unless they become reflective of the practices and general principles of international arbitration. As such they are acquiring considerable authority. Yet, over and again there are problems in this area, one of the reasons being that international arbitration is a business for arbitrators and potentially an important source of income. There result conflicts of interests and, as in so many businesses, an undercurrent of monopolisation is apparent in a small group of insiders, who remain largely unsupervised and are often close to the law firms and arbitration institutions that give them their cases. It is common ground in this connection that arbitrators must properly investigate and use their own conscience first to decide whether to take a case, and may in case of doubt disclose possible conflicts while accepting the appointment, leaving it to the parties to object, and if the latter do not do so promptly the matter is settled. However, the problems have not gone away and have undermined the reputation of the arbitrating profession, which is often believed to be self-serving and covetous. As we shall see, this has become an issue especially in foreign investment arbitration where private dispute resolution in public policy matters is under pressure, especially surfacing in the discussions concerning the Transatlantic Trade and Investment Partnership (TTIP): see section 3.5 below. The obligation to remain independent and impartial is a continuing obligation, as is the duty to maintain the appearance thereof at all times. Especially when arbitrators accept other appointments as arbitrators, company directors or advisers, they must review the situation. As in all cases where monopolisation results or is threatened and transparency is a problem, independent supervision is the ultimate answer and peer pressure through LCIA or ICC courts may not be enough, if only because they are habitually manned by the same insiders. In this connection the creation and operation of an international commercial court or similar institution, not to substitute for

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i­nternational arbitration nor to operate as an appeal body but to protect it, may be called for and has already been mentioned in chapter 1, section 1.1.12.36 It would supervise the process and deal with challenges of arbitrators, could also take over the function of annulment or setting aside of awards and could even operate the process of recognition and enforcement of awards in individual countries. It might also order and enforce preliminary measures. Most importantly, it may redress the move towards ever greater judiciality in the attitudes and behaviour of international arbitrators and the resulting inclination to prolong the agony for the parties. On issues of transnationalisation as well as the application of the relevant domestic regulatory and competition laws or other public policy matters, this court could also issue preliminary opinions if asked by arbitrators or by parties in agreement on such a request. That could lead in particular to a better representation of the public interest in the formulation of international minimum standards. This may have added importance in foreign investment arbitrations as we shall see in section 3.3.5 below. Such a court may require treaty status to operate properly. There is an increasing need to think in this direction since international arbitration as a self-regulating world of dispute resolution has come under considerable pressure. In view of its size and importance, and the intrinsic contradictions resulting from its being a business service that may also deal with the public interest, stronger independent support appears necessary to guarantee its legitimacy, credibility and feasibility and also to make up for unavoidable shortages in terms of transparency and accountability. Again, this is becoming more particularly an issue in foreign investment dispute resolution and is a particular concern in the present negotiations concerning the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU: see further sections 3.1.5 and 3.5.4 below.

1.1.13  International Moot Competitions, Modern Literature, and the Concept and Meaning of International Arbitration Moot court competitions have become popular for international arbitration and one must admire the size and jamboree atmosphere they manage to create. It may surprise arbitration practitioners, however, that these competitions are conducted in the style of ordinary court proceedings, usually concentrating on points of law, as it were at the appellate level. The approach is thus judicial, extremely so, and it could be argued that this sets students up entirely in the wrong direction with a flawed perception of what international arbitration truly is. It may inadvertently contribute to an ever more deeply engrained misunderstanding, which threatens arbitration’s credibility. It has already been said that arbitration is foremost about facts and concentrates on cross-examination (in which art most advocates are poor). Fact finding in terms of

36  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.

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discovery, depositions, witness-of-fact statements and cross-examination is a long and often very tedious process. It can for practical reasons hardly be approximated in moot competitions. So much may be obvious. But if it is understood that in international arbitrations law must also be pleaded as fact, there is an important alternative to the appellate court approximation. In arbitration moots, students should concentrate on expert witness statements concerning points of law for either party and on the subsequent cross-examination of the expert witnesses by the advocates and on closing statements. That would present a much better and also steeper learning curve into international arbitration and what it truly is or means to be. It was further submitted in the above that the key to understanding international arbitration can indeed be found in (a) the attitude towards its delocalisation, therefore in the issue of whether international arbitration is truly international, and in (b) the answer to the question whether it is judicial or not. The modern literature on international arbitration seems unable to handle these matters clearly and it must thus be assumed that it has no clear idea of international arbitration and its nature either. As a consequence, it does not give students and scholars a proper perspective and may seriously threaten international arbitration’s credibility; we seem not to know what we are doing. The important book Redfern and Hunter on International Arbitration, which this author uses as important class material and which is rightly liked by uninitiated students for its practical approach, in its fifth edition (2009), may serve as a ready example. It may even have been regressive in its successive editions and is seriously contradictory in these two vital aspects. This continues in the sixth edition of 2015. On the question of delocalisation, it rightly suggests on pp 82–83, repeated on p 63 of the sixth edition, that business people, lawyers, and arbitrators who are involved in international arbitration need to be capable of abandoning a parochial view of the law, as constituted by the particular national system with which they happen to be familiar in favour of a wider and more international outlook. In particular, they must be prepared to accept that there are other systems of law which may, in some respects, be better than their own and which must in any event be taken into account.

It continues on pp 188–89, repeated on pp 179–80 of the sixth edition: In this connection, two separate developments are seen. The first is for the State to relax the control which it seeks to exercise over international commercial arbitration conducted on its territory. This is the route taken by modern laws of arbitration. These laws take careful note of the theme of the Model Law, which is that their courts should not intervene in arbitrations, unless authorised to do so. The role of the courts should be supportive, not interventionist. The second development is to detach an international arbitration from control by the law of the place in which it is held. This is so-called ‘delocalisation’. In this way the whole world (or most of it) would be available for international commercial arbitration and international arbitration itself would be ‘supra-national’. ‘a-national’, ‘transnational’, ‘delocalised’, or even ‘expatriate’.

It then cites the French Cour de Cassation in Putrabali. It also noted earlier (p 77, repeated on p 64 of the sixth edition): There are no fixed, detailed rules of procedure governing international arbitration. Each tribunal is different; each case is different; and each case deserves to be treated differently.

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But there is a basic underlying structure, which is built on three essential elements: first the international conventions (and the Model Law) which have helped to bring about modern national laws of arbitration, secondly, established rules of international arbitration, and thirdly the practice of experienced arbitrators and counsel.

This would appear to suggest that these three transnational sources of law provide a more stable legal framework for international arbitration than the mere lex arbitri of the seat, which does not figure here (even as the residual rule). So far so good. But on p 8 (affirmed on p 7 of the sixth edition), the authors say that ‘every arbitration is a “national” arbitration, in that it must be held at a given place and is accordingly subject to the national law of that place’. They continue (p 180): [P]rocedural law is that of the place of arbitration and, to the extent it contains mandatory provisions, is binding on the parties whether they like it or not. It may well be that the lex arbitri will govern with a free reign, but it will govern nonetheless.

Interestingly this language is deleted in the sixth edition. The authors proceed to cite the support (rather than supervision) function of the local courts in aid of localisation at the formal seat (p 190 repeated on p 181 of the sixth edition), although these courts can be many, in very different countries and often likely to be far from the seat, not only in recognition and enforcement where in any event we have the New York Convention. Nothing in this support function of local courts localises the international arbitration itself; one could argue quite the contrary. More extreme is the conclusion on p 190 (repeated in the sixth edition on p 181): More crucially, this law [of the seat] will confer nationality on the award of the arbitral tribunal, so that it is recognised for example, as a Swiss award or a Dutch award and may benefit from any international treaties to which its country of origin is a party.

However, notably the New York Convention does not depend on it; it applies to all awards needing enforcement elsewhere (Art 1(1)), the double exequatur of the Geneva Convention having specifically been abolished. It follows that the international character of international arbitration is here denied altogether. Against the position of the French Cour de Cassation, the authors only cite the Belgian change back to control of the court of the seat (unless parties want otherwise), as support for its localisation stand (p 192, or p 184 in the sixth edition). On p 188, it is said that the idea of delocalisation is ‘as illusory as that of universal peace’. That would then appear to apply to all of international arbitration, the result being its domestication (see also the repeat on p 179 of the sixth edition). This is a return to the parochial view: there is no international arbitration. Notwithstanding decisions such as Hilmarton, Chromalloy and Putrabali, enforcing awards that have been set aside by the courts of the place of the arbitration remains controversial. With some notable exceptions, courts around the world are still more likely to decline than to enforce annulled awards.

But the point is that they do not need to with reference to the Cour de Cassation in France and the American Federal Courts or indeed the New York Convention itself. It is suggested that ‘to proceed in this manner reduces the seat of the arbitration to a legal fiction: a place of ­arbitration where nothing takes place’

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(p 183 and p 175 of the sixth edition), and it is still posited that ‘the place or seat of the arbitration is … the territorial link between the arbitration itself and the law of the place in which the arbitration is legally situated’

(p 181 and p 173 of the sixth edition), but the true question is how and why this should be so. Indeed the idea of the seat in this formalised manner may itself be the fiction, precisely because of its total lack of contact with the case. Could it be that all there is to it is that this kind of seat determines the applicable arbitration law, but that the applicable arbitration law determines in turn the dominance of the seat? That makes the argument perfectly circular. In section 1.1.9 above, it was mentioned that the 2014 LCIA Rules also insist on the dominance of the lex arbitri of the seat; it is the same parochial attitude which denies international arbitration its international character. But it was also said that it cannot determine its own place in the modern lex mercatoria concerning international arbitration and must accept that there may be other rules, or fundamental or general principle and arbitral custom and practices, that may prevail over it, as may treaty law. It remains surprising how little practitioners seem to be aware of the fundamentals and the legal structure of the international law concerning international arbitrations The question of the judicial nature (or not) of international arbitration was identified above as another vital issue in understanding international arbitration properly. Here again the book cannot give guidance and becomes contradictory. The essence is whether the applicable law is law or fact. This means can it be found independently from the pleadings and applied and explained by international arbitrators autonomously? (And if so which law?) The key statement is on p 410: It takes only a brief moment of reflection to appreciate that the convenient fiction that ‘foreign law is fact’ does not work in the context of an international arbitration. Imagine three French lawyer arbitrators, sitting in England, with French avocats presenting arguments on the applicable French substantive law. Any suggestion that English procedural law would require the relevant French substantive law to be proved as ‘fact’ would surely be greeted with some hilarity. Equally, if a hybrid tribunal composed of one French lawyer, one Egyptian lawyer, and one Canadian lawyer were sitting in London applying the substantive law of Kuwait, how would the Kuwaiti law issues be handled? Would experts on Kuwaiti law give oral evidence to the tribunal, and solemnly change places to cross-examine each other? That would be absurd.

This is strong language but it is completely misguided and was deleted in the sixth edition. First it puts into doubt the common practice and need in ordinary courts to plead foreign law as fact. The suggestion is that international arbitrators have here greater power and better insights. But it has already been said several times that to international arbitrators all law is ‘foreign’, they do not have a natural lex fori to hold on to and apply or it would be the transnational law itself. They are not experts in anything and have no institutional status as representatives of any legal system that they would be called upon to apply and clarify. True, if all advocates and arbitrators came from the legal system that is applicable in the case, they might take it upon themselves to operate as their own expert witnesses. For the advocates that would not be problematic as de facto they are subject to each other’s cross-examination, but it would be very different for the tribunal to go its own way and interpret the law as it deemed fit.

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International arbitrators do not have that authority. Moreover, they are not subject to cross-examination and may come to conclusions that were never an issue between the parties, potentially stating far outside their authority and solving issues and disputes which do not exist and are not raised by the parties, thus undermining the entire arbitral process. There are also important due process implications where international arbitrators may have more institutional power such as in all procedural matters. This is transnational fundamental principle and can indeed be seen as an instance of judicial power, where international arbitrators can formulate their own due process view, confirmed to the authors on p 335 (328 in the sixth edition), but it remains exceptional. No less important, it would follow that in the view of the authors the rule ius curia novit is deemed implied in the activities of international arbitrators as it is for ordinary judges, but this is rightly a huge issue in international arbitration (see the discussion below in s 1.2.5). Again, it would suggest that arbitrators are always expert in the applicable law, as ordinary judges are supposed to be, but rightly only in their own. This is an untenable position, directly connected with the question whether law should be treated as law or fact. The authors do not elaborate, but there is here nothing ‘hilarious’ and ‘absurd’ other than perhaps their proposition itself. It is seriously irresponsible and directly undermines the status and credibility of international arbitration. Moreover, it tends to lead to extensive debates on legal detail that parties meant to avoid. One basic problem in this connection is that the authors never seriously discuss the source and scope of the powers of international arbitrators and their true role, potentially even as law makers except by reducing them to the arbitration clause, which suggest limited authority and which they again locate for its legality and effect in the law of the seat rather than in transnational law upon proper separation exploring also other sources of law. In fact, at least in matters of public policy and the proprietary effect of the transactions between the parties, these powers may be a great deal broader, leaving again the issue of whether international arbitrators can raise issues of this nature themselves, which would indeed make them more like judges. Whatever these powers—and they are exceptional—the basic rule remains that arbitration is about fact, fact and fact. That is the key distinction from ordinary court proceedings and it is crucial to a proper understanding of international arbitration. It is also reflected in the decision-taking and reasoning activity of international arbitrators: they do not impose their own views but choose between the views of the parties, again unless they have autonomous powers (under transnational law, of which the international arbitration practices are important manifestations although not the only one, as we have already seen). ­Ordinarily, however, international arbitrators are not judges! In conclusion, the book (regardless of its many virtues) does not know how to set out a coherent view in these matters and does not give the student proper guidance into what international arbitration is, what it means to do, and how it goes about dispute resolution. Quite apart from the difficulty in locating international arbitration and understanding the meaning of its international character, it is the idea of international arbitration as an increasingly judicial dispute resolution facility in a fictitious seat, ultimately at the pleasure of its courts, that eats at international arbitration’s credibility, and is ‘running [it] into the ground’ (not the delocalisation issue as the authors have it on p 192, although deleted in the sixth edition). In this void, international arbitration

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risks becoming a lawyers’ paradise, much promoted by law firms as part of the monopolisation tendencies in all businesses, and to the detriment of non-lawyer arbitrators. This attitude needs to be seriously questioned and has an effect on the future of this dispute resolution facility. Where, as in foreign investment disputes, there may be more autonomous power for international arbitrators, albeit increasingly mistrusted, these situations need to be carefully explored. They may also extend to public policy issues arising in international commercial arbitrations. These autonomous powers are in any event important in procedural matters (see s 1.1.10 above) but even in these instances international arbitrators need to show considerable restraint in going beyond the representations of the parties. Not understanding this is not understanding international arbitration.

1.2  The Process of Legal Transnationalisation. The Operation of the Modern Lex Mercatoria. Transnational and Domestic Public Policy Considerations in International Arbitrations 1.2.1  The Transnationalisation of the Arbitration Clause and of the Law Applicable to the Arbitral Process. The Residual Role of the Arbitration Law of the Seat The discussion so far has centred on the idea that the whole infrastructure of international arbitration, once properly understood, is delocalised and the applicable arbitration law transnationalised. Parties may of course vary this by common agreement and make other arbitration laws applicable although, technically, only in areas at their free disposition, meaning that strictly speaking in international arbitration it is not within their power to avoid transnational fundamental principle or mandatory arbitration practices prevailing, especially when it comes to due process in matters of procedure and evidence. Not accepting this risks domesticating the proceedings, inviting in particular local review, and might even deprive the award of the full benefits of international recognition; the arbitration is not then truly international, which would (in this view) assume at the same time its operation under transnational law. But even if still sufficiently international to fall under the recognition facilities of the New York Convention, in the framework of the Convention there would still be review of the award on the basis of domestic public order requirements of the country of recognition rather than under a transnationalised concept of public order. However, even this localisation must in the transnational view be seen in the context of the operation of transnational law, meaning that even the New York Convention must be put in that context. Indeed, it leads increasingly to a more transnationalised concept of public order being read into Article V(2)(b) of the Convention in each country, as we shall see in section 1.6.2 below. When its operation is properly understood, even the New York Convention itself is thus subject to higher fundamental principle and customary transnational law. ­Significantly, it allows at the same time for its further evolution short of official ­amendment, which will be hard to achieve.

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In this book, the transnational delocalised approach is not presented as some absolute truth but only as the better model and guidance. It explains and simplifies now more than the older theory of the seat with its traditional domestic concept of dispute resolution and its approach to the applicable arbitration law, relying on the lex arbitri of the seat as the law applicable to the international arbitration process. It sits uneasily with the effects of globalisation on international business and the force and nature of the international commercial and financial flows. Rather, when one puts oneself firmly in the international flows, that is to say legally in the transnational commercial and financial legal order, one sees a very different need and perspective. To repeat, it follows from the sheer size of the globalisation and the transformation of the nature of these flows, which is in any event for a great part virtual and can hardly be properly located any longer. It would as a minimum require these flows still to be cut up into pieces in the hope that the sum total of the domestic laws and policies concerning it would still add up to some efficient and credible legal system for transactions in these flows, including the dispute resolution facility and the particular needs in this connection in terms of speed, efficiency, and manner of supervision. In fact, only in a delocalised approach may international commercial arbitration become truly operative and it is for us to determine exactly what that means from a legal point of view. It has already been said that the model of the ‘seat’ increasingly deserts us and this is now more generally understood, to start with in the French Cour de Cassation. It has already been noted in section 1.1.9 above that that does not mean that local courts and local leges arbitri are no longer important. They continue to have a support function and might even correct to the extent an international arbitration comes onshore at the seat, but it would not appear that this is different from it coming onshore and needing support in any other country, although of course there may still be more contact and therefore more support needed at the seat, eg in the appointment of arbitrators if the parties cannot agree. However, courts in other countries might also appoint, notably if they would otherwise become the competent court. For preliminary protection measures and the compelling of evidence, support in countries other than those of the seat is much more likely to be needed. It has already been mentioned several times that there is nothing per se extraterritorial in the application of the law of the seat in this connection; it has no validity per se elsewhere without proper recognition; only transnational (and public international) law may claim it. Local laws cannot assume international standing per se and to the extent many believe the law of the seat still can in international arbitrations, that must be a fallacy. It probably never could. If especially the Supreme Court in the UK and the London Bar are behind here (see also s 1.1.9 above for Art 16(4) LCIA Rules (2014), which also reflect this older attitude), it means that the international arbitration scene in London is still handicapped; there remains indeed a danger of over-interference by the courts in England, demonstrated by the possibility of a review on points of law, which is still part of the English Arbitration Act of 1996, which Act does not clearly distinguish between domestic and international arbitrations either. Transnational arbitration practices as they develop are then largely ignored and the Act of 1996 remains dominant in all matters regarding arbitrations conducted in England or where England is declared the seat while the Act claims extraterritorial effect for itself.

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A different way of thinking or paradigm may now be needed and follows from the delocalisation theory. Again, it assumes a different perspective, that of the pull of the international flows which are now far larger than the domestic ones and can hardly be broken up any longer along domestic lines as the contacts are increasingly unclear in a virtual world of rights and obligations which are often no longer localised. Transnational sources of law operate here in the modern lex mercatoria, which also affects arbitration in its institutional and procedural aspects. It means that, although arbitrators may still rely on a domestic law of the seat, even sometimes its rules of private international law as to the law applicable to the substance of the case, this law must find its place among the sources of transnational law and yields if the latter are higher. It is the argument in this book that such a domestic law, to the extent still applying, is itself transnationalised. Thus, even if in institutional and procedural matters, we were still to adhere to the dominance of this law of the seat, it must still be ranked among the other sources of law and yield if they are higher. It means that, if transnationalisation of international arbitration is properly understood, local leges arbitri no longer operate independently in international arbitrations, even in their support functions. To summarise, these other sources are: (a) transnational fundamental principle, for arbitrations especially important in terms of due process, but they also speak to the separation of the arbitration clause from the rest of the contract, to the Kompetenz/ Kompetenz issue, the other powers of international arbitrators such as determining arbitrability issues and their own way of reasoning, and perhaps issues of public interest such as in competition and market abuse cases, corruption, etc (see ss 1.1.10 above and 1.2.5 below); (b) transnational arbitration custom and practices, especially important in procedural and evidential matters, but also in other areas where international arbitrators have acquired autonomous powers as an expansion of fundamental principle in this area; (c) treaty law, especially the New York Convention in the area of recognition and enforcements of awards; (d) general arbitration principles, especially the Model Law; and (e) party autonomy in particular expressed in the arbitration clause including the institutional rules it may incorporate, which clause itself is separated from the rest of the contract under transnational customary law and founded in the transnational legal order. Importantly in this area, we thus also have treaty law (the New York Convention), but it must also find its place between the other sources and yield if higher. It has already been said that it allows an evolution of the Convention, especially where it still authorises domestic public order requirements to be used as a bar to recognition and enforcement of international arbitral awards where, however, transnational higher standards may increasingly prevail through the operation of customary transnational law. Again, in appropriate cases, local leges arbitri may supplement the transnational law in its various sources. Domestic public policy and public order requirements operate beside them and compete in this area of arbitration law and will prevail to the extent an international arbitration, in conduct and effect, still comes demonstrably onshore in a particular country (covering only these aspects and no other), unless transnational minimum standards of public policy or order can be formulated, which may then be more appropriate for international arbitrators to apply, it is for them to decide upon proper argument by the parties or perhaps even autonomously if they consider themselves spokespersons for the public order.

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As far as the law applicable to the international arbitration process is concerned we may therefore have (a) both in procedure and substance, transnational law with the different sources indicated and their hierarchy; (b) for the procedural aspects and support functions the addition of the lex arbitri of the seat or of any other country that is asked to support or intervene, embedded to this effect also in that transnational law after shedding its domestic peculiarities and subject to its hierarchy of legal sources and potentially transformed thereby; (c) domestic public policy wherever an international arbitration comes demonstrably onshore (in conduct and effect) unless superseded by transnational minimum standards; and (d) for the international recognition and enforcement of the arbitration clause and of the award the New York Convention subject again to any higher transnational sources of law.37 In the meantime, it may be of interest to compare what the UNCITRAL Model Law and important domestic leges arbitri still make of the applicable arbitration law concerning the arbitral process, at least in terms of procedure and evidence where they now tend to be specific. The Model Law in its Article 19 states that parties are free to agree on the procedure to be followed by the arbitral tribunal, failing which agreement, the tribunal may conduct the arbitration in such manner as it considers appropriate, subject to the mandatory provisions of the Model Law itself. The English Arbitration Act of 1996 in section 34 also leaves the procedural and evidential matters to the tribunal subject to the parties’ agreement and that is now often considered the consensus view. In this book this freedom is not perceived as discretion however. It only means that international arbitrators are not obliged to apply the lex arbitri of the seat but rather transnational law, including the established transnational arbitration practices. International arbitration does not float in a legal vacuum, rather it floats under transnational law. Even a choice of law agreement by the parties as part of their arbitration clause is transnationalised, also the applicable lex arbitri in its remaining support function. To demonstrate the point: in respect of procedure it has already been said that that arbitrators may now have the right and perhaps even the duty to hurry things along as higher international arbitration principle. Similarly, appeal and review provisions in the arbitration clause might increasingly be ignored, again as a matter of higher international arbitration principle.

1.2.2  The Transnationalisation of the Applicable Substantive Law. The Modern Lex Mercatoria as the Substantive Law. Sources of Law and their Hierarchy. Differences Between International Arbitrations and Proceedings in the Ordinary Courts Also in the area of the substantive law applicable to the dispute, the basic problem remains that, even in international transactions, since the nineteenth century it has

37  For the present discussion we shall leave foreign investment arbitration to one side where the respondent is invariably a state and the public interest is engaged more directly. The applicable law in those disputes will be dealt with in s 3.3 below in connection with Art 42 of the Washington (ICSID) Convention.

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become normal always to think in terms of national laws (only) as the modern state (and its courts) have come to be seen as the natural stabilisers and promoters of all law (including private law) while moving it forward, even in international transactions. Thus all law became national and then also territorial as a matter of political ­philosophy, a residue of romanticism—only 50 years earlier people had held exactly the opposite and saw law as universal—although there was also a practical aspect, a cleaning-up operation and the need to move ahead more effectively. This was very much the subject of the previous chapter, which can only be briefly summarised. For the following discussion, it should first be realised that present statutory or Model Law texts make a distinction between the procedural and substantive law applied in international arbitrations. The rules made applicable in the Model Act and the English Arbitration Act to the arbitration process have already been discussed in the previous section. As to the substantive law applicable to the dispute, the Model Law in its Article 28 states as follows: (1) The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substance of the law of that State and not to its conflict of laws rules. (2) ­Failing any designation by the parties, the tribunal shall apply the law determined by the conflict of laws rules which it considered applicable.

It suggests (wrongly) that arbitrations have autonomous powers. Moreover, it still presents the old-fashioned approach: all law is national but whichever national law it is, it is at the free disposition of the parties. This cannot be true either, eg in proprietary and regulatory matters. Also in appropriate cases, local values cannot be ignored, even in international transactions to the extent they come demonstrably onshore in conduct and effect. Once more, we have to ask ourselves whether this statist approach supported by an expansive view of party autonomy can still be the natural reflex where the international flows of goods, services, money, information and technology have become far larger than any domestic GDP. The better view is that in these international flows, there is substantive law beyond states and that the modern lex mercatoria in its various sources and hierarchy are the main expression of all private law in the transnational commercial and financial legal order. Even when a domestic substantive law is chosen, it is then subject to higher sources of law of the modern lex mercatoria and adjusted to play by its rule as the residual transnational source of law. In the meantime this law is applied by international arbitrators when properly pleaded or perhaps even as the default rule and is increasingly becoming part of their reasoning,38 upheld by state courts recognising their awards.39 It is the natural trend in these international flows and can no longer be ignored.

38  See ICC Case No 3131, 26 October 1979 (Bernardo Cremades, President) (1984) IX Yearbook Commercial Arbitration 109. It was probably the first major international arbitration in which the modern lex mercatoria was applied. 39  The French Cour de Cassation accepts the application of the modern lex mercatoria, 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

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Nevertheless also the English Arbitration Act of 1996 in its section 46 remains traditional: The arbitral tribunal shall decide the dispute (a) in accordance with the law chosen by the parties as applicable to the substance of the case, or (b) if the parties so agree, in accordance with such other considerations as are agreed by them or as determined by the tribunal.

It allows more flexibility under (b) as parties may opt for the application of the lex mercatoria and one might even assume that the tribunal can apply it if the parties have said nothing about the applicable law.40 But the meaning of any (local) law still chosen by the parties remains problematic. It has already been said that it is an issue in public policy, regulatory and also proprietary matters. For the rest, again, a choice of a local law must still be considered in the light of the application of the other sources of applicable law and their hierarchy. Not accepting this challenge is creating major practical problems, not only in regulatory and proprietary matters. Nevertheless, private international law thinking remains dominant in many, always looking for a domestic law, which makes it particularly difficult, for example, to transfer or give as security interest in an international commercial/cash flow, a subject dealt with more extensively in ­section 2 below on international financial arbitrations: see in particular section 2.2.7.41 The true problem is that the international flows and their dynamics in the minds of many still have no legal status at all. Rather, how to structure international transactions, especially when backed by these flows as ‘flows’, therefore in their movement and transformation, and the measure of party autonomy in this area under transnational law become real issues.42 Again, it is the flows that count, now in their globalisation.

109. So did the Austrian Supreme Court 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. As these cases show, this is in itself i­ ncreasingly contentious. 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, see also n 27 above, 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, thus accepting not only general principle as a source of law, but allowing international principles and customs to operate in that connection also. One may, however, regret the divergence here between arbitration and ordinary courts, which is, however, becoming increasingly accepted, see again n 27 above. 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. 40  Even sharia law may thus be accepted in commercial and financial matters or Jewish law in appropriate cases, see, however, also Halpern v Halpern [2007] EWCA Civ 291. 41  See further JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers University Law Review 19. 42  It is often thought that the facility for parties to opt for a local law may solve all problems. This is naïve and still assumes first that local law can properly deal with international transactions for which it is seldom written. It has already been said in the text that even domestically, modern financial products hardly fit. The second assumption is that this power to select the law is unlimited, which it is not, particularly in proprietary and regulatory

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Not accepting this gives rise to serious legal problems, also in respect of transactional and payment finality in the international market place, which in respect of these flows can hardly be satisfactorily resolved any longer with reference to the law of a particular place, even if it could easily be determined—see further the discussion in section 2.2.6 below. Of course, one could ask for treaty law instead and it can be helpful but there is much beyond it in the transnational commercial and financial legal order that cannot wait or be fully captured by treaty law alone. Developing custom will always be ahead and is indeed considered higher in the operation of the modern lex mercatoria: see chapter 1, sections 1.4.7 and 1.4.8 above. In any event, the quality of treaty law is often poor and coverage only partial, its nature being mostly compromise that does not allow for much deeper thought nor easy amendment. In private law, the international sales law of the CISG of 1980 is a vivid example of the limits; it is avoided on the whole and excluded by the transnational professional practice. More importantly, it needs interpretation too, in which treaty law of this nature cannot ignore the other sources of law either and among which it must then also find its place in the hierarchy of norms transnationally, which it cannot itself determine—see further the discussion in chapter 1, sections 1.4.10 and 1.4.13 above. Transnational principle and practice prevail over it. The EU, which has an infrastructure in this respect, may do better but has other problems and only limited authority in private law formation, see chapter 1, section 1.4.20 above, while its recent sales law initiative (CESL) is not promising, is unaware of most of these problems, does not consider methodology, and lacks sufficient quality.43 But at least it is fully acknowledged in its case law that the EU constitutes a legal order of its own, which, in appropriate cases, will even allow fundamental principle to prevail over the texts of its founding treaties, a recognition therefore of the operation of different sources of law, also at that level, and of their hierarchy.44 That would also transfer to any of its private law enactments, although nothing of this has transpired in the Draft Common Frame of Reference (DCFR) and its CESL offshoot. The real question is therefore whether there is a transnational commercial and financial legal order operating, as maintained in this book, therefore whether in the international market place we may or must now think in terms of a transnationalisation of the applicable (substantive and procedural) law. For substantive private law issues, that would indeed be the modern lex mercatoria built on fundamental and general p ­ rinciple, ­ atters where it does not go very far. Even in contract, parties cannot determine their own capacity nor the validm ity of their agreement, including the defence; see further 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. 43  JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299; see further also H Eidenmueller, ‘What Can Be Wrong with an Option? An Optional Common European Sales Law as a Regulatory Tool’, SSRN.com (2012). See further Vol 2, ch 1, s 1.6.13. 44  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. This has become a check on private law legislation, although it may not (yet) be invoked directly between private parties. Non-discrimination according to nationality is no less fundamental, see Case 115/08 Land Oberoestereich v Cez [2009] ECR I-10265 and also applies in private dealings under EU laws, in this case directly. See further also Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA a.o [2009] ECR I-9823 and in particular para 40 of the Opinion of AG Tristenjak, see further ch I, s 1.4.5 above.

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custom and practices, and party autonomy as operating in the international markets. The Eurobond and its status in property law have long been the prime e­ xample.45 It is now followed by the ISDA Master Agreements as an expression of transnational ­customary law in respect of the set-off and netting facilities provided under them (see ch 1, s 3.2.3 above and s 2.2.2 below). It has already been noted several times that it is the expression of the public interest and the corrections that it may entail that are truly the challenge when we start thinking transnationally in a legal sense. A key question is here indeed whether these public interest issues can be raised autonomously by arbitrators in appropriate cases. In civil law terms, we refer here often to the fact that the court knows the law, ius curia novit (see also the next section) but there is strictly speaking no lex fori in international arbitrations for the arbitrators to know and apply or it must be the transnational lex mercatoria and the international fundamental public policy principles or minimum standards themselves. It may well be that as a consequence, the very opting for international arbitration changes the applicable law or at least how it is perceived, not merely as a matter of party autonomy but rather as activation of different powers of dispute resolution altogether, which then acquire institutionally their own autonomous dynamic and meaning in the transnational commercial and financial legal order and may also affect the applicable substantive law. Although both courts and arbitrators will have to think about this transnationalisation of private law and even transnationalisation of regulation in terms of international minimum standards along the above lines, it has already been said that even now it is often assumed that international arbitrators have greater freedom here and thus more power.46 As just mentioned, in proprietary matters, they may even start matching the powers of ordinary courts when stating in matters of priority and ranking, also in respect of parties not directly involved in the arbitration—it may also be clear in arbitrations concerning intellectual property rights and patents.47 Again, this goes directly into the question of their authority and the foundation of these powers as an institutional issue at the transnational level, as these powers, which affect third parties, cannot merely derive from the arbitration clause, they are not at the free disposition of the parties to a contract, who can at most determine the consequences between themselves.48 May international arbitrators more broadly become spokespersons for the public interest and how should they handle this?—see also the discussion in the next section. International arbitrators in their interpretation activities may also have 45  The Eurobond has long been considered an international (negotiable) instrument, see for English case law n 147 below, see further ch 1, s 3.2.3 above. It also affected the structures possible in them such as securities lending and repos as well as the services connected with them such as underwriting, brokerage and market making. Transnational minimum standards against market abuse may then not be far behind, although there may be doubt again in respect of security entitlements in custodial holdings of these bonds and their trading, the use of which may, in the more traditional mindset, have ‘re-nationalised’ at least to some extent this business; it will be discussed later in s 2.2.4 below and more extensively in Vol 2, ch 2, s 3.1ff. 46 In Deutsche Schachtbau- und Tiefbohrgesellschaft see (nn 27 and 39 above) it was held in England that at least international arbitrators could rely for the applicable law on internationally accepted principles. 47  See W Grantham, ‘The Arbitrability of Intellectual Property Disputes’ (1996) 14 Berkeley Journal of ­International Law 173 and SH Blackman and RM McNeill, ‘Alternative Dispute Resolution in Commercial ­Intellectual Property Disputes’ (1998) 47 American University Law Review 1709. 48  See Dalhuisen (n 18).

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to consider and deal with (in their view) overriding notions of justice, social peace and efficiency or utility, now also at the transnational level, at least when properly pleaded, and determine the reasoning they will use in this connection; see more particularly the discussion in section 4.1.4 below.

1.2.3  The Representation of the Public Interest at the Transnational Level. International Minimum Standards and the Relationship to Local Policies and Values If we assume that law is the result of the constant debate in the society it concerns, here the international business community, we see on the one hand a new legal order emerging to facilitate commerce and finance internationally—its law is the modern lex mercatoria—but on the other, new policies and values to balance the international market place and keep it clean. These policies and values are not at the free disposition of the parties, indeed they are mandatory in their legal order, which means that they cannot be changed by contract (although the financial consequences may still be reallocated by the parties among themselves, eg of taxation or environmental policies). Parties while drafting the applicable law clause often forget that they have no power over public policy although they might more effectively attempt to redistribute the burdens among themselves. To be more precise, in the new (immanent) private law formation in the transnational commercial and financial legal order, therefore in the modern lex mercatoria, we have fundamental principles through which these new values or policies may more directly infuse private law. There may also be the horizontal effect of human rights and of licensing or similar requirements for financial intermediaries, which suggest other elaborations of fundamental principle or the operation of policy in private law to protect private parties among themselves,49 but public policy may more likely come in from the outside directly as correction, eg competition law declaring some contracts illegal. Financial regulation may thus give investors and borrowers extra protections, although this may still be in the form of strengthening eg fiduciary duties of brokers under the private law of agency. Specific regulation may also facilitate the market functions, eg by preventing forms of market abuse, such as insider dealing, price manipulation, forms of corruption and the like, and punish perpetrators. It may even try to promote financial stability. Combining public policy with a search for fundamental principle in this way may be especially important in the international market place where there is no natural regulator, except potentially through treaty law, the EU being a special legal order in this regard, a form of mini-globalisation with an institutional infrastructure. Short of that, it raises the question who the spokespersons are for the public interests and values in the transnational commercial and financial legal order and who can enunciate them or elaborate on them. In dispute resolution between

49 

See also the discussion in ch 1, s 1.4.5 above.

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participants, that may be international arbitrators and formulating such policy interventions concerns their powers. Even if one takes the perspective of the international flows and places oneself squarely in the transnational commercial and financial legal order, therefore the international market place itself, as this book does, one still has to accept that these policy objectives and values are often still expressed most clearly in domestic legal orders and that they remain very relevant to the extent international transactions demonstrably come onshore in such countries, although in such situations there may still result a competition between national and international public order requirements and values. Domestically in its courts, the latter are likely still being considered the higher; international arbitrators may take a different view. In this connection, it should also be realised that in one international transaction there may be several national systems or governmental interests that compete, a problem well known from US case law, there often expressed in terms of the proper ‘jurisdiction to prescribe’.50 Which government can claim the higher interest or must governmental interests be balanced, eg when different competition laws impinge on one transaction? In the US, this is the area of sections 402 and 403 of the Third Restatement of Foreign Relations, see chapter 1, section 2.2.6 above and international arbitrators may also be susceptible to such balancing and more neutral than national courts. Quite apart from the operation of the lex mercatoria in the private law aspects of an international transaction, doing away with the tenets of private international law and its search for closest connections in respect of each aspect of an international transaction, in matters of policy one important issue is therefore to determine when the international flows and any transaction therein still come demonstrably onshore, and where. It has already been said that this creates itself an important new problem, not least for public policy, as much of these flows can hardly be situated anywhere any longer and if bits and pieces of it still can, their situs is often temporary or fortuitous. The example used in this book is the production flow from raw materials to semi-finished products to end products transferred upon a sale into receivables and upon payment into a bank account, all in different countries, while there is a need to give this whole process as security for working capital or otherwise to keep the unity of the production, sale and collection process in tact (see further s 2.2.7 below). Purely domestic public policies interfering with parts of it may then be equally troublesome. The result is that transnational minimum standards may increasingly be needed to take over to create a minimum of order and that was already identified as truly the greater challenge in the whole legal transnationalisation process in the international commercial and financial legal order or international market place. Will local courts accept this? This is relevant under the recognition facility of the New York Convention and its public policy bar, more particularly when international arbitral awards concerning these flows are tested in domestic bankruptcy courts (see s 2.3.3 below). Will the local bankruptcy order also yield to the requirements of the transnational legal order in this regard as expressed in arbitral awards? The view presented in this book

50 

The Bremen et al v Zapata Off-shore Co 407 US 1 (1972), Scherk v Alberto-Culver Co 417 US 506 (1974).

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is that if countries want the benefits of globalisation for their businesses, local courts will have to give, in insolvency particularly important for newer financial products and facilities developed in the international market place unless there is indeed a superior public policy issue, which for its credibility would then likely be transnationalised at the same time in the form of a demonstrable transnational minimum standard.51 The alternative is for businesses to stay at home, indulge in local politics, and close the borders, no longer a real alternative for most.

1.2.4  Public Order and Parallel Legal Orders In the previous section it was suggested that public order requirements can operate at different levels. We have domestic and transnational legal orders each with their own public policy requirements. In the transnational legal order, we may refer in this connection to transnational minimum standards. Neither domestically nor transnationally are these policies fixed but they develop all the time around our value system or political power centres. Domestic public policy requirements invariably impinge on international transactions when they come onshore in conduct or effect, although it was noted that in respect of the international flows, this may be ever more difficult to detect, hence the increased emphasis on transnational minimum standards. It was further mentioned that in international transactions, domestic policies may conflict and it then becomes a matter of jurisdiction to prescribe or of balancing the governmental interests. In international arbitrations these matters may come up for decision if they affect the private relationship between the arbitrating parties and arbitrators may have to make choices. The ultimate authority then vests in the recognition courts and their public policy bar to recognition under the New York Convention. Of course there could also be an attempt at setting aside under the lex arbitri of the seat or of any other ­country, if this is still considered useful and proper. In the case of recognition and setting aside, public policy is defensive, and normally interpreted narrowly.52 Under the New York Convention, judges can raise their own public policy sua sponte or autonomously. In the substance of the case, public policy may, on the other hand, be proactive—eg to promote competition or defend ­consumers—and may be expansive. In international arbitrations, that would in the first instance again be a matter for arbitrators to decide, but it raises the question whether they can raise these issues themselves; see the discussion in the next section. This can be taken one step further into the operation of parallel legal systems. When we accept transnationalisation, parallel legal systems operate like the modern lex ­mercatoria and domestic laws. The connection was already mentioned above in ­section 1.2.1 in terms of local laws being the residual rule in the modern lex mercatoria. It was submitted in that connection that even if chosen by the parties, local laws must

51 

See the Australian Ansett case, nn 120 and 155 below. Specifically acknowledged in the US in Restatement of Law (Third) of the Law of International ­ ommercial Arbitration (Draft April 2012), s 4-11. C 52 

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find their place in the hierarchy of legal sources and norms of the modern lex mercatoria. Similarly, public policy can operate at various levels: domestically, when international transactions come onshore, as well as transnationally as minimum standard, although it is less clear how they connect if the latter also exist and are operative. The normal attitude is one of accommodation, which may be demonstrated in recognising courts in the EU. Thus in France in Cytec,53 the French Cour de Cassation decided that enforcement of an arbitral award may be denied on the basis of EU public policy but did not find a reason to do so in this case, the violation not having been flagrant, effective and concrete. Again, such a finding is helped by the narrow interpretation of bars to recognition. Parallel legal ordering in the area of public policy may particularly be demonstrated when public policy becomes substantive as is eg the case in the EU with regard to foreign investment treaties entered into by its Member States.54 The situation may become acute when concessions under a bilateral investment treaty (BIT) run counter to the prohibitions on government aid enforced under EU law.55 In such situations, there may be a real conflict, difficult to resolve at the level of recognition as the Washington Convention (assuming an ICSID arbitration) has a direct enforcement regime and only limited annulment grounds that do not cover public policy. Under this Convention, the issue is left exclusively to arbitrators as a matter of substantive law; in the EU there is no recourse to the ECJ either in terms of preliminary opinions.56 Problems of this nature may disappear now that the EU under the Lisbon founding treaties has acquired the jurisdiction in this area, but the older BITs remain in place. To get out of their obligations and avoid claims for damages from investors, EU Members as host states have (unsuccessfully)57 argued in this connection that the BITs terminated upon both Contracting States joining the EU. Member States have also argued that under Article 344 TFEU the interpretation and application of the Lisbon treaties is being left

53  Ste SNF SAS c/ Ste Cytec Industries BV, Cas Civ, 4 June 2008, Bull Civ I no 162, Gaz Pal No 52. There are cases of the ECJ showing similar restraint, see Case C-38/98 Regie nationale des usines Renault SA v Maxicar SpA and Orazio Formento [2000] ECR I-2973. In the setting-aside cases of Case C-126/97 Eco Swiss v Benetton [1998] ECR I-3055, Case C-168/05, Elisa Maria Mostaza Clarov Centro Movil Milenium SL [2006] ECR I-10421, and Case C-40/08 Asturcom Telecommunicationes SL v Cristina Rodriguez Nogeira [2009] ECR I-9579, the ECJ emphasised through preliminary opinions that national courts in their recognition of arbitral awards must consider EU public policy. So must arbitrators although the question whether they can and should do so autonomously was not clearly answered, and they may not if the defendant does not make the case. The US Supreme Court in Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc 473 US 614 (1985) also conceded considerable power to international arbitrators to decide these issues. 54  See GA Bermann, ‘Navigating EU Law and the Law of International Arbitration’ (2012) 28 Arbitration International 3 97 and MT Parish & CB Rosenberg, ‘Investment Treaty Law and International Law’ (2012) 23 American Review of International Arbitration 138. 55  Even so, accommodation or rejection is not impossible, at least not according to arbitrators, see Eastern Sugar BV v Czech Republic, Stockholm Chamber of Commerce no 088/2004 (2007) in which the Czech Republic unsuccessfully claimed that the EU non-discrimination provision (Art 18 TFEU) excused its price decrees from the fair and equitable provision in the relevant BIT; their enactment was not considered obligatory. The question whether EU law could supersede the obligations under BITs was sidestepped. 56  Arbitral tribunals are not courts or tribunals of the Member States, see most recently Case C-196/09 Miles and Others v Ecoles Européennes (2011) and first in Case 102/81 Nordsee Deutsche Hochseefisherei GmbH v Reederei Mond Hochseefischerei Nordstern AG [1982] ECR 1095. 57  Eastern Sugar BV v Czech Republic, see n 55 above.

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to other methods of dispute settlement, but this Article only refers to Member States and not to the rights of private parties.58 Again note that the decisions in this regard have been arbitral. The question whether the EU in its area of jurisdiction is higher than treaty law engaged in by its Member States when no accommodation can be made59 may be transposed to the transnational level.60 Are there international law principles that may supervene? The arbitral tribunal in Eureko BV v Slovak Republic61 suggested as much and it would then also be higher than EU law.62 In foreign investments, this also applies to the discussion about super public purpose under international law, which may indeed excuse host countries in appropriate circumstances from their treaty obligations and protections, although there may still be some form of taking requiring some compensation although it need not be full compensation, see the discussion in section 3.4.3 below.

1.2.5  Ius Curia Novit? Do International Arbitrators Know the Law and Apply it Autonomously? It was mentioned before that international arbitrators state on the basis of the law, which they must foremost find in the pleadings and presentations of the parties although they might then also listen to international principles, custom and practices or the modern lex mercatoria, both in procedural and substantive matters. Indeed, it has already been submitted that in international arbitrations law must be pleaded as 58 

Eureko BV v Slovak Republic, PCA Case no 2008-13.

59 See AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary, ICSID Case No ARB/07/22

(23 September 2010), in which Hungary among other arguments had also claimed the EU law was higher than the Energy Charter Treaty, but the Tribunal upheld the priority of international law and did not accept that EU law could be used to break an international obligation. Again, this is an award, not a judgment of the ECJ. A similar conclusion in Eastern Sugar BV v Czech Republic was used for a setting-aside action in Germany but refused in the appellate courts, Decision Appellate Court Frankfurt am Main, 10 May 2012, case 26 SchH 11/10 under appeal. The ECJ is known for criticising the US for not enforcing international law but upholds its own superior status tenaciously, see Joined Cases C-402/05P & C-415/05P Kadi and Al Barakaat International Foundation v Council and Commission [2008] ECR I-6315 often on the basis of the argument that community law has a specific framework of implementation while international law has not and depends on local laws for its effect. But it can be argued with equal force that the international principle of pacta sunt servanda is overriding in both situations and puts international treaty law at the same level and then in a prevailing position. National constitutional courts have largely gone along with the ECJ even in respect of fundamental rights as long as the ECJ polices itself properly in this regard and the Human Rights Court in Strasbourg assumes that the ECJ does, Bosphorus Hava Yollari Turism ve Ticaret Anonim Sirketi v Ireland, 45036/98 (2005) Series A, no 440 para 304. But this feeling of superiority has played an important role in the ECJ frustrating the EU’s attempt to join the European Economic Area (EEA) and in 2014 to join the European Human Rights Convention (even though mandated by the Lisbon Treaties) out of concern for the autonomy of the Community legal order. In the view of the ECJ, there are no higher principles than the Lisbon Founding Treaties although in other contexts, there may be greater flexibility at least in respect of fundamental principle, see chapter 1, section 1.4.5 above. 60  See also International Law Commission, Fragmentation and International Law: Differences Arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission, UN Doc A/CN.4/L.682 (2006). 61  See n 58 above. 62  See also AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary n 59 above. The EU keeps resisting, see the aftermath of Micula v Romania, ICSID Case No ARB/05/20, Award of 11 December 2013 and for the enforcement action in the US regardless, Micula et al v The Government of Romania, N0 15 MISC 107, 2015 WL 4643 180 (SDNY 5 August 2015) dismissing Romania’s sovereign compulsion argument.

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fact (see s 1.1.3 above), arbitrators have no law of their own which they can apply, they are not judges and are not there to clarify anything beyond what parties have brought to the table, except perhaps in those areas where they have acquired autonomy (see s 1.1.10 above) when the applicable law is transnationalised. This may be so especially in procedure and evidence, in matters of determining their own jurisdiction, in the issue of arbitrability, and in the reasoning. In proprietary matters they might even operate as equity judges with an effect on third parties; this is an important issue especially in arbitrations concerning intellectual property rights and patents, but also in asset-backed financing and set-off. They may also listen to considerations of justice, social peace and efficiency when sufficiently pressing in the transnational legal order and perhaps raise them themselves as corrections. Especially efficiency considerations are unlikely to remain purely national in international transactions; increasingly they will be the expression of the consensus in the transnational commercial and financial legal order itself. If globalisations holds, international arbitrators may become ever more sensitive to the promotion of these flows, their liquidity and the requirements of risk management at that level. It has already been said repeatedly that international arbitrators will not be able to avoid the impact of domestic regulatory law and other public policy or public order considerations either. They must respect overriding domestic values and policies when international transactions demonstrably come onshore in a particular country in terms of conduct and effect: eg a government might not want certain financial products being sold in its country and may deprive the relevant contracts from all effect, at least in respect of its own residents or resident companies. Competition policy is perhaps the even more obvious example. It was already noted that this leaves the question when such transactions may be deemed to come onshore in an ever more virtual world of intangible rights and obligations. In any event, there may still be conflicts if these transactions come onshore in several countries at the same time. It raises the issue of the jurisdiction to prescribe discussed in section 1.2.3 above. Transnational minimum standards may also be developing, which may compete with local ones. But also in these aspects, international arbitrators remain foremost dependent on the arguments and pleadings of the parties. Again they are there to solve their problem, as they see it, no others. Even these laws, values or policies must be pleaded as fact and proven. However, it is an important question how far international arbitrators themselves may also raise these issues of public order and public policy and under what conditions and safeguards. Are they even under an obligation pursuant to transnational law? Competition issues in particular may now have to be raised by i­ nternational arbitrators autonomously and there is important case law that s­ upports their authority to do so in the EU.63 Other situations where the public interest is engaged or needs consideration also spring to mind: corruption, market abuse, money laundering, tax

63 See Eco Swiss v Benetton n 53 above, in which it was held that the antitrust provisions of the EC Treaty (Art 81) were matters of public order that still could first be raised as late as setting-aside proceedings (the original agreement had not been properly notified to the EU antitrust authorities and was thus void). 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 they 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.

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e­ vasion, etc, as already mentioned also. It must then be considered how far international arbitrators may independently represent the public interest.64 It is the issue of whether international arbitrators know the relevant law in such instances and may find and apply it independently of the arguments of the parties as ordinary courts are able to do: ius curia novit. In fact, this issue arises in all areas where international arbitrators now have autonomous powers beyond deciding the issues as presented by the parties. Case law follows this line of thinking and considers it a matter of whether arbitrators have remained within their authority under the arbitration clause or have stated beyond it, and if so, when they can do so.65 It is increasingly accepted that international arbitrators can raise public interest issues on their own motion.66 Thus they can formulate the law in the areas where they have acquired autonomy. The real question thus becomes the state of dialogue on the relevant law in society or the pertinent legal order and arbitrators hearing evidence in this regard, even at their own initiative. The further question then becomes whether international arbitrators can independently seek advice and ask for expert opinions, eg from NGOs or the informed press as to what constitutes the public interest in the particular case and how any competition with domestic policies and values should be resolved. The parties must be allowed due process and especially a hearing and the ability to cross-examine such experts. Arbitrators cannot spring surprises in their awards. It prolongs the arbitration and there is also the important issue of costs to consider, which could easily spiral out of control. The fact that arbitrators became law makers or judges in these instances also raises important questions about legitimacy, accountability and their public standing. Other issues are consistency and precedential.

64  In a well-known precedent Judge Lagergren took it upon himself not to enforce a contract whose object he considered to be the trafficking of influence, an issue not raised by the parties, see ICC Case 1110 dating from 1963 but only published in (1994) 10 Arbitration International 286. The contract was considered not arbitrable because not capable of being supported by ‘the machinery of justice’, see also Himpura California Energy Ltd v PT (Perrsero) Perrusahaan Listruik Negara, Arbt’l Award 1999 (2000) XXV Yearbook of Commercial Arbitration, expressing similar sentiments. Other cases show, however, international arbitrators’ reluctance to get involved, see World Duty Free Co Ltd v Kenya, ICSID Case No ARB/00/7, 4 October 2006 and Wena Hotels Limited v Egypt, ICSID Case No ARB/98/4, 8 December 2000. Parties tend to be particularly wary of pleading corruption in which they may have been tainted and arbitrators dislike acting sua sponte, see also M Hwang and K Lim, ‘Corruption in Arbitration—Law and Reality (2011) 8(1) Asian International Arbitration Journal 1, but see for an important more recent case where there was a fuller investigation on the authority of arbitrators Metal-Tech Ltd v Uzbekistan, ICSID Case No ARB/10/3, 4 October 2013 in which a finding of corruption proved determinative. Clearly arbitrators decided here issues which were not in dispute between the parties and the question then is whether they had this authority under the relevant BIT or under the Washington Convention so that they did not exceed their powers altogether, potentially rendering the award subject to annulment. 65  See Case 4A-400/2008 of the Swiss Federal Supreme Court setting aside the award in question. So did the Quebec Superior court in a similar situation, Case 2008 5903; also the Supreme Court of Finland in Werfen ­Austria v Polar Electro, KKO 2008:77; and the Court of Appeal Paris in Engel Austria GmbH v Don Trade, 3 December 2009, RG 08/13618. 66  So does the ICJ, see Nicaragua v US (Merits) para. 29 [1986] ICJ Rep. 24, but that is a court. More to the point, in Case 4A-254/2010, the Swiss Supreme court allowed an award to stand where the sole arbitrator on its own motion found a sham invoking Swiss law. This may be seen as raising a public policy issue.

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1.2.6  Autonomous Private Law Trends in Transnational Law Returning to matters of private law, it is still likely that at least one of the parties will argue on the basis of a national law system found through the habitual conflicts rules of private international law and this may then often be the starting point for international arbitrators also. Certainty will often be invoked67 to apply more traditional nationalist thinking, but one obvious problem is that national (private) laws are seldom written for international transactions and may be wholly inadequate to support them. This may be clear especially in international finance. Indeed in a faster-moving world that depends on the international flows, the application of national laws may become of such a low quality that it destabilises everything. As we have seen in chapter 1, section 1.1.7, the issue of transactional and payment finality is here to be clearly distinguished from the notion of certainty and benefits itself from transnationalisation; the international market place may be wholly dependent on it in its operations. In any event, it is much more important than the concept of legal certainty, capable of being achieved and basically a proprietary issue. Predictability may be another issue, to be clearly distinguished also, but since disputes nor how they may arise can hardly be predicted, the applicable law, even if it could be clear and applied mechanically, cannot be predicted either. In any event, it would appear to be a misconception that the law is there mainly in order to solve disputes, an issue already raised in chapter 1, section 1.4.17 above. Rather it is there to make daily life easier for all of us; the law is probably the most unpredictable and therefore also the most unsatisfactory in litigation. Dispute resolution cannot be its main purpose: rather it should be dispute avoidance and it was submitted before that the law cannot be properly understood in terms of strife. International arbitrators are likely to understand this better and to be sensitive to what made more sense all along—also in terms of justice, social peace and efficiency—and may then also exercise the equitable remedial functions (as was already mentioned in section 1.1.10) probably even autonomously but perhaps seldom explicitly. They are increasingly likely to consider the more traditional (parochial) rules in this light and it is very unlikely that they will resort to a purely mechanical approach to this law and its application, still cutting up international transactions into domestic parts in the hope that it all adds up unless parties insist on this exercise. Why should they do so, unless it is convenient for one of them on the particular occasion? Mostly coming from different legal backgrounds and (again) not having a lex fori of any sort as a base (or it must be the lex mercatoria itself and international minimum standards in policy issues), international arbitrators exercise considerable freedom here even if they are not free. Again, much will still depend on the submissions and advocacy of the parties, but it is increasingly unlikely that a purely nationalist approach will continue to prevail in the international market place in these cases,68 even with respect to regulation. That 67  One may also recall in this connection the reference of Jerome Frank to the childish dread of uncertainty and unwillingness to face legal realities, (London, 1930) 41 and 159. 68  In truth, in the international market place, the pull of transnational rules was never entirely obliterated, notwithstanding the 19th-century nationalisation of all law, including the commercial law in international transactions, and they continued to contribute to the infrastructure for the international marketplace. One may think here of the law concerning bills of lading, negotiable instruments, especially eurobonds and euromarket practices

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must be very much kept in mind by all parties and those who advise them in making their arrangements and guide them in the implementation and in dispute resolution through international arbitration. The international flows, their liquidity requirements and risk management mechanisms may be increasingly respected as such and it will be recognised that there is absolutely no point in continuing to chop them up into domestic parts, even if that were technically still possible, never much of an option with respect to locating intangible assets such as monetary claims. However, it has already been noted that the problems now go much deeper. In a virtual world, where as far as the law is concerned we talk in any event only about rights and obligations, all becomes intangible and the proper location (or situs) becomes a chimera. It has already been said also that where we enter the world of fundamental principle, custom and practices, general principles and party autonomy at the transnational level in the modern lex mercatoria, states may still step in through treaties to stabilise the new law merchant and clarify it; they may certainly also do so in regulation. This is not to be rejected out of hand but their success in doing so is often limited, especially in private law, viz the modest acceptance of the 1980 Vienna Convention on the ­International Sales of Goods in the business community and the lack of success of both UNCITRAL and UNIDROIT in their many other unification projects. Similar observations have already been made in respect of the EU proposal for a Common European Sales Law (CESL)69 and more generally in respect of the Draft Common Frame of Reference (DCFR), which now figures in the EU as an academic model for a full EU codification of private law in the traditional civil law codifications mode ruling out all other sources of law: see Volume 2, chapter 1, section 1.6. It has been submitted all along that this is the wrong approach for professional dealings, which at the same time takes all such dealings within the EU out of the emerging transnational lex mercatoria. They become local and parochial at the EU level under a traditional (codified) intellectualised statist and territorial legal system that may hardly be responsive to or aware, first, of professional needs and international flows, and, second, of the values and standards developing in the transnational order in this connection.70 The DCFR was identified earlier as the epitome of this approach: see chapter 1, section 1.4.20 above. including clearing and settlement, the law of international assignment, of set-off and netting, and of letters of credit (UCP) and trade terms (Incoterms). It may also concern the important and connected issue of finality of title transfers and payments, see for more detail, ch.1, s 1.4.4 above. 69 

See Dalhuisen (n 43). For those who continue to insist on the application of domestic laws, in theory it may still be possible for international arbitrators, when it is properly pleaded by any of the parties, to interpret these laws in the light of the internationality of the case and this has sometimes been supported in conflicts law theory in the US amounting for the ordinary courts to an embellished lex fori approach in international or interstate cases, see ch 1, s 2.2.2 above (in the lex fori approach). International arbitrators could then do so in respect of any law that became applicable under applicable conflicts rules although for them even these conflict rules are not a given; they have none of their own and are now generally thought to be able to choose them probably on the basis of general principles derived from some important domestic models (or the EU Rome Regulations). The same interpretational freedom could be adopted in respect of a choice of a domestic law by the parties even if such a choice of law may not go as far in its effect as most seem to think: it has already been noted that it is limited to areas of the law over which parties have power and there is much in property law and regulatory law over which they have none so that other concepts would have to be invoked to find the relevant domestic law. Even in contract law, matters of contractual validity and capacity are not at the free disposition of the parties and much of it is intermingled with public policy, which the parties cannot avoid through a choice of law clause either. Again, these uncertainties and confusions may enhance the status and powers of international arbitrators who are called upon to decide the dispute and must find a way. 70 

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1.2.7  Principles of Transnational Contract and Movable Property Law Probably more importantly, in private law between professionals newer forces are at work, both in contract and movable property law, more so at the transnational level. They cannot be ignored and the parties can also not fully control them through a choice of law clause or even by writing down a specialised regime in their contract. International practices or custom on which other participants rely in this connection cannot simply be set aside: the routines of the trade must be respected by all who participate and a choice of law that may counter them needs interpretation as to its effect. This is true especially in respect of other parties: again one may think of ranking and priorities through set-off and netting or otherwise. Some of these rules may be mandatory in the environment or order in which they operate as property rules usually are also. It has already been said that in international professional dealings the choice of a local law still puts this local law in an international context where it must make sense and this choice is in any event preceded by fundamental principle, mandatory custom and general principle operating in the transnational commercial and financial legal order itself. Thus it follows that the application of English law in an English case might well be quite different from its application in an international case upon a choice of this law by the parties. This should very much be kept in mind even in relation to the ISDA Swap Master Agreements and the TBMA/ISMA Global Master Repurchase Agreement, and their choices of a domestic law (commonly New York or English law) both in particular in respect of the netting clauses and set-off principle where mandatory transnational custom may prevail over any choice of domestic law, which could in any event hardly carry much weight in matters affecting other parties. Ranking and priority are not issues at the free disposition of the parties and cannot be determined by their choice of law. While at the same time raising important issues of risk management and financial stability, they also engage the public interest and are not then any longer merely proprietary either: one may think in particular of the promotion of set-off and netting as transnationalised risk management tools, as such actively supported by regulators worldwide.71 Arbitrators in international commercial and financial disputes will be aware or will be made aware of the newer international trends by the parties or at least by the ones in whose interest it is to plead them in any particular case and it might find much favour. Indeed for both contract and movable property, this may lead to a more dynamic concept of the applicable law from which arbitrators in appropriate cases may choose newer concepts geared primarily to promoting the international flows, their liquidity, and risk management, see further chapter 1, section 1.1.6 above. This may be closer to the traditional common law, which in contract and movable property was always more geared to commercial realities. The essence is that in professional dealings, the

71  There is much confusion about ISDA being a sort of regulator; see further also the discussion in section 2.2.2 below and especially in Vol 3 ch. 1, ss 2.6.7 and 3.2.5.

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contract is likely to be considered a road map and risk management tool in which the literal meaning will prevail over intent and even good faith requires a strict interpretation of duration agreements. These contracts are not truly intent based, which also shows in the defences and excuses. Blame or the absence thereof as excuse are irrelevant unless the contract introduces the concept (eg in force majeure clauses). In this connection, in common law, the notion of consideration introduced early on the idea that parties must be willing to invest in their contract and that the consensus or mere promises are not enough (although their exchange may lead to a valid and enforceable executory contract). Conduct and detrimental reliance are now more properly at the heart of contract formation in international business transactions rather than ­formal notions of offer and acceptance and suggest that new rights and obligations may emerge ­during the entire contract period and sometimes even before or thereafter. This may be objective in terms of pre-contractual disclosure, contractual co-operation, and post-­contractual renegotiation duties, see more in particular the discussion Volume 2, Chapter 1, Sections 1.1.5. In moveable property, proper risk management may also require a measure of party autonomy in the creation of proprietary rights which are not then cut off at the point of creation but rather at the point of their operation as they will not be relevant for buyers in the ordinary course of business of commoditised products. The idea of a numerus clausus of proprietary rights is here abandoned under certain circumstances. The essence is that the normal commercial flows are protected against these interests and are free from them. That even concerns monetary claims or receivables and their use in asset-backed funding. Thus bona fide assignees who collect in good faith may keep the collections unless they are insiders such as banks and suppliers. There is no search duty even if there are registers, only professional insiders are exposed and must investigate. This confirms the approach in equity in common law countries. In this way, floating charges, finance sales and similar trust-like structures became major instruments in asset-backed financing structured by the parties in the way they want, but they were always limited in their (proprietary) reach. They work only against the insiders. The flows are free. Notions of constructive trust and segregation supplement and suggest a dynamic approach to property law also and its basic function as a risk ­management tool.72 Although civil law in particular has had difficulties in developing these facilities, modern commercial and financial law are likely to reflect these trends in contract and movable property law at the transnational level and again arbitrators are or will be made aware of them and may positively react. The movement of the international flows of goods, services, information, payments and money (if not also of people) and their scale require it. Resort to fundamental and general principle, custom and practices, and party autonomy at the transnational level is the legal answer. Where codification civil-law style eliminated all other sources of law beyond legislation (except if specially authorised by it, which even relegated custom to statutory authorisation),73 72  The dynamic concept of movable property law is discussed at length in ch 1, s. 1.1.6 above and Vol 2, ch. 2, s 1.10. The basic features are here only summarised. 73  It will not here be discussed any further how in civil law these various sources of law revived in the liberal interpretation that was necessary to keep the statutory texts living and relevant, see ch 1 s 1.2.13 above.

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and in its territorial approach proved inimical to the international market place, these sources and their autonomy fundamentally revive in the transnational commercial and financial legal order. It may be added that even the common law in England remains here ambiguous and this may well be the reason for the general reserve in England in respect of legal transnationalisation, which would otherwise be of enormous ­benefit to ­London, as an international legal centre. In the Benthamite and Austinian view (see ch 1, s 1.3.1 above) all law issues from the sovereign, but at least in commerce the ­English courts remained pragmatic in respect of customary law, although there could be greater problems with international custom. In the US the UCC still favours the other sources of law, unless expressly displaced, and expresses this well in section 1-103. That may be seen as the more traditional common law attitude. It is not without consequence and may mean that the New York courts have the advantage and remain better placed as alternatives for international arbitration assuming that their jurisdiction can be established, which may be promoted by a forum choice in favour of these courts. It is an important point; the ordinary courts are not down and out but not all are suitable. Courts in different countries are likely to have a different approach to the applicable law and there is also the problem of international recognition of the ensuing judgment, treaty law being absent, see also section 1.1.6 above. The New York Convention here gives the advantage to international arbitration, although its enforcement mechanism remains fraught and especially in regulatory and bankruptcy issues it is affected by public policy considerations and bars to the recognition and enforcement of foreign awards as we shall see.

1.3  International Arbitration: Initial Steps and Complications 1.3.1  Introduction. Submission and Arbitration Agreements. The Requirement of a Writing. What does the Arbitration Agreement Cover and Who can be Party to the Arbitration? The arbitration clause binds the parties to arbitrate their disputes. Beyond this, in the above, it was posited that the arbitration clause is not the true source, or at least not the only source, of the powers of international arbitrators and their jurisdiction. Rather these are activated thereby but are founded in the transnational commercial and financial legal order itself and modulated by its public order requirements. That goes to jurisdiction and arbitrability issues and notably also covers the separability and Kompetenz/Kompetenz notions (see ss 1.1.9 and 1.1.10 above). It is the consequence of delocalisation when properly understood. It follows that the law (lex arbitri) applicable to the arbitration clause and in fact also to the arbitration itself is also the transnational lex mercatoria with its different sources of law of which local laws (at the seat or elsewhere) and treaty laws would be part but subject to the hierarchy between all sources of the applicable transnational arbitral law. Higher norms from these other sources may notably be transnational fundamental principle in matters of due process. Then there are the practices established in international arbitrations (of which the Model Law is

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some reflection) or general principles that might derive from modern arbitration laws. Thus even established practices in the international arbitral order could prevail over domestic and treaty laws concerning international arbitrations and the relevant arbitration clause. This was the subject of the discussion in section 1.2 above and needs no repeating. Limiting ourselves for the moment to the arbitration clause, it must be in writing, at least that is the present requirement under the New York Convention, for its international recognition and that may now well have become a general transnational principle or at least customary in international arbitrations. That means that local leges arbitri must also conform. Although a writing is required, it is of interest that under the New York Convention it needs not be signed by the parties. That is reflected in Article II and an exchange of letters or telegrams may be sufficient in the antiquated wording of its text. The requirement is in a modern world not without complications, however, and the Model Law has in its 2006 amendment dealt with this issue in that more modern context in which all paper-based requirements become burdensome and the entire concept of a writing contentious. Indeed newer transnational customary law may well overtake the New York Convention and provide an example of its postponement, although ultimately it remains an issue to be decided in recognition proceedings in the domestic courts in Member States, which under the Convention still have the last word in these matters. Historically there are two types of arbitration agreements. The one would be drawn up once a dispute had arisen, this is commonly referred to as a submission agreement and the other would be pre-existing as part of a fuller sales or other type of agreement. That is the arbitration clause proper. The submission agreement is likely to be more detailed as it is geared to a situation in which parties know what type of dispute has arisen and what the particular needs are in that connection. Of course, a pre-existing arbitration agreement may also be amended to reflect the actuality of a dispute once it is clear what the problems are. Both are covered and considered the same for its purposes by the New York Convention, which in Article II gives them international recognition meaning that these clauses will be enforced and local courts ousted in all Member States of the Convention. It is a key achievement of the New York Convention (besides the recognition and enforcement of the ensuing awards), and was foreshadowed by the 1923 Geneva Protocol, which first established this international recognition, followed by the 1927 Geneva Convention, which also included the recognition and enforcement of the awards and of which the 1958 New York Convention was the successor. As a practical matter, it is important that the arbitration clause is kept simple, more particularly because it cannot be known at that stage what conflict may arise. Any complication endangers the arbitration and may create doubts as to the duty to arbitrate and the powers and jurisdiction of the arbitrators. Defective clauses, not uncommon, often drafted by lawyers who have no idea of what an international arbitration truly is, can cause havoc—for example, a clause simply referring to disputes to be resolved by international arbitration, but saying nothing on how to get there—and the ordinarily competent domestic courts may then have to take over. The LCIA suggests a simple formula as follows: Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred and finally resolved by arbitration

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under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be [one/three]. The language to be used in the arbitral proceedings shall be […].

One may quibble more with the rest of the language: ‘The seat, or legal place, of arbitration shall be [City and/or Country]. The governing law of the contract shall be the substantive law of […]’. Here we still see strong localisation tendencies but may also note that the law applicable to the arbitration clause itself (upon separation) is not settled. As mentioned in section 1.1. above, it is under the 2014 LCIA Rules specifically the law of the seat, a new departure which may be much criticised. Note in particular the reference to disputes ‘arising out of or in connection with this contract’. This language tries to be a catch-all but there is unavoidably doubt as to its coverage. Contractual issues are clearly covered, but there may be an issue with competition or regulatory matters raising the question of arbitrability as we shall see below. Also proprietary issues may be more doubtful as are issues of set-off, which invariably affect parties not involved in the arbitration. Company law issues may also arise in a contractual framework, although many may not. The same goes for tort or negligence claims. The issue is always how one gets to such non-contractual issues and how far the clause reaches and there may still be justified doubt about all that is not purely contractual, but one of the important developments of the last generation in international arbitration has undoubtedly been the increase in its expanse and movement into these non-contractual areas as long as some relationship can still be established with the underlying contract (in its formation and implementation) that is being litigated. That is what the language ‘arising out of or in connection with this contract’ now signifies.74 Pure tax and environmental issues, for example, cannot be arbitrated, principally because the relevant authority or regulator might not have subjected itself to arbitration, although the (financial) consequences may still be redistributed among the parties under their contract and any dispute in relation to this redistribution may then be decided under the arbitration clause. The emphasis is thus on (commercial) relationships, but even so there remains the important issue of the true powers of international arbitrators. It has already been said that especially in proprietary and regulatory matters institutionally these powers may well need a deeper foundation in the transnational legal order itself, to be truly effective here. That is the approach of this book (see more particularly the discussion in ss 1.1.9 and 1.1.10 and 1.2.5 above) and also goes to the issue of arbitrability see s 1.3.8 below). This also goes to the question who may truly be considered amenable to being a party and can therefore be forced into an international arbitration as well as claim the benefit of this type of dispute resolution when disputes arise. To repeat, it is not or no longer right to claim that the arbitration clause is the only source of the power of the arbitral tribunal over the parties. There may also be powers implied. Others, it was submitted, derive directly from the arbitration being founded in the transnational commercial and financial legal order itself. They may also bear on who is subject to the

74  So the House of Lords in Fiona Trust & Holding Corp v Yuri Privalov [2007] UKHL 40. The German ­ rbitration Act (s 1030(1) and (2) CCP) allows any claim that involves an economic interest as may be all claims A that are not economic but at the free disposition of the parties.

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arbitration and this may go beyond the parties who signed the agreement. Thus upon an assignment, a new party (assignee) will surface under the old contract. There may be undisclosed agency situations. Companies may also merge and there may be forms of succession. Not unusual is also that parent companies which exercise substantial control over subsidiaries might be sued together with them in an arbitration to which they have not signed up. Deemed or assumed consent may force an unwilling party to participate; lifting of the corporate veil may be another way.75 There may also be consolidation of cases between different parties but bearing on the same dispute. The French have a theory of connected agreements or groupings of contracts which may also have an effect. In any event, the arbitration agreement is subject to interpretation as already mentioned, but for the moment the more important issue is who may be considered parties to the agreement and that has become the subject of some expansionary interpretation under transnational law. There may also be the possibility of joinder when eg providers of goods and services are sued not only by their direct counterparties, but by all in the chain who may subsequently have suffered from bad design or workmanship. The applicable rules may themselves shed some light. Thus Article 4(2) of the Swiss Rules allow the arbitral tribunal to decide whether a person can join after consulting all the parties and taking into account all relevant circumstances. Article 22(1)(viii) of the 2014 LCIA Rules, on the other hand, requires consent but from the applicant party and third parties only. One important consequence and complicating factor in a joinder or other forms of participation by non-signatories is what rights they have in such cases in the appointment of arbitrators. These may be issues of public policy or fundamental principle.76 Under newer ICC Rules, it is the ICC Court that may decide these issues. Under the LCIA Rules, it is the LCIA Court that must do so (see further also s 1.4.3 below). It may be repeated that indirectly upon a set-off non-parties to the arbitration may be substantially affected by the outcome. The difference is that they have no standing at all.

1.3.2  When is there a Dispute? Statute of Limitations It would seem obvious that there must be a dispute before an arbitration can be started. The central role of what a dispute is has already been explained in section 1.1.3 above and is directly connected with the issue of arbitral jurisdiction, which cannot in principle go beyond how parties have defined it and presented their case. Arbitrators behaving otherwise (or knowing better) will only complicate matters and make the arbitration longer and more costly. It has been noted in that connection that all becomes fact—normally even the applicable law must be pleaded as fact about which

75  Tribunals are reluctant, but see DOW Chemical France v ISOVER Saint Gobain, ICC 4131/1982, (1983) 110 Journal du Droit International 899. The interim award to the effect was endorsed by the Paris Court of Appeal, 22 October 1983 [1984] Revue de l’Arbitrage 98.l. 76  See French Cour de Cass In BKMI and Siemens v Dutco, 7 January 1992 Bull Civ 1 (1992), but regardless of this public policy element, parties may apparently agree otherwise through adopting ICC or LCIA Rules.

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parties differ, and arbitrators have to limit themselves to what the parties argue in this connection and not start a new line of argument not adopted by any of them. So if Party A pleads rule A and Party B rule B, that is all that is disputed and arbitrators will have to find either for Rule A or B upon hearing proper testimony and for no other. More likely is that the dispute is about the interpretation of a rule, and arbitrators will have to find between the different interpretations presented by the parties and not indulge in a third interpretation which was never in dispute and cannot therefore be considered. It would undermine the legitimacy of the award, which states in such cases outside the arbitration clause. Again, arbitrators are not judges representing a legal system that they must clarify as such in the particular case. It has already been said also that arbitrators’ behaviour may be different when the public interest becomes engaged, or in other instances where international arbitrators have acquired original power (see the discussion in s 1.2.5 above) and they may then become more like judges. Similar issues arise in foreign investment arbitration but it is not in the nature of arbitration proper and doing otherwise means not understanding it. There are other issues in this connection: especially in collection cases there may not be a real issue of fact or law at all. Summary judgment would be normal in ordinary courts or perhaps a special collection facility, but that is not the way in international arbitrations. Ordinary courts might here be the better venue and they may in fact already have disposed of the matter upon the request of one of the parties before the arbitration can be activated. Nevertheless, this is not the approach of the New York Convention which gives international recognition to arbitration clauses in all issues that may arise between the parties, present or future. It has already been said before that under some arbitration rules shortened proceedings may now be considered in such cases. Time limits are other matters to be considered at the outset and there may be statutes of limitation to consider. Particularly in international cases, this poses the question under which laws and whether such laws may also be transnationalised. In all cases it needs to be determined from when any time bar started running. In the ordinary courts, this is normally connected with the cause of action first arising. There is the further issue of when the statute of limitation is properly interrupted. In the more traditional conflict of laws approaches in the ordinary courts, there is a debate in this connection whether statutes of limitations are substantive or procedural. In the latter case, often followed in common law countries, the issue was one of the lex fori, among localists in arbitration likely to be considered the lex arbitri of the seat. In civil law countries the issue was rather considered substantive, activating other (domestic) rules, now also increasingly followed in common law countries. It may allow for a form of party autonomy, parties choosing a particular law in this connection, always assuming that prescription of this nature may be considered a matter at their free disposition and not a public order issue. Again transnationalisation may cut through this and relies on the hierarchy among its different sources of law. Even treaty law, which exists in this area under the ­UNCITRAL text of 1974, would then also have to find its place among these sources as would any domestic law chosen by the parties or resulting from other private international (conflicts) rules or even the lex arbitri of the seat as the residual rule. If these issues are

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considered purely procedural, arbitrators might even take it upon themselves to raise and decide them accordingly. They may invoke arbitral customary law, and general principle or may ultimately rely on what they believe is proper in the situation as a matter of justice or public policy or order. Generally, they will do so as a preliminary issue, increasingly and properly, it is submitted, on the basis of the law as they find it and their sources and hierarchy under the modern lex mercatoria. It is generally accepted in this connection that the start of an arbitration interrupts the time limits, but in the details that still raises the issue of the start proper. Here again there may be doubt in international arbitrations and arbitrators will decide; the notification of the claim to the other party or, in the case of an institutional arbitration to the ICC or LCIA, as the case may be, to their secretariats, is likely to be sufficient, but sometimes a request for designation of the tribunal is necessary under local laws or rules. Thus the Swiss 1987 Arbitration Act (Art 181) states that: The arbitral proceedings shall be pending from the time when one of the parties submits its request to the arbitrators designated in the arbitration agreement or, in the absence of such designation, from the time when one of the parties initiates the procedure for the constitution of the arbitral tribunal.

This may seem quite severe; and notice to the other party would normally appear to be adequate, at least if sufficiently formalised and that may now well be the better ­transnational practice. It is also the approach of the 1996 English Arbitration Act (Art 14). Institutionalised rules also tend to follow this approach, but it shows that even in these details, arbitrators may have to lead the way under the modern lex mercatoria concerning them and that there is no great certainty in international cases.

1.3.3  Ousting of the Ordinary Courts. Article II New York Convention A key issue in arbitration is the ousting of the jurisdiction of the ordinary courts. The courts of each country are likely in this regard to respond to different national ­procedural rules, which may impose conditions or limit the possibility of ouster in other ways. In international arbitration, the New York Convention in its Article II here provides a uniform rule for courts in all Contracting States. The basic text is as follows: Each Contracting Party shall recognise an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

This is a broad statement addressed to all courts in Contracting States, even specialised ones or courts of limited jurisdiction such as bankruptcy courts, which will be discussed later in section 2.3.3 below, especially in respect of financial arbitrations. It covers present and future disputes, of a contractual nature or not. Only if the arbitration agreement is ‘null and void, inoperative or incapable of being performed’ may it be ignored by these local courts. In Article II, the Convention does not say what law applies; it is more specific in Article 5(1)(a), where, in the context of the recognition

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of awards, the law of the seat is the default rule. The same lack of clarity may be found with respect to the notion of arbitrability in Article II. In Article V(2)(a), the Convention refers to the law of the recognising country. Where reference is here still made to local laws, one may again ask about the force of transnationalisation and whether these laws, even under the New York Convention, must now be put in the context of the modern lex mercatoria and its different sources of law as should be the New York Convention itself. In Article II, there may be more room for this in respect of jurisdiction and arbitrability, since there is no express reference to any national law. One may also say that the arbitration agreement upon proper separation from the rest of the agreement is itself covered by transnational law (unless parties expressly state otherwise, running the risk of domesticating the arbitration in the process), see the discussion in section 1.1.9 above. In that sense, one could even say that Article II suggests this transnationalisation. Note, however, that under Article II (and Art V) it is the national courts that still decide on jurisdiction and arbitrability, not arbitrators, who now commonly do so within the arbitration itself, although the ultimate test is still in recognition proceedings under the New York Convention. While international arbitrators may be all the more likely to depend on transnationalised concepts here, it should also be relevant for national courts in a more up-todate interpretation of the New York Convention. This will be discussed for Article V in ­section 1.6.1 below.77 The Convention famously lacks an interpretation clause and uniformity in its ­application is not a stated objective. To repeat, in the approach of this book, the Convention is part of transnational law and must find its place among the other sources of law that may also apply, but again the Convention is silent and these issues are left to local courts in Contracting States faced with a request for the ousting of their jurisdiction. In this regard, the need for a writing has already been discussed and is now set in a broader modern context: see section 1.3.1 above. As to the arbitration agreement being ‘null and void, inoperative or incapable of being performed’, there may be some systemic guidance in Article V(1)(a) of the Convention where reference is made to issues of incapacity, the law applicable thereto and to the relevant contract, again all issues better placed in the context of the modern lex mercatoria and its different sources and their hierarchy. It may be noted in this connection that these issues are unlikely to reach the arbitral tribunal as it is unlikely to be already in existence. If ordinary domestic courts assume jurisdiction regardless of the arbitration clause, an international arbitration tribunal may, however, still be set up at the request of one of the parties, and there would be competing jurisdictions. In that case arbitrators could also decide on the validity of the arbitration clause (and their own jurisdiction based on it) if challenged before them.

77  Even if under Art II, the ordinary courts of a particular country take over, the arbitration may still open. The practical consequence will be in enforcement. The judgment would not have international currency but an award would have under the New York Convention and therefore be potentially enforceable in third countries. It may still be possible that the ordinary courts issue an injunction to prevent parties from continuing the arbitration elsewhere but it can only affect parties properly subject to their jurisdiction.

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Again, it would be for courts in the relevant enforcement countries ultimately to decide on the international status of any ensuing award and its recognition and enforcement. These could, however, be the same courts that assumed jurisdiction in the first place if indeed closest to the business of the party against whom the award is pursued, which would likely impede the recognition process.

1.3.4  Interface of International Arbitration and the Ordinary Courts in the EU Under Regulation 44/2001 (Brussels I) and the 2012 Amendments The ECJ has in three cases tried to distinguish the regime concerning international arbitration from that of the Regulation, which does not cover arbitration (Art 1(2)). The issue arose in particular under anti-suit injunctions issued in the UK meaning to pre-empt the jurisdiction of other courts in the EU. In West Tankers,78 the ECJ held (unlike the House of Lords in the UK) that such an injunction, although concerning an arbitration, could not pre-empt the jurisdiction of the Italian courts first seised in the matter (by insurers upon subrogation). It was for them to decide the issue. Criticism may centre on the presumed prevalence of the court of the seat in these matters to promote efficiency (through injunctions) but probably still based on an excessive regard for the seat and its powers to validate or invalidate, as the case may be, arbitration agreements and supervise the arbitration. This decision of the ECJ followed the earlier case of Marc Rich,79 in which the question was whether the validity of arbitration clause itself was excluded from the Regulation. This was found to be the case so that this issue could still be handled by the ordinary courts outside the jurisdiction rules of the Regulation. Note that this does not need to be the court of the seat. In the Van Uden Case,80 the issue was rather whether provisional support remedies could issue from the ordinary courts in support of the arbitration. These measures were deemed to come under the Regulation as not being ancillary to the arbitration itself and benefit then also from the recognition of these orders in other EU countries. Subsequent attempts to delete the arbitration exemption from the Regulation failed and the 2012 recast of the Regulation retained it. Regulation 1215/2012 in Preamble 12 confirms that court orders of this nature, including arbitral appointments, annulments or recognition of awards, do not have an effect in other Member States (and overturn in this regard West Tankers but not when it comes to forbidding anti-suit injunctions). Enforcement of awards is governed by the New York Convention only, which therefore takes precedence over the Regulation. Another issue is whether the EU has jurisdiction to intervene in arbitrations at all, either through the Regulation or otherwise, and concerns its power of intervention in private issues including private dispute resolution. It may be on firmer ground when it comes to arbitrability of competition and regulatory issues to the extent these are

78  79  80 

Case C-185/07 Allianz SpA and Another v West Tankers Inc (2009). Case C-190/89 Marc Rich Co AG v Societa Italiana Impianti PA (1992). Case C-391/95 Van Uden Maritime v Deco-Line (1998).

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within the EU competency. In fact in Eco Suisse,81 the ECJ supported the arbitrability of competition issues although it would be conceivable for the EU at the legislative level to make other provisions or exclusions. It has not so far done so, but whenever public p ­ olicy becomes engaged, there will be an effect: see the discussion in section 1.2.4 above.

1.3.5  Establishment of the Arbitral Tribunal. Selecting Arbitrators, Qualities. Arbitrator Fees The basic idea is that international arbitration is a party arbitration, that is to say that each party appoints one arbitrator and that they together choose the Chair. This is reflected in all better-known arbitration rules, with the LCIA, however, maintaining a system by which all three arbitrators are appointed by it unless parties in their arbitration clause have agreed otherwise, which they normally do. In recent times an argument has been made that all arbitrators should commonly be appointed by such an arbitration body.82 The idea is that independence and impartiality would be enhanced but it would give these bodies and the people who control them even more power so that the effect may be quite the opposite and the argument becomes merely self-serving. Also, many parties would feel less involved with the case while the tendency of international arbitration to become more judicial would be even more enhanced. As for the Chair, it is possible that he or she is in fact a kind of umpire between the two party-appointed arbitrators (in certain trades it is still common only to have two arbitrators but it does not fit international arbitration) and is in that sense more passive and waits for the moment they cannot agree, but more common is now that the Chair is a full member of the team with one vote. The Chair’s vote is legally not preponderant but in practice the Chair’s view often is, the Chair usually also taking it upon itself to draft the award. In order to do so effectively, the Chair will test the ground during the proceedings and see where there is consensus in the tribunal and he or she will effectively promote this. This being said, if there is no agreement, the Chair may be outvoted. In such cases, the Chair may continue the drafting or turn it over to the other arbitrators. Even in a consensus situation, some of the other (wing) arbitrators may draft part or all of the award—it is for the tribunal to agree. If there are dissenting or concurring opinions, the arbitrator concerned is likely to draft his or her own text, which could be part of earlier (discarded) draft awards. Instead of the more normal three arbitrators, it is possible that parties instead agree on a sole arbitrator, whose appointment then depends on a further agreement between them when a ­dispute arises. It is by no means uncommon in smaller international arbitrations; it may save costs and usually also time. What qualities should be looked for in arbitrators? There is no single or even ­obvious standard. The Chair may be particularly important, so what makes a good Chair? 81  82 

See n 53 above. See n 34 above.

