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PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS

Lex Mercatoria

1. 2.

INTRODUCTION

RISE AND FALL OF LEX MERCATORIA MEDIEVAL LEX MERCATORIA ABSORPTION OF LEX MERCATORIA THE NEW LEX MERCATORIA THEORY OF NEW LEX MERCATORIA

CONTENTS

3. 4. 5. 6. 7.

DEFINITION: CONCEPT AND SOURCES THE THEORY LEX MERCATORIA AS APPICABLE TO INTERNATIONAL CONTRACT NEW SOURCES CHARACTERISTICS OF LEX MERCATORIA

8. SOURCES-EXPLAINED CONT 9. 10.

WHEN DOES LEX MERCATORIA APPLY? WHAT IS THE RELATION BETWEEN THE LEX MERCATORIA AND NATIONAL LAW?

11.
12. 13.

WHAT ARE THE RULES OF LEX MERCATORIA?


HOW IS LEX MERCTORIA TO BE ASCERAINED? CONTRACTS FORMATION AND NEGOTIATION

INTRODUCTION
Consider the situation:Logging on to a Singapore website from New Zealand (NZ), it is feasible (and would be quite unexceptional) to procure goods manufactured in China, warehoused in Malaysia, distributed from Indonesia, shipped by a freight company headquartered in the USA, and delivered to an Australian destination. Payment is effected in advance, and the goods never arrive. In the absence of clear contract conditions defining dispute procedure, and assuming that our disgruntled New Zealander is actually able to secure a party to file a claim against, which system of law would be applied in the courts or an arbitration tribunal?

Conflict of law rules is a complex concept

It is exacerbated by a wide variation of rules between countries


Often leads to frustrated commercial contracts on the international stage and assertions that such rules have 'failed to provide the simplicity desired by the business community'. So can international parties to a contract choose not to apply a national system of law but rather adopt general principles of law unique to their particular commercial environment and transactions

The LexMercatoria has been defined as 'an autonomous legal order, created spontaneously by parties involved in international economic relations and existing independently of national legal orders' for which the impetus of its

emergence is 'the need to transcend idiosyncrasies and uncertainties of


national legal systems [and] the desire to escape complicated conflict of laws rules that apply in international disputes'.

RISE AND FALL OF LEX MERCATORIA


MEDIEVAL LEX MERCATORIA 11th and 12th Century Formation of a special social class : Merchants Customary practices of ancient times
Growth of commerce in Europe
From different territories and ethic groups met and traded Complex problems of conflicting laws arose Through experts and independent decision-making procedures, the medieval merchants were able to create and reinforce their own customary codes: lex mercatoira.

ABSORPTION OF THE LEX MERCATORIA


With the falling of Rome Empire, the emerging nation-states helped to promote the lex mercatoria as a unified body of commercial law for traders for the reason that they did not want to be bypassed by the growing international trade. In England, for example, the Carta Mercatoria (1303)and Statute of the Staples (1353) assured the application of lex mercatoria in her special merchant

courts. Some continental nations also aided the growth of law merchant by
issuing its customs in code form, such as the Book of Customs of Milan (1216).

THE NEW LEX MERCATORIA New bottle, old wine Theory of New Lex Mercatoria

DEFINITION
TWO APPROACHES
POSITIVIST
AUTONOMOUS

POSITIVIST
Stresses the importance of international and selfregulatory rules in international business law

It is looking to the substance of international commercial law and dispute resolution and claims that not only statutory rules and cases decided by domestic courts must be taken into account, but other rules without national origin should also be considered.

AUTONOMOUS

Much controversial than the first

Treated the new law merchant as a transnational legal system, which had its own sources and rules and international arbitration as the preferred means of dispute settlement. It is a set of general principles, and customary rules spontaneously referred to or elaborated in the framework of international trade, without reference to a particular national system of law

There are three main concepts of lex mercatoria.

1.
2. 3.

The first one conceives the lex mercatoria as an autonomous legal


order. The second one characterizes it as a body of rules capable of operating as an alternative to an otherwise applicable national law. Finally, a third concept describes the lex mercatoria as a conglomerate of usages and expectations in international trade, which may complement the otherwise applicable law.

The concept of the lex mercatoria is usually blended with other concepts,

which may be similar or alternative. Some authors, for instance, refer to


transnational law as a synonym of the lex mercatoria. Transnational law, however, is a broad concept, which encompasses all law regulating trans-boundaries actions or events, including public and private international law and other rules not fitting into those categories. The lex mercatoria is a much narrower concept used to indicate that part of transnational commercial law which is unwritten.

