This is the first post in the blog posts series entitled Perspectives on Law in a Transnational Context. The idea behind the blog post series is to explore the transnational tendencies in the application of laws and rules of law and critically assess their purpose from different legal and ethical perspectives. We are kicking off this series by writing on the historical overview of the transnationality of commercial law from the Western perspective (focusing on Roman law) and its contemporary counterpart in international commercial arbitration.
Transnational Evolution of Commercial Law from the Western Perspective
Philip Jessup provided an early definition of transnational law as including ‘all law which regulates actions or events that transcend national frontiers.’[i] This definition was intended to capture the various ways that international law influences national jurisdictions, while at the same time being shaped by them. One key feature of transnational law, defined in this way, is the way it destabilises conventional theories of legal authority, anchored as they are in positive schemes based on sources regarded as legitimate within each national legal culture. As Peer Zumbansen has noted, ‘the more we allow to imagine any part of law – transnational or not – as no longer being traceable back to what is considered a legitimate lawmaking authority, its foundational status ‘as law’ is called into question.’[ii]
By taking a historical perspective, it becomes possible to assess what has been previously considered a legitimate lawmaking authority in the legal regulation of transnational actions or events. One instructive example is the ius commune (common law) in medieval Western Europe. Modern transnational law is often closely associated with the intensification of globalising processes over the course of the 20th century.[iii] Likewise, the ius commune arose, at least in part, from an intersection between developments in the medieval universities and the Commercial Revolution. The Justinian Digest was ‘rediscovered’ and became the focus of renewed study in the northern Italian universities from the late 11th century. The Commercial Revolution, which is also traced back to the 11th century and was initially focused in Italian maritime republics, was characterised by intensifying consumer demand, an increase in cross-border transactions, the consolidation of medieval bureaucracies, the refinement of financial instruments and a growing rationalisation in the governance of economic relations.[iv] Roman law was able to provide a level of commercial sophistication that European customary laws had not contemplated and therefore deemed to be better suited to commercialising society. The later medieval period also witnessed the early development of the lex mercatoria (merchant law), which drew upon the language and concepts of the Roman law but developed them in line with cross-border customs. Merchant courts were established in parallel to territorial jurisdictions, along key trading routes and later in key urban trading entrepots such as Antwerp and Amsterdam. This is not to say that the ius commune was confined to economic relations or represented a ‘market-adjacent’ or mercantile project in opposition to the regulatory structures of the state. The Justinian texts helped to stimulate new discussions around political power, its legitimisation, and its control.
The ius commune and lex mercatoria were characterised by a distinctive legal methodology, based on prevailing custom and the consensus of learned legal opinion. This was in stark contrast to the positive models of authority which emerged in the 19th century, which stressed the legitimisation of law by territorial state institutions. The method of the ius commune was also purposive rather than technical.The late medieval Commentators sought to apply the rediscovered Justinian texts, alongside Canon law, feudal law, and mercantile customs, to practical disputes in late medieval Europe. The Commentators sought to reconcile the ius commune with the positive laws of any city or state that conflicted with it. Positive rules that conflicted with the ius commune were presumed to be unjust unless it could be shown that they were consistent with its purpose. For example, Bartolus was once asked if a rule in Venetian law which required only three witnesses for a valid will was acceptable, given that the Roman lawrequired five. Bartolus replied that the Roman rule could be relaxed in certain circumstances to ensure that testamentary intent was upheld. In this case, the Venetian rule had been developed to reflect the fact that five men were rarely available in one place to witness a will. Insisting on five witnesses would therefore run contrary to the purpose of the ius commune.
By the 15th century, the sources of the ius commune were regarded as an illustration of the principles of natural law. The English Year Books recorded a recognition that relationships between merchants were to be regulated secundum legem naturae (in accordance with nature) in the 1470s.[v] As national jurisdictions such as Scotland acquired their own senior appellate courts, they treated the ius commune as persuasive ‘so far as it appears to us to be consonant with natural equity and reason.’[vi] The ius commune was therefore not treated as a body of static authority in competition with the positive rules of the state, but rather as a store of argument drawn from natural principles which could be drawn upon to better understand the purpose of a rule or to fill lacunae in the law. One of the concepts derived from the Romans texts, which came to play a central role in the development of the lex mercatoria, was aequitas, which had broad application to contractual remedies as well as the governance of commercial partnerships and business entities.