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­ robably as important: how can people get the necessary experience and what experiP ence is needed as a minimum? This touches also on the issue how much of a closed shop international arbitration has become, with insiders claiming or suggesting that the lack of experience of the others disqualifies them. Expertise in arbitrators may be an obvious expectation and it helps of course if arbitrators have sat before. That is the procedural side, but as to the merits expertise is in fact not without problems. Arbitrators cannot put their own insights in the place of the representations of parties and their witnesses. That is notably not their task; they must choose between the arguments of the parties, no more. Expertise of this nature would also give the more knowledgeable arbitrators a dominant position in the tribunal, which is equally to be avoided. Experience is only useful in order to facilitate the comprehension of the tribunal and thus shorten the proceedings. The minimum is that potential arbitrators can independently handle complex issues of fact and when necessary of law (still pleaded as fact, see s 1.1.3 above) and are capable of deciding the disputes that have arisen in these connections and of writing a comprehensive and coherent account. Especially for the Chair, there must also be the ability to hold the proceedings together and move the arbitration forward promptly, not being distracted by unnecessary complications raised by the parties (or other arbitrators). Organisational talent and efficiency are then key issues. Sufficient language capability is obviously also important for all. If the argument is not substantially legal, it is not necessary for international arbitrators to be lawyers and it may be very helpful to have an accountant, engineer or intellectual property rights person on the tribunal. But even if it is legal, it need not truly be an issue if we accept that all law must be pleaded as fact and any decisions limited to legal disputes that have arisen between the parties. It has already been said that it is not that different from deciding between construction expert witnesses. ­Nevertheless, the development has been in the direction of ever more lawyers with the undoubted consequence that the proceedings have become ever more judicial at the same time, arbitrators increasingly behaving as if they were appeal courts on points of law. It has already been mentioned several times that this may be unavoidable where arbitrators acquire autonomous powers (see ss 1.1.10 and 1.2.5 above) and it may be partly unavoidable also because arbitrations are in the nature of adversarial proceedings although again arbitrators find primarily on the basis of the representation of the parties and not on their own expertise. They should not promote legal sophistry either serving only to promote more lawyers to arbitral positions. If they become inquisitive it should only be in a procedural sense on the basis of their autonomous powers. Although the civil law tradition may be conducive to more aggressive investigation to fill out some missing facts in a given legal picture, there should be considerable constraint as this legal picture is itself fact that must be proven by the parties. Sometimes such arbitrators come to the hearing with a draft award already in their pocket in which they seek only the (in their view) missing parts of the puzzle, which subsequently becomes the focus of their investigation. To the extent they mean to complete the legal picture, this may horrify especially the more common law-oriented arbitrators who depend on fact. It has already been said many times and cannot be repeated often enough that in most international arbitration cases arbitrators do not have a lex fori or system to worry

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about. They may not have any specific knowledge at all except that they are likely to be better versed in business disputes and are comfortable with them and their resolution. But especially when disputed complex issues of law arise (or are promoted by one of the parties), lawyers are more naturally favoured as arbitrators. It suggests that the Chair should normally be a lawyer as indeed they normally are in commercial courts where still operating independently from the ordinary court system, for the rest often with lay judges, but again such proceedings are not judicial and it is not a precondition or a given. Special complications arise in the appointment process where one party fails to appoint an arbitrator or fails to cooperate in the appointment of a single arbitrator, or where both party arbitrators cannot agree on the Chair. So alternatives must be provided and they usually result in an appointing authority, either already foreseen in the arbitration clause or otherwise part of the applicable rules, either institutional or not. As has been said before, ICC and LCIA rules are important examples for institutional arbitrations and the UNCITRAL Rules for ad hoc arbitrations. The former have their own courts dealing with these matters, the latter, in particular, relying on the Permanent Court of Arbitration (PCA) in the Hague. Failing such an alternative, it is also possible that the court of the seat fulfils this role in its support function, an instance therefore where the chosen seat may still be of special importance even in a delocalised transnationalised arbitration. But it might also be the court in another country that would otherwise become competent to hear the case. Finally there is the matter of fees and rewards: it should never be forgotten that international arbitration is a business, which, like all other businesses, is subject to the danger of monopolisation in a small group. This is further encouraged by the substantial amounts that arbitrators might be able to charge, the confidentiality of which in most cases may be another problem. From cases such as Merrill & Ring Forestry LP v Government of Canada83 and other ad hoc cases mostly under the UNCITRAL Rules, where arbitrators must state on their own fees, one gets some idea of the level of fees in foreign investment arbitrations. In the case of the ICC and the LCIA, fees are fixed in principle by these institutions, in the first case based on the value of the claims, in the latter case on an hourly rate set by arbitrators within certain ranges. That is also the policy at ICSID. Each arbitrator need not charge the same, even on an hourly basis, and also in ICSID it is quite normal that they do not. Often arbitrators negotiate cancellation fees meaning that the closer they get to the agreed dates of the arbitration hearing, the more they will charge of the agreed fee even if the arbitration never takes place. In ad hoc cases, they will ask for a deposit and may even have negotiated to retain it if the arbitration does not proceed. Fees or cancellation fees are not implied, however, and must be specifically agreed,84 although the applicable Rules may be more specific. Reasonable expenses are reimbursable also, mostly within certain limits if the arbitration is institutional.

83  84 

ICSID Administered Case, 31 March 2010. K/S Norjarl A/S v Hyundai Heavy Industries Co Ltd [1991] 1 Lloyd’s Rep 260.

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1.3.6  Challenges of Arbitrators It is necessary in this connection to point out that international arbitrators, even though party appointed, are and must remain independent from the parties appointing them and their lawyers (this issue was mentioned in s 1.1.12 above). That is the modern rule in international arbitrations and it is now often considered fundamental principle, although domestically, especially in the US, the situation may still be different. International arbitrators must not seek or canvass for these appointments either. It is not uncommon for parties (and their lawyers) to interview possible candidates but these interviews have to be handled with considerable care by the latter, who are wise to keep the discussion brief and business-like, and retain a record that can be shown to the other party if necessary. In view of the requirement of independence, the merits of the case hardly call for a discussion. After an appointment, there should not be contact, except perhaps when the chosen arbitrators cannot agree on a Chair and there is an impasse when the appointed arbitrators may confer with the party that appointed them as to what to do next. Under the arbitration agreement or the applicable Rules, it may then be for the parties to take the necessary steps and they must be alerted accordingly. Again caution is required in order not to undermine the impartiality and independence of the arbitrators. They must also be seen to have maintained it at all times. That goes to challenges, which are tied in particular to impartiality and independence and the requirement to maintain them and their appearance at all times, first raised in section 1.1.12 above where the International Bas Association’s Guidelines were also mentioned. Clear is or should be that if a prospective arbitrator has too close a connection with one of the parties or its supporting entities, its legal representatives or even another arbitrator, an appointment should be refused. A common alternative is that all relationships are disclosed so that the other party can review them, which would avoid the drama and cost of later challenges which, if successful, are much more destructive as a new arbitrator needs to be appointed and the earlier appointment of the Chair may then also be undermined. The possibility of a challenge is a continuous hazard in this regard as it can come up at any time when new facts become known. This may also motivate a challenge to the award or its recognition and enforcement. Invariably these preventive actions on behalf of potential arbitrators require a high degree of judgement in the candidates whose integrity can be judged by the investigation they have conducted and the quality of the disclosure of the results. In this connection there may also exist an information duty, particularly important if a sitting arbitrator takes on other functions as legal counsel, director or arbitrator. He or she may not be able to gauge how this may impact, but the parties to the arbitrations in which this arbitrator is involved should be advised to be able to form their own opinion. The 2004 IBA Guidelines on Conflicts of Interest amended in 2014 proved helpful but did not manage to reduce the problems. The issue is always interconnectedness and the appearance of impartiality and independence at all times; it is not per se a question of the factual independence or impartiality which may not be endangered, but it can no longer be assumed and appearances have become as important to retain the credibility

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of the whole process; in a better world, international arbitrators should not accumulate functions. When they do, a lack of investigation cannot support a lack of knowledge and therefore a claim to independence; it is self-induced and undermines its appearance. The alternative is independent supervision of international arbitrators (of behaviour not appeal) by an independent board, court or similar facility, advocated earlier in this book (see ch 1, ss 1.1.12, and further in s 1.1.12 above). Perhaps the international arbitrating community should have long ago asked for it in order to strengthen its legitimacy; not having done so has undermined its stature and has made it subject to abundant criticism, which may be largely uninformed but has nevertheless weakened its stature. In public interest issues, it has raised the more fundamental question whether private dispute resolution is at all appropriate and it may no longer appear to be so to many exactly because of the lack of supervision.85 This is or has become a major issue in foreign investment arbitrations where the public interest is more directly engaged and might in appropriate cases still discharge host governments from their protection duty under BITs or at least mitigate the compensation payable for intrusions on the basis of the public interest. This is the key issue of super-public purpose and indirect regulatory takings; see for a discussion in the context of the Transatlantic Trade and Investment Partnership (TTIP) section 3.5.5 below. There are also important practicalities. Who decides these challenges? If there is a court, as in the case of the ICC or LCIA, it is that facility. If there is none, as under the UNCITRAL Rules and under the Washington (ICSID) Convention in the case of foreign investment arbitrations, it is the other two arbitrators. This may in itself be less than desirable and it has been argued that the embarrassment this may cause the other arbitrators has raised the bar for the challenge to succeed. The issue of and proper grounds for challenges of arbitrators remain the Achilles heel of international arbitration, its credibility and ultimately its legitimacy.

1.3.7  The Jurisdiction of International Arbitrators and Challenges to Jurisdiction Arbitrators may decide the jurisdictional issues as preliminary matters to avoid a full discussion of the case and its cost, should there prove to be no sufficient jurisdiction. It has already been noted in section 1.1.9 above that in a proper delocalisation analysis, the powers of international arbitrators derive institutionally from the transnational commercial and financial legal order itself and its public order notion. The arbitration clause, which upon proper segregation, may be considered to be founded in that same order and its laws only activates these powers, although it may also modify and expands them albeit no further than the public order in the transnational legal order allows. Parties can make a domestic law applicable to the arbitration clause and also opt for a domestic lex arbitri to cover the proceedings, but in doing so it has already been said that they risk making the arbitration domestic. 85 

See JH Dalhuisen, Letter to the Editor of the Financial Times, 7 May 2015.

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It was further noted that the powers of arbitrators, especially in proprietary matters, may well be considered equitable in the more traditional common law sense and that this may give them power over third parties when it comes to ranking and the determination of preferences, eg in set-off and netting, which may affect third parties not party to the arbitration. Again this concerns key issues which require ample consideration in international financial arbitrations when the effects on local insolvency laws may also have to be considered (see s 2.3.3 below). It may be noted once more in this connection that the applicable law clauses in the Model Law and domestic legibus arbitri appear hardly aware of these matters, are caught in cliché, and often provide little guidance. The question of jurisdiction may come up in different contexts. First it may arise under Article II of the New York Convention when an arbitration clause is argued to oust the jurisdiction of the normally competent court in a Member State of the Convention. It may also arise under Article V of the Convention in the context of the­ ­recognition and enforcement of the award. In these instances local courts decide the issue, but beyond these two situations, arbitrators decide on their own jurisdiction. That is the transnational principle of Kompetenz/Kompetenz also already mentioned and is besides the transnational separation principle, which severs the arbitration clause from the rest of the agreement, a cornerstone of international arbitration and fundamental principle (see s 1.1.10 above). Properly considered, the New York Convention in its Article V restricts the jurisdiction issue to a review by recognising domestic courts of the arbitrators’ decisions in these matters, which review goes, however, beyond the formal review of the existence of an arbitration agreement (Art V(1)(a)) and that it is in writing (the requirement under Art II(1) and (2)). Under Article V(1)(c), the relevant language refers to awards dealing ‘with a difference not contemplated by or not falling within the terms’ of the arbitration agreement. Article V(1)(d) deals with the proper composition of the tribunal and therefore indirectly also with the issue of impartiality and independence as a matter for consideration in the context of recognition and enforcement of the award domestically. In Article V the residual or default rule in matters of arbitral jurisdiction remains for recognising courts the law of the seat, not therefore transnationalisation. It has already been said that Article II is unspecific on the issue of the applicable law and it has been submitted all along that international arbitrators deciding on their jurisdiction in the course of an arbitration are increasingly likely to refer to transnationalised concepts, and upon a proper interpretation of the New York Convention domestic courts may also increasingly do so. Again, it requires the New York Convention to be put properly in the context of the different sources of law under the modern lex mercatoria. It has already been said that this is necessary for it properly to evolve.

1.3.8  The Issue of Arbitrability in International Arbitrations The issue of arbitrability concerns the question of what is ‘capable to be settled by arbitration’ in the language of the New York Convention (Arts II(1) and V(2)(a)) and the

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Model Law (Arts 34(2)(b)(i) and 36(1)(b)(i)). It needs as such to be distinguished from the issue of jurisdiction, which may now in principle cover all contractual, proprietary, regulatory, tort and all other matters that may arise from or in connection with the contract, its formation and performance. It was submitted before that in international cases, the issue of arbitrability is also best considered in a delocalised context where it is covered by transnational law: see section 1.1.10 above. This has allowed a broad expansion of the concept, notably for it to include competition, regulatory and proprietary issues, the latter, it was also submitted, being connected with equitable powers in international arbitrators. Altogether one may see here a substantial increase in the tasks of modern international arbitrators and in their powers of determination. National courts, especially the US Supreme Court,86 have followed in the interest of promoting international trade and comity although the final check is still in the recognising courts and the use by them of their public policy bar, even if transnationalisation of the concept may well be taking over, also in the interpretation of the New York Convention (Arts II and V), as discussed in section 1.3.3 above. Outside the Convention, arbitrators will decide the arbitrability issue (such as the one of jurisdiction) in the first instance themselves and may do so in preliminary awards, again to avoid a full discussion of the case and its cost, should there be no arbitrability. As public policy is often the key issue in terms of arbitrability, it is argued throughout that in view of these greatly expanding powers, the proper supervision of international arbitrators is becoming a major issue, even more so in foreign investment arbitrations where the public interest is directly engaged. The alternative should also be considered. One important motivation in the extension of arbitrability is that otherwise incidents in the proceedings must return to the ordinarily competent state courts with their procedural and appeal complications. This presents the worst of all worlds: the arbitration may be suspended for years, with arbitrators retiring etc.

1.3.9  Other Early Incidents: Preliminary Issues and Protections One problem in the early stages of an arbitration is that there is not yet an arbitration tribunal in operation that may provide the necessary steering and where necessary to decide about the preservation and other protection measures that need to be and can be taken either by the tribunal alone (upon the request of one or both parties) or after activating the relevant courts in states where action is required. In this case the lex arbitri (or other procedural laws) of that country (and not of the seat, unless there is activity in that country also) will in the first instance decide whether requests from the tribunal, their orders, or from relevant parties may be honoured. One important ­question is then indeed who takes the initiative and who can order what. The Model Law, especially after its 2006 amendments, deals with preliminary ­matters in terms of preserving assets and evidence or ordering the continuation of 86 

See cases cited in n 53 above.

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vital activity pending the resolution of the dispute. It is of interest to compare also Article 25 LCIA Rules, s 44 of the English Arbitration Act and s 21 of the AAA Rules. The Model Law still seems to arrogate to the lex arbitri of the seat the major role, although not necessarily to its courts, never mind where the action is to have its effect or the assets involved are located. Chapter IVA, according to its title, still distinguishes between interim measures and preliminary orders. Article 17 states that in principle the arbitral tribunal may at the request of a party grant interim measures. They are defined as any temporary measure, whether in the form of an award or otherwise, by which before a final award the tribunal orders a party to (a) maintain or restore the status quo, (b) prevent current or imminent harm or prejudice to the arbitral process, (c) preserve assets out of which a subsequent award may be satisfied, or (d) preserve evidence. Article 17A mentions the conditions and requires for the first three types of measure that irreparable harm would result without them, while there is a reasonable possibility that the requesting party will succeed on the merits. This last requirement, although not unusual in respect of ordinary courts under national laws, may be greatly bothersome. Although it is said that granting the interim measures does not affect the tribunal’s powers in determining the main dispute, it may show bias; the requirement should have been stated negatively in the sense that the requesting party could not be given the benefit of an interim measure if it was unlikely to succeed in the main suit. Frivolous requests should obviously be eliminated. This being said, in view of the importance of these measures, they should not be ordered lightly and restraint is necessary in the arbitral tribunal, especially if supplies are to be redirected and bank accounts or other assets are to be blocked. As for preliminary orders, under the Model Law, a party may request them from the tribunal together with a request for an interim measure directing the other party not to frustrate the purpose of the order requested. They are valid for 20 days and are renewable. In order not to frustrate the surprise element, the request for the order may be ex parte, that is to say without prior notice to the other party, but notice must be given immediately thereafter as a matter of due process (Art 17C). While an interim measure may be issued as an award, the preliminary order cannot be. It therefore lacks enforcement potential (Art 17C(5)). Interim measures, on the other hand, may be recognised and enforced elsewhere (Art 17F(4)(c)) although the New York Convention itself does not cover them even though they may be issued as awards. Under the Model Law, this is so irrespective of the country where they were issued, subject to similar constraints as existing under the New York Convention (Art 17I). Note that this means that countries adopting the Model law will enforce such measures coming from the appropriate arbitral tribunal. Article 17J states further that appropriate national courts may also order the interim measures irrespective of where they are located based on their own procedures in this regard. So it is not necessary for the parties to go through the arbitral tribunal, they may go directly to the ordinary courts for protection if that suits them better, although the English Act requires the arbitral tribunal to be accessed first except in case of urgency or if both parties agree or if the tribunal is not yet constituted. Note the diminished role of the court of the seat here. It is not given a special role, even when the tribunal is not yet constituted, the reason probably being that most of the action will not be at the seat, which is neutral and normally far away from the businesses and assets of the parties.

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On the other hand, the English Arbitration Act in section 44 concentrates the support powers in the court (of the seat), but only to the extent the arbitration tribunal lacks adequate powers or has not yet been constituted (s 44(5)). Otherwise, permission of the arbitral tribunal is first required for parties to access the ordinary courts directly unless there is urgency or all other parties agree to the measures (s 44(4)). Again, the true issue is the effectiveness of these measures in the places where it matters most, eg where the assets or evidence are, and it may be best to address the relevant courts in those countries directly rather than go through the tribunal or courts at the seat first. The party most concerned may have to make an early choice here but may still require the consent or some form thereof from the tribunal, which it may do best at least to notify. Requesting interim measures from local courts (including the parties’ own courts) is not considered a breach of the arbitration agreement (Art 9 Model Law). These measures could even be broader than under the Model Law and might be the same as these courts may order in support of the proceedings in their own countries. It depends on the relevant local laws.

1.3.10  Procedural Order No 1 The Chair after the appointment of the tribunal is likely to call a business meeting as soon as possible to establish proper order in the proceedings but also for the main persons to get to know each other: especially arbitrators and the main advocates, preferably including an authorised person for each party. The time frame is of special importance here: pleadings, discovery, number of witnesses, witness statements and especially the start and duration of the hearing and how it is going to be conducted may be agreed. The Chair may ask the parties to make a first draft of what is to become Procedural Order No 1 so that the meeting will be limited to the points on which there is as yet no agreement. It is not likely to last long, one day at the most. The Chair will strive to keep the temperature as low as possible and at least on procedural points will look for consensus; the merits are unlikely to be discussed. The Order is usually signed by the Chair only. This confirms the practice that in procedural matters the Chair normally acts alone while keeping the other arbitrators informed unless more major complications arise. The Chair will vary the Order as needed, especially when reasonable requests for extensions of time arise. This flexibility is the reason that parties will not sign the Order even if they have prepared its text as it could then be explained as an amendment to the arbitration agreement, not to be subsequently varied except with the consent of both of them. Rather, the Procedural Order is likely to demonstrate a shift that is occurring at the same time in the relative position of the actors: the arbitrators and particularly the Chair are taking over in procedural matters (unless parties still specifically agree otherwise, which is ever less likely when the dispute warms up). In any event, it is now mostly assumed that arbitrators have original power to move the proceedings along. It is particularly important that the Order establishes the dates and length of the hearing as it is difficult to get all the actors together and change their schedules at short notice. Some safeguard will be built in order not to call the hearing too early so that postponement becomes unavoidable. Altogether it may mean about two years

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into the arbitration before everything is ready for the hearing: appointment of the tribunal, challenges, preliminary issues of jurisdiction and arbitrability, and organising pleadings, witnesses and discovery. With the time necessary to agree and write the award, much of the third year may be gone also. In large cases, this is indeed the minimum framework and may be just acceptable in terms of speed, although there is much pressure for shorter or even shortened proceedings, see section 1.1.2 above. One key remains for there to be an activist Chair who does not entertain complications lightly, avoids legal sophistry, concentrates on what needs to be decided, and also seeks to write a prompt and focused award.

1.3.11  Terms of Reference? The ICC Rules still require terms of reference to be formulated by the arbitrators before the arbitration proper starts. It is a typical civil law concept, abolished now in most countries, recently also in Portugal, which requires judges to summarise the case after the pleadings and parties in an arbitration will sign the document. It is supposed to make clear what is required to be shown in both fact and in law but usually results in simply reciting the pleadings rather than condensing the issues. It fits to this extent in civil law thinking that it is legal system oriented and seeks to concentrate on the relevant facts that must be proven in that context after the legal framework has been defined. The requirement is on the whole no longer believed to be greatly helpful and only tends to cause delay of the proceedings. It also pre-empts and even seeks to deny the factual nature of international arbitration, which now follows more the common law tradition. It is one reason why common law practitioners dislike it. It shows: the civil law-oriented ICC still has the facility, the LCIA does not.

1.3.12  The Status of Early Decisions A number of early decisions were mentioned: Procedural Order No 1, provisional measures, and possibly early decisions on jurisdiction and arbitrability. It has already been noted that the Procedural Orders may be changed by arbitrators and are not intended to make any final determinations. They are not then awards proper. The same may go for interim measures and orders, but it is different for decisions in respect of jurisdiction and arbitrability. Although they are sometimes also called interim or even provisional, this is misleading as these are awards that are final as to the issues settled therein (of jurisdiction and arbitrability) and cannot be changed by arbitrators ­thereafter. They are covered by the New York Convention, not the others. These jurisdiction and arbitrability issues are decided up front only for efficiency reasons to avoid further cost should these challenges succeed and this can be done if no factual inquiry is needed. But the fact they may come first does not make them less final. Challenges of arbitrators are usually decided by the Courts of institutional arbitration facilities such as the courts of the ICC or LCIA and are then also final although not strictly speaking awards. If arbitrators decided these issues themselves as in the case of

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an ad hoc arbitration under the UNCITRAL Rules and under the Washington Convention, one must assume that such decisions are then also awards and final.

1.4  The Conduct of the Proceedings and the Award 1.4.1  Pleadings and Discovery The exchange of pleadings is an essential phase at the beginning of an international arbitration and they define the dispute as the parties see it. In the common law tradition there are only three, the claimant being considered to have the last word. So there is the claim, the answer to the claim, and the reply to the answer. Different sets of Rules use different terms here but this is the idea in general. Parties may agree otherwise: in many civil law countries the last word is given to respondents. There is in any event a fourth document if there is a counterclaim, but it is only the reply to the answer to the counterclaim. The Procedural Order No 1 may have set the time frame which the Chair may amend if such becomes reasonable under the circumstances. Otherwise the institutional rules where applicable will do so. The pleadings are accompanied by all documents on which they rely, normally all contemporaneous documentation on which the parties can lay their hands such as the contracts that were signed, perhaps the exchanges of messages preceding them or concerning the way the conflict arose and all statements made at the time in connection therewith.87

87  Some practical advice may be in order: (a) The pleadings are addressed to the tribunal, not to the other party or anybody else (the purpose is to define the dispute for arbitrators, get their attention, and incur their favour as early as possible). (b) The pleadings must be concise and show what is in dispute, no more; they should avoid as far as possible presenting the case for the other party, which only confuses. (c) Law must be pleaded as fact, just like all else and must be proven; it must be shown, not narrated; the same applies to public policy considerations, which exceptionally might also be raised by the arbitrators themselves (see s 1.2.5 above). (d) Never assume that arbitrators know anything in the case; they are the last to come to it, the opposite of the advocates; it does not mean that international arbitrators are stupid and the tone in the pleadings should never be condescending and never throw in anything merely to impress. (e) Be very aware of the different cultural and linguistic backgrounds of the arbitrators; use short sentences, avoid acronyms, do not use superlatives, set out clearly and simply who the relevant actors are, find and do not hesitate to use common language, omit especially technical procedural legal terms (litigation lawyers are often poor performers in international arbitrations for that reason), avoid all sport analogies and almost any other, never try to be funny or insert jokes—they may not be understood and may give an impression of clumsiness. It is necessary to present upfront all points in dispute, especially in the claim, with supporting evidence in a summary manner but no more. Again, it is necessary to be precise and to the point to get the attention needed. Lack of discipline in this aspect gives arbitrators too much room to play around and this becomes costly. It should further be realised that English arbitrators will seldom read anything before the hearing, at least not large bundles. Others may not spend more than a day and nothing should be made more complicated than necessary at this stage. There will mostly be a second chance during the hearings, the closing arguments, and in the post-hearing memorials. New arguments may be brought on those occasions but not new issues in dispute except with leave of the other party or possibly the tribunal. There are obvious complications when there is a challenge of arbitrators, a jurisdiction problem, an arbitrability issue, a need for preservation measures, a counterclaim, or requests for disclosure. They must also be dealt with concisely, one by one, in proper order; it is necessary to make a tidy impression at all times. That creates confidence in arbitrators, reduces their workload, and is efficient.

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Requests for documents not so far disclosed but allegedly in the possession of the other party or that party having access thereto are commonly made. This is the issue of discovery, which may start immediately in the claim or the answer to the initial claim. In international arbitration this may under its practices not amount to a fishing expedition or wild goose chase, as it may sometimes become in common law countries in the search for facts which come first. The requesting party must show cause, therefore must make clear that the document would be relevant and material. The search must be for contemporaneous documents or a specific class thereof (eg all connected with the formation of the contract). They must not be otherwise available and reasonably be suspected to be accessible by the other party. This is expressed in Article 3 of the International Bar Association’s Rules on Taking Evidence in International Commercial Arbitrations of 1999. Although this is not a binding document (albeit parties can make it so by contract), it is an important expression of the practices in international arbitration. It may increasingly be considered part of the lex mercatoria concerning the proceedings and as such find a place therein. There will be room for a further answer or reply upon the documents presented and more may be asked or given. Again, orders in this connection are not awards enforceable under the New York Convention and it would be up to the law of each relevant country that has jurisdiction over the other party to enforce these requests under its own rules concerning the support for foreign arbitrations. If there is no co-operation, more likely is that international arbitrators will use the technique of negative inferences as specifically admitted in Article 9 of the IBA Rules. This is more like the civil law tradition, the common law being directed here to injunctions, not directly available to international arbitrators. The standard of proof is always the balance of probability, this being civil litigation where there is no need to reach the standard of proof beyond all reasonable doubt. This being said, the weight of contemporary evidence will normally be the greatest, higher especially than uncorroborated witness testimony.

1.4.2  Witnesses and Hearing It has already been said repeatedly that international arbitration, if properly understood, is about facts, facts and facts. Even law must be pleaded as fact. Witnesses are here the next concern to confirm or establish these facts further. Only in Moot competitions is arbitration transferred to an activity of appellate courts and gives students entirely the wrong idea—see section 1.1.13 above. There may be witnesses of fact and expert witnesses including those on points of law. They normally produce statements in advance of the hearing and the Procedural Order No 1 will confirm this. In international arbitrations, these witnesses may be coached by the lawyers unless this becomes clearly inappropriate, eg mendacity cannot be encouraged or promoted. Too slick a presentation will soon arouse suspicion in arbitrators and may be counterproductive. They may also ask more pointed questions. A further business meeting may be called before the hearing to iron out any remaining questions or problems and will usually be conducted by telephone. The hearing itself normally starts with opening statement by either party and there is usually an

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agreement how long they may take, otherwise the Chair will determine it. It will be ­followed by examination and cross-examination of the witnesses of fact, first the ones for claimant than the ones for respondent. Then follow the expert witnesses. Examination by the party presenting the witnesses and cross-examination by the opposing parties is different in that the examining lawyer may not ask leading questions, while the cross-examining lawyer can, but arbitrators tend to be informal also in this aspect and basically will allow anything that serves their better understanding of the case unless the evidence is clearly privileged. Cross-examination of witnesses of fact and expert witnesses is at the heart of the hearing. Who and what among witness testimony should be believed and accepted? This is a particularly difficult area for arbitrators. Assuming that nobody is clearly lying, what is to be preferred and how should the preferences be reasoned out? (See also s 4.1.2 below on legal reasoning.)88 For expert testimony there is the further question of expertise in the tribunal, how they can judge. They can appoint their own expert but that may make things worse: yet another opinion while arbitrators cannot leave the decision to this third party who is not cross-examined. It has already been mentioned that there is a problem with expertise in the tribunal itself; it may lead to de facto sole arbitration and may disturb the balance in the tribunal. There are also issues with cross-examination or the lack of it. One way to facilitate the decision is to ask the experts presented by the parties to jointly present a report on where they differ and why. Often the best explanation is the simplest, one that arbitrators can understand, but it is clear that in these matters there is an end to rationality and room for subjectivity, countered when there are three arbitrators; there is some protection in numbers and a three-member tribunal may be particularly important in such situations.89 At the end of the cross-examination, the Chair will ask the other arbitrators whether they have further questions and may ask some him- or herself. All arbitrators may intervene with questions all the time but should not raise new issues or start a new line of thought unless they feel called upon to do so in areas where they have autonomous powers (see s 1.2.5 above) so as to raise issues of eg public policy or public

88  Art 20(6) LCIA Rules empowers the tribunal to decide whether or not to apply any strict rules of evidence as to admissibility, relevance or weight of any material tendered on any matter of fact or expert opinion. The International Arbitration Rules of the AAA (Art 20(6)) have a similar rule (Art 22(1)). It leaves little room for a challenge at the seat and none for a review by recognising courts under the NY Convention. All evidence deemed relevant and material by arbitrators will be accepted unless privileged, cf also Art 9(1) and (2) of the 1999 IBA Rules on the Taking of Evidence in International Commercial Arbitration. Common sense is here a major guide followed by arbitral reasoning practices. It is submitted throughout that this is now a question of transnational law in which arbitral practice will figure large. 89  In the assessment of damages, the quantum, there may be further confusion between the art of accountants and economists. Their roles are quite different but often poorly understood by arbitrators. Accountancy is technical, concerned with profits and losses in an accounting sense, the difference between revenue and operating expenses. Economics also looks at the opportunity costs. One could also say that accounting is looking backwards to historical figures and their change over time, while economic analysis also discounts the future. It is more concerned with correlations and causality and changes in preferences and a business’s response. To show the difference: if an asset is lost, accounts will assess the loss foremost according to the values shown in the balance sheet. Economist will look at the effect of the loss on the business and its further conduct. Similarly, accountants look primarily at the flows of assets and liabilities compared to last year’s or the last quarter’s record, whatever the veracity of that record. Economic analysis will go behind that record, see what has still meaning in a business context, re-evaluate the figures accordingly, and discount or enhance their importance for the future of the b ­ usiness in the light of its challenges and opportunities.

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order, competition issues being the most important example so far. There could also be issues of money laundering, corruption or market abuse, but it has already been said repeatedly that arbitrators must be careful not to complicate things, prolong the proceedings and increase the costs, eg forcing parties to come up with new expert witnesses unless there are very good reasons to do so. Even then, one must assume that the parties can still dismiss the arbitrators if they do not like it. Subsequently, it will be time for the closing statements and also here there will normally be an agreement as to how long they may take. All will be recorded verbatim, and the text will be circulated daily. Often there will also be a possibility for parties to present post-hearing memorials. Arbitrators will set a time frame and they will be delivered simultaneously so that there will be no further replies. These texts are likely to be of great help to arbitrators when drafting their award. In the post-hearing memorials, parties sometimes even present a text for a final award as they would like to see it.

1.4.3  The Conduct of Multi-party Arbitrations. Class Arbitrations? The question of joinder was broached in section 1.3.1 above when discussing the parties to an arbitration, but there may also be more than two parties from the beginning, notably when there are more parties to the same contract, all situations therefore of a multi-party arbitration, which raises the issue of what complications may be expected and how these might be handled. In such cases under ICC Rules the Court of the ICC may deal with the matter of appointment of arbitrators and how many there should be. The LCIA Court under its Rules must now do so. Guidance will be that if there is a party arbitration, each party should be able to appoint an arbitrator provided presumably that it does not weigh the total number of arbitrators in favour of one set of parties. The New York Convention is mainly concerned that the composition of the tribunal is in accordance with the agreement of the parties (Art V(1)(d)) and does not elaborate. The French Cour de Cassation in Dutco expressed some public policy concern here as we have seen.90 When there are several contracts with different parties litigating the same issue, it may be convenient and efficient to consolidate. May one interested party freely join or may parties even demand consolidation, eg involving subcontractors who may otherwise be sued by the contractor in different proceedings but on the same ground, namely faulty materials? The general rule is that consent is required from all in order for anyone to join or to consolidate.91 If there is sufficiently broad appointing power in an appointing authority, at least the same arbitrators could be appointed in each case so as to avoid opposite decisions, but different laws could still apply as to the substance and the applicable arbitrations rules could also be different. International recognition

90  See n 76 above, and further B Hanotiau, Complex Arbitrations: Multi-contract, Multi-issue and Class Actions, Kluwer Law International. (The Hague, 2005). 91  Abu Dabi Gas Liquefication Co Ltd v Eastern Bechtel Co [1982] 2 Lloyd’s Rep 425, cf also s 35 English Arbitration Act 1996.

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may be further complicated, especially if there was no agreement of the parties to the composition of the tribunal. Class arbitrations should be distinguished. It would seem curious that they could happen but the US Supreme Court proved amenable in the case of a standard form contract under a sole arbitrator and left it to the latter to decide whether there was a class.92 The fact that not each interested party appointed an arbitrator was not considered decisive. It is now not uncommon in standard contracts to see an express exclusion of this form of dispute resolution in the US. The facility is so far limited to domestic arbitrations. It may be of interest in this connection that the transnational arbitration practice in some commodity markets in so-called string arbitrations has allowed the award between the seller and the last buyer to be binding on all intermediaries as to the quality of the product passing through a chain. This may also obtain in maritime arbitrations in the case of sub-charters.

1.4.4  The Award All decisions that are final, meaning dispositive of any disputes between the parties, either of fact or law, procedure or any other made by arbitrators in the course of the arbitration are awards in a technical sense, no matter what they may be called. They may even be called preliminary, interim or partial, it does not matter, and it cannot characterise them. Thus decisions on jurisdiction or arbitrability as preliminary issues raised in an arbitration, which is common, may well lead to ‘preliminary’ awards in that sense, but they are all the same dispositive and final and cannot be varied by later decisions; see also the discussion in section 1.3.7 above. There may still be possibilities for review, even sometimes for appeal, although it has already been noted93 that in international arbitrations it may increasingly offend the notion of finality. The essence is that the award itself cannot be reviewed by arbitrators and that the arbitration itself is at an end in respect of the issues covered, except that the applicable rules may still allow for minor corrections of obvious mistakes, notably in calculations. On the other hand, all decisions that are not final, even if called awards, are not such in a legal sense: so the Procedural Order No 1 and its successors and preservation measures do not settle any matters conclusively and are not then awards in the true sense. Nor normally, therefore, are preliminary or interim measures either, even if Article 17(2) allows the form of an award, but it should not confuse. Neither the New York Convention nor the Model Law have a definition of awards. The UNCITRAL Rules in Article 32(2) only require the award to be in writing and declare them to be final and binding on the parties (see also Art 26(2) and (8) LCIA Rules (2014)). In terms of formality, the seat must often be mentioned also. The 1998 LCIA in Article 32(2), and other Rules may further require that the ­tribunal make every

92  93 

Green Tree Financial Corp v Bazzle 539 US 444 (2003). See n 1 above and accompanying text.

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effort to ensure that the award is enforceable but need not investigate the local laws of countries where enforcement takes place. It was limited to enforceability at the seat in the 2014 LCIA Rules, where it is seldom relevant and sought. If parties are concerned about these issues, they should make it part of their pleadings. Default awards may present special problems. They are not in the nature of default judgments in the ordinary court and, even if a party does not defend, they are normal awards. The problem is due process and proper representation of the interest of the absent party. If there are (some) pleadings this may help. Arbitrators must be satisfied, on the one hand, that they make the proper decision but on the other must not become the advocates of the absent party in the examination of witnesses although they may well have to become more inquisitive. They may have to be particularly mindful of their own jurisdiction and the arbitrability of the contentious issues. Again, in areas where they have acquired autonomous powers and do not therefore depend solely on the representations of the parties they may be able to do more. There may be consent awards and they are important as parties may reach a settlement but may want it to be issued in the form of an award so as to ensure enforceability under the New York Convention. International arbitrators will normally be co-operative as long as there are no overriding public policy or public order considerations. Article 39 of the UNCITRAL Rules makes clear that arbitrators cannot be forced. The relief that may be given in awards varies widely and may be anything that the parties legally may require, including damages, specific performance, injunctions, (compounded) interest and costs. In appropriate cases it may even mean adaptation of contracts in the light of new circumstances. There may, however, be a problem with punitive or exemplary damages, which may approximate criminal sanctions. There is likely to be considerable hesitation on this point.94 Specific performance is unusual because it is messy and hard to enforce, but it is not out of order. Restitutio in integrum is a special form of it and is not uncommon. In respect of costs, the principle in international arbitration is that loser pays all, but that may not cover the management cost and arbitrators are likely to look further at what is reasonable. If the winner brought an excess of witnesses or unnecessarily prolonged the argument, this will be taken into account. Full costs are seldom given. Tribunals decide by majority or if so agreed the voice of the Chair may be preponderant. If the majority prevails, it may still happen that there is no majority at all, ­especially when determining damages. The ICC Rules allow the Chair to decide the issues in that case. That is more generally the practical approach in all matters of procedure. As to quantum, what may happen alternatively is that the arbitrator allowing the higher amount will also be counted for the next lower amount until a majority is reached. Other issues are those of separate, concurrent or dissenting opinions. They are on the whole not encouraged in international arbitration as they may undermine the credibility of the award and may give individual arbitrators an undesirable opportunity to show off or, in the worst case, to show that they are defending the interests of the party having appointed them. Since arbitrators are not there to clarify the law either but

94 

It was refused by the House of Lords in British Airways Board v Laker Airways Ltd [1985] AC 58 (HL).

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only to solve a problem, these opinions cannot serve a purpose in that context either and only unusual circumstances should motivate them. Rather, it is submitted that arbitrators have a duty to strive for unanimity and that a minority should defer to the majority as two, after all, normally know better than one. It is an important rule that the deliberations are secret and cannot be disclosed. There is danger where secretariats of arbitration institutions become involved and arbitrators need to keep a proper ­distance, bureaucracies and similar agents being notorious for leaking like sieves. The issue of reasoning will be dealt with more extensively below in section 4.

1.4.5  Effect of the Award and Potential Impact on Third Parties For this discussion, the res judicata effect of awards and its meaning are important. It should not be compared and automatically equated with the effect of ordinary judgments. It is clear that the same cause of action cannot be restarted between the same parties, but the collateral effect is less clear. It is possible to distinguish in this connection between the effect on the same parties in another cause of action and on third parties. As to the former, findings of fact in one award may be relevant in another if finally determined in the first where the situation is the same. In common law this is often considered an issue of estoppel. More troublesome is the position of third parties, especially in proprietary matters and issues of set-off, perhaps especially relevant in subsequent bankruptcy of one of the parties. These issues will be discussed more extensively in the context of financial arbitrations in section 2.3.3 below. But the issue might also arise purely contractually, especially in related contracts when it is an issue of privity (see more particularly Vol 2, ch 1, s 1.5), relevant also with respect to arbitral awards which could themselves be seen as matters of contract law in this aspect. An example may suffice: the price under a supply agreement is dependent on that of another concerning semi-finished products. Under this contract arbitrators have allowed an increase following a dispute. Need the purchaser of the final products accept this finding or can the matter still be re-argued in a second arbitration? These are matters with which the ILA’s International Commercial Arbitration Committee has concerned itself since 2004 in its Report on Res Judicata and Lis Pendens and its Recommendations on Lis Pendens and Res Judicata and Arbitration, in which connection it indeed notes that the situation should not necessarily be equated with ordinary judgments. It is submitted that the issue also has to do with the powers of arbitrators. If, as must be increasingly assumed, they do not merely derive from the arbitration clause but institutionally rather from the transnational legal order itself, which the arbitration clause only activates, it is easier to see that international arbitrators acquire powers also in public policy and proprietary matters. This was discussed above in section 1.2, where it was further noted that in property matters they operate more and more like equity judges. It is another matter whether this may also apply to connected agreements— see the supply contract example above. Altogether this would mean more and more approximation to the ordinary judicial function, which is much resisted in this book. In any event, it would still not make arbitrators judges, certainly not appellate judges

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ready to clarify the law, as was submitted earlier. It will also be clear from their reasoning, but from the expanding notion of arbitrability we know also that their powers are dramatically increasing and that may also affect third parties. It has already been said that the issue becomes here truly one of supervision of international arbitrators as private dispute resolution in matters affecting third parties or the public at large may become increasingly questionable, certainly also in investment arbitrations. It is a ­question of transparency, accountability and ultimately legitimacy.

1.5  The Role of National Courts 1.5.1 Support It has already been suggested several times that an international arbitration does not operate in a legal vacuum. Traditionally it was still believed that its legal place was the seat and that the latter’s laws encapsulated the arbitration even if it was international. As a general proposition it was argued above that this is no longer tenable and the delocalisation model was found to be better because it simplifies and explains more: see section 1.1.8. In fact, it has long been held that at least in matters of procedure, evidence and private international law, including the facility to apply the modern lex mercatoria, the tribunal is free, although in this book this freedom is not unfettered either but subject to the submissions of the parties and always embedded in law, now at the transnational level subject therefore to the hierarchy of the various autonomous sources of law that here operate (both in procedure and substance). In this view, transnationalisation of the law applies all the more to the areas where international arbitrators have acquired autonomy. It very much concerns the legal infrastructure of the entire international arbitration. It then also covers the notion of segregation of the arbitration clause and the law applicable to it, including jurisdiction, arbitrability and the reasoning of international arbitrators. At least in matters affecting the public interest, international arbitrators may even be able to raise such issues autonomously and look for transnational minimum standards, see sections 1.1.10 and 1.2.5 above. International arbitration may, however, still need involvement from local authority. There are basically three areas where this may be needed and they can be summarised as follows. First there may be a need for support. Preliminary preservation measures are one such situation, which will be dealt with in this section. Supervision of arbitrators and the award may be others. That is the area of challenges to the award and its annulment, dealt with in the next section. Finally there is the issue of recognition and enforcement, especially against local assets of a respondent, dealt with in section 1.6 below. In the first case, it concerns especially the preservation of assets or evidence, the continuation of supplies and the compelling of witnesses. It is therefore not limited to support at the seat where parties likely have little activity, having chosen it exactly because of its neutrality. The main issue in terms of support is where it is needed and whether the laws of that country will induce its courts or other relevant instances upon request to give it under its own laws. That has nothing to do with the laws of the seat

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unless it is still given a special role here or the relevant national law refers back to that law in matters of support, but it is unusual. In section 1.3.9, it was noted that as far as support is concerned, except in matters of appointment of arbitrators, the seat has little to contribute. Students should not be deceived by the Model Law. Although it refers to the seat directly or indirectly many times and was probably written with that central theme still in mind, it is no more than a model for national arbitration laws. As such it serves (or not) international arbitration in whatever form it may be required and it should not be considered in a seat-centred way, putting emphasis on the courts of the seat retaining the initiative also in terms of authorisation for whatever support may be required elsewhere. It is an antiquated notion and if there is a need for centralisation, that function is now more commonly left to the arbitral tribunal under transnational law, while in case of urgency the parties may go directly to the relevant courts or authorities that need to be activated. It has been said many times that the law of the seat is only truly relevant to the extent there is conduct and effect of an international arbitration in the country of the seat or a need for support there, but the same goes for the law of any other country where there may also be such conduct and effect, for support especially relevant in places where assets must be preserved, evidence safeguarded, witnesses called and activity sustained pending the arbitration. Another interesting issue in this connection is the compelling of witnesses. Again it depends on local support in the residence of these witnesses and its laws as to whether their courts will act. In the US, the issue arose under the Federal Rules of Procedure, which allowed support of this nature for foreign ordinary court proceedings but strictly speaking no others. The US Supreme Court started to make an exception, however, for foreign competition authorities, now commonly extended to international ­arbitration.95 There is here often also the need for a surprise element (see again the discussion in s 1.3.9 above) therefore a need for ex parte facilities, which activating the arbitral tribunal, or even more so the court at the seat with its publicity, may disturb. The accent in terms of support is thus on local authorities in countries where it is needed. This being said it is not unnatural and probably even sensible to keep some control and centralise these measures at least so that the arbitral tribunal knows what is going on and what is being asked for in support and where. Again, this centralisation is now more likely to take place in the arbitral tribunal itself, not in the courts of the seat, which proved inefficient and simply introduced yet another complication The key is rather to keep the arbitral tribunal informed after measures have been requested and taken in the most relevant jurisdiction. The English arbitration Act of 1996 is of interest in this connection and has already been cited before. Indeed, it puts the arbitral tribunal at the centre except in cases of emergency or urgency or if the tribunal is not yet constituted, when courts in the relevant countries can be directly accessed by the parties for necessary measures. It should be understood in this connection, which is not apparent from the text, that the English Act has no automatic control over all of an international arbitration and its incidents wherever but only over conduct and effect

95 

US Supreme Court in Intel Corp v Advanced Micro Devices, Inc, 542 US 214 (2004).

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of the arbitration in England, no more. Ultimately it is again the arbitral tribunal itself and what it will accept under its own transnationalised rules in this regard that will determine how the arbitration proceeds. As there is no international recognition for support measures under the New York Convention, it will ultimately always depend on national laws in the place where action is needed, whether the tribunal’s instructions or orders will have the required effect. The Model Law proposes here a special national recognition regime in Article 17H and I, which basically copies the conditions of the New York Convention. Significantly, there are no special recognition rules under the Model Law for orders of the courts of the seat in this connection demonstrating a lack of relevance. The metaphor of the relay between the tribunal and the court of the seat in these matters is often still used but it must be asked whether it is still apt, although it has already been said that especially in appointments of arbitrators and perhaps even in their challenges (Articles 11 and 13 Model Law), the court of the seat may still have a special role to play if the arbitration clause and applicable institutional rules do not provide for a solution. It was also said that courts in countries which would otherwise be competent may also attempt to constitute the tribunal in such cases when faced with a valid arbitration clause under Article II of the New York Convention. The constitution of the tribunal would then ultimately be tested in recognition proceedings concerning the award under Article V of the Convention. For the rest, the support switches rather to a relay between the arbitration tribunal and the relevant courts in any country where support is needed although the relevant courts may normally also be directly accessed by the parties: it ultimately depends on the law of these countries themselves, in which even the arbitration tribunal and its measures or authorisations may not figure decisively, although parties requesting such measures may be out of order under the applicable arbitration rules. A discussion of the support function of local courts where action is required or of the court of the seat in the more institutional aspects of the arbitration may be extended from provisional or temporary support measures to the issue of enforcement of the arbitration agreement, the establishment of the arbitral tribunal, challenges to jurisdiction, and matters of arbitrability and from there to all involvement of ordinary courts including challenges of the award at the seat or in the place(s) of enforcement of the awards. These different areas of court involvement were distinguished above. In the following, the latter two areas of involvement will be dealt with separately. Anti-arbitration orders or injunctions in local courts may be seen as the opposite of support and they are not uncommon.96 Must international arbitrators follow suit when their arbitration is forbidden by a local court? Again, it can only have an effect in the relevant country but not impede the arbitration elsewhere, even if the order came from

96  For the EU, anti-suit injunctions were already mentioned in section 1.3.4 and should be clearly distinguished as they order parties rather to continue the arbitration and avoid local courts, in that sense pushing the opposite ethos favouring the arbitration.

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the courts of the seat. If one of the parties is within that jurisdiction, the arbitration may become truncated but it will not end.97

1.5.2  Supervision and Challenges The essential question in matters of supervision of arbitrators and their award is whether we centralise the review at the seat or whether we leave it to the recognition courts? In the first case, we speak of challenges or annulment of the award. The New York Convention suggests that such challenges may not be limited to the courts of the seat but that there may be multiple countries where challenges can be mounted, notably also in the courts in the country of the applicable law. It is not dispositive as it depends on the laws of each country and not on the New York Convention where challenges may be brought. Still it may be in several countries. This being said, under the Convention the final word is with recognition courts; we should not have it both ways. It offends the principle of finality. Nonetheless, there may also be multiple recognition courts but that simply and unavoidably depends on wherever assets can be found. Where challenges of the award in local courts are still possible, it is important to determine what the grounds are—the Model Law uses the same as those in the New York Convention for the refusal of recognition and enforcement. We must then also ask whether such an annulment concerns the validity of the entire award or only its effect in the relevant country, normally the one of the seat. It may be best to again approach this from the point of view of different legal orders operating in parallel. Courts of the seat or any other have no power over the international commercial and financial legal order and its dispute resolution facility or what the French now call the international arbitral order. The effect of annulments of this nature are limited to the international arbitration coming demonstrably onshore in the country of the annulment although that need not be only the country of the seat. That means that an annulment has no effect in other countries. It has already been pointed out several times that annulment wherever does not prevent recognition and enforcement of such an award elsewhere under the New York Convention either.98

97  The situation may become very complicated and embarrassing. In the saga of Himpurna v Indonesia, TDM 2 (2004), a US Corporation, in a second arbitration against Indonesia in respect of an earlier award, the payment under which was guaranteed by the State, was faced with an injunction from the Indonesian courts against continuation. The tribunal ignored the injunction and moved the hearing to The Hague. The Dutch courts did not sustain the injunction and an award was issued. The complication is, however, that arbitrators when they continue may themselves be at risk in the manner of a contempt of court or similar recourse in the country of the injunction. 98  It has been firmly established in case law that a successful challenge at the seat does not pre-empt recognition under the New York Convention, see in France Ste PT Putrabili cited in n 13 above, summarising earlier French case law including Hilmarton Ltd v Omnium de Traitement et de Valorisation (1997) XXII Yearbook of Commercial Arbitration 696, and in the US Chromalloy Aeroservices Ltd v Arab Republic of Egypt 939 F Supp 907 (DDC 1996), repeated in TermoRio SA ESP et al v Electranta SP, et al, 487 F3d 928, 939 (DC Cir 2007) and most recently in Corporación Mexicana de Mantenimiento Integral, S de RL de CV v Pemex-Exploración y Producción, No 10 Civ 206 (AKH), 2013 US Dist LEXIS 121951 (SDNY 27 August 2013).

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Some special concerns and issues may be of particular interest. First courts should not meddle. Such a disposition, especially in the courts of the seat, only gives losers more ideas and creates a litigation mentality. It takes far too long; in any event early recognition elsewhere will pre-empt it in practice and requests for annulment do not suspend recognition requests. On the other hand, there is mostly only a short period for challenges, under the Model Law 30 days from whenever awards are rendered, be they interim or final. Another issue to consider in this connection is that, unless everything goes obviously of the rails, complaints about conduct of arbitrators are better reserved until after the award is rendered. After all, the nervous or aggrieved party may well win the case and there is nothing served by a stop-go attitude in the arbitration.

1.6  The New York Convention. International Recognition and Enforcement of the Awards 1.6.1  The Coverage of the New York Convention The New York Convention is usually associated with the international recognition and enforcement of arbitral awards as is suggested by its title. It is the subject of ­Articles II–V, but in section 1.3.3 it was mentioned that in Article II it covers other aspects as well, importantly also the recognition and international currency of arbitration agreements. Article I further delineates its scope and possible limitations. The issue of what is international and commercial is broached here although in incomplete ways (see the discussion in s 1.1.7 above). What is notable from the text is the absence of an interpretation clause. As for all treaties, the Vienna Convention on the Law of treaties of 1961 applies, notably its Article 31, but it does not mean a great deal and what is notably absent is a need for uniform interpretation, cf Article 7 of the other (1980) Vienna Convention on the International Sale of Goods (CISG). It means that each Member of the New York Convention and its courts can still go their own way and there is no uniform approach so that very different solutions may still be found in domestic courts recognising an arbitration agreement (eg in the law applicable to jurisdiction and arbitrability) and more particularly in those that recognise and enforce awards. In any event, much remains unsettled and the incorporation statutes in each Member State may shed more light. There may be the commercial exception under Article I and the requirement of reciprocity provided for in the same Article but beyond this, the ratifying state may also indicate which courts are competent, how much of an appeal in these courts is still possible and the time frame, mostly between one and three years, with the question whether this runs from each (interim and other) award or only from the final award in the arbitration. The Convention remains old-fashioned in so far as all international awards appear to remain some species of domestic award in the country of the seat. Where the law is invoked, that appears to be local law. It reflects the situation in 1958 from when the Convention dates. It was observed before that references to the place and law of the seat remain explicit or may be implied throughout unless reference to another (national)

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law is made or rules of private international law may be deemed implied. The delocalisation model dates from much later, although of course in the key element of the validity of the award, the law of the seat is no longer dispositive under the Convention and awards may be recognised and enforced even if successfully challenged at the seat (or in the country under the law of which the award was rendered), see Article V(1)(e) and section 1.5.2 above. This being said, localisation at the seat even remains the system of the Model Law, last amended in 2006 and to the extreme in the new LCIA Rules of 2014, see section 1.1.9 above. For the rest, it was submitted that the New York Convention, in order to evolve, is best seen as being placed in the context of the transnational lex mercatoria with its different autonomous sources of law, of which treaty law is only one, and it must compete with them, notably fundamental and general principle, the practices developing in international arbitration, and party autonomy (in the arbitration clause, transnationalised upon separation from the rest of the agreement). This applies also to the evolution of the concept of arbitrability in Articles II and V(2), in the latter Article the notion still being connected to the law of the country recognising or enforcing the award. The notion of public order and its bar to recognition and enforcement of the award should similarly be considered evolutionary.

1.6.2  Recognition and Enforcement. Article V of the New York Convention The law depends in its dispute resolution on voluntary compliance with judgments or arbitral awards. Social and economic considerations or fears of adverse publicity or economic retaliation may reinforce this. On the other hand, unwillingness to comply may be tactical in order to get a more favourable settlement. However this may be, it will be necessary to have a stick somewhere. Police force is the ultimate remedy and must be activated, which can only be done through local courts in the place where assets can be found, or other action must be taken, for example when it comes to specific performance. There may result multiple enforcement possibilities in different countries. Article IV specifies a simple procedure: an authenticated arbitration clause and award, duly translated, must be presented to the proper court. It is of interest that in respect of international arbitral awards and their recognition and enforcement, the model of ordinary judgment recognition is chosen. There would have been other possibilities, notably simply suing for contract performance on the basis of the award. The judgment analogy derives from older bilateral recognition treaties, see eg the Dutch–Belgian one of 1925, which covered both ordinary judgments and arbitral awards. In respect of foreign judgments, commonly a distinction is made in treaties between recognition and enforcement. That is maintained also for arbitral awards and reflected in Article III of the New York Convention even if under it the conditions for either are the same. It remains also the system of the Model Law, but it is very different, for example, in the EU Regulation (Brussels I) on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, last amended in 2012, under which recognition of these judgments is now virtually automatic but not

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enforcement. It should be realised that many judgments never need enforcement, such as the ones for defendant, or declaratory or constitutive judgments. Yet they might still require recognition. The distinction between recognition and enforcement here enters the realm of understanding of what is going on. Recognition operates like a defence or shield. It prevents further litigation, especially important if there was an award in favour of respondent, including those concerning a lack of jurisdiction and arbitrability. Enforcement is not then the issue. But when it is needed, the award rather acts as a sword and activates police force, especially important, therefore, for a claimant who successfully claimed damages or specific performance. Again, it should be realised that some decisions, even if in favour of claimant, may not need enforcement eg decisions that quiet title and other declaratory decisions or those concerning status and capacity although especially the latter could still affect the validity of the arbitration clause and require recognition in subsequent proceedings. Article V defines the impediments to recognition and enforcement of awards in Member States of the Convention. There are some more, such as those resulting from the definition of internationality and those affected by the commerciality reservation and any reciprocity requirement in Article I. Another impediment may be that the arbitration clause must have been in writing under Article II (even if the requirement of a writing is not repeated in Article V, and does not apply to the award either). A further, extra-Convention, impediment may derive from sovereign immunity claims in respect of foreign states. The essence of the New York Convention is that recognition and enforcement never entail an appeal on points of fact or law, or procedure, unless they rise to the level of the specific conditions laid down in Article V, which only concentrate on proper composition and jurisdiction of the tribunal, due process, arbitrability, and public order. A further key is that the impediments under Article V are never dispositive and allow the recognising and enforcing domestic courts some leeway; they may be, but are not necessarily, a ground for refusal of recognition or enforcement. In other words, the language is permissive, not mandatory. In fact, the recognition and enforcement facility is implied and the ground for refusal must be established by the party objecting to it, except in matters of arbitrability and in the public policy bar where recognising courts have autonomy. They are narrowly interpreted although not necessarily the same everywhere.99 It has already been said that there is notably no requirement of uniformity in the interpretation. More specifically Article V(1)(a) requires proper capacity of the parties to the arbitration agreement under the laws applicable to them and that the arbitration clause is valid under the law the parties have chosen and otherwise under the law of the seat. For companies it raises the question of ultra vires authority and under which law: that of the formal seat or of their main activity? The issue of capacity is more particularly

99  See AJ van den Berg, The New York Convention of 1958 (The Hague, 1981) 267ff. See more recently especially the International Law Association, Final Report on Public Policy as a Bar to Enforcement of International Arbitral Awards (2002), referred to in n 103 below.

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relevant in respect of state agencies. Note again the absence of transnationalisation of these concepts (especially important if state entities operate internationally), which would depend on further evolution of the Convention’s interpretation. Invalidity of the arbitration clause may result from lack of intent but also because of illegality (competition issues). Here again transnational minimum standards could become relevant. Article V(1)(b) deals with due process, but only in the form of proper notice of the appointment of arbitrators or of the proceedings and the ability to present the case. More modern law concentrates on equal treatment and a proper hearing. Article V(1)(c) deals with jurisdiction in terms of the dispute being contemplated or falling within the scope of the arbitration agreement (an issue which might often also be brought under Article V(1)(a) in the sense that there is no valid arbitration agreement covering the dispute). It has already been said that it is important especially where arbitrators are tempted to start a new line of reasoning that was never in dispute between the parties. Article V(1)(d) deals with the proper composition of the tribunal pursuant to the arbitration agreement or otherwise the lex arbitri of the seat. One may assume that issues of independence and impartiality and other matters of conduct of arbitrators may be covered under this section. In all of these issues, there is a question as to what extent they should have been raised during the proceedings before the arbitrators when the impediments became known and the issue of acceptance, directly or indirectly, may enter into the discretion of the recognising or enforcing domestic courts.100 Article V(1)(e) finally allows domestic courts to refuse recognition or enforcement on the basis that the award was successfully challenged at the seat or in the country under the law of which the award was made. Although the latter part may be unclear, the importance of this language is that there may be multiple places for challenges under the Convention and that they are not limited to the courts of the formal seat of the arbitration. The conditions outlined under Article V(1) are presented by the party against whom the award is invoked and who wish to contest its recognition or enforcement. In Article V(2) there are two conditions which may also be invoked by the recognising or enforcing domestic courts at their own initiative. They concern the questions of arbitrability and public order, both to be determined according to the law of the country where the recognition or enforcement are being sought. Note here again the absence of a more transnational approach, hardly surprising in a Convention dating from 1958. It will have to come from the evolution of its interpretation within the modern lex mercatoria and its other competing sources of law. Indeed the concept of arbitrability has been substantially broadened in the international arbitration practice following Mitsubishi in the US and Eco Suisse in the ECJ101 and many countries now also operate a kind of international public policy concept that is a lesser bar to recognition and enforcement. Especially the American courts eschew parochial tendencies and have a

100  This issue may also arise when a losing party starts ordinary court proceedings arguing that the arbitration agreement on which this party relied in the arbitration was always invalid. This could become an issue under Art II. 101  See for these cases n 53 above. See further the comment in n 99 above.

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pro-enforcement bias.102 This is not a uniform (transnational) standard; as we have seen, every country still practices its own notion of ‘international’ public order. It has already been noted that uniform interpretation is not an aim of the Convention and there may be substantial differences. This being said, countries that are part of globalisation and want its benefits will be harder pushed to deny international arbitral awards recognition and enforcement on purely domestic considerations. The International Law Association (ILA) has tried to help with more uniform definitions of public policy and emphasises exceptional considerations for refusal under this heading103 (see ­further also the discussion on public policy in ss 1.2.3–1.2.5 above). A special issue may be recognition in bankruptcy situations if international ­arbitral awards, for example in their approach to set-off and other preferences, offend the domestic bankruptcy order in recognising countries. This will be discussed more extensively in section 2.3.3 below. Here again one may see that countries seeking to benefit from international finance may increasingly have to accept the impact of products common in that world, therefore also in local bankruptcies, and may then recognise relevant arbitral awards accordingly. At the local level, depending on the incorporation statute into local law, it may still be problematic whether bankruptcy judges can directly deal with these issues or whether a special court must be activated for recognition and enforcement, which may imply some double review when it comes to fitting in the award into the local bankruptcy order. Another issue already mentioned also may arise locally when under the incorporation statute a time limit is set for recognition and enforcement, often three years. Does it start from the time of each type of award or from the final (last) award? It may create problems when, for example, the arbitration jurisdiction issue is early settled in favour of arbitration. The other party cannot object to recognition as it is unlikely to be requested by the successful party at that time and when recognition of the final award is sought it might be too late to object to the earlier award on jurisdiction, whose recognition is then assumed. 102  Sonatrach (Algeria) v Distrigas Corp 1995 (US District Court Mass), XX Yearbook of Commercial ­Arbitration 1995, 795. See for Switzerland KS AG v CC SA, XX Yearbook of Commercial Arbitration 1995, 762 and for case law in Germany XII Yearbook of Commercial Arbitration 1987, 489. In Koehler v Bank of Bermuda Ltd 12 NY 3d 533 (2009), this pro-arbitration bias went as far as to motivate the New York Court of Appeals to extend recovery from the losing party (a foreign bank) to its assets abroad (outside the US) as a consequence of personal jurisdiction over the defendant in New York, now limited, however by the US Supreme Court in Daimler AG v Bauman 134 S Ct 746 (2014), which found a minimal direct presence in the US insufficient. Being at home in New York or conducting a substantial proportion of business there would now appear to be the minimum threshold to reach foreign assets through recognition of an award in the US. 103  ILA Committee on International Commercial Arbitration, Final Report on Public Policy, Transnational Dispute Management, vol 1, issue 1 (2002). In its Recommendation 2(b) it is stated: ‘In order to determine whether a principle forming part of its legal system must be considered sufficiently fundamental to justify a refusal to recognise or enforce an award, a court should take into account, on the one hand, the international nature of the case and its connection with the legal system of the forum, and, on the other hand, the existence or otherwise of a consensus within the international community as regards the principle under consideration (international conventions may evidence the existence of such consensus). When said consensus exists, the term “transnational public policy” may be used to describe such norm’. Note that this may go further than domestic notions of ‘international public order’, increasing the bar to international recognition and enforcement of awards. Justice Stephen Breyer, The Court and the World (2015) 195 suggests that courts may thus look beyond their borders, even though confirmation by the US Supreme Court is still awaited.

Part II  International Financial Arbitration 2.1 Introduction104 2.1.1  Special Problems in International Financial Arbitrations One of the first things to remember when discussing international financial disputes and arbitration is that modern financial products such as loans secured by commercial and related cash flows, particularly in floating charges, or supported by other forms of asset backing as in finance sales (finance leases and receivable financing) have encountered problems integrating into the law wherever, including therefore domestically, both in the contractual and proprietary aspects. So have many hedging instruments such as futures, options and swaps and others to manage risk, such as securitisations and credit default swaps, and the way these products are traded or unwound. Commonly, problems arise here in the obligatory or alternatively proprietary nature of these products and it affects their transfer and liquidity. Thus options, futures and swaps are contractual and it is difficult to unwind or transfer them without consent of the counterparty. In investment security entitlements, we must decide whether the claims against one’s custodian are contractual or proprietary or something in between. The legal status of stock lending, and even of repos may then also remain troubled.105 Similarly in the status of client accounts. Do clients own them or do they have only a contractual claim? That reduces them to the lowest rank in a distribution upon bankruptcy of the account holder. More generally there may be problems with constructive or resulting trusts, especially with the notion, manner and effectiveness of segregation of client assets. One may further ask whether credit default swaps are credit risk management instruments under which risk is commoditised and ­seemingly transferable or tradable, or whether they are legally merely contractual guarantees. The extent of the set-off and contractual netting facilities is also often less than clear. They have become other major risk management tools and result in strong preferences in a bankruptcy liquidation. In many jurisdictions, there are also problems with the law of assignment. The result is that modern finance is legally often poorly embedded and the (­ domestic) laws deemed applicable, whichever they may be, might hardly give an answer or may in any event leave considerable doubt. That may even go for the most sophisticated domestic jurisdictions such as those of England and New York. Although these are issues of substantive law, they may cast international financial arbitration in a special

104  See for a shortened version of the following text, Jan H Dalhuisen, ‘The Applicable Law in International Financial Disputes’ in J Golden and Carolyn Lamm (eds), International Financial Disputes, Arbitration and ­Mediations (Oxford, 2015) 169. 105  See for a discussion of these financial products and risk management tools, Vol 3, ch 1.

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light as potentially it may deal differently with them when properly so pleaded by one of the parties. The second thing to remember is that finance is heavily regulated.106 This means that financial service providers, especially banks,107 will need a licence for much of their money recycling activity, notably in terms of their deposit-taking function when directed towards the general public and their lending activity.108 This is now also true for many activities of the intermediaries in the recycling of money through the capital markets, notably investment banks or similar institutions in their different functions such as their underwriting, market making, brokerage or investment management activities.109 Even issuers are now commonly subject to a form of authorisation when accessing the capital market and will have to produce a prospectus. There is also the role of official markets or over the counter markets (OTCs), Multilateral Trading Facilities (MTFs), other Alternative Trading Systems (ATSs), or Central Counterparties (CCPs) to consider, which may require some licensing as well and their activities and forms of trading may be subject to at least some supervision, common in the pre- and post-trade price reporting functions as we shall see. This is foremost the area of administrative law but the public concern is also likely to extend to conduct of business and product supervision where there may be direct public intervention in private law formation and its remedies, thus reinforcing private law protection between participants such as brokers and their clients. This may happen especially where weaker parties become involved, notably as investors needing (private law) protection against these intermediaries, in particular in terms of damages for losses or the annulment of inadvertent investments.110 106 

Vol 3, ch 2 is devoted to this subject. The operation of non-banks or of the shadow banking system remains largely outside the present ­discussion. They are hard to define and it remains unclear how far they will or can be incorporated in the financial regulatory system. 108  Issues of financial regulation and the public interest are here clearly distinguished from issues of liquidity and monetary policy, although obviously accommodating monetary policy may have an effect upon the stability of the banking system, as may liquidity policy. This is problematic where central banks are in charge of both banking and monetary policies and also exercise a major role in effectuating financial stability. These overlapping powers and the way this may impact on the financial system are not further discussed here either, but see Vol 3, ch 2, s 1.1.6. 109  There are for these activities or functions commonly (a) a licence or authorisation requirement with conditions in terms of (i) ‘fit and proper’ tests of management, (ii) minimum capital standards of the institution, (iii) adequate systems, and (iv) a clear business plan (which serves as basis for the other conditions), (b) ­prudential supervision making sure that these conditions remain complied with, (c) conduct of business rules, and (d) supervision of the products (that these work), the latter two especially (but not only) important in respect of retail customers or investors. In authorisation and prudential supervision, we are foremost in the area of ­administrative law. In commercial banking, this remains the main focus of regulation. In the capital markets, the emphasis was traditionally more on conduct of business and product supervision than on licensing and prudential supervision, particularly in brokerage services, therefore more on private law than administrative law remedies even if this may be changing—before 2008 investment banking was mostly considered less risky and less of a threat to financial stability; at least there were no depositors to protect and investment banks were supposed to segregate client assets and could not take their moneys as deposits. On the other hand, conduct of business is now becoming more important for commercial banks; how mortgages were sold in periods of euphoria has thus become a major issue. See further the discussion in Vol 3, ch 2, s 1.1. 110  In terms of conduct of business, reinforcement of fiduciary duties springs to mind first and foremost and commonly supplements the law of brokerage and investment advice or management, especially for retail investors in common law countries, supplemented by contract or negligence remedies. For brokerage activity, concepts such as ‘best execution’, ‘know your customer’ and ‘suitability of the investment’ may be mentioned. One may still call 107 

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This will come out in the law applied by arbitrators but the administrative law aspects of regulation are less likely to rise to the level of arbitration, if only because regulators may not want to submit to it in the case of disputes. However, laterally the authorisation conditions and limitation concerning intermediaries may sometimes still have an (horizontal) effect in private law111 and hence in appropriate cases on the intermediaries’ liability towards their clients, thus potentially resulting in extra-contractual civil liability against perpetrators of the licence conditions. Prospectus liability may be seen as another important example: there are other examples but they are relatively rare.112 There could even be the question of civil liability of regulators,113 although there is so far less support and regulators generally continue to benefit from a form of immunity. Again, regulators are less likely to submit to arbitration in this aspect also. More important may be the civil effects of any intervening bankruptcy of an intermediary, which in truth may be seen as a special form of regulation in situations of (approaching) insolvency, as will be discussed later (in s 2.3.3).

2.1.2  Special Arbitration Needs in International Finance It is probably true that in international financial disputes there is an increasing need for arbitration as there earlier was in purely commercial disputes; efficiency, s­ ensibility this reinforcement or private recourse against intermediaries a form of regulation, although regulation is more commonly associated with direct instructions to intermediaries, therefore with the licensing requirement and prudential supervision but the public interest also speaks through the reinforcement of private law remedies. Conduct of business concerns now increasingly also arise in commercial banking. Here it is not so much the protection of the depositors, who may benefit from deposit guarantee schemes, but rather those who take out loans. Again, the (mis)selling of mortgages to them has given rise to major claims. As far as the soundness of the products offered is concerned, one may think of concern about (electronic) payments in banks and the creation and transfer of investment securities entitlements by securities brokers. 111  It is generally understood that the licence requirements for these activities or functions and the p ­ rudential supervision that follows are no longer geared to the protection of depositors and investors directly, who are ­primarily protected through deposit guarantee and investor protection schemes. Rather they concern the stability of the system or systemic risk. Increasingly macro-prudential supervision is here superimposed over the more traditional micro-prudential supervisions; this is pure policy for which legal recourse is often missing, see Vol 3, ch 2, s 1.1. 112  It is an important instance of civil liability directly attaching to an authorisation or licence requirement, which is otherwise more unusual but there are others such as under recent EU Directives the liability of rating agencies for their ratings. 113  The House of Lords in Three Rivers District Council and Others v Governor and Company of the Bank of England [2000] 2 WLR 1220 seemed less concerned with depositors but accepted—absent bad faith—the ­prevailing statutory restrictions on liability for banking supervisors as an adequate defence, in the UK more ­extensively interpreted than elsewhere, eg in France, where administrative courts now accept in this connection faute simple as sufficient ground for civil liability, therefore leaving more room for depositors’ protection; see also Cour Administrative d’Appel de Paris, 30 March 1999. In Three Rivers, even reasonable policy objectives and considerations connected with systemic risk or the smooth operation of the financial system did not seem to figure large. They were in any event not weighed against the ­statutory requirements of depositors’ protection as laid down in s 3 of the UK Banking Act 1987. It was assumed that the EU First Banking Directive of 1977 (77/780/EEC), now largely superseded by the Credit Institution ­Directives of 2000 and 2006, even though clearly concerned with depositors, did not give depositors extra rights in this connection. No guidance from the European Court of Justice was sought; see further M ­Andenas, ‘Liability for Supervision’ [2000] Euredia 379. Protection of regulators appeared here an objective in itself, although not ­everywhere as broadly interpreted as in the UK.

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and rationality may sustain it and the conscience and knowledge of international ­arbitrators may also contribute. This is borne out by recent changes in the ISDA ­Master ­Agreements (see for these Agreements s 2.2.2 below) allowing for arbitration. The applicable law issue may itself demand it in terms of greater flexibility and sensitivity to transnational trends; it has already been noted in this connection that international arbitrators have more room for manoeuvre in this regard than ordinary courts.114 It may be that in a globalised environment, rationality and efficiency may acquire a ­special meaning in finance as they imply responsiveness to newer needs on a very different and more specialised scale. Informed international arbitrators may be more concerned with the promotion of the commercial flows, liquidity and better risk management at that level, but finance is policy heavy, the reason why an expansive view of arbitrators’ p ­ owers and their role generally may remain here more controversial and the call for greater supervision of them (not appeal) more urgent; this will be discussed in greater detail later. These then are in a nutshell the challenges in terms of the applicable law in international financial transactions and the role of international arbitrators in this area. We are thus concerned primarily with the private law recourse against counterparties, for professionals and consumers alike (although likely to be different) and therefore their protection in a private law sense. This is likely to be reinforced through regulation or similar mandatory standards, which will be the main subject of this part of the discussion, rather than the administrative law issues, except for any horizontal (or private law) effect.115 When it comes to international financial arbitration, we must also consider how far these issues when touching on the public interest are still arbitrable and may indeed be raised by arbitrators themselves. These issues are closely connected with the question of the powers of international financial arbitrators and the foundation of these powers in a globalised legal order and raises important issues concerning the operation of the arbitration itself (see s 1.1.10 above). The basis remains that arbitrators are only there to resolve disputes as defined by the parties in which connection both facts and the, in their view, applicable laws must be pleaded: see section 1.1.3 above. Only in limited areas do international arbitrators have original power such as in procedure and evidence, the determination of their jurisdiction, arbitrability of the issues, and their way of reasoning. Perhaps they now also have equitable power in proprietary matters and issues of set-off, and may have other equitable powers of relief, which may even suggest a more activist role in the proceedings, but these powers remain exceptional. However, in public policy and order matters they may also be acquiring their own function, for example in competition issues and market abuse, as was the main subject of discussion above in section 1.2.5. It may remain controversial although increasingly supported. This also poses the question whether international arbitrators in pressing cases are also empowered to consider or even raise issues of justice, social peace and efficiency as overriding considerations.

114 See 115 

Deutsche Schachtbau- und Tiefbohrgesellschaft cited in nn 27 and 39 above. See the discussion at n 111 above.

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If we may indeed assume that finance is now largely an international activity and at least in structure, services and products on offer gravitates towards a universal model, this may make it all the more conducive to strong forms of (spontaneous) legal transnationalisation, especially in the applicable private law between professionals. That poses more urgently the issue of the development and application of the modern lex mercatoria in this area, the representation of the public interest in this context, and the issue of delocalisation, the operation of the transnational commercial and financial legal order, and the powers of arbitrators to raise legal issues independently (see ss 1.1.10 and 1.2.5 above). It was noted there that the development of the Eurobond and the financial practices in that market were an early demonstration of these developments. The international swap market followed under the ISDA Master Agreements.116 Delocalisation of international financial arbitration and legal transnationalisation are major connected issues already discussed more generally in sections 1.1.8ff above. Again, these are important trends, especially in countries that will accept that further globalisation as a means for renewed energy and growth, and are the real trade-off. This would also appear to affect the nature of international dispute resolution, especially at the level of international arbitration, perhaps even more so in finance, which is the reason why it may increasingly have to be considered separately from other commercial arbitrations, an idea probably also behind the creation of P.R.I.M.E. (Panel of Recognised International Market Experts in Finance) in The Hague (see s 2.5 below). This may be reinforced by the wholly different spectre of an insolvency of the counterparty, which, besides liquidity, counterparty and market risk, directs much of the thinking of financiers and may then also be more specifically relevant in financial dispute resolution. When an insolvency intervenes, this creates a potentially different environment, which may have a considerable effect on the applicable law and remedies. One may think of the attachment of assets, the ranking of security interests, and the extent of setoff and impact of netting clauses in swaps and repo transactions. This may also affect an international arbitration. Like regulatory law, insolvency including liquidation or reorganisation proceedings remains as a starting point typically domestic, although their international reach has been extended in the EU under the Insolvency Regulation and unilaterally under variations of the UNCITRAL Model Law adopted notably in the US and the UK. However, so far there is no such thing as an international bankruptcy regime and bankruptcy remains as such in principle territorial, effective especially in respect of any conduct and effect of an international transaction in the territory of the bankruptcy (but not necessarily in others unless there is international recognition under the instruments just mentioned or local case law), therefore that of the bankruptcy court.117 Other

116  In the meantime, the international eurobond market (which has nothing to do with the euro currency) became the largest capital market in the world. International swaps may be the other example of true transnationalisation of the legal regime; see for the size of these markets, ch1, nn 1 and 19 above. 117  An excursion into the nature of bankruptcy is avoided here. It is still often seen as a matter of private law because that was where it was traditionally embedded (in commercial law) when regulation did not have its modern status and effect. Even though it may still admit of much party autonomy, there can hardly be any doubt that bankruptcy is basically a regulatory matter, even clearer in modern reorganisation proceedings when also cutting down the rights of secured creditors.

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courts in the country of the bankruptcy will submit and defer to their bankruptcy courts, but courts elsewhere and especially international arbitrators may not, although they can often not ignore the existence of such a bankruptcy either and they might have to consider or even define their (anticipated) impact when this becomes an issue in dispute resolution. This may affect first and foremost any proof of claim for which there is usually a summary procedure in the bankruptcy court even in respect of foreign claims against the bankrupt. It may also impact on the powers of international arbitrators with regard to any set-off of claims—see more particularly section 2.3.3 below. It must be noted in this connection that arbitral awards cannot in the traditional approach affect parties who are not party to the arbitration,118 which may especially concern matters of ranking of security interests and issues of set-off. It is of particular interest and more obvious when a bankruptcy is pending. Such an arbitration would not appear to be able to upset the bankruptcy order in the country of the bankrupt, and may then even raise issues of recognition under the New York Convention in that country, bankruptcy courts being courts of special jurisdiction which may have their own public policy reasons to ignore foreign arbitral awards—it is another hot and problematic issue. It may then concern all proprietary issues involving assets, especially relevant in asset-backed funding including finance sales and related trust or other structures when becoming embroiled in a domestic insolvency, unless again we assume that international financial arbitrators have institutional power to decide these issues, which invariably affect third parties not party to the arbitration and in that sense potentially the whole bankruptcy. This becomes another key issue,119 likely, it is submitted, increasingly to redefine the consequences of (domestic) insolvency through international financial arbitrations.120 Local insolvency regimes would thus appear to be increasingly under pressure. 118  The US Supreme Court in allowing arbitrators to decide class actions, Green Tree Financial Corp v Bazzle 539 US 444 (2003), made an important exception, which shows that this rule may no longer be considered absolute; see also s 1.4.3 above. It may also be noted that where arbitrators interpret standard terms, such as the ISDA Master Agreement, it is likely also to affect others. 119  It was earlier identified and discussed in terms of the equitable powers of international arbitrators, see Dalhuisen (n 18) and accompanying text. It was posited in this connection that ever since Roman law—the ­praetorian law or ius honorarium—this extra facility has proved to be a necessary institutional prerequisite for the adequate operation of private law, especially in order to prevent it from stultifying and to underpin private law’s dynamic character. Ordinary courts may not be able to take this on, never mind how liberal they may be in their interpretation technique, and legislators cannot adequately handle it—it would require a continuous process of updating, which is beyond their purview. Civil law has always been handicapped by the absence of this facility and it may explain why the greatest differences with common law are exactly in equity and its products and facilities (floating charges, finance sales, trusts, assignment and set-off, agency, fiduciary duties, and the like). At the level of transnationalisation, there is in any event no formal legislator and international arbitrators must take over. They become like equity judges. Again, this is an institutional issue in the transnational commercial and financial legal order itself. 120  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 CCP (central counterparty) in respect of mutual airline claims resulting from passenger cancellations and ticket changes, the 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 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

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A choice of law by the parties may not have much effect in these circumstances as these issues are not at their free disposition. On the other hand, in a delocalised environment, it may no longer be impossible for international arbitrators to assume greater powers regardless, although it is a big step. Again it could give international arbitrators in international finance (some) power over domestic bankruptcy courts while relying on transnational market practices or customs among all market participants as part of the modern lex mercatoria, which could then even be mandatory. That could also affect issues of segregation and set-off or netting. Local bankruptcy courts would thus have to accept that if such structures operate in the transnational legal order and are accepted in awards, they can no longer be ignored unless there are overriding public policy or order issues against it in the transnational legal order itself or domestic values are still so overriding that they must continue to be respected. However, it is a matter of appreciation and they would be dwindling at least if in other respects the country of the bankruptcy wanted the benefits of globalisation for its citizens and companies. It was said before that this is not a one way street. It follows that when we talk of the applicable law in international financial arbitrations, the scene is very varied, product wise, regulatory wise, bankruptcy wise, and national/transnational wise, different probably for international arbitrators and more so in finance. For the purposes of this discussion, we shall have to introduce some framework to make it manageable and informative. To this end it may be best to choose six building blocks of private law in international finance (in no particular order), showing both the private international law and transnational approaches, and where useful the DCFR approach, which seeks unification through codification at EU level, supplanting at the same time the modern lex mercatoria approach for that area, whether that makes sense or not. These building blocks are more extensively discussed in Volume 3, chapter 1 and are summarised here to the extent necessary. The chosen building blocks are (i) assignments, (ii) set-off/netting, (iii) secured transactions/finance sales and related trust structures, (iv) the use of book entry systems for investment securities, (v) segregation and (vi) the issue of transactional and payment finality.121 The transnational approach will in each instance be compared with the traditional private international law approach, which still insists on the application of domestic laws. The discussion of these various topics subsequently comes together in the question of how we might transfer an international commercial and related c­ ash-flow and rank proprietary interest holders transnationally for asset-backed financing. It is a key question whether the international flows themselves can now be given legal status. Thereafter it will be the turn of regulation/competition/bankruptcy issues, the jurisdiction to prescribe to the extent regulatory issues can arise in international arbitrations, and then also international minimum standards.

and Creditors Rights Systems, May 2001, available at www.worldbank.org/ifa/ipg_eng.pdf. For another c­ ompilation, see also WW McBryde, Axel Flessner and SCJ Kortmann (eds), Principles of European Insolvency Law (Deventer, 2003). Their usefulness is 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. 121  Much of the research may be found in Vol 3, ch 1.

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As far as the applicable law is concerned, this will hopefully lead to a more c­ omprehensive scenario facing the international adjudicators especially international financial arbitrators. This part will conclude with the applicable law clause in the PRIME Finance Rules and with a few remarks on the selection and abilities of ­international financial arbitrators to take on these various tasks, on the issue of the appearance of their independence and impartiality, and the need for accountability and transparency. This again raises the important issue of their supervision (not appeal),122 probably of greater importance for financial arbitrators as indeed it may be even more so for ­foreign investment arbitrators as we shall see. Comparisons will be made with ordinary judges. Finally, the potential need for supporting treaty law will be considered to ­stabilise international financial arbitrations and make them more effective.

2.2  Building Blocks of Private Law in International Finance. The Applicable Law and its Transnationalisation 2.2.1  Assignments and Securitisations The law of assignment used to get little attention as claims were not considered an important asset class until receivables and other financial claims became important. Indeed the assignment is now a most important building block in finance: floating charges and receivable financing all embed assignments and they spring particularly to mind. In securitisations, large parts of loan books in banks or large portfolios of car loans in car financing companies may be transferred through assignment. See for a fuller discussion Volume 2, chapter 1, section 1.5. There are many problems123 even domestically. They concern mainly the possibility of the transfer of these claims in bulk and the inclusion of future claims, more particularly in floating charges when inventory under the charge may subsequently be converted into receivables and thereafter into cash payments (or bank balances): are they all included in the assignment and, more particularly, when transferred as security, do they all retain their original rank upon conversion? These issues are closely related to the discussion on whether claims are assets at all and capable of being the object of proprietary rights. Of course, internally they are a product of the law of obligations, but the better view is that externally they are just like any other assets: they can be transferred and pledged. Yet especially in Germany, now followed in the Netherlands, claims

122 

Dalhuisen (n 36). In the case of credit derivatives, only risk is removed and this is in principle a purely contractual transaction under which a protection seller assumes the risk. Also in the case of risk layering, there may not be a transfer of underlying assets, at most of future cash flows. Still their transfer will have proprietary effects, as does the trading of credit default swaps (CDS), which must be assumed to be through assignment. In international transactions, the law applicable to the proprietary aspects of assignments will need to be considered and in the more traditional nationalistic view the place of the location of these intangible assets or underlying contracts. In risklayering schemes, short of transnationalisation, the applicable (domestic) law is likely to be the law of the place of the party receiving the cash flow and assuming the risks connected with it. 123 

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are or are no longer considered ordinary assets nor treated as such; again, see further the extensive discussion on these issues in Volume 2, chapter 2, section 1.5.1. This may on the one hand facilitate their transfer and make it subject to a more ­flexible transfer possibility largely dominated by party autonomy, therefore by what parties want, leading in Germany, for example, to the possibility of including claims in charges if they arise in the future as a consequence of the sale of inventory under the charge. In the Netherlands, this is hardly possible and each receivable needs to be separately transferred when it emerges, usually done on a daily basis, lowering the ranking and priority which dates as from such time. The DCFR follows the German approach in principle but applies in essence the same regime to assignment as it does to movable assets, reinforcing in this connection the requirement for identification and existence of the claim before it can be transferred or assigned (Art III-5:104). This undermines the operation of floating charges and impacts also on any party autonomy in this area while at the same time limiting the scope for receivable financing and factoring. In securitisations (see Vol 3, ch 1, s 2.5), which deal mostly with existing claims and their transfer, there may still be questions in respect of future interest income being included. More importantly, there are still serious problems with bulk assignment concerning whole portfolios if the accent remains on individualisation and identification of assets rather than on reasonable description of a class in the context of a proprietary transfer. The UCC in Article 9 has an altogether favourable regime for all assignments including those in bulk but equates them with the creation of security interests unless a transfer for mere collection was the intent. The difference is, nevertheless, that the assignee, although ordinarily no more than a security interest holder, may collect and does not need to dispose of the claims upon a default by way of a sale and also may retain overvalue unless especially agreed otherwise. That is reminiscent of finance sales, discussed in the next section. These problems acquire special significance and create further complications in an international context. How is a portfolio of claims with debtors in different countries to be transferred, either in full or as security or by way of a conditional (or finance) sale as in some forms of recourse financing? What would be the applicable law? This presents a major conundrum that hardly allows for a satisfactory conclusion under the canons of private international or traditional conflicts law doctrine pointing always to a domestic regime; see further Volume 2, chapter 2, section 1.9. Here transnationalisation or the operation of the custom of the international market place must take over, relying at the same time on a much enhanced notion of party autonomy in proprietary matters, but subject to the protection of the bona fide collecting assignee or the assignee collecting in the ordinary course of business. Again that is the solution domestically in common law countries (in equity), which then also allows for bulk assignments and the assignment of future claims upon a proper description in the documentation, but these concepts need to be lifted to the transnational level, therefore to transnational law, to make the transfer of an international portfolio of claims (with debtors in different countries) a real possibility. That may also safeguard these assignments (better) in domestic bankruptcies. On the other hand, in the more traditional approach, which always looks for the application of a domestic law, the first question is where these claims are located with

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the idea that they are transferred according to the law of the situs, like the rules for physical assets as we shall see. However, the true problem is here that a claim does not have a natural situs: in commerce the place of a claim is mostly considered the place of the debtor where it must also be enforced although that rules out an international bulk assignment under one domestic law. Here the (domestic) law of the creditor may be more convenient and would create unity at least in the transfer of claims (and ­therefore in the documentation and especially registration or other formalities) albeit by no means in the enforcement by the assignee against the debtors. Some argument can be and has been made that assets are habitually situated at the place of the owner, although it does not solve the problems with the assignment of future claims. Another way is to assume party autonomy here and allow the assignor and assignee to determine the applicable law, which might even be the modern lex mercatoria with its reliance on evolving custom and general principle. That may more effectively save bulk assignments and assignments of future claims in the international flows and is the beginning of transnationalisation but still requires parties’ choice, always assuming that they can now choose a non-statist law. At least such a choice may be upheld in an international arbitration as we have seen. It would become truly significant if non-statist law could also be applied if parties had made no such choice at all. As a consequence of these problems, the law concerning an international assignment (which may become international not only because debtors are in different countries, but also because assignor and assignee are) has remained unsettled, important as it has become, and is under-developed.124 Because of the difficulty with the situs, one important result is that the private international law concerning chattels is not normally f­ ollowed, so that there is even less guidance. In finding applicable domestic laws in the various aspects of the transfer of chattels, private international law concentrated as we shall see mainly on power, intent and formalities, and may in this connection make a distinction between the contractual, proprietary and enforcement part of the transfer, either in full, as security interest, or conditional (finance) sale. In the applicable law to assignments, however, private international law seems to make fewer distinctions in this regard, probably because it does not sharply distinguish between the contractual and proprietary aspects of claims. On the other hand, although in practice the notion of bulk still appears to be more important for claims and their transfer than for c­ hattels, this is hardly acknowledged either. All the same, there is less emphasis on the disposition right, the contractual requirements for the transfer, the type of proprietary rights created, and any documentation, notification or registration needs in this connection. Rather private international law, at least in Europe, appears to concentrate on different aspects: validity of the assignment, raising more particularly the need (or not) for notification of the debtor, and assignability of the relevant claim, raising more particularly the third-party effect of assignment restrictions in the underlying agreements out of which the claims arise and the possibility of an assignment of future claims and their transfer in bulk (in turn

124  In fact, even if no assignment takes place, one could still ask what the status of a claim and the proprietary rights created therein is in other countries (or in a bankruptcy operating there).