T H E O RY O F L E X M E RC AT O R I A : CRITICISM
Controversial Lacks generality and predictability Only addresses the dispute in question and cannot be applied generally

Vague and incomplete


Lack of binding force Does not have a quality of a legal system

LEX MERCATORIA AS THE APPLICABLE L AW T O I N T E R N A T I O N A L C O N T R A C T S


The applicable law to a contract is the legal framework that gives expression and content to the will of the parties under the contract Traditionally, only national law may function as the applicable law to international contracts. The Permanent Court of International Justice in the Serbian and Brazilian Loans Case already held that "any contract which is not a contract between states in their capacity as subjects of international law is based on the municipal law of some country"

Contd. In the event of a dispute the final result will depend on where proceedings are brought. National courts practice in many cases a homeward trend, which leads to the application of the lex fori The applications of the public bodys own national law is not desirable. The State in question may change the law to the detriment of the private party. Likewise, a State is rarely willing to be submitted to a foreign law. Finally, national law is primarily enacted to regulate domestic transactions and does not take into account the needs of international trade. Sometimes, the applicable law is foreign to the judge and/or the parties and requiring information on its contents is cumbersome.

Three are the foundations for existence; The principle of party autonomy, The principle of good faith and The use of arbitration.

Two sets of codified general contract principles have entered the international arena, the UNIDROIT Principles of International Commercial Contracts (1994) and the European Principles of Contract Law, Parts I and II (1999).

CHARACTERISTICS
Essential characteristics required of Lex Mercatoria as a credible body of law.

Berger, without further comment, refers to the 'desirable characteristics' as:1) 2) 3) 4) Universal Character, Flexibility and Dynamic Ability to Grow, Informality and Speed, and Reliance on Commercial Custom and Practice.

Nygh assists more in identifying the essential features as:


a) the system must be autonomous; b) the system must provide rules 'sufficient to decide a dispute'; and c) it must be a system of law.

The bottom line on essential characteristics of the Lex Mercatoria seems that for universal credibility, it must be 'a system of law' with standards

no less than that attributable to a state legal system with international

standing and authority.

SOURCES
a) General Principles of Law b) Customs and Usages c) Uniform Laws and Principles of International Trade d) Arbitral Awards

WHEN DOES THE LEX M E R C AT O R I A A P P LY ?

Given the weight of analysis to which the lex mercatoria has been subjected, it is surprising how little has been done to identify the criteria which distinguish those transactions which are governed by it from those which are not. EXPREE AGREEMENT ABSENCE OF EXPRESS CONSENT

ABSENCE OF EXPRESS CONSENT


It is generally held that the arbitrator should proceed by three stages, asking himself first whether the application of any national system is appropriate; then, if not, whether he should proceed by amiable composition or by the application of a national rules; and finally, if the latter, what national rules exist and are relevant to the dispute. Various groups of factors have been regarded as relevant to this process.

The first group concerns the parties themselves Other indicators relate to the nature of the transactions. The subject-matter of the transaction may also be relevant. Another group of indicators relates to the terms of a contract

WHAT IS THE RELATION BETWEEN THE L E X M E R C A T O R I A A N D N A T I O N A L L AW

How a conflict between the lex mercatoria and any national law which might otherwise have been relevant ought to be reconciled?

The question has two aspects.


First, what solution should the conscientious arbitrator adopt? Second, what is likely to be the attitude of the courts claiming jurisdiction over the matter namely, the courts of the countries in which the arbitration takes place and the country in which enforcement of the award is sought?

On the first aspect: If the contract expressly stipulates a choice of governing law, and if the arbitrator is not an amiable compositeur, can the arbitrator properly apply the lex mercatoria in preference to the chosen law? AND where the parties have expressly chosen to apply both a national law and some variety of 'general principles of law'.

The second question concerns the likely reaction of national courts to an overtly anational award. A study of this question; which is difficult enough even when expressed in terms of a single national law, is far beyond the scope of the present essay, and indeed never appears to have been attempted I have wished to mention , three awards where the issue has come to the surface. 1. In the arbitration Soc. Fougerolle a. Banque de Proche Orient 2. Case of Pabalk Ticaret v. Ugilor/ Norsolor 3. Dispute between Deutsche Schachtbau und Tiefbaugesellschaft mbH and The Government of Ras al Khaimal

WHAT ARE THE RULES OF THE LEX MERCATORIA?