Even as national jurisdictions began to assert themselves most forcefully in the eighteenth and nineteenth centuries, the ius commune persisted through the formation of epistemic communities of lawyers which transcended national boundaries. One prominent example was the Roman-Dutch law, a fusion of Civil law, Canon law, Holland custom, and natural legal philosophy which also came to exert significant influence in Scotland in the 17th and 18th centuries. This was mainly driven by legal education, as aspirant lawyers in Scotland would travel to Leiden or Utrecht rather than seek legal training at a local Scottish university.[vii] The law taught to them, and which they brought back to Scotland, was Roman-Dutch. The epistemic community of Roman-Dutch law persisted in the absence of any formal lawmaking authority and was mediated by the shared religious and commercial cultures of both Scottish and Dutch lawyers.
By taking a historical perspective on the development of law in Western Europe, it is possible to recontextualise questions around the legitimacy of transnational law, by instead asking why specifically national territorial institutions came to be regarded relatively recently as the only legitimate basis for legal authority or the resolution of disputes across borders. This is especially an important question to ask in the field of international commercial arbitration, the realm of dispute resolution that has tested the legitimacy of both the transnationality of law and the state-issued law.
Evidence of Legal Transnationality in International Commercial Arbitration
The transnational and international theories of international arbitration contributed to the expanded use of arbitration, especially in the second half of the 20th century after the adoption of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1958 (‘New York Convention’). These theories also served as a baseline for a more liberal approach to the determination of the applicable substantive laws and their application by arbitrators. The transnational theory or the theory of arbitral order claims that ‘the juridicity of arbitration is rooted in a distinct, transnational order [...] and not in a national legal system.’[viii]
The transnationality of law in arbitration is evidenced not only through the conflict of laws provisions contained in arbitration acts and rules, but also through the discretion in the application of substantive law, which is guaranteed with the absence of an appeal process as a general rule, and the permissive language of Article V of the New York Convention. Moving a step further, one of the approaches to defining
‘the contents of transnational law is to view transnational law as a method of decision-making [...] This approach consists, in any given case, of deriving the substantive solution to the legal issue at hand not from a particular law selected by a traditional choice-of-law process, but from a comparative law analysis which will enable the arbitrators to apply the rule which is the most widely accepted, as opposed to a rule which may lie peculiar to a legal system or less widely recognized.’[ix]
In other words, in its extreme form, transnational law, similarly to ius commune, represents a methodology rather than a separate legal system, which allows international arbitrators to create substantive rules beyond those recognised in national laws.
Due to all of these fundamental concepts adopted in international commercial arbitration (starting from relaxed conflict of laws provisions to the methodology of applying the most prevailing substantive rules), and the overall pro-arbitration trend in the second half of the last century, international arbitrators destabilise conventional theories of a state as legal authority and hold an important role in lawmaking in the international commercial arena. This stance is, of course, not without doctrinal and practical challenges, which might be a subject of future posts in this series.[x]
When it comes to the relaxed conflict of laws approach in international commercial arbitration which reflects the transnationality of law, this is a more acceptable approach for independent arbitral institutions than national legislators. Arbitral institutions in general allow arbitral tribunals to determine the governing law without indicating any specific conflict of laws rule, but by simply finding such a law ‘appropriate’ in the circumstances.[xi] Such deviation in arbitration rules and laws from the usual practice of the determination of governing law in court proceedings allows international arbitrators more discretion when determining the applicable law.