Part II  International Financial Arbitration  497

connected with identification and specificity requirements). An important issue is then also to what extent under the applicable law a claim can be separated from the contract out of which it arises. There is further attention for the defences of debtors against these assignments and the rights of assignees, especially if payment as a result becomes more burdensome or rights of set-off are endangered. This different approach as compared to chattels is acknowledged and seems to be promoted by Article 14 of the EU Regulation of the Law Applicable to Contractual Obligations (Rome I, earlier the Rome Convention of 1980) without much further discussion and without special attention to bulk assignments (including those of future claims) or to the consequences for international financings where they are especially relevant, but it has created considerable confusion in case law because these various concepts (validity, assignability and the reference to the defences of the debtors) are poly-interpretable and are by no means stable.125 The EU Regulation is here at its weakest and it was always difficult to understand what this text meant to achieve The origin of the text is obscure. Earlier, the private international law of the different countries applied many different rules: sometimes the law of the assignor, sometimes of the debtor, sometimes of the assignment agreement, sometimes of the underlying contract out of which the claim arises. Note that in the EU Regulation, the assignment is dealt with in the context of contract law, and the proprietary aspects seem to have no standing of their own. This is also the English attitude, which allows a more extended notion of party autonomy in equity to operate. It means that an assignment (in bulk or otherwise) of claims under a foreign law, will be accepted in England and be recognised there domestically, but only as an equitable interest, subject therefore to the better rights of unsuspecting other assignees in England who manage to collect first in good faith or at least in the ordinary course of business. It must be noted in this connection that the ­private international law of England in this area has changed as a consequence of the EU Regulation although it could still be applied in international arbitrations, which the EU Regulation does not cover. Because of all these problems and doubts, in international finance it is possible and it may become necessary for international financial arbitrators indeed to accept, when properly pleaded, a much more radical stand and allow transnational concepts to intrude into the non-contractual aspects of assignments, therefore into the aspects of debtor protection, into the proprietary and enforcement aspects, into questions of what types of assignment (including bulk assignments for whatever purpose) are possible, what the formalities are, especially in terms of notification to the debtors, and what their effect is on the collection right of various assignees against the debtor. They could be derived from international Conventions such as the UNIDROIT Factoring Convention and the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade, even in Non-contracting States.126 They could, however, also derive from fun-

125  See Vol 2, ch 2, s 1.9.5, but it may be acknowledged that the terms ‘proprietary’ and ‘enforceability’ equally still lack precision in respect of claims. 126  This important initiative was not a success because it could not take the key step, being the equation of the modern receivable with the promissory note. It also floundered because of its ultimate surrender to private international law (and its great vagaries) in all aspects where the Convention could be interpreted as not having

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damental legal principle, international custom, and general principles or party autonomy (subject to the protection of bona fide purchasers/assignees/­collectors against adverse interests so created), therefore more directly from the modern lex mercatoria. It would allow other than purely domestic proprietary rights to be created pursuant to whatever assignment agreement, international or not, and regardless of the otherwise applicable domestic law. This is the true challenge and will be increasingly reflected, it is submitted, in international financial arbitrations when they are forced to move to these issues and that would be a very positive development. This is likely to result in another, more informal but also more responsive type of (transnational) law and facilitate international bulk assignments and even the recognition of rights in the receivables when the debtor moves to another country or when the type of collection right so created needs enforcement against assets of the debtor elsewhere (if there is no voluntary payment), even in bankruptcies. In such cases, the key question is always who has the collection right and whether the debtor was right not to pay the assignee in view of his own defences or of the better rights of other assignees. Transnational law may set uniform standards also to be recognised in local i­nsolvencies.127 The traditional example derives from negotiable instruments and in more modern times their eurobond variety. That means that the applicable law becomes susceptible to transnational ownership and assignment facilities regardless of more traditional numerus clausus restrictions, also allowing newer security and conditional or temporary transfers subject to their own transnational regime of bona fide assignee/collector protection, all as may be required for a better functioning of the international market place in these assets unless the public interest forbids it, although there would seem little reason for it to do so. It is suggested that this is the true way forward. Private international law depending entirely on some domestic legal regime even in major international financial transactions is, quite apart from the considerable confusion that reigns under it in the subject of assignments, no longer likely to provide sensible answers. It cannot cope and has come to its natural end in this area.

2.2.2  Set-off and Netting Another key area in which we must ask where in the international flows private international law and its predilection for the application of domestic laws have left us is the law of set-off and netting. See for a fuller discussion Volume 3, chapter 1, s­ ection 3.2. Here again, we may have to consider a need for transnational thinking in terms of risk management in an international setting of mutual claims where international

covered the subject, which was itself most unclear; see for comment further Vol 3, ch 1, s 2.3.8. It was an important but missed opportunity in an area of the law where enlightened academic thinking could have helped a great deal, but it must be said that also at the practical level support for this initiative was minimal and often unsophisticated. 127  See for transnational customary law operating and being recognised as such in local bankruptcies, n 119 above and n 155 below.

Part II  International Financial Arbitration  499

arbitrators may equally be forced to take a lead and protect the international flows, their liquidity and the risk management facilities needed in them, at least to the extent properly pleaded by one of the parties, and there is then all to play for. This issue is of special importance in international finance and acquires particular relevance through the ISDA Swap Master and the TBMA/ISMA Repo Master Agreements. Their status in the international market place, their interpretation, the residual effect of the parties’ choice of law in favour of a domestic regime and its meaning must then be further considered, which issues have already been raised in connection with the discussion in section 1.2.2 above concerning choice of a domestic law in areas of the law not at the free disposition of the parties. Indeed parties to the transactions cannot determine their own ranking or preferences in respect of other parties’ rights in the same assets or asset classes, although there may be room for structuring. Notably for swaps and repos, the master agreements and the netting out thereunder, trans-border and in different currencies and maturities, are then important issues. These netting agreements present important examples of financial structuring intended to curtail risk, conforming here to international standards, although their legal status transnationally and the issue of the applicable law may remain in doubt. Again, transnationalisation on the basis of international practice or custom (within the modern lex mercatoria) may have to help out in order to make risk management through these facilities safe at the international level where international arbitration may be first in line to provide the necessary clarity. This may even become an issue of financial stability and also of efficiency as public order requirements in the transnational commercial and financial legal order itself. Indeed, international regulators favour netting and actively promote it. Originally, in the 1988 Basel (I) Accord, they accepted novation netting only in respect of a single swap but gradually allowed ­bilateral close-out netting even of the novation type provided there resulted a single obligation between the parties (see Vol 3, ch 2, s 2.5.5)-. However, here also we still see the destructive force of the application of national laws only: the financial institution concerned must obtain legal opinions confirming that the netting agreement is enforceable under the law (a) of the jurisdiction of the counterparty, (b) of its acting branch if situated elsewhere, and (c) of the relevant netting agreement. This could mean three legal opinions at some considerable cost. In April 1996 the BIS allowed reinterpretation of the Basel Accord also to facilitate multilateral netting, but only for foreign exchange contracts, as is now operated interbank in London for members of Exchange Clearing House (ECHO). As for the law applicable to set-off, if operating internationally (thus when a claim in one country, or arising under the law of such a country, is to be set off against a claim arising in another or under the law of another), conventional private international law or conflicts rules are often still invoked, although it will become apparent shortly that it is by no means always clear which local rules should then prevail. It remains a very grey area; conflicts rules in matters of set-off have not been the subject of much study. At the substantive level, differences in the approaches to set-off, especially in respect of its limitations, may be found in its nature. They may arise and differ in (a) the eligibility of the payment obligations that may be reduced by set-off; (b) the questions of the maturity of both claims; (c) their being liquidated to money; (d) their being in the

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same currency; and (e) the question of the retroactivity in legal systems that require notification by the party invoking the set-off. Another difference may arise (f) in the set-off possibility of time-barred counterclaims. Most importantly, (g) the applicable bankruptcy or other laws may not be receptive to any expansion of the set-off c­ oncept by contractual netting arrangements, dealing with or structuring these limitations, when it may matter most. It is important in this connection to make some further distinctions; see further Volume 3, chapter 1, section 3.2.3. The set-off may be (a) a remedy to be invoked by the parties outside bankruptcy when they may be able to invoke it either generally upon giving notice (as in Germany and the Netherlands) or only as a defence in litigation (as in England, unless there is connexity or an agreement to that effect). In these countries, the set-off is in essence subject to party autonomy, including the right of the parties to expand the notion in the context of bilateral or even multilateral netting agreements. In England, it was the equitable set-off that allowed for these contractual adjustments also, again an important instance of adaptability through forms of party autonomy, which civil law generally missed and only more recently introduced but by no means everywhere. The alternative is to view the set-off (b) as an ipso facto or automatic facility as in France generally and elsewhere in bankruptcy only. This approach is indeed imperative in bankruptcy as the set-off might otherwise not be effective because the bankrupt party is no longer in a position to dispose of its assets so that the set-off would be at the mercy of the bankruptcy trustee and would then, as a minimum, risk losing its preferential character. A related key issue here is whether by agreement the ipso facto set-off can be expanded (or outside bankruptcy) avoided by alternative netting agreements. Are these contractual expansions sustained in bankruptcy? Again civil law has greater difficulty here than common law (in equity). Altogether, these differences raise important issues concerning the applicable law. A uniform regime would obviously help a great deal, especially since in the conflict of laws approach there is no consensus and different suggestions have been made (see further Vol 3, ch 2, s 3.2.6). The lex fori approach is a common one and leaves the decision to the law of the country in which the adjudicating court sits. That would be logical at least where the set-off is (largely) considered procedural, as in England, or arises in bankruptcy even if the debtor and the claimants are outside the bankruptcy jurisdiction. It clearly introduces an objective element and the set-off may not then appear to be capable of being governed by a contractual choice of law. Outside bankruptcy, this approach is also understandable in countries where the set-off remains ipso facto as in France. It may also be justified by the preferential effect of the set-off. But it should be clear immediately that this approach does not provide a solution in international arbitrations where there is no natural lex fori (or it would have to be the old notion of the seat, but at least in procedural matters the compulsory application of the law of the seat has long been abandoned). In general, the lex fori approach has found support in England128 and is (more surprisingly) sometimes also advocated in the Netherlands even outside bankruptcy. Some

128  It is to be noted that English law is undecided, interesting in such a major issue where many assume legal certainty: see Dicey and Morris on The Conflict of Laws, 15th edn (London, 2012) r 19, 7-039.

Part II  International Financial Arbitration  501

cumulative application of the set-off requirements under the laws of both claims to be set off is another option if they are covered by different laws. At least outside bankruptcy or any other ipso facto application, these laws may conceivably be chosen by the parties, which introduces a subjective element, however, and makes the applicable law a lex contractus issue regardless of the preferences that result and may affect ­others creditors adversely. This raises an important public policy issue but nevertheless appears to be the French approach regardless of its ipso facto attitude;129 it is sometimes also favoured in the Netherlands, and would more particularly recommend itself for netting agreements. But the result would still be the application of some domestic law in (conceivably) totally unrelated situations with adverse effects on outsiders. Indeed, here again, it must be asked whether the ranking and preferences that result are indeed at the free disposition of the parties to a netting agreement. Finally, it is not uncommon to see an approach under which a debtor invoking a set-off (therefore a counterclaim) in his defence can only do so under the law of the first claim, therefore the claim against which the set-off is made. This is the German130 and Swiss131 approach in which the applicable law depends on the party first invoking the set-off (as it is always the law of the other party’s claim). Since the law (of the first claim) so applicable may be a law chosen by the parties to their contract, there is also a subjective element here. In this approach, an exception is commonly made for the case of bankruptcy when the applicable bankruptcy law is thought to determine the set-off right. This is then a reversion to the lex fori approach but only in insolvency situations. Applicability of the law chosen by the parties in their underlying contracts, out of which their claims emerge, was an approach sometimes believed to be supported by Article 10(1)(d) of the 1980 EU Rome Convention on the Law Applicable to Contractual Obligations, now replaced by Article 12(1)(d) of the EU Regulation of 2008 (Rome I), which provides that the law applicable to a contract also applies to the various ways of extinguishing obligations. Yet, even though the set-off is in origin a means of payment, therefore a particular means of extinguishing a monetary obligation, it need not necessarily be characterised as a way of extinguishing obligations and could equally be viewed as a surrender of claims or sometimes even as a mere accounting device.132 In a contract for differences depending on novation-netting like the modern swap, it is

129  See for the French cumulative approach, H Batiffol and P Lagarde, Droit international privé, 7th edn (Paris, 1983) ii, no 614. There are several variations on this theme in France and it is sometimes believed that the details of the set-off in terms of calculation and the effects depend on the law applicable to each claim: see P Mayer, Droit international privé (Paris, 1983) no 732. 130  See BGH, 11 July 1985 [1985] NJW 2897, and earlier 38 BGHZ 254 (1962); see further D Martiny, Münchener Kommentar zum Bürgerlichen Gesetzbuch (Munich, 1990) EGBGB, s 32, Rn 37. In a bankruptcy, ­however, the lex fori concursus is preferred: see BGH, 11 July 1985, cited above; see also H Hanish, ‘Report for Germany’ in I Fletcher (ed), Cross-Border Insolvency: National and Comparative Studies (Hamburg, 1992) 111. 131  See Art 148(2) of its Private International Law Act 1987 referring to the law applicable to the claim against which the set-off is invoked as a defence. See also L Pittet, La competence du juge et de l’arbitre en matière de ­compensation: étude de droit interne et international (Lausanne, 2001). 132  As regards the applicability of Art 10(1)(d) of the Rome Convention, opinion is divided. In Germany, it is applied only if both claims are governed by the same law: see J Kropholler, Internationales Privatrecht (Tübingen, 1994) 426. In the Netherlands, its general applicability to set-off outside bankruptcy has been advocated by RIVF Bertrams, ‘Set-off in Private International Law’ in K Boele-Woelki (ed), Comparability and Evaluation, Essays in Honour of Dimitra Kokkini-Iatridou (Dordrecht, 1994) 153.

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even questionable whether the set-off is a method of payment of underlying claims at all. Rather, there is a new financial instrument. In any event, the special feature of the set-off in terms of the creation of a preference may need to be considered separately. Altogether it may also be possible or even necessary now to see set-off and netting mainly as a risk management tool rather than a form of payment. To ease the problems with (close-out) netting, particularly in bankruptcy, the ­aggregation principle has been vigorously pursued in master agreements under which, particularly in swaps, all swap dealings between the same parties, present and future, are deemed integrated into one contract. This is bilateral netting, which indeed has become a major risk management tool. Once signed between two parties, all their swap ­dealings are thus meant to be covered by it and any new swaps are integrated into this system and its netting facilities through standard telex confirmations.133 This i­ntegration is certainly the prime objective of the International Swap Dealers ­Association, which produced in this connection in 1987 an industry standard agreement, the ISDA Swap Master Agreement, in the later version extended to all derivatives.134 But again it must be asked whether the aggregation principle can stand up under the ­applicable (local) laws, especially in a bankruptcy.135 The Swaps and Derivatives Master is subject to New York law, although English law may alternatively be made applicable. This does not seem to prevent parties from choosing any other law, but it is not common. Again it must be questioned what a choice of a domestic (or any other) law here means. Are these matters at the free disposition of the parties or may or must we rely instead on international practice to create a better and more objective regime here? Short of it, the impact in bankruptcy remains unavoidably subject to the applicable (domestic) bankruptcy laws. Indeed, established market practices based on a universal acceptance of the principle of set-off may increasingly underpin the contractual netting concept internationally, also in its enhancement of the set-off principle, at least outside bankruptcy. It would 133  There are other important industry standard master agreements such as the 2000 TBMA/ISMA Global Master Repurchase Agreement, already mentioned, the Overseas Securities Lenders Agreement, the International Currency Options Market Terms (ICOM) and the International Foreign Exchange Master Agreement (IEFMA). 134  There were always two such masters, the Rate Swap Master for interest rate swaps and the Rate and ­Currency Swap Master for both interest rate and currency swaps. The latter is the more common outside the US and usually the one referred to. It was amended in 1989 and 1992 to also cover other derivative products and became a multi-product master agreement, recast as the Swaps and Derivatives Master Agreement in 2002 to better deal with distressed counterparties and markets following the problems in the Asian markets in the late 1990s. In particular the close-out provisions were reconsidered. Force majeure and acts of state affecting payment or compliance with other material provisions are notably not to upset the close-out and its effectiveness and present a new termination event or event of default. In 2009 ISDA developed a new Master Confirmation Agreement, also called the Big Bang Protocol, which introduced two changes. First, it established so-called Determination Committees taking binding decisions on whether a credit event occurred, replacing the prior need for bilateral negotiation. Second it made auction the default option for the price determination of distressed bonds necessary to liquidate CDS contracts. The ISDA further arranged greater standardisation for CDS in terms of expiry dates and premiums, the latter being able to force protection sellers or buyers to make upfront payments to compensate for the difference between these premiums and the market price. 135 See British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390, in connection with novation netting and its limitations in bankruptcy in England; also the Australian case law cited in n 120 above for a different view as to CCP netting. While it is not possible to change the ranking in respect of third parties by agreement, as was the dictum in British Eagle, it may still be by custom, which, by its very nature, concerns all participants.

Part II  International Financial Arbitration  503

appear to be a practical necessity. Again, this leads into transnationalisation and the modern lex mercatoria to which a choice of a domestic law by the parties would become subservient in the context of the hierarchy of norms within the modern lex mercatoria as explained above. It may prove to be a crucial issue in the international market place. It should be noted that in this respect the ISDA Swap Master Agreements may well have acquired their own transnational status, superseding in reality the domestic law declared applicable by the parties (usually English or New York law) or any domestic mandatory law resulting under conflict of laws rules.136 Again, the true issue is how far that also obtains in bankruptcy situations where the (domestic) lex fori concursus may still be considered ultimately to control the effect of the netting agreement. Another limit would be the public order requirements in the transnational legal order itself. Can it live with this extended preference, which especially the netting agreements create at the expense of other creditors, although even domestically it is now often less of an issue as many bankruptcy acts have been amended to allow for it. One may then see here a general principle. It was suggested before that even the applicable domestic bankruptcy laws may increasingly have to accept the ISDA netting arrangements as an expression of the international market practice or custom in the context of the hierarchy of norms of the modern lex mercatoria backed by public policy in the international market place. They could then amount to mandatory practice or customary law binding even on (local) bankruptcy courts. The transfer of swaps as contracts for differences may then also follow its own distinct pattern. So far, it requires the consent of the other party to the swap and could well result in a novation under transnational law. These complications are the reason why swaps are usually not transferred but rather hedged or unwound. If there is nevertheless a transfer, so far the law selected by the original swap parties137 is often believed to cover the novation in all its aspects if it is not assumed that distinct international practices prevail here also. Transnational law may take a more facilitating view, allowing the transfer of the contract more in the way s 2-210 UCC does for sales contracts. In the meantime, the EU Collateral Directive envisages a special close-out netting facility that must be considered bankruptcy resistant in bankruptcies pronounced in EU countries.138 The idea is that financial transactions that are conditional or temporary, such as repos and securities lending, or that move in and out of the money like swaps, futures and options, and maintain collateral requirements to back up the resulting retransfer or payment obligations, are subject to a (statutory) bilateral close-out

136  There has been some confusion on whether the ISDA is a pseudo-regulator, but it is probably still premature. 137  See in the Netherlands, HR 19 May 1989 [1990] NJ 745. 138  See Vol 3, ch 1, ss 1.1.8, 3.2.5 and 4.1.5. The Directive was issued pursuant to an ISDA report of March 2000 on Collateral Arrangements in the European Financial Markets, the Need for Law Reform. Harmonisation of the law in this area at EU level was believed important to facilitate the possibility of funding participants to use the c­ ollateral which they received to secure this funding for their own financing needs. This meant the facility to on-sell, lend or repo investment securities received as collateral subject to an obligation to return similar s­ ecurities. It is often perceived as a novel departure but in fact a similar system had always existed in respect of fungible ­securities that had not been set aside for specific clients.

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and netting of all payment and delivery rights and duties in each EU country.139 Strictly speaking, national laws are here still prevailing but at least they have been harmonised under the Directive and are also enforced in bankruptcy. Again, we might discern here general principle at the transnational level.

2.2.3  Secured Transactions, Finance Sales and Related Structures When in an international transaction chattels must move from one country to another, it is mostly still assumed in the traditional private international law approach that as to the applicable (domestic) law, the lex situs applies in all proprietary aspects of the transaction,140 but it does not provide clarity and a choice needs then still to be made 139  Collateral is itself a broad and undefined concept that may entail security, title transfers or margin accounts. For the Directive, the key is the untrammelled facility to realise any security interest in or to appropriate the relevant assets (in the case of a title transfer) or margin, all to the extent these assets are in the possession of the non-defaulting party, and it nets out all delivery and payment obligations in a final close-out upon an event of default. Notably, local bankruptcy laws that impede these facilities or require statutory delays are made ineffective for these types of financial transactions. 140  In private international law, the lex situs notion finds general acceptance in proprietary matters, if only because they are often closely related to enforcement which, in terms of repossession, is more naturally a question of the law of the country of location of the asset (although particularly in bankruptcy the proceedings may be opened elsewhere). Indeed Art 22(5) of the EU Regulation on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters of 2002 (superseding Art 16(5) of the earlier Brussels Convention of 1968) accepts for enforcement the exclusive jurisdiction of the courts of the situs which apply their own laws. In proprietary matters, it has already been mentioned that the lex situs notion is particularly strained when the assets are intangible, see Vol 2, ch 1, s 1.9, or move frequently, as in the case of aircraft and ships, so that the situs becomes virtually fortuitous. For ships and aircraft that move internationally, the fortuitous nature of their situs often does not change the situation dramatically in so far as the creation and recognition of proprietary rights and charges in them are concerned, when for the creation and perfection the proper situs may still be considered the place of their original registration, although it does not avoid the recognition problems in the case of enforcement if ships or aircraft are arrested elsewhere and subjected to a foreign execution. There is also a classic situs problem when charges shift into manufactured goods or proceeds. In the first case, the situs of their manufacture could be considered the place of the conversion: see the Scottish case of Zahnrad Fabrik Passau GmbH v Terex Ltd 1986 SLT 84. For shifting into the proceeds or receivables, an argument can be made that the situs is the place of the delivery of the asset or of the payment, the law of which would therefore determine any additional formalities of the continuing charge (which could even be seen as an automatic assignment) or indeed the possibility of such a shift giving the original seller collection rights. Any continuation of the original charge in the asset backing up any receivable as an ancillary right would then also be covered by this lex situs, as would indeed be any rights of bona fide successors in the converted property or even of the receivable. In this connection, reference should also be made to repos in fungible assets when only assets of the same sort need to be returned. As the assets to be used will only be known at the time of (re-)delivery, an argument may be made here in favour of the application of the law of the place of delivery as the true situs for this purpose. The place of ­delivery is then the actual place of delivery and not the agreed one. In the case of the use of a book-entry system it would be the place of the intermediary used for this purpose (PRIMA) and the (limited) facility under the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary for parties to choose the applicable law in respect of book-entry transfers as we shall see below in text preceding n 148. Another situs problem arises in respect of registered shares, which are often deemed located at the place of the register. The law of this place then determines the manner of transfer and the way charges may be created in the shares. It does not seem necessary that the law of the place of the register is also the lex societatis as companies may choose to maintain registers outside their country of incorporation. A similar approach may obtain for registered bonds, for depositary receipts and indeed also for shares and bonds subject to book-entry systems. More ­importantly, it may allow transnationalisation of these systems under their own transnationalised rules. As will be argued, in all these situations transnationalisation of the legal regime would appear to be increasingly called for to achieve a greater deal of stability (and sense) in the applicable proprietary law through custom and

Part II  International Financial Arbitration  505

between the laws of the country of origin and destination. These issues are dealt with more extensively in Volume 2, chapter 2, section 1.8. In this approach, it is now often accepted that the domestic law of the country of origin will apply to the creation and perfection of the original proprietary right, even if created under the contract law of yet another country, but that the domestic law of the country of destination will impose a recognition regime under which only foreign proprietary rights properly established at the original situs and largely equivalent to those in the country of recognition will be accepted. The others might be rejected or—always provided that they were properly created—converted into nearest equivalents. There is an element of judiciary discretion here and the result is by no means always predictable. Further problems may arise from disparity in registration and other formation and perfection requirements between the country of origin and destination, even if there is equivalence when some of the foreign interests are not registered in the recognising country while similar local interests in the destination country would be invalid ­without it, particularly relevant for secured interests. The fact that the original requirements in this respect are or cannot be sufficiently advertised in the country of ­destination (in its filing system if any), may be considered an extra impediment for their recognition in that country. Thus a foreign reservation of title in assets such as professional equipment that was moved in the meantime to the US may have no effect there as ­perfected security and retains therefore at best the status of an attached but unperfected ­security interest for lack of filing, with the low rank (just above unsecured creditors) that f­ ollows, while in a bankruptcy the general lien of the trustee will put it in the rank of ordinary creditors. In any event, it would be converted into a security interest in the US with the loss of the appropriation facility upon default. For more limited proprietary rights such as secured interests and floating charges (see Vol 3, ch 1, s 2.2.5) where equivalents might be especially difficult to find, this is more particularly relevant in enforcement in the new country. The English introduce here a further element already noted above for assignments: all foreign interests so recognised are equitable, which means that they are defeated for all who acquire the underlying assets in the ordinary course of business. It means that the ordinary commercial flows in England are protected against those foreign interests of which the acquirer did not know when acquiring the property although it is still conceivable that professional insiders still have some kind of search duty in their due diligence activity. In bankruptcy when not opened at the original situs, there may be further special aspects. In that case, the lex concursus may still prevail over the new lex situs, at least for the limited (but important) purposes of the bankruptcy itself, certainly if the bankruptcy is in a third country. This may create problems if the bankruptcy trustee subsequently seeks to collect the asset from its (new) situs, where neither the original nor the lex concursus attitude to the particular proprietary interest may find favour. For conditional or finance sales and conditional title, there may also be public policy considerations and impediments to recognition elsewhere when the asset moves, or in foreign bankruptcies, in which connection the reservation of title may again provide market practices in the context of the operation of the modern lex mercatoria. It may be argued that in particular the notion of the lex situs has become unmanageable in respect of the international flows of movable assets. Much of this is now also virtual.

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an illustration. What interests us here is primarily finance sales such as the finance lease, repurchase agreement and factoring of receivables. Finance sales present d ­ ifferent forms of asset-backed funding with a different risk and reward structure (see Vol 3, ch 1, s 2.1), manifested in particular by the fact that, as in reservations of title as sales price protection, the asset is appropriated by the non-defaulting party rather than made subject to an execution sale with the return of overvalue to the defaulter, although in several countries there is a possibility of re-characterisation of these structures into secured transactions. That is on the whole undesirable except in cases of a pure sham, but is certainly also the approach of the UCC Article 9 in the US. It left repo financing particularly in the lurch, only to some extent repaired in the federal Bankruptcy Code for the event of an insolvency,141 while at least some finance leasing was subsequently moved to a new Article 2A. Quite apart from these complications, again the desirability of introducing these domestic complication into international transactions through the application of domestic laws that were never written for them may itself be ­seriously doubted and may in any event be the subject of legitimate questioning in international financial arbitrations. In all international transactions raising these issues, to obtain greater clarity, it may be essential first to distinguish between the (a) contractual, (b) proprietary and (c) ­enforcement or (d) bankruptcy aspects and, in the case of modern finance leasing, also between (e) the derivative or collateral rights of the lessee against the supplier, which are in fact rights exerted against a third party as far as the lessee is concerned. Further distinctions may have to be made between (f) the types of proceedings in which these issues may arise. Indeed, besides in enforcement or bankruptcy, the nature of the legal structures concerned may also be tested in preliminary, provisional or summary 141  It is generally agreed in the US that the recharacterisation of repos as a secured transaction is disastrous and leads to dispositions upon default and perhaps even to filing needs at the time of creation in view of the fungible nature of investment securities and therefore the tenuous nature of the possession by the financier. There would also be the danger of a stay and adjustment of the security in an insolvency: see MA Spielman, ‘Whole Loan Repurchase Agreement’ (1994) 4 Commercial Law Journal 476 and JL Schroeder, ‘Repo Madness: The Characterisation of Repurchase Agreements under the Bankruptcy Code and the UCC’ (1996) 46 Syracuse Law Review 999. However, where the repo price is clearly expressed in terms of the original purchase price plus an agreed interest rate, the repurchase seems to be re-characterised as a secured loan, also in the US. It is submitted that that is the better view. Case law is divided, see Cohen v Army Moral Support Fund (In re Bevill, Breslett and Schulman Asset Management Corp) 67 BR 557 (1986) and In the matter of Bevill, Breslett and Schulman Asset Management Corporation and SS Cohen v The Savings Building and Loan Co USCA 3rd Cir, 896 Fed Rep 2d, 54 (1990). In these cases intention was considered decisive as to whether there was a security agreement or a sale and repurchase: see also Jonas v Farmers Bros Co (In re Comark) 145 BR 47, 53 (9th Cir, 1992), but the fungibility of the underlying assets was believed to have an undermining effect on proprietary claims, although it seems that if the assets are with a depository who will provide replacement goods, the fungibility issue may be less urgent. All now translates into entitlements, which could be shared or conditional. See for the new model for transfer and pledging of such securities and the priorities of owners and pledgees in them, Art 8 UCC 1994 Revision. However, case law may sometimes still be construed to be more generally adverse to true repurchase agreements: see LombardWall Inc v Columbus Bank & Trust Co, No 82-B-11556 Bankr. SDNY 16 Sept 1982; cf also In re Lombard-Wall 23 BR 165 (1982), which characterised repos as secured loans and led to the 1984 Bankruptcy Code amendments. See more recently still the US Supreme Court in Nebraska Dept of Revenue v Loewenstein 115 SCt 557 (1994), holding the same, but expressly limiting this finding to taxation matters. It did not mean to interpret ‘the Securities Exchange Act of 1934, the Bankruptcy Code or any other body of law’. It is often thought that the 1982, 1984, 1990 and 2005 amendments to the Bankruptcy Code especially dealing with repos in government and other securities (ss 101(47), 741(7), 101(49), 555 and 559–62) and exempting the netting of these transactions from the stay provisions, now indicate a different approach to repos while taking them outside Art 9 UCC.

Part II  International Financial Arbitration  507

proceedings, or in ordinary proceedings on the merits. Parties should be aware that the recognition of foreign proprietary interests may result differently in each of these proceedings, even in the country of the new situs, in view of their different objectives or the different manner in which the recognition of the interest is invoked, for example as a defence, a collateral issue or the main issue. Again, international arbitrators might take a different view here as compared to dispute resolution in national courts and in particular may be more inclined to a transnationalised approach in international transactions in order to escape all the vagaries and uncertainties of finding some national law which is very unlikely to have considered the international complications. Whatever the proceedings in which foreign proprietary interests arise, are invoked or are made the subject of litigation, whether at the (original) situs or elsewhere, it remains basic in all of them that international contractual issues regarding them arise when the parties to the arrangement are in different countries. The law of the closest connection, often presumed to be the law of the party that must perform the more characteristic obligation, will now normally apply in these contractual aspects unless parties have chosen another law in areas of contract where they can do so and unless again we are here also comfortable with the modern lex mercatoria, which may increasingly satisfy international arbitrators. That is at least the position under the 2008 EU Regulation (Rome I) already mentioned before. It does not prevent the contract from validly creating charges or other types of proprietary interests not accepted or recognised by the proper law of the contract as long as the asset is in a country or will move to a country where they are accepted. A contract regarding chattels is thus international when the parties are in different countries regardless of whether the chattel being sold or made the object of a charge moves or is intended to move to another country. In fact, it will often remain where it is. It does not distract from the internationality of the sales agreement, but it does mean that in a proprietary sense the transaction is not international. Indeed, international proprietary issues proper arise largely when the asset moves between countries, which may or may not be the consequence of a sale. Only in such cases is there in the traditional private international law approach the need to determine the relative impact between the law of the place of origin and destination on the status of the proprietary right. As mentioned above, if the principle of the lex situs is still deemed to apply, it means here applicability of the law of the country of origin in matters of creation and of the law of the country of destination in matters of recognition of the foreign interest so created, with or without adjustment of the relevant interest to the nearest equivalent in the destination country. Under the prevailing private international law view, there is therefore a two-step approach. International enforcement or bankruptcy issues on the other hand arise in recognition terms principally when a physical asset subject to a charge has moved to the country of the enforcement or bankruptcy. In enforcement, which is normally considered an exclusive prerogative of the courts of the situs, international issues will thus arise first and foremost when such an asset moves (or may be moved notably by the bankruptcy trustee) to the country of enforcement with foreign charges attached to it. It is not therefore sales connected. These charges are then subject to the recognition and fitting-in process of the lex executionis or lex concursus in terms of ranking. But enforcement issues may also

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present themselves in an international context in the case of a bankruptcy opened at the centre of affairs of a bankrupt with assets in other countries (that have not moved) to the extent the extraterritorial effect of such a bankruptcy is accepted in the country of the asset. As enforcement proceedings thus take place in a country different from the situs, it should be asked, however, what kind of precise effect they may have at the situs. Ultimately this may be a matter (of recognition) by the law of the situs itself in the foreign bankruptcy. In other words, the enforcement is not international, only the claims to enforcement are. There are here questions of jurisdiction and of recognition of bankruptcy proceedings if conducted outside the country of the situs. This recognition should be clearly distinguished from the recognition of a foreign proprietary right when the asset has moved to the country where any of these procedures is initiated. In bankruptcy, there arises in either case the question how foreign charges in those assets are treated, but the answer may not be the same. The conclusion must be that under present private international or conflict of laws approaches, the validity, status and rank of, or powers under, security interests or conditional sales may be differently decided in the various types of proceedings and may be different again for a foreign asset that has in the meantime moved to the country of these proceedings and for an asset that remains elsewhere upon recognition and enforcement at its situs. In all events, the international status of the ensuing judicial decisions is likely to be different and subject to different recognition possibilities. In fact, it could even happen that a decision reached on the status of foreign proprietary interests in provisional proceedings, or even in proceedings on the merits, is not fully accepted in bankruptcy proceedings even in the same country as the ranking, and the fitting-in process may then require special handling. On the other hand, the bankruptcy findings concerning the foreign proprietary interests may not have any further status or impact outside these bankruptcy proceedings, even in the country of the bankruptcy. In the meantime, for finance leasing and factoring, some international action has been taken through uniform treaty law in the UNIDROIT Leasing Convention of 1988. It has only received a small number of ratifications and may not receive many more. The international aspects of assignments and the factoring technique have already been discussed more fully in the context of the international assignments of claims above. All still rely on traditional private international law for aspects outside the scope of the relevant Conventions. They commonly do so even for those aspects within their scope if not specifically dealt with. In that case, the general principles on which these Conventions are based first prevail, but it is mostly unclear what these principles are, especially in the proprietary and enforcement aspects. Also the scope and coverage of these Conventions are often not sharply defined so that one cannot be sure when such general principles may be invoked and relied upon.142 142  The uniform laws, common in the US among the various States, are not Conventions in the above sense. Although unification is clearly the objective and models are as such presented (by the American Law Institute and the Commissioners on Uniform State Laws), they remain State law and there may and do exist minor differences between States, even in the UCC. Where interstate (or international) conflicts arise, there is, therefore, still a need for a conflicts rule (see eg s 1-301 UCC), which allows the uniform law of the particular State to be applied if the transaction bears an appropriate relation to the state concerned. If there is uniformity between the laws that may so be deemed applicable, the importance of these conflict rules is only to determine that no other law applies.

Part II  International Financial Arbitration  509

In 2002, UNIDROIT also produced a Convention (with an aircraft facility or protocol) aiming at the creation of an international interest in Mobile Equipment.143 The background was that the need for internationally supported security has greatly increased through the privatisation of airlines and railways, with the attendant need to raise international financing, which can no longer depend on state guarantees, while the major assets of these companies (which are at the same time their major capital goods) often have no fixed lex situs so that domestic security interests in them are constantly endangered. The idea is that a distinct type of international interest is created under the Convention resulting from a security agreement, a reservation of title, or a finance lease (Art 2) in mobile equipment as defined in Article 2(3). Realistically, the American functional approach is abandoned here, and re-characterisation of conditional sales and leases is thus avoided. For purposes of the Convention, mobile equipment concerns categories of equipment that habitually move between states and are identifiable (and not future), such as aircraft, aircraft engines, helicopters, ships, oil rigs, containers, railway rolling stock, satellites or other space property and other categories of uniquely identifiable objects. Parties may derogate from the provisions of the Convention only in a number of default remedies: Article 15. This reflects the mandatory nature of proprietary law in which connection a new uniform international regime is created under the Convention. What does all this add up to in international finance and in arbitrations concerning it? At the very least, it must be understood that there is a large area outside the traditional secured transactions where major funding operations with some other form of proprietary protection are increasingly situated. By talking about secured transactions, and more so by forcing new, asset-protected funding structures into a unitary system of secured interests (the re-characterisation issue), we may be making a significant m ­ istake (absent public order constraints) and entering a world of unreality. That is a first issue for international arbitrators to appreciate. The ownership- and security-based systems of funding and protection need to be clearly distinguished. The former normally conform to the pattern of conditional sales of assets, the latter to the traditional secured loan, while sale credit protection is likely to assume the form of the former. In essence, conditional or finance sales present funding through the sale of assets, there is no loan; repos are the main examples. If the repurchase price is not tendered in a timely fashion, the buyer becomes the unconditional owner of the assets he or she bought, and there is no execution sale and return of any overvalue (even if the situation is there for fungible investment security repos now usually handled through netting and set-off under the Repo Master Agreement). Finance leases are others. Only if there is a clear loan, identified by an agreed interest rate structure, is the situation different, and any proprietary support will then function as a secured transaction and be converted into it; re-characterisation would be proper. If not, the different risk and reward structures of these funding alternatives should be clearly recognised and accepted. 143  See Vol 3, ch 1, s 2.1.10 and for a comment, MJ Stanford, ‘UNIDROIT Convention on International ­ inancial Leasing and the Preliminary Draft UNIDROIT Convention on International Interests in Mobile F ­Equipment’ (1999) 27 International Journal of Legal Information 188; see also P Winship, ‘International Commercial Transactions’ (1999) The Business Journal 2001 (ABA).

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In most domestic legal systems, these insights are often still embryonic, although moving in the direction of greater clarity, with English law probably the most sophisticated and, surprisingly US statutory law (Art 9 UCC) on this point perhaps the least, although US case law is not insensitive to the problem. This conclusion is somewhat unexpected as it concerns here two common law countries, while academic opinion, shared by many in England,144 often stresses the intellectual and practical superiority of Article 9 UCC. This is undoubtedly correct in many aspects, especially in the treatment of the floating charge, but not in the unitary functional approach to finance sales and their re-characterisation into secured transactions—even the reservation of title. In the meantime, civil law has had little to contribute here in the realm of ideas. In one of the latest efforts at re-codification, the modern Dutch law approach, security substitutes are simply refused any proprietary effect, even though it is not made clear what they are or when they arise. The result is that the modern finance sales are also threatened. Unlike American law, Dutch law does not even convert conditional sales into secured transactions. In the EU the 2008–09 DCFR does not consider the concept of finance sales either and confines conditional ownership rights to reservation of title, now a special proprietary right as are finance leases; repos are secured transactions (!) all in the German legal tradition, which is on the whole unaware of, or unreceptive to, financial dealings and their needs, whether at the national or transnational level. The importance and danger is that in several countries there remains a substantial re-characterisation risk, which spreads to international finance under the old private international law approach. International arbitrators should be aware of this when dealing with these issues in respect of the international flows of assets and related services. In the meantime, one may ask why ownership-based funding has become so much more popular in the last 20 years, as shown in repos, finance leases and factoring or receivable financing. It is in the possibility of lower cost for the party requiring financing and, particularly, the greater variety of financial products it supports, which are motivated by the need for different risk and reward structures and choice internationally. C ­ ertainly the conditional sale and ownership transfer, leading to ­split-­ownership rights, seems more in tune with the unbundling of risk increasingly practised in international finance. Importantly, opening up the proprietary systems by using the concept of conditional ownership in financing even locally may lead to harmonisation internationally on the basis of an extended notion of party autonomy in this area (always subject to the protection of the commercial flows against these charges, as we have seen), and then provides a bridge between common and civil law, albeit at a conceptual cost to civil law lawyers. It may show that the split ownership in conditional sales and title transfers allows for structures in civil law very similar to those of the common law trust.145 It must be supplemented by a better bona fide

144  For England see the Crowther Report (1970) and Diamond Report (1989) and further MG Bridge, ‘Form, Substance and Innovation in Personal Property Security Law’ [1994] Journal of Business Law 1. 145  It is likely that further ratification of the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1985 (since 1992 effective between the UK, Canada, Australia and Italy), to which the Netherlands has now also acceded, and ratification of which is also being considered in France (see Vol 2, ch 2, s 1.6.7), will provide its own stimulus in this approximation process.

Part II  International Financial Arbitration  511

purchaser and assignee protection, or protection of purchasers and assignees operating anywhere in the normal course of business in commoditised products of this nature. The result would be a more dynamic but also better harmonised law concerning ­collateral operating internationally—this must be considered the trend and the pull will derive from international finance itself, but as earlier in the case of assignments and set-off, we see here also the key influence of equity thinking, now in international financial transactions. When properly pleaded, It must be anticipated that this will find support in international financial arbitrations as this is reality in international finance. It follows that development of a more transnationalised concept of ownership, still existing in the area of commercial paper and documents of title where it is historically the product of the older international law merchant, may further facilitate the operation of proprietary interests as risk management tools in international finance when the assets surface or play a role in other countries. This has already been found to be very relevant for intangible assets such as receivables. Transnationally, the eurobond remains the most important modern example but it should be so more generally now for all types of personal property that are part of or used in the international flow of goods and funding. This then also affects the security and particularly conditional ownership interests created in these assets, confirming a modern dynamic concept and use of modern movable property law. The resulting transnational interests would still need recognition in local bankruptcies, especially in enforcement. It has already been said that this is likely to be supported by transnational custom or practice or party autonomy, as autonomous sources of transnational law, still subject, however, to a fi ­ tting-in process under local bankruptcy or other applicable enforcement laws in terms of an expanded notion of nearest equivalent, but no more. International public order requirements may further facilitate and refine this process. International arbitrators in coming to their awards if touching on these areas of the law between professionals should be aware and are likely increasingly to support structures that support these flows and their needs and move then away from more parochial and fragmented reasoning, subject nevertheless to public order requirements foremost derived from the international market place itself, especially to keep it clean and competitive. Liquidity and proper risk management in these flows may then also become public policy issues. The EU Collateral Directive already mentioned, although limited in scope, is a significant indicator of modern trends in the professional sphere and an important pointer to the development of the lex mercatoria in this area, particularly in its clear distinction between secured transactions and finance sales, its inclusion of future assets including receivables and cash, and its lack of formalities. The 2001 Mobile Equipment Convention, although also limited in scope, was found to be significant in catching modern trends as well. These developments invite discussion on all types of conditional ownership and their operation even in national laws. It was noted before that this will have a similar opening-up effect in the civil law of property as the concept of good faith, fairness or reasonableness had in the civil law of contract. Debate in this area is necessary, urgent and greatly to be encouraged. Unfortunately, it must be noted that the DCFR has not been able to make any innovative contribution and the transnational financial practice itself will have to speak louder, for which international financial arbitration may prove to be an important forum.

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It should always be realised that we are speaking here of the world of professionals in their wholesale dealings in the international flows. When (consumer) assets come to rest in the hand of end users domestically, there may be another world, but it has already been said that these assets are likely to be immediately consumed and in any event largely lose their value once unpacked and they are likely to have only a limited period of use. There may be a secondary e-bay market in them, but it is a low-price and low-quality environment, largely a rotation issue, or merely a question of cleaning out the house. Very few will still feel strong attachments here or a sense of property in the more traditional manner. It is a lifestyle issue in the consumer world or a form of ‘light weight’ living. These changing perceptions of property in that world are unlikely to surface in international arbitrations and are not therefore the subject of this book, but one of the reasons why projects like the DCFR cannot contribute to the discussion is perhaps because they do not know how to distinguish between these different worlds and are unaware of the different trends in them while still looking for a unitary system. It is submitted that greater imagination and courage will lead to an approximation of the different proprietary approaches in international professional dealings or perhaps to a transformation at that level entirely. It may well be a necessary prelude to understanding and accepting transnationalisation better. In fact, in international commerce and financing, there is no real reason or intellectual justification for the fragmentation of the ownership concept along purely domestic lines even if the transnational flows could still be cut up accordingly; it is also illogical. Once this is understood, it will also be seen that there is no reason or justification for the differences to remain operative in purely domestic financial transactions either unless there are overriding public policy or public order requirements still in operation at national levels. It is clear that in terms of legal support for newer financial structures, conceptually, civil law has further to go than common law, but in the end, regardless of the disappointment of the DCFR and earlier the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade, it is unlikely ultimately to hinder the need and tendency to protect modern funding techniques and achieve the necessary cross-border standardisation. Again, international financial arbitration may clarify the picture and support much greater room for the creative force of party autonomy in this area subject to the protection of the ordinary flows. It may then use the opportunity in particular to broaden the facility of transfers in bulk upon a mere description of the asset class including the use to which the ensuing property right is put and support the connected reclaiming, shifting and netting concepts in the process, providing at the same time a better structure for floating charges and tracing facilities at the transnational level. Thus the ultimate aspiration, being the transfer as security of an international cash flow, will be attained, effective against all insiders in the nature of all equitable interests but leaving the international flows otherwise unaffected and its liquidity untrammelled, earlier identified as a key issue (see further the discussion in s 2.7 below).146

146  Domestically, these facilities have commonly depended on statutory law that even now may become increasingly product specific: see eg recent French law in respect of floating charges, repos, securitisations and other newer financial products. Even domestically this is destructive of the existing property concepts of civil law in the countries concerned. Implementation of the EU Collateral Directive in EU Member States had a similar effect at that level; practically, it was a significant move in the right direction although in a limited area.

Part II  International Financial Arbitration  513

In practice, besides Eurobonds and their proprietary status, the rights in oil rigs placed in the high seas may support newer concepts of property rights and security also. It may highlight the importance of physical control at first, but then also of entirely new structures that are not at all physical but may support modern financing of these facilities in terms of conditional ownership and other legal facilities that operate then transnationally and can no longer be reduced to domestic law concepts and their confines either.

2.2.4  Investment Securities and their Modern Holding in Electronic Entitlement Systems In connection with the transfer of investment securities, in either physical or entitlement form, there also arise important proprietary issues; see for a more extensive ­discussion Volume 2, chapter 2, part III. They have to do especially with the nature of the trading and holding of the investments in terms of proprietary, co-ownership or beneficial (or similar) rights against intermediaries. The question arises how these issues must be handled in internationals transactions. Here again, international financial arbitrators may be called upon to clarify and show better ways, which are likely to point to transnationalisation of the applicable legal regime simply because domestic laws can no longer satisfactorily handle these issues in an international market context either when the transfer of these assets is likely to go through several countries. This is not the place for a discourse on the differences between bearer and registered investment securities or investment securities of the more modern security entitlement kind in book-entry systems maintained by brokers, but there are some essentials. The latter immobilise the underlying securities at the level of a depository or custodian, who issues entitlements to investors (or their brokers as sub-custodians) in a dematerialised manner allowing for security accounts to be created by brokers for their clients backed up by their own entitlements against the depositories. These entitlements are then transferred in much the same manner that payments are made in modern electronic payment systems. The result is a securities account with the broker, which will at the same time also hold a cash account for its client. There emerges here

A last observation may be in order. The equality of creditors is often presented as a justified concern and as an argument against the proprietary effects of all kinds of financial schemes likely to protect the financier, as finance sales also do. This equality or the so-called par conditio creditorum is not truly the basis of the system of creditors’ protection or a fundamental legal principle, although in civil law endlessly paraded as such. It is the ranking (and the separation or segregation of assets including reclaiming facilities), and not the equality, that is the essence of modern bankruptcy and of creditors’ relationships more generally. What is equitable, not what is equal is the issue and now usually expressed in (bankruptcy) legislation to which the equality principle is not overriding. What happens in finance sales is a reshuffling of proprietary interests between financiers in more modern ways, who thus re-allocate the risk of default of the counterparty substantially amongst themselves as professional operators. Any detriment is hardly likely to affect the common unsecured creditors, who in bankruptcies are unlikely to get much anyway. Protecting them better—if that became a policy preference—can only be done effectively by giving them a flat percentage of all the assets of the bankrupt estate and can in any event hardly come through dispute resolution.

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a sui generis system of transfer that notably does away with traditional delivery notions and ­requirements in terms of cause and disposition rights. This facility is commonly subject to strict compartmentalisation in the sense that end-investors will not have pass-through rights (amended to some extent only in the case of an insolvency of the immediate intermediary) to the depository and to a strict asset maintenance obligation of the sub-custodians meaning that they must amend their back-up to align it with sales and purchases by their clients/end-investors. This has become the normal way of securities holding and affects trading in the sense that brokers will credit or debit their clients’ securities accounts immediately upon purchase or sales instructions and adjust the back-up promptly by themselves going into the markets or using a set-off against opposite requirements of their other ­clients. Book-entry systems of this nature are an ingenious step forward in the matter of the holding and transfer of investment securities. They underline the importance of ­dematerialisation of assets more generally and the ever greater impossibility to handle them physically (unless they must physically be used). They increasingly become mere claims although still of a proprietary nature, even if the meaning thereof may need further elucidation. In truth they are derivative instruments. Short of the creation of securities entitlements, it is clear that the financial instruments issued in the international markets, in particular the Eurobond as a bearer negotiable instrument, always had a transnational property status and derived it from the international law merchant from which originally all negotiable instruments ­originated. This has already been noted and it is so regardless of the contractual choice of law clause as in proprietary matters the applicable law acquires an autonomous function and is not at the free disposition of parties, meaning that a contractual choice of law, usually in favour of English law or the law of New York, is not decisive here and transnational customary law is. Indeed English law has continued to accept that in connection with the negotiability of bearer bonds: ‘the existence of usage has so often been proved and its convenience is so obvious that it might be taken to be part of the law’.147 The transfer and protection of bona fide purchasers or holders of these bonds (in due course) is then also likely to follow internationally established patterns, which may well extend to the types of conditional or temporary ownership rights and s­ ecurity interests that may be created in them, notably the repo, and it then also extends to securities lending and rehypothecation. This is an important theme. ­Prevailing ­book-entry systems of transfer, based on underlying immobilised ­portfolios of Eurobonds, may then also be subject to similar transnationalisation of the ­applicable legal regime, including the status of these entitlements, the interests created in them and the protection of third parties, although there is here an important (regressive) tendency to see any entitlement register as being located at the place of the intermediary, which has reintroduced domestic notions of the holding of these ­securities, ­un-usefully it is submitted. Because book-entry systems are often still perceived as purely domestic facilities, on the face of it there is thus still a possibility of a strong regression into domestic concepts

147 

Bechuanaland Exploration Co v London Trading Bank [1898] 2 QBD 658.

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even in respect of underlying securities that are internationalised such as Eurobonds. Transnationalisation remains important nonetheless, and necessary in the proprietary aspects, especially in the asset-maintenance obligation affecting tiers in other ­countries, the protection against insolvent brokers who have back-up entitlements elsewhere, any remaining pass-through rights through tiers in other countries (relevant particularly in a bankruptcy of the broker who issued the entitlement), the prohibition on the pledging by intermediaries of back-up entitlements, the way end-investors may themselves encumber their entitlements or transfer them conditionally, the finality of the transactions, the protection of bona fide buyers of these securities entitlements, the danger of a shortfall in entitlements if there is insufficient back-up, and the effect of intervening bankruptcies on clearing and settlement. The lack of interest in the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary is an indication that, after an initial flurry of interest, this private international law treaty, which seeks to perpetuate the prevalence of local laws in the international holding and trading of securities of this nature, did not show the right way. Rather the market sustains the continuing operation of the transnational lex ­mercatoria in this area and it is submitted that in practice that has been the case for a long time, no different now in securities entitlements in these markets.148 It means that domestic laws are irrelevant and conflict of laws rules redundant except in a ­supplementary fashion. In respect of international registers or book-entry systems, domestic laws are in any event fortuitous for lack of sufficient contact. Market practices and general principle then take over. Importantly, this also allows for transnationalised notions of security interests or repos and conditional or other finance sales to attach to or operate in them.149 148  A shock resulted in this connection from the decision of the Belgian Supreme Court of 17 October 1996 (Sart-Tilman) [1995–96] RW 1395, note Storme, ruling out the fiduciary or conditional transfer of assets in ­Belgium. It greatly increased the re-characterisation risk in respect of ownership-based funding through E ­ uroclear and raised the spectre of the need for the execution of a pledge agreement in all cases and the crediting of the investment securities to the special Pledge Account in Euroclear under Art 5 of the Royal Decree of 1967 pertaining to Euroclear, assuming Belgian law was applicable. The situation was remedied through new legislation of 15 July 1998 concerning ‘amendments to certain legal provisions regarding financial instruments and securities clearing systems’ (Art 30) [1998] Moniteur Belge 28.934. The better view is that the 1996 case was not relevant in the first place as market practice applies to euro securities and the way they are held and transferred through Euroclear. Belgium law at most applies residually. That appeared to be the view in the market before the remedial legislation became effective. The Belgian legislation of 1998 covered more than the operations in Euroclear but is limited to situations where the transferor is a bank or other financial institution or performs investment activities for its own account or for the account of third parties (or is a foreign company or institution with a similar status). In other words, it only applies to fundraising in the professional sphere (but can be done on behalf of customers). The re-characterisation risk was eliminated in Luxembourg much earlier through the Grand Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions, but the protection was limited to s­ ecurities located in the Grand Duchy, which raises the issue of the location of securities entered in a book-entry system: see for the modern solutions (also in Euroclear and Clearstream), Vol 2, ch 2, s 3.2.2. 149  There are substantial problems with the pledging of investment securities, repos, stock-lending, short ­selling, margin buying, and rehypothecation, which cannot discussed here at length, but see Vol 3, ch 1, s 4.1.3. They are by no means eliminated in book-entry systems; they may even have become more intractable in international dealings but cannot be resolved by a private international law approach to these problems either without breaking up the markets into domestic parts, which only leads to further complications and confusion for no obvious reasons.

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It may be noted, however, that in the EU, the EU Settlement Finality Directive of 1999 is still couched in terms of domestic law (and its harmonisation);150 it seeks to deal especially with bankruptcy problems but provides for a harmonised regime meant to protect the position of the European Central Bank (ECB) in its liquidity-providing function to the banking system, which is based on repo financing, although many EU countries have implemented the measure to apply more generally. The Directive intentionally side-stepped proprietary issues, which therefore remain unharmonised in the EU. However, in 2004 a limited effort was made in the already mentioned EU Collateral Directive to deal with (some) rights (in terms of securities or repos) that can be established over securities entitlements, without, however, defining these entitlements and their nature either. The type of collateral is also not defined and could be a security interest of conditional or temporary ownership as we have seen. Floating charges are also possible that cover future assets and transfer them in bulk subject to an adequate description. Control must be surrendered but that is possible in many forms, which also remained largely undefined. As already mentioned, the Directive is mainly concerned with the narrower issues of collateral and introduces here a transnational regime within the EU, but the legal status of the underlying investment securities and especially of securities entitlements or the bank balances was not considered and as a consequence neither were the important segregation and pooling issues. Nor is the question of the residual proprietary right of the original owner in the assets offered as collateral. Short of transnationalisation, conflict of laws notions may thus remain important, also in the question of the ­protection of bona fide security investors and in the issue of finality to the extent not covered. The Directive, like the Collateral Directive, still opts here for the so-called PRIMA (Place of Relevant Intermediary Approach) rule, therefore for the domestic law of the most immediately concerned intermediary with whom the account is held. There are some clarifications, however, and in Article 9 a number of issues are clearly identified as being covered by the law of the book-entry register, notably whether the entitlement holder’s right is overridden or subordinated to security interests or conditional sales, the legal nature of any such rights, their creation and effect, the position of bona fide purchasers in this connection, and the execution of such interests. Should the already mentioned 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, which introduces the PRIMA notion internationally, be adopted by EU countries, it would prevail over the provisions of the Collateral Directive in this regard and notably introduce a degree of party autonomy allowing for a contractual choice of law (presumably always of a national nature).

150  The Settlement Finality Directive of 1998 (Art 3(1) and (2)) was meant to reduce the liquidity risk, particularly in transactions with the European Central Bank (but was given a wider scope in most EU countries in the implementing legislation). Ultimately the concern is to reduce systemic risk linked to payment and securities settlement systems and is therefore not only (or even primarily) concerned with payment systems, but at least as much with security entitlement systems and any transfers in those systems (although added only in the later drafts). It only affects certain payment and securities settlement systems governed by the law of a Member State and notified to the Commission by the States whose laws apply to them. Participants are also a defined class and only include supervised financial institutions, public entities, central counterparties, clearing houses and settlement agents.

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The problems with the PRIMA approach are highlighted elsewhere.151 The absence of any sensitivity to market practices and international custom in respect of the operation of modern book-entry systems remains its greatest oversight, but that is also true for the EU Directives. It ignores the connection with the modern lex mercatoria. Even for the uniform perfection regime, reference is then still made to conflicts rules while local registration requirements also remain applicable as long as they do not undermine the validity of the relevant security interest or title transfer. Ranking is also specifically left to the law so found to be applicable. It would of course still be subject to the normally applicable execution or bankruptcy rules. In 2009, UNIDROIT produced a Geneva Convention on Substantive Rules for Intermediated Securities (‘the Geneva Securities Convention’, not yet entered into force for lack of sufficient ratifications),152 aiming at a uniform substantive regime. In the methodology of this book, it would still have to find its place in the modern lex mercatoria, among its other sources of law and their hierarchy, and is therefore subject to higher fundamental principle and custom. In terms of the applicable law, attention must also be given to modern clearing and settlement systems. Technically, clearing and settlement organisations operate on a membership or participants’ basis subject to a membership agreement or general conditions.153 In the case of a transfer, the modern clearing systems themselves may

151 

See Vol 2, ch 2, s 3.2.2. The Convention devotes no special attention to repos but appears to treat them in the same way as security interests (Art 11). This must be a mistake: see also the text at n 136 above. There is an optional Chapter V that deals more extensively with collateral transactions. It also covers title transfer collateral agreements, which here include repos (Art 31(3)(c)) but does not go into the distinctions and re-characterisation issues. The Convention has not attracted practitioners’ attention and seems too contrived to work properly. 153  The following techniques are commonly used in this connection: 152 

(a) A settlement agent or central depository system requires the participants to enter into bilateral relationships with the settlement agent under which that agent holds cash and securities accounts in which intraday debits and credits are netted out on a bilateral basis between the settlement agent and the participant. The modern book-entry systems on which security entitlements are based are an important example of this system and function also between a broker and his clients (assuming that the broker operates a book-entry system). (b) A clearing house system which has two phases in the settlement process and which in p ­ rinciple involves all participants. In the first one, the payment and/or delivery instructions are calculated and netted out between the participants for a period (say one day). Subsequently (either the same trading day or within an agreed period thereafter, say T+1 or T+2) any resulting balances are ­settled by payment or delivery to each participant. That is the system of settlement through E ­ uroclear and Clearstream and most modern payment systems. (c) A central counterparty (CCP) system allows all transactions to be conducted with the same counterparty through back-to-back transactions, while this counterparty nets and closes out (either the same day or within an agreed period thereafter) all deals outstanding between it and any participant in its system. It is often exchange connected (especially in derivative exchanges) and in the case of a transfer between two endusers who have matching trades, the exchange becomes technically the buyer to any potential seller and the seller to any potential buyer. From early on, the DVP or ‘delivery versus payment’ was the standard settlement method, at least in the Eurobond market, based on a shortened settlement cycle. Within it, there were several more specific techniques practised, see also the ‘Delivery versus Payment in Securities Settlement Systems (1992)’ Report of the Committee on Payment and Settlement Systems (CPSS) of the BIS or Central Banks of the Group of Ten Countries, which distinguished between: (a) real-time gross settlement, which meant simultaneous trade-by-trade execution of the securities and of the payment transfers; (b) gross settlement over a time period, in which the trade-by-trade approach is maintained but the securities and the payment streams (often guaranteed by banks) are netted out at the very end of

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guard against default by the broker, of which the central counterparty (CCP) technique is the more advanced.154 It implies a guarantee of the operation of the system by one counterparty, who takes over all rights and obligations from the participants through a kind of novation and nets-out on a continuing basis all mature obligations in terms of security transfers and payments provided there is sufficient standardisation in the underlying instruments to make this feasible.155 It has already been said that although technically often still considered subject to a domestic legal regime, the manner of operation in the international markets, the way of clearing, settlement and netting, the repo business in, and the pledging of the assets, all became substantially subject to the practices of the euro-market and should as such be considered transnationalised, even Euroclear and Clearstream, which were both originally still perceived as domestic (Belgian and Luxemburg) institutions in support of the eurobond market. A similar attitude must then be taken in respect of the derivative markets, their products and operation. This should neutralise not only the legal problems derived from any lex situs as applicable law in respect of the underlying bonds or other investment securities, but also the problems connected with the location and operations of these additional facilities. The result is less legal risk and also a more predictable and cost-effective regime.

2.2.5  Segregation, Ranking and Constructive Trusts If, as is submitted, transnationalisation of the applicable private law is a necessity for operations in the international market place in order for the applicable law to remain relevant and responsive in the international flows (unless public policy forbids it), it must be admitted that for financiers key issues at that level are separation and priority. This issue is more extensively discussed in Volume 3, chapter 1, section 1.1.9. In other words when in a bankruptcy (wherever) may some party, in this case the financier of the bankrupt debtor, lay claim to assets of the latter’s estate and segregate them, ie take possession from the bankruptcy trustee or retain the assets if already in possession, and claim them as his own (potentially leading to appropriation in conditional or temporary sales for financing purposes) or when may a priority right be asserted in any sales proceeds in an execution sale of these assets and who may initiate and conduct the execution sale in such cases? Or when may there be a set-off of mutual claims (either by statute or under netting clauses), which also leads to a form of priority/preference? This facility has already been discussed in greater detail above.

the cycle; and (c) net settlement, in which all is simply netted out between participants at the end of the settlement period (but still on the basis of simultaneity). The practical difference is in the liquidity requirements of the participants. Regardless of DVP, bankruptcy laws may still undermine the system in the case of an intervening insolvency of one of the participants. This is the concern of legislation, see in the EU the Settlement Finality Directive of 1998, n 150 above. 154 

See for this clearing HF Minnerop, ‘Clearing Arrangement’ (2003) 58 The Business Lawyer 197. Note in this connection the Australian (Victoria) cases in IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008] HCA38, see n 133 above. 155 

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Issues of separation of assets and differences in ranking as part of execution sales in or outside bankruptcy emerge all the time in both civil and common law. For bankruptcy, it is often said that equal distribution is the essence of all modern bankruptcy law, but, in truth it is equitable (not equal) distribution,156 which in modern times is a matter of statutory definition in terms of ranking and set-off or netting facilities. Indeed it is the separation and particularly the ranking or priority that is the essence of modern bankruptcy. Equality only exists within the same rank. As each secured creditor is likely to constitute a rank of its own (except perhaps for unperfected or uncrystallised ­security holders in floating charges in England who may figure together as the lowest class of secured creditors just above the unsecured ones), in practice there is likely only to be equality in the lowest ranks. A technical reason is further that unsecured creditors are likely to have only obligatory claims, which rank pari passu per se. Only in modern reorganisation proceedings may the needs and details of the survival plan suspend the separation or priority and demand concessions even in respect of secured claims. It could even interrupt a set-off or at least the operation of contractual netting clauses.157 156 

See the comment in n 146 above, see also Vol 2, ch 1, s 1.1.9. The principles of ranking which will assert themselves also in transnational law may be summarised as ­follows: the older right prevails over the younger (prior tempore, potior iure: first in time, first in right), except that the grantor of the right is always postponed although likely to be fully reinstated at the end of the term of the security right (if not executed). This priority among the grantees is the normal consequence of proprietary rights having an effect against all the world. The older interest holder may therefore ignore the younger. Any secured creditor may (in principle) execute subject to the other liens or similar interests, although subject to the rights of bona fide purchasers (not so likely in a forced sale). Bankruptcy laws may sometimes provide for a sale free and clear by the trustee (to realise overvalue) subject to the secured creditors being paid off according to their rank out of the proceeds (or being given alternative security): see s 363(b), (c) and (f) of the US Bankruptcy Code and s 15(2), (3) and (9) of the UK Insolvency Act (for administrations under the Act). Sometimes there may also be an implied right for the debtor to sell free and clear in the ordinary course of business as under a reservation of title or floating charge to protect the ordinary flow of his business. Although ‘first in time, first in right’ is the basic rule, there are exceptions: purchase money may have the highest priority in order to safeguard the ordinary flow of goods. More specific charges are also likely to prevail over more general ones: therefore the later reservation of title is likely to prevail over an earlier charge over all the buyer’s present and future assets. In England this follows from the crystallisation requirement in respect of floating charges. Possessory liens may be advantaged over non-possessory liens, so that they may more readily entail their own execution right even in bankruptcy of the debtor, and may therefore avoid the trustee’s costs, and will not be dependent on his action and timing. This is not so in Germany, where there is for the non-possessory charge (Sicherungsübereignung) in a bankruptcy of the counterparty only a right to a priority in the proceeds (Absonderung rather than Aussonderung). Other countries such as the US accept rights to repossession and separate recovery but make them subject to a short and temporary stay under s 362 of the Bankruptcy Code. It may also be different for statutory liens or (in France) privilèges, which are usually non-possessory and lead only to a preference in the bankruptcy liquidation proceeds. Contractual liens normally prevail over such statutory ones even if older, although some statutory liens, like tax liens, may sometimes also be given the status of a contractual security interest, especially in the US, as a consequence of which the older ones prevail over younger contractual liens. Statutory liens, especially general tax liens, may by statute also be given super priority status and then take priority also over all contractual liens and more specific statutory liens, which normally would have precedence. It may be added that in this area of status and ranking and the rights derived therefrom, the various legal ­systems are by no means always clear, even in respect of purely domestic proprietary and similar rights. Especially the conflicts between the reservation of title, particularly when allowed to shift to replacement goods and proceeds and floating charges or earlier security interests also comprising future assets of the debtor, may be substantial and have given rise to much litigation. It should also be considered that the set-off gives perforce the highest priority, while retention rights in practice may force the other creditors, even if secured, to pay off the retentor in order to be able to recover any excess value in the retained assets. The status of contractual enhancements of the set-off and retention right may again be much less certain and give rise to many questions. 157 

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Subject to these limitations and amendments, protection against bankruptcy or bankruptcy resistance is created for financiers by granting them full or more limited proprietary rights in the debtor’s assets or through set-off facilities. Separation or segregation facilities or priorities are not, however, only derived from proprietary and set-off rights. In the realm of separation outside the area of proprietary rights and set-off proper, in common law we have constructive trust facilities and the possibility of equitable liens or retention rights—see Vol 2, 2, s 1.4.10. They are often a sequel to unjust enrichment or restitution claims and not typical bankruptcy or default remedies. They may, however, be especially important in bankruptcy situations, but when precisely they arise and how far they go (as into commingled or replacement goods) is often less clear. In common law, the notion of tracing is closely related to the concept of constructive trusts, and means exactly to reach replacement goods, of special importance in floating charges. Common law jurisdictions are basically pragmatic here, again especially in equity, although neither necessarily generous nor even fully clear outside the areas of trusts, conditional and temporary ownership rights, and floating charges. Civil law is more restrained. A key point is that common law jurisdictions allow proprietary relief, thus returning assets in appropriate cases, even in a bankruptcy of the counterparty, while civil law in such matters may at best give a claim for damages, which will be merely a competing claim in a bankruptcy of the debtor. Yet even in civil law, a retrieval facility increasingly surfaces where moneys have been improperly handled or misappropriated by asset managers and broking agents or are threatened by their bankruptcy. It shows a true need, also accepted where proprietary rights are increasingly allowed to shift into replacement goods and proceeds and a beginning of tracing becomes possible. In the law of obligations this type of relief earlier led everywhere (but particularly in civil law) to increased possibilities of specific performance. The notion of separation beyond the realm of proprietary rights, set-off or unjust enrichment is mostly connected with pooling, joint or common ownership and legal personality notions, as in the case of the bankrupt estate itself. In agency and ­guardian relationships, the management and treatment of client assets and moneys, as well as the handling of assets of minors or incapacitated persons, create a need for ever stronger protections of the principals or beneficiaries, also through separation notions, and especially important if the assets are officially in the name of the agent or guardian, which is normally the case. This is a problem habitually resolved in common law through constructive trusts, which are much more difficult to achieve in civil law. Even if there is separation in principle in such cases, there may still be practical problems when the assets remain or become irreversibly commingled with the assets of the holders, managers or trustees, or creators of these separated properties. It is a question of fungibility and is then also a problem in common law (cf in the case of proceeds especially s 9-315 UCC in the US). Note further that sufficiently separated client assets and accounts will give rise to pooling if there are various beneficiaries, but also note that in such cases, this pooling is not itself the cause of separation but rather the result of it. Similar problems arise when assets are used in the manufacturing of replacement goods when separation in principle may be joined by interests of others in the products if their assets were also used in the manufacturing process. Yet it follows from

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the ­foregoing that the extent to which separation/segregation or priority rights can be privately arranged beyond full ownership structures and secured transactions is not always clear. Finally, it should also be considered that creditors may voluntarily postpone ­themselves, as, for example, in the case of lenders conceding subordinated loans. This is truly a question of party autonomy, not therefore limited, as it benefits and does not seek to prejudice other creditors. It is very common and is normally not contentious, although the ranking of these postponed creditors among themselves may still be an issue and the legal nature of subordination may still present problems.158 Subordination may be complete or springing (or inchoate), which means that junior creditors will still receive payments as long as certain events do not happen. In the practical operation there may also be some differences: it is normal in a contractual subordination that the junior does not receive anything as long as the senior creditors are not satisfied, but it is also possible that the junior creditor receives his payments normally but sets them aside for another class of (senior) creditors. In this connection, there may even be a trust structure or subordination trust, which confers on the senior creditors a beneficial ownership right in the sums of money so set aside. More importantly, postponement may also result from the operation of the applicable law. This is again particularly relevant in bankruptcy, and may arise in respect of creditors who have taken an active part in the management of a bankrupt company, such as directors/sole shareholders, and provided loans. It is an instance of lifting the corporate veil or of equitable ­subordination,159 also relevant for loans of unlimited partners. All these issues are likely to arise in financial dealings conducted in the international market place and they may then also be raised in international arbitrations concerning them. Again, it may no longer be useful or even possible in the international flows to rely here merely on domestic concepts, again mainly because of the location issue. In any event, the dynamics of international finance and the way it is protected and risk is divided are likely to take over and cannot then escape international arbitrators.

2.2.6  Transactional and Payment Finality Other overriding concepts may also increasingly have to be considered from an ­international market perspective, especially the concept of transactional and payment 158  It is probably best construed as a third-party benefit agreed with the debtor, the third parties being here the creditors that stand to benefit except in situations where there is an agreement to the effect between all existing creditors of a debtor. Notably in bond issues that is not normally the situation. It cannot be so in respect of unknown future (senior) creditors either. In the case of a bond issue, the undertaking between the debtor and junior (subordinated) creditors arises from the participation in the issue or the acquisition of subordinated bonds in the secondary market. The subordination must probably be seen as irrevocable by the debtor, even before the senior creditors have accepted the benefit. They may in fact never explicitly accept before a bankruptcy of the debtor, but their acceptance may be implied from the moment the benefit is given. It is commonly assumed that this acceptance does not lapse through a default under the original loan agreement, or in the case of its invalidity or rescission after the funds have been supplied. It would amount to a lifting of the subordination when the funds become so returnable. 159  cf s 510 US Bankruptcy Code.

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finality and its theoretical legal underpinnings in that market. This is also reminiscent of the older lex mercatoria because internationally there were early concerns in this connection in respect of negotiable instruments and letters of credit where the protection of the bona fide holder was joined by the notion of abstraction or independence meaning that these facilities were separated from the relationship out of which they arose so that a defect in these relationship could not undermine their effectiveness. These crucial concerns and remedies continue for more modern forms of bank payment, in fact they arise for all traded commodities and, it is submitted, acquire a special significance in the modern lex mercatoria. In international transactions, finality is a major issue; it should not be confused with legal certainty. It is a proprietary matter160 (see also the discussion in ch 1, section 1.1.7). Although these issues are often still perceived as questions of national laws, again they may be better clarified in a transnational context and given their proper weight. The lex situs would otherwise be the first call but again in international business the point is that assets are likely to move in trading or moneys in payment, so that their situs becomes uncertain and the location is in any event unclear when electronic payments are made out of bank balances that could be anywhere while several intermediaries in different places form the (virtual) pipeline through which the payment reaches the payee. For investment securities of the entitlement variety, the situs could also be anywhere, as we have seen, and thus also gives little guidance in terms of determining the finality of the transfer. Yet transactional and payment finality is a key issue in all markets and central to their operation and it acquires in the international market place an international flavour. As already mentioned, it is proprietary: who in the end has what? Ultimately it is for international arbitrators to clarify what the relevant rules in this respect are in the transnational commercial and financial legal order as it concerns here legally a key part of its infrastructure. The bottom line is that in the professional sphere, no amount of legal sophistry (whether under a domestic or transnationalised law) should unsettle done transactions except if there is fraud. The notion of finality is in modern times particularly underpinned by the ­protection of: (a) bona fide purchasers or rather all purchasers in the ordinary course of business concerning commoditised assets to protect the commercial and financial flows; (b) the abstract system of title transfer, which separates the transfer and validity of proprietary rights from the underlying contract out of which they arise and its validity; and (c) the notion of reliance. It is further reinforced by (d) de-emphasising the psychological nature of the will, notably in matters of mistake that could otherwise easily undermine any ­transaction, even the delivery itself as a legal act where still required. The concept

160  Certainty in this narrower sense of finality has traditionally been stressed in English case law (without, however, distinguishing itself sufficiently from the more abstract notion of certainty) ever since Lord Mansfield, especially in mercantile transactions, see Vallejo v Wheeler [1774] 1 Cowp 143, 153 (KB); see more recently also 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 Mc Carthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988). Again, it is to be noted we are concerned here basically with 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 the key issue (not certainty, even when the term is used), see also Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002).

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of independence, well known from negotiable instruments and letters of credit as just mentioned, is an important support here and the abstract system of title transfer is another particular example of it, but there are more instances such as the independence of the receivable vis-à-vis the contract out of which it arises (and once assigned cannot easily be invalidated under it either) further underpinned in assignments by the abstract nature of the rights of the assignee. But the essence is that in the international market place in order to quiet title we must look increasingly for transnational concepts of finality operating in that market and this will surface in international arbitrations. Again finality should not be confused with legal certainty. The latter is an objective of the DCFR (see Art I-1:102(3)(c)), there only relevant in interpretation and, even then irrationally so it is argued, as it condemns participants to antiquated notions that could be so out of date that certainty of this nature means low-quality law. One may here recall what has already been said about an irrational search for stability and the earlier remarks to the effect that future needs can often not be adequately covered by extrapolation of past experiences. Finality in title transfers and payments is a narrower but also more forceful concept than ‘certainty’. Certainty should then also be distinguished from predictability, which is a dynamic concept.161 In securities trading special finality issues may arise in a bankruptcy context. They do not then concern the finality of any transfer proper but rather the power of an insolvent intermediary still to give transfer and settlement instructions, its (continued) functioning in the relevant clearing and settlement facilities, the effect on its participation in the netting, and any retroactivity of the bankruptcy in this regard until the beginning of the day of the bankruptcy (which is a common bankruptcy rule and undermines all transactions in which the bankrupt was involved on the day of his bankruptcy). These finality issues arise typically in the context of the settlement of agreed transactions and have in Europe been the subject of the EU Settlement Finality Directive already ­mentioned above.162

161  The DCFR so far shows little appreciation for this key concept of finality. It is not central to it and it even seems to prevaricate, especially in rejecting the abstract nature of the transfer, ultimately to embrace the causal system at least in the transfer of chattels, Art VIII-2:202 and probably now also in the assignment of claims, Art III-5:118(2) meaning that it allows a completed title transfer to be undermined by the status of the underlying agreement of transfer. It has already been said that this makes little sense in a modern commodity-driven environment. By moving away from the German system, which showed here the better insight—and which it otherwise slavishly followed—the drafters of the DCFR confirm that they had little idea of real needs and it is regressive. Even so, the DCFR adopts the principle of separation between contract and transfer, see Art IVA-2:101, the latter requiring a separate act of transfer to effectuate a change of ownership in the sale of goods. From Arts II-7:212 and II-7:303, it would appear that the effects of nullity or avoidance of the underlying contract are determined by the rules on unjust enrichment. In this connection, Art VII-2:101(2) states that if the contract or other juridical act is void or avoided retrospectively, the enriched person is not entitled to the enrichment on that basis. This would still seem to suggest a need for a retransfer, therefore an abstract system as also borne out by Art VII-5:101, which specifies that where the enrichment consists of a transferable asset, the enriched person reverses the enrichment by transferring the asset to the disadvantaged person. Whatever the right interpretation of these sections, as far as finality goes, the DCFR’s various facilities add up to a concept of finality that seems confused and is too weak for the commercial and financial practice, especially in the adoption of the causal system of title transfer as the general rule. 162  In terms of the legal characterisation of the transfer and its finality, similar issues arise in the case of (electronic) payments through the banking system. These issues also centre around (a) the question of capacity and intent and the effect of fraudulent or defective instructions, (b) the meaning of acceptance, and (c) in the transfer, its formal requirements (eg in terms of existence, identification and delivery) and its acceptance. Finality

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The above does not mean that a defective payment or a defective security transfer cannot be remedied later by the payor or in the case of investment securities by the broker. Naturally, an erroneous or defective payment can be reclaimed by the payor. But that would be a separate issue and a different legal act or cause of action, for example on the basis of mistake or unjust enrichment if too much was paid or credited in terms of investment securities, although even then, as we shall see, the transferee may still be protected and keep the money or securities, regardless of what went wrong, to the extent she was somehow owed them, assuming the receiver was in good faith and did not contribute to the mistake. Again, the key is that a transaction once completed should not itself become invalid and reversible merely because of some legal sophistry in terms of capacity, intent, disposition right or delivery (assuming always that the money was owed and indeed received). That is finality. Different legal systems may take different approaches (or even a combination) or put the emphasis differently as we have seen, but the objective is always finality. In many countries statutory law may still be patchy or non-existent and the matter is left to case law. It is obvious that a more subjective or objective view of finality is possible here, and although there may be legitimate controversy in this area, there is growing unanimity that the effectiveness of transactions and payments should not be undermined by subtle legal reasoning, either at the level of the payment method and intermediaries or systems used or at the level of the liberating effect. So the objective approach is the preferred one. It is not a matter of principle but one of necessity and transnational law would reflect it. In terms of finality, there are also important practical issues eg as to whether and how payments in the pipeline, that is for bank transfers the banking system, may still be stopped or automatically reversed, especially in the case of human or system error (or fraud). Whatever the legal arguments, the modern approach is that that should not happen lightly (and only under special rules). It bears out that these payments, once set in motion, should be seen as independent from their environment and from the defects that may attach to the original instructions and intent. Again, this is a public

is here underpinned by (i) de-emphasising the role of capacity and intent; (ii) the abstract nature of the crediting or debiting; (iii) notions of independence of the instructions; (iv) the bona fides of payees once they have been credited, so that they need not be concerned about the origin of the money or it being tainted unless they were in the plot—it is truly a question of title and disposition rights which may be assumed; or (v) as a question of reliance. It is, however, possible that the issue of finality is handled somewhat differently for securities entitlement transfers than in payments. For payments, the emphasis in the reasoning may be on (i), (iv) and (v), for investment securities it may be more on (ii), (iii) and (iv), in line therefore with the notion of abstractions of the transfer and independence of the instructions derived from the practice of the old negotiable instruments, which investment securities traditionally were. In the US, in payments through the banking system (as against cash payments), the matter is the subject of statutory law in Art 4A UCC. It appears to rely on a combination see also Comment s 4A‑303. The Germans may rely more on the notion of abstraction or independence. For investment securities trading, Art 8 UCC appears to favour option (iv)—finality is enforced and adverse claims cannot be made against bona fide transferees for value: see ss 8‑502, 8‑503(e) and 8‑510 UCC. Similar needs arise also in respect of the irreversibility of instructions once the process of transfer is set in motion although, if the transaction is not chained, there is less danger of legal disruption. However, especially in the case of fraud, it may still (exceptionally) be possible to prevent or reverse any credit to an investor. Also if the debit or credit is due to an error at the level of the immediate intermediary, the latter may still be able to correct its mistake by amending the booking, but not for other reasons. In other words, the intermediary must also respect the finality of the booking. It is not certain whether in the daily practice that is sufficient.

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policy choice and economic necessity to which the applicable law must conform. In other words, once payment is set in motion and is, so to speak, in the pipeline, it must be unhindered as it is in no one’s interest to throw sand in that machine. This policy choice in the operation of payment systems should also come out at the transnational level and if necessary be reinforced there.163 Again, in matters of the applicable law, international financial arbitrators when ­confronted with these issues will likely be increasingly sensitive to the practices developing in this regard in the international market place itself, supplemented if necessary by the general principles they find in domestic laws, rather than breaking up tiered transactions according to the law of the place of the relevant securities intermediary or chained transaction per country of the relevant intermediary bank. It is harmful to international trade and payments and undermines the very finality it seeks. Transnationalisation of the concepts works here in favour of greater market stability and is likely therefore to be favoured by international arbitrators, barring any public policy or public order impediments, which themselves may be increasingly transnationalised.

2.2.7  How Do We Transfer an International Commercial and Related Cash-Flow and How do We Rank Proprietary Interest Holders Transnationally? Ultimately, the transfer of an international cash flow is probably the key issue in all of the foregoing so far, where the applicability of domestic law and its monopolisation of the legal sphere becomes irrational, insufficient, ineffective and wholly out of date. In fact this concerns the legal position of all globalising commercial and financial flows and affects their liquidity and risk management facilities. What is more normal than that a manufacturing plant, which produces cars it wants to sell in different countries, offers its entire stream of products and resulting receivables and payments to a bank for financing of its working capital? But we have already seen that even domestically, this may create great problems, especially in civil law countries when future assets ­cannot be transferred and any transfer in bulk is in any event legally impossible, as (in that approach) all items to be transferred proprietarily must be individualised and identified as existing assets. It is the notion of physicality in respect of all assets, particularly strong in civil countries but in common law countries also at law, although not in equity. It may well be the fundamental flaw in all thinking on the subject. Proprietary rights are not physical, as no right is, and should not be characterised by the nature of the underlying assets either. Legally, it is in essence irrelevant what these assets are. In any event, in a modern environment they have to be captured in their flow rather than as individualised, identifiable, immobilised items. If that much is accepted, it follows

163  Another one is that money is presumed to be untainted. So the ultimate receiver might consider it clean, again, unless he was in the plot itself. That goes for cash but also for credits in banks. To repeat, it is the issue of finality of the transfer or payment. A similar approach may be anticipated in the transfer of investment securities.