A list somewhat on the following lines, as representing a tolerably complete account of the rules which are said to constitute the lex mercatoria in its present form. 1. Good faith and fair dealing in international trade The parties must act in accordance with the standard of good faith and fair dealing in international trade. 2. Standard of reasonableness The parties always have to act according to what is reasonable in view of the particular nature of their transaction and the circumstances involved, in particular the economic interests and expectations of the parties. A list though not complete is laid down in the succeeding slides entailing the general principles of international contract.

1. A general principle that contracts should prima facie be enforced according to their terms: pacta sunt servanda The emphasis given to this maxim in the literature suggests that it is regarded, not so much as one of the rules of the lex mercatoria, but as the fundamental principle of the entire system. 2. The first general principle is qualified at least in respect of certain long term contracts, by an exception akin to rebus sic stantibus. The interaction of the principle and the exception has yet to be fully worked out. 3. The first general principle may also be subject to the concept of abus de droit, and to a rule that unfair and unconscionable contracts and clauses should not be enforced. 4. There may be a doctrine of culpa in contrahendo. 5. A contract should be performed in good faith. 6. A contract obtained by bribes or other dishonest means is void, or at least unenforceable. So too if the contract creates a fictitious transaction designed to achieve an illegal object.

7. A State entity cannot be permitted to evade the enforcement of its obligations by denying its own capacity to make a binding agreement to arbitrate, or by asserting that the agreement is unenforceable for want of procedural formalities to which the entity is subject. 8. The controlling interest of a group of companies is regarded as contracting on behalf of all members of the group, at least so far as concerns an agreement to arbitrate. 9. If unforeseen difficulties intervene in the performance of a contract, the parties should negotiate in good faith to overcome them, even if the contract contains no revision clause. 10. 'Gold clause' agreements are valid and enforceable. Perhaps in some cases either a gold clause or a `hardship' revision clause may be implied. 11. One party is entitled to treat itself as discharged from its obligations if the other has committed a breach, but only if the breach is substantial. 12. No party can be allowed by its own act to bring about a non- performance of a condition precedent to its own obligation.

13. A tribunal is not bound by the characterisation of the contract ascribed to it by the parties. 14. Damages for breach of contract are limited to the foreseeable consequences of the breach. 15. A party which has suffered a breach of contract must take reasonable steps to mitigate its loss. 16. Damages for non-delivery are calculated by reference to the market price of the goods and the price at which the buyer has purchased equivalent goods in replacement. 17. A party must act promptly to enforce its rights, on pain of losing them by waiver. This may be an instance of a more general rule, that each party must act in a diligent and practical manner to safeguard its own interests. 18. A debtor may in certain circumstances set off his own cross-claims to extinguish or diminish his liability to the creditor.

19. Contracts should be construed according to the principle ut res magis valeat quam pereat. 20. Failure by one party to respond to a letter written to it by the other is regarded as evidence of assent to its terms.

Chapter IV: Contract Section 1: General principles No. IV.1.1 - Freedom of contract The parties are free to enter into contracts and to determine their contents (principle of party autonomy).

No. IV.1.2 - Sanctity of contracts (pacta sunt servanda)


A valid contract is binding upon the parties. It can only be modified or terminated by consent of the parties or if provided for by the law ("pacta sunt servanda").

Section 2: Conclusion of Contract No. IV.2.1 - Contractual consent A valid contractual consent requires that the parties intend to be legally bound and that they have sufficiently identified the terms of the contract with respect to the parties and the subject matter. No. IV.2.2 - Silence by offeree Silence by the offeree does not in and of itself amount to acceptance unless the offeree begins with the performance of his contractual obligations or is required to reject the offer due to a long-standing business relationship with the offeror or is subject to a practice which the parties have established between themselves or a trade usage requiring rejection of the offer ("qui tacet consentire videtur").

No. IV.2.3 - No repudiation of contractual consent by state party

A state or state controlled entity may not invoke its sovereignty or internal law to repudiate contractual consent.
Section 3: Form requirements

No. IV.3.1 - Principle of informality


Contractual declarations are valid even when they are not evidenced in writing.

Section 4: Interpretation No. IV.4.1 - Intentions of the parties

The construction of a contract has to determine the common intention of the parties or, if no such intention can be determined, the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances, taking into acount, in particular, the nature and purpose of the contract, the conduct of the parties and the meaning commonly given to contract terms and expressions in the trade concerned.
No. IV.4.2 - Interpretation in favour of effectiveness of contract Where there is doubt about the meaning of a contract term, an interpretation should be preferred that makes the contract lawful or effective ("ut res magis valeat quam pereat"; "effet utile").

