THE CONCEPT OF LEX MERCATORIA AS APPLICABLE LAW by Mare Oladapo.

First, by virtue of the party autonomy, parties shall have the freedom to choose different laws applicable to different parts of the arbitration. Generally, international commercial arbitration is where we can see the application and conglomeration of different laws simultaneously. These laws are a. The law governing the capacity of the parties to enter into an arbitration agreement. Parties to a contract must have the capacity to enter into an arbitration agreement, lack of capacity is a ground to set aside the award b. The Law governing the arbitration agreement and the performance of that Agreement. c. The Law Applicable to the Substance of the Dispute. This is called the governing law or proper law of the contract. d. The Law governing the Arbitration rules of proceeding. e. The Law governing the existence and enforcement of arbitration proceedings, this is usually referred to as the seat of arbitration. However, not on every occasion will an arbitration clause provide for each laws above. Parties may not have included such laws in arbitration either expressly or impliedly and this will therefore raise the issues as to conflict of law. This paper will focus on Lex Mercatoria where the applicable law of the arbitration proceeding is not expressly chosen. In international arbitration one of the peculiar advantages is that parties can choose several jurisdictional laws to govern their arbitration proceedings. The parties can choose their seat of arbitration to be England, the law governing the substantive agreement to be the law of Nigeria such laws for include (Nigeria Sales of Goods Act), and can also choose the applicable law of arbitration to be that of France. In exercising the power of autonomy in arbitration, the parties can choose that no parties’ jurisdiction or law should apply to the proceeding. For example an arbitration between Nigeria and English parties, they can both agree that law of Nigeria or England should not apply to the proceeding . This is usually the case where the parties are governmental authorities or in an investment arbitration. Parties can take two approaches, first parties can choose a third party national law to apply. For example in the arbitration between Nigerian and English parties, parties can choose France as the independent national law to apply. Another approach to choice of laws is where parties have expressly or impliedly exempted (not chosen) any national laws from applying to the arbitration. This is call non-national arbitration. Where the parties do not want any national law connected with the arbitration to apply for reasons such as position on confidentiality, or interpretation of certain concepts such as ‘time’. This then raises a technical question for the tribunal, what law should apply as the arbitration law? Lex Mercatoria is not a new concept in international arbitration, Lex Mercatoria meaning the law of the merchant which frees arbitration agreement from being subject to national law instead it is determined by custom and usages of international trade law. Lex Mercatoria is basically a non-state set of rules gotten from international best practices, components of national laws, and the reasonable expectations of the parties in a particular case. Basically this law does not arise out of any particular state law or a state legal system. Lex Mercatoria is basically a non-national selected by the tribunal which includes trade usages and customs, general principles of law, uniform laws and international conventions regulating international commerce, public international law, comparative analysis of national laws, rules and standard contracts issued by international organizations, and published arbitral awards. This is usually chosen activated by the arbitral tribunal. After much consideration and deducing the intention of the parties, the arbitral tribunal in an effort to “denationalize” the arbitration, generally they have no real forum and can either apply the law of the seat of the arbitration or lex Mercatoria. By Choosing Lex Mercatoria the parties avoid the technicalities of national legal systems as well as rules which are unfit for international contract. Thus they escape peculiar formalities, short periods of limitations and some of the difficulties created by domestic laws which are unknown in the countries for example common law rules on consideration. The basis of the selecting this rules can be found in international laws and principles such as the UNCITRAL MODEL LAW, NEWYORK CONVENTION, UNIDRIOT PRINCIPLE OF INTERNATIONAL COMMERCIAL CONTRACTS. These are international arbitration laws which parties or arbitral tribunal can use in their arbitration proceedings. This paper will focus on UNICTRAL MODEL LAW and UNIDRIOT PRINCIPLE. Generally tribunal in international arbitrations are not necessarily bound by a particular domestic law especially where from the circumstances giving birth to the arbitration that is a non-national arbitration. The preamble of the UNIDRIOT Principles provides that Parties to international commercial contracts who cannot agree on the choice of a particular domestic law as the law applicable to their contract sometimes provide that it shall be governed by the ‘general principles of law”, “usages and customs of international trade”, by the Lex Mercatoria, etc . In this situation, parties are generally permitted to choose “rules of law” other than national laws on which the arbitrators are to base their decisions. In line with this approach, the parties would be free to choose the Principles as the “rules of law” according to which the arbitrators would decide the dispute, with the result that the Principles would apply to the