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that all thinking in terms of lex situs also becomes essentially flawed and redundant. That also suggests that there is no natural preserve for any domestic legal regime left in respect of the international flows, be they of goods, services, money, information or technology. All must be captured in their movement and liquidity. They constantly change in their substance. Reasonable description then takes the place of identification and will capture these assets in their flows and transformation without affecting the title and its transfer. The description will extend to the type of user, income and enjoyment right that is created or transferred, some of which are or may become ­proprietary. Party autonomy takes over but the proprietary aspects only operate against the insiders, that is those who themselves commonly participate in the creation of these rights. All flows are otherwise free of these charges, as has already been said several times, and are the essence of equity in common law countries, which notions are here transferred to the international market place. Floating charges in (common law) countries that recognise them are even now locally an example of this but they are often still considered exceptional. The concept is due to move to the centre and should, it is submitted, become the essence of our thinking concerning all property law in movable assets that are part of the international flows, whether tangible or intangible. This thinking supplements the larger space for party autonomy in this area that is likely to be accepted in the international market place in shaping these proprietary rights while rightly c­ urtailing their effect on these flows in respect of all purchasers in the ordinary course of business of these products. This was explained before and again is strongly reminiscent of the approach in equity in common law countries. It may be recalled that in the traditionalist conflict of laws approach, the inventory and related cash-flows would have to be transferred individually per item or claim per country of their situs, whichever it may have been, even though in respect of physical assets that move between countries and for receivables, there was never a natural situs as there is not for claims either. Yet from this notion of situs and its narrowing concepts in many countries, it followed that under the old private international law approach to the applicable (domestic) laws, it was not possible to transfer an international cash-flow at all. It would have to be identified per country, chopped up and separated accordingly (always assuming that the separation was possible—that is the situs determinable—and that even domestically the transfer of the parts was possible). And this was so for no other than systematic and parochial reasons: law being always national in this perception and in property law physical. Again, even the DCFR could not contemplate a better system, now for the entire EU area, and its approach to floating charges remained confining as we have seen. The modern lex mercatoria would be able and probably keen to take the necessary steps, indeed acknowledge the unity of cash-flows and arrange and protect their transferability under transnational law in the international market place. It is a practical necessity in a globalised environment, unless public policy and public order (then also of a transnational nature) dictate otherwise, although again it would be hard to see why. It presents the ultimate challenge to international financial arbitration, although here again, these newer proprietary structures may for their ultimate effect still depend on recognition in local bankruptcies primarily as transnational customary law being part of the modern lex mercatoria. There can be little doubt that

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transnationalisation of this nature puts local bankruptcy laws under pressure164 and it may not be surprising therefore to learn that in the US, as in Germany upon unification, the bankruptcy laws were the first ones to be federalised. More simply, we may well ask ourselves why it is or should be that when we bicycle from Basle to Strasbourg the legal status of the bike changes twice as we go along and may in respect of the same asset be very different in the three countries concerned. It particularly affects the manner and formalities of a transfer including security transfers. There is no logical reason why this should be so and it was not so before the nineteenth century. It is a defect in our thinking not supported by rationality. Now that we are talking not about one bike but about the international flows, it makes even less sense and the law must respond to this anomaly. The international practice must structure itself around it and international financial arbitrators may be the first in line to face newer realities and deal with them when properly pleaded by one of the parties.165

2.3  Public Policy Concerning Financial Instruments. Remedies 2.3.1  Public Interest in Financial Products To start with, it may be instructive to show what public policy is doing with some of the products and facilities mentioned so far without any attempt at trying to be complete in terms of conduct of business and product control and the effects on the applicable private law. In the next sections, other aspects of policy which directly affect intermediaries in terms of licence requirements and prudential supervision will be discussed. This is more commonly identified as regulation proper. Ultimately, there is the question whether this latter type of regulation, if not directly so providing, may still give rise to civil liability (and when) as a matter of non-contractual liability of intermediaries vis-à-vis their clients or perhaps even of regulators in respect of damaged parties.166 We have seen above that one of the major building blocks in international finance is the assignment. It plays a role in particular in floating charges, receivable financing and securitisations. It was noted that there are special problems with bulk assignments and assignments of future claims; others arise internationally when claims outside the jurisdiction are meant to be included. Again it raises issues of the location or situs of claims if a bank seeks to remove loans from its balance sheet in securitisations or if it wants to be protected by a charge over receivables with debtors in different countries. Beyond the bankruptcy ramifications, no public policy and regulatory concerns have surfaced so far in this area, but it is still possible to identify some more special concerns. Especially the use of SPVs or similar entities to move assets off balance sheet have

164 

See for this development in connection with the operations of transnational CCPs, n 120 above. See for the transnationalised principles of ranking n 157 above. 166  See the text at 113 above. 165 

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been considered to contain a funding element, for example when in a securitisation bonds are issued by the SVP to pay the originator for the assets, but re-characterisation should not be an issue if the transfer of loan assets was outright and paid for. There is no funding of the originator and the transfer does not take the form of a conditional or temporary transfer either. There is an outright sale, no less, no more.167 This has not remained uncontested, however, and re-characterisation could then mean that in the event of a default of an originator, a disposition of the transferred assets would be required, the asset still being part of its bankrupt estate and deemed to have remained with the originator subject to a security interest of the SPV. This would be an extraordinary result, fatally undermining all asset securitisation. The re-­ characterisation debate is thus highly damaging and misdirected, but not, u ­ nfortunately, unusual. Especially post Enron, in which there was in fact no transfer of risk assets at all or any funding proper, this issue was revisited in the US (the Durbin-Delahunt Bill to amend the Bankruptcy Code).168 Following what has already been said, the issue should simply be solved by asking if there is an interest rate (structure) agreed between the originator and SPV. If not (and it would be highly unusual), there is no loan and there cannot be security supporting it. In an asset securitisation, the objective is not funding at all but payment for assets irrevocably transferred. There is therefore also no finance sale or any repurchase implied. The last thing the originator/assignor wants back are the assets moved from its balance sheet.169 On the other hand, it may well be that in risk layering intentionally substantial risks remain with the originator, which ultimately may affect the off-balance-sheet nature of the scheme. The transfer of risk in whatever form may not be complete and this might then leave some room for ­re-characterisation. There may not even be a transfer proper of loan assets, only the risk in respect of them. This could conceivably create re-characterisation risk also,

167  The mere transfer of a class of assets to an SPV, which acquires them outright and pays for them, should therefore never be re-characterised as a secured transaction in which the purchase price could be recast as a loan secured on the assets transferred to the SPV. Doubts remained, however in the US in view of LTV Steel Co, Inc v US 215 F3d 1275 (2000), a bankruptcy case in which it was argued that the transfer of assets to an SPV was not a true sale and that the collections by the (now bankrupt) originator were its cash collateral which, pending a resolution of the sales issue, could be used during the bankruptcy if adequate protection was given. A settlement followed so that the basic issue was not determined. 168  The Durbin-Delahunt proposal (the Employee Abuse Prevention Act) of 2002, intended as an amendment to the federal Bankruptcy Code, was introduced in Congress to undermine securitisations, ostensibly to protect retirees and employees while seeking in s 102 to re-characterise as a secured loan any sale (with or without securitisation) of assets, including those to SPVs, if its material characteristics were substantially similar to that of a secured loan. No criteria were given. It was eventually withdrawn. The fear seems to have been that through securitisation, valuable assets could be improperly taken from weak companies, thus contributing to their insolvency. But as long as the sale price paid by the SPV was normal or within a usual range and not a preferred transaction or fraudulent transfer (against which there is in any event ample protection in the US Bankruptcy Code, s 547), it is unclear what the true concern could have been. 169  See SL Harris and CW Mooney, ‘The Unfortunate Life and Merciful Death of the Avoidance Powers under Section 103 of the Durbin-Delahunt Bill: What Were They Thinking?’ (2005) 25 Cardozo Law Review 1829; see also SL Schwarcz, ‘Securitisation Post-Enron’ (2005) 25 Cardozo Law Review 1539. In fact, some States of the US, such as Delaware, had earlier introduced some special asset-backed securities facilitation statutes exactly in order to promote securitisations. These State laws make sure that asset sales in securitisations are true and final sales and they may as such serve as clarification in the light of the functional approach of Art 9 UCC and, especially in the case of receivables, that all such assignments are final. These State laws would, however, have been superseded by any federal (bankruptcy) legislation of the type just mentioned.

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depending on the nature of the scheme, which always has some funding elements, but if the re-characterisation concerns the transformation of a sale into a secured transaction, there should at least be a formal interest rate structure agreed. This is what international arbitrators must also keep very much in mind when these re-characterisation issues arise in an international arbitration. Another indirect attack on financial engineering, also potentially arising and relevant in international arbitrations, concerns the credit default swap (CDS): see further Volume 3, chapter 1, sections 2.5.2 and 2.5.8. It came from those who see it as an insurance product and argue that, in the case of a naked CDS—that is CDS protection bought without exposure to the underlying risk it insures—there is no insurable interest so that these products must fail. It was thought by 2010 that 80 per cent of the activity in CDSs was naked. It is in truth a form of short selling, which as such has the benefit of increasing market liquidity. Similar effects can be created through options, swaps and futures. The argument then goes to the practice of shorting itself as a normal market function. It is one thing to condemn CDSs outright and forbid, for example, naked CDSs. This could be a regulatory stand, unwise in the view of this author as it would amount to a form of regulatory market manipulation, but it is at least direct. To use what must be viewed as a piece of legal sophistry leading to a contrived recharacterisation to undermine this product is less opportune, especially the insurance analogy. The basic point to make is that insurance assumes a pooling of resources by several interested parties to meet a particular loss in one of them. There is no such pooling in CDSs. This is reflected in the pricing, which, in the case of an insurance, is based on actuarial research and in the case of CDSs on market forces. Another conceptual difference is that an insurance contract covers losses actually suffered while CDSs provide for an agreed pay-out to all holders upon a credit event. Furthermore, insurance coverage is cancelled simply when premiums are not paid; cancellation of CDSs does not automatically follow the non-payment of the protection fee. The better analogy is the guarantee. It is not normally opposed on the basis of similar arguments. In these debates, economic rather than legal arguments are often introduced but this risks confusing everything. There is no doubt that international practice accepts the status and legal effectiveness of the CDS, even if naked.170 It may be of interest that in the US, the Sarbanes-Oxley Act of 2002 already concerned itself (in s 401(c)) with financial engineering. It feared excesses and asked for a Securities and Exchange Commission (SEC) report on the extent of the use of offbalance-sheet (derivative) transactions using SPVs. A report was published in 2005. It emphasised that the use of financial structuring merely for accounting and reporting

170  It was in England, in particular, supported by the so-called Potts opinion, an opinion of a QC, which in England is generally considered to have the status of an opinion of the court of first instance and stands as such until overturned by another opinion of at least similar rank. It was sponsored by ISDA. The argument here is that the payment obligation is not conditional on the payee sustaining a loss or carrying the risk thereof. It does not seek to protect what could be called an insurable interest on the part of the payee and its right is not dependant on it. The Law Commissions of England and Scotland in a 2008 paper on Insurable Interests supported these views.

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purposes should be discouraged.171 In respect of CDSs, earlier the federal Commodity Futures Modernization Act (CMFA) of 2000 aimed at creating greater certainty for CDSs. In that context it clarified first that they are not regulated by the Commodity Futures Trading Commission (CFTC) and the normal banking regulators remain competent, but because these contracts are between professionals, the regulators generally accepted a hands-off approach. It meant that particularly the potential systemic risk implications were ignored. This came in for much criticism during the 2008–09 financial crisis but the International Monetary Fund (IMF) intervened in 2009 to explain the need for this type of risk-management tool and the diversification of risk it achieves. Yet it is clear that especially in the credit derivative market (CDS), there is a problem with the popularity of these newer products, their proper documentation and proper assessment of risk.172 Greater transparency may be needed as it would show when banks protect themselves, thus raising the temptation of neglecting (costly) oversight of their borrowers. This is an instance of moral hazard. Other problems are over-protection, which may allow protection buyers to benefit more from a decline in values than from an increase. Capital adequacy concessions based on CDSs may also have to be reviewed on the basis of a better assessment of the credit of protection givers. However, although excess and abuse is much to be avoided, the concept of risk protection in this manner is sound.173

171  In s 705 of the Sarbanes-Oxley Act of 2002, the Comptroller General of the US was asked to report on the role of investment banks in schemes of this nature. These issues were thus raised well before the 2007–09 financial crisis. On 7 January 2005 the SEC adopted new rules to address the registration, disclosure and reporting requirements for publicly offered asset-backed securities. They applied only to public offerings in the US and not to CDSs. The difference between asset-backed securities and corporate securities was recognised. The accent was on transaction structure, disclosure of credit enhancements, quality of the asset pools, servicing and cash flow distribution. These new rules in essence summarised and streamlined the existing regulatory practices in this area. The use of SPVs and more generally the role and techniques of financial engineering did not come under similar scrutiny in Europe. The role of credit agencies in this connection was also considered in the US: see D Coskun, ‘Credit Agencies in a Post-Enron World: Congress Revisits the NRSRO Concept’ (2008) 9(4) Journal of Banking Regulation 264. Their role in the events leading up the 2007–09 crisis, in which they were much criticised, was therefore not a new issue and had been considered earlier. 172 See D McIlroy, ‘The Regulatory Issues raised by Credit Default Swaps’ (2010) 11 Journal of Banking Regulation 303 and SK Henderson, ‘Regulation of Credit Derivatives: To What Effect and For Whose Benefit?’, Butterworths Journal of International Banking and Financial Law (London, 2009) Part 1-7 and SK Henderson, ‘The New Regime for OTC Derivatives: Central Counterparties’ [2011] Butterworths Journal of International Banking and Financial Law, Part 1-3. See further also European Central Bank, Credit Default Swaps and Counterparty Risk (August 2009) and J Kiff et al, ‘Credit Derivative Systemic Risks and Policy Options’, IMF Working Paper WP/09/254 (2009). The ECB Report also went into the area of netting of opposite off-setting CDS trades (p 44) or ‘compression’/‘termination’/‘tear-up’; see further also the important IOSCO Report, The Credit Default Swap Market (June 2012). Their removal does not change the risk profile but reduces the notional value of a bank’s derivatives and hence the exposure to operational risk. TriOptima provides this service and runs quarterly termination cycles for single-name CDSs and monthly cycles for CDS indices. Perhaps the most important conclusion of these reports is that securitisation is legitimate but that the practice can be improved. 173  The creation of a Central Counter Party (CCP) in this market, especially for CDSs, is often believed to be useful and could at the same time allow for better margin enforcement and also stronger forms of settlement ­netting, especially important between big-bank dealers amongst themselves, see further JP Braithwaite, ‘The Inherent Limits of “Legal Devices”, Lessons for the Public Sector’s Central Counterparty Prescription for the OTC Derivative Market’ (2011) 12 European Business Organization Law Review 87; SG Cecchetti, J Gyntelberg and M Hollanders, ‘Central Counterparties for OTC Derivatives’ [2009] BIS Quarterly Review 45. Under Dodd-Frank in the US and the European Market Infrastructure Regulation (EMIR), the CCP clearing in particular of CDSs is encouraged and given capital adequacy relief as a major incentive for clearing. They present

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The above is only to give examples of the public interest in financial products and their operation. In other areas, public concern with financial products is so far less of an issue although not unknown either. Finance leasing has not so far attracted much public concern or regulatory interest and has remained largely scandal free. Even so in private law legislation, the characterisation and operation of the modern finance lease is handled in very different ways as already discussed above. Floating charges, where legally operative are an important facility protecting lending activity, especially in respect of working capital, create considerable (often systemic) private law problems, especially in civil law countries as we have also seen. This may be remedied through legislation as in Article 9 UCC in the US but in many other countries they remain legally problematic. This has not solicited much public interest either, although, for example in France, this has been changing and legislators have started to take an interest mainly to protect Paris as a viable financial centre: see Volume 3, chapter 1, section 1.4. Elsewhere it is sometimes said that the limitations which, especially in civil law countries, derive from their intellectual system and basic notions of identification, specificity, disposition rights concerning the relevant assets and other transfer requirements, are meant to protect common creditors as a matter of public policy. It has already been shown that that is unlikely; the result is rather a reshuffling of interests between various classes of preferred and secured creditors. The proper functioning of the payment system, on the other hand, is a major policy issue in each country and usually an immediate concern for central banks. Hence their involvement in payment systems and in their proper functioning and their role as organisers of the on-line and off-line clearing systems, although usually still in a private law manner in terms of instructions, finality and clearing (including the responsibilities of clearing members, see the discussion in s 2.2.6 above). The safety of the payment system was indeed a major concern in the financial crisis in 2008. This concern also rises to the level of international payments and the stability of the international financial system. Here again, the traditional approach requires these payment flows to be divided per country or situs, which creates great uncertainty as we have already seen. Errors in instructions and execution and how they are legally dealt with may create further worries here, but again so far this aspect does not appear to have risen to the level of the public interest. Within the EU there is, however, concern about the details of the free movement of money and payments cross-border and the cost, as a policy issue. Indeed, practical problems arose with payments in other Member States and with the delays this often caused. There is also the issue of proper exchange rates to be applied in what are often small transactions in or from Member States that are not yet members

a framework and assume that CCPs as private institutions would be keen to engage in this activity and that their members would be willing to absorb any resulting losses from the default of other participants. This framework appears to be content with the substantial further concentration of risk in these institutions. For the parties, the additional collateral requirements may be quite severe, however, and netting out the requirements or indeed the positions may not be a sufficient counterweight. It will probably take quite some time before we can see how these measures work out and what kind of effect they are going to have. The law of unintended consequences may be in full operation. Ill-targeted regulation or over-regulation as in Sarbanes-Oxley, may easily result. Risk management may be curtailed in its progression or banking may shrink in unacceptable ways.

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of the euro and in respect of payments among such countries themselves. In 2007, the EU started issuing Directives in this area (SEPA, see Vol 3, ch 2, s 3.6.12), which may also affect the modes of payment. Naturally, there will also be money laundering concerns and the use of the banking system and bank transfers to that end, as other major public concerns. There are also a number of obvious public concerns in the operation of book-entry systems for investment securities. They may relate to self-dealing and other forms of internalisation and the best price protections that are afforded. Margin trading and the maintenance of open positions through short selling may be others. Error trades may present further worries, also for regulators. More particular regulatory issues of concern may be short selling more generally, the stresses it imposes on securities entitlement systems in particular, and the risks especially for smaller investors. Naked short selling emerged as a particular concern in Germany in 2010 following the Greek crisis, but it was not immediately related to book-entry systems. In principle, any impossibility to deliver the securities would limit the activity, if not making it illegal at the same time. Intra-day trading or trading occurring within the particular settlement period may, however, not require any delivery at all as the position will be closed out before. Short selling (unless clear market abuse) is usually the messenger of bad tidings. There is an inclination to shoot this messenger but the result may be a false market. The repo market (like the swap market) is a vivid and other important example of an industry-driven and market-supported form of risk management, aided by a risk-reduction facility centred on the netting principle and the master agreement; see further Volume 3, chapter 1, section 4.2. While for repos legal risk may on the one hand be increased because of an inadequate proprietary legal framework under traditional laws, with the attendant characterisation problems and resulting uncertainties and lack of protection, as explained above, the situation is substantially retrieved through the use of the set-off principle in netting agreements, assuming that facility is sufficiently supported in law, although it may still remain unclear which law that is. Netting may be at the expense of unsecured creditors but it reduces counterparty risk, liquidity risk and most importantly systemic risk. It is no wonder therefore that it is popular with regulators and that, where necessary, extended set-off rights of this nature have been supported by statutory amendment, as in sections 555 and 559 of the US ­Bankruptcy Code, and are also fundamentally favoured and protected in the EU Settlement Finality and Collateral Directives as we have seen.174 At an early stage, ­netting also gave

174  There may also be a problem connected with the price at which assets are temporarily removed from ­ alance sheets through repos and they may be used to hide losses during vital reporting dates, usually at the end b of each trimester. A case of regulatory arbitrage was reported in 2010 in connection with the earlier bankruptcy of Lehman’s (the Repo 105 issue). By conducting the deals in London, where under prevailing legal standards they were considered to be true sales (which would not have been the case in the US), they were then so considered in the US upon consolidation of the US and UK accounts. In the US this removed the assets from the balance sheet, even though under prevailing accounting rules in London the characterisation of a ‘sale’ would not have made a difference. Rather than being a traditional regulatory issue, this would appear to be a question of harmonisation of accounting standards worldwide.

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rise to particular regulatory interests in connection with the amendment of the Basel I Accord concerning capital adequacy requirements as we have already seen above. As mentioned also, netting in clearing and settlement systems is fully recognised in both the EU Collateral and Settlement Finality Directives, the latter also guarding against undesirable interruptions because of an intervening bankruptcy of any of the participants in the clearing and settlement process. Perhaps the most important area of public concern is how financial products are offered to investors, especially the smaller ones. Hence the raft of special protections against brokers and investment advisors. It amounts to a reinforcement of fiduciary duties of these intermediaries acting as agents and advisors. Here we see special concepts such as ‘know your customer’, ‘suitability of the investment’, and ‘best price’ emerging among many others. Mandatory private law may thus increase as governments use it to achieve policy objectives, for example a better protection of consumers and smaller investors, the first often through good-faith notions, the latter through the extension or amplification of agency and fiduciary duty notions as already mentioned. In the EU they form the substance of MiFID. In fund management, similar concerns may arise, in the EU now partly taken care of in the UCITS Directives and the Alternative Investment Fund Management Directive (AIFMD). The above examples give some idea of public policy concerns in respect of modern financial facilities and products or the absence thereof. They are discussed here as they or similar issues may be raised in international arbitrations when arbitrators have to deal with them in terms of public interest and it must then be considered how arbitrators might deal with them short of treaty law (or EU Directives or Regulations) or relevant domestic regulation when conduct and effect of international dealings still come onshore in a particular country. Other public policy concerns may exist or emerge; competition law is the most obvious case in point. In international arbitrations it is then for arbitrators to decide what is or is becoming relevant in terms of public interest. As argued before, this may be a matter of them applying transnational (corrective) standards even in private law. If it is accepted, as was also argued, that arbitrators may represent the public interest, it may well be that they could also autonomously raise these issues—see section 1.2.5 above. This will be discussed later. In this connection, it should never be forgotten that even domestically newer social values or methods are not only imposed by governments but may enter private law in other ways, notably through the court system. There is not necessarily a government monopoly here; in civil society it would be a sad day indeed if citizens had to wait solely for government to take action in these matters. New policies enter the law all the time, including private law, even in a mandatory fashion, either directly or more indirectly in dispute resolution. That is not different at the transnational level, but then increasingly in a transnationalised way, potentially in the form of arbitral awards. This is likely to further the demands for justice, social peace and perhaps also utilitarian and efficiency principles or common sense notions to which international arbitrators may be particularly sensitive, as has already been mentioned, in this way updating and pushing forward the living law in the international market place.

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2.3.2  Conflicts of Public Policy. The Jurisdiction to Prescribe, International Minimum Standards and the Spokesperson’s Function in Respect of the Public Interest In the previous section, it was shown that public policy can take the form of private law intervention in finance and then affect the operation of financial products and the ways in which they are sold. Government may, on the other hand, also intervene by directly licensing and supervising financial intermediaries such as banks and ­investment brokers and advisers. Governments may withdraw these licences or impose further conditions in case of bad behaviour. This was identified in section 2.1.1 as a matter of administrative law, which does not normally give individuals a private action. This law does not therefore normally rise to the level of arbitration unless a regulator is respondent, which is less likely although below we shall revisit the question of how far such regulation may still give rise to extra-contractual civil liability in arbitrations. But mostly individuals cannot force governments to act or derive rights against licensed intermediaries who breach the licensing requirements; we accept that governments may have their own reasons (within the law) to deal with delinquent licensees in their own ways. As already noted, in international cases, domestic governmental interests or policies, or domestic public order requirements or values affecting participants 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 order (see also the discussion in ch 1, ss 2.2.6ff). To the extent an international transaction has an effect on the territories of states that are or may be affected or if there is conduct in such territories, local policies (and values) cannot be ignored in international transactions. It has already been noted that in an ever more virtual environment, the international flows might be much more difficult to spot but it remains true that a purely private lex mercatoria approach cannot ignore these local concerns or interests, is in fact deferential to them, and must take them into account to the extent relevant and justified, the determination of which then becomes a key issue.175 The impact of governmental interests on the lex mercatoria can thus be considered a 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. Governments are sovereign on their own territory. Another complication is here, however, the possibility that different conflicting governmental interests impinge on the same transaction so that a choice may have to be made by adjudicators even if in principle they cannot reach beyond their own legal order. Nor, it is submitted, can they interfere under proper notions of the rule of law within their own borders

175  It is clear that domestic laws of this nature do not become part of the hierarchy of the lex mercatoria, as other domestic rules of private law may still do residually, as we have seen, but these rules compete with the lex mercatoria and should in principle be distinguished from fundamental legal principle as ius cogens or human rights or similar public order considerations which operate in the lex mercatoria, and therefore in private law itself, and are for international transactions, it was submitted, of a transnational nature.

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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 confirms, however, that their own public policy or order rules cannot be ignored in other legal orders either, especially in operations taking place on their territory­ (in terms of conduct and effect) and they must in principle prevail unless there are good reasons that it should be otherwise. That is what deference means. Competition policy has been extensively tested in this context and early shed ap ­ articular light. It is also relevant in international finance. Can it be effective and applied extraterritorially (therefore in other legal orders), notably when non-residents organise a (financial) 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 applicable domestic competition laws, these laws extend under their own terms to activities abroad. 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 on the application to foreign situations, also on interpretation. American and EU competition laws are now considered to have extraterritorial effect. A measure of discretion in balancing the interests if there are other competing (­ competition) laws is assumed by the (American) courts and this is accepted to be quite separate from the legislator’s (presumed) intent and is based on comity, which has fairness at its core, but is in such cases mostly still seen as a national rather than an international concept, although reference is now often made to moderation.176 Awareness of the interests of other states is assumed.177 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 are of great interest, need to be carefully considered, and may also be indicative of a more international trend. In Europe, reference in this connection is often made to règles d’application immédiate: see Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I). Here the formulation of a conflicts or private international law rule is still preferred, even though it does not concern private law issues. Reference is sometimes also made to so-called unilateral conflicts rules giving effect to public policy of forum states in appropriate circumstances as a matter of non-choice.178 Under it, precedence is indeed given to governmental policies when they are more obviously

176  See for this international law principle the Barcelona Traction, Light and Water Company, Ltd (Belgium v Spain) (1970) ICJ Rep 3. 177  See for the extraterritorial application of competition laws in the US the well-known line of cases starting with United States v Aluminium Company of America (Alcoa) 148 Fed 2d 416 (1945) and United States v Imperial Chemical Industries (ICI) 105 F Supp 215 (1952). 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 595 F2d 1287 (1979). 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). 178  See for an early comparative study, still relevant, GA Bermann, ‘Public Law in the Conflict of Laws’ (1986) 34 (Supplement) American Journal of Comparative Law 157.

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relevant, notably therefore when there is (significant) conduct or effect on the territory of the state concerned, although courts may always apply the policies and public order requirements of their own forum state. As already noted, since international arbitrators do not have their 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. That was always one of the advantages of international arbitration when the public interest becomes engaged. The key issue is whether ultimately the application of domestic policy rules in ­international cases may be tested and balanced under international minimum standards, that is to say in international arbitrations under notions of the international public order. That could mean that transnational public order requirements take over. Fundamental values in the transnational order may then prevail. Outside the area of international finance, this is now quite conceivable, for example, in competition cases or for workers’ protection issues or in determining environmental standards for international operations. In international finance, it may equally be considered in terms of public order restrictions emerging in the international markets themselves. International arbitrators would then become the spokespersons of these and therefore of the public interest in those markets, much as, even domestically, new social values are often first articulated by courts. Thus issues of financial stability, market discipline (or abuse), money laundering and bribery may arise autonomously as transnational law to be applied by international financial arbitrators without reference to national laws or value systems (although they may still figure as examples or enter as general principle). One important question is whether resulting awards, if affecting the application of domestic regulation, will be enforced (under the New York Convention) in countries most directly concerned, if the regulatory regime that is considered applicable by arbitrators is not the regulation of the relevant (recognising) jurisdiction itself. Their courts may still see this as an issue of their own public order although it is possible and not now uncommon that they accept here a more international interpretation of it as well, practising a kind of domestic international public order concept, although this will depend to a great extent on the sophistication of the relevant domestic court. In financial regulation proper, therefore largely in matters of licensing and authorisations, especially in connection with licensing and prudential supervision, there may arise other, more special issues in international financial operations as there are likely to be home and host regulators each imposing and enforcing special rules in respect of financial activities on their territories, which may raise the question where the more characteristic obligation is to be performed to determine which regulator might be competent in the first place also to determine the rules concerning conduct of business. Which rules of protection of market participants apply here? First, upon proper consideration, it may be that the transaction is not cross-border or international at all, for example where a foreigner unsolicited opens a bank or securities account in another country. That is relevant especially within the EU, since its harmonising ­Directives, including MiFID, only apply to cross-border dealings. That may then also affect the investors’ protection regime and investors’ recourse, which could still be different in respect of purely local financial dealings. Again, much financial regulation is of a

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­ ifferent nature and bears on licensing and direct regulatory supervision of certain d participants. Thus deposit taking, underwriting, market making in securities, brokerage and investment management now commonly require licences to which conditions will be attached. This was earlier identified as a matter of administrative law and does not give private parties direct recourse against perpetrating licensees, but civil liability is not per se excluded. It is a matter of interpretation what the intention of the legislator was179 and there are explicit exceptions, for example prospectus liability following authorisation to issue securities in the public markets. The 2009 Rating Agency Regulation of the EU as amended in 2013 may serve as a further example.180 Investors may now directly claim for damages from Rating Agencies in the case of wilful misconduct or gross negligence. Non-contractual civil liability is then an important issue, which may also surface in international arbitrations when again the issue arises where the licensed activity may be situated.181 The question of arbitrability of regulatory issues is closely connected with the effect arbitrators (may) give to regulation and how they handle conflicting domestic governmental interests in this respect or arrive at international minimum standards in appropriate cases. This may also concern their powers to accept non-contractual civil liability of perpetrators. The substantial expansion of the notion over the last 20 years is well known and international arbitrators, who determine the issue of arbitrability themselves, may take an expansive view here but may arguably still adopt a forum non conveniens mode if they cannot handle the issue, especially if evidence of third parties over whom arbitrators may have no power needs to be solicited to determine the effect of anti-competitive behaviour for example, or if substantive regulatory issues are at stake, which cannot be decided without hearing regulators and others not party to the arbitration.182

2.3.3  The Impact of Insolvency Laws At this juncture it may also be necessary to say more about a bankruptcy intervention in an international financial arbitration, an issue already broached more incidentally above several times. Insolvency is best seen as another regulatory issue even if for historical reasons it is often still cast as an area of private (commercial) law. In the case of a bankruptcy, in purely contractual matters, eg in disputes concerning a

179  Even for MiFID, the ECJ refers to national law to define the civil consequences of the investors’ protection it offers, see Case C-604/11 Genil 48 SL and Comercial Hostelera de Grandes Vinos SL v Bankinter SA and Banco Bilbao Vizcaya Argentaria SA, 30 May 2013. 180  Regulation 2009/1060/EC amended by Regulation 2013/462/EU. For the implementation of the liability, Art 35bis s 4 of the 2013 Regulation explicitly refers to domestic law in terms of the notion of damage, wilful misconduct and gross negligence, causality etc. In trans-border transactions, under EU Regulation (Art 4(1) Rome II) the applicable domestic law is the law of the place of the damage. No special EU concepts were developed here. 181  The civil liability of regulators will not be further discussed here but has been an issue, see n 112 above. 182  Note the well-known cases in the US in which arbitrators were allowed to proceed in regulatory matters: The Bremen and Scherk v Alberto-Culver Co (n 50); and Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc (n 53).

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monetary claim, relevant bankruptcy courts may take the position that they are more competent in the matter than arbitrators and that such claims need to be established in (summary) proceedings in bankruptcy once the latter intervenes. The same may go for any contested proprietary claims, likely to give a right to the facility of immediate repossession of the relevant asset regardless of the bankruptcy. The existence of an arbitration clause would not then be considered a bar to such bankruptcy proceedings under the New York Convention (Art II). That may from their perspective also be more efficient. The further claim may be that arbitrators cannot affect third parties in their award and therefore also not the bankruptcy and its order, the involvement of all being its essence. However, to what extent international arbitral awards may indeed affect others, particularly relevant in matters of ranking in asset-backed financing and in questions of set-off and netting, as we have already seen, remains exactly to be determined as a ­matter of powers of arbitrators and of the status of their award in the ­international commercial and financial legal order. It has become a preliminary issue of the objective law at the transnational level in which, it is submitted, international practice and custom as part of the modern lex mercatoria and its dispute resolution facility may now play an important role. In any event, it should be appreciated that bankruptcies, which always remain local, cannot automatically claim extraterritorial effect, not therefore full power over foreign creditors, debtors and assets or foreign activities of the bankrupt either, and then effectively also not over an international arbitration in respect of any of these or them. Of course in the EU we now have the 2002 Bankruptcy Regulation (although limited in the EU to bankruptcies pronounced in other EU countries) and in several countries the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, notably in c­ hapter 15 of the US Bankruptcy Code, which allows for greater extraterritoriality of foreign bankruptcies in these countries. However, it remains unlikely that a bankruptcy court will suspend its own (summary) jurisdiction to await the outcome of an international arbitration while likely invoking jurisdiction and arbitrability problems in respect of an arbitration in these circumstances or otherwise public policy. It may even seek to terminate the arbitration or at least disallow the bankrupt or its trustee from continuing to participate. Recognition of any subsequent award under the New York Convention may then also fail in the country of the bankruptcy,183 but it should be understood that a bankruptcy court is not a court of general jurisdiction and it could even be questioned whether it is a proper recognition court under the New York Convention. In the literature, sometimes a distinction is made here between core or pure bankruptcy issues and others, the idea being that the latter remain arbitrable also in bankruptcy, but the distinction is not clear especially in the important issue of the determination of the claim.184 At the practical level, it should be noted that many

183  There is precious little case law, but see Audiencia Provincial de Barcelona, Seccion 15a, Auto de 29 Abr 2009, Rec. 708/2008, in La Ley, 213720/2009 in a case where international arbitration was allowed to proceed with reference to international treaties. That did not necessarily mean the acceptance of any resulting award. 184  See also V Lazic, Insolvency Proceedings and Commercial Arbitration (The Hague,1998) 154ff, relying on Zimmerman v Continental Airlines, Inc 712 F2d 55 (3d Circuit 1983); see further also D Baizeau, ‘Arbitration and Insolvency: Issues of Applicable Law’ in A Rigozzi (ed), New Developments in International Commercial Arbitration (Zurich, 2009) 100ff.

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s­ tructural bankruptcy issues are unlikely ever to be the subject of an arbitration such as the appointment of trustees, powers of the court, stay of proceedings, inventorisation of assets and claims, determination of the distribution list or presentation of a reorganisation plan and the voting on it. This is simply a question of bankruptcy jurisdiction, it being hardly imaginable that a contractual arbitration clause would (mean to) cover or anticipate these bankruptcy facilities or aspects. It would likely require some submission ­agreement including the consent of the bankruptcy trustee to farm out specific issues of this nature to an arbitration once the bankruptcy has intervened, which consent is very unlikely to be given; the bankruptcy trustee might have no power to desist. The bankruptcy issues that arise in international arbitrations are therefore likely to be lateral or coincidental although not necessarily minor: the effect of a stay, the modality of the proof of claim, its inclusion in the estate, the order of ranking, the extent of a set-off, the effect of the distribution list or an approved reorganisation plan on the enforcement of claims, etc. In dispute resolution, they pose more immediately the question of the power of the bankruptcy over an international arbitration which—as already said—is a matter of extraterritoriality, which may not be automatically assumed, although the bankruptcy court will have the last word in matters of ­distribution and reorganisation. A special issue is likely to arise when a bankruptcy trustee tries to sue a creditor who invokes the existence of an arbitration agreement as a bar. Such a creditor may well be successful in a third country. Again it would be a question of extraterritoriality of the bankruptcy trustee’s powers in this regard, which may not be assumed automatically to affect the operation of the arbitration clause and of the arbitration, at least if conducted outside the country of the bankruptcy. Indeed, regardless of what issue is arbitrated, an award may still have meaning outside bankruptcy proceedings, especially clear when they are terminated, but it is also clear in countries where the bankruptcy, under its own rules or under the rules of that country, cannot reach while the arbitration or award can. It is often not sufficiently realised or it is easily overlooked that even a determination of a claim in bankruptcy is not res judicata outside the bankruptcy proceedings, even in its own country. Again, the key to understanding bankruptcy is its limited purpose and nature even if the consequences may be quite severe and far reaching; all the same, the bankruptcy court exercises only a limited jurisdiction. Hence also the summary nature of the proceedings, although it is conceivable that upon a full appeal the initial bankruptcy findings must be considered fully settled. This principally c­ oncerns claims against the estate. It may therefore well be that exactly in such appeals the ­arbitration clause will regain its full status as defence or bar. Continuation of the international arbitration would therefore be normal even if the bankruptcy court ignores the results, orders otherwise, or even forbids the bankrupt party to participate.185

185  This raises other important issues concerning undefended arbitrations and ‘default’ awards, which are not here further discussed, but which are very likely to arise upon an intervening bankruptcy. English law has in this respect a special feature that under the English Arbitration Act 1997, s 107, it allows the bankruptcy trustee to confirm or reject the arbitration agreement like any other executory contract. This is in line with the Insolvency Act 1986, s 349A.

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Another relevant although related point is that the position when looked at from the arbitration may be quite different from when looked at from the perspective of the bankruptcy. From the international arbitral perspective, tribunals are normally allowed to proceed regardless of domestic bankruptcies. For arbitrators the issue is one of their own jurisdiction and/or arbitrability or arbitral powers and international arbitrators, having the power of determination in these matters, might not look much further and take a formal attitude. Bankruptcy courts, on the other hand, may take a much more restrictive view of the arbitration and are likely to be guided by different policies and may emphasise instead the most effective distribution or reorganisation of the estate or more particularly the need to preserve their bankruptcy order. Clearly, a balance needs to be struck but it may be much influenced by the perspective one takes and the role one plays or duties one has, either as an arbitrator or bankruptcy trustee/judge, in which connection it should be acknowledged that recognition of arbitral awards in bankruptcy proceedings is an established theme—even if there may be substantial doubts as to how recognition may be affected by a bankruptcy under the New York Convention—although the recognition of the effect of an intervening bankruptcy in international arbitrations is not. An important question is which bankruptcy court/country is ‘relevant’. There is primary and secondary bankruptcy jurisdiction, the first commonly thought to exist in the country of the residence of the debtor, the second in the country where the debtor may have some activity or assets. This raises important issues of definition that will not be further discussed but it follows that there is usually one primary bankruptcy while there may be more secondary ones. Under their own laws, these bankruptcies may have a different international reach and especially secondary bankruptcies might not be considered to have much of an extraterritorial status even if their own law. But if it still assumes it, there may be even less international recognition, although acceptance of the UNCITRAL Model Law on Cross-Border Insolvency or similar local legislation may help. We have already seen that even primary bankruptcies may not have much of it short of treaty law (or, within the EU, the 2002 Regulation). International recognition and especially enforcement, being already problematic for ordinary judgments, may then be ever more so for bankruptcy, also when based on primary jurisdiction. This will also not be further discussed except to say that while the bankruptcy courts hold sway in their own country, both in primary and secondary bankruptcies, and may well ignore an international arbitration, there may be all to play for in third countries, which may upon recognition of either the bankruptcy or the arbitration or both establish a different balance between the two and the perspective may slip here more in favour of the international arbitration. In either situation, the balance is in truth a matter of public policy or order, but countries with the original bankruptcy jurisdiction are likely to react here quite differently from bankruptcy recognition countries and this may be an important point to keep in mind. It should be understood in this connection that the recognition regime is also quite different for both, international recognition of arbitral awards being in most countries under the New York Convention very likely still subject to a different interpretation (of the public policy bar to recognition) in the country of the bankruptcy and in bankruptcy recognition countries. There is nothing similar for international bankruptcy recognition, except now within the EU under the

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2002 Bankruptcy Regulation, while unilaterally there may be in individual countries under the UNCITRAL Model Law on Cross-Border Insolvency as already mentioned. Even under these texts, the bankruptcy recognition regimes are seldom clear on the matter of pending international arbitrations, although they may be clearer on pending law suits.186 There is another policy issue to consider however: courts everywhere may now be more willing to take into account the possibility that relevant assets move around only to avoid a bankruptcy; this is very much behind the greater willingness internationally to recognise domestic bankruptcies and give them some extraterritorial effect. Their own unilateral bankruptcy recognition policy may thus become more liberal. This is also very much behind the increasing acceptance of the UNCITRAL Model Law on Cross-Border Insolvency, which, short of treaty law, presents a text for domestic legislation in the area of unilateral recognition of foreign bankruptcies, notably followed in the US and the UK, still distinguishing in this connection, however, between primary and secondary bankruptcies as the EU Regulation also does. This more liberal attitude could even motivate international arbitrators to help when they also become aware and wary of debtors hiding in or moving their property away from the country of the bankruptcy. As a consequence, they might consider with more favour the unity of the bankruptcy proceedings and their extraterritoriality, in such cases to be promoted by the public order in the transnational sphere itself. Again, it poses the question whether international arbitrators can autonomously raise and decide these policy issues. Such an attitude may then also depend on the receptiveness of the domestic bankruptcy courts to international developments, including a search for a better balance with international arbitrations and their respect in principle for arbitral awards, in particular when determining the status of these assets and the ranking resulting from their use in international financings. In other words, this informal co-operation could not be unqualified or merely unilateral. Here again the issue arises that arbitrators finding under their extended powers in international arbitrations on the basis of transnational market practices in matters of ranking and set-off may then expect their powers to also have an effect in local bankruptcies. In any event, it cannot be automatically assumed that bankruptcies, which remain all local or domestic in principle, can interfere with (or suspend) an international arbitration. It can only concern the conduct under and effect of the arbitration in the bankruptcy jurisdiction and in other countries that

186  cf, however, also Syska and another v Vivendi and others [2008] All ER (d) 34, following for international arbitrations the regime for pending law suits under the EU Regulation, considering therefore the lex concursus as determining the status of the arbitration with the exception of pending arbitrations, which are considered to operate under the law of the EU country where they are pending (assuming there is one); see also I Fletcher, ‘Joseph Syska, as Administrator of Elektrim SA v Vivendi Universal SA’ (2010) 22(10) Insolvency Intelligence 155–57. One may well wonder whether this analogy is correct, local law suits in the ordinary courts being by definition domestic, international arbitration not being so unless one still believes them to be tied to the seat. Even if in this case the award in an arbitration that was already pending was not set aside as English law was held to apply and the arbitration agreement in favour of an arbitration in England was upheld regardless of Polish bankruptcy law to the contrary, one may question the reasoning. The 2012 amendments to the Brussels I Regulation make clear that pending arbitrations are not similarly treated.

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recognise the extraterritoriality of the bankruptcy in question but in these countries always subject to the latter’s own views and conditions for bankruptcy and arbitration recognition and the balance that they strike in this regard, as already mentioned.187 Again, it is a matter of policy which may be shifting. Finally in the foregoing the important issue of ranking of foreign security or set-off possibilities in international arbitral awards and their recognition in (local) bankruptcies was mentioned several times. The English case of British Eagle International ­Airlines Ltd v Compagnie Nationale Air France and the Australian case of IATA v Ansett were noted in this connection,188 the former denying effect to professional parties creating their own priorities (through a CCP) and the latter accepting them in a bankruptcy. It was posited before that since equitable interests only operate between insiders, we need not be concerned here about the flows of goods which remain unencumbered in respect of parties buying in the ordinary course of business. One may also see a transnational principle to which arbitrators will be receptive, but it leaves the position of bona fide common creditors, which remain affected and are pushed down. From the transnational perspective we may not a public order issue to which British Eagle might have been especially sensitive. It meant that uninformed common creditors could still rely on the appearance of ownership in the debtor in respect of all goods it handles except in respect of a limited number of published security interests and a more limited notion of set-off. The case dates from 1975 when this doctrine of apparent ownership was still alive in England. But it was abandoned by the Bankruptcy Acts of 1985/1986, which also confirmed support for netting clauses. The doctrine never operated in this manner in the US and its impact (solvabilité apparente) was in France much reduced after 1980 when in that country the reservation of title was accepted as effective in bankruptcy. The conclusion is that in terms of fundamental principle, public order or policy, the bona fide purchaser is ever better protected and the bona fide common creditor ever less.189 The justification for the latter is often that regulators are now more interested in risk management in banks than in the position of the common creditors at whose expense the expansion of the set-off and netting facility operates. Perhaps more convincing is the argument that statistically common creditors in bankruptcy never got very much anyway and many of them were these very banks for their unsecured credit. If it was really a public policy concern, they should be given a fixed slice of the assets, which has found little support over time. So it would appear that there is hardly a transnational public policy principle at stake that would also have to be discounted in an international arbitration as a transnational minimum standard or operate as a credible public policy bar to the recognition of the ensuing awards in local bankruptcies.

187  Thus in In re JSC BTA Bank, Debtor in a Foreign Proceedings, 434 BR 334, 337 and 343 (2010), the United States Bankruptcy Court SDNY refused to use the recognition of a Kazakhstan primary bankruptcy within the US to stay the proceedings of a Swiss arbitration that had nothing to do with the US or the debtor’s property within the US. 188  See nn 120 and 155 above. 189  See Vol 3, ch 1, s 1.1.10.

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2.4  Complications in International Financial Arbitrations 2.4.1  The Reasoning of International Financial Arbitrators and their Powers to Intervene in the Dispute The reasoning of international arbitrators will be the subject of part IV below and the discussion is here limited to financial arbitrations. Nevertheless, a first general observation to make is that the reasoning of international arbitrators could hardly be more ‘rationally determinate’ than the reasoning of ordinary judges.190 More particularly, arbitrators were never ‘bouches de la loi’ as judges were once supposed to be on the European Continent. Adjudication is not a mathematical exercise; causality and rationality acquire here a distinct legal meaning, more obvious probably in international arbitrations. It has already been said that international arbitrators have great powers but they are not free, including in their reasoning. Their freedom is in particular subject to the rules and practices developing in the transnational commercial and financial legal order itself and to its public order requirements in which, it was argued, the powers of the international arbitrator are themselves founded, but, crucially, international arbitrators articulate these rules themselves, much as they also determine their own jurisdiction, arbitrability, and rules of procedure and evidence. The final test of this is in recognition, which, if international arbitration is to survive, will only be denied on the basis of clear excess, although it should never be forgotten that the New York Convention does not allow any appeal on matters of fact or law and does not go into the reasoning at all. The commercial nature of the transaction between professional parties also enters the equation as do concerns for speed and cost, in the best awards demonstrated by conciseness and focus, further supported by the absence of appeals and reviews. These are legitimate, even prime, considerations in the reasoning. Arbitrators are there to solve a problem between the parties—no more, no less—in the most efficient and expedient manner. In doing do they must base themselves in principle on the representations made by the parties and they cannot start their own line of argument. They may rely on their conscience, knowledge and sensibility as equity judges did and to some extent probably still do in common law countries. They may be activists but are not there to create or clarify a legal system. Ordinary judges should not be copied. They simply decide which of the parties’ arguments are the more plausible. It means that international arbitrators must promptly decide the dispute, focus on the essence, not issue general dispositions, and not attempt to create precedents (or contribute to a jurisprudence constante), whose binding force is in international law in any event contested, while a search for consistency is also inappropriate beyond the obvious. Again, they are there to decide the dispute between the parties on the basis of their arguments, not to attempt system building in the civil law manner; it is clear that international arbitrators are less hemmed in than ordinary judges as they need not

190 

See section 4.1 below.

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worry about the impact on the system. They are far from an appellate jurisdiction. Not having a lex fori of their own (or it would be the transnational law itself), it is not their task to promote and explain local laws either or any other law in particular. As far as the applicable law is concerned, they have the power to apply the modern lex mercatoria (and its hierarchy in which domestic private law may still be the residual rule) when properly pleaded, validate the direct or indirect parties’ choice of such law or other laws and assess their meaning, and in international transactions also determine and recognise the relevant domestic governmental interests in terms of regulation and any other overriding domestic value subject to articulating in appropriate cases minimum transnational standards (or policies). Again, it suggests a large measure of discretion (or comity) in international cases, to be explained in the reasoning but in the manner arbitrators believe best unless there is patent excess. There remains the important issue of whether international arbitrators may raise issues themselves if they consider them of overriding public policy or order importance. Here again, there is great freedom (see s 1.2.5 above) but arbitrators are not free in these aspects either and any power in this regard must be exercised with the greatest care. In fact, it is submitted that they cannot lightly make themselves the spokespersons for the general interest either, but in appropriate cases they cannot avoid it. As a minimum, there will have to be a hearing on these new issues and parties must be treated equally as matters of the utmost due process. Further delays and costs must be seriously considered. In civil law, it is often referred to as the doctrine of ius curia novit (see s 1.2.5 above): the judges know the law, but it has already been noted that the question here is ‘which law?’ as in international arbitrations there is no natural lex fori or it must be the transnational law itself. Whatever law is invoked must be pleaded as fact and proven, and it is in principle not different for public policy issues but for special powers of international arbitrators in this regard. These are major issues, more difficult than sometimes assumed. This raises at the same time the issue whether arbitrators might not only have a right but also a duty to raise these matters on which ICSID case law at least remains divided.191 So may be the case law of the ECJ.192 The ICJ has accepted a duty for itself to do so while invoking its status as a court.193 International arbitrators lack that status and might institutionally not therefore have the same powers and may have to be more circumspect. It cannot be denied that in these matters and the way to reason them out, international arbitrators will bring the ‘ballast’ of the legal regimes from which they hail, with potentially important differences between a more structured inquisitive civil law approach as compared to a more searching adversarial common law approach, a more formal European approach as against a more ‘realist’ American approach, and a more commercial than consumer law attitude, or perhaps even a more policy-oriented rather

191  See eg H v Houtte and M Brunetti, ‘Investment Arbitration—Ten Areas of Caution for Commercial Arbitrators’ (2013) 29 Arbitration International 570. In this connection the practice at the ICJ is often believed normative also in international arbitration, see Nicaragua v US (Merits) [1986] ICJ Rep 24, para. 29, but that does not go without saying. 192  UK v Iceland (Merits) [1974] ICJ Rep 9, para 17. 193  See for ECJ case law, n 53 above.

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than private law-oriented approach. That is all likely to be discounted in the way they reason, even if they may not themselves be greatly aware of it. Again the example of ordinary judges in the countries they come from may not be helpful. Under transnational law, they largely determine themselves how to proceed in this regard, again except if showing excess. Asking for a ‘clear explanation’ or a ‘full picture’ or even ‘elementary logic’ suggests an insufficient understanding of the situation and of the possibilities.194 Realistically, arbitrators cannot even vouch for the possibility that their preferences for some arguments in some aspects of the case may contrast with their preferences for other arguments in others. More neutral may be the requirement that the reasoning on points of fact and points of law can be followed to its conclusion.195 Besides the other elements already mentioned, such as speed, cost, focus and conciseness, that puts the accent on mere plausibility. Again, only the most obvious contradictions can and should be avoided and consistency within the award, let alone with other awards or with the entire law of international business and investments, even if it was clear what the concept of consistency really meant, is no realistic demand either; see further the discussion in part IV below.

2.4.2  Is there a Need for New Treaty Law and for Supervision of International Financial Arbitrations by an International Commercial Court to Stabilise International Financial Arbitration and Enhance Its Credibility? Thinking along the above lines in terms of powers of arbitrators, the laws they apply and their reasoning produces an image of modern international financial arbitration which may become quite different from what is normally considered an international (commercial) arbitration. It has already been said that it raises important institutional issues and issues of applicable law and policies, easier to understand and to place if we assume the delocalised model of international arbitration. But it must also be asked whether international financial arbitration acquires i own distinctive feature in terms of transparency and accountability of participants in international finance, which goes well beyond any concerns there may exist about proprietary structures, regulatory issues and intervening bankruptcies or similar proceedings, although they may also wish to support these better. This may further underline that international financial arbitration is becoming quite distinct from ordinary international arbitrations and may well deserve a different slot altogether like investment arbitrations, although of course in a different way. It also raises important issues of independence, impartiality, accountability, transparency and supervision of these arbitrations themselves. It

194  Requiring the award to be convincing, see P Lalive, ‘On the Reasoning of International Arbitral Awards’ (2010) 1 Journal of International Dispute Settlement 1, does not introduce an objective standard either and also presents an unmanageable test, see further s 4.2.1 below. 195  The view in MINE v Guinea, ICSID Case N° ARB/84/4 Decision on Annulment, 22 December 1989 that the minimum requirement is not satisfied when contradictory reasons are given therefore seems untenable. ­Frivolous reasons, to which this decision also refers, are more to the point, but what are they?

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may support the creation and operation of P.R.I.M.E. as a separate arbitration facility for them. Earlier the creation of an international commercial court or similar institution was proposed196 first to assume a supervisory role in international arbitration in terms of appointment of arbitrators, their impartiality and independence, and especially the appearance thereof, expertise and conduct, but also to issue preliminary opinions to international arbitrators if so requested concerning their powers especially when determining public policy issues, the applicable law in this regard, and the measure of its transnationalisation, and to intervene in matters of challenges and enforcement of the awards. This supervision is useful also as a counterweight to the lack of transparency and accountability because of arbitration’s private nature and could be an important prop to the legitimacy of such proceedings. This may be needed all the more in international finance and could also reinforce the third-party effect of modern financial structures if accepted in arbitral awards, where necessary even in local bankruptcies. Furthermore, this international court could assume an active role in ordering preservation measures pending the constitution of the arbitral tribunal and subsequently order their enforcement through the courts of relevant countries. Ideally, such a court should obtain treaty status to support the authority needed to back up an effective system of international financial arbitration that, in the case of disputes in financial matters, could meet the challenges enumerated above. Such a treaty could also usefully enumerate and reinforce the powers that international financial arbitrators need effectively to solve international financial disputes and which have been described throughout. Indeed, this whole new world of international financial arbitration, if it is as depicted here, may not be able to operate fully and safely or get sufficiently off the ground on its own. In other words, treaty law might stabilise this scene as the Washington Convention did for foreign investment arbitrations.

2.4.3  International Financial Arbitration and the Position of Ordinary Judges Compared Finally, the position and role of ordinary domestic courts in international finance should be further considered, compared and if necessary be re-evaluated. First, as to third-party effect of proprietary structures and set-off rights, it should be considered whether, institutionally, ordinary courts and judges are in principle better placed than international arbitrators. The expertise (and power) of ordinary judges should not be underestimated and upon proper advocacy many might find a way to deal with most problems and ordinary judges may be a great deal more succinct and coherent in their reasoning.197 On the other hand, their findings may be even less likely

196 

See Dalhuisen (n 36). cf eg the important decision of the English Court of Appeal in Lomas & Ors v JFB Firth Rixson Inc & Others [2012] EWCA Civ 419 on the interpretation of the ISDA Master Agreement; see also text at n 200 below. 197 

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to obtain international recognition in the absence of something like the New York Convention, although in the EU we now have the Brussels I Regulation for ordinary civil and commercial judgments, revised in 2012, and also the Bankruptcy Regulation 1346/2000 of 2002. Countries may also follow the UNCITRAL Model Law on Cross-Border Insolvency as notably the US and UK have done, as already mentioned. We also have the Hague Convention of 2005 on Choice of Court Agreements, which envisages a simplified recognition and enforcement regime for ordinary judgments when a court is chosen by the parties, a regime to some extent comparable to that of the New York Convention, although so far it still lacks sufficient ratification to be meaningful.198 However, in domestic courts there are likely still to be language and expertise problems in many countries and there will be generally less awareness of or confidence in international practices and the entire concept of transnationalisation with its effect, also on the applicable regulation and its interpretation. It is probably still an issue for most whether they can apply transnationalised law at all, certainly at their own initiative. Again, in international transactions this is becoming increasingly bothersome. Hence also the potential advance of international arbitration in this area, although it was noted above that especially the courts in the US, in legal realism and with their powers under the UCC to find on the basis of many sources of law, may have an advantage and may still present a true challenge and alternative to international arbitration. Whatever the status of their judgments, mostly ordinary judges may not feel able to assume a similar freedom and flexibility in international proceedings as international arbitrators may do to achieve more up-to-date, higher-quality, and more responsive decisions. In particular, this may mean less willingness to consider application of transnational market custom or principle as, for example, may derive from the ISDA Master Agreements. There also remains the issue of appeal, which may delay a final decision in local courts for many years (even in bankruptcy proceedings), although it may be conceivable that a choice of court agreement itself enhances the power of judges and eliminates appeals, assuming this does not raise public order issues in the relevant jurisdictions and may also be effective in a bankruptcy. Unfortunately, the 2005 Hague Convention on Choice of Court Agreements did not clarify these issues. Finally, especially in appeals, local courts may be hemmed in by a need to clarify their law at large or even contribute to system building, which may sit particularly uneasily with the needs of international dispute resolution, although it was said in respect of the Lehman litigation that the decisions had been ‘more sensitive to the dynamics of the global financial markets’.199 Financial issues are most likely to arise in the ordinary courts in the case of a bankruptcy or similar insolvency proceedings. Indeed, the Lehman situation in England after 2008 may be used as an example. It gave rise to about 30 cases, eight of which

198  Only Mexico has ratified, the US and EU have so far only signed the Convention. For other judgments there is nothing similar except in some countries on a bilateral (treaty) basis. 199  See J Braithwaite, ‘Law after Lehmans’, LSE Law, Society and Economy Working Paper 11/2014 at p 9.

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were appealed200 and three of which ended in the Supreme Court.201 For the present purposes, the cases dealing with the following issues were of the greatest importance: (a) contractual issues, notably the interpretation of the ISDA Master Agreement where it showed gaps, (b) proprietary issues, notably upon the exercise of user rights by the creditor (or repos buyer) in assets given as security and the protection of client moneys, and (c) the concept and protection of the pari passu notion in bankruptcy. In contract (under (a) above) supplementation in respect of any close-out amounts, the Court of Appeal found in Lomas202 that the non-bankrupt party out of the money could either rely on termination (and pay up the valuation as established under the agreement) or under the inapt drafting of clause 2(a)(iii) of the Master Agreement suspend payment until the default was lifted. This allowed a delay until the interest rate situation turned. From the point of the bankrupt estate, at least that was better than immediate extinction of the debt altogether. Rather than implying terms in widely used standard contracts, the context and commercial objectives were considered. Perhaps more fundamental were the proprietary and segregation issues (under (b) above) that surfaced. First it was decided that all that was intended as client money was deemed to be under statutory trust even if not formally segregated. At least that was the interpretation given to the EU MiFID implementation in the UK.203 Floating charges of securities and other balances were on the other hand not considered to have sufficiently transferred control as required under the EU Collateral Directive and were therefore not protected under its UK implementation.204 Other problems were the effect of the right of use of the assets by secured creditors or in repos on the proprietary claims of owners or repo sellers to a return of the property. Importantly, the right of use was not considered an impediment to the return of the assets or duty to replace them, nor commingling per se either. Apparently, a form of tracing and of constructive trust remained implied,205 but for repos, the repo buyer appeared to have all the rights.206 Finally (for the pari passu argument under (c) above), there was some further judicial clarification, notably of the common law anti-deprivation principle, an uncertain concept meant to protect common creditors against a wild growth of (equitable) security interests, a concern which had emerged earlier also in British Eagle.207 It is indeed interesting to see how equitable proprietary interests affect the common creditors

200  Re Lehman Brothers International (Europe) [2009] EWCA Civ 1161; Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2009] EWCA Civ 1160; Re Lehman Brothers International (Europe) [2010] EWCA Civ 917; Re Lehman Brothers International (Europe) [2011] EWCA Civ 1544; Bloom v Pensions Regulator [2011] EWCA Civ 1124; Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419; Lehman Brothers International (Europe) v Lehman Brothers Finance SA [2013] EWCA Civ 188; Trustees of Lehman Brothers Pension Scheme v ­Pensions Regulator [2013] EWCA Civ 751. 201  Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38; Re Lehman Brothers International (Europe) [2012] UKSC 6; Bloom v Pensions Regulator [2013] UKSC 52. 202  See n 197 above. 203  Re Lehman Brothers International (Europe) [2012] UKSC 6 (also called ‘CASS7 Supreme Court’). It caused considerable delays to determine what the pool now was and who was entitled to it. 204  Re Lehman Brothers International (Europe) [2012] EWHC 2997 (Ch) (also called ‘Extended Liens’ case). 205  Re Lehman Brothers International (Europe) [2009] EWHC 2545 (Ch) (also called ‘MCF’ case). 206  Re Lehman Brothers International (Europe) [2011] EWCA Civ 1544 (also called ‘Rascals’ case). 207  See n 135 above and accompanying text.

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(or not) and how difficult it seems to be for Chancery to create some clarity here outside and especially inside bankruptcy or similar proceedings. In Belmont,208 the view was expressed that it concerns ‘intentional or inevitable evasion of the principle that the debtor’s property is part of the insolvent estate’ but also it should be ‘applied in a commercially sensitive manner, taking into account the policy of party autonomy and the upholding of proper commercial bargains’. This obfuscates. Between the insiders, it is of course all about risk management—a dominant regulator concern also—and one may well ask how much concern there should still be about the rest as statistically they never got much in bankruptcy and they know that. The law protects bona fide purchasers against all equitable interests (they have no search duties) but not bona fide creditors (who have). That empties substantially the pari passu (anti-deprivation) argument, which was probably never much of a fundamental principle except in the breach. For similar reasons, in 1985 the UK Bankruptcy Act did away with the notion of apparent ownership (or solvabilité apparente). It has already been said that international financial arbitrators may on the one hand have less power in finding erga omnes in proprietary and ranking matters as compared to local judges, particularly relevant in proprietary issues (unless we accord them the status of equity judges as was suggested above). In other areas they may have more. How much guidance there is from local courts in bankruptcy situations, such as from the Lehman’s case law in England, at the transnational level may be debated, but it may be of some help especially where it demonstrates that local judges are no less groping in the dark, particularly in proprietary matters where transnationalisation of the interests in the international flows and a greater space for party autonomy may be the answer between insiders competing for recovery rights (see the discussion in s 2.2.3 above). In all risk-management techniques, there may also be elements of public interest to consider. They remain by their very nature often more domestic, but if they conflict, international financial arbitrators may be able to exercise greater freedom or power than ordinary judges as to which regulation is more properly applicable, although it also complicates their role (see the discussion in s 1.2.2 above). They may be forced to make a choice, for example when it comes to prospectus liability in an international offering, or, as mentioned before, even opt for international minimum standards. This may, for example, also be so in competition cases as a form of regulatory transnationalisation where ordinary judges would simply give preference to their own policies in all cases, not least also in bankruptcy. This balancing may at the same time give international arbitral awards a better chance to be recognised elsewhere, although local bankruptcy courts may still test these awards simply on the basis of compatibility with their own (regulatory or other mandatory) laws, including their secured transaction laws, as was noted before. Third countries recognising such bankruptcies may give the same preference to their own regulation in their own territory. One sees here potentially a special bar to all recognition of foreign decisions, whether judicial or arbitral, although arbitral awards may still have some edge. Again, it will depend a great deal on the sophistication of the relevant court, either in the original or

208 

See n 201 above.

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in a recognising country. On balance and for the reasons stated, international arbitration may here be in the ascendency also.

2.5  The Emergence of P.R.I.M.E. 2.5.1  Special Needs of International Financial Arbitration. The Emergence of P.R.I.M.E. It was argued that law is the result and outcome of a constant dialogue in society about its meaning and extent and it can never be completely known. Even purely domestically, where legislation and judgments try to stabilise the scene, that is clear in interpretation. Law is there to provide a modicum of order in the relevant legal order, which is better when it is just, promotes social peace, and is efficient. Even if in modern times, national legislatures and judiciaries became the most likely spokespersons and clarifiers, also in private law, at the international level this stabilising role is now to some considerable extent left to others in terms of market practices, custom and principle or party autonomy. When disputes arise, international arbitrators increasingly play a role in this clarification process besides ordinary courts, practitioners and perhaps academics. This concerns especially the modern lex mercatoria in private law but increasingly also minimum regulatory or public policy standards in public law or the public interest in terms of market balancing values and the articulation of public order constraints on transactions, if only to avoid abuse. Insolvency as a regulatory phenomenon acquires a special place here in finance and, although domestic in principle, its international ramifications acquire a particular significance, the extent of which then needs to be further defined. It was pointed out that the role of international arbitrators is here quite different from the ordinary courts, which will not only seek to articulate and clarify, but may also see it as their task to stabilise the system further, especially in appeals. That is notably not the task of international arbitrators who have no lex fori to explain or expand or it must be the transnational law itself. This may explain why, when properly pleaded, it is now widely accepted that international arbitrators may apply principles, customs and perhaps also accept a broader concept of party autonomy, therefore the modern lex mercatoria when finding and applying the applicable law, while in international commerce and finance domestic courts may remain relegated to the presumed certainties of private international law, leading to the application of some domestic law that is unlikely to have been written for the international financial flows. In this atmosphere, it may not surprise that international arbitration is increasingly becoming the preferred dispute resolution mode also in international finance. The main purpose was to explain what this means in terms of the applicable law and how this subject should be approached. In summary, in international commerce and finance, the applicable law is then not or no longer an automatic and mechanical application of some national law but rather a more direct search for a new normativity that operates in the international market

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place itself in order to make its operations more meaningful and the applicable law more responsive to the concerns of the business community and of the public alike at that level. These are major challenges facing international arbitrators in the financial area where issues of financial stability, honesty and reliability in markets and in the offering of financial services by businesses or banks that operate internationally are then also important; money laundering and bribery being others. International arbitrators cannot shirk their responsibilities and may well operate in a significantly different environment than has so far been considered. It directly affects their powers and way of reasoning where it should be further considered that on the one hand they are not an appellate jurisdiction—they are called merely to resolve an individual dispute mostly upon the basis of facts as they find them—but on the other they may be faced with issues that may affect third parties in matters of priority and indeed the public interest more broadly, which also raises the question whether arbitrators may or even must raise public interest issues autonomously. It is submitted that this opens important new vistas in international arbitration. It was further argued that international financial arbitration might increasingly be distinguished from ordinary commercial arbitrations because of the intricacies, public policy aspects, and regulatory concerns in international finance. Specifically to further international arbitration in the financial area, in 2010 a foundation was set up in The Hague, the Netherlands, called P.R.I.M.E. (Panel of Recognised International Market Experts in Finance) with the aim of upgrading dispute resolution in the global financial markets, making use of the collective experience of experts familiar with the operations, practices and developments in these markets.209 These experts are intended to function as arbitrators, mediators and litigation experts in international finance and will also assume an educational function. Especially because of the interaction with regulation, bankruptcy and public policy, and the demands of transnationalisation, a facility of this nature in international finance is likely to have to face a number of more specific issues or complications.210

2.5.2  The Applicable Law Clause in the P.R.I.M.E. Rules It was submitted that to achieve effective international arbitration in finance, much will depend on recognition of the institutional power of the arbitrators with respect to proprietary, bankruptcy and regulatory issues that may arise, which also goes to the issue

209  An important point is that it will take a while before financial institutions will adopt the relevant arbitration clause and even longer for a dispute to occur under these clauses. Will PRIME still exist? In other words, will it remain subsidised long enough to maintain itself out of the flow of this business? Submission agreements may bring business sooner, but some considerable flow is required before institutions of this nature become financially self-sustainable. 210  The author made a first attempt discussing PRIME in Jan Dalhuisen, ‘Arbitration in International Finance’ in Jorge Miranda et al (eds) Estudos em Homagem a Miguel Galvao Telles, Vol II, (Coimbra 2012) 99; see further also the contribution of Jonathan Ross, ‘The Case for P.R.I.M.E. Finance: P.R.I.M.E. Finance Cases’ (2012) 7 ­Capital Markets Law Journal 221.

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of the applicable procedural and substantive laws and their transnationalisation in the international commercial and financial legal order, including its dispute ­resolution facilities, especially international financial arbitration. A key insight was here considered to be that the powers of international arbitrators derive from the transnational commercial and financial order itself and are only activated by the arbitration clause, which upon a proper analysis acquires its own effectiveness also from the transnational commercial and financial order in which it is founded. The UNCITRAL language adopted by P.R.I.M.E. on the applicable law would appear wholly inadequate in this regard and derives from an environment of contractual (nonfinancial) disputes only. It reads: Article 35 1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate. 2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so. 3. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract, if any, and shall take into account any usage of trade applicable to the transaction.

Given the limited powers of the parties over many of the relevant issues in international finance, in the context of PRIME, this language should be amended to: The arbitral tribunal shall determine the applicable law, taking into account the internationality and financial nature of the transaction and/or dispute, the rules designated by the parties in areas of the law at their free disposition, the relevant property, regulatory and bankruptcy laws, as the case may be, as well as the requirements of the international or pertinent national public order especially in terms of, but not limited to, financial stability, risk management, protection of the commercial and financial flows, transactional and payment finality, competition, market abuse, other improper market practices, corruption and money laundering. In doing so, the tribunal shall consider in particular the fundamental principles and public order requirements obtaining in international finance, the customs and practices that have developed in the international market place, relevant treaty law, and the general principles of law that may be found in the operation of advanced domestic financial markets. The tribunal shall be authorised to raise issues of overriding fundamental principle or public order autonomously, subject to the rights of parties to equal treatment and a fair hearing. If the parties have expressly authorised the arbitral tribunal to do so, the arbitral tribunal shall decide as amiable compositeur or ex aequo et bono in all matters at the free disposition of the parties.

2.5.3  P.R.I.M.E. Preliminary Issues (a) Is there a need for a facility to expedite the formation of the Tribunal and for expedited proceedings? (b) What are the typical preliminary preservation and continuation needs that may require immediate action even before an Arbitral Tribunal can be formed?

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(c) Especially if they concern the preservation of assets, what is the role of the o ­ rdinary courts at the situs? What is the situs of receivables or of assets that ­habitually move between countries for these purposes? (d) Who will order these measures in such cases; may they be ex parte; and what are the procedural safeguards? (e) Is early relief of this nature to be provisional and tied to some prospect of ­ultimate success on the merits? (f) How are these orders to be enforced if coming from the arbitral tribunal and what is the support and enforcement function of the ordinary and possibly b ­ ankruptcy courts in relevant countries? (g) Is Article 17 of the Model Law adequate in this regard and may it be assumed to represent and have the force of international custom or practice or general principle?

2.5.4  P.R.I.M.E. Status, Powers and Operation of Arbitrators. Arbitrability (a) What is to be required from arbitrators in terms of expertise and i­ndependence? There will also be the important issue of the (continued) appearance of ­independence and impartiality. (b) How far do the arbitrators’ powers reach? In particular, does the arbitration clause cover property issues and the ranking or priority of creditors or issues of ­set-off and netting, which may affect third parties but also the relevant ­bankruptcy regime and its order in distribution and reorganisation?211 (c) If that is the case, how best should the arbitration clause be drafted?212 (d) How far are financial disputes arbitrable if public policy becomes engaged or regulation starts to impact?213 (e) May arbitrators anticipate the attitude of relevant bankruptcy courts in terms of their own jurisdiction or arbitrability of the issue? (f) Is there to be a rule of precedent, are prior decisions to have persuasive effect; or are arbitrators foremost to solve a dispute between the parties mainly on the basis of the latter’s submissions of law and fact? (g) May arbitrators in this connection also rely on their own expertise in international finance and their own experience of the international practices (the civil law notion of ius curia novit)? How far may they substitute their own knowledge for that of the parties and how does that fit in with the notion of a proper hearing?

211  See also British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390 and IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008], dealing with the operations of a CCP internationally including its netting-out of claims, which in Ansett was considered to be binding on domestic bankruptcy courts; see also n 152 above. It may be wondered whether an arbitral award recognising and reinforcing the practice would similarly bind domestic bankruptcy courts. Acceptance in local bankruptcies is the ultimate test of the acceptance of transnationalised law. 212  See section 2.5.3 above. 213  See ss 1.2.2ff. above.

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(h) May arbitrators, in respect of the operation in the international market or in international financial transactions if they deem it appropriate, assume the objective transnationalisation of the private law and apply the lex mercatoria? (i) Do arbitrators also have in this connection powers similar to those of equity judges (in a common law sense), especially in areas not at the free disposition of the parties, for example to develop newer proprietary structures on the basis of evolving practice or borrow them from existing legal systems in terms of general principle?214 (j) How far may arbitrators consider, apply or give weight to concepts such as financial stability and proper risk management, for example through CCPs, and declare them overriding as a matter of transnational public policy? (k) May this also concern the promotion of the international commercial flows unencumbered by all kinds of (domestic or other) charges and imposts (except among insiders) and the issue of finality of transactions and payment? (l) May arbitrators raise these overriding issues autonomously and are there others such as prevention of market abuse, anti-competitive behaviour, corruption, ethics and the like? What about a hearing? (m) Do arbitrators have power to apply international minimum standards in regulatory matters?

2.5.5  P.R.I.M.E. Procedural Issues (a) What freedom do arbitrators have in determining procedural matters and matters of evidence? May they proceed on the basis of transnational fundamental (due process) principles or general principles or established practices in international arbitrations? (b) May arbitrators independently decide issues of speed and efficiency in the proceedings?

2.5.6  P.R.I.M.E. Contractual Issues (a) Are financial contracts concluded between professionals foremost to be read as a roadmap and risk-allocation document subject to a high degree of literal

214  As already mentioned in the text above, at issue here are more up-to-date forms of set-off and netting, trusts facilities and tracing rights especially under floating charges (which would themselves be transnationalised and cover assets in different countries), or more modern forms of (bulk) transfers or assignments, subject always to the protection of the ordinary commercial flows (or of bona fide purchasers or assignees and purchasers or assignees in the ordinary course of business). This may be relevant, especially when determining priorities on the basis of secured transactions or finance sales, in floating charges, in constructive trusts and tracing situations, in finance sales such as leases and repos, in short selling, security lending, rehypothecation, in matters of finality of security entitlements and electronic payments, in the effect of set-offs and the possibility of netting, in matters of assignment, and in matters of agency concerning the passing of property rights and obligations.

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interpretation? How much room does this leave for the notion of good faith? Is it mandatory in international financial transactions, what does it mean, and may parties set standards? May arbitrators define it on the basis of transnational practices? (b) In international finance what is the room left for defences and excuses such as mistake, force majeure and change of circumstances, assuming the result has not become manifestly unreasonable, taking into account the overall situation of the professional party seeking relief? (c) Are there pre-contractual disclosure and negotiation duties to be considered as normative in international financial dealings?

2.5.7  P.R.I.M.E. Proprietary Issues (a) How far are third parties to be affected by arbitral findings in terms of priority and ranking, set-off and netting? Does it make a difference if they or their organisations (such as ISDA) have been heard as amici curiae? (b) If arbitrators have this power, should some better facility be created for potentially affected third parties to intervene in the proceedings? (c) How far may arbitrators allow or promote party autonomy in proprietary structures? May they rely on international practices? (d) What about the issues of transactional and payment finality and the status more generally of buyers in the ordinary course of business (freeing of the commercial flows)? Again, may arbitrators apply international standards in these areas where party autonomy and choice-of-law clauses cannot reach (matters not at the free disposition of the parties)?

2.5.8  P.R.I.M.E. Regulatory Issues (a) Are all financial regulatory issues arbitrable? (b) May arbitrators determine the international reach or extraterritoriality of domestic regulation (the jurisdiction to prescribe), balance different conflicting governmental interests or claims to regulatory power in this connection, or formulate minimum transnational standards of regulation and protection for transactions with contacts (conduct or effect) in several countries?

2.5.9  P.R.I.M.E. Taxation Issues (a) It being assumed that international arbitrators may always redistribute the taxation burden between the parties if their contract so provides or custom and practice require it, may these also decide taxation issues, for example the ranking of tax liens if the relative priority in collection proceeds is to be determined between the parties?

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2.5.10  P.R.I.M.E. Bankruptcy Issues (a) May arbitrators take the bankruptcy environment into account and also determine the international reach or extraterritoriality of domestic bankruptcy laws to the extent relevant in an arbitration? (b) May they consider the UNCITRAL Model Law on Cross-Border Insolvency the transnational standard in this connection and the EU Bankruptcy Regulation within the EU the standard also in arbitrations? (c) How far must they follow the orders or instructions of bankruptcy courts? Does it make a difference if there is primary or secondary bankruptcy? Does it make a difference if it is the original bankruptcy court or a court in a country that recognised the bankruptcy? (d) Is any intervention of the courts at the seat of the bankruptcy in respect of a foreign bankruptcy relevant to the arbitral tribunal? (e) Assuming, on the other hand, that bankruptcy courts will ignore arbitrations even in the determination of claims, will always prefer their own system of summary proceedings for proof of claim, and will always apply their own regulatory regime even in international cases, may international arbitrators also anticipate this and take these attitudes into account? (f) May they abandon the arbitration because of the intervention of a bankruptcy and when?

2.5.11  P.R.I.M.E. Applicable Law Issues and Parties’ Choice of Law (a) May or must arbitrators ignore the choice of a law by the parties in areas that are not at their free disposition, including in property matters? (b) May parties in this connection still attempt to opt out of the lex situs (including in assignments when the issue of the location of receivables arises) and also have freedom to choose the applicable regulatory or bankruptcy laws? (c) May arbitrators apply transnationalised concepts instead, such as international market practices and customs or general principles developed in commercial and financial centres, if necessary as mandatory private property law under the modern lex mercatoria? (d) May they also recognise in this way newer transnationalised proprietary structures and set-off rights and determine the degree of party autonomy in proprietary matters? (e) May arbitrators apply overriding fundamental transnational principles in terms of financial stability and risk management, movement of the international flows, finality of transaction and payments, market abuse and competition? (f) Assuming parties have (sometimes) the possibility effectively to opt into another legal system, what if the law so chosen by the parties proves wholly inadequate to safeguard the international transaction for which that law was never written or makes no proper sense in the circumstances?

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(g) Would the choice by parties of a non-statist law such as the lex mercatoria (including international custom and practices) or sharia law be effective (again assuming it concerns areas of the law at the free disposition of the parties)? (h) Again, to what extent do the arbitrators have original powers here to apply these concepts, subject to the requirements of a proper hearing?

2.5.12  P.R.I.M.E. Legitimacy of the Award. Supervision, Recognition and Enforcement Issues (a) Are the arbitral decisions (and arbitration clauses and procedure) to be rooted in the international legal (or arbitral) order or still in some domestic lex arbitri, mostly considered to be the law of the seat? Should the concept of the seat of the arbitration be usefully maintained in this regard? (b) Should any court wherever be put in a similar situation of support when action in its country is required and what would the remaining function of the courts at the seat be in such cases in terms of support and supervision of financial arbitrations? (c) If the review is essentially left to the courts in countries where support or enforcement is sought, as for final awards under the New York Convention, how is ­uniformity to be achieved especially in local (bankruptcy) courts? In particular, how can the notion of public order, jurisdiction and arbitrability be delocalised for these purposes? (d) Do bankruptcy courts have here a special status under the NY Convention, such as to be able to invoke public policy considerations more broadly?

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Part III  Foreign Investment Arbitration 3.1 Introduction 3.1.1  Proceedings Against States Foreign investment arbitration presents a prime example of a fully delocalised and transnationalised international arbitration, at least if it is conducted under the ­Washington Convention of 1965, but delocalisation may also receive an extra impetus if the foreign investment arbitration is conducted under other rules, especially those of UNICITRAL when any heavy emphasis on the law of the seat would appear misplaced. Before embarking on the subject of foreign investment and foreign investment protection against host states, being the states that receive the foreign investment, it may be useful to consider first more generally the problems of enforcement against states, because even if there is recourse in principle against host states, eg through arbitration, any award not voluntarily complied with still needs to be enforced, which in the case of states may be particularly problematic. How far does the rule of law go here? If there is a need for enforcement, can host state property be attached by creditors, especially private property in the hands of states, property therefore that has no ostensible public function or only a more remote one. There may be all the more reason for this if the business a state has engaged in has itself no particular public function. It is in this respect now well established that a state may act de iure gestionis, therefore merely as a private party—eg buying chairs for its civil servants or buying up real estate for office buildings and contracting construction ­engineers. If a state does not pay its commercial debts, presumably these chairs or buildings could be attached, the former to be reclaimed under a reservation of title, the latter to be offered in an execution sale, but even here it could be considered that they still have some public function lest civil servants have no place to sit and suffer the indignity of having to stand up without a roof over their heads. Private land might ultimately be used for some public good, not merely redevelopment, such as for military or security purposes. But even if the contract and its enforcement are purely issues of private law, states may still have special ways out; it depends on local law in terms of contractual excuses and defences. This brings to light another issue: local (host state) laws are applicable. It is unlikely that any state, at least in its own territory, can be forced into payment under someone else’s law, never mind which law is chosen by the parties (one of whom will be the state itself). The manner of enforcement against all, and states in particular, is commonly one of the place where they or their assets can be found and this may obviously present problems with an unwilling sovereign in its own territory. The state is likely itself to dictate the rules of enforcement in this regard even in purely private transactions and may vary the applicable private law through its legislature. The conclusion must

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t­herefore be that payment by states remains largely voluntary, at least in their own country. So much for the rule of law. The only thing left is opprobrium. Can property of a state in foreign countries be attached? That would appear easier if it can be found and many states (or their agencies and central banks) may have large accounts especially with the Fed in New York or (earlier) with the Bank of England in London, but it might embarrass the US or UK governments even if it concerns private business dealings. Here the issue of foreign sovereign immunity arises. Local case law traditionally formulates limitations and in the US as well as in England there now operate foreign immunity statutes which set out a more limited scenario for enforcement against foreign governments, basically confining it to operations entered into by them (wherever) de iure gestionis, with (often) some more liberal regime for enforcement in respect of foreign state agencies. Still assets used for public purposes may not qualify, eg ambassadors’ residences or even their cars. Can the home state of the creditor help? This comes down to diplomatic protection. Will the home state give it and raise the issue with the relevant foreign government? Much as in the case of enforcement against foreign governments through its courts, it might be loath to get involved and may in any event have other priorities. It may rate the friendship of the host state higher. If it did not, in the olden days a gunboat might be sent. This was the era of gunboat diplomacy, but already at the Second Hague Peace Conference in 1907, in the Convention on the Peaceful Resolution of International Disputes, this was ruled out and a system of international arbitration between states (which could also be in respect of private claims of its nationals215 who could not bring them themselves) was set up in the Hague through the Permanent Court of Arbitration (PCA).216 Such arbitrations could also result under bilateral treaties of which the treaties of Friendship, Commerce and Navigation (FCNs) were important examples. Yet they gave individual investors no direct enforcement rights either, they still depended on their countries (home state) to pursue the matter with the host state, if necessary through state-to-state arbitration. Bilateral Investment Treaties (BITs) were here an important progression as we shall see. They not only provided a system of stability for investor rights. They were now protected by international law, which could not easily be challenged by host states lest a form of expropriation resulted giving rise to compensation, but also gave investors direct rights against home states in this regard, which were enforceable in arbitrations, the resulting arbitral awards being self-executing against the relevant host state. As we shall see, this lifts the foreign investment protection to the level of public ­international law.

215  The key point is that nationals do not have a remedy of their own under public international law, which is the law between states. Another point is that states can only protect their own nationals not others in this manner in terms of judicial action or diplomatic protection, see Permanent Court of Justice in Panevezys-Saldutiskis Railway (Estonia v Lithuania) (1939) PCIJ Reports Series A/B 76, 16. 216  The PCA is clearly to be distinguished from the ICJ, which came later. Again there remained the problem with enforcement of an award. The Hague Conference was not able to put an enforcement regime in place against states nor did it prove possible later for ICJ judgments.

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3.1.2  Foreign Investments and their Protection. Host Country Investment Statutes and Investment Agreements. The Calvo Doctrine. The Washington Convention and BITs A foreign investment, that is an investment in a country other than the one of the investor, is subject to ordinary commercial risks. This will concern the private set-up: land may be bought, a factory built, and people hired. Production may start and this may or may not prove profitable in the host market or in the export market or preferably in both. But there are extra risks from the perspective of the foreign investor, which have largely to do with the host government. Will it increase taxes, may it impose tariffs on exports of products as well as imports of materials or make them subject to licence requirements? May foreign exchange be freely brought in and converted into local currency, and may earning in local currency be freely converted back into international currencies either in the open market or via the host country’s central bank? At what exchange rate in the latter case? May the open currency market be accessed if the central bank does not have enough hard currency? May foreign earning in hard currency be retained outside the host country? What about the threat of nationalisation? This can come about in many ways: through an outright taking or through increased taxation, which may become confiscatory or other regulatory measures with similar effect. Management may be removed or imposed or there may be an imposition of regulatory micro-management rules similarly limiting the commercial freedom of the foreign investor. An example may help: because of apparent public health and safety concerns, a government might decide to nationalise all nuclear power plants outright, including those resulting from foreign investment; alternatively, it may replace the management with local people, or impose a system of micro-management through regulation. In all likelihood there will be a substantial reduction in value for the foreign investor (and probably for any other). Even if these measures might be necessary, the issue of compensation may still arise either in terms of an expropriation or more likely in this case in terms of a non-expropriatory taking (for ‘super’ public purposes) as we shall see below in section 3.4, the difference being in the measure of compensation, the one requiring in principle full compensation, the other probably leaving more discretion. Host-government investment statutes or codes, meant to attract foreign investors giving them assurances, may clarify the situation for them. They are not unlikely to offer protection against expropriation and similar measures or other imposts, while also clarifying the taxation system and foreign exchange regime in what are then often called stabilisation clauses. In the case of the extraction of minerals from the subsoil, which in most countries the government owns, there may be a further regime concerning royalty payments and government involvement in the exploration and production, all conceivably subject to similar stabilisation promises, but what do or can these promises mean? Can a state bind its sovereignty through statutes which were unilaterally given and can obviously be changed? Justified reliance may be an issue (see s 3.4.5 below) but a foreign investor fully relying on such promises may be deemed to be naive

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or the beneficiary of poor legal advice. A sovereign can change all laws and there may be no recourse, at least not under its own rules. Even in an international arbitration, it may not be different unless one can point to a higher (transnational, normally treaty) rule and there would still be the problem of enforcement against the host government. Again the only thing left may be opprobrium: henceforth, foreign investors are warned and new foreign investment may suffer but memories may be short and on the basis of new economics, especially increasing market prices, or worse conditions elsewhere, soon new investors may arrive. Only notorious defaulters such as Argentina may suffer longer-term damage. One result may be that new foreign investors may want their initial money lay-out back sooner and will not further invest easily, decreasing the benefit for the host country, but under competitive pressures foreign investors may still relent. Might investment or concession agreements help? They usually do four things: (a) they guard against expropriation or require at least full compensation in such cases, (b) they stabilise the tax and foreign exchange regime (while for the extraction industry they may also impose royalties and other imposts), (c) they choose the applicable law, and (d) they allow for international arbitration in the case of disputes. However their status in law is unclear. The key issue is again whether a host government can bind itself and its sovereignty irrevocably by private (concession) agreements even if authorised by statute to enter into them. What does reliance still mean?217 As they are bilateral, concluded between international companies and host governments? Do they provide greater protection against breaches of this nature by host governments than their investment legislation? A similar issue arises in terms of whether a government can bind itself for the future. Is reliance on a contract that the host state signed better protection? Except for de jure gestionis aspects, this is unlikely. Do doctrines of good faith implementation work? In matters concerning the sovereign, they acquire at least a different connotation. This is no longer or never was a purely private deal in the defences and excuses of the sovereign party and it would be naive to think that it was ever otherwise. Quite strenuous efforts have been made to somehow give these contracts international status even though they often referred to a specific domestic legal regime as a choice of law by the parties.218 It required large international corporations to be seen as legal personalities under (public) international law, which did not convince. Does it 217  See again n 326 below. The notion is known but often connected with treaty obligations. In Czech Republic BV (the Netherlands) v Czech Republic Partial [2001] IIC 61, the ad hoc Tribunal (under the UNCITRAL Rules) found that the government ‘breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest’. Similarly in Tecnicas Medioambientales TECMEDS v United Mexican States [2003] Case ARB (AF)/00/2,IIC 247 (ICSID), where the Tribunal considered that the fair and equitable provision of the relevant BIT ‘in the light of the demands of good faith required by international law, requires the Contracting Parties to the Agreement to accord a treatment to foreign investment that does not go against the basic expectations on the basis of which the foreign investor decided to make the investment’. In LG&E v Argentina [2006] Award on Damages Case ARB/02/1 (ICSID), para 130, the Tribunal was more specific and required that the investor’s fair expectations have the following characteristics: ‘they are based on the conditions offered by the host state, … they may not be established unilaterally, they must … be enforceable by law, … damages arise except for those caused in the event of state necessity, the fair expectations cannot fail to consider parameters such as business risk or industry’s regular patterns’, but stability does not mean that the legal system remains frozen in time. 218  Especially in France by Prosper Weil, ‘Droit international et contrats d’Etat’ in P Bardonnet (ed), Mélanges offerts à Paul Reuter (Paris, 1981) 549.