Another such evidence of the transnationality of arbitration is the scope of the laws and legal rules that can be chosen as applicable law. In that sense, the parties in arbitration in principle enjoy a broader expression of party autonomy than in court proceedings when it comes to exercising their right to choose the governing law. It can be said that such a choice includes for the party in arbitration the following options:
- State (national) law,
- Combination of state (national) laws, i.e. dépecage,
- Non-state laws or rules or guidelines, including transnational law/lex mercatoria,
- Equity and good conscience.[xii]
Whereas the first two above-mentioned options are available before national courts, the last two are thus far available only in arbitration.[xiii] The scope of such a choice of non-state law for both the parties and the arbitral tribunal will again depend on the provisions of applicable arbitration rules or arbitration laws, and it is determined by the use of different terminology.
The expression ‘rules of law’ includes non-state legal rules such as lex mercatoria, general principles, trade usages, and transnational public policy.[xiv] The notion ‘law’, on the other hand, encompasses then only state-issued legal rules. For example, the UNCITRAL Model Law on International Commercial Arbitration (‘UNCITRAL Model Law’) makes a clear difference between the scope of potentially governing laws at the disposal of the parties and arbitral tribunals. Whereas the parties may choose ‘rules of law […] applicable to the substance of the dispute’ (emphasis added), the tribunals can decide only to apply ‘the law’.[xv] The same approach is adopted by the UNCITRAL Arbitration Rules, while the 2021 International Chamber of Commerce Arbitration Rules (‘2021 ICC Rules’) allow both the parties and the arbitral tribunals to choose the non-state law options.[xvi] Similar to the 2021 ICC Rules, the 2020 London Court of International Arbitration Rules (‘2020 LCIA Rules’) and the French Arbitration Act reserve the same scope of applicable rules for both the parties and the arbitrators.[xvii] The most restrictive approach can be found in the English Arbitration Act 1996 which narrows the choice to only a state-issued law for both the parties and the arbitrators.[xviii]
Finally, there is an option for arbitral tribunals to decide the dispute ex aequo et bono or as amiable compositeur, and this option can only be exercised with the parties’ express authorisation.[xix] Deciding ex aequo et bono in international commercial arbitration served and still serves a certain purpose in practice as will be shown in a follow-up blog post written by our colleague Dr Gloria Alvarez; such decision-making is a clear indication of possible derogation of the conventional stance that only law handed down by a legitimate lawmaking (state) authority governs the resolution of commercial disputes.
The methodology for determining the applicable law in international commercial arbitration, as shown above, challenges this stance by expanding the pool of potentially applicable laws and rules of law in comparison to those available to national courts. Furthermore, as shown above, there is often no need for any connection between the governing law and the underlying dispute in international arbitration, unlike the traditional approach in domestic courts. Moreover, when choosing the applicable law, arbitral tribunals are not bound by private international law rules and can apply non-state law under certain circumstances.
This is further fostered by the general principle in international commercial arbitration according to which arbitral awards are not subject to an appeal on a point of law. The judicial review of international arbitral awards is limitedunder most national laws and the New York Convention to procedural issues, and it excludes de novo review by a national court. Some limitations to these general principles can be found in the application of overriding mandatory rules by arbitral tribunals and the ‘second look doctrine,’ which are a reflection of the opposite trends of localisation in arbitration.[xx] These are not the theme of this post and might be addressed to a fuller extent in other blog posts in this series.
Finally, in addition to the indicated transnational trends in the determination and application of laws and rules of law in international commercial arbitration, the last example in this post confirms the existence of modern transnational substantive rules created by international arbitral tribunals. The substantive rule that will be addressed is the rule governing the allocation of costs in arbitration.
A discussion regarding the rules of allocation of the costs took place between the two diametrically opposite approaches that were initially developed in litigation: the American Rule, under which each party bears its own costs, and the ‘costs follow the event’ rule, under which, roughly speaking, the losing party pays all the costs. The dichotomy of these two approaches however never took full sway in international arbitration.