exclusion of any particular national law . Article 1.4 of the principle provides that nothing in these Law shall restrict the application of mandatory rules, whether of national, international or supranational origin , which are applicable in accordance with the relevant rules of private international law. On the other hand, UNCITRAL Model Law Article 28 provides that ‘The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties. Rules of law in that context is succinctly explained by the Explanatory Note of UNCITRAL MODEL LAW as amended in 2006 stating that by referring to the choice of “rules of law” instead of “law”, the Law broadens the range of options available to the parties as regards the designation of the law applicable to the substance of the dispute […] parties may agree on rules of law that have been elaborated by an international forum but have not yet been incorporated into any national legal system. Article 28 (4) goes further to provide that the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. In this context the component of relevant trade usages used to determine the law applicable amounts to activating Lex Mercatoria. Therefore, such a tribunal should be permitted to apply the Lex Mercatoria to cases where (i) the tribunal finds that the contents of the applicable law have not been ascertained. (ii) there are residual questions of contractual rights, obligations and risk allocations arising from the imperfect knowledge of the parties, i.e. incompleteness of contractual clauses and default rules chosen by the parties . Therefore in cases where there are still questions on the rights and liabilities of parties and the applicable law has not be ascertained but it is clear that both parties do not want a national law, then Lex Mercatoria can be applied. In ICC 1996, Case No. 8502, the arbitral tribunal heard a dispute regarding a contract between a Vietnamese seller and a Dutch buyer acting through a French company and its agent and was of the view that although the contract contained no choice of law clause, it referred to international trade usages which should be applied as the law of the dispute. Indeed the contract included some provisions imposing the application of INCOTERMS and UNIFORM CUSTOMS PRACTICE for contractual obligations, the arbitral tribunal therefore held that: By referring to both incoterms and the UCP 500 the parties showed their willingness to have their contract governed by international trade usages and customs… in particular the arbitral tribunal shall refer to the Vienna convention on contractions of international sales of goods or the UNCITRAL rules as evidencing admitted practices under international trade law . The concept of Lex Mercatoria is a universal set of rules which have earned a wide acceptance and international consensus in international business community and it reflects generally accepted principles and rules brought together to form the applicable law in international arbitration. In 1996 ICC Case the case involved nine contracts made in 1970 between Iran and US supplier, which did not contain a choice of law clause neither party could have agreed to use the other party’s national laws, the tribunal held that: The tribunal will apply general principles and rules of law applicable to international contractual obligations which qualify as rules of law and which have earned a wide acceptance and international consensus in international business community, including form notions which are said to part of lex Mercatoria, also taking into account any relevant trade usage as well as the UNCITRAL principles, as far as they can be considered to reflect generally accepted principles and rules. However, this concept has been criticised on several grounds. One of the major grounds is the vagueness of the concept. Basically, the concept requires a special law to be drawn and drafted, and then applied. This (non-national) law as earlier said is derived from several sources such as international law, customary law and principles. This is already a vague concept as there is no actual law in operation just one drafted by the arbitrator or tribunal. With the vagueness, it invariably leads to the ‘drafted’ law lacking legal force or ‘seriousness. Where a law is drawn up from an arbitration, it will be perceived to lack force of law and therefore create issues in enforcement. Any decision arising out of the proceeding will not be taken seriously by the party due to one primary reason, the law does not belong to any national state. Domestic state system of coercion is what enforces law and decisions, where the law applied does not have root in any state, enforcement will be difficult. This further can be take up as a reason to challenge the award arising from the proceeding by the other party. Lastly another criticism is that this concept is not necessarily genuine. The writer is of the view that though Lex Mercatoria requires a whole new set of law to be put together to apply to the proceedings, there is in actual fact no new set of laws. Every provision in the drafted laws will have its root from one jurisdiction or state; at the end of drafting the law, the law will have strong familiarity and root with a particular jurisdiction depending on the caprice or ingeniousness of the tribunal. Another approach in applying this concept is that the tribunal they will be inclined to choosing an existing principles such as UNIDRIOT Principle which, again is not a new law. Parties must be careful in apply this concept as it may spun up several disadvantages to choosing arbitration such as time consumption and it will consequently amount to unending loop of trying to choose a law that benefits both parties equally rather than settlement of disputes.