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help to characterise the investment agreement contract as an administrative contract?219 This issue has been raised in several cases, and while it has not been rejected out of hand, neither has it been embraced, although it would appear the more proper analysis. The further question is then whether these administrative contracts are still governed by a national administrative law (usually that of the host government as counterparty), or whether this law may itself be considered transnationalised, thereby becoming part of international law, which might entail international minimum standards of investor protection. What is its relationship to any other law chosen by the parties? In the Aminoil case, the tribunal did not pursue the theory of the administrative contract and it is not fully developed in international law (which concerns itself only with the law between states), but the Tribunal did not dismiss the concept either.220 In TOPCO, the arbitrator reasoned that administrative contracts are not sufficiently widely and firmly recognised in the leading legal systems to constitute general principles of law.221 In Aramco, the tribunal concluded that there was no justification for applying this French law notion to a dispute between a US company and Saudi Arabia.222 The administrative law characterisation is becoming more prominent, however. If a concession agreement can be so qualified, there is no full protection for foreign investors and there will be important rights for governments to change the terms but there are conditions. Again it becomes a matter of compensation, which may be little or lacking altogether, at least under local (host country) laws and local courts will enforce this regime. However, it might be better than mere private contract principle and these standards could be transnationalised although any higher rules under international law still need to be further developed. There are other consequences. First the choice of a foreign law would hardly be ­relevant: an administrative agreement is governed by the law of the sovereign it ­concerns, hardly by that of any other (see also the discussion in s 3.3 below) but again there might be international minimum standards, at least for countries that barely have any developed administrative law but engage in these investment agreements regularly. However, even under such international law, (host) states might still be able to rebalance these contracts and change them, subject to compensation, although there will still be the issue of how much. That was at least the message in Aminoil223 where the principle of compensation was made to work at the international level. In i­ nternational 219  In foreign investment, the consequences of the administrative contract characterisation still remained unclear because international law did not traditionally cover these relationships and has not yet developed a clear notion of administrative law. Arbitrators struggle with this although the subject is receiving increasing attention. See Hernán Pérez Loose, ‘Administrative Law and International Law’ in P Bekker, R Dolzer and M Waibel (eds), Making Transnational Law Work in a Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 380. See also Rudolf Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative Law’ (2005) 37 International Law and Politics 953–72. 220  Government of Kuwait v American Independent Oil Company (Aminoil) [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976. 221  Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v Gov’t of the Libyan Arab Republic 17 ILM 1, 10–11 (18 January 1977). 222  Saudi Arabia v Arabian Am Oil Co (ARAMCO) 27 ILR 117, 164 (Arb Trib 1963). 223  See n 220 above. At least that was thought to be so for oil concessions whose nature was deemed to have been generally transformed since they were first entered. It was not a question of change of circumstances but rather of a change in the nature of the contract itself. This approach was preferred to pursuing the idea of the administrative contract but the result is very similar.

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t­ransactions, it may be conceivable that international law will correct and clarify the standards further: at least the measures should not have been whimsical, vindictive, irrational or disproportionate and discriminatory. There was already language to the effect in the Libyan arbitration cases (which were, however, not defended),224 and it is incorporated in BITs in the F&E clause discussed later. The sum total of this is that large international companies may have some protection under international ­(administrative) law where they are otherwise not considered to be legitimate actors. In the meantime, the Washington (ICSID) Convention lifted the arbitration agreement to international status BITs, which may elevate investment agreements to the level of protected investments altogether. That is done under the so-called umbrella clauses, the consequence of which is that its protections are then elevated to international law and enforceable as such in BIT arbitrations as we shall see. It may operate in parallel with investment agreement arbitration under ICSID. The so-called Calvo doctrine, first proposed in 1868 in Argentina, struggled with these issues much earlier by requiring foreign investors to submit to the local laws of the host states (rather than depend on the gunboat diplomacy of those days) or deeming them to have done so, just like domestic investors. This approach was supported at the First Hague Peace Conference of 1899. The problem for investors was then with stability and with the disposition of local courts in respect of foreign investors, especially when the local public interest became engaged. This is the issue of neutrality, compounded by local procedural and appeal complications. The foreign investor was thus fully in the hands of local government and its courts. It became an ideological and political aspect for the South and Middle American Countries of those days, but there was also an economic issue: by giving the foreign investor extra benefits of this or any other nature, local investors and entrepreneurs could be disadvantaged and soon a country would only have foreign investment. There may nevertheless be good reasons for this in terms of modernisation and acquiring the benefits of foreign technology beyond the cost of importation. The host country may even become a major exporter because it can offer lower salaries by international standards (but higher than local ones), and may also impose fewer regulatory impediments (which on the other hand could mean more pollution). At present, China is a most important example but Mexico is another one. In the extraction industry, there may be little alternative: not everybody can explore and develop oil and gas reserves, nor may the country have the financial resources to put them into production, but it is a trade-off and policy issue. There are cycles in this: international companies were considered continuations of the colonial regimes in the 1970s and persecuted. They became much sought after by the 1990s, especially after the change of policies in China. Globalisation has further changed the atmosphere in their favour but this is not to say that there may not be reversals and that civil society will always accept the consequences. The result of the discussion so far in terms of legal protection against host governments has nevertheless been only modest, even when they are the counterparties 224  Libyan Petroleum cases, BP Exploration Company (Libya) Limited v Government of the Libyan Arab ­Republic [1973 and 1974] 53 ILR 297; and Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic [1977] 53 ILR 389.

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under foreign investment agreements. Enforcement may always remain a difficult issue, whatever protection is offered. Again, it is more a matter of opprobrium as long as it lasts (see the discussion in s 3.1.1 above). Beyond the problems of enforcement, it is commonly assumed that governments can only bind their sovereignty irrevocably vis-à-vis other governments, not private parties and this is done through treaties, or they may be so bound under customary international law (CIL). In this area of foreign investment, treaty law came in first through the Washington Convention of 1965 although cases brought under it date only from 1990. The protection was a limited but important one. Under this Convention, Contracting States recognised (vis-à-vis each other) that at least arbitration clauses in investment agreements opting for this new arbitration facility were binding and could not be unilaterally withdrawn. Prior consent to arbitrate was still necessary, so there had to be an arbitration clause or submission agreement, but this consent could even result from the provisions of investment laws in host states. Article 25(1) confirms this and sets the jurisdictional framework allowing investors from Contracting States to enforce the arbitration clauses in investment agreements against host governments. The Convention further provides a regime for how these arbitrations are to be conducted and the awards challenged and enforced. To help administer them, the ICSID was established in Washington under the World Bank.

3.1.3  Bilateral Investment Treaties It is, however, through BITs that true protection has come to the fore and these treaties have overtaken the scene, ICSID arbitration remaining the normal venue in the case of disputes, although it is not normally exclusive.225 It follows that the major protection for foreign investors now derives from treaty law and follows directly under public international law albeit for investors only in a derivative manner under BIT treaties between host and home governments to which investors as private agents ­cannot be parties. In this manner these governments promote the investment from the other country under special protections set out in these treaties, which also concede to the investors an arbitration facility through which they can enforce these rights against host countries directly. The awards are self-executing against such countries, although here again in enforcement there is no mechanism against losing host governments in their own countries, while enforcement in other countries remains constrained by the applicable foreign sovereign immunity laws. If ICSID arbitration under the ­Washington Convention is chosen by the investor, awards may be annulled,

225  BITs are often considered the successors to the earlier treaties of Friendship, Commerce and Navigation (FCN), which had never, however, given direct rights to investors against host governments as we have seen above. Under them direct military or similar intervention of home states was normally barred (even before the Hague Peace Conferences) unless there was denial of justice or extraordinary delays in administering it. The origin of the BITs is usually traced to the 1959 Abs-Shawcross Draft Convention on Investments Abroad and the 1967 OECD Draft Convention on the Protection of Foreign Property.

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the r­evision process is internalised in ICSID and may be obtained on the limited grounds of Article 52. Upon annulment, a new arbitration must be started to obtain relief. If the commonly existing alternative of arbitration under the UNCITRAL Rules is chosen by the investor, recognition and enforcement will be under the New York Convention assuming that any payments under the award may be characterised as ordinary commercial debt, which appears to be accepted in most countries, even though the investment itself and any disputes concerning it under the relevant BIT would probably not be so characterised. These BITs, which may sometimes also be multilateral and of which the North American Free Trade Agreement (NAFTA) in its chapter 11 provides the most important example,226 commonly offer a number of standard protections, notably against expropriation, which requires full compensation to be legal (although the area of non-proprietary takings mostly remains a muddle as we shall see in s 3.4 below). They normally also offer national treatment, which means no better treatment for nationals, and also most favoured nation (MFN) treatment, which means that benefits given to investors in another BIT are automatically extended to all. They usually also offer fair and equitable treatment (F&T), which means that basic standards of rational behaviour must be met by foreign governments (and especially vindictive and repressive behaviour must be avoided). There is also likely to be a foreign exchange regime. Investment agreements or concessions may still top up these protections under which, in particular, a foreign law may be made applicable. It has already been said that these investment agreements may themselves even enter as protected investments under a BIT and are then lifted to the level of treaty law through so-called umbrella clauses to be discussed later. All the same it does not mean that mandatory law can be replaced in this manner. A party choice of law of this nature can only be effective in areas of law at the free disposition of both parties, therefore mainly in the private law aspects of the investments. As to the applicable law, Article 42 of the Washington Convention may be interpreted accordingly (see further the discussion on the applicable law in s 3.3 below). The BITs themselves mostly concede that the law of the host state will apply to the investment unless overruled by international law, which means treaty law or CIL. It has already been noted that the administrative nature of these investment agreements (and indeed of all foreign investment protection) is now increasingly understood and recognised and in the process of being transnationalised. It leaves little room for a choice of law by the parties.

226  There are others as part of the 1987 ASEAN Agreement for the Promotion and Protection of Investments (between Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand), as part of the 1994 Energy Charter Treaty (ECT), and as part of the MERCOSUR Treaty (between Argentina, Brazil, Paraguay and Uruguay) through the 1994 Colonia and Buenos Aires Protocols. Some bilateral free trade agreements have similar chapters, such as the one between the US and Chile of 2003. An attempt by the OECD to come to a global Multilateral Agreement on Investment (MAI) failed spectacularly in May 1995. Hence the present efforts at regionalisation in the Pacific and Transatlantic areas in respect of the Trans-Pacific Partnership or TPP and Transatlantic Trade and Investment Partnership or TTIP, see further the discussion in section 3.5 below.

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3.1.4  The Concept of Foreign Investment and Foreign Investor. The Jurisdictional Issue For foreign investments to gain special treaty protections, investors are those who make longer-term commitments and are not traders or speculators. Investments of this nature are usually a package but they could also be a portfolio of bonds or a loan intended to be held to maturity as we shall see. For purposes of protection, foreign investments might best be characterised as a type of administrative licence protected as such. That characterisation may now well present the better insight, probably clearer in the extraction industry, and may then also receive a beginning of protection under p ­ ublic international law. Of course there may be private law aspects too: the foreign investor may buy land for manufacturing facilities from the host government at the same time (although it may be more likely to buy them from third parties), or occupy private land for extraction purposes, or may directly receive such land from the host government for the time being, or receive occupation rights, eg offshore on its C ­ ontinental Shelf. It does not change the status or nature of the foreign investment itself and its characterisation as such in terms of its protection and the principles underlying it, even though the established definition of the foreign investment in investment agreements or BITs may also incorporate types of private property that are to be protected such as patents, shareholdings and loans. There is often confusion as a consequence, not least in the US, but the public (administrative) and private law aspects of a foreign investment should be clearly distinguished. They are subject to different laws and the latter often involve parties other than host states.227 Article 25 of the Washington Convention does not define foreign investment or the foreign investor. It proved impossible for the drafters to do so but it leaves a problem with the jurisdiction of ICSID arbitrators, which is naturally confined to foreign i­ nvestment disputes. Since BITs came on board, their definition is normally used in arbitrations under these treaties, but it leaves the question whether the ICSID Convention uses a broader or narrower concept, the essence being that the requirements of both Conventions need to be fulfilled when it comes to an ICSID arbitration under a BIT. From the pre-existence of the Washington Convention it must be assumed that it always implied a concept of foreign investment and case law has further developed it, although, again, especially its legal nature as an administrative licence remains ­underdeveloped. It is often thought that as another fundamental aspect, the investment in order to qualify

227  Thus the substantive protection under BITs, NAFTA (and eventually the TTIP) if it is to follow what has become the model, is in the nature of administrative law protection (as a statutory concession or licence), which through a treaty may gain the status of international law or otherwise this protection may become part of CIL. It is notably not expressed in terms of private contract or property rights although often confused therewith. Beyond the notion of administrative licence, there is hardly a water-tight definition and some description can only lead the way. There may be other limitations, but the limitation to ‘investments made in accordance with the applicable law’ has little clarity as it immediately raises the question: which law? It is likely to be the higher treaty law or CIL and not host country law where conflicting. That goes to the complicated problem of the applicable law, especially when chosen by the parties, see JH Dalhuisen and A Guzman, ‘The Applicable Law in Foreign Investment Disputes’ available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2209503; see further section 3.3 below.

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must aid the further economic development of the host country.228 It is difficult to judge but at least it helps explain why loans might be foreign investments.229 In this connection, a mere commercial sale gone wrong is not enough;230 expenses incurred for bidding for public contracts were not deemed foreign investments either.231 The foreign investor may operate in the host state through a company fully incorporated in that country (it may even be a requirement of the host country) but that does not disqualify the investor from its foreign status. The investment may itself be in many forms: hardware, software, patents, bonds or loans (if held until maturity and not for speculative purposes), shares in other companies (not held for speculative purposes either), oil and gas concessions etc. It is now accepted that foreign investors may themselves be controlled by foreigners or perhaps even by investors in the host country if organised from abroad. It is thus possible to choose the home state in order to benefit from its treaty network concerning foreign investment and target a specific country for investment from that country. So there may be shell companies created to this effect in the relevant home country to benefit from the foreign investment protection in the host country (see Saluka Investments BV v Czech Republic)232 and a formal approach is usually taken here. In Tokios Tokeless v Ukraine,233 the same principle was upheld even though most investors in the shell company were from Ukraine itself. But there is also case law in which arbitrators were looking for the ‘ultimate owner’, which could not be in the host country.234 This was seen as an issue of foreign control under Article 25(2)(b). A special issue is whether BITs may be retroactive, meaning covering pre-existing foreign investments. New investment was originally the aim but newer BITs may also cover prior investments although this requires a special provision to the effect and is not deemed implicit in the text. Even then it has been held that prior action of host governments in respect of such earlier investments was still not covered and there was no retroactivity in this aspect.235

3.1.5  The Complications Deriving from the Nature of the International Flows, the Overlap Between Trade and Foreign Investments Laws. Different Dispute Resolution Techniques There may be a substantial overlap between international trade and investment, which raises the issue in particular of concurrent dispute resolution facilities and how that is

228  In respect of Art 25 of the Washington Convention, arbitral tribunals are divided. The ad hoc annulment committee in Patrick Mitchell v Democratic Republic of the Congo, ICSID Case No ARB/99/7, IIOC172 (2006) insisted on it, but not the tribunal in LESI SpA et ASTALDI Spa v People’s Democratic Republic of Algeria, ICSID Case No ARB/05/3, IIC 205 (2001). 229 See Ceskoslovenska Obchodni Banka AS v The Slovak Republic, ICSID Case No ARB/97/4, IIC 49 (1999). 230  ICSID Annual Report, 6 (1985). 231  Mihaly International Corporation v Sri Lanka, ICSID Case No ARB/00/2, IIC 170 (2002). 232  Saluka Investments BV v Czech Republic, UNCITRAL Rules Partial Award, IIC 210 (2006) paras 222–43. 233  Tokios Tokeless v Ukraine, ICSID Case No ARB/02/18, IIC 258 (2004). 234  TSA Spectrum de Argentina SA v Argentine Republic, ICSID Case No ARB/05/5, IIC 358 (2008), paras 160–62. 235  Tecnicas Medioambientales Tecmed SA v United Mexican States, ICSID Case No ARB(AF)00/02, 43 ILM 133 (2004).

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to be handled. It is the approach of this book to see the legal world from the perspective of the international flows of goods, services, information, technology, money and related investments and place oneself firmly in that universe. While doing so it may become clear that the issue may not be the investment itself, which may still be sufficiently located and identified in a particular country, but that the real importance and relevance of such an investment is truly as part of the international commercial flows themselves. Foreign investments then serve a broader purpose, have a supporting function and cannot or can no longer be seen in isolation. One consequence is that the distinction between trade and investments erodes. In terms of present distinctions and facilities, trade resolution regimes (under WTO) and investment dispute resolutions may start to overlap and become alternatives or indeed may both be operative at the same time. It may be recalled in this connection that trade dispute resolution, unlike foreign investment disputes, is still dealt with between states which may be activated by aggrieved private parties although they retain discretion. The remedy is the withdrawal of trade concessions by the state in question. In investment disputes, on the other hand, aggrieved private parties have direct recourse against host states through international arbitration as discussed above, at least if there are BITs or similar treaties. These different dispute resolution techniques may thus combine in the context of the international flows and their trade and investment protection.236 There are important examples of this, the most egregious being the case of Philip Morris, whose production of cigarettes in Australia was made subject to extra warning requirements which were fought by the company and its subsidiaries in both ways.237 Cases like these are still relatively few but it can easily be seen that they may increase in the future. The notion of trade and investment in these international flows as flows may then need re-evaluation and this poses the question whether a choice between the two different resolution techniques must be made or whether they may still operate cumulatively. It may not be objectionable that they continue to do so in principle and there is important support for this position which favours fragmentation.238 Others have pointed out that this may put smaller states with lesser resources in a disadvantageous position.239 This may be so but they face the same problem in many other areas: the basic problem is that they have difficulty in finding the talent to man a modern state and in the face of globalisation may experience greater pressure to conform. It is the same reason why they tend to suffer more from financial crises. They cannot help themselves and risk becoming dysfunctional.

236  See Y Shany, The Competing Jurisdictions of International Courts and Tribunals (Oxford, 2003); BE Allen and T Soave, ‘Jurisdictional Overlap in WTO Dispute Settlement and Investment Arbitration’ (2014) 30 Arbitration International 1. 237  This case gave rise to much discussion, see S Puig, ‘The Merging of International Trade and Investment Law’ (2015) 33(1) Berkeley Journal of International Law; J Pauwelyn, ‘Dealing with the Increasing Complexity of Investment–related Treaties: A Framework and some Policy Guidelines’, available at http://iisd.org. 238  S Ratner, ‘Regulatory Takings in an Institutional Context: Beyond the Fear of Fragmented International Law’ (2008) 102 American Journal of International Law 475 and PS Berman, ‘Global Legal Pluralism’ (2007) 80 Southern Californian Law Review 1155. 239  See Pauwelyn (n 237).

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As in the Philip Morris example in Australia, the argument against enforcing treaty protection on public health grounds may become quite emotional, but the dangers of smoking have long been broadly advertised and do not threaten the Australian race with extinction. There are much greater public health problems and it might therefore be difficult to argue that ‘super’ public purpose was engaged to such an extent that it supersedes treaty commitments in this situation in the manner discussed in ­section 3.4.3 below. Much of this is political cliché and it may be a bad example. Obviously these are or should be big issues in the present TTIP debate between the US and EU (see s 3.5 below on the dispute resolution regime). Suffice it to say for the moment that these problems should not only be considered from the perspective of present facilities, but that the nature of the international flows themselves may require their reconsideration. It will be argued later that arbitration may be the only viable dispute resolution facility but that it needs a form of supervision.

3.1.6  Powers of Foreign Investment Arbitrators In Sections 1.1.10 and 1.2.5 above, much was said about the powers of international arbitrators and their role and jurisdiction. The essence was that they are there only to resolve a dispute between the parties as the latter have formulated it. The arbitrators are limited to the pleadings and arguments of the parties in which connection the applicable law must be pleaded as fact and proven as such. International arbitrators have no natural lex fori to uphold or clarify; they are not judges. They only determine which arguments are in their view the better and are not meant to bring their own ideas (as they are not in dispute). That is the traditional position, but it was also said that there are increasingly areas where international arbitrators have received their own powers in which areas they may then also apply the law autonomously and formulate it. Traditionally, that applies to procedure and evidence, but it now also applies to the determination of their own jurisdiction, arbitrability and ways of reasoning. They may even be exercising equitable powers in proprietary matters and issues of relief. More generally they may become spokespersons for the public interest, in areas such as competition issues, and market abuse or corruption. They might even bring to bear their own ideas of justice, social peace and efficiency. It must now be considered whether this is all moving forward in foreign investment arbitration under treaty law (not necessarily under investment agreements) as in these foreign investment cases the public interest is primarily engaged. That would make these arbitrators much more like judges while precedent and its force become other issues. That then also enters into the issue of openness of the proceedings and publication of the awards. It is indeed submitted that foreign investment arbitrators fulfil here a different function and play a different role, although to what extent may still be a matter for discussion. One may see a progression: traditional commercial disputes were largely contractual and private, indeed entirely dependent on the representation of the parties. Financial arbitration moves out of these shadows because of the stronger proprietary and public policy elements, while in foreign investment the public ­interest starts to dominate. There may then also be a progression towards a more judicial role

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in each instance suggesting at the same time the powers of arbitrators to raise and determine legal issues themselves and clarify the applicable legal regime, but this still does not make international arbitrators ordinary judges. If that had been wanted, the relevant treaties could have created a foreign investment court or retained the jurisdiction of the local courts in host countries. This might now happen in the TTIP: see section 3.5.6 below.

3.1.7  The Supervision of Foreign Investment Arbitrators. Annulment Proceedings Compared Foreign investment arbitrators, in particular, often deal with issues that are closely related to the public interest. It may be true that investment agreements and BITs more particularly motivate host states to give many protections and limit policy considerations at the level of the state, but in the interpretation these considerations revive and, as will be argued later in section 3.3, ‘super’ public purpose may still override the concessions made by the host state. This again raises the issue of the arbitrators’ powers but also of their supervision and setting aside the (full) protection. Is private dispute resolution still the proper answer? It became much questioned during the TTIP negotiations between the US and EU (see s 3.5 below). The answer is, it will be submitted in section 3.5.4, not appeals but better supervision by a specialised international court or similar institution or board.240 This should also have been the solution under the Washington Convention rather than its procedure of annulment under Article 52, which avoids appeals and seems to aim at some similar result in terms of supervision but in a way that ill expresses the concept and has destabilised the set-up of the Convention. Annulment has become its most contentious part.

3.2  The Basic Foreign Investment Protections. Direct Investors’ Claims and the Role of Investment Arbitration 3.2.1  Investment Agreement and Treaty Law Protections It has already been said that in investment or concession agreements the objective is normally to guard against expropriation, to create stability in the fiscal, foreign exchange and regulatory regime, to select an applicable law, and opt for international arbitration in the case of disputes. The latter facility was strengthened by the Washington Convention for those parties who selected ICSID arbitration in their investment agreement. BITs commonly added to this or in the absence of an investment agreement provided a more precise regime of protection concerning expropriation and compensation, also

240  See Dalhuisen (n 36) and JH Dalhuisen, ‘The Transatlantic Trade and Investment Partnership Response Answer to the EU Questionnaire of March 2014’ see SSRN Working Paper Series and the text at s 3.5 below.

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provided for national treatment, introduced the most favoured nation clause, promised fair and equitable treatment and introduced arbitration allowing foreign investors directly to claim protection from host states, all now at the level of international law. The fair and equitable treatment (F&E) concept has here given rise to the most controversy and is unclear.241 In respect of the arbitration facility, the most favoured nation (MFN) provision has raised the question whether it also applies to procedural issues, in other words, whether a more favourable provision in other BITs may condition the arbitration facility in the BIT under contention. Famously in Emilio Agustin Maffezini v Kingdom of Spain,242 it was held that the MFN concept applies in such situations, so that a requirement to first consider mediation and a fixed time frame for it may fail if it is not a requirement in other BITs of the same country.243

3.2.2  Concurrent Investment Agreement and BIT Arbitration Jurisdiction There may be concurrent arbitration facilities under Investment (or Concession) Agreements and BITs. The normal rule is that in such cases each facility is directed towards the cause of action that arises under the investment agreement or the BIT respectively.244 They may fall under both. If there is an umbrella clause, it may further be that all protections in the investment agreement rise to the level of international law, potentially therefore also enforceable under the BIT arbitration. This is commonly not believed to be so for purely private issues, especially contractual claims to be resolved under private law, unless the arbitrators act in a reproachable manner when there may still be room for further protection against such an event under the BIT rules. It amounts to a kind of review. This was the issue in the well-known case of SGS v ­Philippines,245 but the subject remains controversial.246

3.2.3  The Issue of Compensation Under most BITs an expropriation becomes legal if there is full compensation. In ­section 3.4, this issue of legality will be further explored and also the question of

241 

See the discussion in n 276 and at 319 below. Emilio Agustin Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, IIC 85 (2000). 243  It needs to be distinguished from the discussion as to whether this requirement, where existing, is merely procedural or jurisdictional. Case law remains divided on this issue. If the requirement is purely procedural, it may in appropriate cases be ignored by arbitrators, but not if it suspends their jurisdiction, see Ronald S Lauder v The Czech Republic, UNCITRAL Rules, IIC 205 (2001) in favour of the procedural characterisation as against Enron v Argentina, ICSID Case No ARB/01/3, IIC 92 (2004). 244  Lanco v Argentina, ICSID Case No ARB/97/6, IIC 148 (1998). This principle has been upheld many times since. 245  SGS v Philippines, ICSID Case No ARB/02/6, IIC 224 (2004). 246  See J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24 Arbitration International 3 and earlier TW Waelde, ‘The “Umbrella” Clause in Investment Arbitration’ (2005) 6 Journal of World Investment & Trade 183. 242 

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indirect expropriations as compared to non-expropriatory takings and the matter of compensation in respect of them, which may be less than full compensation. The ­question of full compensation is itself not as simple as it may seem either and is capable of many interpretations. It is also very case specific.

3.3  The Applicable Law in Foreign Investments 3.3.1 Introduction Determining the applicable substantive law in foreign investment disputes raises a number of complicated issues.247 It was said before that ICSID arbitrations are ­transnationalised but that does not automatically mean that the applicable law is transnationalised at the same time. In fact the Washington Convention in Article 42 speaks to this issue, and so may BITs. Consulting the usual legal sources of treaty texts, available cases and scholarly literature yields helpful but incomplete guidance. It may raise more questions than it answers. Case law also contributes to our understanding, but the number of cases on point is limited.248 The academic literature is relatively scarce.249 The dominant approach to the applicable law question distinguishes between two situations, depending on whether or not there is an investment agreement (traditionally called a concession agreement in the extraction industry and infrastructure projects) or at least an arbitration agreement, submission agreement, or some other dispute resolution clause (which we will simply refer to as the investment agreement). For present purposes, situations in which this sort of agreement exists will be referred

247  The following is an updated and edited version of JH Dalhuisen and A Guzman, ‘The Applicable Law in Foreign Investment Disputes’ (n 227). 248  Wena Hotels Ltd v Arab Republic of Egypt [2002] Revision Case 98/4 paras 31, 36 (ICSID); LG&E v ­Argentine Republic [2006] Decision on Liability Case 02/1 (ICSID); Duke Energy Electroquil Partners v Republic of Ecuador [2008] Award Case 04/19 (ICSID); Azurix Corp v Argentina [2006] Case ARB/01/12 67 (ICSID); Vivendi Universal SA v Argentine Republic [2007] Decision on Annulment Case ARB/97/3 paras 95–96, 102 (ICSID); Asian Agricultural Products Ltd v Republic of Sri Lanka [1990] Award Case ARB/87/3 paras 20–21 (ICSID); Autopista Concesionada de Venezuela, CA v Bolivarian Republic of Venez [2003] Award, Case ARB/00/5 paras 92–105 (ICSID); Compañía de Desarrollo Santa Elena SA v Costa Rica [2000] Award 39 ILM 317 para 64 (ICSID); Enron Corp & Ponderosa Assets, LP v Argentina Republic [2007] Award Case ARB/01/3 paras 206–09 (ICSID); LG&E v ­Argentina [2007] Award on Damages Case ARB/02/1 para 98 (ICSID); CMS v. Argentina [2005] Award Case ARB/01/8 115–16 (ICSID); MTD v. Chile [2004] Award Case ARB/01/7 72 (ICSID); Sempra Energy International v Argentina [2005] Case ARB/02/16, 235–35 (ICSID); Maritime International Nominees Establishment v Republico of Guinea [1989] Decision on Annulment Case ARB/84/4 paras 5.03–6.43 (ICSID). 249  But see WM Reisman, ‘The Regime for Lacunae in the ICSID Choice of Law Provision and the Question of its Threshold’ (2000) 362 15 ICSID Review: Foreign Investment Law Journal; and earlier Ph Kahn, ‘The Law Applicable to Foreign Investments: The Contribution of the World Bank Convention on the Settlement of Investment Disputes’ (1968) 28 Indian Journal of International Law 44; I Shihata and A Parra, ‘Applicable Substantive Law in Disputes between States and Private Foreign Parties’ (1994) 183 9 ICSID Review: Foreign Investment Law Journal; A Parra, ‘Applicable Substantive Law in ICSID Arbitrations Initiated under Investment Treaties’ (2001) 20 16 ICSID Review: Foreign Investment Law Journal; A Parra, ‘Applicable Law in Investor-State Arbitrations’ in AW Rovine (ed), Contemporary Issues in International Arbitration and Mediation (Fordham Papers, 2007) 7; VC Igbokwe ‘Determination, Interpretation and Application of Substantive Law in Foreign Investment Treaty Arbitration’ (2007) 23(4) Journal of International Arbitration 297.

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to as the ‘ICSID approach’. When there is no agreement, the ‘NAFTA approach’ will be referred to. The distinction between these two approaches emerges from the relevant treaty texts. Under the ICSID approach, the investment agreement includes a choice of law ­provision negotiated and agreed upon by the parties. Under the NAFTA approach no such choice is made by the parties. In one case, then, the parties choose the applicable law and in the other they do not. It is perhaps not surprising that much discussion on the applicable law question focuses on this distinction. Upon careful consideration, however, the practical difference between these two situations is much less than it initially appears. Though it is commonly believed that the presence of an investment agreement grants the parties considerable authority to choose the applicable law, it is submitted that this party autonomy is, in fact, highly restricted. The true issue is to identify that which is at the free disposition of the parties and that which is, instead, mandatory. When the question is examined carefully the parties have much less choice than is commonly believed and the difference between the two approaches fades away.

3.3.2  The ICSID and NAFTA Approaches Distinguished Under what may be termed the ICSID approach, the treaty text regarding the ­appropriate applicable law (Art 42) reads as follows: The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such an agreement, the Tribunal shall apply the law of the ­Contracting State party to the dispute (including its rules of the conflict of laws) and such rules of international law as may be applicable.250

As this text suggests, the ICSID approach assumes there is always an investment agreement (or at least arbitration agreement) in place. This was accepted by the Washington Convention of 1965, substantially before the era of BITs. At the time an arbitration agreement was, indeed, the minimum requirement to get to arbitration and the issue of applicable law. Though the investment agreement does not have to include a choice of law provision, the opportunity exists for such a clause, and the treaty text in question states that the parties are free to choose the applicable law. Under the NAFTA approach, on the other hand, there is no need for an arbitration clause, either in an investment agreement or a specific arbitration or submission agreement. The treaty itself provides for international arbitration. Article 1130 NAFTA uses the following formula (which may also be found in many BITs): A Tribunal established under this Subchapter shall decide the issue in dispute in accordance with this Agreement and the applicable rules of international law.251

250  251 

Art 42 of the Washington Convention. Art 30 NAFTA.

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In contrast to the ICSID approach, NAFTA does not explicitly provide for party autonomy with respect to the applicable law. Taken at face value, it would seem that the content of the law is prescribed by the treaty. The US Model BIT, including the most recent 2012 version, accommodates both the ICSID and NAFTA approaches. Article 30 uses the ICSID formula when there is an investment agreement and a variation on the NAFTA formula when there is no such agreement or when the investment agreement is not relied on to conduct the arbitration: The tribunal shall apply: (a) (b)

the rules specified in the pertinent investment authorization or investment agreement, or as the disputing parties may otherwise agree if the rules of law have not been specified or otherwise agreed: (i) the law of the respondent, including its rules on the conflict of laws; and (ii) such rules of international law as may be applicable.252

The US Model BIT, then, specifies that in the absence of a choice by the parties, the law of the host state applies along with international law. However one chooses the applicable law, it is worth noting that three sources of law dominate the applicable law discussion: the law chosen by the parties, the law of the host country (including its conflict of laws rules), and international law (including the rules of relevant investment treaties). Focus on the distinction between the ICSID approach and the NAFTA approach emerges naturally from the different contexts. The language of ICSID Article 42 seems to say that the parties are free to choose the applicable law while NAFTA omits any mention of party choice. This language certainly suggests that party autonomy is greater under the former than the latter. The author believes, however, that the different texts actually have very similar—indeed, almost identical—legal meanings. The ability of the parties to choose the law is much more constrained under ICSID than it might appear, and NAFTA gives the parties significant flexibility, despite its failure to do so explicitly.

3.3.3  How far does a Choice of Law by the Parties Reach? Under the ICSID approach, parties are explicitly given the power to choose the law that applies to the investment. With it they acquire significant flexibility, at least in theory. They can choose the law of the home state, the host state, a third state, or some other set of rules. They can even rely on international law broadly or ‘general principles common to civilized nations’. The choice could, in principle, be virtually anything including a modern lex mercatoria, sharia law, or even a regime drafted by the parties for just this purpose.

252 

Art 30(2)(b), US Model BIT 2012.

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In practice, the chosen law is often the law of the host state. Sometimes it is instead that of the home state. This latter choice can be found, for example, in international loan documentation but is otherwise quite rare. However, as noted above, no national law needs to be chosen and there are important examples where even general principles are selected by the parties. For example, in the Aminoil Arbitration Agreement,253 the parties chose the principles of law and practices prevailing in the modern world, while the Concession itself referred to the principles common to the laws of Kuwait and the State of New York and, in the absence of such common principles, the law normally recognised by civilised states, including law which has been applied by international tribunals. In at least one instance, similar language derived from Article 38(1) of the Statute of the International Court of Justice, where the sources of international law are defined, was used in case law.254 Noting that the parties are free to choose the applicable law, however, is only the start of the inquiry. To say that the parties may choose the law does not identify the limits of that choice. The parties, after all, are not free to completely remake the applicable legal system. To understand the applicable law issue, then, we must understand the range of legal rules that the parties have at their free disposition. What aspects of law may they choose? What remains beyond their reach? What applicable law is mandatory? The same issue comes up in the domestic context. It is routinely said that the parties to a contract can choose the law that will apply to that contract. But here, too, the choice is far from unfettered. We must look to the applicable legal system to see where the parties can or cannot deviate from background rules. Put another way, the domestic legal system establishes many mandatory legal rules that the parties cannot avoid or change. That is so even in the basic aspects of capacity and validity, but it is also so in all that relates to public policy or public order. Many legal systems, for instance, impose mandatory securities laws, competition laws, labour laws, and more. The question is similar, if more complex, when the agreement is made between a foreign investor and the host state. The host can, of course, provide whatever rules it wishes for the investor (limited only if some jus cogens rules apply). The question is whether the host is able to commit itself not only in the present, but also for the future. The same question applies to the choice of applicable law that seeks to set aside the host country regime. Is that choice something to which a sovereign state can bind itself irrevocably through agreement with an investor? If so, what could the choice of a different municipal law, amalgam of laws, or a special contractual regime achieve? What ground could it cover? More generally, what can a contract with a host government arrange or set aside in terms of the otherwise applicable law? Can it set aside prevailing public policy and public order notions of the host state, including environmental, taxation and competition laws? Put another way, can such set-asides, once given, be withdrawn by the home state? Can this kind of contractual arrangement with a host government imply a kind of alienation or privatisation of sovereignty? 253 

21 ILM 976 (1982). Lord Asquith in the case Petroleum Development (Trucial Coast) Ltd v the Sheikh of Abu Dhabi [1952] I ICLQ 247, 260 was probably the first to use it in the more limited sense of the law applicable to a concession agreement. It does not necessarily refer to principles of international law. 254 

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The issue of whether the host state’s public policy can be set aside in an investment agreement is particularly important in regard to expropriation. For example, when an investment agreement includes protection against expropriation or a stabilisation clause, can it guard against inconsistent existing or future public policy regulations? The difficult question is whether an agreement of this nature is strong enough to trump public order notions. Is reliance of the investor on the contract and its good faith implementation sufficient protection against sovereign authority?255 We know that governments in the exercise of their public function may change their minds, but then what is the applicable law? Can it be chosen in order to obtain a more favourable regime and bind governments better? If so, does it stick?

3.3.4  The Characterisation Issue: Contract, Administrative Agreements and Treaties Some of the uncertainty surrounding the applicable law issue stems from the fact that the investment agreement does not fit neatly into our existing categories of agreements. Because it involves a state and a private party agreeing on terms that are more than merely commercial, there is ambiguity about the status of the investment agreement. Perhaps the most obvious characterisation of the investment agreement, and its choice of law clause, is as a private law contract. An important implication of such a characterisation is that the agreement cannot bind public authority. The host state, then, enters into the contract as, in effect, a private party that cannot make binding commitments about its future actions as a sovereign. The investment agreement, then, is not strong enough to guard against policy changes by the host. If the investment agreement is characterised as a private law contract, then the ­parties’ ability to choose the applicable law faces the same limits as a contract between two commercial actors. Put slightly differently, the state can make a binding commitment with respect to its commercial dealings, but it cannot do so with respect to its sovereign conduct. The author acknowledges that there are difficult interpretive ­question about whether a particular government action or commitment is in the nature of a commercial action or a sovereign act. These challenges are familiar, however, and so they will not be discussed in detail here. Characterisation of the investment agreement as a private law contract is not the only possible option, however. One alternative would be to think of the investment agreement as an administrative contract, which would allow the state to unilaterally amend or terminate the agreement, within certain limits. This issue has been raised in several cases, and though most tribunals have not embraced the concept, it is fair to say that it has not been entirely rejected either. This description fits the ­Aminoil case, in which the tribunal considered the theory and neither dismissed it nor

255  For a discussion of the impact of reliance on governmental undertakings on expropriation, see Jan H ­Dalhuisen and Andrew T Guzman, ‘Expropriatory and Non-Expropriatory Takings Under International Law (2012) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2137107 and section 3.4.5 below.

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embraced it.256 The issue has already been raised in section 3.1.2 above. In TOPCO the arbitrator reasoned that administrative contracts are not sufficiently widely and firmly recognised in the leading legal systems to constitute general principles of law.257 In Aramco, the tribunal concluded that there was no justification for ­applying this French law notion to a dispute between a US company and Saudi Arabia.258 In BP v Libya, however, the arbitrator found the concession to be an administrative ­contract.259 The point here is simply that classifying such agreements as administrative contracts would affect the way in which they are viewed by a tribunal. It can hardly be denied that contracts with governments in the public sphere form a special category in all legal systems. If this is clearer in systems like the French (where the notion of an administrative contract is familiar), then it is that civil law on the whole concentrates more on contract types than the common law, which looks more at types of relationships, although the result is not truly different. This may mean that international lawyers with a common law background are less comfortable with the administrative contract as a concept, but much of this is semantics. The point here is simply that classifying such agreements as administrative contracts would affect the way in which they are viewed by a tribunal. The more specific question under such an interpretation is whether the applicable administrative law may be chosen by the parties rather than being always the law of the host country. Could the administrative law of any other country be opted into? It would seem unlikely that a host government could be bound under any other than its own administrative law, but perhaps international arbitrators would be prepared to accept international minimum standards under international law if the applicable municipal administrative law is underdeveloped The characterisation of the investment agreement as an administrative law contract would thus limit the space for a choice of law but could enhance the protection of the investor. The Aminoil case described two special rules that would apply if an administrative contract were found to exist. First, host states may require a variation in the other party’s duties under an administrative contract but they cannot unilaterally modify the financial terms and must always maintain the contractual equilibrium. Second, a contract may be terminated when essential necessities concerning the functioning of the state are involved, but in that case reparations must be made. There is therefore an implied sovereign right to breach these agreements but only in limited circumstances and with appropriate compensation. However, purely commercial clauses are not affected, although even here governments may still have special opt-outs. It has already been noted that there is, in any event, much middle ground. Another possible characterisation of an investment agreement is as a contract under public international law. Such a contract between states is a treaty. The question is 256  Government of Kuwait v American Independent Oil Company [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976 (ICSID), paras 90, 92, see also section 3.1.2 above. 257  Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v Gov’t of the Libyan Arab Republic [1977] 17 ILM. 3, 19–21 (Arb Trib). 258  Saudi Arabia v Arabian American Oil Company (ARAMCO) [1963] 27 ILR 11 Report 117–64 (Arb Trib). 259  BP Exploration Company (Libya) Ltd v Government of the Libyan Arab Republic [1979] 53 ILR 297 (Trib Arb).

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whether some similar form of contract is conceivable under international law between a state and a non-state entity. If so, does an investment agreement fall in that category and what would it mean if it did? This leads to a consideration of the status of private parties under international law.260 Public international law, being traditionally the law between states, is not used to dealing with private parties. It would represent a radical departure from historical practice to give an agreement between a state and a private party a standing similar to that of a treaty between states. Views about such things can change over time, and perhaps the notion that an agreement between a state and a private party might create binding international law may emerge. For now, however, one is hard pressed to imagine how a tribunal could reach this result. The issue comes up today, however, if there is an umbrella clause in the relevant investment treaty. Here, even if the investment agreement itself does not constitute a binding form of commitment, the investment treaty may represent a binding promise by the host state to honour the commitments made in the agreement. Consider, for example, the language in the Swiss–Philippines BIT at issue in the SGS v Philippines case:261 ‘Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party’.262 Although the interpretation of umbrella clauses is controversial (see also s 3.2.2 above), there appears to be agreement that it is possible to draft a clause that will lift what would otherwise be merely a violation of the investment agreement to a higher level, making it a treaty violation. Even SGS v Pakistan, which is generally sceptical of the umbrella clause, conceded as much, stating that ‘Article 11 of the BIT would have to be considerably more specifically worded before it can reasonably be read’ to convert contractual breaches into treaty violations.263 The clear implication is that a ­sufficiently well-drafted umbrella clause would, indeed, protect an investor against breach of the investment agreement under international law. This must surely be correct. Any other conclusion would imply that states entering into a treaty are incapable of binding themselves in this way—creating a jus cogens rule prohibiting treaty commitments in which states promise to honour their promises to private parties. But one should not exaggerate the potential of an enforceable umbrella clause. By elevating what would otherwise be a contractual commitment to the level of international law, an umbrella clause prevents the host state from unilaterally changing the terms of that particular commitment. The umbrella clause, in other words, allows the state to make binding commitments that it lacks the legal authority to avoid. Through this mechanism, for example, a state can commit itself to a stabilisation clause. It ­follows that the parties can exercise a broader choice if an umbrella clause applies. This inevitably brings us back to the question of how to interpret an umbrella clause.

260  This is not yet a completed evolution but nevertheless increasingly a reality to which BITs also testify. See for this discussion also Richard M Buxbaum ‘The Role of Public International Law in International Business Transactions’ in JJ Norton (ed), Public International Law And The Future World Order (Littleton, CO, 1987). 261  SGS Société Générale de Surveillance SA v Republic of the Philippines [2004] Decision on Jurisdiction Case No ARB/02/6 92, 95–97; 113–35 (ICSID). 262  Swiss–Philippines BIT, Art 11. 263  SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan [2003] Decision on Jurisdiction Case ARB/01/13 171 (ICSID).

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Even a clause that satisfies the tribunal in Pakistan might not be interpreted to apply to a choice of law clause that sets aside the host country’s public laws. A tribunal would ultimately return to the question of what the parties intended and the clarity of the umbrella clause.

3.3.5  Public Law and Private Law We see the most important illustration of the argument—that the ICSID and NAFTA approaches to the applicable law question when properly construed work out essentially identical—in the distinction between public and private law issues. Even under the ICSID approach, the parties are only able to select the private law that applies to them. They cannot bind the state with respect to its public functions. This highly constrained choice, then, provides the parties with a flexibility that is not so different from what is available under the NAFTA approach. The text of Article 42 of the ICSID Convention provides strong support for the claim that party autonomy is limited to private law matters and that investment agreements, at least in an ICSID context, are best viewed as equivalent to private law contracts. The Article states that if the parties have failed to agree on the applicable law, the tribunal is to apply the law of the host state and ‘such rules of international law as may be applicable’. The English version fails to specify whether the law at issue is all law, including public policy and public international law, or some subset of international law. In the Spanish version, which is equally authoritative, the language is more precise. It states that in addition to local law tribunals should apply ‘derecho international privado’ (private international law). The clear implication is that the parties are granted the authority to choose the applicable private law only. BITs follow suit, as does the US Model Treaty Article 30(2).264 If this is correct, party autonomy is indeed limited to private law and private law issues. Though parties are free to incorporate or exclude the private law at their ­disposition—meaning laws which are not mandatory—they are not able to choose public law (or even deviate from mandatory private law). The category of laws beyond their control, then, would include regulatory laws such as environmental, taxation and competition laws. Whatever laws are mandatory for private parties negotiating a private contract are beyond the scope of party choice in an investment agreement. Thus, for example, under this approach all administrative and i­nternational

264  The US Treaty provides that if the parties have not specified the applicable law, the tribunal shall apply the law of the respondent and ‘such rules of international law as may be applicable’. US Model Treaty 2012. To the extent relevant, it may be noted that Art 28(1) and (2) of the UNCITRAL Model Law also make a reference to conflicts rules of private law in the context of stating the applicable law. So does the English Arbitration Act of 1996 in its Art 46. Extending the analysis from the ICSID Convention to the US Model BIT is made more difficult by the fact that the US treaty does not have an official Spanish version and so one cannot make quite the same argument as that made for the ICSID Convention. Nevertheless, given the similarity in language and the fact that the ICSID Convention was in place prior to the US Model treaty, it is reasonable to assume that the language in the latter is intended to have the same meaning as that in the former.

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law would be outside party control. Parties, including host states, would lack the power to bind themselves irretrievably with respect to public law. Here we see the end of party ­autonomy and the power to effectively choose the law pertaining to their relationship. As the foregoing indicates, there are significant limits on what a choice of law ­provision can achieve. This may be affected by treaty, of course, but only if the treaty itself changes the fundamental limits on party choice. It may be possible for a treaty to do so through an umbrella clause, as already discussed, but to succeed it must at a minimum be explicit about its intent. Thus, even if parties (including the host state) purport to choose the mandatory environmental laws of another state, that choice is not decisive. Because the investment agreement or choice of law agreement is not itself a treaty, it cannot override existing mandatory law. The only exceptions would be if an investment treaty contained an umbrella clause, as already mentioned, providing that such concessions would be binding as a matter of international law. Another possibility is that host state law could authorise such concessions through its domestic laws. In that case, however, the concession would be binding only as long as domestic law made it so. There would be nothing to prevent the host state from changing its laws.265 To repeat, if the law of a state other than the host state were chosen by the p ­ arties, the only addition to host country law would be that the other state’s private law rules would apply to private law issues. Even in the private law realm, however, the foreign state’s laws would only apply in matters at the free disposition of the parties. To ­provide a concrete example, if the parties were to include an expropriation or stabilisation clause in the investment agreement, it would not move the applicable law away from that of the host country or international law. In particular, such clauses cannot irrevocably protect against the host state’s sovereign power to change its law. A claim that the host did not honour the stabilisation clause would not be sustainable based on the investment agreement alone, because it was not within the power of the parties to freeze host country law. The host is free to change its laws and so may disregard the stabilisation clause. There will, therefore, be no violation by the host state, and no question of compensation would arise in terms of breach of contract. The only hope for the investor, then, would be international law, including both customary international law and any applicable investment treaty. When party autonomy fails to reach a particular area of law, as is the case for ­public policy or public order issues as well as private law issues that are not at the free ­disposition of the parties, the choice of law issue becomes simplified: The relevant law will normally be the law of the host state but it could also be international law. The remaining question is whether the law of the host state prevails over inconsistent international law. Both ICSID and the US Model Treaty specify that the relevant

265  There might be some issue of good faith here if the host were to behave in a sufficiently duplicitous ­ anner and the investor were to rely on assurances from the state. This is a subtle question because, while the m obligation of good faith cannot be waived by the parties, if it is understood that that state is entitled to change its laws one might conclude that the investor cannot reasonably rely on any assurances from the state that it will refrain from doing so.

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law is the law of the host state and applicable rules of international law, but neither treaty specifies which of those two sources is to take precedence. One’s instinct is to favour international law as it is meant to bind states, and arbitral decisions in Wena and LG&E confirm this view.266 The pre-eminence of international law is even clearer in legal systems that incorporate it into domestic law.267 In that situation there can be no doubt that international law takes precedence over inconsistent domestic law. The best view, then, is that host states normally maintain their own mandatory laws and values and international law only becomes relevant if it conflicts with or supplements these laws.

3.3.6  International Law Let us examine the impact of any commitment in an investment agreement that ­purports to avoid a rule of international law. Does the investment agreement have that power? Consider, by way of illustration, an agreement that, by its terms, allows expropriation without compensation. Under prevailing customary international law states are required to provide compensation when they expropriate investments. The measure of compensation is controversial, but it is broadly accepted that some compensation is required. Alternatively, could the parties also choose to discard existing customary international law protections against discriminatory or vindictive measures, which is a matter of minimum treatment, now often expressed as fair and equitable treatment, as confirmed in Aminoil, Genin, and SD Meyers?268 The answer is generally held to be that the parties cannot deviate from otherwise applicable public policy,269 or policy issues settled under international law.270 In the latter case, that would at least apply to customary international law and to applicable treaty provisions, including those under BITs.271 Intuitively, there may be n ­ othing wrong with an investor voluntarily abandoning its protection under international law and of course no one needs to pursue its remedies. Legally, the problem is not so

266 

Wena [2002], LG&E [2006] (n 248). BG Group Plc v Republic of Argentina [2007] Final Award paras 89–97 (UNCITRAL); Siemens AG v ­Argentine Republic [2007] Award Case ARB/02/08 paras 78–79 (ICSID). 268  Aminoil (n 220); Alex Genin, Eastern Credit Ltd, Inc v Republic of Estonia, Award ARB/99/02 para 367 (ICSID); SD Myers v Canada [2000] First Partial Award paras 258–59 (NAFTA). 269  It is true that under rules of comity, domestic courts sometimes yield to the better claims of other c ­ ountries to the application of their regulatory laws in international cases where more than one regulatory regime my apply. Arbitrators are perhaps more likely to do the same in appropriate cases. Comity of this nature is sometimes also considered international law, but is quite different from (public) international law as normally perceived and in truth no international law at all except where international minimum standards are applied and substitute for domestic notions in such cases, but again always within the discretion of the local courts, cf also s 401/2 Restatement (Third) of Foreign Relations Law in the US and Art 9 EU Regulation on the Law Applicable to Contractual Obligations (2008). These issues are not further pursued here either. 270  See Thomas Wälde, ‘The Umbrella Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases’ (2005) 6 Journal of World Investment and Trade 183, 211 and authorities cited therein. 271  WM Reisman, ‘The Regime for Lacunae in the ICSID Choice of Law Provision and the Question of its Threshold’ (2000) 15 ICSID Review: Foreign Investment Law Journal 362. 267 

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much that such an agreement would represent bad policy as it is that the parties lack the authority to make such a change to the prevailing rules of international law. This is the inevitable result of the doctrinal observation that only states are empowered to create or change international law. Though a normative defence of this outcome is ­somewhat beside the point, one might be found by analogising the investor to a ­consumer a­ bandoning its protection under mandatory consumer law. This protection is a form of public right and parties cannot modify it, although the consumer need not pursue the remedy and may also agree to a settlement of a dispute. More formalistically, obligations contained in both customary international law and investment treaties are obligations between states. Strictly speaking, then, an investment agreement allowing expropriation without compensation seeks to overturn an obligation owed to another state, not simply one owed to the investor. The investor obviously has no authority to release the host state from an obligation it owes to the home state, so terms in the investment agreement that purport to do so are not effective. Because the parties to an investment agreement cannot change international law, the ultimate rule is that parties acting under a private agreement (such as an investment agreement) cannot change the rules governing expropriation, protection against whimsical or vindictive government action, procedural (due process) standards, or safety protections under customary international law. In addition, parties may not change the application of treaty law, including an applicable BIT. Consider a contemporary example. Imagine an investor that is owed money by a host government. Suppose further that the investor and host reach an agreement under which the debt is renegotiated and reduced. The investor is, of course, free to make such an agreement, and it is likely to be effective. If there is a BIT in place, however, then the investor lacks the authority to waive the protections offered by the treaty. The public international law rules created by the treaty (or present in customary international law) remain. This is more than a hypothetical example. A BIT exists between Germany and Greece, for example, so any renegotiation of Greek bonds held by German investors would face this issue. There is, to be sure, considerable uncertainty about the content of foreign investment law. Even here, however, the parties are not in control. Consider, for example, the required level of compensation for an indirect expropriation under customary international law. Some take the view that full compensation is required, while o ­ thers assert that ‘adequate’ compensation is sufficient. One could imagine the parties, in search of certainty, specifying the compensation that would apply in their investment agreement. How should a tribunal treat such a provision, assuming it is clear and on point? This is a difficult question because two competing principles are at play. On one hand, this is a question of law, suggesting that the parties have no control over it. The ­parties, as already mentioned, have no power to change international law, so it should be for the tribunal to deal with uncertainty and vagueness in international law, not the p ­ arties. On the other hand, given the uncertainty of international investment law (level of compensation, meaning of fair and equitable, impact of umbrella clauses, etc.), it is hardly surprising that the parties may at times prefer to provide clarity at the time

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of the investment rather than waiting for a future dispute and a tribunal ruling. This ­perspective suggests a strong policy reason to allow the parties to specify the content of international law that would otherwise be uncertain. Investment tribunals are pragmatic institutions, and a firm prediction about how they should or would resolve this question is not ventured. One obvious ­possibility, though not the only one, would be to accept the parties’ agreement if the parties’ ­proposed rule falls within the scope of plausible rules. If it does not, the tribunal would determine the rule without regard to what the parties wished, assuming of course that the investor insists on the investment agreement being discarded in this respect. This may not be a fully satisfactory solution. To the extent such a decision influenced future arbitral rulings, there is a risk that the parties to the initial dispute would have a disproportionate impact on the law of investment. The absence of stare decisis provides some protection against such an outcome, and may provide the tribunal with just enough flexibility to adopt this approach.

3.3.7  The Applicable Law in the Absence of an Investment or Arbitration Agreement Up to this point the discussion focused on the situation in which an investment or arbitration agreement is in place and we have argued that the impact on choice of law is smaller than is often suggested. The choice of law question when an arbitration is initiated under a BIT or NAFTA in the absence of an investment or arbitration agreement will now be considered. In such a case, no choice of law has been made by the parties. The parties could, of course, enter into a choice of law agreement on the eve of arbitration. This would return us to the already discussed situation in which a choice of law clause exists. If an arbitration is started directly under a BIT, modern treaty texts support the idea that the relevant treaty applies plus international law.272 Although the law of the host state is not mentioned, it cannot be that local law simply is irrelevant. After all, the large majority of law governing the daily operation of an investment is local law. The better reading of the treaty provision is that the law of the host state, including choice of law, public policy and public order considerations continue to apply unless those are overridden by the law of the treaty or customary international law. This conclusion is inevitable because international law is not a comprehensive legal system. It does not cover all matters. Again, the difference between this situation and the situation in which there is an investment agreement with a choice of law provision is smaller than it initially appears. In both cases the parties are able to choose the applicable private law to the extent that local law allows them to do so but not much more.

272 

US Model BIT, Art 30(2)(b).

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3.3.8 Conclusion In the end, then, there is virtually no difference between the ability of the parties to choose the applicable law. Whether one considers the ICSID approach or the NAFTA approach, the parties have essentially the same ability to choose the law that will apply to the investment. In both cases, that choice is limited to private commercial law m ­ atters and, even within this category, to those rules of law that are not mandatory. The result must be that three sets of law may be applicable depending on the type of issue: (a) Any domestic private law, general principle, or lex mercatoria the parties choose to the extent the private law was at the free disposition of the parties and not mandatory. In the absence of such a choice of law, the applicable private law is the law resulting under the choice of law rules the Tribunal shall apply, or it may be the lex mercatoria as transnational private law if the Tribunal prefers it. (b) The host country’s mandatory laws apply and there is no possibility of a choice of law by the parties affecting these laws with regard to the conduct of the investor or the effect of the investment on the host state. These mandatory laws include regulatory, tax and competition laws, and local administrative law. (c) International law, including the applicable BIT or other treaty law, applies. These laws can be in addition to local law and overrule any conflicting mandatory domestic law and also any conflicting private law (such as private agreements that try to set aside or modify international law). How conclusive are treaty texts with regard to stating the appropriate applicable law? Are they merely declaratory and must we accept they are often unfocused and incomplete? When host country law and customary international law are mandatory they always appear to apply regardless of such texts. The exception is when host country law is clearly overruled by the applicable treaty law. The above demonstrates that the explicit distinction in some treaties between investment and arbitration agreements and the selection of applicable law is not of great consequence. Clearly, in the first case there may be a choice of private law by the parties, but this selection cannot do away with the private domestic mandatory laws such as regulatory, tax, competition and administrative law, even if their government so agrees. In conclusion, even though these treaty texts are seldom well thought out, the greater problem is that there is insufficient clarity in the area of applicable law to foreign investment disputes. In this sense the treaty texts are only a manifestation, not the cause, of this ambiguity. For these reasons not much authority can be given to these treaty texts where they exist. A solid argument can be made that these texts are confusing and we are better off without them. BITs that have no applicable law provisions (such as the model UK BIT) may be preferable. Since it remains difficult for treaty authorities to answer these issues of applicable law, it may be best to leave them to arbitrators or the competent courts.

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3.4  Proprietary and Non-Proprietary Takings 3.4.1 Introduction273 As we have seen, international investment law deals more particularly with expropriation, protection against which, in its various forms, is at the core of the topic. In principle, expropriation is a host government’s right, but at least requires compensation to be lawful. Under customary international law, the required level of compensation has been disputed, as has the question of what other consideration (other than a failure to compensate) would render an expropriation unlawful.274 In particular it is not clear what other recourse, beyond compensation, is available in such cases. Could there be reinstatement? Treaty law, especially BITs and the NAFTA, now elaborates on the issue and tries to create greater clarity but there remain many problems. First, there is the preliminary question of what constitutes an expropriation.275 In considering this question, it is useful to start here with the neutral term ‘taking’, which identifies an economic consequence (a reduction in the value of the investment) without directly speaking to the legal status of the government action. We can then ask whether a taking is an expropriation under international law, whether it is lawful or unlawful, what the consequences are and what non-expropriatory takings are and how they should be treated. Note, in particular, that not all takings are expropriations under international law. As discussed below, this set of non-expropriatory takings includes those carried out for what we term a ‘super’ public purpose or public welfare as well as takings incidental to normal government action. That such takings are not expropriatory, however, does not mean that they are necessarily lawful and non-compensatory. We must, therefore, consider questions of both legality and compensation for both expropriatory and non-expropriatory takings. A full inquiry into the rules governing expropriation,

273  The following is an updated and edited version of JH Dalhuisen and A Guzman, ‘Expropriatory and Non-Expropriatory Takings Under International Investment Law’ (n 255). 274  As a starting point, we may still take the Libyan Petroleum cases, BP Exploration Company (Libya) Limited v Government of the Libyan Arab Republic [1973/1974] 53 ILR 297; and Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic [1977] 53 ILR 389, and (the Aminoil case) Government of Kuwait v American Independent Oil Company [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976. They moved the concept of expropriation forward under customary international law. Aminoil stated that expropriation could be legal provided that compensation was paid. Under customary international law, the measure of damages remained unclear. As is well known, the Hull formula requiring full compensation, normally adhered to in modern BITs, has been heavily contested as the absolute standard under customary international law. It has been applied with substantial variations, not least because the concept of full compensation itself is not clear. It raises obvious valuation questions and in particular the question of the inclusion of future profits and their calculation, issues not discussed here. 275  Early on Gordon Christie and later Rosalyn Higgins reflected on this issue without, significantly, arriving at clear answers, see GC Christie, ‘What Constitutes a Taking Under International Law’ (1982) 38 British Year Book of International Law 307; and R Higgins ‘The Taking of Property by the State: Recent Developments in ­International Law’ (1982) 176 Recueil des cours—académie de Droit international 259.

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thus, must address three questions: Is a taking expropriatory or non-expropriatory? Is it lawful or unlawful? Is it compensable or non-compensable? Though these questions are related, they each involve different legal issues and must each be answered separately. As is often true with international law inquiries, we should begin by considering the background rules provided by CIL. Beyond its rules on expropriation, CIL provides for a minimum standard, sometimes equated to the need for fair and equitable treatment (F&E). The distinction between the minimum standard and F&E under CIL is largely a matter of semantics in the context of international investment law. F&E appears to be the modern expression of the traditional minimum standard developed under CIL.276 In treaty law, as is well known, F&E may go no further, but at times it may be expansive and provide some additional protection, although there is often still a question how much and in what areas. This may be relevant, as we shall see, in the area of non-expropriatory takings, their legality, and the question of compensation in the case of their illegality, but F&E may also define better the protection against expropriation proper. At least with respect to what might be called direct expropriation—meaning expropriation that affects the legal title of an asset or its management—expropriation clauses in investment treaties provide significant guidance with respect to the question of legality. However, the way in which they define and approach the meaning of expropriation and, in particular, their use of the distinction between direct and indirect expropriation, may create more confusion than clarity. A tribunal must obviously accept an investment treaty as written and so must apply the text, and this is what the key cases on the subject try to do. The legal system governing expropriation would be more straightforward, however, if the direct/indirect distinction were discarded. ­Further clarification is here relevant and may then also affect the interpretation of these texts. Moreover, although investment treaties often distinguish direct and indirect takings (eg, the US Model BIT), they normally fail to address the legality of either type of takings with sufficient precision to make clear when they are permitted, when they are unlawful and what the precise recourse is.277 In the following an attempt will made to simplify and clarify a long discussion on these subjects and to provide a framework in which the cases, in so far as we have them, may fit better and the choices may become clearer. Directly relevant cases will be cited, but no claim is made to an exhaustive discussion.278

276  See, ‘A Tale of Two Standards. “Fair and Equitable Treatment” and the Minimum Standard in International Law’ (2011) 27 Arbitration International 27. The F&E treatment language is not traditional in customary international law, which more commonly continues to use the reference to the ‘international minimum standard of treatment of aliens’, see further the discussion in s 3.1 above. 277  See LY Fortier and SL Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know it When I see it, or Caveat Investor’ (2005) 13 Asia Pacific Law Review 79. 278  The approaches under these various types of rules may not always be equated and some are more political than others. Where necessary these differences will be highlighted, see for example, n 287 below.

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3.4.2  Takings and Expropriation To make progress in the area of takings in international law requires, foremost, greater clarity with respect to the vocabulary used.279 An attempt is therefore made to clarify the terminology. To begin with the broadest category of governmental acts that concerns us here, they are ‘takings’. A taking in its most general meaning is any host governmental action that negatively affects the economic value of the foreign investment.280 One way to understand when a taking occurs is to view the foreign investment as a bundle of rights (and obligations). A taking has occurred if a government measure negatively affects one or more of these rights. This definition focuses on value reduction and so encompasses both direct and what is commonly termed creeping or indirect expropriation. It is also useful when considering the US Model BIT which, in Annex B, states that an action cannot constitute an expropriation unless it ‘interferes with a tangible or intangible property right or property interest’. The same Annex states further that ‘an adverse effect on the economic value of an investment’ is not sufficient, by itself, to constitute an indirect ­expropriation.281 The proposed use of the term taking is thus consistent with what the US BIT describes as ‘interference with property rights or interests’. A taking may be expropriatory or non-expropriatory, lawful or unlawful, compensable or non-compensable.282 Before turning to the question of which takings constitute expropriation, it is helpful to set aside altogether government actions which affect the value of an investment, but do so only minimally. Glamis283 asserts that for a taking to constitute an expropriation, there must be some minimum economic impact on the investment. If this minimum

279  See the pioneering article by Thomas Waelde and Abba Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’ (2001) 50 ICLQ 811. Besides the sources mentioned, other key materials have been researched for clues, especially the ILC ‘s Responsibility of States for Internationally Wrongful Acts and the Energy Charter Treaty. 280  For the emphasis on a ‘material and functional analysis’ of the effect and on the ‘equivalent economic effect’ see also Waelde and Kolo (n 279) 813. A formal or title-based approach is rejected by them and the economic meaning of a ‘taking’ moved to the centre. It is now commonly considered that the focus of the analysis of an expropriation is the effect of the host state’s measures on the investor’s property, the so-called ‘sole effect doctrine’ confirmed in Tippetts, Abbett, McCarthy, Stratton and TAMS-AFFA Consulting Engineers of Iran v Islamic Republic of Iran [1984] 219–25 (6 Iran-US CTR). It is the ‘reality of their impact’ that is important. See also Compañia de Aguas del Aconquija SA and Vivendi Universal SA. v Argentina [2007] Award Case ARB/97/3 para 7.5.20 ICSID. ‘While intent will weigh in favour of showing a measure to be expropriatory, it is not a requirement, because the effect of the measure on the investor, not the state’s intent, is the critical factor.’ 281  US Model BIT (2012), Annex B.4(a)(i). 282  An investment, for our purposes, is any form of property entitled to protection under international law (whether treaty or CIL). This type of property should not be confused with more traditional private law notions. In particular, it need not be operated and transferable in a similar manner and may be subject to different public order or public policy constraints. Rather, this kind of ‘property’ operates more in the way of a licence, therefore as an administrative law facility created under and covered by public international law. This does not mean, of course, that part of the investment may not take the form of ordinary private law facilities, such as the ownership of land and buildings, equipment, inventory, receivables and cash in the host country. There may also be specific governmental permits in that context. 283  Glamis Gold Ltd v United States of America [2009] NAFTA/UNCITRAL Award, paras 357, 536.

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is not reached, we can still talk of a taking in as much as some value has been lost, but it is not legally cognisable under international law. There may still be some remedy ­available under local (host state) law, but the investor is otherwise without recourse. It must be correct that some level of takings ought to be considered de minimis.284 If nothing else, this result is a practical necessity. Virtually any government action that affects the economy will have some, however small, impact on foreign investment. To provide one simple example, a successful effort to improve social programmes will affect the labour force and may create at least some small upward pressure on wages. It is inconceivable that every foreign investor would be insulated against these sorts of changes to the business environment. These de minimis takings, then, do not, and should not, rise to the level of being legally relevant to an expropriation analysis. The example of a de minimis taking is a helpful starting point for our discussion because it demonstrates that a government taking need not be expropriatory. The key distinction between the terms is that a taking is defined in an economic sense whereas an expropriation is a legal term. A taking is a necessary condition for an expropriation, but it is not sufficient. We are interested, then, in identifying the sufficient conditions for an expropriation. Put another way, beyond the de minimis exception, we would like to know when a taking is non-expropriatory and when it is expropriatory. The most convenient approach, and one we follow below, is to define those takings that are ­non-expropriatory and identify those that remain as expropriatory. It is submitted that a taking that is more than de minimis is non-expropriatory if it belongs in either of two categories: (i) takings that promote public welfare (also referred to as ‘super’ public purpose), a category that includes health, safety and security;285 and (ii) takings that are incidental to legitimate, ordinary government action.286 These two

284  The requirement for a substantial deprivation was mentioned in Pope & Talbot Inc. v Canada [2000] Interim Award 122 ILR 316 s 102 (UNCITRAL); Sempra Energy International v Argentina, [2005] Case ARB/02/16 s 284; and Tecmed v Mexico [2006] Case ARB (AF)/00/2 10 ICSID Reports 54 para 115. In Biwater Gauff ­(Tanzania) Ltd v United Republic of Tanzania [2007] 464 Case ARB/05/22 (ICSID), it was confirmed that effects of a certain severity must be shown to qualify an act as expropriatory, there being nothing to require, however, that such effects be strictly economic. In Tippets, see n 280 above, the Iran-US Claim Tribunal held that it was not even necessary for the host government to acquire anything of value. Legal title to the property need not be affected. The interference may, for example, be the appointment of new management, an issue of particular relevance in many Iran–US cases. As discussed further below, the level of deprivation required for a non-expropriatory t­akings to become compensable may be greater than for expropriatory takings. At this stage of the discussion the key is that for takings to become legally relevant in terms of foreign investment protection, there must be some m ­ inimum level of economic damage. 285  See also Christie (n 275) 338: ‘The existence of generally recognized considerations of the public health, safety, morals or welfare will normally lead to a conclusion that there has been no “taking”.’ Note here the denial of a taking altogether. What should have been said is that there is no expropriation. 286  Case law under the Iran-US Claims Tribunal referred here to the ‘police power of states’, see eg Too v Greater Modesto Insurance Associates [1989] Award 378 (23 Iran-US CTR) where the Tribunal found that ‘a State is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation or any other action that is commonly accepted as within the police power of States, provided it is not discriminatory and is not designed to cause the alien to abandon the property to the State or to sell it at a distress price …’. See also Sedco, Inc v National Iranian Oil Co [1985] 248–75 (9 Iran-US CTR), where the Tribunal recognised the existence of ‘an accepted principle of international law that a State is not liable for economic injury which is a consequence of a bona fide “regulation” within the accepted police power of states’. The principle has also been confirmed in more recent investor–state arbitrations, see eg Saluka v Czech Republic [2006] UNCITRAL Partial Award. ‘It is now established in international law that States are not liable to pay compensation to a foreign

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categories are simple enough to label, but devilishly hard to define with precision.287 These two forms of non-expropriatory takings and the distinction between them are addressed in the next two sections. It follows from this approach that all other takings are in principle expropriatory.

3.4.3  Public Welfare and Non-Expropriatory Takings A taking that promotes public welfare is termed a non-expropriatory taking. The US Model BIT is fairly clear (at least relative to many other treaties) on this question. In section 4(b) of Annex B it states that: Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.288

This is, of course, just one example from a single model treaty, but it illustrates the existence of this category of takings that are considered non-expropriatory because they are based on public welfare considerations. The next question, of course, is to clarify what counts as ‘public welfare’. There is no perfect clarity to be found here, but in the case of the US BIT at least, health, safety and the environment are included as a non-exhaustive list of policies that may satisfy the public welfare requirement.289 The treaty language, then, is helpful, but falls well short of a complete definition of the term ‘legitimate public welfare’. Beyond the treaty language, one can look to the relevant case law. Though the issue has come up in some cases, tribunals have provided at best only modest guidance on this question. Indeed, there are at least some instances in which different tribunals have reached contradictory conclusions. Consider, for example, the cases of Methanex and

i­nvestor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare’. We may see here a distinction between ‘super’ public purpose or welfare and incidental takings and the connection with regulation, but it is not clear what may qualify as such. 287  The Iran-US Claims Tribunal for technical and political reasons tried to distinguish between takings that it considered legal but still subject to some interference which then made them compensable, see Amoco ­International Finance Corp v Government of the Islamic Republic of Iran [1987–1988] Award 310-56-3 and 27 ILM 1314 (Iran-US CTR); and Mobil Oil Iran, Inc v Government of the Islamic Republic of Iran [1987] Award 311-74/76/81/150-3 (Iran-US CTR), but they did not fall under the category of non-expropriatory takings and were in substance expropriations. See also GH Aldrich, ‘What Constitutes a Compensable Taking of Property? The Decisions of the Iran-United States Claims Tribunal’ (1994) 88 American Journal of International Law 585. It shows that decisions of this nature may be tailored to a particular framework or institutional regime of dispute resolution and are therefore not necessarily conclusive or even persuasive in other contexts. There is in any event no rule of binding precedent in international law and, even if there was, arbitral awards might not qualify. See for further comments of this nature, SR Ratner, ‘Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law’ (2008) 102 American Journal of International Law 475. 288  United States Model BIT, Annex B.4(b) (2012). 289  The text can be read to suggest that direct takings (however defined) even for welfare or environmental purposes are still expropriations. This is not the line followed here. It further admits that in ‘rare ­circumstances’ indirect regulatory takings may still be illegal. Again, it does not say what these circumstances and the ­consequences are, especially in terms of compensability.

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Santa Elena.290 Both involved measures aimed at environmental protection and both raised the question of whether takings of this sort constitute a compensable expropriation. The tribunal in Methanex stated that: [A]s a matter of general international law, a non-discriminatory regulation for a public ­purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.291

The Santa Elena tribunal took a different view of environmental measures, stating that: Expropriatory environmental measures—no matter how laudable and beneficial to society as a whole—are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.292

In Methanex, then, an environmental measure that is non-discriminatory and for a public purpose was judged not to be an expropriatory taking unless the host state had given some specific commitments to the contrary to the investor.293 Methanex goes ­farther than this author would in as much as it declares that any non-discriminatory regulation for a public purpose is non-expropriatory (and also non-compensatory) as long as due process is satisfied and no specific commitments are given. The author not see here a ‘matter of general international law’ and prefers that only a narrower ­category of ‘super’ public purpose be considered non-expropriatory. In contrast to Methanex, Santa Elena took the view that the public purpose of the measure was irrelevant. Thus the fact that the measure in question was an environmental measure was not decisive to the question of whether or not there was an expropriation.294 The lesson here is that not all environmental measures are universally recognised as satisfying the elusive requirements of a ‘super’ public purpose.295 As a minimum, the

290  For an overview of the interplay between environmental protection and international investment law, see Kyla Tienhaara, The Expropriation of Environmental Governance—Protecting Foreign Investors at the Expense of Public Policy (Cambridge, 2009). 291  Methanex Corp v United States of America [2005] Award 44 ILM 1345. The issue of specific commitments is an important one is returned to in section 3.4.5 below. The conclusion that these takings are then automatically non-compensable is questioned below and is a key issue. 292  Compañía de Desarrollo Santa Elena SA. v Costa Rica [2000] Award 39 ILM 317 72 (ICSID). 293  The tribunal also required that the commitments be made prior to the investment. 294  One might seek to distinguish Methanex from Santa Elena on the grounds that the former was a ­‘regulatory’ taking while the latter was a direct taking. The Santa Elena reasoning, however, was extended to regulatory takings in Tecmed v Mexico [2004] Case ARB (AF)/00/2 43 ILM 133 (ICSID) in which the Tribunal relied on Santa Elena and stated (para 121) that it did not find ‘[any] principle stating that regulatory administrative actions are per se excluded … even if they are beneficial to society as a whole—such as environmental protection—, p ­ articularly if the negative economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or commercial use of its investment without receiving any ­compensation whatsoever’. 295  Another example is provided in Metalclad Corporation v Mexico [2001] Case ARB(AF)/97/1 40 ILM 36 (ICSID). In that case Mexico issued an ‘Ecological Decree’ to establish a Natural Area for the protection of rare c­ actus. Metalclad argued that this decree precluded the operation of its landfill facility (p 59). The tribunal ­concluded that this decree was enough to constitute an expropriation, implying that in the eyes of the tribunal this form of taking is not what has been labelled ‘super’ public purpose here.

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question depends on the facts and circumstances of the case, the views of the particular tribunal and, of course, any relevant language in the applicable treaty.296 Beyond the available investment cases, one can turn to soft law sources in an attempt to clarify the content of the ‘super’ public purpose category. The so-called Harvard Draft Convention on International Responsibility of States of 1961297 referred to tax, currency, public order, health or morality, exercise of belligerent rights or actions ­otherwise incidental to normal state action. EU law may instruct us further. Under European law governments may not take action that impedes the free movement of goods, services and money or the freedom of establishment unless the relevant government measure is motivated by reasons of health, safety and security (Arts 36, 52 and 62 TFEU). Though these rules are not primarily about investment, they offer a list of public welfare objectives sufficient to override important policy considerations. Host countries may still impose their own rules in these areas if the issues are sufficiently pressing, always subject to the requirement of proportionality and non-discrimination. But the ECJ has introduced some other categories under the notion of the general good where host country action may also remain appropriate, subject mainly to four conditions: the action must be justified by imperative public purpose requirements, must be non-discriminatory, suitable to achieve that purpose, and proportional.298 This is very much in line with what one has in mind when one speaks of public welfare or ‘super’ public purpose. The EU approach has even developed the same kinds of safeguards as those present in the international law of foreign investments. The ECJ has adopted an expansive notion of the general good, one that goes well beyond simply health, safety and security. The key line of reasoning was first formulated in the EU through case law in 1979,299 and became important in the financial s­ ervices area pursuant to the German insurance case in 1986 used in the area of ­consumer protection.300 It has since been expanded to the protection of workers,301 the protection of creditors, and the proper administration of justice.302 It is also used for

296  Note that in Marvin Roy Feldman Karpa (CEMSA) v United Mexican States [2003] Case ARB (AF) 99/1, 42 ILM 625 (ICSID), the NAFTA Tribunal confirmed that ‘governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes [etc]’. So much is clear but it should be noted that this does not by itself imply that there is no cause for compensation. Indeed it will be submitted that it is this (widespread) assumption that stands in the way of a more rational analysis. It may be recalled that the US Restatement (Third) of Foreign Relations Law refers here to general regulation ‘commonly accepted as within the police power of States’. This suggests a margin for appreciation but also that any resulting takings are non-­compensable. Again, in the thesis here presented, that remains to be seen and must be the subject of further analysis. 297  (1961) 55 American Journal of International Law 554. 298  Case C-55/94 Reinhard Gebhard v Consiglio dell ’Ordine degli Avvocati e Procuratori di Milano [1995] ECR I-4165. This entire area is of great importance in the EU and the operation of its internal market has given rise to highly important case law, to which Gebhard provides perhaps the best introduction. This case law can only be signalled here and summarised in the briefest of ways. Note that Waelde and Kolo (n 279) also make particular reference to EU case law although being less specific. 299  Joined Cases 110/78 and 111/78 Van Wesemael [1979] ECR 35. 300  See Case 205/84 Commission v Germany [1986] ECR 755. 301  Case 279/80 Re Alfred John Webb [1981] ECR 3305. 302  Case C-3/95 Reisebüro Broede v Gerd Sandker [1996] ECR I-6511.

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social ­protection,303 to retain the cohesion of the local tax regime,304 to preserve the good standing of the local industry,305 to prevent fraud,306 and in certain other special situations.307 Environmental issues are notably absent from this list, though they would perhaps be included if an appropriate case presented itself to the ECJ. EU case law and the Harvard list are not conclusive but, it is submitted, provide ­useful guidance. In the EU, the general good became in this manner a general and overarching concept, which could also be deemed to include the security, safety and health exceptions to the free movement of goods and the freedom of establishment, which the EU Treaties themselves had introduced. But although an expansive concept, it remains constrained and the EU in its Directives and Regulations tries to define and limit it in its effect on the free flow of goods, services and money, the essence of the internal ­market.308 This constraint derives from the nature of the relationship between the Member States and the treaty objectives themselves, especially because the resulting curtailment of cross-border movement goes against the basic concept of the Union and the operation of one open internal market. Nevertheless, in appropriate cases there is public policy of a national nature that overrides the internal market policy. International law may intervene here as well. The arbitral tribunal in Eureko BV v Slovak Republic309 suggested as much in a conflict between a BIT and EU public policy and it would then be higher than EU law.310 The conclusion is that treaty provisions do not stand alone or in a vacuum. Not being subject to these constraints, it is likely that the notion of the general good, or ‘super’ public purpose, in this sense has a more liberal and broader application in the international law of foreign investments. If so, the expropriation provisions of investment treaties would leave states with more, rather than less, authority to regulate their economies. On the other side of the balance, however, the F&E obligation might be interpreted strictly on the grounds that doing so promotes cross-border investment and is consistent with the preamble of many BITs. There may, therefore, be some ­tension between expropriation rules and F&E, and the way a tribunal perceives this relationship may affect its decision. Neither investment treaties nor arbitral decisions provide enough clarity to specify the precise contours of available public policy objectives sufficient to render a taking non-expropriatory. For this reason it remains necessary to manage the issue on a caseby-case basis, accepting that tribunals may not always agree. What matters most is that

303 

Case C-272/94 Guiot [1996] ECR I-1095. Case C-204/90 Bachman [1992] ECR 249. 305  Case C-384/93 Alpine Investments BV v Minister van Financien [1995] ECR I-1141. 306  Case C-275/92 Schindler [1995] ECR I-1039. 307  See Case 62/70 Coditel v Ciné-Vog Films [1980] ECR 881 in connection with the protection of intellectual property; Case C-180/89 Commission v Italy [1991] ECR 709 in connection with the preservation of the national heritage; Case C-353/89 Mediawet [1991] ECR I-4069 in connection with cultural policy; Case 55/93 Van Schaik [1994] ECR I-4837 in connection with road safety, perhaps extendable to environmental matters more generally. 308  In the financial area more particularly in the Markets in Financial Instruments Directive (MiFID 2004) and its implementation Directive and Regulation, see Vol 3, ch 2, s 3.5. 309  PCA Case no 2008-13 (2010). 310  See also AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary [2010] Case Arb/07/22 (ICSID). 304 

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the focus of the inquiry should remain on the question of whether or not a particular regulation is a matter of public welfare or ‘super’ public purpose. As the cases mentioned above show, not any public purpose will do. If there is public welfare or ‘super’ public purpose, however, the taking should be considered non-expropriatory. As we shall see, this still leaves the question of when these takings are lawful or unlawful and when they are compensable.

3.4.4  Incidental Government Takings as Non-Expropriatory Takings The second category of non-expropriatory takings consists of those that are incidental to ordinary government action. As an initial matter it is worth repeating the point from the prior section—if takings are public welfare takings, they are non-expropriatory. In that case, no inquiry into whether or not they are incidental to normal government activity is required from an expropriation perspective. The objective of this section, then, is to shed light on how and when takings that are not specifically in pursuit of public welfare could still be considered non-­expropriatory. As is true throughout the field of expropriation, the boundaries can be difficult to discern, but it is nevertheless true that government actions taken as part of normal public functions and which incidentally lead to a taking are often not considered expropriatory.311 This class of takings is sometimes referred to as ‘regulatory’ or ‘indirect’. We prefer to avoid this terminology because it seems to us that it obscures more than it clarifies. The term ‘regulatory’ evokes a narrower range of government activities that are often thought of as ‘regulation’. Normal tax policy, for example, is not typically characterised as ‘regulatory’ though it can certainly lead to a taking, which if incidental to normal government activity, would be non-expropriatory but could still be unlawful and compensable.312 The term ‘indirect’ is also problematic because the conventional understanding of the term does not accord well with the legal requirements for an expropriation. Government actions that amount to a taking can be quite direct and yet still be incidental to regular government activity. Taxes once again provide an example. The taxation of an investment is most accurately described as direct. To be sure, a general form of taxation

311  cf Saluka Investments BV v Czech Republic ICC 210 (2006) para 263, ‘international law has yet to identify in a comprehensive and definitive fashion precisely what regulations are considered “permissible” and “commonly accepted” as falling within the police or regulatory power of States and, thus, non-compensable. In other words, it has yet to draw a bright and easily distinguishable line between non-compensable regulations on the one hand and, on the other, measures that have the effect of depriving foreign investors of their investment and are thus unlawful and compensable in international law’. Note here again the idea that these takings are noncompensable. They are non-expropriatory, but may still be compensable, see s. 3.4.6 below. cf also the 2004 OECD Report Indirect Expropriations and the Right to Regulate in International Investment Law, which hardly clarifies these issues. 312  See for the consequences in terms of protection and compensation, WM Reisman and RD Sloane, ­‘Indirect Expropriation and its Valuation in the BIT Generation’ (2004) 75 British Yearbook of International Law 115.

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is not targeted, but it is a direct taking nonetheless. Securities laws and other information disclosure requirements offer other examples. These requirements are incidental to government action, but their impact on firms will often be direct rather than i­ndirect. Requiring, for example, the disclosure of information considered sensitive to the firm seems better described as a direct taking rather than an indirect one. The term ‘takings incidental to normal government activity’ fits the needs of the moment considerably better. Such takings are the result of burdens imposed by host governments in the normal exercise of their public functions in a non-discriminatory fashion. The requirement that the activity be in the normal exercise of a government’s public functions excludes essentially commercial activities. Thus, for example, the failure of a government to pay bills owed to a foreign investor would not be a typical public function, and so would not fit under this category. As the above discussion suggests, the class of takings incidental to normal government activity may encompass a great deal. There is little limit on what fits within the category other than the requirements that they be non-discriminatory and carried out in the exercise of a public function. They may even be ‘super’ public purpose, but the essence is that all are non-expropriatory. This leads to the question of how to handle especially confiscatory takings of this nature. Such takings are sometimes viewed as the paradigmatic example of expropriation and many investment treaties treat such takings as such. The US Model BIT, for example, distinguishes ‘direct expropriation, where an investment is nationalised or otherwise directly expropriated’ from ‘indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without a formal transfer of title or outright seizure’.313 The definitions provided in the US treaty should make it clear why distinguishing between direct and indirect expropriation is problematic. If an indirect expropriation has ‘an effect equivalent to direct expropriation’, why should the law treat the two differently? A further example may clarify. In a crisis situation, a host state may nationalise all nuclear power plants. It might instead change all management or it may try to micromanage all nuclear power plants in a non-discriminatory manner through regulation. This may even come about ‘indirectly’ by imposing new regulation on all public ­utilities of whatever nature. All can agree that the measures are for public welfare or otherwise incidental to government action. The result is a non-expropriatory taking. The essence is not how it is done but the question for the investor is the reduction in value of the investment, after having complied with all previous requirements, and what his remedy still is. Thus despite the common distinction made in treaties between direct takings, relying on the way in which formal title is handled, and other takings, it makes more sense to group takings as has been done—based on whether they are incidental to normal government activity (or specially targeted public welfare takings). As such, there should be no distinction between direct and indirect expropriation. It is clear that a seizure of property and title could be incidental to normal government activity and would not automatically be considered an expropriation, even if it were confiscatory.

313 

US Model BIT, Annex B.3-4 (2012).

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The proposed analysis is, of course, normative rather than positive. It assumes that the prevailing treaty law is consistent with the approach outlined. To the extent an applicable treaty provides clear guidance it must be followed. So, for example, if a treaty distinguishes direct from indirect takings, a Tribunal must consider the relevant text. Under the US Model, as mentioned above, an outright seizure of a foreign investment is seen as an expropriation. Under the treaty, then, a taking of title represents an exception to the above comments about takings incidental to normal government activity (and, for that matter, to the comments about public welfare takings). Even here, however, the proposed approach is useful as it provides a more coherent and tractable approach to the question of whether a taking is expropriatory and if this approach may be more widely understood and accepted, it could have an effect on treaty interpretation.

3.4.5  Lawful and Unlawful Expropriations. Non-expropriatory Takings Having described expropriatory and non-expropriatory takings, the question of ­lawfulness, which arises in both categories, is now considered. Only thereafter can the matter of compensation be determined. When a taking is expropriatory, we must still inquire into its lawfulness under ­international law. The familiar rule is that an expropriation made for a public ­purpose and in a non-discriminatory manner is lawful if compensation is paid. The precise level of compensation required is more contentious, but there is wide agreement that some compensation is needed. Most investment treaties, of course, require full compensation. In addition to these requirements, one can add that the expropriation must not violate due process or F&E. In other words, there is a connection between the legality of expropriation and the obligation of F&E. This relationship is explicit in many treaties, including the US Model BIT and NAFTA, which provide that an expropriation is lawful only if it complies with international minimum standards (which, in turn, are defined in the BIT as encompassing F&E).314 The F&E obligation, then, has at least two parts to play within the context of most investment treaties (and may also still have a CIL component beyond it). The first, as just mentioned, is as one of the elements, along with non-discrimination, public purpose and compensation, required to make an expropriation lawful. F&E here increases the chance that an expropriation is unlawful and connects it with a potentially expansive interpretation of the F&E concept. It second role is as a stand-alone obligation within the treaty. Indeed a violation of the F&E provision may constitute an ­independent violation, even if there is no expropriation. These two roles for F&E, however, have significant overlap. Where a lawful ­expropriation requires that F&E be provided, a failure to meet that standard will yield two violations—an expropriation and a violation of the F&E clause itself. In either case, some compensation is required, although compensation does not a­ utomatically cure

314 

US Model BIT, Arts. 5, 6; NAFTA Arts 1105, 1110.