The prevailing approach, in return, which is applicable in international commercial arbitration, is the ‘costs follow the event’ rule, but never in its strict form. This approach is modified when it applies as a default solution. In that case, the ‘event’ is no longer only the outcome of the case, as other circumstances are also taken into account. Therefore, one may say that the ‘event’ is no longer subject only to the determination of a ‘winner’ and a ‘loser’ in the case. A shift in terminology is suggested by some other authors as well, for example, Colin and O’Reilly recognize that there is a clear tendency towards ‘moderated costs follow the event’.[xxi] Under the moderated version of this approach, ‘the principle that costs follow the event is merely the starting point and may be adjusted or even eclipsed by other factors […][and] the recoverable costs are subject to a test of reasonableness and possibly proportionality also’ (emphasis added).[xxii] This is an example of how progressive arbitral practice can lead to predictable results in determining applicable law by creating a transnational substantive rule.
Concluding remarks
For more than half a century, contemporary international commercial arbitration aspired to transnational solutions. This post explained the fundamental principles that legitimised such an approach. This discussion was embedded into the historical evolution of transnational commercial law in Roman times, which showed that the legitimacy of transnational law depends on the general acceptance of national institutions as the only legitimate basis for legal authority or the resolution of disputes across borders. Despite the transnational tendencies in modern arbitration, these are not without a challenge based on more localised/territorial theories, which are attempting to stabilise the role of the state as the only lawmaking authority. This post contends that such changes in attitudes towards lawmaking are not a novelty and they are serving the legal transposition of economic and political values of the societies. Transnational law as a methodology, hence, can as any methodology serve different purposes, as will be shown in posts that will follow in this series.
[i] PC Jessup, Transnational Law, New Haven, 1956, 2.
[ii] P Zumbasen, ‘Transational Law: Theories and Applications’, in P Zumbasen (ed), The Oxford Handbook of Transnational Law, Oxford, 2021, 8.
[iii] See generally E Fahey, Introduction to Law and Global Governance, Cheltenham, 2018.
[iv] See generally R Lopez, The Commercial Revolution of the Middle Ages, New York, 1976.
[v] Pasch. 13 Edw. 4 pl. 5.
[vi] T Craig, Jus Feudale, Edinburgh, 1603, I.2.14.
[vii] JW Cairns, “Importing Our Lawyers from Holland”, Law, Lawyers and Humanism, 2015, 223-241.
[viii] Emmanuel Gaillard, Legal Theory of International Arbitration (Brill 2012) 35.
[ix] Emmanuel Gaillard, ‘Transnational Law: A Legal System or a Method of Decision Making?’ (2001) 17 Arbitration International 59, 62–63.
[x] Those challenges are rooted in the localised theory of arbitration. This theory echoes the stance that the legitimacy of the arbitration process stems from the seat, as it is the national courts that have the ultimate power to decide whether an arbitral award is or is not to be set aside Gaillard (n 1) 15–24.
[xi] For example, Article 21(1) of the 2021 ICC Rules provides: “The parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate” (emphasis added).
[xii] See, for example, Chapter 3 in D Bentolila, Arbitrators as Lawmakers (Kluwer Law International, 2017).
[xiii] ibid 111, 123.
[xiv] ibid 137.
[xv] Article 28(1) and (2) of the UNCITRAL Model Law (n 2).
[xvi] Article 35(1) of the UNCITRAL Arbitration Rules (n 2); Article 21(1) of the 2021 ICC Rules (n 2).
[xvii] Article 22.3 of the 2020 LCIA Rules (n 2), Article 1511 of the French Arbitration Act.
[xviii] Section 46(1) and (3) of the English Arbitration Act 1996.
[xix] Article 28(3) of the UNCITRAL Model Law (n 2), Article 1512 of the French Arbitration Act, Article 21(3) of the 2021 ICC Rules (n 2), Article 22.4 of the 2020 LCIA Rules (n 2), Article 35(2) of the UNCITRAL Arbitration Rules (n 2).
[xx] See more in: Patricia Živković, ‘International Commercial Arbitration: Law Applicable to Merits and “Creeping” Judicial Substantive Review’, From Theory to Practice in Private International Law (Bloomsbury 2024).
[xxi] ibid.
[xxii] ibid.