No. IV.4.3 - Contra proferentem rule

Where there is doubt about the meaning of a contract term that has not been individually negotiated, an interpretation against the party who supplied it should be preferred ("contra proferentem").
No. IV.4.4 - Context-oriented interpretation Contractual stipulations shall be interpreted taking into account the whole contract in which they appear.

No. IV.4.6. - Rights and Duties of the parties under "FOB", "FAS", "CIF", and "CF" If the parties have agreed on a sale "FOB", "FAS", "CIF" or "CF", the respective rights and duties of the parties under the contract are to be determined according to the latest version of the the International Commercial Terms (INCOTERMS) issued by the International Chamber of Commerce (ICC) unless the parties have indicated that a different meaning is to be attributed to the term used.

Section 5: Contractual obligations No. IV.5.1 - Subsequent fixing of contract price

If the contract does not contain a provision fixing the price or a method for determining it, the parties are to be treated as having agreed to the price generally charged at the time of the conclusion of the contract for such performance in comparable circumstances in the trade concerned, or, if no such price is available, to a reasonable price.
No. IV.5.2 - Fixing of price by third party If the contract provides that the price is to be fixed or determined by a third party, and this determination is manifestly unreasonable, a party may apply to a court or arbitral tribunal to have a reasonable price fixed, notwithstanding any agreements to the contrary.

No. IV.5.3 - No contract to detriment of third party

Contracts may not be concluded to the detriment of a third party ("res inter alios acta alteri non nocet").
No. IV.5.4 - Best efforts undertakings

If a party promisses its "best efforts" in the performance of its contractual duties, that party owes to the promissee all efforts which can be expected from a reasonable person of the same kind in the same circumstances, taking into account the particular nature of the contract and the interests of the parties.

No. IV.5.5 - Time is of the essence

Unless otherwise agreed by the parties or contrary to the intrinsic nature of the contract, time limits and other contractual stipulations as to the timely performance of the parties' obligations have to be strictly complied with ("time is of the essence").
No. IV.5.6 - Holidays and non-business days If a notice, letter or other communication cannot be delivered at the address of the addressee on the last day of a period set by law or contractual stipulation, because that day falls on an official holiday or non-business day at the place of business of the addressee, the period is extended until the first business day which follows.

No. IV.5.7 - Duty to renegotiate

Each party has a good faith obligation to renegotiate the contract if there is a need to adapt the contract to changed circumstances and the continuation of performance can reasonably be expected from the parties.
No. IV.5.8 - Duty to notify Each party is under a good faith obligation to notify the other party of any problems that occur in the performance of the contract and to cooperate with the other party when such cooperation can reasonably be expected for the performance of that party's obligations.

Section 6: Invalidity of Contract No. IV.6.1 - Invalidity of contract due to fraud

A contract that violates boni mores is void ("fraus omnia corrumpit").


No. IV.6.2 - Invalidity of Contract due to Bribery Contractual obligations based on or involving the payment or transfer of bribes ("coruption money", "secret commissions", "pots-de-vin" "kickbacks") are void. Any intentional offer, promise or transfer of any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official or private party, for the benefit of that official or private party or for a third party, in order that the official or private party acts or refrains from acting in relation to the performance of official or other duties, in order to obtain or retain business or other improper advantages in the conduct of international business constitutes bribery.

No. IV.6.3. - Right to avoid the contract for mistake in fact or law (a) A part may avoid a contract based on a mistake of fact or law existing at the moment the contract was concluded if: i) the mistake was caused by information given by the other party, or ii) the other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error iii) the other party made the same mistake provided that the other party knew or ought to have known that a reasonable person in the same situation as the party in error would not have entered into the contract or would have concluded the contract on materially different terms.

(b) A party's right to avoid the contract for mistake is excluded if

i) the risk was assumed, or, under the particular circumstances, should be borne by it, or
ii) it was grossly negligent in committing the mistake.

Section 7: Precontractual liability No. IV.7.1 - Principle of pre-contractual liability A party who breaks off contract-negotiations in bad faith (i.e. when the other party was justified in assuming that a contract would be concluded) is liable for the losses caused to the other party ("culpa in contrahendo"). Section 8: Limitation period No. IV.8.1 - Limitation periods

Contractual claims are subject to limitation periods.

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