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the F&E violation. Including the F&E requirement within the definition of ­expropriation may make little practical difference since even if it is not included there, it enters as an independent requirement for legality. In either case it seems that full compensation is likely to be ordered by a tribunal. This was the result in Metalclad, where lack of transparency in the regulatory regime was (contentiously) deemed a violation of F&E under Article 1105, which was deemed to require full compensation under Article 1110.315 Next the lawfulness of a non-expropriatory taking needs consideration. A non-­ expropriatory taking obviously does not violate the prohibition on expropriation, and so we must look elsewhere for a potential violation. One familiar pattern involves ­special government undertakings. There is some support in case law for the notion that the F&E provision converts a breach of special government undertakings or other assurances provided by the host government into a breach of the treaty resulting, potentially, in an unlawful expropriation.316 This approach, which renames a taking that would otherwise not be an expropriation as expropriatory simply because the government made some assurances to the investor, is resisted. It seems more sensible to acknowledge that a non-expropriatory taking can be a violation, and that this violation operates through the F&E obligation and that this may be so especially when government undertakings are breached. The key implication for present purposes is that takings we describe as non-expropriatory might be deemed unlawful. If the issue of lawfulness comes down to a breach of a government undertaking, the question goes to whether a sovereign can bind itself to commitments made through an investment agreement.317 If viewed as an inquiry of the content of the F&E obligation, we must ask at what point do government representations become so significant that a failure to honour them amounts to a violation of that obligation? There is no consensus on this point.318 Whatever the answer, it is clear that a more expansive ­interpretation of the F&E obligation (under the relevant treaty or CIL) would increase the likelihood that a non-expropriatory taking is unlawful.

315  Metalclad Corp v Mexico [2001] Award 5 ICSID Reports 209 (ICSID). Quite apart from the contentious expansion of the concept of fair and equitable treatment in this case, it would appear that the conclusion that a breach of Art 1105 may amount to an expropriation is correct. The reasoning in SD Myers, Inc v Government of Canada [2001] Partial Award 40 ILM 1408, decided at virtually the same time without apparently the benefit of knowledge of the opinion in the other case, may here be contrasted. In SD Myers, the Tribunal decided that there was a breach of fair and equitable treatment under 1105 NAFTA but it saw no expropriation and therefore decided on compensation according to its discretion. In neither case was there a public welfare taking or one incidental to ordinary governmental action, so in the analysis here defended and given the damage to the investment, there would indeed have been an expropriation: Metalclad was right. Full compensation would have been the standard, although in practice that may not have been different from compensation awarded for the ‘material harm inflicted’ in SD Myers. If there had been a non-expropriatory taking, the discretion in the matter of compensation (presumably under the fair and equitable treatment clause) would have been more understandable. 316  See eg Saluka (n 311) para 302; Metalclad (n 315) para 103; Generation Ukraine, Inc v Ukraine [2005] Award Case ARB/00/9 44 ILM 404 (ICSID), para 20.37; Methanex (n 291) IV D para 7. The Methanex Tribunal actually focused on ‘specific commitments’ with regard to public purpose takings, see text accompanying n 289. 317  On this matter, see Dalhuisen and Guzman (n 227) and s. 3.3 above. 318 Compare Glamis Gold (n 283) para 616; and Merrill & Ring Forestry LP v Canada [2010] NAFTA/­ UNCITRAL Award 210.

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The most common starting point for analysis of the F&E requirement is still the Neer case,319 which is quite minimalist and protects only against exorbitant treatment.320 It is possible for the Neer standard to reach flagrant breaches of earlier undertakings, but only if they are egregious. Some recent cases have tried to soften the Neer standard. ADF notes that the concept evolves over time so a state’s obligation reflects the requirement ‘as it exists today’.321 In Pope and Talbot322 the Tribunal dispensed with the Neer requirements that the conduct be ‘“egregious,” “outrageous” or “shocking,” or otherwise extraordinary’.323 In the recent Merrill & Ring case,324 business considerations were given greater weight, which served to lower the threshold necessary to find a violation of F&E. On the other hand, Genin325 and Methanex show how hesitant arbitrators were and probably remain to judge the regulatory policies of host states and to consider any resulting takings unlawful in the absence of bad faith. This is hardly an area in which the law is clear, but it can be said with some confidence that the host government intervention must be (objectively) quite bad, perhaps even requiring that it be idiosyncratic or vindictive. That was the message in Glamis. A less expansive notion of F&E means that the taking is more likely to be lawful, a more expansive notion increased the likelihood of unlawfulness. Host government undertakings also raise the matter of investor reliance on such assurances and their legal meaning under international law. With respect to government undertakings, one view is that it may be assumed that investors realise that a government has it within its sovereign powers to change its mind and so reliance on such statements may not be justified.326 It is not the purpose here to expand on this

319  LFH Neer and Pauline Neer (USA) v United Mexican States [1926] 4 RIAA 60 21 AJIL (1927) 555 (US–Mexico General Claims Commission). 320  See Glamis Gold (n 283) para 616. But see Merrill & Ring (n 318) para 210 (suggesting a lower standard). 321  ADF Group Inc v USA (2003) 18 ICSID Review: Foreign Investment Law Journal, 6 ICSID Reports 470 (ICSID). 322  Pope and Talbot v Canada [2001] Award on Merits 7 ICSID Reports 102, 122 ILR 352 (ICSID). The intervention of the NAFTA Fair Trade Commission and its restrictive interpretation, the discussion whether this amounted to amendment and on the retroactive effect are not further considered here. By tying the interpretation to the rights of aliens, the standard of protection under the F&E clause became the one accorded to local investors but that is a repeat of the national treatment clause except if the element of ‘effective market access’ were also included, a concept not tested so far in this connection. 323  Pope and Talbot (n 322) para 118. 324  Merrill & Ring (n 318). 325  Genin v Estonia [2001] 6 ICSID Reports 241, 17 ICSID Review: Foreign Investment Law Journal 39 (ICSID). 326  We enter here the world of the rights and obligations as between governments operating in their p ­ ublic capacity and private parties, which is the remit of administrative law. Concessions or similar investment agreements can be conceived of as administrative contracts and have often been so characterised in investment arbitrations, see ss 3.1.2 and 3.3.4 above. The consequences of such a characterisation remain unclear, because international law did not traditionally cover these relationships and has not yet developed a clear notion of administrative law. Arbitrators struggle with this although the subject is receiving increasing attention. See Hernán Pérez Loose, ‘Administrative Law and International Law’ in P Bekker, R Dolzer and M Waibel (eds), Making Transnational Law Work in a Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 380. See also Rudolf Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative Law’ (2005) 37 International Law and Politics 953–72. See for reliance also n 217 above. In (UNCITRAL Rules) Czech Republic BV (the Netherlands) v Czech R ­ epublic Partial [2001] IIC 61, the Tribunal found that the government ‘breached its obligation of fair and equitable ­treatment by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest’.

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important discussion except to say that notions of reliance and good faith operate here potentially quite differently from the private law of contract and they may play out quite differently, especially when governments give these undertakings in the exercise of their public function (de jure imperii). But even if they act as ordinary commercial partners (de jure gestionis), they may still have special ways out of the contract or ­similar undertakings if the public interest becomes engaged. For present purposes it is enough to note that to the extent a general legal rule ­protecting such undertakings exists, it must come from the F&E obligation. To complete the picture, non-expropriatory takings may be unlawful also for other reasons: non discrimination, proportionality and due process spring to mind. Again, they would derive from F&E protection, although there may also be analogy here with expropriations.327

3.4.6 Remedies The discussion so far has identified four distinct scenarios to consider: lawful and unlawful expropriations and lawful and unlawful non-expropriatory takings. Each of these four situations presents a different question with respect to compensation. To repeat what has already been said, for expropriations we commonly distinguish between lawful and unlawful expropriations and the key standard is full ­compensation.328 Indeed, compensation is one of the conditions to make an expropriation ­lawful, which casts compensation as a requirement for legality rather than a remedy.329 This curious formulation is no doubt explained by the fact that states do not like to be accused of illegality and to be punished. Compensation, however, is only one of the four conditions required for legality. The expropriation must also be non-discriminatory, taken for a public purpose, and

In Tecnicas Medioambientales TECMEDS v United Mexican States [2003] Case ARB (AF)/00/2, IIC 247 (ICSID), the Tribunal considered that the fair and equitable provision of the relevant BIT ‘in the light of the demands of good faith required by international law, requires the Contracting Parties to the Agreement to accord a treatment to foreign investment that does not go against the basic expectations on the basis of which the foreign investor decided to make the investment’. In LG&E v Argentina [2006] Award on Damages Case ARB/02/1 (ICSID),­ para 130, the Tribunal was more specific and required that the investor’s fair expectations have the following characteristics: ‘they are based on the conditions offered by the host state, … they may not be established unilaterally, they must … be enforceable by law, … damages arise except for those caused in the event of state necessity, the fair expectations cannot fail to consider parameters such as business risk or industry’s regular patterns’, but stability does not mean that the legal system remains frozen in time. 327  Technically, they might also become unlawful for breach of national treatment, most favoured nation treatment, violations of other treaty provisions, as the case may be, or of CIL beyond F&E treatment although the remedies may be different. 328  See Reisman and Sloane (n 312). For the available remedies in international investment law, in particular, Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2008). 329  Note that there have been some voices in the literature that argue differently. For Mohebi, ‘the non-­ payment of compensation does not, as such, make a taking ipso facto wrongful, rather it is a violation by the expropriating state of an independent duty which applies evenly to both unlawful and lawful takings’, M Mohebi, The International Law Character of the Iran-United States Claims Tribunal (Boston, MA, 1999) 289. Importantly in the context of the present discussion, it suggests that even lawful takings may require compensation.

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done in accordance with due process of law. It follows that even if there has been full ­compensation, the expropriation may still be unlawful. So, for example, if the measure was discriminatory, if there was no demonstrable public purpose, or if it was carried out without sufficient due process, it remains unlawful, even if compensation is paid.330 This form of unlawfulness—one that is present even when full compensation has been paid—raises the question of a suitable remedy. Perhaps reinstatement (restitutio in integrum) can be ordered by arbitrators. That would appear to be the only sensible remedy left, though it is not explicitly provided for. It is sometimes argued that the difference is in the measure of damages: fair market value in the case of a lawful expropriation as compared to the cost of restoring the prior position, but both are entirely compatible with the notion of full compensation.331 The real difference is therefore in the possibility of physical reinstatement or specific performance. At least in private law, the civil law tradition is specific performance. In the common law, on the other hand, it is exceptional. Treaty law332 does not specifically cover this problem, so the basis on which an arbitrator might choose it is difficult to identify. Furthermore, reinstatement is normally not considered a remedy under international law unless the relevant ­government co-operates. Without that cooperation it faces severe practical problems.333 Another possibility is that there simply is no remedy beyond full compensation. It is hardly unusual for international law to declare something unlawful without imposing a formal sanction. Perhaps the distinction between a lawful and unlawful expropriation is nothing more than the identification of the latter as impermissible. All of this suggests that the concept of unlawful expropriation may have little meaning beyond full compensation. Indeed, there may in practice be no difference between lawful and

330  Note that some arbitral tribunals have refrained from distinguishing between lawful and unlawful e­ xpropriation and applied the compensation provision of the BIT in either case, probably to avoid sensitivities. See Sedelmayer v Russia, Award of 7 July 1998, Chamber of Commerce Stockholm; Wena Hotels v Egypt [2000] Case ARBl98/4 41 ILM 896; Middle East Cement Shipping and Handling Co v Egypt [2002] Case ARB/99/6. 331  We may also think of the cases starting with ADC Affiliate Limited and ADC & ADMC Management ­Limited v Republic of Hungary (ICSID Case No ARB/03/16), Award of 2 October 2006, which, when assets increased in value, distinguishes for the assessment of fair market value between legal expropriations (date of the taking) and illegal expropriations (date of the award). 332  The issue was extensively discussed for customary international law in BP v Libyan Arab Republic, see n 224 above and the answer was that specific performance was probably not available, although it was even then suggested that special host governmental undertakings could make a difference. This subject of reinstatement does not get much attention in modern discussions but Art 1134(1) NAFTA mentions the possibility of restitution, as does Art 34 of the US Model Treaty but under both the host state may always pay monetary damages and the applicable interest in lieu of restitution. Art 54 ICSID renders only pecuniary obligations directly enforceable in the host state, but non-pecuniary obligations may be enforced elsewhere subject to the pertinent rules of sovereign immunity. 333  In international law, restitution is still considered to be the primary remedy, but in international investment law significant limitations to restitution apply and arbitral tribunals will on the whole refrain from issuing awards of a restitutionary nature, mostly for practical reasons. An example is the case of LG&E v Argentina [2006] Award on Damages Case ARB/02/1 (ICSID), para. 84, where the Tribunal rejected the claim to re-establish the pre-breach legislative framework: ‘The judicial restitution required in this case would imply modification of the current legal situation by annulling or enacting legislative and administrative measures that make over the effect of the legislation in breach. The Tribunal cannot compel Argentina to do so without a sentiment of undue ­interference with its sovereignty.’.

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unlawful expropriation at all if full compensation as of the day of the taking is being offered. If so, host governments could take for any reason and in any manner if they offer full compensation, though in the case of unlawful expropriations there are perhaps some additional reputational harms as a result of being seen to act outside the law. The reputational consequences would not be limited to the reaction of other states. An investor may prefer to invest in a country where unlawful expropriation is less, rather than more, likely. A country that engages in unlawful expropriation, therefore, may be seen as a less desirable host. There remains, however, a sense that the distinction between lawful and unlawful expropriations is minor. The more important distinction is between takings that are expropriatory and those that are not. In the case of non-expropriatory takings, the question of legality does not primarily hinge on the presence or absence of compensation but instead on whether there has been a violation of some other investment treaty provision. As already discussed, this makes the F&E obligation of central importance, and drives the inquiry toward matters of non-discrimination, proportionality and due process and probably also special governmental undertakings. To the extent there is a violation of the F&E obligation (or some other obligation), a strong consensus has emerged from investment tribunals that a non-expropriatory taking still leads to an obligation to provide compensation.334 Even if there is no unlawfulness of this nature, a non-expropriatory taking may still require compensation and would become illegal without it. In the above, the example was given of intervention in the nuclear power industry for public welfare reasons or as a result of the exercise of regulatory jurisdiction incidental to normal government action in the area, leading to a substantial diminution in value for the investor. For very good public policy reasons, the investor might be divested of the entire investment but that does not in itself discharge the host state from paying compensation assuming the investor has so far complied with all its obligations. Again, in our view, it is not helpful to move the taking in such cases to the category of expropriations. Rather it is a matter of unjust enrichment and restitution by the host state, but again we do not perceive this in private law terms. It is a question of F&E under international law. The question then becomes: How much value has to be seised for a nonexpropriatory taking to be compensable. There are rarely clear answers once one gets into this sort of line-drawing exercise, and none exist here. The best that can be said is to observe that if the burdens imposed on the investment are confiscatory, then the taking is still compensable in respect of a foreign investment.335 This may expand the de minimis rule or concept at least for takings incidental to ordinary government action which are legal. For illegal ones, there will obviously be more room for compensation.

334 See Metalclad (n 315) 113; MTD v Chile [2004] Award Case ARB/01/7 238 (ICSID); CMS v Argentina [2005] Award Case ARB/01/8 409-10 (ICSID); Azurix Corp v Argentina [2006] Case ARB/01/12 420 (ICSID); LG&E v Argentina (n 333) paras 58, 60. In the approach here defended, the author would have preferred an award under which the taking in Azurix was indeed expropriatory requiring full compensation rather than saying that nothing was taken so that relief could only follow under the F&E clause leading to full compensation in that manner. 335  Waelde and Kolo (n 279) 819 require an ‘excessive detrimental impact’.

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This leaves ambiguity and there is no consensus or clarity available on this question, and one should refrain from generating a false or unwarranted sense of certainty. Once again, there will be case-by-case resolution,336 but recognising the ambiguity within the framework proposed may itself clarify the situation. Thus there is a lack of complete clarity with respect to the measure of damages for non-expropriatory takings, whether lawful or unlawful. Even if an investment treaty applies, the standards of compensation are not necessarily the same as those for legal or illegal expropriation. In respect of these non-expropriatory takings, it need not ­necessarily even be the same for public welfare takings and takings incidental to normal host governmental action. In the absence of clarifying case law so far—SD Myers may give some hints—one must assume here some considerable discretion for arbitrators.

3.4.7  The Public Interest Discounted in the Quantum of the Damages? It has been argued that the public interest may affect the measure of damages and may be discounted in that manner over the express protection provisions of investment treaties.337 This is a more dubious approach. Either there is ‘super’ public purpose or there is not. If so the host government may be excused and there will be no expropriation but it may still have to pay damages for a non-expropriatory taking in the manner discussed above. It will not be full compensation. There is greater discretion depending on the circumstances, therefore the facts. To imply such a discretion also in the assessment of full compensation would appear to confuse the issues. Rather than mitigation of full compensation on the basis of overriding public interest considerations, in the present analysis, these should qualify the taking as non-expropriatory and thus lead to the possibility of lower damages or none at all in this more articulate manner. It is not a backdoor ploy.

3.4.8 Conclusion The purpose of this discussion was not to give precise solutions for individual cases, but rather to provide a better framework to explain and understand the issue of host government takings of foreign investments. The approach outlined may allow for a better and more coherent classification of cases and provides a useful roadmap for the resolution of future disputes that raise the critical question of when a taking is expropriatory, when it is lawful, and when it is compensable. Fundamental is to distinguish the questions of expropriation, legality and compensation. The treatment to be afforded any given taking depends on how it connects to

336 

Confirmed in Methanex (n 291) and Ethyl Corporation v Canada [1999] 38 ILM 708. A Kulick, ‘Sneaking Through the Backdoor—Reflections on the Public Interest in International Investment Arbitrations’ (2013) 29 Arbitration International 435. 337 

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these three legal issues. In exploring the importance of each question, we also highlight the importance of the F&E obligation under either CIL or treaty law. With respect to expropriation, for a taking to be an expropriation its impact on the value of the investment must be more than de minimis, and it must not fall into either of the two categories of non-expropriatory taking: those that promote public welfare (‘super’ public purpose takings) and those incidental to legitimate ordinary government activity. Whether expropriatory or not, a taking can be either lawful or unlawful. It is well established that an expropriation is lawful if it is made for a public purpose, in a nondiscriminatory manner and the required compensation is paid. It also must not violate the requirements of due process and F&E. If any of these requirements are not satisfied, it is unlawful. A non-expropriatory taking can also be unlawful, most importantly by violating the F&E obligation. Of particular concern here is the importance of government ­undertakings—at what point does a government’s failure to honour its prior promises violate the investor’s right to F&E? The remedies appropriate for each situation were also discussed. Expropriations require compensation, and investment treaties almost always require that it be full compensation. Whether some other compensation is required for expropriations that fail the test of legality for other purposes (eg, those done in a discriminatory manner) is not clear. If such additional compensation is necessary, it is hard to know what it would be—perhaps some form of restitution? Or perhaps there is simply no additional compensation in this situation.

3.5  The Transatlantic Trade and Investment Partnership (TTIP) The EU 2014 Questionnaire and Subsequent Action 3.5.1  Introduction The dispute resolution facility through international arbitration has now become the model in BITs for foreign investment protection, supported by the ICSID facility under the Washington Convention as we have seen. It has not remained unchallenged and in connection with NAFTA gave rise to an early discussion in the New York Times in 2001.338 Undoubtedly the progression to arbitration with respect to foreign investment

338  This discussion focused on the role of private arbitrators under the NAFTA to decide disputes relating to the guarantees foreign investors were given against direct and indirect forms of expropriation. Until that time, it had been broadly understood that ordinary local courts were not the most suitable venue for disputes in this area, not only because they were often parochial and could therefore create little foreign investor confidence, but also because their appeal systems meant that these foreign investment disputes could go on forever. In the discussion that followed, it was nevertheless suggested that private dispute resolution of this nature ousting the ordinary courts in host countries was improper and could in particular defeat these countries’ legitimate public policy concerns, but it was these treaties and not their dispute resolution systems that created the applicable regime and made the difference in this regard.

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under modern BITs was an extraordinary development, now supported by treaty law, therefore by the full force of international law, to private recourse in foreign investment under that law rather than to diplomatic action between governments. That still remains the normal facility in international trade, although strengthened within the WTO, but for alleged violations of the trade rules, private parties still remain dependent on their government to take action (or even retaliate as has become possible under the WTO). The critique of foreign investment arbitration, which centred on the national courts (in the US) being deprived of jurisdiction in matters of public interest where private dispute resolution could be considered less appropriate as a matter of principle, subsided when the US won all early (and later) NAFTA cases. In the context of the TTIP negotiations, the Guardian newspaper in the UK voiced similar reservations in ­November 2014, although it was not immediately clear whether the arbitration facility itself or all special protections were being attacked, or whether the EU was merely seen as depriving UK courts of jurisdiction and infringing on Member States’ sovereignty. This criticism, which found a resonance in the European Parliament and some national parliaments, notably that of the UK, but also in the press in France and ­Germany, managed to unsettle the European Commission in the context of the discussion of a prospective dispute resolution facility in the TTIP between the US and the EU and concerned the position the EU should take in that context. It soon appeared that the EU had no clear idea itself but sought to accommodate very different points of view. It was, however, correctly realised that the issue was not merely the application of the foreign investment protection rules of the treaty. Even if arbitrators were on occasion liberal, it was always within the powers given them by these treaties. Thus soon the entire treaty structure of foreign investment protections as it had developed under BITs came under scrutiny, including the definition of a foreign investment, the issue of stability, and then also the facility of arbitration itself, as we shall see. Resuming the discussion in section 3.4 above, the key issues are always the takings by governments, and therefore value reductions with respect to foreign investments resulting from host government action (provided such reductions were more than de minimis). When do they amount to expropriations and are therefore expropriatory takings, and when are they not? In the case of expropriatory takings, when are they illegal and what kind of compensation is required even if they are still legal? But also with respect to non-expropriatary takings, there still arise serious issues of legality and compensation. These issues may be clarified and the arguments simplified by reducing them to three clusters: (a) when are takings expropriatory and non-expropriatory? (b) when are they legal and illegal? and (c) when are they compensatory or non-compensatory? It may be noted in this connection that much anxiety derives from the idea that under these investment treaties (and under governmental undertakings in investment agreements whether or not they are supported by umbrella clauses), host states are supposed to have given away their sovereignty and have lost control over the foreign investors. International arbitrators are then seen as the mouthpieces and defenders of that order. This is of course not at all the case. BITs and investment agreements will define the risks of host government action and who bears them, but even then it is well known that there are super public policy considerations as peremptory norms that allow

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governments in appropriate circumstances to ignore their guarantees and assurances given in this regard and that under customary international law they may also ignore these commitments when the takings are incidental to their ordinary governmental activity. This was also discussed in section 3.4 above. For the present purposes we need not go into further detail on investors’ protections and on host country exposure except to note that (a) whether there is i) super-public purpose or ii) activity that is merely incidental to ordinary governmental action and whether there is still a need for compensation, even if there is no illegality but still confiscatory action or considerable host government enrichment, and what such compensation should be, whether or not it falls under Fair and Equitable (F&E) clause, allows for a wide range of opinion as to what the solution in each case is. This is so exactly because it concerns public policy and its impact; (b) these issues are the ones likely to be at the heart of all dispute resolution in this area (besides issues of of jurisdiction) arising under investment agreements (whether or not supported by the ICSID mechanism with respect to host states being Members), or under BITs or multilateral investment treaties where the ICSID mechanism may still be chosen instead of other venues like the one under the UNCITRAL Rules; (c) there is also a question whether these public policy issues are truly justiciable, meaning that there may be sufficient guidance in the texts themselves for arbitrators or courts to decide these issues or whether it forces them into a law making function that exceeds their normal role in dispute resolution. This would suggest that the ISDS in BITs may always have been a bridge too far and needs reconsideration. To repeat, we have three types of dispute resolutions in this wide area of possible argument where there is great case sensitivity, exactly because of the public policy flavour. They are (a) arbitration, (b) the ordinary courts (either domestic or international), and (c) state to state or diplomatic intervention. All three should be considered in greater detail with regard to their nature, effectiveness and appropriateness.

3.5.2  The Dispute Resolution Options (ISDS) To start with investment arbitration: arbitration is, as we have seen, commonly defined by three features that distinguish it from court proceedings. (a) There is procedural flexibility and parties are in principle in charge and also appoint their own arbitrators. (b) The proceedings are adversarial and are not inquisitive. This means that they depend on the submissions of the parties and even the law, like everything else, is pleaded as fact. (c) Consequently, there is no appeal on points of law (or on any other), the issue of precedent does not arise, and there is no concern with consistency. It all depends on what parties bring to the table; arbitrators do not have an autonomous law finding, law making or law enforcement function—they are not judges and do not institutionally have that status which is commonly not conferred on them by arbitration clauses

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either (see the discussions in section 1.1 above). In this approach, arbitrators are only to decide the disputes submitted by the parties, as the latter define them and their powers are limited. The only issue is for them which arguments are the more plausible and one does not need lawyers to decide these issues. Just as lawyers may decide construction disputes on the basis of expert witness testimony, non-lawyers may equally decide legal issues upon saucg testimony. Thus arbitrators, especially international ones, are not to start any new argument or reasoning of their own, which would go beyond what is in dispute between the parties and they cannot resolve issues that have not arisen between them. Thus if one party says it is black, and the other party says that it is white, it will be either black or white and arbitrators cannot find that, on a proper interpretation of the applicable law, it is green. This is one type of dispute resolution and became the preferred one in investment dispute settlement. To repeat, broad discretion in the formulation and interpretation of the applicable law as related to the facts of the case is not then an issue, the limit is the parties’ submissions and their dispute as they define it. No other. It may be recalled in this connection that common law courts traditionally also behaved much like umpires in an adversarial approach, unlike civil law courts who tested the system of their laws more pro-actively in an inquisitorial manner. Even if common law courts especially in the US became more inquisitorial and in the UK engaged increasingly in came management, the situation did not change in international commercial arbitrations (except as we shall see when the public interest became more involved). It may also be noted in this connection that arbitration and what it means or entails as a dispute resolution mechanism in foreign investments seems not to have given rise to a great deal of fundamental discussion when originally introduced. One might have thought that it would have been an issue at the time of the drafting of the Washington (ICSID) Convention, but it seems not to have been so. That may seem surprising but is not if one realises that for the drafters of the Convention the arbitration clauses in investment agreements were a given and the issue was to give them a status under international law. This lack of interest, as far as I have been able to check, also spilled over into BITs when they started to become popular, although not all opted for arbitration and in some of the older ones domestic courts in the host state remained competent and in others there remained also the issue of the exhaustion of domestic remedies. As a practical matter and depending on the circumstances, this could also be beneficial for the investors, who in any event might want to retain that option. Dispute resolution of this arbitral type was simple and could also deal with the broad discretions left under the applicable rules as all depended on how parties presented their case and the meaning of the rules themselves even if public interest oriented. But the situation shifted where arbitrators assumed an autonomous function in the process. That started in commercial arbitration when competition issues became arbitrable under Mitsubishi in the US while the idea that arbitrators might have to raise these issues themselves, or at least could do so, took hold under ECO Suisse in Europe (see n 53 and sections 1.1.10 and 1.3.8 above). Potentially, arbitrators thus started to speak for the public interests autonomously. That raised important issues as to their powers which could not then any longer derive from the arbitration clause itself. In matters of other market abuse like insider dealing, money laundering, corruption, they

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could acquire similar powers (see further section 1.2.5 above). It suggested that even in commercial disputes arbitration could become a hybrid form of dispute resolution, somewhere between the original adversarial idea and the inquisitive model. For arbitrators it raises serious issues about their status, their legitimacy to deal with these issues, accountability and supervision as already discussed. Questions of consistency and precedential value of the decisions in these areas then also arise, as does the matter of appeal. Foreign investment arbitration had already drifted into that direction, whether or not it was originally so intended. In fact, Article 42 of the Washington Convention always suggested some autonomous law finding authority in arbitrators. BITs and NAFTA followed. It was also much favoured by the arbitration community which preferred to see itself as pseudo judges and liked that status, an attitude on the whole much encouraged by advocates. One incentive for them was undoubtedly the legalistic result and legal sophistry that accompanied it which confirmed the dominance of lawyers and allowed the effective monopolization of this type of dispute resolution between them. Even lawyers outside this inner group were made suspect having no experience in this art, not being part of its priesthood. Although in commercial arbitration this led to a great deal of unease (see n. 26 above) in foreign investment arbitration, this justicialisation was generally welcomed, and was sustained by the informed press that talked about greater certainty as if the field was sufficiently mapped out or could be, but the danger for the arbitrating profession was always that this mapping out was then better done by courts as it required a great deal of law creation. It was not then merely the investor protection itself but also how it was to be distributed or superseded under more objective rules that became the issue. The determination of super-public purpose as an excuse against more protection or whether the taking was pursuant to ordinary government action and even then whether it was still confiscatory or legal in terms of discrimination, proportionality and due process thus became key issues, supposedly to be determined in a more objective legal framework that could be invoked, elaborated and perfected in the relevant dispute resolution process by the decision takers themselves, but it questioned the suitability of arbitration itself and the proper dispute resolution method in such situations. There is a closely connected question and this one is no less fundamental: Is there a system of law to be developed in this area and is dispute resolution subservient to it? This was much the subject of Professor Michael Reisman’s Freshfield lecture in 2012 responding to the Glamis Gold Case, see section 1.1.11 above. Are the issues raised in these disputes so case-specific that no jurisprudence constante can safely or reliably develop, or putting it otherwise, can these public policy considerations ever be mapped out in a rule based manner? Glamis at least thought that we should learn to think in such a framework. This again would favour a court system for its development, although the author himself believed that the area remains too case specific and therefore too fact based. That may favour the continuation of an arbitration mode, in which only in the case of clear gaps in the applicable law, would arbitrators assume a law making function. But if it is true that these gaps are still so frequent and large, that role would still be substantial. Even so, case specificity might continue to mitigate against (a) court like system seeking, (b) the dictates of consistency, and (c) the rule of precedent, as indeed

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the ICJ also recognises and practises because international law is not considered by it to be sufficiently developed. For the same reason there is no appeal in these arbitrations, as indeed is also uncommon in international courts partly because they do not need to resolve differences in lower courts. Another issue that may be considered in this connection is what greater justice means. Professor Steven Ratner in his book “The Thin Justice of International Law” (OUP 2015) reflects the above mentioned critique that host states may be prevented from implementing their policies, which was already shown to be incorrect when it comes to super-public purpose takings or takings incidental to ordinary government action, even if this leaves a wide margin for differences of opinion. Other concerns are that foreign investors’ protection may favour the rich elites in host countries but harms the poor through corruption, abuse of cheap labour, environmental degradation and the like. In the meantime, another problem may be that what little local activity is still there (in less developed countries) or may develop is disadvantaged because foreigners have a better (tax and regulatory) deal, which is stabilized against further burdens. The question thus becomes whether other peremptory notions develop to impact on and vary the investor protections and guarantees under treaty law further: are the treaty rules of investment protection also to be considered in the light of their promoting social peace, human rights, redistribution and social welfare, or the rule of law in terms of procedural fairness and due process for all? Again, courts might then be better placed than private dispute resolution through arbitrators to consider these issues and make new law, although one may question whether they could be local courts. One may then even ask whether home states have a duty to supervise their investors when they operate in foreign countries. That may also concern the issue whether they pay proper taxes, respect the environment, do not abuse labour, and observe competition rules of the host country. Do home governments also have supervisory obligations in this respect which are justiciable, if necessary in their own courts? One must also consider the arbitrators themselves. Who are they, what do they represent? Undoubtedly the standing of international arbitrators has been damaged by their exalted idea of themselves, their covetous attitudes and craving for new cases, and by the bureaucracies that surround them where there may be a symbiotic relationship that threatens them both. Arbitration is a business and it is in the nature of all businesses to strive for monopolization. Amongst an insider crowd of arbitrators and law firms, at first much manifested in the International Council for Commercial Arbitration or ICCA (before its opening up which made it a jamboree of arbitrator hopefuls and insignificant at the same time), cross appointments and mutual advancement became common in the various Secretariats if not also in the courts of the established arbitral institutions. These Secretariats and courts which may exert great power over appointments and the handling of cases (often at the invitation of arbitrators who have too many) are like all bureaucracies characterised by four features: (a) they want more power and influence, (b) they do not want liability for their action, (c) they gravitate towards the lowest common denominator, and (d) they leak like a sieve. It takes a strong leader to avoid these pitfalls and a good (and published) internal rule and procedures hand book to keep order. Some Secretariats and courts have been more successful at this than others.

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As far as the arbitrator blend itself is concerned, they were once modest but have become prone to a narcissistic disposition that might make investment bankers blush. It is embarrassing for students to see their large fees and the challenges. Even for large rewards, they may not write their own awards but hire others to do so, an issue that arose dramatically in Yukos Shareholders v Russia (2014). What are such arbitrators thinking in terms of public respect especially when they mean to deal with key public policy issues and then find that these awards are challenged because of their own behavior? Their obligation always was to make sure as best as they could to make their awards enforceable. It has created anger (and jealousy). No wonder that the informed press wants an international court for foreign investment disputes. This author does not believe, however, that international arbitration in these matters is completely broken, but it needs proper supervision and accountability. There is now an uphill struggle for credibility and legitimacy—indeed not unlike the situation of investment bankers and a court system may be needed to calm the situation, but it would show that the true issue remains the nature of the protections themselves through a clearer definition of the rules, which the EU is trying to acieve. That is the issue of calibration which in the EU is also conducted with respect to the general good, especially in financial regulation (MiFID), although it can never exhaustively define the concept. The idea of supervision of these arbitrations through an international court especially set up for this task, not as an appeal court, but with a possibility for arbitrators also to ask preliminary opinions in matters concerning public policy and order (which may themselves become coordinated in the supervising specially created international court) is proposed throughout this book (see also section 1.1.12 above) and could also be the way forward for the TTIP. If the alternative is to be ordinary courts, there are two options, the national courts of the host states or an international court. We might not dwell too long on national courts. Courts in the US, Canada and England could handle these issues. In the case of TTIP, that is also the view of Senator Warren and others in the US. They believe foremost that domestic public policy is better considered (and favoured) in this manner, which is not necessarily the objective perspective one should look for in dispute resolution. It recalls the discussion in the New York Times already referred to in the previous section. Foremost, national courts might not see themselves as international law creators, acting as international courts on those occasions; they may instead pursue local policies and legal concepts. Especially in Europe, there are many countries where there must be other doubts about the involvement of local courts, not in the least also in their appeal function, the time that would take, procedural niceties, language issues, etc. In the TTIP, the jurisdiction in these matters could, however, be attached to the ECJ. It has already been said that there may be reasons why the investor in particular situations might also prefer local courts, but the better alternative would then seem to be a specialised international court to be set up by treaty law, in the case of the TTIP by the relevant treaty itself. It might be offensive to the US as a matter of pride or policy and may look less good politically, but in practice it might not be that different from giving these powers to international arbitrators with enforcement provisions in the treaty and might be a better way to develop the law in this area if that is what is truly wanted and achievable. The EU Commission as we shall see in section 3.5.6 below, propose here

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a two tier system, a lower court which still has some arbitration features and then an instance of appeal on both points of fact and points of law. The question of appeal itself remains, however, contentious in such an environment. An appellate mechanism commonly has three functions: (a) control of the decision makers, (b) correction of errors in law making and law application, potentially even reconsidering the facts, (c) issues of consistency, precedent and potentially system clarification and system building. The latter two functions suggest that we can see what errors of law and fact are in the broad areas of policy where reasonable people may differ as to the meaning and application of these policies. It assumes that we have a concept of like and like in these matters where fact situations may prove to be and are usually very different and everything seems more case specific. It assumes indeed that there may be a rationality here that is not obvious, nor is it clear that it can be developed, see the discussion above. If on the other hand we must accept that rules cannot be sufficiently clarified by a judicial system, even courts may not provide the appropriate dispute resolution facility and we would have to revert to intergovernmental or diplomatic solutions. That remains the system of dispute resolution under the WTO and is also recommended by the Economist Weekly. A state-to-state diplomatic resolution process is also still active especially under the older Treaties of Friendship, Commerce and Navigation as we have already seen. A related idea is to have at least interpretation committees of contracting states which can give binding directives to courts, assuming always of course that they would be able to agree on anything. It would suggest an unfortunate blend of judicial and political power in dispute resolution, but, whatever it is, this approach indicates that a more judicial system of dispute resolution as developed under BITs may be seen as having been an overstep.

3.5.3  The EU Questionnaire In its efforts to regain some control of the situation, in March 2014 the EU Commission published a Questionnaire, which expressed newer ideas and sought further guidance. It published a summary of the answers in January 2015 and a Concept Paper for further action in May 2015, invoking especially a new text which it had concluded in December 2014 with Canada (CETA). It was followed by an EU proposal for investment protection and dispute resolution in Nov. 2015 that substantially deviates from the existing model, see section 3.5.7 below. The first Question of the EU March 2014 Questionnaire concerned the ‘Scope of the Substantive Investment Protection Provisions’ and concentrated on the issue of ‘investment’ (see the discussion in section 3.1.4 above). What is a foreign investment? The substantive protection under BITs, NAFTA and eventually TTIP, if this protection is to follow what has become the model, is part of administrative law protection, which through a treaty gains the status of international law. It may be recalled that originally this protection was sought by investors through concession or licence agreements, which had difficulty reaching a sufficient level of certainty under customary

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i­nternational law as sovereigns cannot irrevocably bind themselves under domestic laws and private investors did not have sufficient standing under public international law to defend themselves. Whatever modern treaty law texts may now say or provide (which may be confusing while Art 25 of the Washington Convention notoriously left the issue open), a foreign investment for purposes of treaty law can not be expressed in terms of private contract or property rights. The issue is one of administrative protection only. It was submitted that investment in this sense properly considered is an administrative licence, although to gain this special (treaty) protection, there are some confines. Foreign investors are only those who make longer-term commitments and are not traders or speculators. Investments of this nature are usually a package but they could also be a portfolio of bonds or a loan, all in principle intended to be held to maturity. There is no watertight definition and descriptions only lead the way, but there may be further limitations. ‘Investments made in accordance with the applicable law’, is the definition the Commission appeared to like, but it has no clear meaning. It immediately raises the question: which law? It is likely to be the higher treaty law and not host country law where they conflict. This points to the complicated problem of the applicable law, especially when chosen by the parties (see the discussion in s 3.3 above). The sum total is that it is likely not to be the law of the host state when it matters most for them. There is also the question of time. Here the Commission seems to want to move away from the text to which it subscribed itself in the CETA, referring to the applicable law ‘at the time’ of the conclusion of the Agreement. With respect to host country laws, that is the issue of stabilisation, dealt with in the next section, a concept which the Commission now appears to start to reject, but which was always the essence of investment protection and earlier of concession or investment agreements.

3.5.4  What Protections are Justified and How do They Relate to Evolving Public Interest Concerns of Host Governments? Investor-State Dispute Settlement (ISDS) The second Question focused on ‘Non-discriminatory Treatment for Investors’. The expropriation/compensation clause, the MFN clause, the National Treatment clause, the F&E clause and the Investor-State Dispute Settlement (ISDS) system have become the heart of treaty law in this area. The key is the stabilisation of the legal regime. Host governments can give further undertakings, which are subsequently also enforceable under international law, as concession agreements under umbrella clauses in BITs may also be. If the EU now means to limit in particular the MFN clause but also the F&E and ISDS clauses, and rejects the notion of stabilisation they embody, it aims in essence at a different foreign investment protection set-up altogether. Quite apart from whether that would be acceptable to the US, the motivation now seems to be politics in Europe and a defensive attitude at the EU level following the press reports already mentioned. Yet it risks lacking sufficient clarity and may be

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based on a poor understanding by the public, especially focused on what ISDS tries to achieve. The Commission states that only in ‘rare cases’ may there be a need to deviate when even discrimination against foreign investors may be justified but did not elaborate. In this connection, the Commission seems to be especially exercised about the MFN clause, which was always at the very heart of international protection of this nature, originally especially in the GATT with respect to the trade of goods, and was as a concept a compelling success. If the importation of protection standards offered to others now becomes offensive, the real question is why they were given to others at all. It becomes a discrimination issue. It has already been said that the new approach is progress in so far as it acknowledges that it is not arbitrators but the treaties themselves that give the extra protections, especially against later host government policy measures. To repeat, these protections are only enforced and not created by international arbitrators even if one allows for liberal interpretation on occasion, which may give rise to some criticism but is not the real issue here. If the EU now wants to create another balance, it would seems that there comes a moment when one must ask whether there is still much meaning and whether foreign investment could then still be part of the TTIP. What does the EU want, not only therefore in terms of dispute resolution but in all that may lead up to it? Although the main issue for the Commission in this Question was the furtherance of domestic public policies rather than ISDS itself, both the conflict with domestic public policy developments and the ISDS issue should be put at the centre of the discussion and the accompanying sensitivities firmly addressed. Yet it is necessary to make proper distinctions. When it comes to the furtherance of domestic public policies, not every host country public interest is sufficiently compelling to override treaty law if it is still to have some meaning. We must therefore first define what is compelling or ‘super’ public purpose since presumably all government activity has some public purpose.339 Not every consumer, environmental or financial stability measure qualifies to supervene the treaty protections, but some do. The EU case law on the general good may be of interest with regard to this (see s 3.4.3 above). On the other hand, there are also measures incidental to ordinary government action that may also be considered outside the treaty protection and, even if not pursuing a special higher public interest or ‘super’ public purpose, must equally be accepted by foreign investors. That is CIL, which is often further elaborated in the F&E clause. These two very different categories of exceptions (which are not new) were discussed in section 3.4 above and further mentioned in section 3.5.1 above: (a) ‘super’ public purpose measures and (b) measures incidental to normal government activity may be identified as resulting in non-expropriatory takings, but another key here is that there may still be some form of compensation, especially if the measures amount to unjust enrichment of host governments, are (even when incidental) still confiscatory, breach special governmental undertakings, or were discriminatory or disproportionate and therefore still illegal, but may not require full compensation since there is no expropriation proper. This picture, it was submitted, simplifies and we should concentrate

339 

See again Dalhuisen and Guzman (n 255), and further s. 3.4 above.

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on it while discussing ISDS where it may be tested in light of the totality of treaty law protections. These should not be curtailed per se but the exceptions should be better defined when host government policies may still prevail and under what conditions. It will later be argued that in these matters arbitrators should seek preliminary opinions from a court or similar facility established under the Treaty. The third EU Question was connected and looks into the meaning of ‘Fair and Equitable Treatment’. The EU Commission is seeking to ‘clarify the standard’. In doing so it should be understood that the subject of the F&E clause is not only protection, where CIL may always have confined it; the Neer case law (see s 3.4.5 above) is still valid but greater restrictions could be introduced in the treaty, indeed F&E itself does not always deal with more rights and may itself be restrictive. Importantly, it also fills gaps in the texts, much as good faith does in private contract law (although good faith and reliance may have a narrower meaning in administrative dealings where governments have more options, an especially important point with respect to special governmental undertakings under international law, see section 3.4.5 above). The F&E clause will deal with that and may also elaborate on the realm of non-expropriatory takings, their definition, their lawfulness, and the compensation regime. It is this entirely different but essential (supplementation) aspect of the F&E clause that seemed to be largely and wrongly overlooked in the ideas of the Commission. The fourth Question dealt more particularly with ‘Expropriation’. In section 3.4.4 above, the distinction between direct and indirect expropriation was rejected as unclear and confusing, and it is suggested that the Commission should seek similar clarity here rather than perpetuating the present obfuscation. For example, regulatory and tax measures are usually considered indirect, but their effect may still be confiscatory and therefore very direct. To repeat, it does not mean expropriation if these measures are accepted as overruling the treaty protections by being ‘super’ public purpose or by being incidental to ordinary governmental action, but there may still be a taking and therefore a need for some compensation. In respect of the previous Questions it has already been said that there may still be compensation, although more so in the case of illegality, but that does not make for expropriation either, only for a higher measure of compensation under the F&E clause, which may even then not be full compensation. It is for ISDS to decide although, again, it would be helpful if the TTIP Treaty further defined here the categories and options. It could greatly simplify the picture. The fifth Question dealt with ‘Ensuring the Right to Regulate and Investment Protection’. This seems to come to the heart of the problem already foreshadowed in the previous Questions. It would appear particularly unwise to carve out special areas from treaty protection beyond ‘super’ public purpose measures and measures incidental to ordinary government action, both subject to their own rules of compensation as nonexpropriatory takings under the F&E clause as already explained. It may create far more problems than it solves. Also, where should disputes concerning them (eg competition issues and impact of subsidies, which can be very destructive of foreign investment) go? Multiple dispute resolution systems would start operating side by side. All would end up in a litigation culture. To repeat, consumer, environmental, even financial stability and similar issues should be distinguished not on the basis of field or substance but only on whether there is an

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overriding domestic public policy issue at stake or otherwise whether the measure was incidental to ordinary government action.

3.5.5  Investment Arbitration and the Suitability of Investor State Dispute Settlement (ISDS) Through Arbitration The subsequent questions dealt with ISDS in particular. The essence of all dispute resolution in this field would appear to be a prompt resolution mechanism. National courts are simply not the proper venue because of lack of experience (in most countries), language problems, potential regulatory bias and endless possibilities for appeals and other procedural complications, which only benefit lawyers and create a litigation culture that should be avoided at all costs. This has long been recognised. Arbitration is by no means ideal but it has proved to be the only viable alternative if ISDS is to be maintained. It can be more firmly institutionalised. Its real problem is the lack of supervision of arbitrators and their behaviour, which is a matter of accountability and transparency and also affects credibility and legitimacy. Responsible arbitrators should long ago have asked for such supervision and arguably it should now be imposed. This will be elaborated below. ISDS in the form of arbitration should therefore continue but it must be supervised by a specially appointed court or similar authority created under the TTIP Treaty. Importantly, arbitrators should also be able to ask for preliminary opinions from this body if the defence of ‘super’ public purpose is raised by host states or when the question of whether incidental measures pursuant to ordinary government action are still illegal or clearly confiscatory arises. The sixth question deals with transparency. The true issue is not publicity proper; the EU Commission might overemphasise it, although it could be improved by, for example, publishing all pleadings (the awards are already published). But one would have to be careful in opening up the arbitration hearing itself to the public as it may become unmanageable and a broad discretion must be left to the Chair in terms of what it can handle. Again, the issue is rather transparency and accountability of arbitrators. As a start, as in the case of ordinary judges, their fees should be published and all connections with the law firms should end. A code of conduct is further suggested. There the keys are enforcement, effective supervision on that basis and probably the need for a court. The seventh Question dealt with ‘Multiple Claims and the Relationship to Domestic Courts’. It may now well be that the EU has to say that it favours domestic courts in principle although it correctly points out why this venue is hardly suitable. That should be accepted and it may be better to make this clear up front. It has already been said that any ambiguous EU approach to the jurisdiction of arbitrators invites parallel proceedings, which are highly undesirable and only promote a litigation culture in which nothing will be promptly settled. Again, the only true issue is to make ISDS through arbitration more palatable through better supervision and preliminary opinions in distinct areas. No more, no less.

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The eighth Question dealt with ‘Arbitrators’ Ethics, Conduct and Qualifications’ and closely follows from the sixth Question. Again, the prime issue is one of supervision where a code of conduct as well as roster may indeed be helpful, but one important issue has always been proper access to the arbitration profession. Established arbitrators have constantly sought to limit it and there is much evidence of monopolisation within a small group which also dominates the bodies of the appointment institutions or agencies. This must be broken in investment arbitration and a supervising court or similar authority is very much needed to create and maintain order. Of course experience in arbitrators is important, but how does one get it if one cannot participate? We need a more diverse group and also younger people. Risk can and must be taken here subject to the ultimate supervision of the court, which should maintain the proper discipline. This should not be left up to the arbitrators themselves, whether or not they act together with their law firms. Impartiality and independence of arbitrators has already been mentioned; in particular any affiliation with law firms should end: people should not be both arbitrators and advocates. The appearance of impartiality and independence is as important as the facts and should be maintained at all times. Investigation, disclosure and information duties of arbitrators should be strictly enforced. The court should be able to remove arbitrators and should not need to give reasons (which invariably would impact reputations and the ICC model). Question nine asked about ‘Reducing the Risk of Frivolous and Unfounded Cases’ and the court or similar facility established under the Treaty should have the power to summarily dismiss cases which are in its view frivolous. Question ten went into ‘Allowing Claims to Proceed (filter)’. The issue of financial stability is used as an example and is real, as has already been mentioned several times before. In the approach defended here, the key is, however, that it should not be seen as a different area of government intervention, but rather in terms of ‘super’ public purpose or measures incidental to ordinary governmental action. Regulators and others should be allowed to file amicus briefs, but there would appear no need to create a different category of exceptions beyond the two indicated categories. What would be next? This connects to the next Question (eleven) which asks about the appropriateness of ‘Guidance by the [Contracting] Parties on the Interpretation of the Agreement’. The intervention of the Contracting States in a binding manner is a policy issue. It makes ISDS subject to the balance of power between them and their political priorities from time to time and was expressly avoided in modern BITs. In truth, this type of intervention is never a good idea once dispute resolution is judicialised. It goes against the separation of powers in civil society and creates a meddling culture in litigation. As for the issues of uniformity and predictability, also raised by the EU Commission in this Questionnaire, they are desirable abstract objectives but no more. The fact of the cases are usually far too diverse and it is much more important that cases are decided honestly and promptly on the basis of the facts by people who have no other interests than to apply the rules as they see them upon proper advocacy by both parties. Legal reasoning in international arbitrations is in any event highly problematic and can hardly be sorted out in a Treaty of this nature (see part IV below). Over-judicialisation should be avoided and creating and clarifying rule systems should have no priority.

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The final Question asks about an ‘Appellate Mechanism and Consistency of Rulings’. This author holds that an appellate mechanism is a very bad idea. There should be a court or similar authority, as has already been mentioned several times, which should supervise arbitrators and give preliminary opinions in the two key areas of concern mentioned above, and it should have the power to summarily dismiss frivolous cases. That would seem more than enough to rebalance ISDS at the moment. It might also be in charge of challenges to the award and of their enforcement. Further experimentation is likely to create ever more confusion. It may be politically expedient for the moment but it is bad policy that will give all kind of other vested interests new ideas. A judicial system that is not simple and prompt is no judicial system at all. It has already been said that there should not be over-justialisation. A search for consistency should also not be overriding and motivate appeals of this nature: Lord Bingham thought it a vice, even in judges (see section 4.1.11 below). The question of uniformity and predictability has already been raised in Question ten above. Binding precedent has never been accepted in international law, nor in civil law jurisdictions either, all for very good reasons. As yet, there is no jurisprudence constante or single intellectual system and we are far away from a mechanical application of rules in foreign investment protection. The EU should not get distracted by these notions and ideas. It is not its task to look for full clarity either, which cannot be provided at this moment and must be left to others to find.

3.5.6  The EU Concept Paper of May 2015, Overall Assessment After having reviewed the answers to its Questionnaire and upon the completion of the text of CETA in 2015, the EU Commission in its May 2015 Concept Paper, moved in the direction of reserving the ability of states to pursue their public policy objectives subject to strict definition lest all treaty protection became illusory. It also envisages a special annex for the clarification of indirect expropriation and considers a future appeal mechanism. The notion of F&E was to be defined. Governments were to be given ultimate control in matters of interpretation. There will be a code of conduct for arbitrators. The feeling is, however, that the new set-up missed an anchor, hence the proposal in the above for a court, which could also give preliminary opinions. One could also become worried that the EU was creating barriers that would only diminish the chances of success for the TTIP, including therefore foreign investment protection, simply due to as lack of a clearer vision. This being said, its concern for the proper representation of overriding domestic public policy issues and also its anxiety about ISDS should be shared. These were written about long before they surfaced in the present manner at EU level,340 but there may be some overreaction and the EU should be concerned that the dispute resolution regime does not end up in one big mess.

340 

See Dalhuisen (n 36).

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The alternative dispute resolution ideas may present a better picture of how to move forward. It is a question of rebalancing what we have. Again, the key is proper supervision of arbitrators. This eluded ICSID, which has lost a lot of credibility as a consequence. The TTIP should learn from this and make up for it.

3.5.7  The November 2015 EU Proposal for Investment Protection and Resolution of Investment Disputes In November 2015, the EU Commission came out with a new document that summarised the protection it was willing to offer foreign investors, meaning in this case US investors in the EU. In respect of dispute resolution, it introduced at the same time the idea of a specialised court with a further appeal possibility. The US immediately pointed out that this would give investors another chance. It has already been pointed out that this could promote a litigation culture which serves no one except lawyers. Judiciality seems excessively promoted and legal system thinking favoured, but such a court may only lead to legal sophistry and further delays in the pursuit of finding a system that may not be there. The project may be poorly thought out. What about enforcement? The lower Investment Court itself still seems to be in the arbitration mode with parties able to opt for the ICSID or UNCITRAL Models, although the reference is to a fixed panel of judges, the workload being divided between them without party intervention. Nevertheless, in Article 30, the document speaks of awards not judgments. This is apparently done to retain the benefit of the New York Convention in third countries. In the US and EU the decisions are self-executing subject to local enforcement proceedings against states. Most states will not allow execution against themselves. Interestingly, the references to ICSID, UNCITRAL and to awards suggest an investment arbitration court rather than a court of law, thus a passivity in finding the applicable law whilst avoiding justiciality. This is not borne out, however, by Article 13 on the Applicable law. It suggests that the judges are to be spokespersons for the international law. Only local laws are pleaded as fact even though the judges are still able to make the final determination autonomously on their prevailing interpretation. Whether there is to be precedent or a search for a jurisprudence constant remains an open question, but, as already mentioned, much suggests a search for a system and system building, and for systematic unity and certainty of an intellectual nature. This is further promoted by an appeal facility. The grounds are (a) error in the applicable law, (b) manifest error in the appreciation of the facts, and (c) procedural reasons (‘akin to annulment or set aside procedures’). But what are errors of law unless one assumes that there is a system that can be automatically applied and has all the answers? Why should they not then be manifest also? The EU Fact Sheet further states that all must be over within two years, but what if not? There are other problems: the ICSID Convention has been much critised, especially its annulment facility. One must assume that this facility and the direct enforcement rules of the Convention do not apply. In the case of the UNCITRAL Rules, the

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New York Convention would not be directly applicable either, except perhaps in third countries, at least that seems to be the hope, see Article 30(1), (5), and (6). As for the substance of the protection, in Section 2, the EU appears to do away with the MFN notion and national treatment (but there are still references to it in Section 3, Article 1: proposals can only be found in the EU discussion document tabled in the negotiation round of July 12–17 2015). In the cases of emergency there is still equal treatment with nationals (Article 4) but it does not appear to apply where overriding public policy issues are invoked to eliminate the protection (Article 2). There is no appreciation of the fact that where a ‘super public purpose’ is invoked (see section 3.4.3 above) there might still be a need for some (not full) compensation under the fair and equitable clause, as there may be in the case of indirect expropriations when confiscatory (see section 3.4.4/5 above). It may be noted in relation to this that Article 5.3 refers to ‘fair market value’ as the measure for compensation in the case of expropriation rather than the more common ‘full compensation’ standard. The document invokes ‘greater certainty’ many times, but it must be asked what is meant by the concept. Law and fact are sharply distinguished in the positivist tradition. The idea seems to be that this is all a mathematical excercise, but the facts are usually so different that nothing fits very well. This also goes back to the question whether a system of law can be built, what errors of law are in such a situation, and how they can be spotted. It is by no means clear. The risk is a great deal more obfuscation. A further Committee will be set up to give binding interpretations. The Nov. 2015 Document seems to be a negotiation document and political pamphlet pasted together. From a conceptual point of view, it may be considered disappointing. It may well want to change the entire discussion on foreign investment protection and the dispute resolution regime, but it would require a great deal more sophistication before it could be convincing. In terms of the approach of this book, an Investment Arbitration Court system would be perfectly acceptable with supervision by, but without appeal to a superior court, especially in matters of conduct of the judges. It could also be asked to give preliminary opinions on public order and public policy issues. As for conduct it may be noted that the judges under Article 11 of ­Section 3 may not serve as counsel or expert witnesses but could still be commercial and foreign investment arbitrators.

Part IV  The Reasoning of International Arbitrators 4.1 Introduction 4.1.1  The Importance of Legal Reasoning Legal reasoning remains an important subject in dispute resolution although at present it is not on the whole attracting much academic attention.341 In adjudication, it is often connected with interpretation and remains as such a key subject even if it may be ­challenging to shed new light on it. The need for legal reasoning is then usually expressed in terms of ‘giving the reasons for the decision’,342 which could technically be any, but that may not be all and other requirements may extend its ambit. As a minimum, parties would appear to require some explanation of the decision in order to show that they were fairly treated even if they may not consider the outcome so—it is a fact of life that the winner could not care less and the loser is unlikely ever to be ­convinced.343 It may come down to whether they have been taken seriously. Reasoning of this nature also enforces discipline in adjudicators and at least in ordinary ­judgments the legal 341  In England, legal philosophers like Hart and Raz at one stage were fully engaged in the subject, later also Dworkin, well summarised in ‘Interpretation and Coherence in Legal Reasoning’, Stanford Encyclopedia of ­Philosophy (update 2010). In the US, there are the classical studies by Levy and Llewellyn, see E Levi, An ­Introduction to Legal Reasoning (Chicago, IL, 1949, reprinted in 1962) and K Llewellyn, The Common Law Tradition: ­Deciding Appeals (Boston, MA, 1960). See for a summary in the US of the views expressed by the end of the 1960s also GC Christie, ‘Objectivity in the Law’ (1969) 78 Yale Law Journal 1310. The subject is now often thought to be too close to the practice of the law to merit great academic thought. Others may think that all that could possibly be said about it has already been said. Yet there is a legitimate question whether the subject is not quite different in different dispute resolution ­scenarios, different therefore for ordinary judges as opposed to arbitrators and for them potentially different in domestic and international arbitrations and for the latter even in international commercial and financial disputes and then again in foreign investment disputes. Furthermore, differences emerge here in the different backgrounds and cultures of international arbitrators, which may also affect their reasoning. Why do they exist or persist and what can be required from international arbitrators in this regard? These are major issues which remain to be explored. 342  In arbitration, the requirement of giving reasons is not universal, however. It is embedded in the UNCITRAL Model Law, Art 31(2), but the parties may dispense with the requirement. The UNCITRAL Rules in Art 32(5) are similar. The Washington Convention, on the other hand, requires a fully reasoned award in Art 48(3) without exceptions. It is uncommon for parties to waive the need for reasoning but especially in commodity ­arbitrations, it may mean very little if the peer group is asked to decide on quality: the ‘look and sniff ’ kind of arbitrations. It can be argued that these are not arbitrations at all, but expert binding opinion, see section 1.1.4 above. The ICC Rules 2012, in Art 33, talk about the scrutiny of awards and it is well established that insufficiency of reasoning may motivate the ICC Court to ask arbitrators to do better, insufficient reasoning being seen here importantly as a deficiency in form, not substance. The US Supreme Court does not require reasons in arbitral awards, see United Steel Workers of America v Enterprise Wheel Corp 363 US 593 (1960). 343  So much may be obvious but the writer as member of a tribunal led by the late and much lamented senior Belgian arbitrator Andre Faures had the extraordinary experience of lawyers for the winning Respondent writing to arbitrators that the award had convinced the losing Claimant to resume normal functioning on the board and restart co-operation. One likes to think that the quality of the award was indeed the reason.

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reasoning enters into the issue and prospects of appeal. The ­reasoning has additional relevance where guidance is sought in these decisions for the further d ­ evelopment of the law. They may even start figuring as precedent, which raises the question what that truly means. But the real issue is whether this may all be different in international arbitrations.344

4.1.2  Formal and Substantive Aspects of Legal Reasoning There is a formal and a substantive aspect to legal reasoning. It may correspond to the distinction between methodological and ontological hermeneutics and shows the close connection with interpretation. Formally, the most direct reasons must be given, probably selected from and limited by the arguments the parties have presented, although it is often assumed that adjudicators have more freedom on points of law; at least domestically ordinary judges are supposed to know it, which may give them leeway or may even require them to expand the parties’ arguments. It may be very different for international arbitrators as was noted in section 1.1.3 above: there is no difference between points of fact and points of law in international arbitrations, all is fact and law must be pleaded as such. Arbitrators are not judges and do not have their own lex fori to explain, apply and clarify. This may give legal reasoning an entirely different twist, and reasoning in arbitral awards may for this reason hardly be a legal function, it may only be about explaining preferences for certain arguments, except perhaps in those limited (but important) areas where international arbitrators may have obtained autonomous powers and may then act more like judges: see sections 1.1.10 and 1.2.5 above. In international arbitrations, these areas were identified as those of procedure and evidence, issues of jurisdiction, arbitrability and indeed the reasoning, and perhaps proprietary issues, if not also matters of public policy and order, such as competition issues and situations of market abuse and corruption and even considerations of justice, social peace and efficiency if sufficiently pressing upon the case. All are becoming subject to transnational law, it is submitted, under the modern lex mercatoria or correcting standards of public policy or public order; see more particularly for a discussion of the relevant policies or public order aspects at the national and transnational level, ­section 1.2 above. But whether the reasoning is legal or not, there may still be the deeper issue of how the adjudicators came to their conclusions and what they considered or did not consider and why, even if for strictly legal reasoning it may be quite different. More generally, must they show these considerations in their decision as well and in what detail? In the case of legal reasoning, that may be considered the substantive aspect. Thus reasoning of this nature may also explain the way the decision came about, although serious difficulties arise where it is said that it must be convincing, give a clear ­explanation, or 344  Lord Mansfield is often cited as having said that judges should consider what justice requires and decide accordingly, but ‘never give your reasons; for your judgment will probably be right, but your reasons certainly be wrong’ quoted by Lord Bingham (as implausible), ‘Reasons and Reasons for Reasons: Differences Between a Court Judgment and an Arbitration Award’ (1988) 4 Arbitration International 141, 147.

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a full picture, or must show elementary logic.345 These are subjective criteria that soon become unmanageable beyond prima facie defects. More neutral may be the requirement that the reasoning on points of fact and points of law can be followed to its conclusion. That is much less ambitious and puts the accent on plausibility.346 Perhaps the reasoning must also make sense overall in the light of the law as we have it or perceive it. This raises the point whether adjudicators may amplify the arguments of the parties and in turn raises the issue of furthering the law’s progress although it is a judicial function more typical in the ordinary state courts, which bears upon the issue of legal education and clarification and the further development of the law and in particular of the relevant legal system and confirms the ordinary judges in their lawmaking function, although it remains contested, even for them, how far they can go. It poses among others the question whether law may indeed be perceived as a system of rules to which adjudicators must contribute. This will be discussed more extensively in section 4.1.6 below, and poses the further question what ‘system’ means here347 and also raises the issue of consistency in the decision-making process and the meaning of precedent (see s 4.1.11 below). Again, such a task would not automatically extend to international arbitrators who may have no special authority in legal reasoning and in any event no natural lex fori to develop or defend. They will concentrate on the facts, of which the pleaded law is only one part, and are limited by the submission of the parties; it is not for them to develop a new line of argument—including in legal issues—and there are normally no appeals. System building of this nature may more properly be the role of academic research and critique even if only a typical civil law preoccupation. It is certainly not the task of arbitrators, who only decide (in principle) what is disputed between the parties, no more. All is fact, except perhaps where they have special autonomous powers (see again the discussion in section 1.1.3 above and throughout the first part of this chapter). There may also be cultural issues or simply questions of experience affecting it. In general, common and civil lawyers may take different attitudes, especially when it comes to legal reasoning. As we shall see, this may have to do largely with the dominant role and status of statutory law in civil law countries and indeed the perception that law, at least private law, is a logical self-contained system of rules, much less a common law attitude, which is, to start with, much more fact oriented. There may also be differences between more public law- or private law-oriented specialists: the former may be more aware of governmental interests, may be more public interest supporting, and more aware of the potentially direct application of national policies in international cases or of the operation of international minimum standards in this respect. That

345 

For international arbitrators, see text at n 415 below. See text at n 416 below. 347  See for public international law, International Law Commission, Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law: Report of the Study group of the International Law Commission, Finalised by Martii Koskenniemi (2006). For foreign investment arbitration in particular WM Reisman, ‘“Case Specific Mandates” versus “Systemic Implications”: How Should Investment ­Tribunals Decide?’, The Freshfield Arbitration Lecture 2012 (2013) 29 Arbitration International 131, with reference in particular to Glamis Gold, Ltd v The United States of America, Award (UNCITRAL) 8 June 2009. 346 

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may carry over to the avoidance of conflicts rules in private law to a search instead for more universal policies beyond domestic private laws, and then also more readily to the direct application of transnational private law or the modern lex mercatoria, at least to the extent pleaded by one of the parties. There is evidence of that in international commercial arbitrations, therefore of greater readiness among international commercial arbitrators to consider that type of argument as will be discussed later. In commercial disputes, adjudicators may act and reason differently for yet other reasons. It was said in section 1.1.2 above that in this connection, international arbitrators might best be seen as continuing the discussion between the parties after their own efforts at a settlement and possibly mediation have been unable to find a solution, which now requires the intervention of outside decision takers, in principle always still upon the basis of the representation of the parties. One may see here a progression. These professional disputes suggest a form of quicker justice by members of the peer group. In international cases, it may also be that in a globalised environment, rationality, sensibility and efficiency may acquire a special meaning as they imply greater responsiveness to newer needs on a very different scale, but again it should not go beyond solving the disputes as raised by the parties. Efficiency, sensibility and rationality may even sustain rougher justice and the conscience and knowledge of arbitrators may also contribute: informed international arbitrators may in particular be concerned with the promotion of the commercial flows, liquidity and better risk management at that level. This may also affect their approach to the applicable law in terms of greater flexibility and sensitivity to transnational trends and the needs of the international market place, here again the modern lex mercatoria directly applied.348 They may promote speed in the proceedings, even autonomously as an expression of their powers, perhaps increasingly as a fundamental principle of international arbitration. Equally they might ignore revision and appeal provisions in the arbitration agreement.349 In countries that still have separate commercial courts, like France and Belgium, the existence of these specialised courts with lay judges always suggested such a difference in commercial matters. This may even affect the reasoning in these courts and then also in commercial arbitration, in the latter case probably more so when the arbitration is international, thus dispensing notably with legal sophistry and academic niceties of the local variety. At least an overly intellectualised approach will be avoided and there may be less ‘system’ sensitivity also from that perspective. In this connection it is relevant that international arbitration is often believed to have become too judicial, a virtual parody of the courts in ordinary cases and therefore inimical to the commerce it is meant to serve. This criticism is to be taken seriously;350

348  See in England Deutsche Schachtbau- und Tiefbohrgesellschaft (n 27) and ch 1, n 122 above for other countries. It was already mentioned before, that this creates an unfortunate dichotomy between arbitrations and the operations of the ordinary commercial courts which are left behind, stuck in a more parochial environment, even in England, but it may be the unavoidable consequence of the institutional back up of either facility, which as will be argued below, is very different for international arbitration when seen as founded in the transnational commercial and financial legal order. 349  See n 1 above and accompanying text. 350  This view is widely held and not new, see RB Lillich and CN Brower (eds), International Arbitration in the 21st Century: Towards Judicialisation and Conformity (Leyden, 1994), see also section 1.1.11 above.

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see the discussion in section 1.1.11 above. Unfortunately, there is still an inclination among international arbitrators, especially of the professorial type, to treat arbitration as if it were some form of appellate jurisdiction. In moot competitions, youngsters are educated in similar attitudes—see for a critique section 1.1.13 above. It has already been said that this is an undesirable development, which ignores the typical nature of this type of dispute resolution. It may also have to do with different perceptions of law in action and law in litigation, international commercial and financial arbitration being much in the former camp: see chapter 1, section 1.4.17 above. This being said, one does not need to go as far as to suggest that international arbitration is no arbitration at all,351 but it is likely quite different from domestic arbitrations (sometimes still seen as a mere replacement of the court of first instance), and even more so from ordinary litigation, see section 1.1.2 above. Foreign investment arbitration may be more different because public policy issues become more evident while arbitration is here often also preferred over the ordinary courts, even though increasingly a point of contention, see also the discussion in section 3.5 above. But even adjudication of public policy issues does not automatically make international arbitrators judges either, although they may come closer if they may raise these issues autonomously; see also section 1.2.5 above. When properly considered, in commercial cases and in commercial arbitration in particular, some kind of de minimis concept may operate, which means that it is incumbent on all international commercial arbitrators to concentrate on the major issues in the case and not become distracted. For foreign investment arbitrations, the ­Washington Convention in Article 48(3) goes against this. In particular it wants the tribunal to deal with every question presented to it, which, it will be argued in ­section 4.2.2 below, is an unworldly and irresponsible requirement even for foreign investment arbitration and alien to the concept of arbitration. It must be left to arbitrators to decide what is relevant, as it is also for ordinary judges,352 and it is wholly unclear why more should be expected from them. Again, at least in commerce and finance, speed, cost and closure are essential concerns and that may have a legitimate effect on the reasoning, which must be concise and focused. One prudent approach and common protection is here to stick to the proven facts (including points of law pleaded as fact) to the extent possible—lining them up in such a way that the solution presents itself—and avoid large tracts, especially on the law and its application. It may more truly reflect the needs in and nature of international arbitration and avoids hairsplitting and ponderous exposés. It is also more the common law attitude that begins with facts. It may be different for foreign investment arbitration or where arbitrators otherwise have acquired autonomous powers of adjudication but such a case would still have to be made and it is not obvious.353 Perhaps without realising it, international arbitrators are likely to use a kind of cocktail in their approach to reasoning in international cases, further promoted by the fact

351  See J Paulsson, ‘International Arbitration is Not Arbitration’ (2008), 2 Stockholm International Arbitration Review 1. 352  See text at n 412 below for the way this complication is normally handled. 353  See further text following n 420 below, cf also H v Houtte and M Brunetti, ‘Investment Arbitration—Ten Areas of Caution for Commercial Arbitrators’ (2013) 29 Arbitration International, 570.

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that they will often sit as a tribunal of three persons coming from different legal backgrounds, traditions and experiences so that there will be no single line. But there is little clarity in these matters and it is therefore still of interest to consider what that cocktail may consist of. In this connection, in international arbitration, it should especially be considered how the requirements of speed, cost control, conciseness and focus are ­handled and how or to what extent their connection with the reasoning is recognised. Whatever the exigencies, also in commerce and finance, the reasoning of arbitrators remains relevant as it shows at least some of the debate and contributes (or not) to the credibility of this dispute resolution process. It must therefore be taken seriously although not necessarily in the same manner as that of ordinary judges (or even domestic arbitrators) and it would appear wrong to simply copy them. As already mentioned, there is no appeal and there are other considerations. It is even necessary to determine under what law the reasoning operates in international arbitrations but as long as the narrative is plausible and understandable on its face, there may not be much consequence, whatever law may apply, at least not under the New York Convention where the reasoning or lack thereof or its potential flaws are no ground for refusal of recognition and enforcement of arbitral awards and neither is the law applied unless the result rises to a public policy offence. Wisely or unwisely, in foreign investment cases the situation is different under Article 52 of the Washington Convention where failure to state the reasons is a ground for annulment of the award, but it leaves wide open the question when there is a failure, whether the reasoning must be sufficient or adequate, what that means, and whether this can ever be a manageable criterion beyond obvious prima facie cases: we shall return to this towards the end—see section 4.2.2 below. Analytically, the essence is that in all disputes of this nature there are relevant rules and there are relevant facts which must be selected and somehow be related to each other in order to determine whether in the particular case there is a cause of action, recourse, and what that is. That is at least the way of looking at the process of reasoning from the positivist perspective, law as technique leading to automatic results (see further s 4.1.6 below) and is then on its face the same in the ordinary courts and in arbitrations, except that in the latter case upon a proper analysis the rules to be applied must be pleaded and are not at the free disposition of arbitrators to select from the applicable legal system. Whatever the rule is, we then like to think or wish that this process of adjudication is objective and can be presented as such but the fact that there are no clear rules in this regard, even in the ordinary courts, suggests a measure of discretion which in turn implies the possibility of (a measure of) subjectivity. This issue is very much at the forefront of critical legal studies and has then a direct impact also on the status and meaning of precedent.354 At least in international arbitrations, this type of discretion may allow for special considerations: speed, cost, conciseness and focus have already been mentioned, but there may also be

354  See in particular Duncan Kennedy, A Critique of Adjudication (Cambridge, MA, 1997), see further n 380 below. Here the idea is defended that judges fundamentally engage in strategic behaviour in interpretation, both with regard to legal reasoning and with regard to rights discourse (p 339). All people do this, judges are found to be no different in their work.

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concern with ­overriding notions of justice, social peace and efficiency as perceived in the international market place. There may even be (overriding) ‘policies’ and values of a transnational nature, although this may leave even more room for ‘the irrational and intuitive, facile shortcuts, or cognitive biases’.355 Proper reasoning should help and enforce here at least some discipline. It may well be its true function, ie to promote ‘slow thinking’, which at the more mundane level enters also into the determination of damages and may then militate against a natural human tendency to split the difference. But how can preferences be explained or, at the practical level, why do we trust some witnesses more than others, or at the more normative level, prefer certain rules over others and reformulate them accordingly? There would be no end to the reasoning if all alternatives were discussed and their rejection explained. It would not necessarily make it better either. On a more negative note, much reasoning, especially legal reasoning, might serve to present a rationality which in truth was never there. It may be that in this aspect judges may need to worry less than arbitrators. Institutionally, judges may have a stronger position. However, (unless highest judges) they are subject to appeal and therefore to a review, but it does not affect them personally except perhaps in their prospects of promotion. For the future of an arbitrator’s business, being criticised for the reasoning may have more consequences. Also from this perspective it would be helpful to have some yardstick to determine whether such criticism may be justified.

4.1.3  Modern Theories on Legal Reasoning In the previous section, reference was made to the more irrational aspects of legal reasoning and also to the work of ‘critical legal studies’. Purely deductive reasoning is now virtually universally rejected as the predominant judicial tool.356 Many other considerations will enter consciously or more likely unconsciously into the decision-making process. Although at least for judges, it is not denied that they may be laid back and might be able to detach themselves completely from their case, this is mostly no longer perceived as the normal situation. Modern decision theory has already been referred to also in this connection. In the last generation this gave rise to further enquiry.

355  See Lucy Reed in the Kaplan Lecture Hong Kong 2012, Arbitral Decision Making: Art, Science or Sport? See for a profound insight and modern account into decision making more particularly D Kahneman, Thinking Fast and Slow (London, 2011). 356  For treaty law, Art 31 of the 1969 Vienna Convention on the Law of Treaties remains the starting point and may still take a more literal and narrower view in respect of treaty law. Under subs 1, the ordinary meaning of the terms is the starting point, although under subs 3, object and purpose may be considered but, it is mostly assumed, only as expressed in the relevant treaty and not the extra-textual subjectivities of the parties when one deals with complex socio-legal entities such as states. Indeed a narrower more traditional positivist attitude may still be detected in the literature distinguishing also between interpretation and supplementation or gap-filling and between law making and law application with the resulting reservations about all judge-made law, see eg Reisman (n 347) 149, but it is usually accepted that when treaty law cannot move forward, adjudicators may have little choice but to step in (p 135). However, institutionally, arbitrators may not have that power although it is conceivable that it is different in finding and formulating customary international law.

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­ ritical legal studies have already been mentioned but ‘law and economics’ also became C involved.357 Most of these studies concentrate on the situation in the US and suggest indeed that judicial behaviour may be better explained by judges’ ideology and policy preferences. Others concentrate on the maximisation of judges’ preferences in the longer term. Some find judges more guided by texts, others by underlying policies. Empirical studies have focused among other things on the conditions under which appellate court judges follow the legal doctrines set out by the Supreme Court, the impact of shifts in the composition of Congress and the Presidency on the decisions in the DC Circuit Court; and the voting behaviour of justices on the Renquist Court. Others358 focused on the voting patterns of judges, evaluated their ideologies or party affiliations and the effect of the composition of tribunals on the final outcome. Interestingly, they also showed that like-minded judges may move to more extreme positions and that whistle blowing may increase the chances of more doctrinal decisions. The conclusion may be that the positive law (texts), precedent, argumentation by the parties, composition of, diversity in, leadership of, or the existence of a core group in the tribunal, and its internal court rules or practices, may all be important but that nothing is a priori determining. Arbitration has remained largely but not entirely outside this discussion.359 At least one would expect less political bias in arbitrators working outside a particular national system or context (if indeed it could be convincingly demonstrated in ordinary judges), but it does not automatically follow that arbitrators are more objective or that their decision taking and reasoning are more rational, except to the extent they are limited to the pleadings of the parties even in legal matters, which may well limit their freedom in this respect. Even so, whatever rule they so choose as being applicable still raises the issue of its application to the facts of the case. So even if law is fact, there remains a normative element when it comes to evaluating the facts of the case, but here again arbitrators must be guided by what the parties say. One limitation in this connection is that it is difficult to learn the individual position of 357  Earlier studies are those of L Baum, The Puzzle of Judicial Behavior (Ann Arbor, MI, 1997) and Judges and their Audiences (Princeton, NJ, 2006); JR Macey, ‘Judicial Preferences, Public Choice, and the Rules of Procedure’ (1994) 23 Journal of Legal Studies 627. More recent is also the work of RA Posner, How Judges Think (Cambridge, MA, 2008). See for more empirical studies, FB Cross, Decision Taking in the US Courts of Appeal (Stanford, CA, 2007); MA Perino, ‘Law, Ideology, and Strategy in Judicial Decision Making’ (2006) 3 Journal of Empirical Legal Studies 497; RL Revesz, ‘Congressional Influence on Judicial Behavior’ (2001) 76 NYU Law Review 1100; and R Spill Solberg and SA Lindquist, ‘Activism, Ideology, and Federalism’ (2006) 3 Journal of Empirical Legal Studies 237. 358  CR Sunstein, D Schkade, LM Ellman and A Sawicki, Are Judges Political? (Washington, DC, 2006); FB Cross and EH Tiller, ‘Judicial Partisanship and Obedience to Legal Doctrine’ (1998) 107 Yale Law Journal 2155; HT Edwards, ‘The Effects of Collegiality on Judicial Decisions Making’ (2003) 151 University of Pennsylvania Law Review 1639; T Jacobi, ‘Competing Models of Judicial Coalition Formation and Case Outcome Determination’ (2009) 1 J legal Analysis 411; S Alumbaugh and CK Rowland, ‘The Links between Platform-Based Appointment Criteria and Trial Judges? Abortion Judgments’ (1990) 74 Judicature 153; PT Kim, ‘Deliberation and Strategy on the US Courts of Appeals’ (2007) 157 University of Pennsylvania Law Review 1319; SJ Choi and G Mitu Gulati, ‘Trading Votes for Reasoning: Covering Judicial Opinions’ (2008) 81 Southern California Law Review 735. 359  See D Kapeliuk, ‘The Repeat Appointment Factor’ (2010) 96 Cornell Law Review 48 and ‘Collegial Games’ (2012) 31(2) Review of Litigation 1; and earlier O Ashenfelter and DE Bloom, ‘Models of Arbitrator Behavior’ (1984) 74 American Economic Review 111; H Farber and MH Bazerman, ‘The General Basis of Arbitrator Behavior Under Conventional Arbitration’ (1986) 68 Review of Economics & Statistics 578; and RD Cooter, ‘The Objectives of Private and Public Judges’ (1983) 41 Public Choice 107.

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arbitrators except in sole arbitrations or dissenting or concurring opinions. Even then, except for ICSID awards, the decisions are not normally published. So the behaviour of arbitrators may be much more difficult to follow, which has a limiting effect especially on empirical studies. Another problem is that we do not normally know the full submissions of the parties.

4.1.4  Sources of Law and Interpretation As already noted in section 4.1.1 above, in the more traditional discourse on the subject, legal reasoning is often associated with the interpretation of written rules and cases as relating to the facts of the dispute. That is understandable but it is not only interpretation of these rules and relevant cases that should concern us here, rather more generally the search for all relevant sources of law, where there may be considerable differences of opinion especially in international business dealings, at least in those areas where international arbitrators have autonomy and do not depend on the mere representations of the parties. For international arbitrators this means that, unless they have autonomous powers, they are in principle limited to the law the parties plead but it could still come from many sources. Which law is potentially relevant in these areas, from where does it hail, and which do arbitrators choose? First, in practice, there may be no clear divide in this connection between sources of law and interpretation360 or supplementation,361 that is to say that in the interpretation of texts, even if they were deemed the dominant or only relevant source of the applicable law, other sources of law may reappear in interpretation and supplementation (which may easily overlap), especially fundamental principle and custom. That could even be so in respect of rules which the parties have pleaded to the exclusion of others. Legal reasoning might have to say something about this in each case, especially if the disputes were international, potentially more so if the issue of the applicable law goes beyond the representation of the parties in areas where arbitrators have autonomous powers to invoke rules of law. There may be many questions in this regard, especially about the (additional) weight of public order and public policy and deeper values or ‘policies’, as were already mentioned. May these policies suggest some minimum mandatory standards or lead to the recognition of some special governmental interests beyond the texts and the ­submissions of the parties? More generally, may morality, social peace, utility and

360  Interpretation is not confined here merely to a linguistic activity that seeks meaning in words, as it may be in literature, but as a search for legal normativity or a duty that requires something to be done or not to be done or something to give, seen here in constant evolution at the macro level of society although perhaps always within the image of some original purpose of the rule (‘originalism’), an important issue especially in the US in constitutional law but not further discussed here. 361  It may still be somewhat different for treaty law, see n 356 above. As is well known, for Dworkin all is law that judges use as decisive argument and much of legal reasoning is exactly to determine this. Indeed the norms can come from any direction. There are no abstract rules as such or extra-legal (especially moral) considerations. Once invoked by judges, they are law, see Taking Rights Seriously (London, 1977) against others who still make distinctions here as the consequence of their more pronounced legal positivism. Technically, it leaves (international) arbitration in suspense as arbitrators are not judges and institutionally have a different position.

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e­ fficiency considerations also be autonomously introduced? Perhaps we may then also think of the need for growth and also of the effect on the climate or even financial stability. Arbitrators might thus also have to consider what is needed to further a better society in terms of stability, lack of abuse and proper competition. There may also be overriding issues of certainty, predictability and finality to consider. This may be all the more challenging in international cases. But again, may they go beyond the ­submissions of parties and raise these issues themselves? Are there considerations separate even from the more traditional legal sources, especially in private law, or are all sources of law including these special considerations part of one moral and social discourse, very much the modern attitude in American realism where ‘policy’, whatever it may be, moves us forward. If in international commerce and finance we now put ourselves in the international flows with emphasis on the market place, most would agree that we must respect it but also that it must remain clean and efficient. So there are countervailing powers, also at the transnational level, but especially in international business dealings it may be less clear what the limits are as between professional parties, where they come from, and when they become legally normative between the parties in the dispute. They may as such be autonomously applied by arbitrators in what they consider appropriate cases, as such to be explained in the reasoning. There is then the further question whether these standards might be transnationalised or how much room there still remains for purely domestic considerations and values in international transactions, at least in respect of any conduct and effect of international dealings on a given territory assuming that the international flows of goods, services, money, technology and information can still be properly spotted and broken down into domestic parts (see the discussion in ss 1.2.3ff above). It is often assumed that that is still the case, but it has already been said repeatedly that these flows are increasingly virtual and can often hardly be identified in relation to a territory. In any event, the risk in respect of them can easily be shifted through derivatives so that it becomes unclear where the economic interest is. When argued by one of the parties, when may these (policy and value) considerations be considered overriding? Can they even be so compelling that they may be invoked by international arbitrators on their own motion, in civil law connected with the idea that the applicable law does not need to be pleaded but that the court knows (ius curia novit)?362 See again section 1.2.5 above. Clearly, international arbitrators do not have their own law, but would this power be inherent in international arbitrators assuming that these overriding public order or policy notions or social values can be established?363 Transnational law would be the normal starting point. If pleaded by

362  In international cases, parties would be most unwise to leave the applicable law to arbitrators to find and it must be pleaded just as much as the facts, but that is not to say that in appropriate cases arbitrators may not raise legal issues themselves if not raised by the parties. This would especially be the case if public policy became an issue as we shall see. 363  In this connection, the practice at the ICJ is often believed normative also in international arbitration, see Nicaragua v US (Merits) [1986] ICJ Rep 24 para 29, but that does not go without saying. ICSID case law is divided, especially on any duties international arbitrators may have in this regard; see also v Houtte and Brunetti (n 353) 571, but in ordinary arbitration cases, this power to clarify the applicable law is normally denied, again unless it comes to the public interest.

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one of the parties how do international arbitrators decide these issues and can they still fill in the gaps or use their tools of interpretation of the rules found applicable to introduce other sources of law?364 Considerations may be quite contradictory, eg the balance between national governmental interests among themselves and between them and transnational minimum standards, so that (uncomfortable) choices may have to be made. If we think also of considerations of justice, social peace and efficiency as potentially correcting factors, is what is cost-effective also just or has efficiency always the priority in the international market place unless the result becomes manifestly unbearable even for business entities? When is that point reached? There are here also important issues of due process: the parties must be heard, more (expert) witnesses may be called. Such intervention by arbitrators has therefore also a substantial cost element for the parties who may not agree or be unhappy about further argument and expense. More importantly, they may argue that these powers are not conferred by the arbitration clause. The contract or arbitration clause is here a source of rules that may attempt to sort some of this out and above all to try to manage the foreseeable risks better, also in the conduct of the arbitration. But even then, it is not clear what the status of such a contract (or clause) is among other objective rules of public and private law, which may seek to limit or correct its content in an international arbitration. Especially in international business dealings, this may be another major challenge. Again, what is the full scale of the law applicable to the arbitration clause, and what law can parties incorporate or set aside in their contract, especially when it comes to values and policies of whatever nature and origin? A choice of a domestic law by the parties cannot reach any further in these matters than the contract itself and often means much less than parties think or may hope.365 More importantly probably and in any event more fundamentally, it was already suggested in section 1.1.10 above that in international arbitrations the arbitration clause is not the foundation of the arbitral jurisdiction but that this jurisdiction is founded in the transnational commercial and financial legal order and its public order requirements itself, only activated to the effect by the arbitration clause. Once so started, there is much under the applicable arbitration and substantive law that parties do not or no longer control and this again raises the issue whether international arbitrators indeed become judges in the areas, or on these limited occasions, where they obtain autonomous powers and what that means. The issue is then also how they and their application are explained in their reasoning.

364  In a well-known precedent Judge Lagergren took it upon himself, sua sponte, not to enforce a contract whose object he considered to be the trafficking of influence; see s 1.2.5 above, for the position of the ICJ and ECJ. The problem for arbitrators is that they are not judges who are institutionally supported by their own legal system, which they represent and have power to further develop. 365  What can be set aside in this respect by choosing a foreign law is itself a question of law that cannot be freely determined by the parties, 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; see further the discussion in section 1.2.2 above.

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4.1.5  The Narrowing Concept of Codification in Civil Law We know from tradition what the more common sources of law are. Pre-codification thinking—under Article 38(1) of the Statute of the ICJ still valid for public i­ nternational law—considered fundamental principle, custom, general principle, statutory texts and party autonomy the basic sources. It has already been said that that is pure Grotius and much of the first chapter of this volume was devoted to this thinking. In private law, codification thinking only maintains statutory texts; the law was nationalised; henceforth the other sources of law only operated by licence of the codes, meaning that they were only accepted to the extent these codes referred to them or rather their governments would allow them to operate. That applied even to customary law and party autonomy. Thus there was only one (top-down) system. The history was set out in chapter 1, sections 1.2.7ff. It allowed the 1804 French Code Civil, for example, to do away early with a myriad of local laws and even the Roman law as a superior form of custom, understandable in the circumstances—it was a cleaning-up operation— although to eliminate or deny in this manner also the autonomous force of customary law was always less convincing in commerce, especially if international. Probably more important, fundamental principle to the extent not expressed in these codes was likely also to be ignored; natural law tendencies became suppressed. We have also seen that the German civil code or BGB, which came about a hundred years later, equally eliminated all other sources of law beyond the statute unless specifically admitted. This was more than a cleaning-up exercise; the codification idea was rather based on the notion that the modern state had the deeper insights into human relations and the way they should be organised and society should move forward. Only rules and values expressly accepted by the state were relevant, all activity outside them was unauthorised. Again, many of these sources would come back in interpretation, perhaps in some uncontrolled way, although that was not the original idea. Whatever the philosophy, henceforth in civil law, even for private law, law formation was top-down, statist and territorial. Other sources of law were at best supplementary. It was simply a change in political philosophy or paradigm. It has already been said that 50 years earlier people had held exactly the opposite view that law, private law in particular, was universal except for some local enactments, which, especially in commerce, were usually centred on certain market places, not countries. This view may now well be in the process of being rehabilitated, at least in international commerce and finance in a globalising market place, although this narrowing attitude is still adopted in the Draft Common Frame of Reference (DCFR), which now figures as a model for codification of private law for all of the EU (see ch 1, section 1.4.20 above). Here again, there are no other sources, values or policies except to the extent the text expresses them.366

366  In the meantime, the ECJ itself has expressed the opinion that there may be higher values which even override the written texts of the EU foundation treaties, see Case 144/04 Mangold [2005] ECR I-19981 and Case 101/08 Audiolux [2009] ECR I-9823, and further Vol 1, ch 1, s 1.4.5, something of which the DCFR knows nothing: see further also text at n 376 below.

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There is no place for custom or practices either, unless a special reference is made to them. The validity of the contract derives from state authorisation. The original idea was that this kind of law was essentially value neutral and could then serve any party, but the more intriguing question became whether people in their dealings among themselves were still free to do whatever they liked in the manner they liked if the codes did not cover the subjects or whether they could only do what these codes (and their systems) authorised, which would go much further than public policy or order guiding or prohibiting certain activity. No wonder the English are worried that within the EU this attitude may waft over to the markets in London. Their attitude was never dogmatic, the common law was never meant to cover the whole field and remained comfortable with multiple sources of law, although in Benthamite and Austinian nineteenth-century thought, law was also considered to issue from a sovereign and was therefore national and territorial, including private law, but at least there was never a monopoly for statutory law (see ch 1, s 1.3.1). Although in England (as elsewhere) there is now also much legislation, it is still meant and perceived mainly as streamlining the common law or replacing the equitable jurisdiction of correction and cutting out excess in the courts of Chancery. It remains therefore still limited in character, which has also an effect on statutory interpretation. It is restrictive and literal in order to leave as much room as possible especially for the old common law, even equity, and the law merchant. But it is relevant to note in this connection that the status of custom as source of law also suffered in England, international custom especially, although the courts remain pragmatic while at least the 1893 Sales of Goods Act continued to refer to the law merchant (deleted in 1979) and in matters of documents of title and negotiable instruments it is accepted that they remain internationally subject to the transnational law merchant unless relevant domestic law takes a different view.367 More importantly, in the US, Article 1-103 UCC is categorical in demanding a liberal interpretation of the text to permit the continued expansion of commercial practices through custom, usage and agreement of the parties and allows as much room as possible for the common law, equity and law merchant. This is not by special statutory authorisation but is declaratory and reflects the traditional common law approach. In particular it allows international custom to operate unhindered unless set aside by the contract (except where mandatory) or otherwise (even if mandatory) by the code itself, assuming that international custom will not in practice remain effective and render the code non usus in the effects of international transaction in the US, which remains a possibility. This issue of desuetude, which remains contentious in the case law of the US Supreme Court, will not be discussed here any further.368 The above shows different attitudes to law, private law in particular, and where it comes from. This is an important issue and is likely also to be reflected (in one form or another) in the reasoning of international arbitrators, even if they may be little aware of it. Do they look for system in the application and interpretation of whatever law is

367  368 

Roy Goode, Commercial Law, 4th edn (London, 2010) 513. See US Supreme Court in Poe v Ulman 367 US 497 (1960) and also ch 1, s 1.4 above.

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presented to them, and is that still possible where the representations of the parties in respect of the applicable law are limited, incomplete or perhaps wrong? One may assume that international arbitrators with a civil law background may still look for a statutory system, assume its completeness (if only as a matter of interpretation of what is handed to them), and may also be less comfortable with non-statist autonomous sources of law, therefore more generally with the impact of fundamental and general principle (except underlying statutory law), customs and practices, and party autonomy, thus with the modern lex mercatoria that embodies them until they become more experienced. May international arbitrators assume their expansion when transnationalisation or the modern lex mercatoria is properly pleaded? Unless they are public law oriented, they may at first also be less comfortable with overriding public policy and public order issues or other values or policies but still it must also be repeated that the starting point in international arbitrations is always what parties have pleaded, also as to the applicable law; only in those areas where international arbitrators have acquired autonomous powers may it be different. In those limited areas transnationalisation of the law will probably be increasingly accepted by them.

4.1.6  Law as a System The question whether law is a system that must as such be protected and expanded by adjudicators may need some further attention, and may then also need to be considered in the context of the reasoning of international arbitrators, at least in those areas where they have autonomous legal powers.369 In the other areas of law where arbitrators must depend on the representations of the parties, law being fact, it could be argued that systemic thinking is out of the question altogether as no full picture may be presented, but, if arbitrators are so inclined, it may still come back in the interpretation of the rules that are pleaded and chosen by arbitrators. Whether that is a good thing may be another matter, but it may be expected from those arbitrators educated in that tradition, therefore mostly civil law academics. In the above, two early nineteenth-century paradigm shifts were noted in this ­connection. On the European Continent, private law not only became territorial and statist, but statutory texts also excluded all other sources of law unless specifically allowed to operate. Unlike in England, legislation thus took over, hence the c­ odifications.

369  This is an issue often associated with private law and then more particularly with codification, but system creation and thinking is also an important issue in international law, see Reisman (n 347) 139 and text at n 423 below, where it bears a close connection with the meaning of precedent. In international law, the issue is mostly seen as mere interdependency between parts, components and processes, not necessarily leading to rational coherence, which allows for systematic interpretation. System thinking may then have little operational significance and could refer to little more than ‘greater contextual awareness’, see Glamis Gold, Ltd v United States, Award (NAFTA Ch 11, Arb Trib 8 June 2009). It may nevertheless give rise to thinking in terms of more general policies and objectives, which in foreign investment protection might, however, be less clear than many think: is it the protection of the foreign investor, or of the host state, or what are the true underlying policies? Do they lend themselves to systemic explanation?

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But there was a third paradigm shift in civil law, which again never caught on to the same extent in common law countries. Law, private law in particular, came to be seen as an intellectually complete system. When properly applied it was expected henceforth to allow by itself for the resolution of all legal problems, present, past and future. The text and the system underlying it thus had all the answers and became all.370 The rule system comes first, facts come later and whether or not they are legally relevant is determined by that system, the rest is irrelevant. It has often been observed that there is a terrible intellectual prejudice at the heart of this approach (see also the discussion in ch 1, s 1.4.2 above). Nevertheless, in the eyes of its proponents, this law is considered just, promotes social peace, and is by definition efficient. No empirical testing is necessary. Intellectual unity in all private law (per country) is here implied and makes it perfect. This law covers all private activity, whether national or international, in the latter case assuming it is applicable under the relevant rules of private international law, which are for each country also part of its system. Again, other sources of law have no place in this, lest the purity and virtue of the system be corrupted or destroyed. It is often associated with German legal rigidity, which does not allow for extra systemic considerations and out of the box thinking.371 As such it is also the enemy of overriding fundamental principle and changing social values unless recognised by the codes (meaning by the state!). It assumes the elevation of this law to a higher level that claims supremacy and ­clarity. The appeal system’s main task is to enhance it. It has already been said that the intellectual model becomes the true expression of reality here; it is the truth. Its legitimacy derives from that state of affairs, not from any democratic process or sanction. The state’s academies are meant to formulate the rules and provide the intellectual rigour. Parliaments have to rubberstamp their work into law; this was not to be a

370  See also Vol 1, ss 1.2.11ff where it was very much considered the objective and result of nineteenth-­ century German idealism, which ultimately produced the German BGB as an icon of German intellectual culture and ­progression in the law. The danger was always ossification or the dictatorship of the framework. The other aspect was nationalism: these systems although ostensibly based on logic were not considered universal, quite the contrary. This type of system thinking and system operation was explained in a more sociological manner by M Weber, Economy and Society: An Outline of Interpretive Sociology (ed Roth and Wittich) (Berkeley, CA, 1968) 976ff; see further also J Habermas, 2 The Theory of Communicative Action, 235 (transl. T McCarthy, Cambridge, 1987); see also ch 1, s 1.2.13 above. These studies concern more particularly society’s organisation and drift off the point here made, which concerns the legal system as a source of interpretation and completion of the law it covers. 371  See Jan K Schaefer, ‘Focussing a Dispute on the Dispositive Legal and Factual Issues, or How German Arbitrators Think’ (2013) 2 b-Arbitra, and how in this manner facts fall off the plate. The approach is inimical to everything new unless the system can be stretched to cover it, facts are otherwise ignored and become irrelevant; the activity unauthorised. This is also called Relationstechnik in Germany (see ch 1, n 363) under which the legal framework is somehow established first on the basis of a cursory review of the facts and it becomes the test of what must subsequently be satisfied in fact. Even the good faith notion, which is more fact oriented, cannot break this, see also Vol 2, ch 1, s 1.3.4 for ­German system thinking and the good faith concept. Through Fallgrupen and Funktionskreisen (see Palandt/­ Henrichs, Buergerliches Gesetzbuch (2012) at s 242 nos 2 and 13) German academia primarily tries to reinvent and reinforce the system. This approach is wholly alien to common law thinking where facts come first. For international arbitration, it would appear a serious mistake, but undoubtedly it saves cost, as all prejudice does. It is the tyranny of the framework, very common in academics of all kind, not only in Germany, and much encouraged by the drafting of legal texts where considered complete. Again, international arbitrators, when hailing from ­countries with this tradition, should be aware of its confines, arbitrators coming from others of its limitations.

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question of political choice lest the system was disturbed and its claim to truth eroded. It is here and in the related elimination of all other sources of law that we see methodologically the true difference between the civil and common law. Largely unrealised by them, it may also determine the approach to reasoning in international arbitrators coming from this tradition. They may see themselves as appellate judges operating in and ­clarifying a legal system. Although it may be admitted that law upon proper study presents interdependencies between its parts and may show discernible regularities and may manifest a degree of organisation and coherence especially around common values and normative principles, it may not naturally tend towards completeness, however. If the accent is on fact finding, a case-specific approach rather than system orientation is likely to result. This naturally comes about if we understand properly that in international arbitrations law is pleaded as fact; for arbitrators there is no more on the table. It is surprising how little understanding there often seems to be of this elementary point in international arbitrations and in the reasoning of international arbitrators—they are not judges, although again it may be different in those limited areas where international arbitrators have obtained autonomous power and may be able to formulate the law. The common law was never truly system friendly, not even rule oriented (see the discussion in ch 1, ss 1.3.1ff above). It moved from case to case on the basis of practical needs and avoided generalisations. Even now the English are often mistrustful of them, although in modern times, the need is also felt in England, at least in academia, to find system in disparate cases and legislative texts. Again it goes to the issue of unity and coherence discussed earlier, but it always sat less easily with the common law tradition, courts remaining unconvinced, and even statutory interpretation soon reverted to case law that was fact oriented and looked first at the case in all its factual elements and then found the nearest decision or, if necessary, the nearest statutory text or applicable rule related to similar fact patterns. The approach is not abstract but preferably reduced to real-life examples found in case law that may then be followed or distinguished. Even precedent has a much more limited meaning than most people seem to think: see section 4.1.11 below. That is also likely to guide common law-oriented international arbitrators. Domestically, the English approach remains cautious, based on precedent perceived narrowly as little pictures or stories or vignettes where facts and rules come together in a non-analytical manner. In the American ‘realist’ approach, on the other hand, much is reduced to considerations of ‘policy’, also in private law. It gives a different dimension to the notion of legal evolution where the responsiveness to practical and social needs is paramount in order to keep the law ‘living’. That becomes very much the issue in all law application in domestic as well as international cases. The essence is that legal reasoning is here not separated from moral and political discourse. It destroys any idea of system thinking, in the US mostly now rejected as legal formalism and leading to doctrinal rigidity. It was already mentioned that in commercial law, the UCC, referring to many sources of law, supports this thinking, which is nonsystematic in a logical sense. Whatever its name, the UCC is not a codification in the European tradition at all.

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Again, this difference in approach, even between English and American lawyers,372 will be reflected in the reasoning of ordinary judges and is also likely to become apparent among international arbitrators. It is not irrelevant, therefore, where these arbitrators come from, which will determine their natural attitude, often derived from that of the ordinary courts in their own countries. For most adjudicators engaging in international arbitration, this may mean a re-education at the same time, which re-education comes mostly from the interaction with other arbitrators and counsel from different jurisdictions. But upon a proper analysis, it is also promoted by the fact that international commercial arbitration is substantially fact based, and was thus always more in the common law tradition. Again, system thinking is here mistrusted and often ignored.

4.1.7  Normative Interpretation. The Meaning of Good Faith. Consumer Law Influences in the Professional Sphere In the foregoing the traditional independent sources of law were identified, which in nineteenth-century statist thinking were increasingly rejected beyond statutory texts, especially on the European Continent—system thinking replaced them—but even then their connection with interpretation and supplementation of the statutory rules could not continue to be ignored. It has already been said that where the sources of law are limited—in civil law to legislation (and the system underlying it, and probably s­ upporting case law, although there is no rule of precedent)—they revive through interpretation or supplementation of the existing texts. The modern central role of case law, when properly analysed, shows this, also in civil law: see chapter 1, section 1.2.13. In contract, this revival happened particularly through an expansive notion of good faith. In civil law, this is also referred to as normative contract interpretation: see Volume 2, chapter 1, section 1.1.7. Thus higher or general principle again became relevant, in appropriate cases (eg of worker, consumer and small investor protection) overriding the written wording of the agreement. Good faith notions also reintroduced fundamental principle in terms of pre-contractual negotiation and disclosure duties, contractual co-operation duties, and post-contractual renegotiation duties. It further concerned itself with reliance and additionally accepted customary practices or perceptions and common notions or more general principles. Most importantly, it started to distinguish more fundamentally between consumer and professional dealings, a type of relationship thinking that had always been more fundamental to common law where, for example, the law of contract and movable property was developed in commercial law first and was as a consequence always less anthropomorphic, less protection oriented, and more geared to risk management in commerce.373

372  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). 373  See Vol 2, ch 1, s 1.1.1. and Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, 439, in which it was held that the English authorities looked at the nature of the transaction and

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This is probably one reason why good faith remained less necessary as protection in common law where the concept is less developed. Common law, besides its relationship thinking, also had the notion of reliance, fiduciary duties, implied conditions and sometimes natural justice to make the necessary adjustments. Intent and promises were less important than more objective notions of consideration, conduct and (detrimental) reliance. This in turn had a considerable effect on the defences and excuses which in common law are less easily available. In business, declarations remain on the whole literally interpreted, especially if the contract is a roadmap and risk management tool. Civil law is here only at its beginning. Although there are green shoots374 which acknowledge that in the professional sphere good faith itself may indeed require a more literal interpretation of the contract and therefore gives fewer protections. The civil law of contract still prefers to distinguish between the types of contract, not the types of party. The more serious consequence is that consumer protection notions quickly move over to professional dealings under the guise of the type of contract being the same for all and also the modern good faith protections concerning it. The cry ‘I did not mean it, I could not help it, it is not my fault’ goes much less far in commercial law of the common law type than it goes in civil law unless the contract itself introduces these defences or excuses. Only the other party not performing a major contractual condition is a perfect defence in common law. This may well be increasingly also the attitude in transnational dealings (see also ch 1, s 1.1.6 above). Again, international commercial and financial arbitrators should be well aware of this, which could also affect their reasoning to the extent they feel they may go beyond the representations of the parties as to points of law. Indeed, they may still not make the necessary distinction in this regard and think in a consumer mode as this unitary and consumer-inspired approach is now fundamental in much codification thinking as demonstrated also in the DCFR, still entirely in the anthropomorphic civil law codification mode and nineteenth-century model.375 It suggests at the same time a censorious attitude towards business as a whole and a suspicion of the market place that goes well beyond ordinary public policy and public order standards. Good faith is here substantive (rather like another source of law), often still the mere opposite of bad faith, and not essentially a liberal interpretation technique that reintroduces the other legal sources. But as submitted in Volume 2, chapter 1, section 1.3.2, that is its more proper role, allowing these other sources of law to revive at least in international commercial transactions in interpretation and supplementation (if one still wants to distinguish)

the character of the parties to it, to consider what was necessary to conclude a binding contract, and that particularly onerous or unusual conditions had to be brought to the special attention of consumers. The conventional analysis of offer and acceptance was not followed. 374  See HR 19 January 2007 (PontMeyer), NJ 575 (2007); 29 June 2007 (Derksen/Homburg), NJ 576 (2007); 9 April 2009 (UPC/Land), JOR 179 (2010). The idea is here indeed that the good faith notion itself may require a literal interpretation of the commercial contract in which justified reliance plays a major role, especially if the contract is negotiated by outside law firms. 375  JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299.

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and focusing on a risk management approach to contract interpretation with a literal explanation of texts when meant as a roadmap and risk management tool. It has already been said that this creates challenges outside contract where the good faith interpretation technique fits less well but there may still be normative or expansive interpretation of texts along similar lines. Again the essence is that other sources of law revive rather than that an exclusive statutory standard is imposed and maintained. For experienced international arbitrators this may be easier to digest, again because they are or should be less inhibited by system thinking, are not there to promote or clarify any legal system in particular—they have no natural lex fori to consider—and have more freedom, which also may lead them into applying the modern lex mercatoria in appropriate cases (when properly pleaded) or even transnational minimum ­standards in areas where they have autonomy, as we shall see.376

4.1.8  Objectivity in Interpretation. The Effect of Public Policy, Public Order and Values We have talked so far about rules, that means the norm side of legal activity. One has to start somewhere, but it should be understood that this is in itself a contentious abstraction and the consequence of positivist thinking, which analytically makes a sharp distinction between norm and fact. It is true that in more advanced thinking, the relevant rule must be found among all of the sources of law, but which rule is relevant depends on the facts. The law lives in the facts and only becomes relevant in relation to them. To ask what the legal rule is in the abstract does not have much relevance even if beyond litigation abstract rules serve as warning and daily guidance. To that extent they have a meaningful general content. They are also an important means of understanding the law and are equally of use in organising our information, but in daily practice and in litigation much comes down to the facts of the case and the general content of rules disintegrates. In section 4.1.6 above, the effect of system thinking, which gives the advantage to rules, was critiqued and its intellectual prejudice mentioned. In this approach, the system as a whole serves as general filter for the facts in each particular case. This is engrained in all system thinking or intellectualisation when becoming the established approach in the mindset of practising lawyers, now prevalent in all civil law thinking. It has the advantage of making litigation shorter and cheaper, in civil law countries supported by codification’s pretence to truth and completeness. However, it has already been said that in this manner much fact may fall off the plate and be considered ­irrelevant as not fitting the system. Hence also the lesser role of discovery in the civil

376  Art 31 of the Vienna Convention on the Law of Treaties refers in the context of treaty interpretation also to good faith. Here it is connected to finding the ordinary meaning of the terms of the text in dispute. But it is only one source of law, there are others which remain clearly relevant, to which Art 38(1) of the Statute of the ICJ testifies. One may also ask whether international treaties concerning private law need not be interpreted differently. Treaties like the Vienna Convention on the International Sale of Goods have their own interpretation clause (Art 7), however much it may be criticised; see also ch 1, s 1.4.15 above.

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law litigation tradition, although it risks stifling the (re)formulation of the i­ndividual rule that must determine the outcome of each case in the light of all the facts. The better view is that in each case the legally relevant rule depends on the legally relevant facts and vice versa. They cannot be separated and there is an intimate ­connection.377 This interdependence of norm and fact is analytically an epistemological issue. It means that the nearest rule must be found and is tailored or reformulated so that it can cover the relevant facts but also that the facts are selected or restated in such a way that they conform to the rule. That goes ultimately to the cause of action and the relief on offer. If norm and fact remain too far apart and cannot be formulated as relevant to each other in this manner, there will be no cause of action and no relief can follow. It is truly in this aspect that judges and arbitrators come into their own and this is also at the heart of their reasoning. It inevitably leaves them substantial d ­ iscretion.378 Choices must be made, although in international arbitrations there is the further limitation that the law must be pleaded by the parties. Still, it behoves adjudicators to find as much objective guidance as they can, even if ultimately there is a discretionary ­element, which is generally acknowledged, and the cleverest reasoning cannot hide that fact. It has already been said that it may impose some rigour, and for arbitrators the outcome might not be the same, hemmed in as they are by the pleadings of the parties (except in limited areas of their autonomy). To keep this process as objective as possible, there are traditional tools in deductive, inductive and analogical reasoning. None of them achieves it entirely and unless the situation is pure repeat, which is unlikely, why incur the cost and bother?379 More importantly, none can easily deal with innovation in terms of meeting new fact situations and needs, which then also regards the coherence and completeness of the system. While logic (deductive and sometimes inductive reasoning) is traditionally considered the key to the application of civil law and fits better or conforms more easily to system thinking, one could argue in this connection that the common law thrives more on analogy in its search for the nearest case or statutory text after all facts in so far as they can be known are put on the table.

377  The issue becomes more pressing where there is still a possibility for appeal on points of law, see s 69(2) of the English Arbitration Act of 1996, which allows an appeal on points of English law if the other party agrees or with leave of the court. Can fact and law always be distinguished, eg conduct may lead to reliance and a valid contract, but how much conduct and reliance is needed? Is custom fact or law? Is lack of evidence a point of fact or law? Which law decides about the distinction? 378  One can also say that the norm is here constantly remade, different in every time frame for every case, which connects with the American realist approach that all law finding in this manner is part of the general moral and social discourse of the time, which ultimately rises above subjectivity and becomes cultural; see in Germany Hans Georg Gadamar, Wahrheit und Methode (1960), transl Truth and Method, 2nd ed, (London, 1989). See f­ urther ch 1, s 1.2.13 above. 379  It is not necessary to digress and a simple example may suffice. Assume that there is a rule that all vehicles must drive on the right. That is the major in deductive reasoning. You did not, that is the minor, so you broke the law. But in fact you drove a moped on the pavement in the opposite direction. Is a moped a vehicle? Here we may have to resort to inductive reasoning by going up to an imagined higher rule which requires that anything that has wheels must drive on the right. So there may still be an offence, but it is less certain. In any event, is a pavement included in the general prescription that we must drive on the right? That would be analogy. Or may mopeds not drive on pavements at all because they are only meant for pedestrians? That is teleological interpretation. If so, is there still an exception for small children, etc? The importance is that nothing is here fully objective; everything is a matter of judgement.

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In doing so, common law is supported by binding precedent—a rule of relatively recent vintage, which does not apply in the highest courts—but it has already been said that the common law lawyer thinks rather in terms of little pictures or stories where fact and norm combine as examples in an unarticulated manner.380 This type of analogy is not irrelevant in civil law either and has become much more important in modern times under similar notions of nearest cases and a similar emphasis on ­comparable fact situations; there is here some approximation. Ever since von Savigny, civil law has also allowed teleological interpretation, at least in private law, where the English remain more sceptical but sometimes allow a more limited purposive approach; see also ­Volume 1, chapter 1, section 1.3.3. Teleological interpretation assumes that the purpose of all rules can be established, but again it is hardly an objective criterion if the purpose is not clear or is changed and it would appear to allow easily for multiple solutions. Social policies are here no better guide. In Germany in case law, under pressure of the circumstances, a change of circumstances was early on allowed to lead to adaptation or termination of the contract but the development of pre-contractual disclosure and negotiation duties took much longer, both codified since 2002. Interestingly, German scholarship in search for renewed objectivity is keen to reinvent further system even in respect of the good faith notion and judges are supposed to contribute to this also, although the German courts have taken the lead from academia assuming greater freedom even though with a predilection still to express themselves in a ­systemic manner.381 Again, we also have public policy and order to think of here, while there are also ­‘policies’ in terms of moral or other values or objectives, the idea of justice, the demands of social peace, utility, efficiency and growth; the need to keep the market place clean, perhaps more stable, and there are also issues of certainty, predictability and finality, already mentioned. Much is thus dependent on the views of judges in individual cases

380  It may be repeated in this regard that precedent becomes truly only relevant in repeat cases of fact and law and does not merely work on the rule side in terms of ratio decidendi, which depends on extrapolation and is often an uncertain search by no means objective either, see GC Christie (n 341) 1317. See also the reference to Karl Llewellyn in n 341 above, but cf also M Eisenberg, The Nature of the Common Law (Cambridge, MA, 1988), 50ff who has more confidence. In truth, precedent does not go very far in practice, even less far in the US. ‘Critical Legal Studies’ has always been suspicious of precedent as a means to support and safeguard the rules of the establishment, see Duncan Kennedy, A Critique of Adjucation (Cambridge, MA, 1997), see also n 355 above. There are no reliable criteria for distilling any rule from it. It is only guidance or a matter of persuasive force. Fact situations (unless repetitive) may easily be distinguished, although, while trying to do so, it must be admitted that a more analytical attitude may take over with the accent on rules as such, which, however, may well be formulated quite differently from what the original case might have contemplated. That allows moving forward regardless of the original finding, but also undermines the concept of binding precedent. In civil law (and international law), the rule of precedent never had an official status; its role is only relevant when it may lead to custom. Justinian law in C.7.45.13 had expressly rejected the idea: 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. Even in common law countries, it is also the attitude of the highest courts. 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, but the status of custom is in modern codification thinking now deprecated as we have seen. This may also have an effect in the area of precedent. 381  See n 372 above and ch1 n 84 above.

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or on those of arbitrators in the limited areas where they have obtained autonomous law application power and need not merely depend on the representations of the parties. Thus advocacy becomes important and legal reasoning risks becoming ‘rationally indeterminate’. Can this really ever be more than accepting that adjudicators simply like and have the right to promote some values or policies more than others? More generally, how much can be explained beyond preference or inference? How much is truly objective? It has already been asked how adjudicators can explain why they find some witnesses of fact more truthful or credible than others assuming nobody is openly lying.382 Does expert testimony (even on points of law) need to be further explained if it is preferred by adjudicators and must they say why in their decisions? It would assume superior knowledge, which is unlikely to exist and greater plausibility is then the only realistic criterion. In fact, in arbitrations, arbitrators with special knowledge might be a danger unless all members of a tribunal have it—a de facto situation of a sole arbitrator would result. In any event, it is most questionable whether arbitrators can take the lead in matters of fact and substitute their own knowledge. It raises also the question of the absence of the possibility to cross-examine them.

4.1.9  Sources of Law in Transnational Professional Dealings383 Even where a more liberal interpretation technique along the above lines now prevails and the other traditional sources of law may indirectly revive, at least in contract interpretation and supplementation, even at the domestic level in the ordinary courts, it may be more obvious in international cases but even in international arbitrations this interplay of many sources of law still largely goes unnoticed. The perception in the mind of many, including international arbitrators, often remains that all law is territorial and it is often still so pleaded. The important consequence is that even in international commercial and financial transactions, it is still axiomatic for many that some local law must be found to apply because there is no other, even where international arbitrators have obtained some autonomy in the application of the law. Yet the true issue is whether other non-statutory laws, such as fundamental legal principle, custom,

382  It may explain the greater scepticism generally in England with respect to the reasoning requirement. If it is true that people are not aware of how they think, and are in any event much guided by their subconscious, then they cannot rationally know how they come to their conclusions either. In this vein, everybody tries to rationalise their position in conflicts of the most diverse sort, but most of them produced in the heat of the argument or upon subsequent rationalisation may have little to do with the conflict and its cause. In evaluating a situation, it would appear that there are rational and subconscious processes at work which are difficult to separate and work differently in different people. It may also explain the overturning of earlier precedent and the emergence of new perceptions in identical cases. The most that can be and must be asked is that arbitrators are neutral, have no ulterior motives (and are seen not to have them) and do their best. Indeed no more could be required from them. For ordinary judges it may still be different as they may have to explain the law at the same time. Again, that is not the task of arbitrators. 383  The word ‘transnational’ is used here for private transactions and the law applicable to them. The word ‘international’ is then reserved for public law, which conforms to current terminological practice.

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general principle and party autonomy, can still be ignored in this manner in international transactions, for example the customs of the international market place, but in international arbitrations also the customs of international arbitration itself. That is an issue even when transnational law is not pleaded but arbitrators exercise autonomy in the areas where they may do so, the simplest example being the procedural and evidential areas but it also concerns public policy and public order. That all law is national and territorial was and is indeed the basic tenet of all private international law, which purports to be no more than a conduit to the ‘proper’ domestic laws and is itself part of it: see chapter 1, section 2.1 above. In civil law, the consequence is that the only legitimate law is legislation, even if subject to some liberal interpretation to maintain the credibility of the system, when other sources of law may revive, as already mentioned. It follows that if such law excludes all other sources or could only give a limited place to them in interpretation, this would have to be accepted also in international cases. It is to be noted that the English accepted this private international law approach also, a result of their variety of legal positivism and territorial thinking.384 In essence, this approach is conflict accepting rather than avoiding. However, it was also shown that as of the 1930s in the US in interstate cases, early cracks appeared in this proposition (which dates also from von Savigny). Here the idea is that the courts seised in each instance in interstate cases are likely always to apply a form of their own law (lex fori), adapted, however, for the foreign ­elements in the case. This ‘homeward trend’, which is sometimes also seen as a return to the true common law method,385 was not necessarily followed in international cases with contacts outside the US, but it also had an important effect in that area. ­However, it was not immediately useful in international arbitrations as international arbitrators did not have a proper law of their own (lex fori) which they might thus vary. N ­ evertheless, American arbitrators would bring this newer attitude also to international arbitrations. The true significance was the emergence of a substantive approach to internationalisation ending in legal transnationalisation, which allowed flexibility and at least avoided a blind application of domestic laws that had never been written for international transactions. Other sources of law could thus also be considered directly relevant in international transactions and different public policies or g­ overnmental interests could be better weighed. This reflected the domestic US approach in commerce (see again s 1-103 UCC) and could then perhaps also find more acknowledgement in international arbitrations. In interstate cases, the problem was that in this manner each court or other ­adjudicator developed its own ‘transnational’ state law. In international dealings, the modern concept of the lex mercatoria or transnational law merchant reinstitutes some discipline and provided a clearer method. It is conflict of laws avoiding and returns

384  Very much in the formal German style to which Dicey, Morris and Collins in their newer editions up to 2012 increasingly testified, pushing back international custom ever further, see eg r 222 in the 14th edn of 2006 allowing the custom of the mercantile world to operate in the area of international bonds, deleted in the 15th edn of 2012, although maintained in part in the text at p 2099. 385  B Currie, ‘The Verdict of Quiescent Years’ in Selected Essays on the Conflict of Laws (Durham, NC, 1963) 627.

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to pre-codification Grotian thinking, basically taking the same approach as public international law does under Article 38(1) of the Statute of the ICJ and recognising as sources of law fundamental principle, customary law, treaty law, general principle and party autonomy. When conflicting, it must find a hierarchy between these various sources of law. That is one challenge of the new lex mercatoria, with which courts and more particularly international arbitrators are confronted.386 But the further challenge is to deal in appropriate cases also with overriding public order, public policy and social values or policies (or governmental interests) and determine in each case which one is relevant and whether they may themselves be transnationalised, particularly as minimum transnational standards. Or to put it in American realist language: dispute resolution in international cases becomes part of the moral and social discourse about the applicable law in a globalised world. Even in respect of relevant local governmental interests (or regulation), finding the relevant or pertinent ones is here not truly a question of private international law (as it is not a private law issue), never mind Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I), which in any event does not apply in international arbitrations, including in the EU. Perhaps sections 402 and 403 of the Restatement (Third) of Foreign Relations Law in the US (1987) are more to the point. It is a question of what the Americans call the ‘jurisdiction to prescribe’ in respect of all that happens in terms of conduct and effect under an international transaction on the territory of a state whose policies and values cannot then be ignored. It has already been said many times that a sovereign must be obeyed in its own territory and the international transaction to the extent it comes demonstrably onshore must be deferential to domestic overriding values and notions unless treaty law (or customary international law) says otherwise. Modern BITs are important examples for international investments, although conflicting state policies in international transactions may still have to be balanced in individual cases. Importantly, to the extent the international flows can hardly be localised any longer, there may here also be transnationalisation: these are the international minimum standards when it comes to public policy and public order: see section 1.2.3 above. This is not a matter of the new lex mercatoria proper, which is private law, but of other norms that compete with it and will often be found to prevail as mandatory policy. Competition law still provides the best example. In any event, regulation in many areas can often no longer be efficient on a purely national basis; one may think of the environment or of financial stability. Foreign investment protection is already substantially internationalised and has become in truth an aspect of transnational administrative law.387 The law in international transactions here loses its purely territorial flavour and ambition. The market place itself is transnational and at least in terms of stability and abuse can hardly be regulated any longer on a domestic basis. The idea that all law is domestic per se thus has run its rational course. It cannot or can no longer effectively respond or, when applied to

386  It should be noted that this hierarchy is not at the moment at the forefront of concern under Art 38(1) of the Statute of the ICJ where the same problem nevertheless arises. 387  Dalhuisen and Guzman (n 227) and s. 3.3.1 above.

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international cases, may lead to very low-quality results. It should be recalled in this connection that the value of the international flows of goods, services and money now far exceeds the GDP of the largest countries in the world. Of course, one could ask for treaty law instead and it can be helpful but there is much beyond it that cannot wait or be fully captured by treaty texts alone; in private law unification, its quality is often poor and its coverage only partial, its nature being mostly compromise that does not allow for much deeper thought nor easy adaptation. The international sales law of the CISG of 1980 is a vivid example of the limits; it is excluded on the whole by transnational professional practice. More importantly, it needs interpretation too so that treaty law of this nature cannot be seen in isolation and when properly understood cannot ignore the other sources of law either, among which it must find its own place in the hierarchy of norms, which it cannot itself determine although Articles 4, 7 and 9 make some attempt: see further the discussion in chapter 1, section 1.4.15 above. Mandatory transnational principle and practice prevail over it: see chapter 1, section 1.4.7 above. The EU, which has an infrastructure in this respect, may do better but has other problems and only limited authority in private law formation while its recent sales law initiative (CESL) is not promising and lacks sufficient ­quality.388 But at least it is acknowledged in its case law that it does not produce national law but constitutes a legal order of its own, which, in appropriate cases, will also allow for fundamental principle to prevail even over the texts of its founding treaties389 (see further also ch 1, s 1.4.5 above). A similar attitude may be expected in the transnational commercial and financial legal order if its workings are properly understood. Indeed, it may now be similarly argued that in the professional sphere we have a commercial and financial legal order with the lex mercatoria and its hierarchy of legal sources as its private law and with its own public order and policy requirements, potentially expressed in international minimum standards, notably in respect of competition issues and other market abuse, see chapter 1, section 1.5 above.390 This law may be 388  Dalhuisen (n 375); see further also H Eidenmueller, ‘What Can Be Wrong with an Option? An Optional Common European sales Law as a Regulatory Tool’, SSRN.com (2012). 389  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. This has become a check on private law legislation, although it may not (yet) be invoked directly between private parties. Non-discrimination according to nationality is no less fundamental, see Case 115/08 Land Oberoestereich v Cez [2009] ECR I-10265 and also applies in private dealings under EU laws, in this case directly. See further also Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA [2009] ECR I-9823 and in particular para 40 of the Opinion of AG Trstenjak, see further ch 1, s 1.4.5 above. This case law may also be seen in the light of the extension of the Court’s jurisprudence following Case C-33/76 Rewe v Landswirtschaftskammer fur 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. See further also D Kraus, ‘Die Anwendung allgemeiner Grundsätze des Gemeinschaftsrecht in Privatrechtsbeziehungen’ in K Riesenhuber (ed), Entwicklungen nicht-legislatorischere Rechtsangleichung in Europäischen ­Privatrecht (2008) 54, and A Metzger, ‘Allgemeine Rechtsgrundsätze in Europa’ (2011) 75 RabelsZeitung 845. 390  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. See further also G Shaffer, ‘Transnational Legal ordering and State Change’ in G Shaffer (ed), Transnational Legal Ordering and State Change (Cambridge, 2013) 1.

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applied by arbitrators and become part of their reasoning,391 upheld by state courts recognising their awards.392 IT means that while international arbitrators on the one hand have less power than judges to impose their own views, they may on the other hand show much greater sensitivity to legal transnationalisation and favour it in appropriate cases, especially when pleaded by one of the parties but no less in areas where they have acquired autonomous powers of law finding and decision taking.

4.1.10  The Powers of International Arbitrators In the foregoing it was submitted that we must place the role of the modern arbitrator in international cases and dispute resolution firmly in the international flows and in the law formation in that context. It follows that we must see the challenges of legal reasoning in international dispute resolution in that light. Without it, it may hardly be possible to understand what is going on and what the problems truly are. Purely local law and dispute resolution, especially if limited to statutory law (and the system underlying it and cases supporting it) presents too narrow a picture even if through liberal interpretation we may obtain some flexibility in international cases. That means in particular that the civil law method of reasoning may come short in international business dealings unless it adheres to a more liberal interpretation technique that d ­ iscounts all modern sources of law and can also take the internationality of transactions into account. This is so far hardly the case in Europe, not only on the Continent but not much in England either, where a narrow private international law ethos also prevails in the ordinary courts, although it may be better in international arbitrations as was

391  See ICC Case No 3131, 26 October 1979 (Bernardo Cremades, President) (1984) IX Yearbook Commercial Arbitration 109. It was probably the first major international arbitration in which the modern lex mercatoria was applied. 392  The French Cour de Cassation accepts the application of the modern lex mercatoria, 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 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. As these cases show, this is in itself increasingly contentious. 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, see also n 27 above, 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, thus accepting not only general principle as a source of law but allowing international principles and customs to operate in that connection also. Again, one may, however, regret the divergence here between arbitration and ordinary courts, which is, however, becoming increasingly accepted. In the 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.

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noted in the previous section assuming that international arbitrators are sufficiently aware of the dilemmas and challenges. Although international commercial arbitrators may be better placed in this regard and do more justice to the international commercial aspects of the case, their role must still be further considered and explained. This was posited in summary at the end of the previous section. Here we may also have to consider more precisely their powers. It has already been said several times that this is particularly relevant as to the question whether they can invoke and apply the new law independently, that is regardless of the representation of the parties. The easy answer is that the arbitrators’ powers are determined by the arbitration clause and the rules that may be incorporated into it, supplemented or corrected by the lex arbitri of the seat, usually the seat’s arbitration statute, but it was doubted before whether that still gives the full picture or any satisfactory picture at all: see especially the discussion in section 1.1.10 above. Another view is that the international arbitrators’ powers institutionally arise rather in the international commercial and financial legal order itself, or what the French now call the international arbitral order in which they deem the arbitration and its award to be founded:393 see the discussion in section 1.1.8 above. It follows that the arbitration clause (split out to this effect) and the powers of arbitrators are founded and covered by the laws of that order as may still be corrected by the mandatory laws of individual countries to the extent the arbitration in conduct and effect plays out on their territory or needs support there. That gives the lex arbitri of the seat powers only to the extent there is conduct and effect of the arbitration on its own territory but no more and they are not extraterritorial per se.394 It was explained before that leges arbitri of other countries are similarly relevant in as far as the arbitration plays out on their territory especially in terms of support and recognition and enforcement of any awards and the conditions in this regard. Another issue is one of characterisation. Is the power of the international arbitrator indeed contractual or has it become judicial in the international legal order? This question is often posed primarily in connection with the liability of arbitrators or their immunity but is more profound as we have seen in section 1.1.11 above.395 As a model, it would now appear preferable to look at the arbitrator’s powers as sui generis, or ­judicial only in a special manner or in special areas, and not therefore to compare them to ordinary judges, although there may be immunity. Rather it was assumed that these powers are founded in the transnational commercial and financial legal

393 See Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia v Société Rena Holding et Société Mnugotia Est Epices, Arrêt no 1021, 207 Revue de l’Arbitrage, 507 and for the delocalisation issue see s.1.1.5 above. It may still be true that this International Arbitral Order remains French style, but there is in France some ­significant acceptance of a more transnational approach, more recently perhaps best represented before the Hague Academy by Emanuel Gaillard, ‘Aspects Philosophiques du Droit de l’Arbitrage International’ (2008) 329 Receuil des Cours 49. 394  It is well established that there is no longer a double exequatur and that the annulment at the seat is not dispositive of recognition of an award elsewhere. Similarly for support. It should be asked from the courts in countries where it is needed and the prior intervention of the court of the seat would not appear relevant any longer. 395  See the discussion of Redfern and Hunter on International Arbitration (5th edn, 2009 and 6th edn, 2015) in this regard in s 1.1.13 above.

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order itself and are merely activated by the relevant arbitration clause, which could further delineate them but which is not the origin of these powers. The arbitration clause itself is governed by the law of that order (after proper separation from the rest of the agreement and its applicable law, itself a facility also derived from the law in that order),396 therefore transnational law or the modern lex mercatoria and its various legal sources, therefore not or no longer the law of the seat. It will be argued in section 4.1.12 below that internationally this dispute resolution facility is part of the law in action rather than the law in litigation, another key insight, it is submitted (see further ch 1, s 1.4.17). Founding these powers in the transnational legal order itself allows for a more objective view of what they are in the areas where international arbitrators have obtained their own authority, as in procedure and evidence, jurisdiction, arbitrability and reasoning. In property they may even have acquired equitable powers,397 also to give relief. In public policy and order issues they may now also have autonomy; competition issues and issues of market abuse were mentioned before. In pressing cases they also might use transnationalised notions of justice, social peace and efficiency as correctives. It was said before that this does not make these arbitrators amiable compositeurs; they decide on the basis of the (transnational) law as they find or construe it, but it reflects the fact that arbitrators may exert considerable powers in these areas, even though they are not free. It also means that they become more like judges, at least in these areas, and may then also see it as their task to clarify the law in these areas, but again that would be the transnational law and the law of the order for which they speak and in which their powers are founded. Indeed, in international arbitration, the international arbitrators’ transnational powers are fully recognised with regard to the law of procedure and evidence and also apply to the determination of the applicable substantive law in the sense that arbitrators no longer need to follow conflict of laws or other rules in this regard, certainly not those of the seat, if they find the result improper and may in appropriate cases opt instead also for the modern lex mercatoria as the substantive private law as we have seen (at least to the extent pleaded by one of the parties).398 This is what transnationalisation means. Importantly for the our purposes, once this is understood and accepted, this also applies to the method of reasoning, which is then also determined by the requirements and law in this regard emerging in the international commercial and financial legal order itself and which in principle international arbitrators define themselves. It also applies to the notion of arbitrability: regulatory issues may thus become arbitrable under transnational law, and in finance also issues of financial stability, market abuse and money laundering.

396  If parties still want a domestic law to apply they can choose it but in doing so they risk domesticating their arbitration and it is not advisable. 397  Dalhuisen (n 18) 510. 398  As was shown in n 391 above, the application of the modern lex mercatoria by international arbitrators has constantly been upheld in recognition and enforcement cases and may be deemed accepted. A proper analysis of the lex mercatoria will also discount a party choice in favour of a domestic law, which must still find its place among the other rules and is subject to higher mandatory ones in the transnational order, see s 1.2.2 above.

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This may have a special importance in international financial arbitration as set-off and netting (see s. 2.2.2 above) may then also be issues that become arbitrable and the decision conclusive even in respect of their effect on third parties, not themselves party to the arbitration when it comes to determining the extent of the set-off and the existence and ranking of security interests.399 This may also have a bearing on the effect of an intervening bankruptcy concerning any of the parties.400 To determine the rank of security interests in relation to outside interests and its bankruptcy effect may thus also enter within the powers of international arbitrators, just as it does for ordinary judges. Related issues of public policy and public order, either of the national or transnational type, may then also come within the ambit of international arbitration401 and international arbitrators may even be able to determine which governmental interests are to prevail in international business transactions. Again, this becomes a matter of their powers under transnational law and they could not possibly derive from the arbitration clause as these are issues not at the free disposition of the parties.402 Overriding issues or values might even be raised at the initiative of the arbitrators (always subject to a proper hearing and equality between the parties).403 It may well be that as a consequence financial arbitration is acquiring a different slant (as foreign investment arbitration has), this being the reason why it was treated as a special type of arbitration in part II above.404 If in this manner the legal reasoning is governed by the law and practices of the transnational commercial and financial legal order or international market place and essentially determined by international arbitrators themselves, their reasoning still has to be plausible and they must show restraint and good sense. These are minimum standards but they are few and only geared to avoiding excess. They may be seen as transnational arbitration principles, which underline that international arbitrators are in full control and principal spokespersons for the transnational commercial and financial legal order from which they derive their authority, and for the law that prevails in it. They can avail themselves in this regard of the modern functional methods if they wish, but it has already been said that legal sophistry and hairsplitting are much to be avoided. ­Especially, they must be aware of the submissions of the parties, not expand or complicate their disputes, understand the need for speed and be aware of the costs, as well

399  This area of third-party effect of arbitral awards may have to be rethought, also in the light of the US Supreme Court’s positive attitude towards class actions in arbitration, see Green Tree Financial Corporation v ­Bazzle, 539 US 444 (2003). 400  See s 2.3.3 above. 401  See also ss 1.2.3–1.2.4 above. 402  International practice is also cited in connection with the separability of the arbitration clause, see Art 19 Arbitration Act People’s Republic of China and Art 5(4) CIETAC Rules. It would appear to follow that the arbitration clause is then also covered by such practices, therefore by transnational law, unless parties have clearly indicated that they want it differently. Again, it is not or no longer a matter of the law of the seat. In any event, parties can choose another, whether wise or not, but any choice of this nature is still subject to the hierarchy of all sources of law within the modern lex mercatoria, here concerning international arbitration. 403  See s 1.1.4 above. 404  See also JH Dalhuisen, ‘The Applicable Law in International Financial Disputes’ in J Golden and C Lamm (eds), International Financial Disputes (Oxford, 2015) 169.

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as being aware of the consequences in this regard of their own interventions in the proceedings. In this connection they must be no less aware of the commercial nature of the dispute, which may impose its own efficiency considerations. These should be prime considerations in their legal reasoning, not least where they also exercise a law-formulating function in the areas where they have been given that ability under customary transnational arbitration law. To repeat, international arbitrators are there to solve a dispute, no more, and they are unwise to see themselves in any other role, especially as law makers, even if it may be the result.

4.1.11  The Issue of Consistency and the Meaning of Precedent Ultimately the issue of consistency may need some further attention in the context of international arbitration and the reasoning of arbitrators before we can move on. Is consistency in their findings relevant and if so within the ability of international arbitrators, to achieve? In practice, there may result inner inconsistency in the award itself and inconsistency of especially the legal findings with the broader tenets of the applicable law. This goes also to the question of legal systems and whether arbitral awards can make any particular contribution to them, and the feasibility and appropriateness of doing so. It then also goes to the meaning of precedent405 and ultimately reaches into the issue of legal certainty (beyond the paramount need for transactional and payment finality).406 Reasoning from any such system and the power of analogy are then closely related issues as they suggest some unity. Again, are there differences between ordinary judges and international arbitrators, business and consumer lawyers or common and civil law lawyers, public law- or private law-oriented practitioners? This would have an obvious bearing on their reasoning also. First, it is submitted that there is nothing obvious about coherence in the law;407 we know this very well from regulation but also from interpretation. Law is always work in progress, unless one adopts the academic civil law codification view in private law and its intellectual pretence, which indeed assumes one coherent rational system that by definition stands for reality (seeing it as entirely separate from the facts to which it applies) as discussed in section 4.1.6 above. In any event, there are other considerations and ever evolving values, which may seriously conflict: pressing aims of justice, social

405  See also Gilbert Guillaume, ‘The Use of Precedent by International Judges and Arbitrators’ (2012) 2(1) Journal of International Dispute Settlement 5. Famously, Karl Llewellyn demonstrated early on the problem with all precedent: it is Janus-faced, the process being driven by getting rid of precedents that are troublesome and by promoting precedents that seem helpful, see KN Llewellyn, ‘Remarks on the Theory of Appellate Decisions and the Rules and Canons about How Statutes Are to be Construed’ (1950) 3 Vanderbilt Law Review 395. See further also the comment in n 380 above. See for foreign investments, n 423 below. 406  Certainty is an unclear objective but finality is much more concrete and is a proprietary concept, see ­section 2.2.6 above. It raises problems as to the third-party effect of any awards, that is its effect on persons or entities not party to the arbitration, see the comment in n 393 above. 407  See K Kress, ‘Legal Reasoning and Coherence Theories: Dworkin’s Rights Thesis, Retroactivity, and the Linear Order of Decisions’ (1984) 72 California Law Review, 369.

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peace and efficiency have already been mentioned. All the same, it is often still assumed that consistency is inherent in all law once properly understood or that at least adjudicators must strive for it at least in civil dispute resolution. It has already been said that it may be a legitimate academic pursuit where finding order in disparate cases and legislative texts becomes an objective. Indeed, as academics, we must look for structure (see also ch 1, s 1.1.7 above) although this is quite different from presuming systematic unity and assuming some higher truth in each case and its resolution that may help solve other disputes more satisfactorily or objectively and which could motivate and support a measure of consistency. As just mentioned, even in codification countries, the search for unity or system has never been very obvious in regulation and in other more politically motivated parts of the law and its formation. In section 4.2.2 below the issue will be briefly revisited for foreign investment law. But in international arbitrations, it may be more fundamentally undermined by arbitrators being limited to the representation of the parties, also on points of law. In any event, is consistency merely an issue of logic depending on some intrinsic unity or is there also some overriding unitary notion of virtue or of social policy?408 In truth, it is seriously problematic to have consistency arguments enter legal reasoning as an overriding requirement even if it were easy to determine beyond the obvious. Few experienced lawyers would believe that consistency is innate in the law although many would accept that there is linkage and that there are common principles or notions. However, we are far from being able to draw conclusive inferences from this to achieve consistency in outcome and a coherent narrative or account, probably even less so in international disputes. Much would be mere opinion and suggests unity or a form of rationality which may not be there. The law hardly speaks with one voice, certainly in international cases, and there are in any event many (conflicting) rules and in individual cases other overriding considerations as just mentioned, which again may conflict. Decisions will reflect this and can hardly go beyond it. As already mentioned, in international arbitration the picture is further complicated by the requirement that parties must plead fact and law and that no other dispute is on the table in respect of either beyond what the parties have represented. The consistency argument becomes thus moot; consistent with what? Precedents are also irrelevant because the whole array of legal argument may not have been shown or tested. The decision is limited to the legal arguments the parties have put forward. It has already been said several times that it can only be different where international arbitrators have acquired autonomous legal power, but even then, in the practice of adjudication, each case needs still to be decided promptly in order for the dispute resolution facility to remain credible. We must move on and not doing so is draining, inefficient and costly, particularly in international commerce and finance. In commercial arbitration, there is a need for speed, cost control, conciseness, focus and closure. Again, disputes must

408  N MacCormick, ‘Coherence in Legal Justification’ in A Peczenick, L Lindahl and GC van Roermund (eds), Theory of Legal Science (1984). Finding unity is not at the moment a priority in advanced American scholarship, which is more interested in policies and in keeping the law living for the next generation and what that takes. See for system thinking nn 349 and 370 above and n 425 below.

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finish, it is an old rule: litis finiri—hence also the possibility of rougher justice in commercial cases and, importantly, in international commercial arbitrations commonly the absence of appeals or similar types of review. In any event, who is to say that appeal judges always know better. It is often believed that speed comes at the cost of justice, but that remains very much to be seen. There is no justice if it cannot be obtained within a reasonable period of time. It follows that beyond the obvious, even a search for consistency, which itself may only be imaginary, cannot be an overriding priority and cause of delay, certainly not in international arbitrations. It is easy to get lost in theory but in the circumstances a search for consistency beyond the obvious could not reasonably or realistically be the task of international arbitrators who are in any event ill-equipped for it, especially when considering the applicability of the law from many different sources. In a perfect world the whole law would be consistent but there may not then be much need for it. At best consistency is a minimalist requirement and aim. Again beyond the obvious, it is an unmanageable concept and the search for it may be very destructive. Lord ­Bingham thought that looking for consistency was a vice even in judges,409 and it ­cannot be more strongly expressed. It would be all the more erroneous in international arbitrations. Asking for it means not understanding it and international arbitration’s limited scope.

4.1.12  Relevance and Materiality of Evidence The issue of arbitral powers, consistency and reasoning may particularly come to a head in matters of evidence. The 1999 non-binding but authoritative IBA Rules on the Taking of Evidence in International Commercial Arbitration in its Article 9 covers the subject of admissibility and assessment of evidence and indeed leaves it to the tribunal to determine these issues. Article 9(2) excludes from evidence or production of documents, statements, oral testimony or inspection all that lacks sufficient relevance or materiality or is privileged or imposes unreasonable burdens to produce. Confidentiality, political or institutional sensitivity may also be invoked. Article 9(5) deals with inferences when no satisfactory explanation for not producing is available. If one accepts that international arbitrations are now delocalised and operate under transnational law, one may consider these Rules general principle and as such a part of that law. Relevance and materiality are not defined. They are usually not distinguished but taken together and the true meaning may remain problematic. Again it must be assumed that the tribunal has the last word (except perhaps in prima facie cases). So also Article 20(6) of the AAA International Arbitration Rules, see further Article 27(4) UNCITRAL Arbitration Rules, and for this discretion also s 34 English Arbitration Act and s 599(1) German Code of Civil Procedure. Challenges in the courts of the seat or

409 

See Obituary in the Daily Telegraph, 13 September 2010.

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elsewhere hardly seem possible on the basis of an improper evaluation of evidence.410 Common sense and arbitral convention or practice are decisive, in which what arbitrators may find helpful and relevant in their reasoning figures large. Issues of credibility (or reliability) and sufficiency are sometimes distinguished. This concerns more particularly the weight of the evidence presented and its more precise probative value, which also goes to inferences. A question may be how far the attitude of arbitrators in this regard can be an issue in the arbitration itself and subject to argument. Are the parties still in ultimate control when it comes to these issues also? The rules cited above are not mandatory. The question of admissibility and sufficiency may indeed be subject to further agreement between the parties but the evaluation of the evidence presented and whether it rationally supports a party’s allegations may be considered a typical arbitral function which cannot be pre-empted by the parties or delegated. Transnational public policy or due process may also be an issue here. What is relevant for the present discussion is that the established rules do not give a great deal of guidance as to how and why certain evidence should be preferred and substantially leave discretion to international arbitrators whose findings in this regard can hardly be challenged in domestic courts or be the subject of review in recognition and enforcement proceedings under the New York Convention. They may say something about it in their reasoning but it has already been said that it is often difficult to explain why one prefers one witness or argument over another beyond plausibility. It is not dissimilar in juries and it may be the proper analogy, an area where much empirical research has been done in the US. It shows all the irrationalities in decision taking, its unpredictable nature, and its sensitivity to being hijacked by one preponderant voice. Cross-examination which is geared to questioning the credibility of the witness might not make much difference.411 It requires a great deal of experience in the decision takers, which may not always be sufficiently present but there must also be room for new entrant arbitrators. In any event, much cannot be explained, it is not a mathematical equation. The process is complicated if there is some expertise in the tribunal itself, not shared by all members. It may even go into the direction of replacing the opinions of expert witnesses without cross-examination, another undesirable twist in arbitrations already mentioned.

4.2  A Proper Perspective 4.2.1  Conclusions so far What does this all add up to for the task and reasoning of international arbitrators in international commercial and financial disputes? Again they are substantially in charge 410  See also GM von Mehren and CT Salomon, ‘Submitting Evidence in an International Arbitration: The Common Lawyer’s Guide’ (2003) 20(3) Journal of International Arbitration 290. 411  See also the discussion at n 355 above.

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of the proceedings, determine the rules to the extent parties have not done so and can only be faulted for excess. At least in these matters they operate under transnational law. They also do so in procedural and evidence matters, probably also in matters of jurisdiction and arbitrability. That is delocalisation. It was said earlier that international arbitrators are likely to have some cocktail of considerations in their reasoning, which may remain unexpressed, probably the result of the different legal backgrounds from which they hail. They may give (some) reasons, probably the more proximate ones, but might in particular not find it necessary or useful to explain their method. The subject is difficult to unravel, but there are a number of aspects and elements that were identified. (a) The first observation to make is that the reasoning of international arbitrators could hardly be more ‘rationally determinate’ than the reasoning of ordinary judges. In any event, arbitrators were never ‘bouches de la loi’ as judges were once supposed to have been on the European Continent. Adjudication is not a ­mathematical or systematic exercise; causality and rationality acquire a distinct legal meaning, more readily acknowledged probably in international arbitrations. (b) There is the further important issue that arbitrators are limited in their reasoning by what the parties have presented as arguments and by way of evidence. Law must be pleaded as fact and international arbitrators are not judges or law makers. There may be powers to overcome these constraints in certain areas or situations, but they must be exercised with the greatest of care. (c) International arbitrators may be able to do so especially when they consider overriding public policy or order. As a minimum, there will have to be a hearing and parties must be treated equally as a matter of the utmost due process. Further delays and costs must be considered, but in appropriate cases NGOs and others who attempt to articulate the public interest may be asked to help and clarify. (d) Although arbitrators may have great powers, they are not free, including in their reasoning. Their freedom in these matters is in particular subject to the practices developing in the transnational commercial and financial legal order itself and to its public order requirements in which the powers of the international arbitrator are (it was argued) themselves founded, which may indeed allow them also to raise public policy issues but only in appropriate cases. (e) Within these confines, international arbitrators determine the rules concerning their reasoning themselves, much as they also determine their own jurisdiction, issues of arbitrability, and rules of procedure and evidence. The true test is recognition in countries where enforcement is needed, which, if international arbitration is to survive, will only be denied on the basis of clear excess. That is also the gist of the New York Convention, which does not cover the reasoning of arbitrators and it is no bar to recognition and enforcement unless it rises to the level of the public policy bar. (f) The commercial nature of the transaction between professional parties also enters the equation in which literal interpretation of texts may figure large, particularly of contracts when a roadmap and risk management tool was intended. Issues of transactional and payment finality also figure prominently. There may be rougher but also quicker justice and concerns for speed and cost, d ­ emonstrated

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also by conciseness and focus. There is an acknowledged need for closure, further supported by the absence of appeal and reviews. Ordinary judges should not be copied. (g) It means that international arbitrators must promptly decide the case, focus on the essence, must not go beyond what is in dispute, do not formulate rules or issue general dispositions, need not set examples nor create precedents (or build a system through a jurisprudence constante), whose binding force would in any event be contested in international law. They do not speak to the public at large; tracts on their methods and attempts at deeper insights are to be avoided. (h) Here again international arbitrators may be freer than ordinary judges; especially they need not worry about the impact on the system while a search for consistency is also inappropriate beyond the obvious. Not having a lex fori of their own (or it would be the transnational law itself), it is not their task to promote and explain local laws or any other. (i) International arbitrators must concentrate on the facts, being guided by the parties only as to which facts are legally relevant and in selection of which they are also not to go beyond the different views of the parties in the matter. Again, law is here pleaded as fact and the whole arbitration becomes a fact-finding mission to the extent these facts are disputed, unless arbitrators are given autonomous law-formulating powers. (j) Other elements discussed above were the power of international arbitrators to apply the modern lex mercatoria (and its hierarchy in which domestic private law may still be the residual rule) upon the proper pleading of (one of) the parties, validate the direct or indirect parties’ choice of such law or other laws and assess in the latter case their rank and meaning, and in international transactions also determine and recognise the relevant domestic governmental interests in terms of regulation and any other overriding domestic values subject to formulating, in appropriate cases, minimum transnational standards (or policies). (k) A large measure of discretion (or comity) in international cases is confirmed, but always within a legal framework that defines the powers of international arbitrators, which comes down to transnational customary law therefore to what it has become normal to expect in international arbitrations as part of the modern lex mercatoria. Here, also on the procedural side, other sources of law, notably fundamental principles in terms of due process, treaty law, in particular the New York Convention, and general principle as represented eg by the Model Law also figure besides the wording of the arbitration clause, which itself is governed by transnational law and accordingly separated from the rest of the contract. It was noted that in these matters international arbitrators unavoidably bring to the arbitration the ‘ballast’ of the legal regimes from which they hail, although the example of ordinary judges in their own countries is unlikely to be helpful. In this connection, there may result important differences between a more structured or rule-based civil law approach as compared to a more searching fact-based common law approach, a more formal European approach as against a more ‘realist’ American approach, and a more commercial rather than consumer law attitude, or perhaps even a more p ­ ublicor policy-oriented rather than private law-oriented approach. That is all likely to

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be discounted in the way international arbitrators may reason, even if they may not themselves fully realise it. In selecting arbitrators, parties should be aware, but also must accept the result of this cocktail from a tribunal that they have (mostly) installed themselves. In sum, in their reasoning, international commercial arbitrators have and exercise great freedom. Under customary transnational law, they largely determine themselves how to proceed in this regard except if showing excess. Asking for a ‘clear explanation’, or a ‘full picture’, or even ‘elementary logic’ suggests an insufficient understanding of the situation and of the possibilities.412 These are criteria that soon become unmanageable beyond prima facie defects. Realistically, arbitrators cannot even vouch for the possibility that their preferences for some arguments in some aspects of the case may contrast with their preferences for other arguments in others, if only because it may depend on what parties have argued. More neutral may be the requirement that the reasoning on points of fact and points of law can be followed to its conclusion.413 Besides the other elements already mentioned, such as speed, cost, focus and conciseness, that puts the accent on plausibility. Again, only the most obvious contradictions can and should be the source of criticism. Consistency within the award, let alone with other awards or with the entire law of international business and investments is not a realistic demand, even if it was clear what the concept of consistency really meant and that the applicable law was also clear. One does not need to have a class of the best students in front of one to realise that little of the law and of the cases concerning it hangs together. Was it ever otherwise in any other part of the law, especially in areas that are in full development such as the transnationalisation of modern commercial and financial law? If that is true, why should it be a special concern in arbitration with its more limited ambition and scope. In its generality, with present insights, not much more can be said on how international arbitrators should conduct themselves in their approach to dispute resolution and in their reasoning. Although much can be made of the different approaches and the impact of legal cultures upon them, they come together in international arbitration and it is then the principal task of international arbitrators to reason in the best way they can, ultimately as they deem fit, again being aware of the need for speed, to limit cost and to show conciseness and focus in that context and considering the need for closure. Legal sophistry is to be avoided. If there is a risk here, it is one which the parties selecting the arbitrators are usually willing to take; if not or if they sense that things are getting out of hand they will settle. In the formative era of legal transnationalisation, including the dispute resolution facilities, in which we find ourselves, greater clarity will perhaps come in due course but cannot be expected now. This should not deter

412  To require the award to be convincing, see P Lalive, ‘On the Reasoning of International Arbitral Awards’ (2010) 1 Journal of International Dispute Settlement does not introduce an objective standard either and also presents an unmanageable test. 413  The view in MINE v Guinea ICSID Case No ARB/84/4 Decision on Annulment, 22 December 1989 that the minimum requirement is not satisfied by contradictory reasons seems therefore untenable. Frivolous reasons, to which this decision also refers, may be more to the point.

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or embarrass us and does not have the appearance of calamity. Transnationalisation is work in progress as all law always is. There is one further observation to make. If it is true that common law lawyers reason differently because they are fact oriented, have several sources of law to consider, also look differently at interpretation, and do not believe in system thinking, then it should be clear that since the transnational law in this area is equally based on various sources of law and does not at this stage aspire to system thinking either, the common law approach to reasoning is more likely to gain in importance transnationally. That may also include its approach to precedents, not so much in that they would be considered binding—it is unlikely in international dispute resolution—but as a collection of pictures among which the ones found closest to the case in question will acquire special significance and may provide the more decisive guidance or analogy. It may be observed that this is already largely the approach to and application of foreign investment law, which, as part of public international law, has its variety of legal sources confirmed under Article 38(1) of the Statute of the ICJ while cases seem to be argued out in a common law manner. There is or should be no system building at this stage here either. Indeed, this is the area of transnational administrative law that may to some extent now be setting the pace for all arbitrators at the transnational level, at least to the extent the public interest becomes engaged, and should be watched as such, but again its experience is not decisive.

4.2.2  The Situation in Foreign Investment Disputes It was concluded in the foregoing that international arbitrators must find on the basis of the facts as presented by the parties and on the basis of the law as they formulate it in the case, although they are given great freedom and are also in charge of their reasoning beyond excess. They must explain but beyond being plausible, concise and focused, taking into account the need for speed and to limit the cost, they must be given the benefit of the doubt. Not even under the New York Convention is the quality of the reasoning a matter of legal review. It is submitted that international arbitration cannot prosper without this insight. Any other attitude amounts to an ethos of appeal and pseudo-judiciality. In particular, it is necessary that the awards remain short and are promptly delivered. Legal tracts should never be written. Arbitrators should not get lost in recitals and arguments, must be to the point, and should not hesitate to cut knots. In fact, this should be ­encouraged;414 in commerce, the nature of disputes resolution requires it. Here we may not at the moment be moving in the right direction, at least partly because there may be little

414 In Mohsen Asgari Nazari v Islamic Republic of Iran (24 August 1994), Judge Howard Holtzmann mentioned ‘the Tribunal’s growing tendency to write Awards that are overly long and excessively detailed’. This is now much a more general complaint, see also n 23 above. The reason is that many international arbitrators do not seem to have a clear idea of their role, probably never thought much about it and implicitly believe that they are some kind of surrogate judge, see further s 1.1.11 above.

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understanding of what legal reasoning is, what it requires in international a­ rbitrations, and what the task and powers of international arbitrators are in this respect, while commentators often have little idea of the operation of the international market place and its needs, the meaning of the transnational commercial and financial legal order, and how dispute resolution in it functions, and are themselves in the mindset of domestic appellate courts. As is well known, the issue acquires special importance and relevance under the Washington Convention where failure to state the reasons on which the award is based is a ground for annulment (Art 52(1)(e)). This is notably different from the admitted ground for refusal of recognition under the New York Convention and may indeed suggest a more judicial approach in foreign investment arbitration, further supported by its (often) stronger public policy content. Of all the grounds for annulment in ­Article 52(1), this one comes closest to an appeal, but it is not—so much is clear and that is a crucial point. The discretion of international arbitrators in their legal reasoning is not therefore at issue nor is the fact that they have the last word here, but what Article 52(1)(e) then still is or means to achieve, becomes contentious. The Lucchetti case415 elaborating on the earlier decision in MINE416 suggests that as a minimum it must be possible to follow the reasoning of the Tribunal on points of fact and law to its conclusion. The requirement to state reasons is then satisfied even if there is an error of fact or law. In the annulment decision concerning Vivendi II (para 247(iii)),417 arbitrators—burdened by the fact that virtually everything in the award was contested—thought unanimously that the reasoning used by the Tribunal must have been ‘plausible, that means adequate to understand how the Tribunal reached its decisions, it being given the benefit of the doubt if there is room for a difference of opinion in the matter’. This was also believed above to be the bottom line in international commercial arbitrations and bears out the findings in the Azurix annulment case (para 53) on the subject418 stating that ‘It is generally accepted that this ground of annulment only applies in a clear case when there has been a failure by the tribunal to state any reasons, and not in a case where there has merely been a failure by the tribunal to state correct or convincing reasons’ and in the Vivendi I annulment case (paras 64 and 65)419 stating that ‘annulment … should only occur in a clear case’. It is submitted that the annulment ground of Article 52(1)(e) was always poorly ­conceived and should never have entered Article 52 in this form without clarification. As already mentioned, the New York Convention in its recognition and enforcement

415  Industria Nacional de Alimentos SA (Lucchetti) v the Republic of Peru, ICSID Case No ARB/03/04, Decision on Annulment, 5 September 2007. The requirement of a properly conducted interpretative process or ‘proper factfinding procedure’ per Sir Frank Berman (dissenting under para 15) is troublesome. What is proper beyond the most obvious aberration? When three original arbitrators and two in annulment proceedings thought differently, it is less convincing for one dissenting arbitrator in annulment to persist. 416  See n 413 above. 417  Compania de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment II, 20 August 2010. 418  Azurix v The Argentine Republic, ICSID Case No ARB/01/12, 1 September 2009. 419  Compania de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment I, 3 July 2002.

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conditions of foreign awards does not refer to anything similar. In investment arbitrations, the problem is compounded by the fact that Article 48(3) of the Washington Convention requires that the award deals with every question submitted to the tribunal and states the reasons upon which it is based. This sounds reasonable enough but is upon proper analysis highly undesirable, as already submitted, makes the awards potentially endless, gives arbitrators every incentive to increase the already considerable costs, and is likely to require a great deal more time—important elements in the present discomfort with ICSID arbitrations, where speed and cost concerns often appear of little concern to arbitrators. With the consent of the relevant party, in practice the requirement to deal with every question may be whittled down to what arbitrators consider to be the fundamental arguments in the case.420 This should be the default rule. From the history of the Convention it is in any event clear that the normal remedy is a request for a supplementary decision under Article 49(2), not annulment under Article 52(1)(e).421 It may be recalled in this connection that ordinary judges normally only choose those arguments which they consider relevant for their decision; no more is expected from them. All the rest is irrelevant. If it sometimes makes sense to follow the attitudes of ordinary judges in international arbitrations, that should in this instance also be the approach in international commercial and investment arbitrations and if necessary the arbitration clause or rules should make that increasingly clear. There is absolutely no reason why international arbitrators are bound to do more. Of course, the Washington Convention in its approach to reasoning is hard to change and we have to live with the present text in investment arbitrations, although in the view of this book it evolves under the influence of the other sources of international law and their hierarchy as the New York Convention also does. In any event, the arbitrating community and ICSID annulment arbitrators in particular may be well advised to show restraint. It should be noted also that except again if there is a prima facie case, the issue is not the sufficiency, quality or adequacy of the reasoning, but simply the lack of the reasons on which the award is based.422 Technically they could be any reason or only the most immediate ones. The argument is heard that ICSID awards are different because the public interest is engaged so that the world at large has an interest and special care must be taken. It is then often also argued that only arbitrators with special expertise in this field can be chosen. This is self-serving and overstates in its generality the role and importance of arbitrators—and the drafters of the Washington Convention while opting for arbitration must have been aware of the confines regarding arbitrators and accepted or even preferred them; they could have created a court instead. It may also be noted that

420 See

Vivendi Annulment II n 417 above. See also the important Background Paper on Annulment for the Administrative Counsel of ICSID, August 2012, n 104. 422  That is also how the author understands Professor Lalive, see n 412 above, who considers investment arbitrations a different category, but see for a similar attitude in this respect in investment and commercial arbitration MINE, n 413 above, at para 5.08 and earlier Asia Corporation and others v Republic of Indonesia Arb/81/1 Resubmission (Amco II) para 7.55. 421 

658  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

at the domestic level, this point is not normally made in respect of ordinary judges either, who can be quite brief and straightforward also in high-level constitutional and administrative cases. But it could still be said that since ICSID arbitrators do not have the same institutional status and standing as ordinary judges, they must do more. This is also a misconception: the many cases we now have, including a considerable number of annulment cases, do not truly show that they can or should. Most are modest in their elucidation and in their contribution to our knowledge, others confuse, but this is common in all case law and a more aspiring form of reasoning is unlikely to make much difference. Rather it may lead to preciousness and self-consciousness or pedantry or to a show-off culture on the part of arbitrators, which serves nobody; again, it also slows down the process and increases cost considerably for no obvious reason. If present arbitral practices now favour all of this, this may be considered a misfortune and a serious self-inflicted challenge to the credibility of international arbitration. It again raises the important issue of the increasingly judicial nature of these proceedings. Such a sentiment may nevertheless also be behind a desire in some to develop a jurisprudence constante as a coherent system of rules, at least in foreign investment law through arbitration.423 Again, system thinking of this nature raises many questions. It has already been submitted that it is a bad idea in international arbitration424 and finding structure (if any) in the foreign investment cases under a host of different BITs must at this stage be left to academic analysis. It is a considerable weakness in the present ICSID practice that many seem to think differently and assume that arbitrators and annulment committee members have a broader remit. This would go far beyond their capabilities. Again, the Washington Convention, having accepted arbitration as the normal dispute resolution facility in foreign investments (rather than setting up its own court), does not suggest it in any way. A more modest disposition in international arbitrators, in first instance appointed by the parties themselves, would not be detrimental, including to the world of foreign

423  See also Reisman (n 347). Foreign investment arbitrators are divided. In Methanex v United States, ­ NCITRAL, Decision of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, 15 January U 2001, it was clearly spelled out that ‘this tribunal can set no legal precedent, in general or at all’, while in AES v Argentine Republic, ICSID Case No ARB/02/17, Decision on Jurisdiction, 26 April 2005, para 30, it was said that ‘this tribunal remains sovereign and may retain … a different solution for resolving the same problem’. Others have, however, referred to the ‘need to ensure the coherence and well being to the system of justice established by the drafters of the ICSID Convention’, see Bureau Veritas; Inspection, Valuation, and Control, BIVAC BV v Republic of Paraguay, ICSID Case No ARB/07/9, Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009. There is sometimes also emphasis on like cases being decided alike, see Daimler Financial Services AG v Argentine Republic, ICSID Case No ARB/05/1, Award 22 August 2012. Other cases have referred to the goal of establishing a predictable, stable legal framework for investments, Suez and Vivendi Universal v The Argentine Republic, ICSID Case No ARB/03/19, 30 July 2010, n 189, or to legitimate expectations, EDF International v ­Argentine republic, ICSID Case No ARB/03/23, Award 11 June 2012. 424  The reference in Glamis, cited in n 369 above, to ‘greater contextual awareness’ was not followed by an identification of the ‘systemic implications’. In the meantime, nobody denies the persuasive force of earlier decisions, but we are still far away from systemic interpretation. Restraint is mostly counselled unless perhaps there are lacuna which, in a non-positivist mindset, are hard to distinguish from interpretation. A case-specific attitude remains therefore the more prudent in international arbitration, see also Reisman (n 347). This also results simply from the fact that arbitrators are limited to the disputes in the facts as presented by the parties, law being pleaded as fact also, although international arbitrators may have more of an independent role when the public interest is engaged as has been intimated throughout.

Part IV  The Reasoning of International Arbitrators  659

investment arbitration. The key is that a genuine effort to solve the dispute is made in each case by the arbitrators and that there is clarity (rather than obfuscation). Arbitrators should not take upon themselves more than they can handle. It puts the much criticised ICSID annulment facility in the spotlight. Here again, unless a prima facie case can be shown to exist in any of the five annulment grounds, including the last one on the legal reasoning, the awards should stand. That is of much greater importance than splitting hairs on the details of the decision including the reasoning where, as the annulment cases have amply shown, reasonable people my easily differ while the status and true powers and authority of the original arbitrators in this area and, in so far as the reasoning is concerned, the problems with it are often poorly understood. In sum, where the public interest is engaged, the general task of international arbitrators does not change but there may be a need for greater support, potentially from an international court or similar institution, which may also more generally supervise international arbitrators’ behaviour, and, if requested to do so, give preliminary opinions in public policy and public order issues425

4.3 Conclusions For the reasons stated, it is innate in international arbitrations that there are potentially great differences in the manner and method of reasoning, which must in essence be resolved by arbitrators who are likely to come from different backgrounds and traditions. This being the general position, it was noted that in the practice of international dispute resolution, the reasoning may become closer to that of common law dispute resolution, the reasons being the emphasis on facts, the multiple sources of this law, the different approach to interpretation, and the use of the English language and its legal terminology. There is no system thinking, no search for consistency, and not much for precedent either; much depends in this respect on what the parties have pleaded and that may be very little. International commercial arbitrators are not only in charge of their own reasoning as guided by the submissions of the parties and their definition of the dispute, but they also determine the rules upon which it is based in conformity with the practices developing in this connection in the transnational legal order itself and in its dispute resolution facilities. For them, the reasoning thus becomes largely an issue of customary law in which more fundamental (arbitration and due process) principle may also figure. That is the consequence of their institutional status and the powers they have in the international commercial and financial legal order, where they also determine their own jurisdiction and the arbitrability of the issues, as well as the applicable procedural rules while as to the substance of the law, in commercial cases, they may even resort to the modern lex mercatoria unless parties want it otherwise. Even then, international arbitrators must determine how far such a choice goes, especially in respect of

425 

See the discussion in s 3.5.4 above.

660  VOLUME 1: THE NEW LEX MERCATORIA AND ITS SOURCES

g­ overnmental interests and overriding values or other mandatory rules or policies at the relevant national and now even transnational level. It does not mean that there are no limits to their powers under the transnational practices that have so far developed, including minimum requirements for their reasoning, but they are few and are only directed towards excess. Speed, the limitation of cost, the need for conciseness, focus and closure are important considerations. The situation is not basically different in foreign investment disputes, even in annulment cases. It follows that in both international commercial and foreign investment disputes, the reasoning sustaining the awards should be given the benefit of the doubt, assuming the findings are plausibly sustained and parties in their own arguments have made that possible. Only prima facie cases should be treated differently and they would be rare. Anything more is destructive of international arbitration and its effective functioning and operation, not least also in foreign investment disputes, and suggests an appeal ethos. If there is to be criticism, it should be in the area of delays, added cost, and lack of conciseness and focus in the award. It has already been said that help may be needed in public policy issues. Here the creation of an international court or similar institution becomes relevant. It may then also go to the supervision of arbitrators, not as a matter of appeal but rather as a facility to strengthen their credibility and support their legitimacy. This does not concern the reasoning directly, but rather enters into the whole world of international arbitration and also touches on the internal procedures of arbitration institutes especially in matters of appointment, fees and billing practices, and guidance. Where international arbitration is a business for the participating arbitrators, attitudes are intertwined with other considerations, notably conflicts of interest, for which the requirement of ‘independence’ stands as a common metaphor,426 but there are much broader issues, more clearly expressed in the IBA’s Guidelines on Conflicts of Interest (2004) and the ABA’s Code of Ethics (2004): see section 1.1.12 above. The concern is here not only impartiality and independence, but rather the undiluted appearance of them. Another impediment is the progressive commercialisation of the international arbitration practice, which is increasingly laying it low in the international estimation and rendering it suspect in civil society as the problem with ISDS in the Transatlantic Trade and Investment Partnership (TTIP) shows (see s 3.5 above). With international arbitration having become a major force in international dispute resolution—often the only realistic alternative, if by no means a perfect one—there is

426  The hunger for cases is obvious and there is an urgent need for billing practices and amounts charged for fees and expenses to be disclosed. ICSID should do so in respect of all past, present and future cases. In the rare (UNCITRAL) cases where this must be done, of which the Merrill & Ring Forestry LP v Government of Canada, ICSID Administered Case, 31 March 2010, was a prominent example, it may give raise to amazement. Transparency in this regard is appropriate and would clear much of the air. The ICSID Secretariat and the other main arbitration centres should also publish their internal procedure manuals and resist being seen as appointing agencies for the insiders. Cross-appointments between the various arbitrations institutions and their boards should be avoided. The close relationship between the law firms and the arbitrators they appoint should end. International judges should curb their eagerness to become international arbitrators at the same time. International arbitrators should learn to keep their distance, much as ordinary judges do. In this aspect they can learn from them. It would be helpful if they could consider their appointments as honorific and reputational rather than a sources of substantial extra income.

Part IV  The Reasoning of International Arbitrators  661

a need for proper oversight. It is time for international arbitration practice to mature and recognise and reinforce its status to avoid a deficit in credibility and confidence. As already noted, there is a tendency towards copying judicial proceedings, also in the reasoning, to suggest greater legitimacy but this is a false departure and better oversight constitutes a more adequate response. To repeat, this oversight is not a matter of appeal or even one of reducing the powers of international arbitrators, which derive from necessity not from choice, but rather one of confirming international arbitrators in their true task of facilitators, where transparency and accountability, independence and impartiality (as well as the appearance of them), professionalism and moral standing are important further aspects, but no less the ability and confidence to decide, avoid sophistry and cut knots.427 To protect the distinctive nature of international arbitration and also to preserve its standing, we may thus need a new supervisory authority, not to replace international arbitration but to reinforce it. It may need treaty status and could also provide direction, giving preliminary opinions to arbitrators when asked, especially if the public interest becomes engaged,428 maintain order and set standards, which can hardly be left to often erratic reviews where existing, either under local challenges at the seat, under the New York Convention in terms of the conditions for recognition and enforcement of international commercial awards, or under the Washington Convention for the annulment of foreign investment awards, or in any other form or manner as in LCIA or ICC courts under their respective rules. The present project for a TTIP between the US and the EU will require a dispute resolution mechanism in which international arbitration may still be allowed to play an important role but the creation of such an international supervisory body should be urgently considered. It may take much of the animosity towards foreign investment arbitration off the table and a similar body may also reinforce the credibility and legitimacy of commercial and financial arbitration, especially where public policy becomes increasingly engaged.429 See for this discussion further section 3.5.7 above.

427  The 2014 UNCITRAL Rules on Transparency in Treaty Based Investor-State Arbitration may help for proceedings under the UNCITRAL Rules. 428  It is important especially when ‘super’ public purpose must be established to override investors’ ­protections although conceivably still subject to some compensation. The same could apply to determine when indirect t­ akings become confiscatory, see for these problems Dalhuisen and Guzman (n 255) and s 3.4 above. 429  See also JH Dalhuisen, Letter to the Editor of the Financial Times (7 May 2015).

662 

Index Introductory Note References such as ‘178–79’ 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 repeatedly throughout the book) as entry points has been minimised. Information will be found under the corresponding detailed topics. a-national awards  390, 439, 644 abandonment  58, 75, 115–16, 313 absence of appeals  543, 650, 653 absolute impossibility  384 abstract models  112, 178 abstract system  6, 250, 369, 522–23 abstraction  99, 107–8, 123, 133, 173, 182, 522, 524 abuse of rights  45 academia  48, 120, 122, 124, 126, 152–53, 155–56, 169–71 academic models  5, 7, 109, 122, 124, 151, 153, 169 academies  9, 53, 102, 111, 117, 125, 178, 263 acceptance  36, 38–39, 50, 94–95, 159, 161, 275–76, 363–64 language, see offer and acceptance language accountability  271, 273, 426, 429, 545–46, 607, 609, 614 Accursius  89 acquired rights  298, 305, 308–9, 385 Acquis group  249, 251 actes de commerce  56 Action Plan, EU Financial Services  246 activities, professional  63, 245, 254, 282, 353 ad hoc arbitrations  406, 463 adjudicatory jurisdiction  330, 335–37, 346, 378 administrative contracts  201, 289, 333, 563, 577–78, 598 administrative law  327, 333, 488–89, 534, 537, 563, 578, 598

administrative tort  201, 289 admiralty  15, 17, 73, 286, 315, 351 ADR (alternative dispute resolution)  201, 236, 383, 400, 404–5, 441, 617 agency  36, 186–87, 189, 240–41, 278, 307, 331, 348 indirect  36, 357 undisclosed  20, 36 agents  20, 38, 187, 240, 357, 365, 517, 520 aggregation principle  502 aircraft  221, 241, 306, 504, 509 airline claims, mutual  35, 285, 492 Alfonso X El Sabio  91 alternative dispute resolution, see ADR ambiguity  135, 577, 585, 602 American academic attitudes  151–57 American Arbitration Association (AAA)  406, 473 American courts, see United States, courts American Law Institute (ALI)  55, 240 amiable compositeurs  16, 239, 390–91, 401, 404–5, 552, 646 analogical interpretation  9, 129–30, 186 annulment  68, 478, 481–82, 571, 573, 617, 654, 656–61 anthropomorphic attitude  25, 40–41, 64, 244, 249–50, 364, 367, 635–36 anti-competitive behaviour  4, 218, 264, 355, 537, 554 Anwartschaft  33, 186 apparent authority  218, 357, 365 appeal facilities  398, 400, 616–17

664  INDEX

appeals  70–74, 122, 236–38, 397–401, 407–9, 423–25, 546–48, 624–26 absence of  543, 650, 653 on points of fact  399, 484 on points of law  122, 605, 638 appellate judges  234, 239, 398, 477, 634 Appius Claudius  78 applicability  216, 224, 231, 310, 312–13, 319, 501, 507 applicable domestic law  300, 324–25, 351–52, 369, 386, 388, 496, 498 applicable law  70–72, 305–9, 340–46, 493–501, 550–52, 573–77, 584–85, 627–28 clauses  442, 466, 494, 551 applicable private international law rules  70, 344 applicable private law  321, 360, 491, 518, 527, 559, 580, 584–85 applicable substantive law  70, 287, 386, 418–19, 424, 437, 441, 573 appointment of arbitrators  401, 435, 456, 474, 479–80, 485, 546 arbitrability  285, 417–18, 420–21, 455, 459–61, 466–67, 470–71, 482–85 and jurisdiction  401, 459, 470, 482, 484, 557, 652 arbitral awards  71–74, 208–9, 285, 445, 482–83, 540–41, 619–20, 647–48 international  284–85, 436, 483–84, 486, 538, 542, 545, 549 recognition and enforcement of international awards  66, 69, 73, 285, 405, 409, 484, 486 arbitral tribunals  437–39, 445–46, 455–56, 458–59, 468–69, 479–80, 552–53, 600 arbitration  65–68, 398–408, 410–27, 429–39, 453–60, 462–67, 477–82, 537–41 BIT  564, 572 clauses  67–68, 201, 211, 334, 336–39, 376–77, 383, 390 commercial  73–74, 238, 338–39, 353–54, 383, 400, 486, 606–8 confidentiality of  382–83, 400 international  65–67, 69–75, 402–4, 410–38, 453–55, 460–66, 536–47, 644–61 and its nature  401–2 panels/tribunals  72–73, 337–39, 385, 395 arbitrations, financial  487, 489–95, 497–99, 505–7, 511–13, 525–27, 545–47, 549–53 arbitrators  401–4, 422–33, 454–59, 461–67, 469–77, 604–9, 622–29, 651–61

appointment  401, 435, 456, 474, 479–80, 485, 546 challenges faced  429, 464–65, 470 commercial  237 ex aequo et bono  390 international, see international arbitrators party-appointed  427, 461 powers  67, 212, 410, 417, 419, 421, 538, 545 reasoning  182, 624, 648, 652 supervision  478, 481, 614, 660 Argentina  562, 568, 572–73, 582, 588–89, 599–601, 656, 658 Aristotle  94–96, 98, 103 asset-backed financing  26, 29, 31, 33–34, 375, 377, 452, 492–93 assets  2–4, 29–31, 33–37, 368–72, 374–76, 504–16, 518–20, 525–28 movable  25, 29–30, 62, 98, 368, 375, 495, 505 physical  30, 317, 368, 496, 526 underlying  50, 177, 369, 371, 494, 505–6, 525 assignability  496–97 assignees  33–35, 375, 456, 495–98, 511, 523, 554 bona fide  34, 452 assignments  29–30, 34–36, 191, 307–8, 380–81, 383, 492–98, 527–28 bulk  29, 35, 191, 308, 310, 375 equitable  140, 189 international  35, 191, 380, 383, 450, 496, 498, 508 Augustine, St  95–96, 98 Augustinian/Aristotelian principle  98 Austin, J  18, 105, 146, 157, 208 Australia  43, 270, 383, 400, 510, 569–70 Austria  42, 47, 100, 112, 117, 119–20, 290, 448 Supreme Court  238, 390, 439, 644 authorisation  179, 211, 334, 350, 352, 388 automaticity  152, 164, 230, 305, 315, 387 inbuilt  50 autonomous legal sources, see autonomous sources of law autonomous sources of law  22, 193, 197, 201–2, 208, 210–12, 378, 388 transnational  21, 23 autonomy  15–18, 32–37, 211–12, 254–56, 264–66, 273, 302, 359–61 group  262, 264–65, 269 party  32–34, 46–49, 178–81, 211–12, 224–28, 301–2, 380–82, 495–98

INDEX 665

bailment  18, 142 balance  70–72, 94, 271, 318, 353, 384, 472–73, 540 Baldus  89, 128, 143, 151, 639 bank guarantees  192, 223 Bank of International Settlement, see BIS banking  14, 50, 57, 59–60, 191–92, 241–42, 488, 492 bankruptcy  35–36, 58–60, 163–65, 491–93, 500–508, 518–21, 537–42, 547–49 courts  166, 426, 458, 491–92, 503, 538–40, 553, 556–57 domestic  35, 443, 493, 541, 553 France  59, 119 Germany  119, 186 intervening  338, 489, 515, 533, 539–40, 545, 647 jurisdiction  500, 539–41 law  15, 20, 58–60, 115, 118–19, 518–19, 552, 556 local  486, 498, 511, 526, 541–42, 546, 553 Netherlands  119 bankruptcy laws, domestic  375, 379, 556 banks  172, 191–92, 241–42, 329–30, 488–89, 525, 534–36, 542 bargain  38–39, 163 Bartolus  38, 89, 91–92, 99, 103, 151, 203 Basilica  85–86 Begriffsjurisprudenz  111, 130, 132 behaviour, human  11, 46, 102, 112–13, 125, 160, 180, 208 Belgium  59, 117, 191, 290, 329, 368, 413, 515 Benelux Convention on Private International Law  310 Bentham, J  18, 105, 146, 208 bilateral investment treaties (BITs)  379 bilateral netting  191, 379, 499, 502 bills of exchange  55, 57–58, 240, 288, 292, 354, 368, 373 bills of lading  17–18, 29–31, 49–50, 55, 188, 292, 368–69, 378 BIS (Bank of International Settlement)  241–42 black-letter law/rules  152–53, 156, 159, 164–66, 226–27, 229–30, 232, 267 Blackstone  142 bona fide assignees  34, 452 bona fide purchasers  33, 221, 368, 370–71, 514, 516, 519, 522 protection  359–60, 378

bonds  31, 55, 62, 220, 368, 373, 441, 567–68; see also eurobonds book-entry systems  14, 220, 282, 295, 504, 513–15, 517, 532 boycotts  300, 314, 335, 337 Bracton, H  135, 141 Brazil  56, 60, 117, 119, 335, 566 breach  39, 43, 139, 162, 333 brokerage  186, 246, 441, 488, 537 brokers  186, 195, 202, 204, 513–15, 517–18, 524, 533 bulk assignments  29, 35, 308, 310, 375, 380, 383, 495–97 international  35, 380, 383, 496, 498 bulk transfers  37, 55, 184, 308, 375–76, 496, 512, 525 bureaucracies  172, 477, 608 Burke, E  105, 146–47, 258 business community  27, 207, 257, 260, 392, 402, 442, 450 Byzantium  82–83, 85 Calvo doctrine  561, 564 Canada  167, 270, 409, 582, 589, 597–98, 602, 609–10 Canaris, CW  5, 58, 192 Canon law  88–91, 95–96, 98–99, 137–39, 225, 227, 254–55, 260 capacity  50, 206–7, 302, 304, 364–65, 378, 484, 523–24 capital  24, 242, 246, 249, 291, 294, 525, 531 adequacy  191, 231, 242 markets  14, 31, 373, 488, 491 capitularia  87 Cardozo  101 case law  127–29, 151–53, 183–84, 186–90, 208–10, 284–85, 592–93, 634–35 cash flows  31, 487, 493–94, 512, 525–26 causality  94, 130, 201, 268, 289, 387, 537, 543 CCP (Central Counterparties)  237–38, 285, 342, 411–12, 488, 516–18, 530–31, 553–54 Celsus  84 Central Counterparties, see CCP centralisation  15, 81–82, 136–37, 350, 479 certainty  46, 48–51, 125, 321, 323, 325, 387, 391–92 CFR (Common Framework of Reference)  249 Charlemagne  83, 87 chattels  29, 138, 142, 186, 189, 369, 371, 496–97 law of  18, 29, 33, 142

666  INDEX

cheques  17, 54, 56–58, 60, 248, 288, 354, 368 choice of law  71, 222, 304, 315, 321, 323, 342, 373 clauses  165, 324, 338, 343, 389 contractual  165, 302–3, 319, 321–24, 340–42, 373–74, 388–89, 514 Christians  97–98, 259, 261 church law, see Canon law Cicero  93–94, 96, 98 CIL, see customary international law CISG, see Vienna Convention on the International Sale of Goods civil codes  59, 118–19, 148, 179, 322, 351 civil law  20–23, 29–34, 36–38, 40–46, 116–26, 139–43, 147–52, 178–90 approach  5, 11, 13, 15, 20–21, 29, 41, 46 codes  118–19, 147 codification  13, 15, 116, 119–22, 125, 147–48, 299, 301 national  7, 11, 116–19, 139 in commerce and finance  5–16 countries  36–37, 54–56, 118–19, 126, 168, 186–88, 325–26, 531 judges  134, 145, 183, 189 lawyers  164, 182–83, 235, 376, 510, 648 precedent in  128, 189 civil liability  489, 527, 534, 537 civil society  125, 127, 131, 133, 170–71, 198–99, 233, 236 class arbitrations  474–75 clearing  21, 31, 191 systems  515, 531 Clearstream  515, 517–18 closed systems  46–47, 112, 121, 130, 225, 229, 375, 381 co-operation  39, 42, 45, 205, 236, 277–78, 280, 298 duties  45, 364–65, 367, 635 Coase, RH (Coase theorem)  158, 161–62 Codex  84–85, 89 Codex Theodosianus  86 codification  83–85, 105–8, 112–14, 116–22, 145–49, 183–84, 247–49, 262–63 approach  10–11, 25, 74, 148, 306 civil law  13, 15, 119–22, 147–48, 235, 250–51, 299, 301 countries  6, 8, 14, 118, 134, 201, 262, 350 ethos  5, 74, 102, 114, 121, 147, 202, 206 France  56, 118, 120 Germany  7, 59, 107–8, 111–12, 114, 116, 202, 250 narrowing of concept  630–32

national  7, 11, 117, 139 nineteenth-century  77, 128 partial  222, 382–83 and precedent  145 private  208, 381 of private law  65, 105–7, 113, 125, 174, 247, 350 thinking  43, 58, 114, 132, 151, 184, 630, 636 and von Savigny  108 coercive powers  102, 259, 275 cognitio  81, 85 coherence  83, 85, 146, 155, 178–79, 184, 634, 638 intellectual  53, 132, 152, 185 cohesion, group  259–61 Coke, Sir Edward  17–18 Colbert  58 collateral  165, 248, 503–4, 511, 516, 533 Directives  46, 51, 213, 219, 248, 250, 511–12, 516 Collins, L  71, 191, 194, 284, 373, 641 Comitia  78, 81 comity  298, 301, 326, 329–30, 335, 337, 535, 582 approach  300, 304, 309, 318, 331, 337, 393 commentators  89, 91, 101, 168, 656 commercial acts  56–58, 63 commercial and financial legal order  23–24, 200, 202, 227, 278–79, 290–91, 326–27, 352–53 commercial arbitration  73–74, 238, 338–39, 353–54, 383, 400, 486, 606–8 commercial arbitrators  237 commercial codes  6, 20, 54–60, 116, 118–19, 148 commercial courts  54, 56–57, 59, 70–73, 236–37, 394–95, 424–25, 622 international  70–74, 236–37, 274, 343, 394, 426, 428–29, 545–46 commercial flows  32–33, 35–37, 49, 51, 55, 358–59, 505, 554–55 commercial law  15–19, 29–31, 53–61, 77, 227–28, 255–57, 286–88, 634–36 commercial practices  17–18, 27, 43, 56, 154, 190, 359, 367 commerciality  53–55, 63, 65–66, 69, 410–11 Commissioners on Uniform State Laws  55, 240, 242, 508 commoditised products, purchasers in the ordinary course of business of  31, 33, 221, 284, 376, 378, 452 common creditors  177, 187, 531, 542, 548

INDEX 667

Common Framework of Reference (CFR)  249 common law  16–23, 38–43, 52–56, 74–80, 135–39, 141–53, 180–90, 234–35 approach to precedent, legislation or codification  143–51 approach to scholarship  141–43 in commerce and finance  16–21 countries  18–21, 29–30, 45–46, 54, 144–45, 375–77, 457, 525–26 courts  17–18, 183, 235, 255, 606 and equity  20, 135–41, 157, 186, 188 federal general  288 judges  17–18, 138, 144, 183, 235 jurisdictions  14, 18, 67, 119, 121, 181, 186, 520 old  148, 150, 631 tradition  1, 5, 21, 153, 175, 228, 470–71, 634–35 common legal principles  326 communities, systemic  109 company law  30, 55, 59, 65, 119, 164, 189, 413 comparative law  190, 199–200, 291, 293–97, 316, 318, 362, 378–79 compensation  560–63, 571–73, 581–83, 586– 87, 591–92, 596–97, 599–605, 612–13 competencies  4, 71, 140, 243, 247, 263, 276, 461 competition  171–72, 254, 256–58, 270–72, 279–80, 282–83, 326–29, 534–35 between custom and statutory or treaty law  209–10 between transnational law and mandatory state laws  279–86 issues  285, 485, 490, 606, 613, 620, 643, 646 laws  195, 329, 339–41, 533, 535, 576, 580, 585 competitions, moot  429–30, 472, 623 completeness  8, 22, 122, 130, 181, 632, 634, 637–38 conceptualisation  28, 148, 151 concession agreements  200, 384, 563, 571, 573, 576, 611 concessions  333–34, 562, 566, 571–72, 576, 578, 581, 610–11 conditional ownership, rights  33, 46, 184, 218, 296, 510 conditional sales  129, 295, 375, 392–93, 508–10, 516 confidential information  383, 400 confidentiality  74, 201, 383, 400, 409–10, 463, 650

conflict rules  222, 230, 307–8, 313, 316, 321–22, 388 conflicting public policies  335–39 conflicts, interstate  287, 309, 311, 313–15, 330, 334, 336–37, 362 conflicts law, see private international law conflicts of law  55, 314, 319, 369 rules  199, 222, 311 conflicts of laws  163, 283, 318 conflicts rules  215, 222, 298–99, 306–9, 312–13, 316, 321–23, 499 hard and fast  21, 299, 384–85 modern  309 drawbacks  305–12 traditional  48, 302, 311, 321–22, 325–26 conscience  104, 138–39, 428, 490, 543, 622 consensus  38–40, 160, 273, 276, 360, 363–64, 367, 486 consimili casu  136 consistency  145, 152–53, 423–25, 545, 605, 607, 648–50, 654 search for  153, 543, 616, 650, 653, 659 Constitutio Tanta  85 Constitution, United States  144, 154, 238, 287 constitutions, imperial  81–85, 95 constructive possession  370 constructive trusts  20, 30, 36, 140, 518, 520, 548, 554 consuls  78, 81–82, 118 consumer dealings  25, 44, 56, 63, 127, 133, 244, 252–53 consumer law  24–25, 77, 127, 244, 247, 344, 346, 350 consumer protection  61–63, 245, 247–48, 253, 302, 312, 321, 327 consumers  25–26, 41–45, 54–55, 63–65, 244–45, 247–53, 300, 302 contract employment  186, 192, 246, 312 interpretation  127, 150, 154, 156, 188, 203, 301 principles  39, 41, 244, 249, 303, 366, 384, 388 contract formation  38–41, 181, 363–64, 367, 452 contract interpretation  44, 102, 150, 154, 188, 190, 637, 640 contract law  37–38, 41–45, 115, 196–97, 204–5, 251–52, 296, 355–57 private  333, 613 contract terms, see terms

668  INDEX

contract theory, modern  39, 41, 44, 115, 364, 367 contracts administrative  201, 289, 333, 563, 577–78, 598 duration  38–39, 41, 44, 234, 244 international  211, 240, 293, 313 professional  24, 41, 44, 181, 188, 363 contractual choice of law  165, 302–3, 319, 321–24, 340–42, 373–74, 388–89, 514 and party autonomy  340–43 contractual interpretation  203, 301 contractual purpose, demonstrable  39 contractual rights  40, 115, 177, 295, 366, 371, 381 contractual validity  44, 204, 206, 212, 302, 355, 364, 378 Convention on the International Sale of Goods, see Vienna Convention on the International Sale of Goods (CISG)/ ICSG convergence  240, 242, 259 international  213, 240 Cooter, RD  159, 162, 167, 208, 256, 294, 362, 387 Corpus Iuris  78–79, 81–90, 95–96, 108, 128 corruption  4, 436, 442, 447–48, 552, 554, 606, 608 counterparties  41, 63, 487, 490–91, 499, 513, 517–20, 563–64 states as counterparties de iure imperii  332–34 country of destination  308, 385, 505, 507 country of origin  308, 341, 431, 505, 507 coverage  28–32, 46, 56–57, 120–21, 180, 189, 221, 363–64 civil law national codifications  116–19 credibility  397, 399, 424, 426, 464–65, 651, 658, 660–61 creditors  221, 319, 324, 501, 503, 519, 521, 539 common  177, 187 secured  177, 491, 519, 531, 548 unsecured  505, 519, 532 criminal law(s)  79, 86, 103–4, 112, 117, 142, 149, 157 cross-border services  62 cross-border transactions  62, 77, 214, 247, 345–46 cross-examination  402–3, 429–30, 432–33, 473, 651 cultural manifestation, law as  258–62

cultures  11, 40, 111, 133, 137, 157, 159, 259–66 group  159, 168, 259–61 national  5, 260, 263, 265, 270 curia regis  92 currencies  170, 179, 332, 374, 499–500, 561, 592 custodians  374, 487, 513 custom  201, 204–5, 207, 231, 364–65, 377 mandatory international  23, 360, 370 custom support  363–77 customary international law (CIL)  104–5, 565–67, 581–88, 597, 599–600, 603, 605, 612–13 customary law  18, 77–78, 207, 209–10, 222–23, 378–83, 453–54, 630 mandatory  190, 214, 342, 356 customs  16, 144, 201–5, 207, 209, 291–92, 364–65, 377–78 directory  42, 179, 220–22, 265, 342, 356, 359–60, 380–85 damages  37, 39, 161, 365–67, 476, 537, 599–600, 602 DCFR, see Draft Common Frame of Reference De Iure Belli ac Pacis  38, 91, 96–97, 100, 103–4; see also Grotius, H debtors  34–35, 308, 375, 495–98, 500–01, 519–21, 538, 540–42 decemviri de legibus scribundis  78 decentralisation  102, 256, 266, 272, 294, 352, 362 Declaration of Principle on Money Laundering  242 Decretum of Gratianus  90 default rules  47, 179, 206, 209, 419–20, 422, 459, 466 defences  40–41, 75, 78, 80, 375–76, 497–98, 500–501, 636 defendants, unwilling  72 delivery  62–63, 300, 320, 335, 369–70, 504, 517, 522–24 physical  31, 368–69 delocalisation  66, 68, 413–14, 416, 419, 421, 430–31, 435 major consequences  416–19 democracy  52–53, 102, 104, 126–27, 259, 262, 264–65, 280–81 democratic legitimacy  52, 102, 125, 349 democratic process  8, 53, 125–26, 171, 185, 264, 633 demonstrable contractual purpose  39

INDEX 669

Denning, Lord  42, 139, 145, 149–51, 192, 223 dependency  41, 139–40, 218–19, 225, 250 depositories  506, 513–14 depositors  4, 127, 488–89 derivative markets  518, 530 derivative proprietary rights  176 derivatives  2, 125, 242, 502, 628 Dernburg, H  112 desuetude  209–10, 226, 631 detrimental reliance  39, 75, 211–12, 218, 225, 357, 365–66, 452 Dicey  72, 142, 191, 320, 373, 500, 641 Digests, Justinian  45, 78–79, 82–85, 88–89, 93, 95, 202, 235 diplomatic protection  560 directory customs and practices  42, 179, 220–22, 265, 342, 356, 359–60, 380–85 directory law  47, 62, 262 directory treaty law  380, 382 disclosure  39, 348, 357, 365, 427–28, 464, 471, 530 pre-contractual duties  39, 42, 302 discovery  182–83, 391, 430, 469–72, 637 discretion  67–68, 138, 140, 307–9, 314, 316, 329–31, 602 discretionary elements  222, 284, 305, 308–9, 317, 355, 638 discrimination  194, 197, 599, 607, 612 disposition rights  191, 370, 514, 524, 531 dispute prevention  235 v dispute resolution  234–36 dispute resolution  130–31, 404–7, 433–35, 568–70, 605–7, 609–10, 614–19, 654–56 problems and challenges  397–400 v dispute prevention  234–36 distribution  42, 95–96, 127, 158, 160–61, 407, 487, 519 distributive justice  156, 161 diversity  252–53, 255, 261–62, 265–66, 280, 283, 287–88, 293 cases  287–88 of citizenship  287, 316 cultural  260, 264 Divine Law  89, 96, 98, 103 doctrinal thinking  160, 229–30, 232 documents of title  34, 55, 62, 221, 307, 361, 368–70 domain names  74 Domat, J  38, 92, 100 domestic bankruptcy laws  375, 379, 556 domestic courts, see national courts

domestic laws  222–23, 295–99, 319–23, 342– 46, 359–60, 368–69, 373–75, 384–86 applicable  300, 324–25, 351–52, 369, 386, 388 application of  222, 230, 320, 325 as autonomous residual source of transnational law  217 contractual choice of, see choice of law domestic legal orders/systems  212, 217, 291–92, 295, 299, 328, 393, 398 domestic private law  126, 299–300, 360, 544, 585, 622, 653 domestic public policies  333, 342, 385–86, 393–94, 434, 436–37, 609, 612 domestic regulation  50, 75, 237, 283, 536, 555 Donellus, H  89, 91, 99 draft awards  461–62 Draft Common Frame of Reference (DCFR)  7, 41–43, 197–99, 249–52, 289–90, 366–67, 510–12, 523 droit coutumier  87, 90–91, 202 droit écrit  87, 90–91 duration contracts  38–39, 41, 44, 234, 244 Dutch law  99, 196, 308, 321–22, 366, 510 duties fiduciary  36, 42–43, 46, 139–40, 189, 225, 250, 327 good faith  43, 581 post-contractual  41, 327, 366 pre-contractual  38, 45, 183, 252, 366–67 duty of care  62 dynamic concepts of law  4, 32, 38, 44, 108, 231–32, 235, 451–52 dynamic sources of law  351 ecclesiastical courts  137, 254–55; see also Canon Law ECJ, see European Court of Justice economic considerations  40, 182, 188, 271, 483 economics, law and  77, 132, 158–62, 259, 272 edicta  78–79 edictum perpetuum  79, 84 effectiveness  82, 100, 167, 195, 277, 281, 522, 524 efficiency  7–8, 47, 131–33, 155–56, 160–62, 231–33, 264–65, 420–21 considerations  8–9, 38, 130, 150, 188, 196, 230–31, 233 Ehrlich, Eugen  111–12, 131

670  INDEX

eighteenth century  17, 84, 90, 92, 138, 142, 255, 257 Eisenberg, MA  43–44, 127, 155, 181, 639 electronic payments  63, 243, 522, 554 eleventh century  87, 89 empirical research  107, 109–10, 112, 123–24, 131–32, 166–67, 173–74, 626–27 employment contracts  186, 192, 246, 312 enforceability  39, 71–72, 259, 390, 439, 476, 644 enforcement  68–71, 285, 331–32, 408–10, 413–15, 480–86, 504–8, 559–60 facilities  69, 272, 409, 484 function  16, 353, 421, 553 international  73, 285, 408–9, 415, 507 proceedings  404, 508, 651 UCC  43 England, see United Kingdom enjoyment  176–77, 372, 526 Enlightenment  15, 99, 101, 105, 113, 116–17, 258, 262 enrichment, unjust  85, 140, 218, 225, 289, 357, 520, 523–24 EPCL (European Principles of Contract Law)  192, 340, 366–67 equality  93, 96, 98, 104, 177, 179, 513, 519 equilibrium  41, 160–61, 174, 266, 275, 277, 281 equitable assignments  140, 189 equitable interests  29, 189, 497, 512, 542, 549 equitable jurisdiction  7, 19, 81, 138, 186, 631 equitable powers  138, 467, 490, 492, 570, 646 equitable relief  140–41, 239 equitable treatment  333, 562, 566, 572, 582, 587, 597–98 equity  16–20, 33–34, 147–49, 186, 188–89, 351, 375–76, 525–26 and common law  20, 135–41, 157, 186, 188 judges  67, 70, 73, 138–39, 141, 234, 417, 420 law of  139–40, 371 errors  50, 124, 374, 381, 524, 531, 610, 617–18 Esser, J  132, 134, 296 estoppel  20, 45–46, 477 promissory  139, 188 EU (European Union)  22–23, 25–26, 213–14, 237–38, 243–44, 246–47, 249, 342–47 Directives  151, 246, 326, 344–45 harmonisation attempts  243–54 Proposal for Investment Protection and Resolution of Investment Disputes  617–18

Questionnaire  571, 603, 610, 615–16 Regulations  283–84, 308, 310–13, 321–22, 329, 331, 343, 389 eurobonds  166, 190–91, 218, 220–21, 368–69, 373–74, 441, 513–15 markets  14, 31, 166, 207–8, 368, 374, 377, 517–18 Euroclear  368, 515, 517–18 European Continent  6, 18–19, 38, 77–78, 101–2, 178–80, 232–33, 349 European Contract Principles  366, 388 European Court of Human Rights  286, 290–91 European Court of Justice  63, 192, 201, 245, 339, 346–48 European Principles of Contract Law (EPCL)  192, 340, 366–67 European Union, see EU evidence  404–5, 414, 434–35, 467–69, 473, 478–79, 646, 650–52 relevance and materiality  650–51 exception clauses  312, 319–23 exclusionary rule  149–50 exclusivity  16, 181, 185, 218, 263 execution sales  506, 509, 518–19, 559 expansive interpretation  188, 314, 596–97, 637 expectations fair  562, 599 justified  39, 301 legitimate  658 reasonable  39–40, 42, 60, 366 expediency, political  171–73, 232, 262 experimentation  61, 110, 112, 114, 120, 122, 260, 265 expert witnesses  403, 430, 432, 462, 472–74, 618, 651 expertise  16, 60, 64, 462, 473, 546, 553, 651 experts  64, 109, 397, 406, 412, 432–33, 473, 551 decisions  404–5 expropriation  560–62, 571–72, 577, 581–83, 586–91, 594–97, 599–604, 612–13 direct  587, 595 indirect  573, 583, 587–88, 590, 594–95, 613, 616, 618 lawful and unlawful  596, 599–602 unlawful  596–97, 599–601 expropriatory takings, see expropriation extended set-off rights  284, 532 extralegal considerations  130, 165

INDEX 671

extrapolation  9–10, 45, 52, 121–22, 125, 167–68, 180, 187 extraterritorial application  329, 535 extraterritorial effect  305, 341, 415, 421, 435, 535, 538, 541 extraterritoriality  65, 68, 304, 308, 329, 538–39, 541–42, 555–56 fact and law finding  180–84 factoring  184, 221, 241, 359, 495, 506, 508, 510 facts, relevant  42, 101, 123, 182–83, 235 fair and equitable treatment, see F&E fair expectations  562, 599 fair market value  600, 618 fairness  91, 93, 98, 239, 315–16, 321, 329–30, 336 F&E (fair and equitable treatment)  572, 587, 593, 596–99, 601, 603, 605, 613 clauses  564, 596, 598, 601, 611–13 federal courts (United States)  144, 154, 210, 287–88, 316 federal general common law  288 federal law  126, 214, 252, 286–88 fees  43, 58, 183, 406–7, 461, 463, 614, 660 feudal law  90, 136, 142 Fichte, JG  110, 113, 117 fiduciary duties  20, 36, 41–43, 46, 139–40, 189, 225, 250 finality  46, 50–52, 358–59, 365, 369, 393, 522–25, 554 payment  31, 33, 248, 250, 357–58, 521–22, 552, 555 transactional  29, 62, 291, 336, 377, 392 finance international  32–33, 371, 373, 493–94, 509–11, 535–36, 545–46, 550–53 sales  75, 184–85, 375, 492, 504–6, 509–11, 513, 554 financial arbitrations  487, 489–95, 497–99, 505–7, 511–13, 525–27, 545–47, 549–53 financial crisis  112, 175, 252, 263, 284, 530–31, 569 financial dealings  2, 35, 37, 61, 65, 69, 352, 359 financial directives  246, 344 financial flows  1, 3, 410, 415, 522, 525, 550, 552 financial instruments  14, 30–31, 246, 341, 376, 502, 514–15 public policy concerning  527–42 financial law  1, 4–6, 8–9, 18–23, 29–32, 76–77, 357, 361

financial legal order, see commercial and financial legal order financial practices  8, 51, 186, 208, 491, 511, 523 financial products  218, 220, 487, 510, 512, 527, 531, 533–34 financial regulation  219, 242, 442, 488, 536, 609 financial services  36, 150, 218, 245–46, 551 financial stability  242, 488, 551–52, 554, 556, 613, 615, 642 financial transactions  26, 34, 323, 490, 498, 503–4, 511–12, 554–55 floating charges  29–30, 34, 36–37, 369–70, 494–95, 512, 519–20, 526–27 fluidity  46–48 force majeure  39–41, 62, 75, 335, 340, 364, 367, 383–84 foreign bankruptcies  385, 505, 508, 538, 541, 556 foreign charges  507–8 foreign direct investment  378–79 foreign elements  10, 149, 299, 301, 315, 317, 319, 386 foreign exchange regimes  561–62, 566 foreign interests  318, 505, 507 foreign investment, protection  559–60, 566, 568, 603–4, 616, 618, 632, 642 foreign investment arbitrators  494, 570–71, 618, 658 powers  570–71 foreign investments  379–80, 398, 559, 561–65, 567–70, 588–89, 601–4, 610–13 applicable law  573–85 arbitration  400, 428–29, 463, 465, 467, 559–617, 621, 623 concept  567–68 disputes  406, 410, 567, 569, 573, 603, 655, 660 proceedings against states  559–60 proprietary and non-proprietary takings  586–603 protection  571–73 foreign investors  561–65, 567–68, 589, 591, 594–95, 598–99, 603–4, 611–12 foreign law  298–300, 305, 338, 341, 424, 432, 563, 566 foreign proprietary interests  507–8 foreign proprietary rights  312, 385, 505, 508 forfeiture  139

672  INDEX

formalism  19, 121, 123, 151–52, 155–57, 165–66, 229–30, 232–33 formalities  50, 221, 370, 380, 385, 496–97, 504, 511 formation of law, see law formation forum  307, 309, 315–18, 320–22, 330, 335, 337–38, 380 forum (non) conveniens  322, 338 forum private international law rules  230, 380, 384 selection  71, 330, 336–39; see also choice of law shopping  74, 309, 316, 336 state  317, 328–30, 335–36, 535–36 Fouchard, P  293, 361 fourteenth century  87, 90, 135, 138, 368 France  36–37, 53–54, 56–58, 86–87, 89–92, 117–21, 211–12, 411–14 arbitration law  237, 342 bankruptcy  119 codification  56, 118, 120 commercial acts  56–57 Cour de Cassation  68, 238, 414, 417, 430–31, 435, 438, 445 Northern  83, 86–87, 90–92, 202 Southern  83, 86–87, 91 fraud  40, 47, 139–40, 218, 220, 335, 522, 524 Frederick the Great  117–18 free disposition  322, 340–41, 441–42, 450–51, 501–2, 552, 554–57, 581 free movement of goods  168, 372 freedom  42, 70, 93–94, 98, 113, 132, 194–95, 342 contractual  340 Freirechtslehre  128, 131–32 functional approaches  159, 162, 168, 170, 277, 294, 318, 510 functionalism  157 functions  140–41, 236–37, 263, 274, 309, 321, 385, 488–90 autonomous  321, 388 judicial  15–16, 78–79, 82, 92, 118, 130 fundamental principles  193–99, 210–12, 218–19, 223–28, 355–61, 363–68, 388–90, 416–21 elaboration of  208, 377, 442 futures  487, 503, 529 Gaillard, E  14, 293, 361 Gaius  78, 82–83, 85–86, 108 Institutes of  78, 108

GATS  168, 241 GATT  168, 241, 274, 612 general legal principles  49, 97, 200, 228, 233, 258, 350, 360 general principles  72, 192–93, 199–201, 221–24, 231, 288–90, 360–65, 379–85 application of  238, 316 mandatory  219, 355–56, 360, 380 German Academic Council  26, 48, 110, 131–32, 389 German Historical School  100, 105, 107, 109, 114, 117, 298, 305 German idealism  106, 110, 114, 116–17, 152, 633 Germany  56–60, 83–84, 89–92, 99–101, 105–8, 110–17, 130–32, 134 Civil Code  26, 60, 116–17, 203, 630 codification  7, 59, 107–8, 111–12, 114, 116, 202, 250 Northern  83, 92, 99 globalisation  3–4, 13–15, 125–26, 135, 172, 175–76, 273–75, 280–81 globalised world  296, 642 globalising world  10, 12–13, 69, 175, 328, 386, 535 glossae  89, 128 Glossators  89, 108 Goldman, B  191, 293, 361, 363, 393 good faith  40–47, 186–88, 196–97, 203, 209–10, 324–27, 364–67, 635–37 case law  42, 187, 235 civil law  43, 45, 61, 250, 326 common law  42 duty of  43, 581 USA  43 Goode, R  11, 192, 293, 354, 362, 631 goods, replacement  506, 519–20 Gordley, J  20, 99 government actions, ordinary  586, 589, 594–97, 601, 605, 607–8, 612–15 governmental interests  168, 309–10, 317–18, 326–30, 336–39, 443–44, 534, 641–42 governmental intervention, see intervention governmental undertakings  577, 600–601, 604, 612–13 Gratianus  90 Greece  290, 583 gross negligence  537 Grotius, H  38, 83–85, 89–91, 93, 96–104, 106, 146, 193–94

INDEX 673

natural law school of  5, 38, 90, 96–101, 151, 177, 225 group autonomy  262, 264–65, 269 group cohesion  259–61 group cultures  159, 168, 259–61 guarantees  223, 238, 240–41, 266 guest statutes  314, 336 habeas corpus  141 Habermas, J  232, 276, 633 Hague Conference  8, 213, 215–16, 240, 243, 310, 344, 393 hardship  41, 364, 367, 384 harmonisation  15, 240, 246, 248, 344–45, 503, 510, 516 private law  192, 246, 249 Hart, HLA  157, 203, 208, 225, 232, 294, 619 Hegel, GWF  101, 105, 110, 113–14, 117, 123, 258 hierarchy of norms  73, 75, 222, 236–37, 360–61, 384, 388–89, 391–92 from different legal sources  363–86 lex mercatoria as  353–60 hierarchy of sources of law  52, 217–23, 234, 293, 352 higher norms  42, 96, 154, 210, 213, 227, 342, 453 historical interpretation  129, 134 Hobbes, T  99, 101, 104 holdership  85, 176, 370 Holmes, OW  153, 155 home states/countries  334, 336, 379, 560, 565, 568, 575–76, 583 honesty  43, 138, 273, 551 horizontal effect  194–98, 303, 327, 442 Horn, N  191, 211, 293, 362, 380 host countries  333–34, 559–69, 571–72, 575– 85, 588–89, 591–92, 598–601, 608–9 host governments  561–65, 567–68, 576, 578, 595, 597, 601–2, 611–12 House of Lords  71–72, 143, 145, 237, 346 Huber, U  84, 89, 304–5 human behaviour  11, 46, 102, 112–13, 125, 160, 180, 208 Human Law  95–96, 103 human relationships  6, 105, 112, 125, 128, 230, 235, 350 human rights  157, 159, 194–98, 262, 264–66, 268–69, 290–91, 356–57 Humanists  89 Hutchinson, AC  281

IAIS (International Association of Insurance Supervisors)  242 IBRD  242, 379 ICC (International Chamber of Commerce)  207–8, 231, 240–41, 278, 380–81, 405–7, 456, 463 ICC Rules  192, 221, 237–38, 342, 356, 470, 474, 476 ICJ, see International Court of Justice ICMA, see International Capital Market Association ICSID (International Centre for Settlement of Investment Disputes)  332, 445–46, 564–68, 571–75, 578–82, 591–93, 597–601, 656–60 idealism, German  106, 110, 114, 116–17, 152, 633 illegality  207, 485, 587, 599, 605, 613 immanent law  25, 52–53, 106, 113, 147, 199, 202, 206 immunity  422, 489, 645 sovereign  63, 332, 484, 560, 600 impartiality  418, 426–28, 461, 464, 485, 545–46, 553, 660–61 imperial constitutions  81–82, 85, 95 imperium  78–79, 81, 83 implementation  97–98, 192, 195, 198, 245–46, 344–45, 446, 450 legislation  195, 345–48, 516 implied terms  42, 46, 188, 201, 367, 377, 382 impossibility  52, 118, 384, 514, 532 absolute  384 inalienable rights  93, 103–5 inbuilt automaticity  50 income rights  372 incorporation  191–92, 222, 344, 348, 354, 382, 482, 486 Incoterms  21, 27, 191–92, 207–8, 231, 241, 381–82, 384 independence  91, 141, 420, 426–28, 464–66, 523–24, 545–46, 660–61 independent sources of law  17, 22–23, 119, 192, 196, 202–3 India  303 indirect agency  36, 357 indirect expropriation  573, 583, 587–88, 590, 594–95, 613, 616, 618 individualisation  2, 4, 495 individualism  178, 261, 263 induction  129, 180, 183 inductive reasoning  152, 203, 638

674  INDEX

industry practices  15–16, 49, 205, 207, 350, 352, 354–55, 363–65 information duties  427–28, 464, 615 infrastructure  47, 53, 204, 208, 273, 279, 434, 440 injunctions  138, 140–41, 245, 459–60, 472, 476, 480–81 innovation  13, 36, 110, 112, 121–24, 153–54, 166, 176 Inns of Court  137, 142 insiders  31, 33–34, 371, 375, 427–28, 452, 549, 554 insolvency  27, 36, 148, 150, 491–92, 506, 537–38, 540–41; see also bankruptcy Institutes of Gaius  78, 108 institutional power  129, 134, 433, 492, 551 insurance  17, 19, 58, 60, 70–71, 242, 287–88, 529 intangible assets  29–31, 33, 55, 142, 189, 306, 375, 392 intellectual property  290, 371, 400, 441, 447, 462, 593 intellectual systems  108, 111, 116, 125, 176, 180, 184, 350–51 intellectualisation  108, 110, 151, 160, 162, 178, 195, 350 intent  38–40, 42–44, 50, 201, 329, 363–67, 495–96, 523–24 original  39 Interessenjurisprudenz  112, 128, 130–31 interference  223, 264, 290, 386, 435, 588–90, 600 interim measures  71, 73, 468–70, 475 intermediaries  54, 327, 488–89, 504, 513–16, 522–24, 527, 533–34 internal market  25, 126, 244–45, 247–48, 252, 289, 291, 592–93 internalisation  162, 235, 259, 261, 275, 387, 532 international arbitral awards  284–85, 436, 483–84, 486, 538, 542, 545, 549 international arbitration  69–72, 211–12, 237–38, 285, 330, 334–35, 414, 645 conduct of proceedings and award  471–78 credibility  403, 433, 658 initial steps and complications  453–71 recognition and enforcement  483–86 role of national courts  478–82 international arbitrators  422–29, 432–34, 447–50, 464–67, 543–44, 619–23, 644–49, 651–55

powers  67, 70, 420, 422, 453, 455, 644–48, 653 proper perspective  651–59 reasoning  67, 410, 478, 543, 619–61 role  70, 490, 550 status  68, 419, 426 international assignment  35, 191, 380, 383, 450, 496, 498, 508 International Association of Insurance Supervisors (IAIS)  242 international bills  240, 354 International Capital Market Association (ICMA)  207–8, 374 International Centre for Settlement of Investment Disputes, see ICSID International Chamber of Commerce, see ICC international commerce  21, 23, 75–76, 178, 180, 273–74, 296, 550 international commercial and financial legal order  23–24, 227, 271, 274, 352–53, 381, 385, 390 international commercial arbitration  397–486; see also Introductory Note role and status  65–69, 236 international commercial courts  70–74, 236–37, 274, 343, 394, 426, 428–29, 545–46 international commercial disputes  70, 73, 390, 439, 644 defined  410–12 international conflicts  309, 313, 315; see also interstate conflicts international contracts  211, 240, 293, 313 international convergence  213, 240 International Court of Justice (ICJ)  23, 73, 420, 423, 544, 628–30, 639, 642 international courts  71, 73, 143, 420, 423, 608–9, 639, 659–60 international dealings  11–12, 21, 24–25, 255, 278, 280, 329, 343 international enforcement  73, 285, 408–9, 415, 507 international finance  32–33, 371, 373, 493, 509–11, 535–36, 545–46, 550–53 building blocks of private law  494–527 international financial arbitration  410, 439, 466, 487–557, 647 complications  543–50 special needs  489–94 special problems  487–89

INDEX 675

international flows (goods, services, etc.)  2–3, 273–75, 386, 438–39, 443–44, 449–52, 526–27, 569–70 complications arising from  568–70 international legal orders  280, 282, 285, 291, 294, 298, 358–60, 362 international markets  21–22, 30, 208, 303, 514, 518, 550, 554 international minimum standards  279, 281, 283, 417–18, 441–42, 536–37, 563, 642–43 international moot competitions  429–30, 472, 623 international normativity  159, 244, 295, 371 international orders  280, 284, 286, 318, 337 International Organisation of Securities Commissions  242 international practices  368–70, 379–80, 499, 502, 527, 529, 553, 555 International Primary Market Association (IPMA)  374 international promissory notes  240 international public order  165, 210, 286, 301, 333, 335, 486, 536 international recognition, see recognition international sales  61–62, 216, 223–24, 240–41, 308, 310, 380, 382 International Securities Market Association (ISMA)  191, 374, 379 international status  17, 68, 71–72, 202, 373, 410, 562, 564 International Swap Dealers Association, see ISDA international trade  24, 26–27, 205, 207, 240–41, 292–93, 353–54, 362–63 international transactions  2–5, 8–11, 48–50, 299–302, 351–53, 385–86, 443–45, 641–42 internationalisation  24, 28, 48, 50, 61, 66, 71–72, 242 internationalism  159, 178, 216, 254, 362, 393 internationality  10, 63, 67, 69, 222–23, 368, 374, 410–11 interpretation  45–50, 127–30, 132–35, 149–51, 154–56, 178–82, 184–88, 344–48 contract  150, 154, 156, 188, 190, 203, 637, 640 expansive  188, 314, 596–97, 637 historical  129, 134 liberal, see liberal interpretation literal  38, 40, 42, 44, 128, 149, 325, 636 logical  156, 179

normative  45, 160, 188, 203, 226, 325, 363–64, 635–37 objectivity in  637–40 purposive  40, 42, 115, 150, 188, 346 restrictive  20, 150, 181, 598 and sources of law  627–29 techniques  38, 79, 115, 156, 192, 350; see also liberal interpretation, techniques teleological  39–40, 42, 128–30, 149, 151, 188, 325, 638–39 uniform  238, 346, 482, 486 interpretational freedom  120, 128, 130, 145, 180, 450 interstate conflicts  309, 311, 313–15, 317, 330, 334, 336–37, 641 intervening bankruptcy  338, 489, 515, 533, 539–40, 545, 647 intervention  101, 103, 136, 138, 262, 314, 556, 615 investment securities  20, 31, 55, 63, 295–96, 375–76, 513–15, 524–25 Investment Services Directive  348 investments  332, 334, 565–69, 584–86, 588, 591–92, 594–95, 610–11 TTIP (Transatlantic Trade and Investment Partnership)  74, 428–29, 566–67, 570–71, 603–4, 609–10, 616–17, 660–61 Investor-State Dispute Settlement, see ISDS investors  334, 560–62, 564–68, 576–79, 581–85, 588–91, 601, 608–11 IOSCO  242 Iran-US Claims Tribunal  588–90, 599 Irnerius  87–89 irrationalities  113, 159, 172, 651 ISDA (International Swap Dealers Association)  21, 166, 218–19, 377, 451, 490–92, 502–3, 546–48 ISDS (Investor-State Dispute Settlement)  605, 611–14, 616, 660 ISMA, see International Securities Market Association issuers  141, 374 Italy  56, 58–60, 82–83, 86–89, 91–92, 117, 119, 198 Northern  86, 89, 92, 304, 351 Ius Civile  80, 84, 90, 103 ius cogens  218, 221, 325, 388–89, 534, 576, 579 Ius Commune  88, 90, 92–93, 108, 114–16, 202–3, 227–28, 257–58

676  INDEX

and local law  89–93 Ius Gentium  80–81, 84, 86, 88, 90, 95, 99, 101–3 Ius Honorarium  80, 84, 139, 492 ius in causa positum  235 ius voluntarium  98–99; see also voluntary law Iustinian Digests, see Justinian Digests Jansen, N  126 Japan  26 Judicature Acts  17, 140, 147, 398 judicial discretion  29, 42, 140, 314, 316 judicial function  15–16, 78–79, 82, 92, 118, 130, 422, 426 juries  17, 136–37, 152, 182, 651 jurisdiction  71–72, 247–49, 322, 330–31, 444–47, 458–60, 465–67, 484–87 adjudicatory  330–31, 335–37, 378 and arbitrability  401, 459, 470, 482, 484, 557, 652 bankruptcy  500, 539–41 exclusive  71, 73, 137, 504 proper  10, 275, 357, 394 jus cogens rules, see ius cogens justice  131–33, 138, 140–41, 155–56, 158–59, 161, 231–34, 398 distributive  156, 161 natural  41–42, 250, 636 rougher  325, 365, 425, 650 justified reliance  50, 208, 364, 366–67, 561, 636 Justinian  78, 82–83, 85, 87, 89–90, 95, 118, 143 Justinian Digests  45, 78–79, 82–85, 88–89, 93, 95, 202, 235 Kant, I  101, 105, 109, 115 Kantorowicz, H  112, 131, 133, 259 Kelsen, H  225, 232–33 knowledge  16, 54, 113, 209, 375–76, 402–3, 463, 465 Kompetenz/Kompetenz  416–18, 466 Koschaker, P  85, 90 Lando, O  63, 293, 341, 362, 385 Larenz, K  5, 111, 134–35 Latin America  117 law participatory  102, 126, 350 traditional sources of  20, 185, 258 law and economics  77, 132, 158–62, 259, 272 law and sociology  111, 157–58, 275

law as a political organisational tool  262–65 law as a system  21, 64, 268, 632–35 law as cultural manifestation  258–62 law as fact  402, 404, 432 law formation  3–4, 6–8, 28–29, 102, 168–70, 255–57, 259–61, 349–50 powers  53, 139, 398 transnational  4, 159, 225, 256 law merchant  17–18, 20, 204, 207, 253, 255, 288, 631; see also lex mercatoria law schools  123–24, 126, 142, 151, 153, 157, 166–67, 267 LCIA, see London Court of International Arbitration leasing  55, 184, 241, 359 Leflar, RA  315, 318–19 legal capacity, see capacity legal dynamism  32–46, 50, 134, 181, 187, 201, 204, 231 legal education  87, 89, 151, 167, 235, 621 legal formalism, see formalism legal functionalism, see functionalism legal history  291, 293, 295 legal orders  254–58, 271–86, 289–91, 294–96, 326–28, 352–55, 358–63, 534–35 domestic  22, 212, 217, 280, 291–92, 308, 328, 347 independent  18, 257, 311 national  168, 289–90, 294 new  64, 234, 269, 274–75, 361–62, 442 operation in private law  286–91 separate  69 legal positivism, see positivism legal principles  20, 157, 166, 185, 193, 196, 200, 204 common  326 general  49, 97, 200, 228, 233, 258, 350, 360 legal realism, see realism legal reasoning  153–54, 156, 182–83, 619–21, 624–25, 627, 647–49, 656 formal and substantive aspects  620–25 importance  619–20 modern theories  625–27 legal relationships  185, 188, 210, 215, 298–99, 305–6, 310, 312 international  215, 305, 319, 360 legal rights  162, 275, 366 legal risk  4, 14, 61, 121, 165, 281, 324–25, 410 legal scholarship  143, 157, 166–67, 176, 182, 228, 233, 235 American  77, 151, 157, 165–67

INDEX 677

French  272 modern  78, 167 legal sophistry  401, 403, 522, 524, 529, 617, 622, 647 legal sources, see sources of law legal theory  143, 150, 153, 157–58, 162, 182, 291, 293–94 legal universalism, see universalism leges  78, 80–81, 90 Leges Barbarorum  86–87 Leges Romanae  86–87 legitimacy  52–54, 67–68, 85, 261–63, 276–77, 426, 465, 660–61 democratic  52, 102, 125, 349 legitimate expectations  323, 658 legitimation  349, 361 letters of credit  55, 188, 191, 220, 222, 240–41, 381–82, 522–23 lex arbitri  65–68, 412–13, 415–21, 431–32, 437, 457, 467–68, 645 Lex Citandi  82 lex contractus  299–302, 305, 309 lex fori  304–6, 312, 314–15, 317–18, 321–22, 345–46, 500–501, 641 natural  309, 420, 432, 500, 570, 621, 637 Lex Hortensia  78 lex loci delicti  298–99, 305–6, 308, 320 lex locus contractus  306 lex mercatoria see also Introductory Note application and enforcement  394–95 approach  231, 299, 311, 341–42, 368, 374, 391 background to revival  349–53 direct references to  386–91 as hierarchy of norms  353–60 major protagonists  361–63 modern/new, see new lex mercatoria objections to approach  391–93 old  229, 351, 393 operation  386–95 and private international law  349–63 transnational  165, 221–23, 239, 279, 297, 334, 380, 453 lex rei sitae, see lex situs Lex Salica  86 lex scripta  90 lex situs  220–21, 298–99, 305–6, 308–9, 504, 507, 518, 522 lex societatis  305, 308, 504 lex specialis  7–8, 15, 18, 30

liability  57–58, 314, 318, 336, 356, 364, 366, 489 non-contractual  201, 527, 537 product  162, 314, 344 state  201, 347 liberal interpretation  6, 10, 12–13, 181, 183, 185–86, 641, 644 techniques  10, 12–13, 22, 42, 185–86, 196–97, 227, 229 liberalisation  168, 292 licensing  195, 442, 488–89, 534, 536–37 liens  187, 189, 221, 519 liquidity  177, 447, 451, 487–88, 490–91, 499, 511–12, 525–26 liquidity risk  516, 532 literal interpretation  38, 40, 42, 44, 128, 149, 325, 636 litigation culture  613–14, 617 living law  84, 107, 154, 206, 231, 263, 327, 533 Llewellyn, K  54–55, 148, 155, 243, 619 loans  81, 487, 489, 494, 509, 521, 527–28, 567–68 local bankruptcies  486, 498, 511, 526, 541–42, 546, 553 local courts  70–71, 421–22, 443–44, 458–59, 480–81, 547, 563–64, 608–9 local law(s)  116–17, 219–20, 222, 274, 311, 385–86, 439, 584–85 and Ius Commune  89–93 local public policy  270–71, 283, 300, 385 localisation  3, 66, 415, 431, 434, 455, 483 location  2–3, 35, 494, 504, 515, 518, 522, 527 Locke, J  99, 101, 104–5, 114 logical interpretation  156, 179 Lombards  83, 86–87 London Court of International Arbitration (LCIA)  237, 403, 405–7, 418–20, 454–56, 463, 470, 475–76 Lord Chancellors  80, 136–38, 141, 145 Louisiana  314 Lowenfeld, AF  362 Luxembourg  117, 346, 515 Magna Carta  136, 141 maintenance creditors  311–12, 321 makeability of society  116–17, 156, 169 mandatory custom and practices  346, 377, 380, 389 mandatory general principles  219, 355–56, 360, 380

678  INDEX

mandatory international custom  23, 360, 370 mandatory law  197, 220–21, 262, 264, 314, 341, 581–82, 585 mandatory rules  194, 206, 218, 247, 303, 308, 313, 322 mandatory uniform treaty law  356, 360, 380 Mansfield, Lord  18, 49, 288, 335, 522, 620 market abuse  436, 441–42, 447, 552, 554, 556, 643, 646 market forces  134, 152, 159–60, 171–72, 174, 179, 206, 529 market practices  324, 503, 505, 515, 517, 550, 552, 556 market value, fair  600, 618 markets  14, 17, 172, 251–53, 491, 514–15, 522–23, 550–51 capital  14, 31, 373, 488, 491 derivative  518, 530 eurobond  31, 166, 207–8, 368, 374 international  21–22, 30, 208, 303, 514, 518, 550, 554 open  252, 561 repo  14, 191, 379, 532 swap  14, 166, 205, 354, 491, 532 master agreements  191, 218–19, 221, 371, 379, 499, 502–3, 509 mediation  201, 404–5, 487, 572–73, 622 methodology  3, 5, 21, 27, 168, 173, 228, 248–49 Mexico  70, 242, 293, 297, 314, 589, 591, 597 MFN clause  611–12 Middle Ages  90, 95, 103, 304, 361 minimum standards international  279, 281, 283, 417–18, 441–42, 536–37, 563, 642–43 transnational  4, 49, 199–200, 269–71, 301, 421, 436–37, 443–44 misbehaviour  45, 365, 367 misrepresentation  20, 40, 75, 383 models  45, 111–12, 123–24, 162, 169–70, 172–73, 267–68, 415 abstract  112, 178 academic  5, 7, 109, 122, 124, 151, 153, 169 newer  111, 124, 152, 166, 173–74, 184 modern common law  54 modern contract law  32, 38, 44, 61, 188, 226, 269 modern legal scholarship  78, 167 modern lex mercatoria, see new lex mercatoria modern private law  226, 270–71 modern society  262, 272, 387

modern state  15, 102, 104–6, 125, 171–72, 260–65, 269–70, 349 modernity  76, 105, 114, 121, 169–74, 262, 265, 275 monetary claims  35, 298, 370, 375, 450, 452, 538 money laundering  4, 242, 321, 357, 417, 532, 536, 551–52 moot competitions  429–30, 472, 623 international  429 morality  94, 155–57, 160, 170–72, 230, 232–33, 273, 275 Morris  72, 191, 320, 373, 500, 641 mos italicus  89 most characteristic performance  310, 320 movable assets  25, 29–30, 62, 98, 368, 375, 495, 505 movable property  22, 32, 37–38, 45–46, 54–55, 218–19, 250, 377–78 law  2, 4, 45, 47, 51, 355, 358, 451–52 mutual airline claims  35, 285, 492 nation state  11, 104, 269, 280 national codifications  7, 11, 116–19, 139 National Conference of Commissioners on Uniform State Laws  55, 242 national courts  68, 70–73, 192, 236, 347, 459, 467–68, 609 role  478–82 national legal orders  168, 289–90, 294 nationalisation  3, 15, 106, 111, 134, 305, 349, 561 nationalism  15, 17–18, 111–12, 229–30, 258, 262, 265–66, 269–70 and system thinking  119, 175 nationalistic system thinking  13–14, 19, 48, 111, 305, 419 nationality  174, 198, 259–60, 349, 431, 440, 643 natural justice  41–42, 250, 636 natural law  84, 89–91, 93–106, 109, 116, 193, 224–30, 304–5 principles/concepts  83, 99, 103–4, 116, 276 secular  85, 88, 90–91, 96–102, 107–8, 119, 139, 228 natural lex fori  309, 420, 432, 500, 570, 621, 637 natural sciences  109–10, 112, 152, 169, 268, 399 naturalism  110, 159

INDEX 679

negligence  39, 47, 129, 147, 176, 184, 218, 537 negotiability  191, 220, 373 negotiable instruments  17–19, 49–50, 220–21, 288, 359, 368–71, 373–75, 522–24 negotiation  38, 40, 241, 280, 366–67, 429, 618 duties  39, 364, 367, 555, 639 nemo dat rule/principle  368, 370 neo-classical thinking  11, 125, 160, 162 Netherlands  59–60, 119, 133–34, 290, 308, 320–22, 494–95, 500–501 bankruptcy law  119 netting  29–31, 191, 218–19, 379, 450–51, 498–500, 530–33, 553–55 agreements  377, 499–501, 503, 532 bilateral  191, 379, 499, 502 clauses  451, 491, 518–19, 542 facilities  29, 36, 441, 487, 493, 502–3, 519, 542 multilateral  499 novation  35, 499, 501–2 neutrality  68, 306, 401–2, 409–10, 413, 478, 564 new legal orders  234, 269, 274–75, 361–62, 442 New York Convention  68–69, 71–74, 408–11, 413–16, 453–54, 457–60, 466–68, 480–86 nineteenth century  38, 55–56, 76–77, 107–9, 138–39, 146–48, 202–3, 304–5 early  112, 144, 258, 349, 632 nineteenth-century, ideas  41, 105, 115 nineteenth century late  79, 113, 152 models  12, 43, 112, 636 nationalism  116 nominalism  109–10, 158 non-contractual liability  201, 527, 537 non-discrimination  195, 198, 440, 590–92, 595–96, 599, 601, 643 non-expropriatory takings  573, 586–87, 589–90, 594, 596, 599, 601–2, 612–13 non-merchants  54–58 non-possessory security interests  186, 221, 371 non-professionals  20, 60, 63 non-proprietary takings  566, 586 non-statist law  72, 279, 313, 387, 389, 496, 557 formation in modern social and economic theory  277–79 non-territorial law  247, 354 normative approach  43, 115, 130, 164, 188, 323, 364

normative interpretation  45, 160, 188, 203, 226, 325, 363–64, 635–37 normativity  104, 111, 159, 192, 323 norms  101–2, 123, 184, 222, 229–32, 275, 355–56, 637–39 hierarchy of  73, 222, 236–37, 360–61, 363, 384, 388–89, 391–92 higher  42, 96, 154, 210, 213, 227, 342, 453 Northern Germany  83, 92, 99 notification  34–35, 191, 270, 458, 496–97, 500 novation  503, 518 netting  35, 499, 501–2 Novellae  84–85 numerus clausus  30, 33, 176, 452 objective approach  57, 115, 364–65 objective law  192, 201, 207, 306, 377, 382, 538 objectivity  109, 156, 158, 281, 310, 409 in interpretation  637–40 obligations  38–40, 47–48, 97–98, 184, 193–95, 583, 596–98, 601 law of  47–48, 184, 235, 258, 321 Odoacer  82 offer  38, 364 offer and acceptance language  38 official status  12, 81, 242, 639 onshore, coming  271, 284, 291, 330–31, 421, 435–38, 443–45, 447 open system  33–34, 142, 169, 184, 186, 196, 250, 322 openness  167, 267, 280, 296, 570 ordinary commercial flows  33, 36, 250, 359, 505, 554 ordinary courts  70, 394, 397–402, 404–5, 424–25, 457–60, 468–69, 623–24 ordinary government action  586, 589, 594–97, 601, 605, 607–8, 612–15 ordinary judges  343, 543, 545–47, 549, 619–21, 623–24, 653, 657–58 reasoning  543, 635, 652 organisational powers  125, 178, 264, 266 original powers  79, 139, 234, 239, 286, 420, 457, 469 Ostrogoths  82–83 overriding public policy  31, 272, 286, 291, 312, 325, 346, 476 overvalue  37, 495, 506, 509, 519 owners  3, 35, 138, 177, 308, 496, 506, 509 ownership  29–30, 33–34, 36, 141–42, 218, 290, 296, 368–73 concepts  372–73, 512

680  INDEX

protection  290, 356 rights  370 conditional  33, 46, 184, 218, 296, 510 temporary  29, 34, 36, 138, 187, 189, 514, 520 transfer of  29–30, 36, 369, 378, 510 transnational  368, 371–73, 498 pacta sunt servanda  38, 98, 218–19, 225, 356, 363 Pandectists, see German Historical School Pandects  84 Panel of Recognised International Market Experts in Finance, see P.R.I.M.E. paperless systems  31, 191 Papinianus  45, 82 parallel proceedings  338–39, 614 parochial concepts  109, 174, 250–51, 274, 350, 386, 430–31, 449–50 parol evidence rule  149–50 participatory law making  102, 126, 350 party-appointed arbitrators  427, 461 party arbitration  461, 474 party autonomy  32–34, 46–49, 178–81, 211–12, 224–28, 301–2, 359–61, 380–82, 495–98 and contractual choice of law  340–43 past experiences, extrapolation of  52, 121–22, 125, 167–68, 180 Paulus  82 payment finality  31, 33, 248, 250, 357–58, 521–22, 552, 555 payment systems  55, 516, 525, 531 payments  29–31, 49–50, 292, 373–76, 501–2, 516–18, 521–25, 531–32 electronic  63, 243, 522, 554 peace  98, 100, 104, 170, 649 peer groups  109, 209, 323, 365, 393, 406, 619, 622 perfection  48, 189, 398, 504–5 performance  39–40, 43, 318, 320, 364, 476, 483–84, 600 most characteristic  310, 320 personal property  37, 54, 75, 92, 121, 140, 184, 206 personal statute  304–5 personality principle  86–87 persuasive force  19, 89, 119–20, 145, 149, 639, 658 philosophy  94–96, 98–99, 101, 104–5, 118, 120, 122, 134

physical assets  30, 317, 368, 496, 526 physical delivery  31, 368–69 physical possession  18, 142, 369–70, 372 placement rules  374 pleadings  237–38, 402–4, 409, 417–18, 424, 446–47, 469–71, 476 plebiscita  78–80 pledging  369, 506, 515, 518 points of law  402–4, 429–30, 435, 620–21, 623, 636, 640, 649 police force  260, 483–84 polis  93–94, 113 political expediency  171–73, 232, 262 political organisational tool, law as  262–65 political process  126–27, 262 Popes  88, 91–92, 96, 598 Popper, K  46, 109, 124, 169, 276 Portalis, J-E-M  118, 120, 130, 203 portfolios  222, 375, 495, 567, 611 Portugal  27, 65, 117, 320, 470 positive law  91, 93–98, 104–6, 123–24, 164–68, 182, 225–27, 232–33 positivism  146, 152, 155, 159, 168, 190, 193, 229–32 modern  224 Posner, RA  158–59, 168, 208 possession  117, 142, 176–77, 290, 292, 369–70, 372, 518 physical  18, 142, 369–70, 372 post-contractual duties  41, 302, 327, 366, 452, 635 post-contractual rights  45 post-glossators  89 post-modernity/post-modernism  111, 169, 172–73, 262 post-realism  157 Pothier, R-J  38, 92, 100, 107 powers  102–4, 234, 417–23, 441–43, 537–41, 543–44, 546–47, 644–48 of arbitrators  67, 212, 410, 417, 419, 421, 538, 545 coercive  102, 259, 275 equitable  138, 467, 490, 492, 570, 646 institutional  129, 134, 433, 492, 551 of international arbitrators  67, 70, 420, 422, 453, 455, 644–48, 653 organisational  125, 178, 264, 266 original  79, 139, 234, 239, 286, 420, 457, 469 regulatory  334, 555, 590, 594 state  101–2, 257, 271

INDEX 681

practices  15–18, 201–10, 222, 363–68, 377–83, 432–37, 449–54, 550–57 directory  42, 179, 220–22, 265, 342, 356, 359–60, 380–85 financial  8, 51, 186, 208, 491, 511, 523 practitioners  25–27, 108, 110, 112, 123–25, 127, 251, 267 role  323–26 praetor  45, 79–81, 85 praetor perigrinus  80 praetor urbanus  80 praetorian law, see Ius Honorarium pragmatism  11, 18, 46–52, 163, 167, 173, 212, 231 pre-contractual duties  38, 45, 183, 252, 366–67 disclosure  39, 42, 364, 452, 639 precedence  90, 202, 311, 330, 360, 424, 460, 582 precedent  17–18, 137–39, 143–46, 203–4, 423–25, 634–35, 639–40, 648–49 predictability  5, 44, 46, 48, 50, 52, 315–16, 615–16 preliminary opinions  73, 237, 445, 613–14, 616, 618, 659, 661 PRIMA  374, 504, 516 P.R.I.M.E. (Panel of Recognised International Market Experts in Finance)  491, 546, 550–57 principles general  72, 192–93, 199–201, 221–24, 231, 288–90, 360–65, 379–85 legal  20, 157, 166, 185, 193, 196, 200, 204 priority  35–36, 90, 168, 177, 186, 202, 303, 308 privacy  383, 400 private codification  208, 381 private contract law  333, 613 private international law  215–17, 243, 309–13, 315–17, 319–23, 337–39, 343–45, 496–99 approach  215, 243, 301, 515, 641 developments in US  313–16 European approach  319–22 modern  297–312 underlying concept  297–304 modern US conflicts theories  317–19 refinement of European model  312–13 rules  215–17, 326, 329, 343, 345, 380, 384, 386 and uniform law  343–48 private law  4–9, 99–108, 111–19, 125–28, 213–15, 246–49, 348–53, 628–34

applicable  321, 360, 491, 518, 527, 559, 580, 584–85 domestic  126, 299–300, 360, 544, 585, 622, 653 early developments  78–81 formation  6–7, 101, 125–27, 170–71, 262, 264, 440, 442 harmonisation  243–54 intervention  127, 326, 534 nature  127, 167, 215, 219, 277, 334, 344, 346 sources of  18, 76, 180, 295, 356 substantive  77, 147, 244, 646 transnationalisation of  194, 232 uniform  249 private parties  194–96, 198, 303, 327, 333, 569, 577, 579 private property  98, 194, 263, 559, 567 private rights  105, 116, 133, 195 proceedings, shortened  404, 457, 470 product liability  162, 314, 344 professional activities  63, 245, 254, 282, 353 professional contracts  24, 41, 44, 181, 188, 363 professional dealings  23–24, 26–27, 41–46, 60–61, 63–66, 188, 247–54, 269–70 professional parties  24–26, 39, 60–64, 127, 273–74, 325, 358–59, 365–66 professional sphere  63–65, 228–29, 313, 321, 324–25, 346, 366–67, 392–93 professionality  54, 60, 285, 326, 387 professionals, see professional parties promises  27, 38–40, 95, 218, 363, 452, 561, 579 promissory estoppel  139, 188 promissory notes  29, 240, 368 property  33, 91, 177, 193–94, 289–90, 306–7, 355–57, 588–91 law  29, 33–34, 44–45, 47, 187, 211–12, 308–9, 355–59 personal  37, 54, 75, 92, 121, 140, 184, 206 private  98, 194, 263, 559, 567 public  383, 400 property rights, see proprietary rights proportionality  196, 232, 281, 283, 592, 599, 601, 607 proprietary interests  33, 140, 142, 371–72, 505, 507, 511, 513 equitable  29, 548 foreign  507–8

682  INDEX

proprietary rights  30–37, 63, 176–77, 186–87, 290–91, 368–72, 375–76, 519–20 foreign  312, 385, 505, 508 limited  290, 369, 505 modern  371 new  210, 219, 375 systems of  20, 37, 61, 63, 186, 375, 381 proprietary structures  31, 34–36, 65, 75, 369, 376–77, 545–46, 554–55 proprietary takings  566, 586 prospectuses  213, 246 protection of bona fide purchasers  29, 206, 274, 292, 359–60, 370, 376, 378 diplomatic  560 of weaker parties  61, 127, 129, 196, 203, 307, 318, 322 prudential supervision  488–89, 527, 536 Prussia  117, 119 Landrecht  117 public interest  80, 103–4, 171, 290, 300, 302, 360, 383 public international law  77, 179–80, 192–94, 207–8, 333–34, 371–72, 560, 578–80 public law  4, 13, 84, 126–27, 580–81, 632, 640, 648 public order  66–67, 75, 171–72, 211–12, 321, 483–85, 620, 641–43 concepts  127, 255 considerations  32, 125, 128, 283, 286, 327, 581, 584 exceptions  321 requirements  281, 283–84, 355–56, 363, 385, 389–90, 511–12, 536 public policy  47–52, 163–66, 283–86, 333–42, 392–95, 414–18, 441–45, 484–86 bar  284–85, 394–95, 410, 443–44, 467, 484, 540, 542 concerning financial instruments  527–42 conflicting  335–39 domestic  333, 338, 342, 363, 385–86, 393–94 local  270–71, 283, 300, 385 overriding  31, 272, 286, 291, 312, 325, 346, 476 standards  4, 49, 426, 550 test  338–39 public purpose  560, 586, 591, 593–94, 596–97, 599, 603, 612 super  446, 561, 570–71, 589–92, 594–95, 602, 612–15, 661

public welfare  586, 589–90, 592, 594–97, 602–3 publicity  370, 372, 400, 427, 479, 483, 614 Puchta, GF  108, 112–13, 117, 258 Pufendorf, S  38, 99–100, 104, 151 purchasers bona fide, see bona fide purchasers in the ordinary course of business of commoditised products  31, 33, 221, 284, 376, 378, 452 purposive interpretation  40, 42, 115, 150, 188, 346 QCs (Queen’s Counsel)  81, 183, 529 quality  49–50, 173, 340, 461, 464, 619, 655, 657 Rabel, E  213, 240, 296 raison d’etat  105, 113, 261–62 ratifications  11, 216, 241, 243, 286, 409, 508, 510 rational law  88, 102, 203 rationalisation  116–17, 158, 162, 190, 349, 640 rationalism  15, 83, 99, 123 rationality  11, 94–95, 97, 101–2, 105–6, 155–59, 172, 275–76 Rawls, J.  156–57 re-characterisation  506, 509–10, 515, 517, 528–29 real estate  2, 62, 139, 142, 249, 299, 336, 340 realism  13, 19, 109, 111, 133, 150–51, 155, 157–59 reasonable commercial standards, observance of  43 reasonable expectations  39–40, 42, 60, 366 reasonableness  43, 311, 316, 321, 329, 338, 367, 535 reasoning, legal, see legal reasoning reasoning of international arbitrators  67, 410, 478, 543, 619–61 receivables  29–31, 34–36, 191, 380, 494, 497–98, 511–12, 525–28 financing  30, 36, 75, 219, 250, 359, 487, 494–95 trade  359, 373, 375 recognition  68–74, 284–85, 372, 394–95, 444–45, 482–86, 507–8, 540 mutual  195, 409 proceedings  400, 404, 410, 454, 459, 480 state  254, 273, 276 recovery rights  177, 549

INDEX 683

redemption  139 registration  35, 63, 65, 245, 496, 505, 530 règles d’application immédiate  284, 308, 313–14, 318, 535 regularity  205–6, 210, 229 regulation  213–14, 244–47, 310–13, 319–22, 340–43, 460, 488–91, 533–37 financial  219, 242, 442, 488, 536, 609 regulatory issues  408, 417, 530, 532, 537, 545, 551, 555 regulatory laws  73, 75, 175, 227, 298, 300, 580, 582 regulatory powers  334, 555, 590, 594 regulatory standards  195–96, 303 regulatory takings  569, 590–91 rehypothecation  514–15, 554 reinsurance companies  383, 400 relationship thinking  24, 42, 45, 127, 635–36 relevant facts  42, 50, 101, 123, 182–83, 235, 470, 638 reliance  38–42, 44–46, 50–51, 364–66, 562, 598–99, 635–36, 638 detrimental  39, 75, 211–12, 218, 225, 357, 365–66, 452 justified  50, 208, 364, 366–67, 561, 636 relief  81, 136, 139, 147, 566, 570, 638, 646 equitable  140–41, 239 religion  93, 156–57, 170–71, 174, 225, 259, 266, 272 remoteness  338 renegotiation duties  41, 45, 302, 452, 635 reorganisation  87, 539–40, 553 replacement goods  506, 519–20 repo markets  14, 191, 379, 532 repos  36–37, 375, 503–4, 506, 509–10, 514–17, 532, 548 repurchase agreements  36, 187, 191, 219, 250, 379, 502, 506 rescission  40, 57, 138, 521 rescripts  83, 85 research, empirical  107, 109–10, 112, 123–24, 131–32, 166–67, 173–74, 626–27 reservation of title  33, 36, 186, 290, 359 residence  191, 207, 301, 310, 320, 322, 378, 479 residual rules  23, 52–53, 217, 391, 394, 415, 418, 420–21 resources  14, 154, 161, 338, 529, 564, 569 responsa  81–82

Restatements, United States  24, 70–71, 148–51, 242–44, 309, 315, 318–19, 336–37 restitution  218, 307, 600–601, 603 restrictive interpretation  20, 150, 181, 598 retention rights  519–20 retransfer  503, 523 rights acquired  298, 305, 308–9, 385 contractual  40, 115, 177, 295, 366, 371, 381 disposition  191, 370, 514, 524, 531 human  157, 159, 194–98, 262, 264–66, 268–69, 290–91, 356–57 legal  162, 275, 366 ownership, see ownership, rights post-contractual  45 private  105, 116, 133, 195 proprietary, see proprietary rights retention  519–20 subjective  85, 89, 98, 115–16, 176, 184 third party  165, 373 rigidity  116, 137–38, 144, 315, 317 risk  39, 44, 61–65, 263–64, 324, 378–79, 384, 392–93 allocation  44, 384 distribution  158, 165 layering  494, 528 legal  4, 14, 61, 121, 165, 281, 324–25, 410 liquidity  516, 532 management  38–40, 44–45, 451–52, 498–99, 531–32, 552, 554, 556 tools  33–34, 40–41, 44, 49, 451–52, 487, 502, 636–37 systemic  4, 489, 516, 530, 532 roadmaps  40–41, 44, 49, 54, 188, 358, 365, 636–37 Robespierre  106 Roman Empire  81, 83, 86, 88, 95, 141 Roman law  5–6, 15–16, 18–20, 77–79, 81–92, 97–99, 107–8, 141–42 classical  81–82, 89, 108, 117 influence  86, 91 revival  83, 86–89, 98 Romanticism  15, 106, 110, 113–14, 117, 258–59, 263, 438 rougher justice  325, 365, 425, 650 Rousseau, JJ  105–6 rule of law  262, 276

684  INDEX

safety  187, 218, 233, 235, 531, 561, 589–90, 592–93 sale of goods  13, 19–20, 29–31, 43–44, 54–55, 62–63, 65, 370 sales conditional  129, 295, 375, 392–93, 508–10, 516 execution  506, 509, 518–19, 559 finance  75, 184–85, 375, 492, 504–6, 509–11, 513, 554 sanctions  68, 104, 160–61, 259, 273, 342, 409, 418 prior  66, 415 state  104, 202, 259, 268 Savigny, FC von  105, 107–8, 115–16, 147, 298–99, 301, 304–5, 307–9 SCC (Stockholm Chamber of Commerce), see Stockholm Chamber of Commerce (SCC) Schmitthoff, C  18, 293, 362 Scotland  66, 84, 88, 145, 228, 529 search duty  33, 284, 371, 375, 452, 505, 549 seat  65–69, 413–21, 431–37, 459–60, 466–69, 478–85, 556–57, 645–47 secular natural law  85, 88, 90–91, 96–102, 107–8, 119, 139, 228 secured interests  29, 221, 370, 505, 509 secured transactions  55, 61, 63, 243–44, 504, 506, 509–11, 528–29 securities entitlements  20, 31, 36, 61, 63, 295, 368, 514–16 securities regulation  242 securitisations  36, 75, 295, 487, 494–95, 512, 527–28, 530 security entitlements  14, 43, 368, 441, 517, 554 security interests  36–37, 54–55, 176–77, 296, 491–92, 495–96, 504–5, 514–17 non-possessory  186, 221, 371 segregation  20, 30, 36, 478, 487, 493, 516, 518 rights  36, 493 seizure  372, 595–96 self-help remedies  93 self-interest  160, 162, 277, 294 sellers  2, 39, 62, 252, 292, 310, 320, 475 Selznick, P  158, 272, 276 senatus consulta  78, 81 separation  98–99, 274, 415–16, 483, 513, 519–20, 523, 526 services  2–3, 13–14, 30–31, 64–65, 241, 330–31, 353, 411

set-off  218–19, 375–79, 450–51, 492–93, 497–502, 518–20, 541–42, 553–56 extended rights  284, 532 settlement  17, 21, 219–20, 238, 241, 379, 515, 517–18 agents  516–17 Settlement Finality Directive  246, 373, 516, 518, 523, 533 seventeenth century  33, 60, 88–89, 91–92, 104, 137, 139, 176–77 seventeenth-century, Dutch School  89 severability  114, 376, 414 Sharia law  272, 340, 342–43, 439, 557, 575 shortened proceedings  404, 457, 470 Siete Partidas  91 Sieyes, Abbé  106 situs  308, 443, 496, 504–5, 507–8, 522, 526–27, 531 sixteenth century  78, 97, 137 slavery  79, 81, 96 social and economic theory  131, 277 social contract  103–4, 106 social costs  158, 161 social order  124, 171 social peace  110, 131–33, 155–56, 169–70, 226, 232–33, 327, 420–21 social policies  127, 144, 159, 163, 313, 318, 639, 649 social values  53, 97, 126, 164, 171, 628, 633, 642 social welfare state  134 society  5, 106–7, 110–11, 153–58, 169–72, 174–75, 231–33, 267–68 makeability of  116–17, 156, 169 modern  171, 174, 262, 265, 268, 272, 387 sociological considerations  108, 188, 254, 257–58, 271 sociology  111, 143, 152, 157–58, 160, 169, 272, 275 Socrates  93–94 soft law  12, 191, 212, 219, 231, 244–45 sophistication  87–88, 232, 269, 536, 549, 618 sophistry, legal  401, 403, 522, 524, 529, 617, 622, 647 sources of law  42–44, 74–77, 82–84, 163–65, 181–83, 185–86, 202–3, 227–28 autonomous  193, 197, 201–2, 208, 210–12, 378, 388 in civil and common law tradition  175–254 dynamic  351 hierarchy  52, 217–23, 234, 293, 352

INDEX 685

independent  17, 22–23, 119, 192, 196, 202–3 multiple  15, 67, 77, 128, 225, 631, 659 private law  18, 76, 180, 295, 356 public international law  202, 207 traditional  20, 74, 135, 165, 178, 185, 258, 358 transnational  10, 21, 23, 214–15, 217, 422, 431, 436 in transnational professional dealings  640–44 Southern France  83, 86–87, 91 sovereign immunity  63, 332, 484, 560, 600 sovereigns  102–6, 128, 146, 258, 332, 334, 562–63, 577 sovereignty  168, 181, 230, 333–34, 561–62, 565, 600, 604 Spain  2, 83, 86–87, 89, 91, 96, 117, 572 SPVs  527–30 stabilisation  332, 334, 611 clauses  334, 561, 577, 579, 581 stability  242, 281, 283, 488–89, 560, 562, 564, 599 standard terms  45, 207, 219 standardisation  33, 278–79, 387, 502 standards  24, 279, 333, 338, 340, 563–64, 583, 587 minimum transnational  555, 642, 653 regulatory  195–96, 303 transnational minimum  4, 49, 199–200, 269–71, 301, 421, 436–37, 443–44 Staple Courts  17 Star Chamber  141 stare decisis rule  145–46, 184 state absolutism  102, 104, 125, 349 state intervention, see intervention state law  101–4, 106, 195, 252, 286–88, 316, 344, 528 state liability  201, 347 state powers  101–2, 257, 271 state recognition  254, 273, 276 state sanction  104, 202, 259, 268 states as counterparties de iure imperii  332–34 home  334, 336, 379, 560, 565, 568, 575–76, 583 modern  15, 102, 104–6, 125, 171–72, 260–65, 269–70, 349 nation  11, 104, 269, 280 proceedings against  559–60

staticism  122, 134, 267 statism  26, 75, 125–27, 179–80, 228–30, 232–33, 269–71, 352–53 statist laws  52, 171, 205, 226, 279, 290, 343 status  71–73, 87–90, 191–92, 201–3, 223–25, 303–5, 507–8, 605–7 of international arbitrators  68, 419, 426 official  12, 81, 242, 639 treaty  74, 242, 429, 546, 661 statutes, personal  304–5 statutes of limitations  195, 354, 384, 456–57, 643 statutist approach  304–5 statutory interpretation, see interpretation statutory law  120, 145–49, 151, 160, 162, 181–84, 510, 524 Stoa  81, 94–96, 98, 100–101 Stockholm Chamber of Commerce (SCC)  406–7, 445, 600 streamlining  147–48, 262, 631 subject matter  62, 66, 85, 214, 287, 345, 381, 411–13 subjective approach  43, 115, 205 subjective rights  85, 89, 98, 115–16, 176–77, 184 subjectivity  50, 473, 624, 638 subpoenas  137 subsidiarity  102, 168, 248–49 substantive law  213, 288, 299, 309, 432, 437–38, 445, 455 applicable  70, 287, 386, 418–19, 424, 437, 441, 573 uniform  216, 243 substantive transnational law  295, 351, 353, 386 successors  82, 85, 89, 108, 112, 310, 313, 371 super public purpose  446, 561, 570–71, 589–92, 594–95, 602, 612–15, 661 supervision  73–74, 400, 412–15, 488, 545–46, 557, 570–71, 614–15 of arbitrators  478, 481, 614, 660 proper  467, 609, 617 prudential  488–89, 527, 536 supplementation  45, 194, 196, 198, 222–24, 625, 627, 635–36 of contracts  42, 196 support function  47, 50, 67, 83, 347, 431, 435–37, 463 swap markets  14, 166, 205, 354, 491, 532 swaps  14, 191, 371, 378–79, 487, 491, 499, 502–3

686  INDEX

Switzerland  42, 56, 59–60, 117, 119–20, 238, 308, 321–22 syllogism  128, 152, 188 system building  42, 543, 547, 610, 617, 621, 655 system thinking  51–54, 108–12, 119–22, 130– 32, 181–83, 228–30, 632–35, 637–38 academic/intellectual  100, 108, 116, 123 and nationalism  119, 175 nationalistic  13–14, 19, 48, 111, 305, 419 systematic thinking  20, 89, 133, 167, 182 systemic communities  109 systemic risk  4, 489, 516, 530, 532 takings  39–40, 365–66, 402–3, 561, 586–92, 594–98, 600–605, 607–8 direct  590, 595 expropriatory, see expropriation indirect  587, 596, 661 non-expropriatory  573, 586–87, 589–90, 594, 596, 599, 601–2, 612–13 non-proprietary  566, 586 proprietary  566, 586 regulatory  569, 590–91 tariffs  29, 168, 274, 300–301, 306, 335, 337, 561 Tarquinius Superbus  78 tax laws  164, 283, 302–3, 340 taxation  49, 289–90, 341, 374, 555, 561–62, 585, 594 technology  2–3, 5, 273, 291, 294, 353, 355, 386–87 teleological interpretation  39–40, 42, 128–30, 149, 151, 188, 325, 638–39 temporary ownership  34, 36, 138, 142, 187, 189, 375, 516 rights  29, 34, 36, 138, 187, 189, 514, 520 terminology  26, 40, 42, 55, 100, 141, 224, 229 terms implied  42, 46, 188, 201, 367, 377, 382 standard  42, 45, 207, 219 unfair contract  302 territoriality  305, 336 Teubner, G  110, 114, 132, 275–76, 293, 362 Theodoric  82, 86 theology  88, 95–96, 98–99 Thibaut, FJ  107 third countries  302, 340, 345, 385, 413, 539–40, 549, 617–18 third parties  33, 176–77, 284, 426–27, 466, 477–78, 514–15, 555

third party rights  373 thirteenth century  87, 136–38, 141 Thomism  95, 98 title  33–34, 36, 252, 368–70, 505–6, 509–11, 519, 595–96 documents of  34, 55, 62, 221, 307, 361, 368–70 reservation of  33, 36, 186, 290, 359 transfer  46, 49, 52, 250, 252, 369–70, 504, 522–23 tolerance  7, 265–66 tort  84–85, 147–48, 158, 162, 205, 289–90, 306–7, 314–15 administrative  201, 289 tracing  36, 140–41, 187, 348, 376, 554 trade associations  205, 207–8 trade receivables  359, 373, 375 traditional sources of law  20, 74, 135, 165, 178, 258, 358, 420 revival  185–89 transaction costs  161–62, 252, 262 transactional finality  29, 62, 291, 336, 377, 392 transactions  48–51, 219–22, 282–84, 299–301, 342–46, 359–61, 386–88, 522–24 cross-border  62, 77, 214, 247, 345–46 secured  55, 61, 63, 243–44, 504, 506, 509–11, 528–29 Transatlantic Trade and Investment Partnership, see TTIP transferability  218, 356, 526 transfers bulk  37, 55, 184, 308, 375–76, 496, 512, 525 of ownership  29–30, 36, 369, 378, 510 of title  46, 49, 52, 250, 252, 369–70, 504, 522–23 transnational commercial and financial legal order, see international commercial and financial legal order transnational law new  3, 22, 24, 31, 64, 70, 354, 356 private  192, 333, 372 substantive  295, 351, 353, 386 transnational law formation  4, 159, 225, 256 transnational legal sources, survival in commercial law  189–93 transnational lex mercatoria  165, 221–23, 279, 334, 380 transnational minimum standards  4, 49, 199–200, 269–71, 301, 421, 436–37, 443–44

INDEX 687

transnational ownership  368, 371–73, 498 transnational sources of law  10, 21, 23, 214–15, 217, 422, 431, 436 transnationalisation  10, 21–28, 49–51, 214–16, 231–32, 439–41, 494–96, 511–16 process  434–53 transparency  15–16, 242, 246, 273, 426–29, 545–46, 614, 660–61 Transparency Directive  246 transportation  19, 29, 55, 57–58, 60, 62, 354, 359 treaty law  10–12, 22–23, 209–10, 212–16, 222–23, 332–34, 440, 565–66 cocnept of place among sources of private law  223–24 uniform, see uniform treaty law treaty status  74, 242, 429, 546, 661 Tribonianus  83 trustees  37, 505, 519–20, 538–39, 548 trusts  36–37, 140, 243–44, 250, 295–96, 307, 375–76, 492 constructive  20, 30, 36, 140, 518, 520, 548, 554 law of  20, 33, 181, 244 truth  108–13, 123–24, 156–57, 173, 180–81, 184–85, 266, 633–34 TTIP (Transatlantic Trade and Investment Partnership)  74, 333, 428–29, 465, 566–67, 570–71, 603–17, 660–61 Turkey  238, 390, 438, 644 twelfth century  87, 225 UCP  21, 191–92, 207–8, 220, 222, 241, 381–82, 384 Ulpianus  82, 84, 95 Ultramontani  89 umbrella clauses  334, 564, 566, 572, 579–81, 583, 604, 611 UNCITRAL (United Nations Commission on International Trade Law)  6, 22, 213, 215, 240–41, 407, 658, 660 UNCITRAL Model Law on Cross-border Insolvency  27 UNCITRAL Model Law on International Commercial Arbitration  27, 391 UNCITRAL Rules  237–38, 420, 463, 465, 471, 476, 562, 566 underlying assets  50, 369 undertakings  334, 521, 598–99, 611 governmental  577, 600–601, 604, 612–13 underwriting  220, 374, 441, 488, 537

undisclosed agency  20, 36 unfair contract terms  245, 302 UNIDROIT  27, 39, 213, 228, 240–41, 354–55, 366–67, 388 UNIDROIT Principles  39, 41, 63, 293, 295, 297, 367, 388 uniform interpretation  238, 346, 482, 486 uniform law(s)  55, 59, 148–49, 213–16, 242–43, 245–46, 319, 343–44 and private international law  343–48 uniform private law  249 Uniform Rules for Collection (URC)  192, 241, 381 Uniform Rules for Contract Guarantees, see URCG Uniform Rules for Demand Guarantees, see URDG uniform treaty law  53, 215–17, 221, 311, 326, 354–56, 380, 382–84 mandatory  356, 360, 380 unitary approach  22, 158, 250, 252, 350 unitary system  20, 63, 188, 350, 509, 512 United Kingdom  16–21, 138–39, 141–47, 149–50, 152–53, 181–84, 190–92, 204 United States  149–57, 159–60, 162–64, 181–83, 192, 286–89, 329–32, 334–39 Commissioners on Uniform State Laws  55, 240, 242, 508 Constitution  144, 154, 238, 287 courts  330–31, 335, 338 interstate conflicts, see interstate conflicts Restatements  24, 55, 70–71, 148–51, 244, 315, 318–19, 336–37 United Statres, Constitution  154, 266, 286–87, 315 unity  35, 37, 82, 87, 180, 189, 228, 648–49 universal banks  242 universal natural law, see natural law universalism  75, 111, 116, 159, 178, 257, 261 revival  268–71 University of Bologna  87 unjust enrichment  85, 140, 218, 225, 289, 357, 520, 523–24 unlawful expropriations  596–97, 599–601 unsecured creditors  505, 519, 532 unwilling defendants  72 updating  9, 80, 121, 125, 327, 349, 492, 533 URC (Uniform Rules for Collection)  192, 241, 381 URCG (Uniform Rules for Contract Guarantees)  241

688  INDEX

URDG (Uniform Rules for Demand Guarantees)  241 USA, see United States usage  6, 56, 154, 191–92, 201, 204–5, 293, 373 usufructs  176–77, 378 utilitarian principles  146, 269, 327 utility  94, 96–97, 99, 101–2, 152, 156, 160, 194 vacuum filling  72, 158, 416, 593 validity  38, 45, 47, 292–93, 459–60, 483–84, 496–97, 522 contractual  44, 204, 206, 212, 302, 355, 364, 378 values  2–4, 111–14, 158–62, 168–71, 279–82, 442–43, 588–89, 627–32 changing  24, 170 local  309, 313, 328, 438 social  53, 97, 126, 164, 171, 628, 633, 642 Vienna Convention on the International Sale of Goods (CISG)/ICSG  27, 30, 205–6, 215–16, 223–24, 240–41, 382–84, 482 Vinnius, A  84, 89 virtual world  193, 281, 299, 301, 436, 447, 450 Visigoths  83, 86–87 Voet, J  84, 89, 304–5 Volksgeist  108, 112–14, 117, 147, 258 voluntary law  101, 103 von Jhering, R  111, 114, 130–32 von Savigny, FC, see Savigny, FC von

warehouse receipts  55, 292 weaker parties, protection of  61, 127, 129, 196, 203, 307, 318, 322 Weber, Max  5, 111 welfare state, social  134 Wernerius, see Irnerius Wertungsjurisprudenz  128, 134, 154, 159 Western culture  159, 189, 259–61, 263–65, 269, 285 Western Europe  5, 77, 83, 86–89, 116, 260, 266, 269 revival of Roman law  83, 86–89 Western society  260, 262–63, 268, 271, 276, 281 Windscheid, B  112 witnesses  462, 469–70, 472–73, 476, 478–79, 625, 629, 651 expert  403, 430, 432, 462, 472–74, 618, 651 Wolff, C  90, 99–100, 130, 151 World Bank  36, 242, 379, 492, 565 World Trade Organisation, see WTO World War I  114 World War II, post-war developments  110, 114, 131, 172, 240, 268, 277, 350 writs  136–39, 141, 147 WTO (World Trade Organisation)  29, 168, 219, 241, 274, 280–81 Zeno  82 Zimmermann, R  182, 228, 251